[Federal Register Volume 75, Number 226 (Wednesday, November 24, 2010)]
[Proposed Rules]
[Pages 72611-72651]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29138]
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Part IV
Federal Deposit Insurance Corporation
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12 CFR Part 327
Assessments, Large Bank Pricing; Proposed Rule
Federal Register / Vol. 75 , No. 226 / Wednesday, November 24, 2010 /
Proposed Rules
[[Page 72612]]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
RIN 3064-AD66
Assessments, Large Bank Pricing
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking and request for comment.
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SUMMARY: The FDIC proposes to revise the assessment system applicable
to large insured depository institutions (IDIs or institutions) to
better differentiate IDIs and take a more forward-looking view of risk;
to better take into account the losses that the FDIC may incur if such
an IDI fails; and to make technical and other changes to the rules
governing the risk-based assessment system, including proposed changes
to the assessment base necessitated by the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
DATES: Comments must be received on or before January 10, 2011.
ADDRESSES: You may submit comments on the notice of proposed
rulemaking, identified by RIN number and the words ``Assessments, Large
Bank Pricing NPR,'' by any of the following methods:
Agency Web Site: http://www.FDIC.gov/regulations/laws/federal/propose.html. Follow the 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: 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 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; Christine
Bradley, Senior Policy Analyst, Banking and Regulatory Policy Section,
Division of Insurance and Research, (202) 898-8951; Brenda Bruno,
Senior Financial Analyst, Division of Insurance and Research, (630)
241-0359 x 8312; Robert L. Burns, Chief, Exam Support and Analysis,
Division of Supervision and Consumer Protection (704) 333-3132 x 4215;
Christopher Bellotto, Counsel, Legal Division, (202) 898-3801; Sheikha
Kapoor, Counsel, Legal Division, (202) 898-3960.
SUPPLEMENTARY INFORMATION:
I. Background
Legal Authority
The Federal Deposit Insurance Act (the FDI Act) requires that the
deposit insurance assessment system be risk-based and allows the FDIC
to define risk broadly.\1\ 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 IDI's assets and liabilities, the likely amount of
any such loss, and the revenue needs of the DIF. The FDI Act allows the
FDIC to ``establish separate risk-based assessment systems for large
and small members of the Deposit Insurance Fund.'' \2\
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\1\ Section 7(b)(1)of the Federal Deposit Insurance Act (12
U.S.C. 1817(b)).
\2\ Section 7(b)(1)(D) of the Federal Deposit Insurance Act (12
U.S.C. 1817(b)(1)(D)).
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2009 Assessments Rule
Effective April 1, 2009, the FDIC amended its assessments rule to
create the current assessment system. Under this system, the initial
base assessment rate for a large Risk Category I institution is
determined by either the financial ratios method (which is also
applicable to all small IDIs) or, for IDIs with at least one long-term
debt rating, by the large bank method.\3\ The financial ratios method
uses a weighted average of CAMELS component ratings and certain
financial ratios.\4\ The large bank method incorporates the financial
ratios method into a financial ratios score and combines this score
with the IDI's weighted average CAMELS component rating and its average
long-term debt issuer rating to produce an assessment rate (the large
bank method). Under the 2009 assessments rule, the FDIC may adjust
initial assessment rates for large Risk Category I institutions up to 1
basis point to ensure that the relative levels of risk posed by these
institutions are consistently reflected in assessment rates; the
adjustment is known as the large bank adjustment.\5\
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\3\ In 2006, the FDIC adopted by regulation an assessment system
that placed IDIs into risk categories (Risk Category I, II, III or
IV) depending on supervisory ratings and capital levels. 71 FR 69282
(Nov. 30, 2006).
\4\ The financial ratios method applies to large institutions
without at least one long-term debt rating (and all small IDIs). The
2009 assessments rule added a new measure--the adjusted brokered
deposit ratio--to the financial ratios that were considered under
the previous 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).
\5\ 12 CFR 327.9(d)(4). 74 FR 9525, 9535-9536 (Mar. 4, 2009).
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The April 2010 Proposed Rule (April NPR)
On April 13, 2010, the FDIC, using its statutory powers under
section 7(b) of the FDI Act (12 U.S.C. 1817(b)), adopted a notice of
proposed rulemaking with request for comment to revise the assessment
system applicable to large IDIs to better capture risk at the time an
IDI assumes the risk, to better differentiate IDIs 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 IDI fails (the April
NPR).\6\ The FDIC sought comments on every aspect of the April NPR and
specifically requested comment on several issues. The FDIC received 18
written comments on the April NPR. Most commenters requested that the
FDIC delay the implementation of the rulemaking until the effects of
then pending comprehensive financial regulation bills were known.
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\6\ 75 FR 23516 (May 3, 2010).
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Congress subsequently adopted comprehensive financial regulation
legislation in the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank), which includes a provision directing the
FDIC to amend its regulatory definition of ``assessment base'' for
purposes of setting assessments for IDIs. As a result of Dodd-Frank, an
IDI's assessment base will be calculated using its average consolidated
total assets less its average tangible equity during the assessment
period.\7\ The FDIC believes that the recent statutory change to the
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assessment base constitutes a substantial revision to the deposit
insurance system and, under the FDI Act (12 U.S.C. 1817(b)(1)(F)), such
changes must be made after notice and opportunity to comment.
Accordingly, the FDIC is issuing a separate notice of proposed
rulemaking with request for comment on the Notice of Proposed
Rulemaking on the Implementation of the Deposit Insurance Assessment
Base (the Assessment Base NPR), which is being published concurrently
with this NPR. Largely as a result of Dodd-Frank and the Assessment
Base NPR, the FDIC is issuing this second proposal for public comment
on large bank assessments, taking into account the comments received on
the April NPR. The attached regulatory text includes proposed changes
for this NPR, as well as the Assessment Base NPR.
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\7\ Public Law 111-203, Sec. 331(b), 124 Stat. 1376, 1539 (to
be codified at 12 U.S.C. 1817(b)). The Act will substitute the new
assessment base for the current assessment base, which is closely
related to domestic deposits. 12 CFR 327.5 (2010).
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II. Risk-based Assessment System for Large Insured Depository
Institutions
In this rulemaking, the FDIC proposes revising the assessment
system applicable to large IDIs to better capture risk at the time an
IDI assumes the risk, to better differentiate IDIs 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 such an IDI fails.
As in the April NPR, the FDIC proposes eliminating risk categories
and the use of long-term debt issuer ratings in calculating risk-based
assessments for large IDIs.\8\ The FDIC proposes using a scorecard
method to calculate assessment rates for all large IDIs. The scorecard
method combines CAMELS ratings and certain forward-looking financial
measures to assess the risk a large IDI poses to the DIF. The scorecard
uses quantitative measures that are readily available and useful in
predicting a large IDI's long-term performance.\9\ Two separate
scorecards are used: one for most large IDIs and another for
institutions that are structurally and operationally complex or that
pose unique challenges and risk in the case of failure (highly complex
IDIs).
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\8\ Dodd-Frank requires all federal agencies to review and
modify regulations to remove reliance upon credit ratings and
substitute an alternative standard of creditworthiness. Public Law
111-203, Sec. 939A, 124 Stat. 1376, 1886 (to be codified at 15
U.S.C. 78o-7 note).
\9\ Most of the data are publicly available, but data elements
to compute four scorecard measures--higher-risk assets, top 20
counterparty exposures, the largest counterparty exposure, and
criticized/classified items--are gathered during the examination
process. The FDIC proposes that IDIs provide these data elements in
the Consolidated Reports of Condition and Income (Call Report) or
the Thrift Financial Report (TFR) beginning with the second quarter
of 2011. See Section II, E of this proposal.
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The FDIC believes that, since the risk measures used in the
scorecards focus on long-term risk, they should mitigate the pro-
cyclicality of the current system. IDIs that pose higher risk over the
long term would pay higher assessments when they assume these risks--
rather than paying large assessment rates when conditions deteriorate.
Consequently, the proposed scorecard system should provide incentives
for IDIs to avoid excessive risk during economic expansions.
As shown in Chart 1, the proposed measures over the 2005 to 2008
period were useful in predicting performance of large IDIs in 2009. The
chart contrasts the predictive values of the proposed measures with
weighted-average CAMELS component ratings and risk measures included in
the existing financial ratios method. The proposed measures predict the
proper rank ordering of risk for large IDIs as of the end of 2009
(based on a consensus view of FDIC analysts) significantly better than
do the other two risk measures 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.\10\ For example, in 2006, the
proposed measures would have predicted FDIC's year-end 2009 risk
ranking of large IDIs more than twice as well as the risk measures in
the existing financial ratios method, which applies to large IDIs
without debt ratings.
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\10\ Lack of historical debt ratings data for a significant
percent of large IDIs makes it difficult to compare the predictive
accuracy of proposed measures to risk measures included in the
current large bank method. However, for a smaller sample with
available debt ratings, adding debt ratings to other risk measures
included in the current small bank model does not improve the
predictive accuracy of the model.
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A ``large institution'' would continue to be defined as an IDI that
has had $10 billion or more in total assets for at least four
consecutive quarters. The proposal would apply to all large IDIs
regardless of whether they are defined as new.\13\ Insured branches of
foreign banks would not be included within the definition of a large
institution.
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\11\ The rank ordering for larg institutions as of the end of
2009 (based on a consensus view of staff analysts) is largely based
on the information available through the FDIC's Large Insured
Depository Institution (LIDI) program. Large institutions that
failed or received significant governemnt support over the perod are
assigned the worst risk ranking and are included in the statistical
analysis. Appendix 1 to the NPR describes the statistical analysis
in detail.
\12\ The percentage approximated by factors is based on the
statistical model for that particual year. Actual weights assigned
to each scorecard measure are largely based on the average
coefficients for 2005 to 2008, and do not equal the weight implied
by the coefficient for that particular year (See Appendix 1 to the
NPR).
\13\ In almost all cases, an IDI that has had $10 billion or
more in total assets for four consecutive quarters will have a
CAMELS rating; however, in the rare event that such an IDI 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 IDIs (Other Than Highly Complex IDIs)
The FDIC proposes to use a scorecard method to calculate an initial
assessment rate that reflects the risk that a large IDI poses to the
DIF. The scorecard uses certain risk measures to produce two scores--a
performance score and a loss severity score--that are ultimately
combined and converted to an initial assessment rate.
The performance score measures an IDI's financial performance and
its ability to withstand stress. To arrive at a performance score, the
scorecard combines weighted CAMELS ratings and financial measures into
a single performance score between 0 and 100.
The loss severity score measures the relative magnitude of
potential losses to the FDIC in the event of an IDI's failure. The
scorecard combines certain loss severity measures into a single loss
severity score between 0 and 100. The loss severity score is converted
into a loss severity factor that ranges between 0.8 and 1.2.
Multiplying the performance score by the loss severity factor
produces a combined score (total score) that is converted to an initial
assessment rate. Under the proposal, an IDI's total score could not be
less than 30 or more than 90. The FDIC would have a limited ability to
alter an IDI's total score based on quantitative or qualitative
measures not captured in the scorecard.
Table 1 shows scorecard measures and their relative contribution to
the performance score or loss severity score. The score for all
scorecard measures is calculated based on the minimum and maximum
cutoff values for each measure. Most of the minimum and maximum cutoff
values are equal to the 10th and 90th percentile values for each
measure, which are derived using data on large IDIs over a ten-year
period beginning with the first quarter of 2000 through the fourth
quarter of 2009--a period that includes both good and bad economic
times.\14\ Appendix 1 to this Preamble shows selected percentile values
of each scorecard measure over this period.
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\14\ The detailed results of the statistical analysis used to
select risk measures and the weights are provided in Appendix 1 to
this Preamble and an online calculator will be available on the
FDIC's Web site to allow insured institutions to determine how their
assessment rates would be calculated under this NPR.
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The score for each measure, other than the weighted average CAMELS
rating, ranges between 0 and 100, where 100 equals the highest risk and
0 equals the lowest risk for that measure. A value reflecting lower
risk than the cutoff value receives a score of 0. A value reflecting
higher risk than the cutoff value receives a score of 100. A risk
measure value between the minimum and maximum cutoff values converts
linearly to a score between 0 and 100, which is rounded to 3 decimal
points. The weighted average CAMELS rating is converted to a score
between 25 and 100 where 100 equals the highest risk and 25 equals the
lowest risk.
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Appendix B to Subpart A describes in detail how each scorecard
measure is converted to a score.
Table 1--Scorecard for Large IDIs
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Weights
within Component
Scorecard measures component weights
(percent) (percent)
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P............................................. Performance Score
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P.1........................................... Weighted Average CAMELS Rating........ 100 30
P.2........................................... Ability to Withstand Asset-Related ........... 50
Stress:.
Tier 1 Leverage Ratio 10 ...........
Concentration Measure 35 ...........
Core Earnings/Average Quarter-End 20 ...........
Total Assets *
Credit Quality Measure 35 ...........
P.3........................................... Ability to Withstand Funding-Related 20
Stress.
Core Deposits/Total Liabilities 60 ...........
Balance Sheet Liquidity Ratio 40 ...........
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L............................................. Loss Severity Score
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L.1........................................... Loss Severity......................... ........... 100
Potential Losses/Total Domestic 75 ...........
Deposits (loss severity measure)
Noncore Funding/Total Liabilities 25 ...........
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* Average of five quarter-end total assets (most recent and four prior quarters).
The FDIC has made simplifying revisions to the scorecard proposed
in the April NPR. These revisions do not materially reduce the
scorecard's ability to differentiate among IDIs' risk profiles.
Simplifying revisions include refining some risk measurements,
eliminating the outlier add-ons, and allowing for an adjustment of an
IDI's total score, up or down, a maximum 15 points higher or lower than
the total score, rather than allowing for an adjustment of both the
performance score and the loss severity score by up to 15 points each.
The FDIC took these steps partly in response to comments on the April
NPR expressing concerns about the complexity of the proposal. The FDIC
recognizes that the scorecard and some risk measures in the scorecard
continue to be somewhat complex; however, this complexity simply
reflects the complexity of large IDIs. Further reducing the complexity
would lead to considerably less accuracy in predicting risk.
As in the April NPR and as shown in Appendix 1 to this Preamble,
the FDIC has carefully selected risk measures that best predict how
IDIs fared during the period of most recent stress. Some commenters
expressed concern that the factors and assumptions reflect a backward
looking analysis of the 2005 through 2009 period--a time of
extraordinary stress--but the FDIC believes that the scorecard should
differentiate risk based on how IDIs would fare during periods of
economic stress. Periods of stress reveal risks that often remain
hidden during periods of prosperity.
1. Performance Score
The first component of the scorecard for large IDIs is the
performance score. The performance score for large IDIs is 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 2 shows the weight
given to each of these three inputs.
Table 2--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
------------------------------------------------------------------------
a. Weighted Average CAMELS Score
To derive the weighted average CAMELS score, a weighted average of
the IDI's CAMELS component ratings is first calculated using the
weights that are applied in the existing rule as shown in Table 3
below.\15\
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\15\ 12 CFR part 327, Subpt. A, App. A (2010).
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A weighted average CAMELS rating converts 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. The score increases at an increasing rate as the weighted
average CAMELS rating increases. Appendix B to subpart A describes in
detail how the weighted average CAMELS rating is converted to a score.
b. Ability To Withstand Asset-Related Stress Component
The ability to withstand asset-related stress component contains
measures that the FDIC finds most relevant to assessing a large IDI's
ability to withstand such stress:
Tier 1 leverage ratio;
Concentration measure (the higher of the ratio of higher-
risk assets to the sum of Tier 1 capital and reserves or the growth-
adjusted portfolio concentrations measure);
The ratio of core earnings to average quarter-end total
assets; and
Credit quality measure (the higher of the ratio of
criticized and classified items to the sum of Tier 1 capital and
reserves measure or the ratio of underperforming assets to the sum of
Tier 1 capital and reserves measure).
In general, these measures proved to be the most statistically
significant measures of a large IDI's ability to withstand asset-
related stress, as described in Appendix 1 to this Preamble. Appendix A
to subpart A describes these measures in detail and provides the source
of the data used to determine them.
The FDIC proposes to include the Tier 1 leverage ratio as a risk
measure rather than the Tier 1 common ratio proposed in the April NPR
so that capital would be defined consistently throughout the deposit
insurance assessment rules to mean regulatory capital, whether it is
for the calculating the risk-based assessment rate or for the defining
the assessment base. Several commenters stated that the FDIC should
delay the implementation of the rulemaking until the effect of the
Basel Committee's efforts on changing the definition of Tier 1 capital
is better known. The definition of regulatory capital will remain
unchanged without further rulemaking, and the FDIC believes that the
current regulatory capital ratio serves as a reasonable measure of
capital adequacy until the Basel Committee's efforts are complete and
the regulatory definition of Tier 1 capital has been changed. The FDIC
plans to reevaluate the cutoffs for scorecard measures affected by any
changes to the definition of regulatory capital once a new capital
regulation is adopted and implemented.
The concentration measure score equals the higher of the two scores
that make up the concentration measure, as does the credit quality
score.\16\ The concentration measure score is based on the higher of
the higher-risk assets to Tier 1 capital and reserves score or the
growth-adjusted portfolio concentrations measure score. Both measures
are described in detail in Appendix C to Subpart A. The credit quality
measure score is based upon the higher of the criticized and classified
items to Tier 1 capital and reserves score or the underperforming
assets to Tier 1 capital and reserves score.\17\
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\16\ The ratio of higher-risk assets to Tier 1 capital and
reserves 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 most loan
portfolio concentrations.
\17\ The criticized and classified items ratio measures
commercial credit quality while the underperforming assets ratio is
often a better indicator for consumer portfolios.
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Table 4 shows the ability to withstand asset related stress
measures, gives the cutoff values for each measure and shows the weight
assigned to the measure to derive a score for an IDI's ability to
withstand asset-related stress. Appendix B to subpart A describes how
each of the risk measures is converted to a score between 0 and 100
based upon the minimum and maximum cutoff values.\18\
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\18\ Cutoff values are rounded to the nearest integer. Most of
the minimum and maximum cutoff values for each risk measure equal
the 10th and 90th percentile values of the measure among large IDIs
based upon data from the period between the first quarter of 2000
and the fourth quarter of 2009. The 10th and 90th percentiles are
not used for the higher-risk assets to Tier 1 capital and reserves
measure and the criticized and classified items ratio due to data
availability. Data on the higher-risk assets to Tier 1 capital and
reserves measure are available consistently since second quarter
2008, while criticized and classified items are available
consistently since first quarter 2007. The maximum cutoff value for
the higher-risk assets to Tier 1 capital and reserves measure is
close to but does not equal the 75th percentile. The maximum cutoff
value for the criticized and classified items ratio is close to but
does not equal the 80th percentile value. These alternative cutoff
values are partly based on recent experience. Appendix 1 includes
information regarding the percentile values for each risk measure.
[[Page 72617]]
Table 4--Cutoff Values and Weights for Ability To Withstand Asset-
Related Stress Measures
------------------------------------------------------------------------
Cutoff values
Scorecard measures -------------------------- Weight
Minimum Maximum (percent)
------------------------------------------------------------------------
Tier 1 Leverage Ratio............ 6 13 10
Concentration Measure............ ........... ........... 35
Higher--Risk Assets to Tier 1 0 135 ...........
Capital and Reserves; or....
Growth-Adjusted Portfolio 3 57 ...........
Concentrations..............
Core Earnings/Average Quarter-End 0 2 20
Total Assets *..................
Credit Quality Measure........... ........... ........... 35
Criticized and Classified 8 100 ...........
Items/Tier 1 Capital and
Reserves; or................
Underperforming Assets/Tier 1 2 37 ...........
Capital and Reserves........
------------------------------------------------------------------------
* Average of five quarter-end total assets (most recent and four prior
quarters).
Each score is multiplied by its respective weight and the resulting
weighted score for each measure is summed to arrive at an ability to
withstand asset-related stress score, which could range from 0 to 100.
The FDIC proposes to eliminate the outlier add-ons, which were used
in the April NPR, to simplify the scorecard. Commenters to the April
NPR argued that the ``all or nothing'' additions of the outlier add-ons
were overly punitive and introduced a cliff effect. While the FDIC
continues to believe that extreme values for certain risk measures make
an IDI more vulnerable to stress, the FDIC recognizes that IDIs with
such extreme values can be better addressed on a bank-by-bank basis
using the large bank adjustment described in detail below.
Table 5 illustrates how the ability to withstand asset-related
stress score is calculated for a hypothetical bank, Bank A.
Table 5--Ability To Withstand Asset-Related Stress Component for Bank A
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Weight Weighted
Scorecard measures Value Score * (percent) score
----------------------------------------------------------------------------------------------------------------
Tier 1 Leverage Ratio....................................... 6.98 86.00 10 8.60
Concentration Measure....................................... ........... 100.00 35 35.00
Higher Risk Assets/Tier 1 Capital and Reserves; or...... 162.00 100.00
Growth-Adjusted Portfolio Concentrations................ 43.62 75.22
Core Earnings/Average Quarter-End Total Assets.............. 0.67 66.50 20 13.30
Credit Quality Measure.................................... ........... 100.00 35 35.00
Criticized and Classified Items/Tier 1 Capital and 114.00 100.00
Reserves; or.............................................
Underperforming Assets/Tier 1 Capital and Reserves...... 34.25 92.14
---------------------------------------------------
Total ability to withstand asset-related stress score... ........... ........... ........... 91.90
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* In the example, scores are rounded to two decimal points for Bank A.
Bank A's higher risk assets to Tier 1 capital and reserves score
(100.00) is higher than its growth-adjusted portfolio concentration
score (75.22). Thus, the higher risk assets to Tier 1 capital and
reserves score is multiplied by the 35 percent weight to get a weighted
score of 35.00 and the growth-adjusted portfolio concentrations score
is ignored. Similarly, Bank A's criticized and classified items to Tier
1 capital and reserves score (100) is higher than its underperforming
assets to Tier 1 capital and reserves score (92.14). Therefore, the
criticized and classified items to Tier 1 capital and reserves score is
multiplied by the 35 percent weight to get a weighted score of 35.00
and the underperforming assets to Tier 1 capital and reserves score is
ignored. These weighted scores, along with the weighted scores for the
Tier 1 leverage ratio (8.6) and core earnings to average quarter-end
total assets ratio (13.30), are added together, resulting in the
ability to withstand asset-related stress score of 91.90.
c. Ability to Withstand Funding-Related Stress
The ability to withstand funding-related stress component contains
two measures that are most relevant to assessing a large IDI's ability
to withstand such stress--a core deposits to total liabilities ratio,
and a balance sheet liquidity ratio, which measures the amount of
highly liquid assets to cover potential cash outflows in the event of
stress.\19\ These ratios are significant in predicting a large IDI's
long-term performance in the statistical test described in Appendix 1
to the preamble. Appendix A to subpart A describes these ratios in
detail and provides the source of the data used to determine them.
Appendix B to subpart A describes how each of these measures is
converted to a score between 0 and 100.
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\19\ The FDIC has modified data elements included in the liquid
assets to short-term liability ration proposed in the April NPR, and
termed it as the balance sheet liquidity ratio to better reflect
what the ratio is designed to capture. See Appendix A for detailed
description.
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The ability to withstand funding-related stress component score is
the weighted average of the two measure scores. Table 6 shows the
cutoff values and weights for these measures. Weights assigned to each
of these two risk measures are based on statistical analysis as
described in detail in Appendix 1 to the preamble.
[[Page 72618]]
Table 6--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 79 60
Balance Sheet Liquidity Ratio.... 7 188 40
------------------------------------------------------------------------
Table 7 illustrates how the ability to withstand funding-related
stress score is calculated for a hypothetical bank, Bank A.
Table 7--Ability To Withstand Funding-Related Stress Component for Bank A
----------------------------------------------------------------------------------------------------------------
Weight Weighted
Scorecard measures Value Score * (percent) score
----------------------------------------------------------------------------------------------------------------
Core Deposits/Total Liabilities............................. 60.25 24.67 60 14.80
Balance Sheet Liquidity Ratio............................... 69.58 65.42 40 26.17
---------------------------------------------------
Total ability to withstand funding-related stress score. ........... ........... ........... 40.97
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* In the example, scores are rounded to 2 decimal points for Bank A.
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 then multiplied by their respective weights and the
results are summed to arrive at the performance score. This score
cannot be less than 0 or more than 100 under the proposal. In the
example in Table 8, Bank A's performance score would be 69.33, assuming
that Bank A has a weighted average CAMELS score of 50.6, which results
from a weighed average CAMELS rating of 2.2.
Table 8--Performance Score for Bank A
------------------------------------------------------------------------
Weight Weighted
Performance score components (percent) Score score
------------------------------------------------------------------------
Weighted Average CAMELS Score.... 30 50.60 15.18
Ability to Withstand Asset- 50 91.90 45.95
Related Stress Score............
Ability to Withstand Funding- 20 40.97 8.20
Related Stress Score............
--------------------------------------
Total Performance Score...... ........... ........... 69.33
------------------------------------------------------------------------
2. Loss Severity Score
The loss severity score measures the relative magnitude of
potential losses to the FDIC in the event of an IDI's failure. It is
based on two measures that are most relevant to assessing an IDI's
potential losses--a loss severity measure and a ratio of noncore
funding to total liabilities.
The loss severity measure applies a standardized set of assumptions
based on recent failures regarding liability runoffs and the recovery
value of asset categories to calculate possible losses to the FDIC.
(Appendix D to subpart A describes the calculation of this measure in
detail.) Two commenters to the April NPR questioned the liability run-
off rate assumptions and asset loss rate assumptions used in the loss
severity model given that no statistical support was provided in the
April NPR. Asset loss rate assumptions are based on estimates of
recovery values for IDIs that either failed or came close to a failure
during the 12 months preceding the issuance of the April NPR. Deposit
run-off assumptions are based on the actual experience of large IDIs
that either failed or came close to a failure during the 2007 through
2009 period.
The FDIC believes that heavy reliance on secured liabilities or
other types of noncore funding reduces an IDI's potential franchise
value, thereby increasing the FDIC's potential loss in the event of
failure. Under the proposal, the FDIC includes a ratio of noncore
funding to total liabilities as a risk measure in the loss severity
scorecard. Both measures are quantitative measures that are derived
from readily available data. Appendix A to subpart A defines these
measures and provides the source of the data used to calculate them.
Appendix B to Subpart A describes how each of these risk measures is
converted to a score between 0 and 100.
The loss severity score is the weighted average of the loss
severity measure and the noncore funding to total liability ratio.
Table 9 shows cutoff values and weights for these measures. The loss
severity score cannot be less than 0 or more than 100 under the
proposal.
The FDIC proposes that a 75 percent weight be assigned to the loss
severity measure and a 25 percent weight to the noncore funding to
total liability ratio. The April NPR considered two measures--the ratio
of potential losses to total domestic deposits and the ratio of secured
liabilities to total domestic deposits--assigning an equal weight to
each measure to calculate the loss severity score. A commenter on the
April NPR stated that the loss severity measure should have a greater
weight in the loss severity score, arguing that the loss severity
measure directly measures the potential effect of an IDI's failure on
the DIF. The FDIC agrees. This proposal also replaces the secured
liabilities to total domestic deposits ratio with the noncore funding
to total liabilities ratio. The FDIC believes that noncore funding,
which, among others, includes brokered deposits, large time deposits
and foreign deposits in addition to secured liabilities, is a better
predictor of
[[Page 72619]]
potential franchise value than secured liabilities alone.
Table 9--Cutoff Values and Weights for Loss Severity Score Measures
------------------------------------------------------------------------
Cutoff values
Scorecard measures -------------------------- Weight
Minimum Maximum (percent)
------------------------------------------------------------------------
Potential Losses/Total Domestic 0 29 75
Deposits (Loss Severity Measure)
Noncore Funding/Total Liabilities 21 97 25
------------------------------------------------------------------------
In the example in Table 10, Bank A's loss severity score would be
68.57.
Table 10--Loss Severity Score for Bank A
----------------------------------------------------------------------------------------------------------------
Weight Weighted
Scorecard measures Ratio Score (percent) score
----------------------------------------------------------------------------------------------------------------
Potential Losses/Total Domestic Deposits (Loss severity 23.62 81.49 75 61.09
measure)...................................................
Noncore Funding/Total Liabilities........................... 43.76 29.95 25 7.49
---------------------------------------------------
Total Loss Severity Score............................... ........... ........... ........... 68.57
----------------------------------------------------------------------------------------------------------------
3. Total Score
Once the performance and loss severity scores are calculated, these
scores are converted to a total score. Each IDI's total score is
calculated by multiplying its performance score by a loss severity
factor as follows:
First, the loss severity score is converted into a loss severity
factor 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
receive a loss severity measure of 0.8 and scores that fall at or above
the maximum cutoff of 85 receive a loss severity score of 1.2. Again, a
linear interpolation is used to convert loss severity scores between
the cutoffs into a loss severity measure.
The conversion is made using the following formula:
Loss Severity Factor = 0.8 + [0.005 * (Loss Severity Score -5)]
For example, if Bank A's loss severity score is 68.57, its loss
severity factor would be 1.12, calculated as follows:
0.8 + (0.005 * (68.57 - 5)) = 1.12
Next, the performance score is multiplied by the loss severity
factor to produce a total score (total score = performance score * loss
severity measure).
Since the loss severity factor ranges from 0.8 to 1.2, the total
score could be up to 20 percent higher or lower than the performance
score. For example, if Bank A's performance score is 69.33 and its loss
severity factor is 1.12, its total score would be calculated as
follows:
69.33 * 1.12 = 77.65
The resulting total score cannot be less than 30 or more than 90.
The total 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 FDIC would use a process similar to the
current large bank adjustment to determine the amount of the adjustment
to the total score.\20\ This discretionary adjustment is discussed in
more detail below.
---------------------------------------------------------------------------
\20\ 12 CFR 327.9(d)(4) (2010).
---------------------------------------------------------------------------
4. Initial Base Assessment Rate
A large IDI with a total score of 30 would pay the minimum initial
base assessment rate and a large IDI with a total score of 90 would pay
the maximum initial base assessment rate; for total scores between 30
and 90, initial base assessment rates would rise at an increasing rate
as the total score increased.21 22 The initial base
assessment rate (in basis points) is calculated using the following
formula: \23\
---------------------------------------------------------------------------
\21\ The score of 30 and 90 equals about the 13th and about the
99th percentile values, respectively, based on scorecard results as
of first quarter 2006 through fourth quarter 2007.
\22\ The rates that the FDIC proposes to apply to large and
highly complex IDIs pursuant to the large bank assessment system are
set out in the Assessment Base NPR, which is being published
concurrently with this NPR. See the Notice of Proposed Rulemaking
published elsewhere in this issue.
\23\ The initial base assessment rate would be rounded to two
decimal points.
[GRAPHIC] [TIFF OMITTED] TP24NO10.343
The calculation of an initial base assessment rate is based on an
approximated statistical relationship between an IDI's total score and
its estimated three-year cumulative failure probability, as shown in
Appendix 2 to the preamble.
Chart 2 illustrates the initial base assessment rate for a range of
total scores, assuming minimum and maximum initial base assessment
rates of 5 basis points and 35 basis points, respectively.
[[Page 72620]]
[GRAPHIC] [TIFF OMITTED] TP24NO10.344
The initial base assessment rate could be adjusted as a result of
the unsecured debt adjustment, the depository institution debt
adjustment, and the brokered deposit adjustment, as discussed in the
Assessment Base NPR.
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 IDI) have a different scorecard under the
proposal. A ``highly complex institution'' is defined as: (1) An IDI
(excluding a credit card bank) that has had $50 billion or more in
total assets for at least four consecutive quarters that either is
controlled by a parent company that has had $500 billion or more in
total assets for four consecutive quarters, or is controlled by one or
more intermediate parent companies that are controlled by a holding
company that has had $500 billion or more in assets for four
consecutive quarters, or (2) a processing bank or trust company that
has had $10 billion or more in total assets for at least four
consecutive quarters.\24\ Under the proposal, highly complex IDIs have
a scorecard with measures tailored to the risks they pose.
---------------------------------------------------------------------------
\24\ A parent company would have the same meaning as
``depository institution holding company'' in section 3(w) of the
FDI Act. 12 U.S.C. 1813(w)(1)(2001). Control would have the same
meaning as in section 2 of the Bank Holding Company Act of 1956. See
12 U.S.C. 1841(a)(2)(2001). 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 or
trust company would be defined as an institution whose last 3 years'
non-lending interest income plus fiduciary revenues plus investment
fees exceed 50 percent of total revenues (and last 3 year's
fiduciary revenues are non-zero).
---------------------------------------------------------------------------
The scorecard for a highly complex IDI is similar to the scorecard
for other large IDIs. Like the scorecard for other large IDIs, the
scorecard for highly complex IDIs contains a performance score and a
loss severity score. Table 11 shows the scorecard measures and their
relative contribution to the performance score or loss severity score.
As with the scorecard for large IDIs, most of the minimum and maximum
cutoff values for each scorecard measure used in the highly complex
IDI's scorecard equal the 10th and 90th percentile values of the
particular measure among these IDIs based upon data from the period
between the first quarter of 2000 and the fourth quarter of 2009.\25\
---------------------------------------------------------------------------
\25\ Some measures used in the highly complex IDI scorecard (and
that are not used in the scorecard for other large IDIs) do not use
the 10th and 90th percentile values as cutoffs due to lack of
historical data. These measures include the following: Top 20
counterparty exposures to Tier 1 capital and reserves, largest
counterparty exposures to Tier 1 capital and reserves, and level 3
trading assets measures. The cutoffs for the top 20 counterparty
exposures to Tier 1 capital and reserves, largest counterparty
exposures to Tier 1 capital and reserves, and level 3 trading assets
measures are based partly upon recent experience, but the minimum
cutoffs range from just under the 5th and 10th percentile values and
the maximum cutoffs range from the 80th to 85th percentile values of
these measures among only highly complex IDIs from the period
between the first quarter of 2000 and the fourth quarter of 2009.
[[Page 72621]]
Table 11--Scorecard for Highly Complex Institutions
----------------------------------------------------------------------------------------------------------------
Weights
within Component
Scorecard measures component weights
(percent) (percent)
----------------------------------------------------------------------------------------------------------------
P............................................. Performance Score
----------------------------------------------------------------------------------------------------------------
P.1........................................... Weighted Average CAMELS Rating........ 100 30
P.2........................................... Ability to Withstand Asset-Related ........... 50
Stress.
Tier 1 Leverage Ratio 10 ...........
Concentration Measure 35 ...........
Core Earnings/Average Quarter-End 20 ...........
Total Assets
Credit Quality Measure and Market 35 ...........
Risk Measure
P.3........................................... Ability to Withstand Funding-Related ........... 20
Stress.
Core Deposits/Total Liabilities 50 ...........
Balance Sheet Liquidity Ratio 30 ...........
Average Short-Term Funding/Average 20 ...........
Total Assets
----------------------------------------------------------------------------------------------------------------
L............................................. Loss Severity Score
----------------------------------------------------------------------------------------------------------------
L.1........................................... Loss Severity......................... ........... 100
Potential Losses/Total Domestic 75 ...........
Deposits (loss severity measure)
Noncore Funding/Total Liabilities 25 ...........
----------------------------------------------------------------------------------------------------------------
1. Performance Score
Table 12 gives the weights associated with the three components of
the performance scorecard for highly complex IDIs. The April NPR
included a market indicator--senior bond spreads--as one of the
performance score components for highly complex IDIs. While the FDIC
continues to believe that market indicators provide valuable market
perspectives on a highly complex IDI's performance, the FDIC thinks
that market indicators may be best considered on a bank-by-bank case
through the large bank adjustments, given concerns regarding market
liquidity and other idiosyncratic factors.
Table 12--Performance Score Components and Weights
------------------------------------------------------------------------
Weight
Performance score components (percent)
------------------------------------------------------------------------
Weighted Average CAMELS Rating............................. 30
Ability to Withstand Asset-Related Stress.................. 50
Ability to Withstand Funding-Related Stress................ 20
------------------------------------------------------------------------
a. Weighted Average CAMELS Score
The weighted average CAMELS score for highly complex IDIs is
derived in the same manner as in the scorecard for large IDIs.
b. Ability to Withstand Asset-Related Stress Component
The ability to withstand asset-related stress component contains
measures that the FDIC finds most relevant to assessing a highly
complex IDI's ability to withstand such stress:
Tier 1 leverage ratio;
Concentration measure (the higher of the ratio of higher-
risk assets to the sum of Tier 1 capital and reserves, the ratio of top
20 counterparty exposure to Tier 1 capital and reserves, or the ratio
of the largest counterparty exposure to Tier 1 capital and reserves);
The ratio of core earnings to average quarter-end total
assets;
Credit quality measure (the higher of the ratio of
criticized and classified items to the sum of Tier 1 capital and
reserves measure or the ratio of underperforming assets to the sum of
Tier 1 capital and reserves measure), and market risk measure (the
weighted average of a ratio of four-quarter trading revenue volatility
to Tier 1 capital, a ratio of market risk capital to Tier 1 capital,
and a ratio of level 3 trading assets to Tier 1 capital).
Two of the four measures used to assess a highly complex IDI's
ability to withstand asset-related stress (the Tier 1 leverage ratio
and the core earnings to average quarter-end total assets ratio) are
determined in the same manner as in the scorecard for other large IDIs.
However, the method used to calculate the other remaining measures--the
concentration measure, and the credit quality and market risk measure--
differ and are discussed below.
Concentration measure:
As in the scorecard for large IDIs, the concentration measure for
highly complex IDIs includes the higher-risk assets to Tier 1 capital
and reserves ratio described in detail in Appendix C to Subpart A.
However, the concentration measure in the highly complex institution
scorecard considers the top 20 counterparty exposures to Tier 1 capital
and reserves ratio and the largest counterparty exposure to Tier 1
capital and reserves ratio instead of the growth-adjusted portfolio
concentrations measure used in the scorecard for large IDIs (and in the
April NPR) because recent experience shows that the concentration of a
highly complex IDI's exposures to a small number of counterparties--
either through lending or derivatives activities--significantly
increases a highly complex IDI's vulnerability to unexpected market
events. The FDIC uses the top 20 counterparty exposure and the largest
counterparty exposure to capture such risk.
Credit quality measure and market risk measure:
As in the scorecard for large IDIs, the ability to withstand asset-
related stress includes a credit quality measure. However, the highly
complex institution scorecard also includes a market risk measure that
consists of three risk measures--trading revenue volatility, market
risk capital, and level 3 trading assets. All three risk measures are
calculated relative to a highly complex IDI's Tier 1 capital and
multiplied by their respective weights to calculate the market risk
measure. All three measures can be calculated using data from an IDI's
quarterly Consolidated Reports of Condition and Income (Call Reports)
and Thrift Financial Reports (TFRs). The FDIC believes that combining
these three risk measures better captures a highly complex IDI's market
risk than any single measure.
The trading revenue volatility measures the sensitivity of the
IDI's trading revenue to market volatility. The market risk capital
measure is largely
[[Page 72622]]
based on regulatory 10-day 99th percentile Value-at-Risk (VaR), but it
incorporates specific market risk and a multiplication factor to
determine the capital charge, which accounts for the number of days
actual losses exceeded daily VaR measures, making the measure more
comparable across highly complex IDIs.26 27 28 Also, model-
based risk metrics such as VaR that rely on historical market prices
would not be a good measure of market risk if the IDI holds a large
volume of hard-to-value trading assets. The more difficult it is to
value an IDI's trading assets, the more approximations and substitutes
are needed to calculate the VaR, making the model results much less
relevant. The level 3 trading assets measure is a potential indicator
of illiquidity in the trading book.
---------------------------------------------------------------------------
\26\ Regulatory 10-day 99th percentile Value-at-Risk (VaR) is
the estimate of the maximum amount that the value of covered
positions could decline during a 10-day holding period within a 99th
percent confidence level measured in accordance with section 4 of
Appendix C of part 325 of the FDIC Rules and Regulations. http://www.fdic.gov/regulations/laws/rules/2000-4800.html#fdic2000appendixctopart325.
\27\ Specific risk as defined in Appendix C of part 325 of the
FDIC Rules and Regulations means changes in the market value of
specific positions due to factors other than broad market movements
and includes event and default risk as well as idiosyncratic
variations. http://www.fdic.gov/regulations/laws/rules/2000-4800.html#fdic2000appendixctopart325.
\28\ The multiplication factor is based on the number of
exceptions based on backtesting--the number of business days for
which the magnitude of the actual daily net trading loss, if any,
exceeds the corresponding daily VAR measures. The backtesting
compares each of the IDI's most recent 250 business days' actual net
trading profit or loss with the corresponding daily VAR measures
generated for internal risk measurement purposes and calibrated to a
one-day holding period and a 99 percent, one-tailed confidence
level. http://www.fdic.gov/regulations/laws/rules/2000-4800.html#fdic2000appendixctopart325.
---------------------------------------------------------------------------
The FDIC recognizes that the relevance of credit risk and market
risk in assessing a highly complex IDI's vulnerability to stress
depends on the IDI's asset composition. An IDI with a significant
amount of trading assets could be as risky as an IDI that focuses on
lending even though the primary source of risk may differ. In order to
treat both types of IDIs fairly, the FDIC proposes to assign a combined
weight of 35 percent to the credit risk measure and the market risk
measure. The relative weight between the two may vary depending on the
ratio of average trading assets to the sum of average securities,
loans, and trading assets (the trading asset ratio) as follows:
Weight for Credit Quality Measure = (1 - Trading Asset
Ratio) * 0.35
Weight for Market Risk Measure = Trading Asset Ratio *
0.35
Table 14 shows cutoff values and weights for the ability to
withstand asset-related stress measures.
Table 14--Cutoff Values and Weights for Ability To Withstand Asset-Related Stress Measures
----------------------------------------------------------------------------------------------------------------
Cutoff values Sub-
-------------------------- component
Scorecard measures weight Weight
Minimum Maximum (percent)
----------------------------------------------------------------------------------------------------------------
Tier 1 Leverage Ratio..................... 6 13 ........... 10%
Concentration Measure..................... ........... ........... ........... 35%
Higher Risk Assets/Tier 1 Capital and 0 135 .............................
Reserves;.
Top 20 Counterparty Exposure/Tier 1 0 125 .............................
Capital and Reserves; or
Largest Counterparty Exposure/Tier 1 0 20 ........... .............................
Capital and Reserves
Core Earnings/Average Quarter-end Total 0 2 ........... 20%
Assets
Credit Quality Measure *.................. ........... ........... ........... 35% * (1-Trading Asset Ratio)
Criticized and Classified Items to 8 100 ........... .............................
Tier 1 Capital and Reserves; or
Underperforming Assets/Tier 1 Capital 2 37 ........... .............................
and Reserves
Market Risk Measure *..................... ........... ........... ........... 35% * Trading Asset Ratio
Trading Revenue Volatility/Tier 1 0 2 60 .............................
Capital
Market Risk Capital/Tier 1 Capital 0 10 20 .............................
Level 3 Trading Assets/Tier 1 Capital 0 35 20 .............................
----------------------------------------------------------------------------------------------------------------
* Combined, the credit quality measure and the market risk measure will be assigned a 35 percent weight. The
relative weight between the two measures will depend on the ratio of average trading assets to sum of average
securities, loans and trading assets (trading asset ratio).
c. Ability to Withstand Funding-Related Stress Component
The ability to withstand funding-related stress component contains
three measures that are most relevant to assessing a highly complex
IDI's ability to withstand such stress--a core deposits to total
liabilities ratio, a balance sheet liquidity ratio, and an average
short-term assets to average total assets ratio.\29\
---------------------------------------------------------------------------
\29\ The FDIC has modified data elements included in the liquid
assets to short-term liability ration proposed in the April NPR, and
termed it as the balance sheet liquidity ratio to better reflect
what the ratio is designed to capture. See Appendix A for detailed
description.
---------------------------------------------------------------------------
Two of the measures (the core deposits to total liabilities ratio
and the balance sheet liquidity ratio) in the ability to withstand
funding-related stress component are determined in the same manner as
in the scorecard for large IDIs, although their weights differ.
However, the ability to withstand funding-related stress component in
the highly complex institution scorecard adds an additional measure--
the average short-term funding to average total assets ratio--because
experience during the recent crisis shows that heavy reliance on short-
term funding significantly increases a highly complex IDI's
vulnerability to unexpected adverse developments in the funding market.
Table 15 shows cutoff values and weights for the ability to
withstand funding-related stress measures.
[[Page 72623]]
Table 15--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 79 50
Balance Sheet Liquidity Ratio.... 7 188 30
Average Short-term Funding/ 0 20 20
Average Total Assets............
------------------------------------------------------------------------
d. Calculating the Performance Score
To calculate the performance score for a highly complex IDI, 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 respective weights and the results are summed
to arrive at the performance score. The performance score is capped at
100 under the proposal.
2. The Loss Severity Score
The loss severity score for highly complex IDIs is calculated the
same way as the loss severity score for other large IDIs.
3. Total Score and Initial Base Assessment Rate
The total score and the initial base assessment rate for highly
complex IDIs are calculated in the same manner as for other large IDIs,
as described above. As is the case for other large IDIs, the total
score cannot be less than 30 or more than 90. The total score for
highly complex IDIs 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, cannot be less
than 30 or more than 90. 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) (2010).
---------------------------------------------------------------------------
As in the case of other large IDIs, the initial base assessment
rate could also be adjusted as a result of the unsecured debt
adjustment, the depository institution debt adjustment, and the
brokered deposit adjustment as discussed in the Assessment Base NPR.
C. Large Bank Adjustment to the Total Score
Although the proposed scorecards should improve the relative risk
ranking of large IDIs, the FDIC proposes that it have the ability to
adjust the total score for all large IDIs, up or down, by a maximum of
15 points, based upon significant risk factors that are not captured in
the scorecard. This discretionary adjustment would be similar to the
assessment rate adjustment that large IDIs and insured branches of
foreign banks within Risk Category I are subject to under current
rules.\31\ In the April NPR, the FDIC proposed that it have the ability
to make discretionary adjustments to the performance score and loss
severity score of up to 15 points each. A number of commenters stated
that these potential discretionary adjustments were too large, too
subjective, and not transparent.
---------------------------------------------------------------------------
\31\ 12 CFR 327.9(d)(4) (2010).
---------------------------------------------------------------------------
The FDIC believes that it is important that it have ability to
consider idiosyncratic factors or other relevant risk factors that are
not included in the scorecards when assessing the probability of
failure and potential loss given failure. The FDIC acknowledges,
however, that the discretionary adjustment process could be streamlined
by applying the adjustment to the total score, rather than having
potential adjustments to both the performance score and the loss
severity score, while still providing the FDIC with flexibility to give
sufficient weight to the idiosyncratic factors or other risk factors
not included 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 IDI's primary federal regulator and, for state
chartered institutions, state banking supervisor.
The FDIC acknowledges the need to clarify its processes for making
any adjustments to ensure fair treatment and accountability and plans
to propose and seek comment on updated guidelines for evaluating
whether assessment rate adjustments are warranted and the size of the
adjustments. The FDIC will not adjust assessment rates until the
updated guidelines are approved by the FDIC's Board. In addition, the
FDIC will publish aggregate statistics on adjustments each quarter.
In general, the adjustments to the total score would have a
proportionally greater effect on the assessment rate of those IDIs with
a higher total score since the assessment rate rises at an increasing
rate as the total score rises as shown in Chart 1.
D. Appeals Process
Notifications involving an upward adjustment to an IDI's assessment
rate would be made in advance of implementing such an adjustment so
that the IDI has an opportunity to respond to or address the FDIC's
rationale for proposing an upward adjustment. Adjustments would be
implemented after considering the IDI's response to the notification
and considering any subsequent changes either to the inputs or other
risk factors that relate to the FDIC's decision. Procedures and
timetables for the appeals process are described in detail on the
FDIC's Web site and can be found using the following link: http://www.fdic.gov/deposit/insurance/assessments/requests_review.html.
E. Data Source
In most cases, the FDIC proposes to use data that are currently
publicly available to compute scorecard measures. Data elements
required to compute four scorecard measures--higher-risk assets, top 20
counterparty exposures, the largest counterparty exposure and
criticized/classified items--are currently gathered during the
examination process. Rather than relying on the examination process as
proposed in the April NPR, the FDIC proposes that the data elements for
these four scorecard measures be collected directly from IDIs. The FDIC
anticipates that the necessary changes would be made to Call Reports
and TFRs beginning with second quarter of 2011. The data elements would
remain confidential.
F. Updating the Scorecard
The FDIC would have the flexibility to update the minimum and
maximum cutoff values used in each scorecard annually without further
rulemaking as long as the method of selecting cut-off values remains
unchanged. As stated earlier, the cutoff values are generally based on
the 10th and 90th percentile
[[Page 72624]]
values for the ten-year period ending in 2009. In particular, the FDIC
could add new data for subsequent years 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 will allow the FDIC
to use the most 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, that the method of selecting
cutoff values should be revised, that the weights assigned to the
scorecard measures should be recalibrated, or that a new method should
be used to differentiate risk among large IDIs or highly complex IDIs,
these changes would be made through a future rulemaking.
Financial ratios for any given quarter will continue to be
calculated from the Call Reports and TFRs filed by each IDI as of the
last day of the quarter. CAMELS component rating changes will continue
to be effective as of the date that the rating change is transmitted to
the IDI for purposes of determining assessment rates.\32\
---------------------------------------------------------------------------
\32\ 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.
---------------------------------------------------------------------------
Appendices 1 and 2 to the preamble will not appear in the Code of
Federal Regulations.
Appendix 1 to Preamble--Statistical Analysis of Measures
The risk measures included in the performance score 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 2008 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] TP24NO10.345
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] TP24NO10.346
Where
Fail is whether an institution i failed on or prior to year-end 2009
or not.\33\
---------------------------------------------------------------------------
\33\ For the purpose of regression analysis, large institutions
that received significant government support or merged with another
entity with government support.
To select the risk measures for the scorecard, the FDIC first
considered those measures deemed to be most relevant in assessing large
institutions' ability to withstand stress. These candidate risk
measures were converted to a score between 0 and 100, using specified
minimum and maximum cutoff values, and then tested for statistical
significance in both the expert judgment ranking and failure prediction
models.
Table 1.1 provides descriptive statistics for all risk measures
used in the large institution scorecard and highly complex institution
scorecard. As noted in Section II. A. 1., most but not all of the
minimum and maximum cutoff values for each scorecard measure equal the
10th and 90th percentile values among large institutions based upon
data from 2000 through 2009.
[[Page 72625]]
[GRAPHIC] [TIFF OMITTED] TP24NO10.347
Table 1.2 provides the average, median, and standard deviation for
each of the scored risk measures used in the expert judgment ranking
and failure prediction models.\34\ The figures are based on data from
2005 through 2009. The loss severity and noncore funding measures (i.e.
components of the total loss severity score) were excluded from the
analysis, since neither of the dependent variables in the two
regressions reflect the expected (or actual) loss given failure. Most
of the performance measures, other than concentration and credit
quality measures, are based on Call Report or TFR data and defined in
Appendix A to subpart A. The concentration measure is described in
detail in Appendix C to subpart A.
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\34\ 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.
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[[Page 72626]]
[GRAPHIC] [TIFF OMITTED] TP24NO10.348
OLS Model Results and Derivation of Weights:
Table 1.3 shows the results of the OLS model using the above
measures for years 2005 through 2008. The dependent variable for the
model is an expert judgment ranking as of year-end 2009. All of the
measures are statistically significant in several years at the 10
percent level. Four of the seven measures--the weighted average CAMELS
rating, concentration measure, credit quality measure, and core
deposits ratio--are significant at the 5 percent level in all years.
[GRAPHIC] [TIFF OMITTED] TP24NO10.349
The weight for each scorecard measure was generally based on the
weight implied by coefficients for 2005 to 2008, with some adjustments
to account for more recent experience. The implied weights are computed
by dividing the average of scorecard measure coefficients for 2005 to
2008 by the sum of the average coefficients. For example, the average
coefficient on the weighted average CAMELS rating was 0.52, which is
about 31 percent of the
[[Page 72627]]
coefficient sum for all measures (1.7). The current proposal assigns a
weight of 30 percent to this measure. Similarly, the average
coefficient of 0.36 on the concentration measure implies a weight of 21
percent (0.36/1.7 = 0.21). The proposal effectively assigns a weight of
17.5 percent (50 percent weight on the ability to withstand asset-
related stress score x 35 percent weight on the concentration measure).
Table 1.4 shows the average coefficients and implied and actual
weights.
[GRAPHIC] [TIFF OMITTED] TP24NO10.350
Logistic Model Results:
Table 1.5 shows the results of the logistic regression model, where
the dependent variable for the model is whether an institution failed
before year-end 2009. The weighted average CAMELS rating, Tier 1
leverage ratio, core deposits ratio, and concentration measure are
significant at the 5 percent level in all years. The core earnings
ratio, credit quality measure, and balance sheet liquidity ratio are
not statistically significant in several years.
[[Page 72628]]
[GRAPHIC] [TIFF OMITTED] TP24NO10.351
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] TP24NO10.352
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 the current small bank model
financial ratios improves the ability to predict the year-end 2009
expert judgment ranking; however, the improvement is not as
[[Page 72629]]
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 47 percent for the model with
proposed measures.
[GRAPHIC] [TIFF OMITTED] TP24NO10.353
Appendix 2 to Preamble--Conversion of Total Score Into Initial Base
Assessment Rate
The formula for converting an IDI's total score into an initial
assessment rate is based on a single-variable logistic regression
model, which uses an IDI's total score as of year-end 2006 to predict
whether the IDI has failed on or before year-end 2009. The logistic
model is estimated as:
[GRAPHIC] [TIFF OMITTED] TP24NO10.354
Where:
Fail is whether an IDI i failed on or before year-end 2009 or not;
and \35\
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\35\ 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 IDI i's total score as of year-end 2006.
Chart 2.1 below shows that the total score can reasonably
differentiate IDIs that failed after 2006. About the worst 12 percent
of IDIs in terms of their total score as of year-end 2006 accounted for
more than two-thirds of failures over the next three years.
[[Page 72630]]
[GRAPHIC] [TIFF OMITTED] TP24NO10.355
The plotted points in Chart 2.2 show the estimated failure
probabilities for the actual total scores using the logistic model and
the results are nonlinear.
[[Page 72631]]
[GRAPHIC] [TIFF OMITTED] TP24NO10.356
The proposed calculation of the initial assessment rates
approximates this nonlinear relationship for scores between 30 and
90.\36\ 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 IDI with a score
greater than 30 and less than 90 is:
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\36\ The initial assessment rate formula is simplified while
maintaining the nonlinear relationship.
[GRAPHIC] [TIFF OMITTED] TP24NO10.357
II. 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.\37\
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\37\ The FDIC may not address all of the questions posed in the
current rulemaking in the final rule, but may consider the
information gathered in future actions.
---------------------------------------------------------------------------
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 performance score and loss severity score be
combined as proposed?
(e) 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 cutoff values for the risk measures appropriate?
(c) The proposal eliminates debt ratings as an input in calculating
a large IDI's assessment rate. In the April NPR, the FDIC proposed
using a senior bond spread as a component of the highly complex IDI
scorecard. The FDIC decided against retaining that component in this
proposal because of comparability issues among IDIs. The FDIC
considered including credit default swap (CDS) spreads in the highly
complex IDI scorecard, but the proposal does not include them due to
the limited number of trades. Is this concern serious enough not to
include the CDS spreads in the scorecard? What other market-based
measures (credit, equity or others), if any, would enhance the proposed
pricing system? Should any other measures be added? Should any measures
be removed or replaced?
(d) Should the growth-adjusted portfolio concentration measure be
computed as proposed? Are the risk weights assigned to each portfolio
as
[[Page 72632]]
described in Appendix C to Subpart A appropriate?
(e) For the higher-risk concentration measure, should
concentrations in other portfolios be considered?
(f) Should counterparty exposures be defined as proposed?
(g) Should the balance sheet liquidity ratio be computed as
proposed?
(h) Should other risk measures be calculated as proposed?
3. Loss Severity Scorecard:
(a) Are asset haircuts and runoff assumptions for the loss severity
measure as described in Appendix D to Subpart A appropriate?
(b) Are asset adjustments due to liability runoff and capital
reductions as described in Appendix D to Subpart A applied
appropriately?
(c) Are the proposed weights assigned to loss severity measures
appropriate?
(d) Are cut-off values for risk measures appropriate?
(e) Should any other measures be added? Should any measures be
removed or replaced?
(f) Should other risk measures be calculated as proposed?
4. Regulatory Matters:
(a) What is the extent of regulatory burden of the proposed large
bank 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?
III. 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.\38\ For RFA purposes
a small institution is defined as one with $175 million or less in
assets. As of June 30, 2010, of the 7,839 insured commercial banks and
savings associations, there were 4,299 small insured depository
institutions, as that term is defined for purposes of the RFA. The
proposed rule, however, would apply only to institutions with $10
billion or greater in total assets. Consequently, small institutions
will experience no significant economic impact should the FDIC
implement the proposed large bank assessment system.
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\38\ See 5 U.S.C. 603, 604 and 605.
---------------------------------------------------------------------------
C. Paperwork Reduction Act
No collections of information pursuant to the Paperwork Reduction
Act of 1995, 44 U.S.C. 3501-3521 (PRA), are contained in the proposed
rule.
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 is amended to read as
follows:
Authority: 12 U.S.C. 1441, 1813, 1815, 1817-19, 1821.
2. Amend Sec. 327.4 by revising 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, highly complex, or a small institution (Sec. 327.9(d)(9))
or a determination by the FDIC that the institution is a new
institution (Sec. 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) or any successor divisions, 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
[[Page 72633]]
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. Revise Sec. 327.5 to read as follows:
Sec. 327.5 Assessment base.
(a) Assessment base for all insured depository institutions. Except
as provided in paragraphs (b), (c), and (d) of this section, the
assessment base for an insured depository institution shall equal the
average consolidated total assets of the insured depository institution
during the assessment period minus the average tangible equity of the
insured depository institution during the assessment period.
(1) Average consolidated total assets defined and calculated.
Average consolidated total assets is defined in the schedule of
quarterly averages in the Consolidated Reports of Condition and Income,
using a daily averaging method. The amounts to be reported as daily
averages are the sum of the gross amounts of consolidated total assets
for each calendar day during the quarter divided by the number of
calendar days in the quarter. For days that an office of the reporting
institution (or any of its subsidiaries or branches) is closed (e.g.,
Saturdays, Sundays, or holidays), the amounts outstanding from the
previous business day would be used. An office is considered closed if
there are no transactions posted to the general ledger as of that date.
For institutions that begin operating during the calendar quarter, the
amounts to be reported as daily averages are the sum of the gross
amounts of consolidated total assets for each calendar day the
institution was operating during the quarter divided by the number of
calendar days the institution was operating during the quarter.
(2) Average tangible equity defined and calculated. Tangible equity
is defined in the schedule of regulatory capital as Tier 1 capital. The
definition of Tier 1 capital is to be determined pursuant to the
definition the Report of Condition or Thrift Financial Report (or any
successor reports) instructions as of the assessment period for which
the assessment is being calculated.
(i) Calculation of average tangible equity. Except as provided in
paragraph (a)(2)(ii) of this section, average tangible equity shall be
calculated using monthly averaging. Monthly averaging means the average
of the three month-end balances within the quarter.
(ii) Alternate calculation of average tangible equity. Institutions
that reported less than $1 billion in quarter-end total consolidated
assets on their March 31, 2011 Reports of Condition or Thrift Financial
Reports may report average tangible equity using an end-of-quarter
balance or may at any time opt permanently to report average tangible
equity using a monthly average balance. An institution that reports
average tangible equity using an end-of-quarter balance and reports
average daily consolidated assets of $1 billion or more for two
consecutive quarters shall permanently report average tangible equity
using monthly averaging starting in the next quarter.
(3) Consolidated subsidiaries.
(i) Data for reporting from consolidated subsidiaries. Insured
depository institutions may use data that are up to 93 days old for
consolidated subsidiaries when reporting daily average consolidated
total assets. Insured depository institutions may use either daily
average asset values for the consolidated subsidiary for the current
quarter or for the prior quarter (that is, data that are up to 93 days
old), but, once chosen, insured depository institutions cannot change
the reporting method from quarter to quarter. Similarly, insured
depository institutions may use data for the current quarter or data
that are up to 93 days old for consolidated subsidiaries when reporting
tangible equity values. Once chosen, however, insured depository
institutions cannot change the reporting method from quarter to
quarter.
(ii) Reporting for insured depository institutions with
consolidated insured depository subsidiaries. Insured depository
institutions that consolidate other insured depository institutions for
financial reporting purposes shall report daily average consolidated
total assets and tangible equity without consolidating their insured
depository institution subsidiaries into the calculations. Investments
in insured depository institution subsidiaries should be included in
total assets using the equity method of accounting.
(b) Assessment base for banker's banks. (1) Bankers bank defined. A
banker's bank for purposes of calculating deposit insurance assessments
shall meet the definition of banker's bank set forth in 12 U.S.C. 24.
(2) Self-certification. Institutions that meet the requirements of
paragraph (b)(1) of this section shall so certify each quarter on the
Consolidated Reports of Condition and Income or Thrift Financial Report
to that effect.
(3) Assessment base calculation for banker's banks. A banker's bank
shall pay deposit insurance assessments on its assessment base as
calculated in paragraph (a) of this section provided that it conducts
50 percent or more of its business with entities other than its parent
holding company or entities other than those controlled either directly
or indirectly (under the Bank Holding Company Act or Home Owners' Loan
Act) by its parent holding company, the FDIC will exclude from that
assessment base the daily average reserve balances passed through to
the Federal Reserve, the daily average reserve balances held at the
Federal Reserve for its own account, and the daily average amount of
its federal funds sold, but in no case shall the amount excluded exceed
the sum of the bank's daily average amount of total deposits of
commercial banks and other depository institutions in the United States
and the daily average amount of its federal funds purchased.
(c) Assessment base for custodial banks. (1) Custodial bank
defined. A custodial bank for purposes of calculating deposit insurance
assessments shall be an insured depository institution with previous
calendar-year custody and safekeeping assets of at least $50 billion or
an insured depository institution that derived more than 50 percent of
its total revenue from custody and safekeeping activities over the
previous calendar year.
(2) Assessment base calculation for custodial banks. A custodial
bank shall pay deposit insurance assessments on its assessment base as
calculated in paragraph (a) of this section, but the FDIC will exclude
from that assessment base the daily average amount of highly liquid,
short-term assets (i.e., assets with a Basel risk weighting of 20
percent or less and a stated maturity date of 30 days or less), subject
to the limitation that the daily average value of these assets cannot
exceed the daily average value of the deposits identified by the
institution as being held in a custody and safekeeping account.
(d) Assessment base for insured branches of foreign banks. Average
consolidated total assets for an insured branch of a foreign bank is
defined as total assets of the branch (including net due from related
depository institutions) in accordance with the schedule of assets and
liabilities in the Report of Assets and Liabilities of U.S. Branches
and Agencies of Foreign Banks as of the assessment period for which the
[[Page 72634]]
assessment is being calculated, but measured using the definition for
reporting total assets in the schedule of quarterly averages in the
Consolidated Reports of Condition and Income, and calculated using a
daily averaging method. Tangible equity for an insured branch of a
foreign bank is eligible assets (determined in accordance with Sec.
347.210 of the FDIC's regulations) less the book value of liabilities
(exclusive of liabilities due to the foreign bank's head office, other
branches, agencies, offices, or wholly owned subsidiaries) calculated
on a monthly or end-of-quarter basis.
(e) Newly insured institutions. A newly insured institution shall
pay an assessment for the assessment period during which it became
insured. The FDIC will prorate the newly insured institution's
assessment amount to reflect the number of days it was insured during
the period.
4. Revise Sec. 327.6 to read as follows:
Sec. 327.6 Mergers and consolidations; other terminations of
insurance.
(a) Final quarterly certified invoice for acquired institution. An
institution that is not the resulting or surviving institution in a
merger or consolidation must file a report of condition for every
assessment period prior to the assessment period in which the merger or
consolidation occurs. The surviving or resulting institution shall be
responsible for ensuring that these reports of condition are filed and
shall be liable for any unpaid assessments on the part of the
institution that is not the resulting or surviving institution.
(b) Assessment for quarter in which the merger or consolidation
occurs. For an assessment period in which a merger or consolidation
occurs, total consolidated assets for the surviving or resulting
institution shall include the total consolidated assets of all insured
depository institutions that are parties to the merger or consolidation
as if the merger or consolidation occurred on the first day of the
quarter. Tier 1 capital shall be reported in the same manner.
(c) Other termination. When the insured status of an institution is
terminated, and the deposit liabilities of such institution are not
assumed by another insured depository institution--
(1) Payment of assessments; quarterly certified statement invoices.
The depository institution whose insured status is terminating shall
continue to file and certify its quarterly certified statement invoice
and pay assessments for the assessment period its deposits are insured.
Such institution shall not be required to certify its quarterly
certified statement invoice and pay further assessments after it has
paid in full its deposit liabilities and the assessment to the
Corporation required to be paid for the assessment period in which its
deposit liabilities are paid in full, and after it, under applicable
law, goes out of business or transfers all or substantially all of its
assets and liabilities to other institutions or otherwise ceases to be
obliged to pay subsequent assessments.
(2) Payment of deposits; certification to Corporation. When the
deposit liabilities of the depository institution have been paid in
full, the depository institution shall certify to the Corporation that
the deposit liabilities have been paid in full and give the date of the
final payment. When the depository institution has unclaimed deposits,
the certification shall further state the amount of the unclaimed
deposits and the disposition made of the funds to be held to meet the
claims. For assessment purposes, the following will be considered as
payment of the unclaimed deposits:
(i) The transfer of cash funds in an amount sufficient to pay the
unclaimed and unpaid deposits to the public official authorized by law
to receive the same; or
(ii) If no law provides for the transfer of funds to a public
official, the transfer of cash funds or compensatory assets to an
insured depository institution in an amount sufficient to pay the
unclaimed and unpaid deposits in consideration for the assumption of
the deposit obligations by the insured depository institution.
(3) Notice to depositors. (i) The depository institution whose
insured status is terminating shall give sufficient advance notice of
the intended transfer to the owners of the unclaimed deposits to enable
the depositors to obtain their deposits prior to the transfer. The
notice shall be mailed to each depositor and shall be published in a
local newspaper of general circulation. The notice shall advise the
depositors of the liquidation of the depository institution, request
them to call for and accept payment of their deposits, and state the
disposition to be made of their deposits if they fail to promptly claim
the deposits.
(ii) If the unclaimed and unpaid deposits are disposed of as
provided in paragraph (c)(2)(i) of this section, a certified copy of
the public official's receipt issued for the funds shall be furnished
to the Corporation.
(iii) If the unclaimed and unpaid deposits are disposed of as
provided in paragraph (c)(2)(ii) of this section, an affidavit of the
publication and of the mailing of the notice to the depositors,
together with a copy of the notice and a certified copy of the contract
of assumption, shall be furnished to the Corporation.
(4) Notice to Corporation. The depository institution whose insured
status is terminating shall advise the Corporation of the date on which
it goes out of business or transfers all or substantially all of its
assets and liabilities to other institutions or otherwise ceases to be
obligated to pay subsequent assessments and the method whereby the
termination has been effected.
(d) Resumption of insured status before insurance of deposits
ceases. If a depository institution whose insured status has been
terminated is permitted by the Corporation to continue or resume its
status as an insured depository institution before the insurance of its
deposits has ceased, the institution will be deemed, for assessment
purposes, to continue as an insured depository institution and must
thereafter file and certify its quarterly certified statement invoices
and pay assessments as though its insured status had not been
terminated. The procedure for applying for the continuance or
resumption of insured status is set forth in Sec. 303.248 of this
chapter.
5. Amend Sec. 327.8 by:
A. Removing paragraphs (e) and (f);
B. Redesignating paragraphs (g) through (s) as paragraphs (e)
through (q) respectively;
C. Revising newly redesignated paragraphs (e), (f), (g), (k), (l),
(m), (n), (o), and (p);
D. Adding new paragraphs (r), (s), (t), and (u) to read as follows:
Sec. 327.8 Definitions.
* * * * *
(e) 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 (f) of this section (other than an institution
classified as large for purposes of Sec. 327.9(d)(9)) 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.
(f) 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
[[Page 72635]]
classified as small under paragraph (e) 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.
(g) Highly Complex Institution. A highly complex institution is an
insured depository institution (excluding a credit card bank) with
greater than $50 billion in total assets for at least four consecutive
quarters that is controlled by a parent company with more than $500
billion in total assets for four consecutive quarters, or controlled by
one or more intermediate parent companies that are controlled by a
holding company with more than $500 billion in assets for four
consecutive quarters, or a processing bank or trust company that has
had $10 billion or more in total assets for at least four consecutive
quarters. 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 or 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.
* * * * *
(k) 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 (k)(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
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 (k)(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.
(l) Risk assignment. For all small institutions and insured
branches 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.
(m) Unsecured debt--For purposes of the unsecured debt adjustment
as set forth in Sec. 327.9(d)(6) and the depository institution debt
adjustment as set forth in Sec. 327.9(d)(7), unsecured debt shall
include senior unsecured liabilities and subordinated debt.
(n) Senior unsecured liability--For purposes of the unsecured debt
adjustment as set forth in Sec. 327.9(d)(6) and the depository
institution debt adjustment as set forth in Sec. 327.9(d)(7), 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.
(o) Subordinated debt--For purposes of the unsecured debt
adjustment as set forth in Sec. 327.9(d)(6) and the depository
institution debt adjustment as set forth in Sec. 327.9(d)(7),
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.
(p) Long-term unsecured debt--For purposes of the unsecured debt
adjustment as set forth in Sec. 327.9(d)(6) and the depository
institution debt adjustment as set forth in Sec. 327.9(d)(7), long-
term unsecured debt shall be unsecured debt with at least one year
remaining until maturity.
* * * * *
(r) Parent holding company--A parent holding 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.
(s) Processing bank or trust company--A processing bank or trust
company is an institution whose non-lending interest income, fiduciary
revenues, and investment banking fees, combined, exceed 50 percent of
total revenues (and its fiduciary revenues are non-zero), and has had
$10 billion or more in total assets for at least four consecutive
quarters.
(t) 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.
(u) Control--Control has the same meaning as in section 2 of the
Bank Holding Company Act of 1956, 12 U.S.C. 1841(a)(2).
6. 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.
[[Page 72636]]
(1) Risk Category I. Small institutions in Supervisory Group A that
are Well Capitalized;
(2) Risk Category II. Small 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. Small 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. Small 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
(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 ncreased
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. (i) 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 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), (7), and (8) 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(f), 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
[[Page 72637]]
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.
(ii) 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. 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.
(iii) Uniform amount and pricing multipliers. Except as adjusted
for the actual assessment rates set by the Board under Sec. 327.10(f),
the uniform amount shall be:
(A) 4.861 whenever the assessment rate schedule set forth in Sec.
327.10(a) is in effect;
(B) 2.861 whenever the assessment rate schedule set forth in Sec.
327.10(b) is in effect;
(C) 1.861 whenever the assessment rate schedule set forth in Sec.
327.10(c) is in effect; or
(D) 0.861 whenever the assessment rate schedule set forth in Sec.
327.10(d) is in effect.
(iv) Implementation of CAMELS rating changes--(A) Changes between
risk categories. If, during a quarter, a CAMELS composite rating change
occurs that results in an institution whose Risk Category I assessment
rate is determined using the financial ratios method moving from Risk
Category I to Risk Category II, III or IV, the institution's initial
base assessment rate for the portion of the quarter that it was in Risk
Category I shall be determined using the supervisory ratings in effect
before the change and the financial ratios as of the end of the
quarter, subject to adjustment pursuant to paragraphs (d)(6), (7), and
(8) of this section, as appropriate, and adjusted for the actual
assessment rates set by the Board under Sec. 327.10(f). 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), 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 will 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), (7) and (8) of
this section, as appropriate, and adjusted for the actual assessment
rates set by the Board under Sec. 327.10(f). 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 will 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), (7), and (8) 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), (7), and (8) 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 a uniform amount. 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) Uniform amount. Except as adjusted for the actual assessment
rates set by the Board under Sec. 327.10(f), the uniform amount for
all insured branches of foreign banks shall be:
(A) -3.127 whenever the assessment rate schedule set forth in Sec.
327.10(a) is in effect;
(B) -5.127 whenever the assessment rate schedule set forth in Sec.
327.10(b) is in effect;
(C) -6.127 whenever the assessment rate schedule set forth in Sec.
327.10(c) is in effect; or
(D) -7.127 whenever the assessment rate schedule set forth in Sec.
327.10(d) is in effect.
(iv) No insured branch of a foreign bank in any risk category shall
be subject to the adjustments in paragraphs (d)(5), (d)(6), or (d)(8)
of this section.
(v) 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
[[Page 72638]]
assessment rate shall be determined under the assessment schedule for
the appropriate Risk Category.
(vi) 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 will 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 this paragraph
(d)(2) of this section.
(3) Assessment scorecard for large institutions (other than highly
complex institutions). (i) All large institutions other than highly
complex institutions shall have their quarterly assessments determined
using the scorecard for large institutions.
Scorecard for Large Institutions
----------------------------------------------------------------------------------------------------------------
Weights
within Component
Scorecard measures component weights
(percent) (percent)
----------------------------------------------------------------------------------------------------------------
P............................................. Performance Score
----------------------------------------------------------------------------------------------------------------
P.1........................................... Weighted Average CAMELS Rating........ 100 30
P.2........................................... Ability to Withstand Asset-Related ........... 50
Stress:.
Tier 1 Leverage Ratio 10 ...........
Concentration Measure 35 ...........
Core Earnings/Average Quarter-End 20 ...........
Total Assets
Credit Quality Measure 35 ...........
P.3........................................... Ability to Withstand Funding-Related ........... 20
Stress:.
Core Deposits/Total Liabilities 60 ...........
Balance Sheet Liquidity Ratio 40 ...........
----------------------------------------------------------------------------------------------------------------
L............................................. Loss Severity Score
----------------------------------------------------------------------------------------------------------------
L.1........................................... Loss Severity......................... ........... 100
Potential Losses/Total Domestic 75 ...........
Deposits (loss severity measure)
Noncore Funding/Total Liabilities 25 ...........
----------------------------------------------------------------------------------------------------------------
(ii) The large institution scorecard produces two scores:
performance and loss severity.
(A) 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%).
(B) Weighted Average CAMELS score. (1) To derive the weighted
average CAMELS score, a weighted average of an institution's CAMELS
component ratings is calculated using the following weights:
------------------------------------------------------------------------
CAMELS component Weight
------------------------------------------------------------------------
C 25%
A 20%
M 25%
E 10%
L 10%
S 10%
------------------------------------------------------------------------
(2) 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.
(C) Ability to Withstand Asset-Related Stress. (1) The ability to
withstand asset-related stress component contains four measures: Tier 1
leverage ratio; Concentration measure (the higher of the higher-risk
assets to Tier 1 capital and reserves or growth-adjusted portfolio
concentrations measures); Core earnings to average quarter-end total
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 A and C define these
measures in detail and give the source of the data used to determine
them.
(2) The concentration measure score is the higher of the scores of
the two measures that make up the concentration measure score (higher-
risk assets to Tier 1 capital and reserves measure or growth-adjusted
portfolio concentrations measure). The credit quality measure 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 weights 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 Leverage Ratio............ 6 13 10
Concentration Measure:........... ........... ........... 35
Higher-Risk Assets to Tier 1 0 135 ...........
capital and Reserves; or....
Growth-Adjusted Portfolio 3 57
Concentrations..............
Core Earnings/Average Quarter-End 0 2 20
Total Assets....................
[[Page 72639]]
Credit Quality Measure........... ........... ........... 35
Criticized and Classified 8 100 ...........
Items/Tier 1 capital and
Reserves; or................
Underperforming Assets/Tier 1 2 37 ...........
capital and Reserves........
------------------------------------------------------------------------
(3) 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 as shown in Appendix B to this subpart. 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.
(D) Ability to Withstand Funding-Related Stress. The ability to
withstand funding-related stress component contains two risk measures:
a core deposits to liabilities ratio, and a balance sheet liquidity
ratio. Appendix A to this subpart describes these ratios in detail and
gives the source of the data used to determine them. Appendix B to this
subpart describes in detail how each of these measures is converted to
a score. The ability to withstand funding-related stress component
score is the weighted average of the two 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 79 60
Balance Sheet Liquidity Ratio.... 7 188 40
------------------------------------------------------------------------
(E) 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.
(ii) Loss severity score. The loss severity score is based on two
measures: the loss severity measure and noncore funding to total
liabilities ratio. Appendices A and D to this subpart describe these
measures in detail and Appendix B to this subpart describes how each of
these measures is converted to a score between 0 and 100. The loss
severity score is the weighted average of these two scores. Each
measure is assigned the following cutoff values and weights 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 0 29 75
Deposits (loss severity measure)
Noncore Funding/Total Liabilities 21 97 25
------------------------------------------------------------------------
(iii) Total Score. The performance and loss severity scores are
combined to produce a total score. The loss severity score is converted
into a loss severity factor 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 receive a loss severity measure of 0.8 and scores
that fall 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 factor: (Loss Severity
Factor = 0.8+[0.005*(Loss Severity Score- 5)]. The performance score is
multiplied by the loss severity factor to produce a total score (total
score = performance score * loss severity factor). The total score
cannot be less than 30 or more than 90. The total score is subject to
adjustment, up or down, by a maximum of 15 points, as set forth in
section (d)(5). The resulting total score cannot be less than 30 or
more than 90.
(iv) Initial base assessment rate. A large institution with a total
score of 30 pays the minimum initial base assessment rate and an
institution with a total score of 90 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:
[[Page 72640]]
[GRAPHIC] [TIFF OMITTED] TP24NO10.358
where Rate is the initial base assessment rate (expressed in basis
points), Maximum Rate is the maximum initial base assessment rate then
in effect (expressed in basis points), and Minimum Rate is the minimum
initial base assessment rate then in effect (expressed in basis
points). Initial base assessment rates are subject to adjustment
pursuant to paragraphs (d)(5), (d)(6), (d)(7), and (d)(8) of this
section, 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--(i) All
highly complex institutions shall have their quarterly assessments
determined using the scorecard for highly complex institutions.
Scorecard for Highly Complex Institutions
----------------------------------------------------------------------------------------------------------------
Weights
within Component
Scorecard measures component weights
(percent) (percent)
----------------------------------------------------------------------------------------------------------------
P............................................. Performance Score
----------------------------------------------------------------------------------------------------------------
P.1........................................... Weighted Average CAMELS Rating........ 100 30
P.2........................................... Ability to Withstand Asset-Related ........... 50
Stress:.
Tier 1 Leverage Ratio............... 10 ...........
Concentration Measure............... 35 ...........
Core Earnings/Average Quarter-End 20 ...........
Total Assets.
Credit Quality Measure and Market 35 ...........
Risk Measure.
----------------------------------------------------------------------------------------------------------------
P.3........................................... Ability to Withstand Funding-Related ........... 20
Stress:.
Core Deposits/Total Liabilities..... 50 ...........
Balance Sheet Liquidity Ratio....... 30 ...........
Average Short-term Funding/Average 20 ...........
Total Assets.
Average Short-Term Funding/Average 20 ...........
Total Assets.
----------------------------------------------------------------------------------------------------------------
L............................................. Loss Severity Score
----------------------------------------------------------------------------------------------------------------
L.1........................................... Loss Severity......................... ........... 100
Potential Losses/Total Domestic 75 ...........
Deposits (loss severity measure).
Noncore Funding/Total Liabilities... 25 ...........
----------------------------------------------------------------------------------------------------------------
(ii) 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 paragraph (d)(3) of this section for the large bank
scorecard applies to highly complex institutions, modified as follows.
(A) The scorecard for highly-complex institutions contains two
additional measures:
(1) A concentration measure based on three risk measures--higher-
risk assets, top 20 counterparty exposure, and the largest counterparty
exposure, all divided by Tier 1 capital and reserves, and
(2) A credit quality measure and market risk measure in the ability
to withstand asset-related stress; and an additional component--average
short-term funding to average total assets ratio--in the ability to
withstand funding-related stress.
(B) Performance score for highly complex institutions. A
performance score for highly complex institutions is the weighted
average of three inputs: Weighted average CAMELS rating (30%); 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
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
resulting score cannot exceed 100.
(C) Ability to withstand asset-related stress. (1) The scorecard
for highly complex institutions substitutes the growth-adjusted
concentration measure with the top 20 counterparty exposure and the
largest counterparty exposure, adds one additional factor to the
ability to withstand asset-related stress component--the market risk
measure--and one additional factor to the ability to withstand funding-
related stress component--the average short-term funding to average
total assets ratio. The cutoff values and weights for ability to
withstand asset-related stress measures are set forth below.
[[Page 72641]]
Cutoff Values and Weights for Ability To Withstand Asset-Related Stress Measures
----------------------------------------------------------------------------------------------------------------
Cutoff values Sub-
-------------------------- component
Scorecard measures weight Weight
Minimum Maximum (percent)
----------------------------------------------------------------------------------------------------------------
Tier 1 Leverage Ratio..................... 6 13 ........... 10%
Concentration Measure:.................... ........... ........... ........... 35%
Higher Risk Assets/Tier 1 Capital and 0 135
Reserves; Top 20 Counterparty.
Exposure/Tier 1 Capital and Reserves; 0 125
or.
Largest Counterparty Exposure/Tier 1 0 20
Capital and Reserves.
Core Earnings/Average Quarter-End Total 0 2 ........... 20%
Assets.
Credit Quality Measure\*\:................ ........... ........... ........... 35% * (1-Trading Asset
Ratio).
Criticized and Classified Items to 8 100
Tier 1 Capital and Reserves; or.
Underperforming Assets/Tier 1 Capital 2 37
and Reserves.
Market Risk Measure\*\:................... ........... ........... ........... 35% * Trading Asset Ratio.
Trading Revenue Volatility/Tier 1 0 2 60
Capital.
Market Risk Capital/Tier 1 Capital.... 0 10 20
Level 3 Trading Assets/Tier 1 Capital. 0 35 20
----------------------------------------------------------------------------------------------------------------
* Combined, the credit quality measure and the market risk measure will be assigned a 35 percent weight. The
relative weight between the two measures will depend on the ratio of average trading assets to sum of average
securities, loans and trading assets (trading asset ratio).
(2) Appendix A to subpart A of this part describes these measures
in detail and gives the source of the data used to calculate the
measures.
(D) Ability to withstand funding related stress. (1) The scorecard
for highly complex institutions adds one additional factor to the
ability to withstand funding-related stress component--the average
short-term funding to average 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 79 50
Balance Sheet Liquidity Ratio.... 7 188 30
Average Short-term Funding/ 0 20 20
Average Total Assets............
------------------------------------------------------------------------
(2) Appendix A to subpart A of this part describes these measures
in detail and gives the source of the data used to calculate the
measures.
(iv) 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
paragraph (d)(3)(ii) of this section.
(v) The performance score and the loss severity score are combined
in the same manner to calculate the total score as for large
institutions as set forth in paragraph (d)(3) of this section.
(vi) 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 paragraph (d)(3) of this
section. Initial base assessment rates are subject to adjustment
pursuant to paragraphs (d)(5), (d)(6), (d)(7), and (d)(8) of this
section, 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 total score for large institutions and highly
complex institutions. The total score for large institutions and highly
complex institutions is subject to adjustment, up or down, by a maximum
of 15 points, 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.
(i) Prior notice of adjustments--(A) Prior notice of upward
adjustment. Prior to making any upward adjustment to an institution's
total 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 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 total 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 total 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. Except as provided in
paragraph (d)(5)(iv) of this section, the amount of adjustment cannot
exceed the proposed adjustment amount contained in the initial notice
unless additional notice is provided so that the primary federal
regulator and the institution may respond.
[[Page 72642]]
(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 total
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 total 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 total
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 institutions, except new institutions as provided
under paragraph (d)(10)(i)(C) of this section and insured branches of
foreign banks as provided under paragraph (d)(2)(iii) of this section,
are subject to an adjustment of assessment rates for unsecured debt.
Any unsecured debt adjustment shall be made after any adjustment under
paragraph (d)(5) of this section.
(i) Application of unsecured debt adjustment. The unsecured debt
adjustment shall be determined as the sum of the initial base
assessment rate plus 40 basis points; that sum shall be multiplied by
the ratio of an insured depository institution's long-term unsecured
debt to its assessment base. The amount of the reduction in the
assessment rate due to the adjustment is equal to the dollar amount of
the adjustment divided by the amount of the assessment base.
(ii) Limitation--No unsecured debt adjustment that provides a
benefit for any institution shall exceed the lesser of 5 basis points
or 50 percent of the institution's initial base assessment rate.
(iii) Applicable quarterly reports of condition--Unsecured debt
adjustment ratios for any given quarter shall be calculated from
quarterly reports of condition (Call Reports and Thrift Financial
Reports, or any successor reports, as appropriate) filed by each
institution as of the last day of the quarter.
(7) Depository institution debt adjustment to initial base
assessment rate for all institutions. All institutions shall be subject
to an adjustment of assessment rates for unsecured debt held that is
issued by another depository institution. Any such depository
institution debt adjustment shall be made after any adjustment under
paragraphs (d)(5) and (d)(6) of this section.
(i) Application of depository institution debt adjustment. The
depository institution debt adjustment shall equal 50 basis points
multiplied by the ratio of the long-term unsecured debt an institution
holds that was issued by another insured depository institution to its
assessment base.
(ii) Applicable quarterly reports of condition. Depository
institution debt adjustment ratios for any given quarter shall be
calculated from quarterly reports of condition (Call Reports and Thrift
Financial Reports, or any successor reports, as appropriate) filed by
each institution as of the last day of the quarter.
(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 paragraphs (d)(5), (d)(6), and (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 in Sec. 327.8(p), 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. Insured
branches of foreign banks are not subject to the brokered deposit
adjustment as provided in paragraph (d)(2)(iii) of this section.
(i) Application of brokered deposit adjustment. The brokered
deposit adjustment shall be determined by multiplying 25 basis points
by the ratio of the difference between an insured depository
institution's brokered deposits and 10 percent of its domestic deposits
to its assessment base.
(ii) Limitation. The maximum brokered deposit adjustment will be 10
basis points; the minimum brokered deposit adjustment will be 0.
(iii) Applicable quarterly reports of condition. Brokered deposit
ratios for any given quarter shall be calculated from the quarterly
reports of condition (Call Reports and Thrift Financial Reports, or any
successor reports, as appropriate) filed by each institution as of the
last day of the quarter.
(9) Request to be treated as a large institution--(i) Procedure.
Any institution 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 consider such a request provided 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
institution 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, highly complex, 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 Risk Category I institution shall be assessed
the Risk Category I maximum initial base assessment rate for the
relevant assessment period. 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 depository
institution debt 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.
[[Page 72643]]
(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) and subject to the adjustments provided at paragraphs
(d)(5), (d)(7), and (d)(8). No new highly complex or large institutions
are entitled to adjustment under paragraph (d)(6). 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(k)(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. A small Risk Category I institution that is
established under Sec. 327.8(k)(4) and (5), but does not have CAMELS
component ratings, shall be assessed at 2 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(k)(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.
7. Revise Sec. 327.10 to read as follows:
Sec. 327.10 Assessment rate schedules.
(a) Assessment rate schedules if, after September 30, 2010, the
reserve ratio of the DIF has not reached 1.15 percent. (1)
Applicability. The assessment rate schedules in paragraph (a) of this
section will cease to be applicable when the reserve ratio of the DIF
first reaches 1.15 percent after September 30, 2010.
(2) Initial Base Assessment Rate Schedule. After September 30,
2010, if the reserve ratio of the DIF has not reached 1.15 percent, the
initial base assessment rate for an insured depository institution
shall be the rate prescribed in the following schedule:
Initial Base Assessment Rate Schedule if, After September 30, 2010, the Reserve Ratio of the DIF has not Reached
1.15 Percent
----------------------------------------------------------------------------------------------------------------
Large and
Risk Risk Risk Risk highly
category I category II category category IV complex
III institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate.................. 5-9 14 23 35 5-35
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Initial base rates that are not the minimum
or maximum rate will vary between these rates.
(i) Risk Category I Initial Base Assessment Rate Schedule. The
annual initial base assessment rates for all institutions in Risk
Category I shall range from 5 to 9 basis points.
(ii) 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 14, 23, and 35 basis points, respectively.
(iii) 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.
(iv) Large and Highly Complex Institutions Initial Base Assessment
Rate Schedule. The annual initial base assessment rates for all large
and highly complex institutions shall range from 5 to 35 basis points.
(3) Total Base Assessment Rate Schedule after Adjustments. After
September 30, 2010, if the reserve ratio of the DIF has not reached
1.15 percent, the total base assessment rates after adjustments for an
insured depository institution shall be the rate prescribed in the
following schedule.
Total Base Assessment Rate Schedule (after adjustments)* if, After September 30, 2010, the Reserve Ratio of the
DIF has not Reached 1.15 Percent**
----------------------------------------------------------------------------------------------------------------
Large and
Risk Risk Risk Risk highly
category I category II category category IV complex
III institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate.................. 5-9 14 23 35 5-35
Unsecured debt adjustment..................... (4.5)-0 (5)-0 (5)-0 (5)-0 (5)-0
Brokered deposit adjustment................... ........... 0-10 0-10 0-10 0-10
Total base assessment rate................ 2.5-9 9-24 18-33 30-45 2.5-45
----------------------------------------------------------------------------------------------------------------
* 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.
** Total base assessment rates do not include the depository institution debt adjustment.
[[Page 72644]]
(i) Risk Category I Total Base Assessment Rate Schedule. The annual
total base assessment rates for all institutions in Risk Category I
shall range from 2.5 to 9 basis points.
(ii) Risk Category II Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category II shall range
from 9 to 24 basis points.
(iii) Risk Category III Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category III shall range
from 18 to 33 basis points.
(iv) Risk Category IV Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category IV shall range
from 30 to 45 basis points.
(v) Large and Highly Complex Institutions Total Base Assessment
Rate Schedule. The annual total base assessment rates for all large and
highly complex institutions shall range from 2.5 to 45 basis points.
(b) Assessment rate schedules once the reserve ratio of the DIF
first reaches 1.15 percent after September 30, 2010, and the reserve
ratio for the immediately prior assessment period is less than 2
percent.
(1) Initial Base Assessment Rate Schedule. After September 30,
2010, once the reserve ratio of the DIF first reaches 1.15 percent, and
the reserve ratio for the immediately prior assessment period is less
than 2 percent, the initial base assessment rate for an insured
depository institution shall be the rate prescribed in the following
schedule:
Initial Base Assessment Rate Schedule Once the Reserve Ratio of the DIF Reaches 1.15 Percent After September 30,
2010, and the Reserve Ratio for the Immediately Prior Assessment Period is Less than 2 Percent
----------------------------------------------------------------------------------------------------------------
Large and
Risk Risk Risk Risk highly
category I category II category category IV complex
III institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate.................. 3-7 12 19 30 3-30
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Initial base rates that are not the minimum
or maximum rate will vary between these rates.
(i) Risk Category I Initial Base Assessment Rate Schedule. The
annual initial base assessment rates for all institutions in Risk
Category I shall range from 3 to 7 basis points.
(ii) 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 12, 19, and 30 basis points, respectively.
(iii) 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.
(iv) Large and Highly Complex Institutions Initial Base Assessment
Rate Schedule. The annual initial base assessment rates for all large
and highly complex institutions shall range from 3 to 30 basis points.
(2) Total Base Assessment Rate Schedule after Adjustments. After
September 30, 2010, once the reserve ratio of the DIF first reaches
1.15 percent, and the reserve ratio for the immediately prior
assessment period is less than 2 percent, the total base assessment
rates after adjustments for an insured depository institution shall be
the rate prescribed in the following schedule.
Total Base Assessment Rate Schedule (after Adjustments)* Once the Reserve Ratio of the DIF Reaches 1.15 Percent
After September 30, 2010, and the Reserve Ratio for the Immediately Prior Assessment Period is Less than 2
Percent**
----------------------------------------------------------------------------------------------------------------
Large and
Risk Risk Risk Risk highly
category I category II category category IV complex
III institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate.................. 3-7 12 19 30 3-30
Unsecured debt adjustment..................... (3.5)-0 (5)-0 (5)-0 (5)-0 (5)-0
Brokered deposit adjustment................... ........... 0-10 0-10 0-10 0-10
Total base assessment rate................ 1.5-7 7-22 14-29 29-40 1.5-40
----------------------------------------------------------------------------------------------------------------
* 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.
** Total base assessment rates do not include the depository institution debt adjustment.
(i) Risk Category I Total Base Assessment Rate Schedule. The annual
total base assessment rates for institutions in Risk Category I shall
range from 1.5 to 7 basis points.
(ii) Risk Category II Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category II shall range
from 7 to 22 basis points.
(iii) Risk Category III Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category III shall range
from 14 to 29 basis points.
(iv) Risk Category IV Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category IV shall range
from 29 to 40 basis points.
(v) Large and Highly Complex Institutions Total Base Assessment
Rate Schedule. The annual total base assessment rates for all large and
highly complex institutions shall range from 1.5 to 40 basis points.
(c) Assessment rate schedules if the reserve ratio of the DIF for
the prior assessment period is equal to or greater than 2 percent and
less than 2.5 percent. (1) Initial Base Assessment Rate
[[Page 72645]]
Schedule. If the reserve ratio of the DIF for the prior assessment
period is equal to or greater than 2 percent and less than 2.5 percent,
the initial base assessment rate for an insured depository institution,
except as provided in paragraph (e) of this section, shall be the rate
prescribed in the following schedule:
Initial Base Assessment Rate Schedule if Reserve Ratio for Prior Assessment Period Is Equal to or Greater Than 2
Percent But Less Than 2.5 Percent
----------------------------------------------------------------------------------------------------------------
Large and
Risk Risk Risk Risk highly
category I category II category category IV complex
III institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate.................. 2-6 10 17 28 2-28
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Initial base rates that are not the minimum
or maximum rate will vary between these rates.
(i) Risk Category I Initial Base Assessment Rate Schedule. The
annual initial base assessment rates for all institutions in Risk
Category I shall range from 2 to 6 basis points.
(ii) 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 10, 17, and 28 basis points, respectively.
(iii) 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.
(iv) Large and Highly Complex Institutions Initial Base Assessment
Rate Schedule. The annual initial base assessment rates for all large
and highly complex institutions shall range from 2 to 28 basis points.
(2) Total Base Assessment Rate Schedule after Adjustments. If the
reserve ratio of the DIF for the prior assessment period is equal to or
greater than 2 percent and less than 2.5 percent, the total base
assessment rates after adjustments for an insured depository
institution, except as provided in paragraph (e) of this section, shall
be the rate prescribed in the following schedule.
Total Base Assessment Rate Schedule (after Adjustments)* if Reserve Ratio for Prior Assessment Period Is Equal
to or Greater Than 2 Percent But Less Than 2.5 Percent**
----------------------------------------------------------------------------------------------------------------
Large and
Risk Risk Risk Risk highly
category I category II category category IV complex
III institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate.................. 2-6 10 17 28 2-38
Unsecured debt adjustment..................... (3)-0 (5)-0 (5)-0 (5)-0 (5)-0
Brokered deposit adjustment................... 0-10 0-10 0-10 0-10
-----------------------------------------------------------------
Total base assessment rate................ 1-6 5-20 12-27 23-38 1-38
----------------------------------------------------------------------------------------------------------------
* 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.
** Total base assessment rates do not include the depository institution debt adjustment.
(i) Risk Category I Total Base Assessment Rate Schedule. The annual
total base assessment rates for institutions in Risk Category I shall
range from 1 to 6 basis points.
(ii) Risk Category II Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category II shall range
from 5 to 20 basis points.
(iii) Risk Category III Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category III shall range
from 12 to 27 basis points.
(iv) Risk Category IV Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category IV shall range
from 23 to 38 basis points.
(v) Large and Highly Complex Institutions Total Base Assessment
Rate Schedule. The annual total base assessment rates for all large and
highly complex institutions shall range from 1 to 38 basis points.
(d) Assessment rate schedules if the reserve ratio of the DIF for
the prior assessment period is greater than 2.5 percent.
(1) Initial Base Assessment Rate Schedule. If the reserve ratio of
the DIF for the prior assessment period is greater than 2.5 percent,
the initial base assessment rate for an insured depository institution,
except as provided in paragraph (e) of this section, shall be the rate
prescribed in the following schedule:
[[Page 72646]]
Initial Base Assessment Rate Schedule if Reserve Ratio for Prior Assessment Period Is Greater Than or Equal to
2.5 Percent
----------------------------------------------------------------------------------------------------------------
Large and
Risk Risk Risk Risk highly
category I category II category category IV complex
III institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate.................. 1-5 9 15 25 1-25
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Initial base rates that are not the minimum
or maximum rate will vary between these rates.
(i) Risk Category I Initial Base Assessment Rate Schedule. The
annual initial base assessment rates for all institutions in Risk
Category I shall range from 1 to 5 basis points.
(ii) 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 9, 15, and 25 basis points, respectively.
(iii) 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.
(iv) Large and Highly Complex Institutions Initial Base Assessment
Rate Schedule. The annual initial base assessment rates for all large
and highly complex institutions shall range from 1 to 25 basis points.
(2) Total Base Assessment Rate Schedule after Adjustments. If the
reserve ratio of the DIF for the prior assessment period is greater
than 2.5 percent, the total base assessment rates after adjustments for
an insured depository institution, except as provided in paragraph (e)
of this section, shall be the rate prescribed in the following
schedule.
Total Base Assessment Rate Schedule (after Adjustments)* if Reserve Ratio for Prior Assessment Period Is Greater
Than or Equal to 2.5 Percent**
----------------------------------------------------------------------------------------------------------------
Large and
Risk Risk Risk Risk highly
category I category II category category IV complex
III institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate.................. 1-5 9 15 25 1-25
Unsecured debt adjustment..................... (2.5)-0 (4.5)-0 (5)-0 (5)-0 (5)-0
Brokered deposit adjustment................... 0-10 0-10 0-10 0-10
Total base assessment rate................ 0.5-5 4.5-19 10-25 20-35 0.5-35
----------------------------------------------------------------------------------------------------------------
* 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.
** Total base assessment rates do not include the depository institution debt adjustment.
(i) Risk Category I Total Base Assessment Rate Schedule. The annual
total base assessment rates for institutions in Risk Category I shall
range from 0.5 to 5 basis points.
(ii) Risk Category II Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category II shall range
from 4.5 to 19 basis points.
(iii) Risk Category III Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category III shall range
from 10 to 25 basis points.
(iv) Risk Category IV Total Base Assessment Rate Schedule. The
annual total base assessment rates for Risk Category IV shall range
from 20 to 35 basis points.
(v) Large and Highly Complex Institutions Total Base Assessment
Rate Schedule. The annual total base assessment rates for all large and
highly complex institutions shall range from 0.5 to 35 basis points.
(e) Assessment Rate Schedules for New Institutions. New depository
institutions, as defined in 327.8(j), shall be subject to the
assessment rate schedules as follows:
(1) Prior to the reserve ratio of the DIF first reaching 1.15
percent after September 30, 2010. After September 30, 2010, if the
reserve ratio of the DIF has not reached 1.15 percent, new institutions
shall be subject to the initial and total base assessment rate
schedules provided for in paragraph (a) of this section.
(2) Assessment rate schedules once the DIF reserve ratio first
reaches 1.15 percent after September 30, 2010. After September 30,
2010, once the reserve ratio of the DIF first reaches 1.15 percent, new
institutions shall be subject to the initial and total base assessment
rate schedules provided for in paragraph (b) of this section, even if
the reserve ratio equals or exceeds 2 percent or 2.5 percent.
(f) Total Base Assessment Rate Schedule adjustments and
procedures--(1) Board Rate Adjustments. The Board may increase or
decrease the total base assessment rate schedule in paragraphs (a)
through (d) of this section 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 in
effect pursuant to paragraph (b) of this section, 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;
[[Page 72647]]
(iv) The risk factors and other factors taken into account pursuant
to 12 USC 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.
8. Appendix A to Subpart A is revised to read as follows:
Appendix A to Subpart A of Part 327--Description of Scorecard Measures
------------------------------------------------------------------------
Scorecard measures 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.
Concentration Measure for Large Concentration score for large
IDIs (excluding Highly Complex institutions takes the higher score
Institutions). of the following two:
(1) Higher-Risk Assets/Tier 1 Sum of construction and land
Capital and Reserves. development (C&D) loans (funded and
unfunded), leveraged loans (funded
and unfunded), nontraditional
mortgages, and subprime consumer
loans divided by Tier 1 capital and
reserves. See Appendix C to this
subpart for the detailed
description of the ratio.
(2) Growth-Adjusted Portfolio The measure is calculated in
Concentrations. following steps:
(1) Concentration levels (as a ratio
to Tier 1 capital and reserves) are
calculated for each broad portfolio
category (C&D, other commercial
real estate loans, first lien
residential mortgages (including
non-agency mortgage-backed
securities), and junior lien
residential mortgages, 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 to
1.2 where a 3-year cumulated growth
rate of 20 percent or less equals a
factor of 1 and a growth rate of 80
percent or greater equals a factor
of 1.2. If three years of data are
not available, a growth factor of 1
will be assigned.
(3) Risk weights are assigned to
each category based on historical
loss rates.
(4) Concentration levels are
multiplied by risk weights and
squared to produce a risk-adjusted
concentration ratio for each
portfolio.
(5) The risk-adjusted concentration
ratio for each portfolio is
multiplied by the growth factor and
resulting values are summed.
See Appendix C to this subpart for
the detail description of the
measure.
Concentration Measure for Highly Concentration score for highly
Complex Institutions. complex institutions takes the
highest score of the following
three:
(1) Higher-Risk Assets/Tier 1 Sum of C&D loans (funded and
Capital and Reserves. unfunded), leveraged loans (funded
and unfunded), nontraditional
mortgages, and subprime consumer
loans divided by Tier 1 capital and
reserves. See Appendix C to this
subpart for the detailed
description of the ratio.
(2) Top 20 Counterparty Exposure/ Sum of the total exposure amount to
Tier 1 Capital and Reserves. the largest 20 counterparties by
exposure amount divided by Tier 1
capital and reserves. Counterparty
exposure is equal to the sum of
Exposure at Default (EAD)
associated with derivatives trading
and Securities Financing
Transactions (SFTs) and the gross
lending exposure (including all
unfunded commitments) for each
counterparty or borrower at the
consolidated entity level.\39\ EAD
for derivatives trading and SFTs is
to be calculated as defined in
Basel II or as updated in future
Basel Accords. EAD and lending
exposure is to be reported at the
consolidated level across all legal
entities for that counterparty.
(3) Largest Counterparty Exposure/ Sum of the exposure amount to the
Tier 1 Capital and Reserves. largest counterparty by exposure
amount divided by Tier 1 capital
and reserves. Counterparty exposure
is equal to the sum of Exposure at
Default (EAD) associated with
derivatives trading and Securities
Financing Transactions (SFTs) and
the gross lending exposure
(including all unfunded
commitments) for each counterparty
or borrower at the consolidated
entity level. EAD for derivatives
trading and SFTs is to be
calculated as defined in Basel II
or as updated in future Basel
Accords. EAD and lending exposure
is to be reported at the
consolidated level across all legal
entities for that counterparty.
Core Earnings/Average Quarter-End Core earnings are defined as
Total Assets. 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 an
average of five quarter-end total
assets (most recent and four prior
quarters). If four quarters of data
on core earnings are not available,
data for quarters that are
available will be added and
annualized. If five quarters of
data on total assets are not
available, data for quarters that
are available will be averaged.
Credit Quality Measure:........... Asset quality score takes a higher
score of the following two:
(1) Criticized and Classified Sum of criticized and classified
Items/Tier 1 Capital and Reserves. items divided by the sum of Tier 1
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 internally
rated the regulatory equivalent of
``Special Mention'' or worse, and
marked-to-market counterparty
positions that are internally rated
the regulatory equivalent of
``Special Mention'' or worse, less
credit valuation adjustments.
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.
(2) Underperforming Assets/Tier 1 Sum of loans that are 30-89 day past
Capital and Reserves. due, loans that are 90 days or more
past due, nonaccrual loans,
restructured loans (including
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.
[[Page 72648]]
Core Deposits/Total Liabilities... Sum of demand deposits, NOW
accounts, MMDA, other savings
deposits, CDs under $250,000 less
insured brokered deposits under
$250,000 divided by total
liabilities.
Balance Sheet Liquidity Ratio..... Sum of cash and balances due from
depository institutions, federal
funds sold and securities purchased
under agreements to resell, and
agency securities (excludes agency
mortgage-backed securities but
includes securities issued by the
U.S. Treasury, U.S. government
agencies, and U.S. government-
sponsored enterprises) divided by
the sum of federal funds purchased
and repurchase agreements, other
borrowings (including FHLB) with a
remaining maturity of one year or
less, 7.5 percent of insured
domestic deposits, and 15 percent
of uninsured domestic and foreign
deposits.
Potential Losses/Total Domestic Potential losses to the DIF in the
Deposits (Loss Severity Measure). event of failure divided by total
domestic deposits. Appendix D to
this subpart describes the
calculation of the loss severity
measure in detail.
Noncore Funding/Total Liabilities. Noncore liabilities divided by total
liabilities. Noncore liabilities
generally consist of total time
deposits of $250,000 or more, other
borrowed money (all maturities),
foreign office deposits, securities
sold under agreements to
repurchase, federal funds
purchased, and insured brokered
deposits issued in denominations of
less than $250,000.
Market Risk Measure for Highly This measure is a weighted average
Complex Institutions. of three risk measures:
(1) Trading Revenue Volatility/ Trailing 4-quarter standard
Tier 1 Capital. deviation of quarterly trading
revenue (merger-adjusted) divided
by Tier 1 capital.
(2) Market Risk Capital/Tier 1 Market risk capital divided by Tier
Capital. 1 capital. Market risk capital
equals market-risk equivalent
assets divided by 12.5.
(3) Level 3 Trading Assets/Tier 1 Level 3 trading assets divided by
Capital. Tier 1 capital.
Average Short-Term Funding/Average Quarterly average of federal funds
Total Assets. purchased and repurchase agreements
divided by the quarterly average of
total assets as reported on
Schedule RC-K of call reports.
------------------------------------------------------------------------
---------------------------------------------------------------------------
\39\ EAD and SFTs are defined and described in the compilation
issued by the Basel Committee on Banking Supervision in its June
2006 document, ``International Convergence of Capital Measurement
and Capital Standards.'' The definitions are described in detail in
Annex 4 of the document. Any updates to the Basel II capital
treatment of counterparty credit risk would be implemented as they
are adopted.
---------------------------------------------------------------------------
9. Appendix B to Subpart A is revised to read as follows:
Appendix B to Subpart A of Part 327--Conversion of Scorecard Measures
into Score
1. Weighted Average CAMELS Rating
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\ -)],
Where:
S = the weighted average CAMELS score; and
C = the weighted average CAMELS rating.
2. Other Scorecard Measures
For certain scorecard measures, a lower ratio implies lower risk
and a higher ratio implies higher risk. These measures include:
Concentration measure;
Credit quality measure;
Market risk measure;
Average short-term funding to average total assets
ratio;
Potential losses to total domestic deposits ratio (loss
severity measure); and,
Noncore funding to total liabilities ratio.
For those 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.
For other scorecard measures, a lower value represents higher
risk and a higher value represents lower risk. These measures
include:
Tier 1 leverage ratio;
Core earnings to average quarter-end total assets
ratio;
Core deposits to total liabilities ratio; and,
Balance sheet liquidity ratio.
For those 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, Max is the maximum cutoff value and Min is the
minimum cutoff value.
10. Appendix C to Subpart A is revised to read as follows:
Appendix C to Subpart A to Part 327--Concentration Measures
The concentration measure score for large institutions is the
higher of the two concentration scores: A higher-risk assets to Tier
1 capital and reserves ratio and a growth-adjusted portfolio
concentration measure. The concentration measure score for highly
complex institutions takes a higher of the three concentration
scores: a higher-risk assets to Tier 1 capital and reserve ratio, a
Top 20 counterparty exposure to Tier 1 capital and reserves ratio, a
largest counterparty to Tier 1 capital and reserves ratio. The
higher-risk assets to Tier 1 capital and reserve ratio and the
growth-adjusted portfolio concentration measure are described below.
1. Higher-risk assets/Tier 1 Capital and Reserves
The higher-risk assets to Tier 1 capital and reserves ratio is
the sum of the concentrations in each of four risk areas described
below and is calculated as:
[GRAPHIC] [TIFF OMITTED] TP24NO10.359
Where
H is institution i's higher-risk concentration measure and
k is a risk area.\1\ The four risk areas (k) are defined as:
---------------------------------------------------------------------------
\1\ The high-risk concentration measure is rounded to two
decimal points.
Construction and land development loans (funded and
unfunded);
Leveraged loans (funded and unfunded);
[[Page 72649]]
Nontraditional mortgage loans; and
Subprime consumer loans. 2,3
---------------------------------------------------------------------------
\2\ All loan concentrations should include purchased credit
impaired loans.
\3\ Each loan concentration category should exclude the maximum
amount of loans recoverable from the U.S. government, its agencies,
or government-sponsored agencies, under guarantee or insurance
provisions.
---------------------------------------------------------------------------
The risk areas are defined according to the interagency guidance
for a given product with specific modifications made to minimize
reporting discrepancies. The definitions for each risk area are as
follows:
1. Construction and Land Development Loans: Construction and
development loans include construction and land development loans
outstanding and unfunded commitments.
2. Leveraged Loans: Leveraged loans include all commercial
loans--funded and unfunded and securities (e.g., high yield bonds
meeting any of the criteria below), excluding those securities
classified as trading book, that meet any one of the following
conditions:
Loans or securities where proceeds are used for buyout,
acquisition, and recapitalization;
Loans or securities with a balance sheet leverage ratio
(total liabilities/total assets) higher than 50 percent or where a
transaction resulted in an increase in the leverage ratio of more
than 75 percent. Loans or securities where borrower's operating
leverage ratio ((total debt/trailing twelve month EBITDA (earnings
before interest, taxes, depreciation, and amortization) or senior
debt/trailing twelve month EBITDA)) are above 4.0X EBITDA or 3.0X
EBITDA, respectively. For purposes of this calculation, the only
permitted EBITDA adjustments are those adjustments specifically
permitted for that borrower in its credit agreement; or
Loans or securities that are designated as highly
leveraged transactions (HLT) by syndication agent.\4\
\4\ http://www.fdic.gov/news/news/press/2001/pr2801.html.
---------------------------------------------------------------------------
For purposes of the concentration measure, leveraged loans include
all loans and/or securitizations that may not have been considered
leveraged at the time of origination, but subsequent to origination,
meet the characteristics of a leveraged loan. Leveraged loans
include all securitizations where greater than 50 percent of the
assets backing the securitization meet one or more of the preceding
criteria of leveraged loans (e.g., CLOs), with the exception of
those securities classified as trading book.
3. Nontraditional Mortgage Loans: Nontraditional mortgage loans
includes all residential loan products that allow the borrower to
defer repayment of principal or interest and includes all interest-
only products, teaser rate mortgages, and negative amortizing
mortgages, with the exception of home equity lines of credit
(HELOCs) or reverse mortgages.\5\
---------------------------------------------------------------------------
\5\ http://www.fdic.gov/regulations/laws/federal/2006/06noticeFINAL.html.
---------------------------------------------------------------------------
For purposes of the concentration measure, nontraditional
mortgage loans include securitizations where greater than 50 percent
of the assets backing the securitization meet one or more of the
preceding criteria for nontraditional mortgage loans, with the
exception of those securities classified as trading book.
4. Subprime Consumer Loans: Subprime loans include loans made to
borrowers that display one or more of the following credit risk
characteristics (excluding subprime loans that are previously
included as nontraditional mortgage loans):
Two or more 30-day delinquencies in the last 12 months,
or one or more 60-day delinquencies in the last 24 months;
Judgment, foreclosure, repossession, or charge-off in
the prior 24 months;
Bankruptcy in the last 5 years;
Credit bureau 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
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.\6\
\6\ http://www.fdic.gov/news/news/press/2001/pr0901a.html.
---------------------------------------------------------------------------
For purposes of the concentration measure, subprime loans include
loans that were not considered subprime at origination, but meet the
characteristics of subprime subsequent to origination. Subprime
loans also include securitizations where more than 50 percent of
assets backing the securitization meet one or more of the preceding
criteria for subprime loans, excluding those securities classified
as trading book.
2. Growth-adjusted portfolio concentration measure
The growth-adjusted concentration measure is the sum of the
values of concentrations in each of the seven portfolios, each of
the values being first adjusted for risk weights and growth. To
obtain the value for each of the seven portfolios, the product of
the risk weight and the concentration ratio is first squared and
then multiplied by the growth factor. The measure is calculated as:
[GRAPHIC] [TIFF OMITTED] TP24NO10.360
Where
N is institution i's growth-adjusted portfolio concentration
measure;\7\
---------------------------------------------------------------------------
\7\ 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/
TFR data and they are:
First-lien residential mortgages and non-agency
residential mortgage-backed securities;
Closed-end junior liens and home equity lines of credit
(HELOCs);
Construction and land development loans;
Other commercial real estate loans;
Commercial and industrial loans;
Credit card loans; and
Other consumer loans. 8, 9
---------------------------------------------------------------------------
\8\ All loan concentrations should include the fair value of
purchased credit impaired loans.
\9\ Each loan concentration category should exclude the maximum
amount of loans recoverable from the U.S. government, its agencies,
or government-sponsored agencies, under guarantee or insurance
provisions.
---------------------------------------------------------------------------
The growth factor, g, is based on a three-year merger-adjusted
growth rate for a given portfolio; g ranges from 1 to 1.2 where a 20
percent growth rate equals a factor of 1 and an 80 percent growth
rate equals a factor of 1.2.10, 11 For growth rates less
than 20 percent, g is 1; for growth rates greater than 80 percent, g
is 1.2. For growth rates between 20 percent and 80 percent, the
growth factor is calculated as:
---------------------------------------------------------------------------
\10\ 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.
\11\ The growth factor is rounded to two decimal points.
[GRAPHIC] [TIFF OMITTED] TP24NO10.361
[GRAPHIC] [TIFF OMITTED] TP24NO10.362
[[Page 72650]]
Report/TFR and t is the quarter for which the assessment is
being determined.
The risk weight for each portfolio reflects relative peak loss
rates for banks at the 90th percentile during the 1990-2009
period.\12\ These loss rates were converted into equivalent risk
weights as shown in Table C.1.
---------------------------------------------------------------------------
\12\ 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. The peak loss rates were derived as follows. The loss
rate for each loan category for each bank with over $5 billion in
total assets was calculated for each of the last twenty calendar
years (1990-2009). The highest value of the 90th percentile of each
loan category over the twenty year period was selected as the peak
loss rate.
Table C.1--90th Percentile Annual Loss Rates for 1990-2009 Period and
Corresponding Risk Weights
------------------------------------------------------------------------
Loss Rates Risk
Portfolio (90th weights
percentile) (percent)
------------------------------------------------------------------------
First-Lien Mortgages.......................... 2.3 0.5
Second/Junior Lien Mortgages.................. 4.6 0.9
Commercial and Industrial (C&I) Loans......... 5.0 1.0
Construction and Development (C&D) Loans...... 15.0 3.0
Commercial Real Estate Loans, excluding C&D... 4.3 0.9
Credit Card Loans............................. 11.8 2.4
Other Consumer Loans.......................... 5.9 1.2
------------------------------------------------------------------------
11. Appendix D to Subpart A is added to read as follows:
Appendix D to Subpart A of Part 327--Description of the Loss Severity
Measure
The loss severity measure 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 FDIC
first uses assumptions about uninsured deposit and other unsecured
liability runoff and growth in insured deposits to adjust the size
and composition of the institution's liabilities. Assets are then
reduced to match any reduction in liabilities.\1\ The institution's
asset values are then further reduced so that the Tier 1 leverage
ratio reaches 2 percent.\2\ Asset adjustments are made pro rata to
asset categories to preserve the institution's asset composition.
Assumptions regarding loss rates at failure for a given asset
category and the extent of secured liabilities are then applied to
estimated assets and liabilities 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. The loss
severity measure is an average loss severity ratio for the three
most recent quarters.
---------------------------------------------------------------------------
\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
Federal Funds Purchased................................. 40.0
Repurchase Agreements................................... 25.0
Trading Liabilities..................................... 50.0
Unsecured Borrowings <= 1 Year.......................... 75.0
Unsecured Borrowings > 1 Year........................... 0.0
Secured Borrowings <= 1 Year............................ 25.0
Secured 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 ratio of 2 percent:
Cash and Interest Bearing Balances;
Trading Account Assets;
Federal 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
Federal 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
Federal home loan bank advances, secured federal funds
purchased, foreign deposits and repurchase agreements are assumed to
be fully secured.
Loss Severity Ratio Calculation
The FDIC's loss given failure (LGD) is calculated as:
[GRAPHIC] [TIFF OMITTED] TP24NO10.363
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.
[[Page 72651]]
By order of the Board of Directors.
Dated at Washington, DC, this 9th day of November 2010.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2010-29138 Filed 11-19-10; 4:15 pm]
BILLING CODE 6741-01-P