[Federal Register Volume 76, Number 38 (Friday, February 25, 2011)]
[Rules and Regulations]
[Pages 10672-10733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-3086]
[[Page 10671]]
Vol. 76
Friday,
No. 38
February 25, 2011
Part II
Federal Deposit Insurance Corporation
-----------------------------------------------------------------------
12 CFR Part 327
Assessments, Large Bank Pricing; Final Rule
Federal Register / Vol. 76 , No. 38 / Friday, February 25, 2011 /
Rules and Regulations
[[Page 10672]]
-----------------------------------------------------------------------
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
RIN 3064-AD66
Assessments, Large Bank Pricing
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The FDIC is amending its regulations to implement revisions to
the Federal Deposit Insurance Act made by the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank'') by modifying the
definition of an institution's deposit insurance assessment base; to
change the assessment rate adjustments; to revise the deposit insurance
assessment rate schedules in light of the new assessment base and
altered adjustments; to implement Dodd-Frank's dividend provisions; to
revise the large insured depository institution assessment system to
better differentiate for risk and better take into account losses from
large institution failures that the FDIC may incur; and to make
technical and other changes to the FDIC's assessment rules.
DATES: Effective Date: April 1, 2011.
FOR FURTHER INFORMATION CONTACT: Munsell St. Clair, Chief, Banking and
Regulatory Policy Section, Division of Insurance and Research, (202)
898-8967, Rose Kushmeider, Senior Economist, Division of Insurance and
Research, (202) 898-3861; Heather Etner, Financial Analyst, Division of
Insurance and Research, (202) 898-6796; 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; and Sheikha Kapoor, Counsel, Legal Division, (202) 898-3960, 550
17th Street, NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Dates
Except as specifically provided, the final rule will take effect
for the quarter beginning April 1, 2011, and will be reflected in the
June 30, 2011, fund balance and the invoices for assessments due
September 30, 2011.
II. Background
A. Current Deposit Insurance Assessments
At present, for deposit insurance assessment purposes, an insured
depository institution is placed into one of four risk categories each
quarter, determined primarily by the institution's capital levels and
supervisory evaluation. Current annual initial base assessment rates
are set forth in Table 1 below.
---------------------------------------------------------------------------
\1\ Within Risk Category I, there are different assessment
systems for large and small insured depository institutions, but the
possible range of rates is the same for all insured depository
institutions in Risk Category I.
Table 1--Current Initial Base Assessment Rates \1\ Risk Category
----------------------------------------------------------------------------------------------------------------
I *
-------------------------- II III IV
Minimum Maximum
----------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)................. 12 16 22 32 45
----------------------------------------------------------------------------------------------------------------
* Rates for institutions that do not pay the minimum or maximum rate will vary between these rates.
Within Risk Category I, initial base assessment rates vary between
12 and 16 basis points. For all institutions in Risk Category I, rates
depend upon weighted average CAMELS component ratings and certain
financial ratios. For a large institution (generally, one with at least
$10 billion in assets) that has debt issuer ratings, rates also depend
upon these ratings.
Initial base assessment rates are subject to adjustment. An insured
depository institution's total base assessment rate can vary from its
initial base assessment rate as the result of an unsecured debt
adjustment and a secured liability adjustment. The unsecured debt
adjustment lowers an insured depository institution's initial base
assessment rate using its ratio of long-term unsecured debt (and, for
small insured depository institutions, certain amounts of Tier 1
capital) to domestic deposits.\2\ The secured liability adjustment
increases an insured depository institution's initial base assessment
rate if the insured depository institution's ratio of secured
liabilities to domestic deposits is greater than 25 percent.\3\ In
addition, insured depository institutions in Risk Categories II, III
and IV are subject to an adjustment for large levels of brokered
deposits (the brokered deposit adjustment).\4\
---------------------------------------------------------------------------
\2\ Unsecured debt excludes debt guaranteed by the FDIC under
its Temporary Liquidity Guarantee Program.
\3\ The initial base assessment rate cannot increase more than
50 percent as a result of the secured liability adjustment.
\4\ 12 CFR 327.9(d)(7).
---------------------------------------------------------------------------
After applying all possible adjustments, the current minimum and
maximum total annual base assessment rates for each risk category are
set out in Table 2 below.
[[Page 10673]]
[GRAPHIC] [TIFF OMITTED] TR25FE11.000
The FDIC may uniformly adjust the total base rate assessment
schedule up or down by up to 3 basis points without further
rulemaking.\5\
---------------------------------------------------------------------------
\5\ Specifically:
The Board may increase or decrease the total base assessment
rate schedule up to a maximum increase of 3 basis points or a
fraction thereof or a maximum decrease of 3 basis points or a
fraction thereof (after aggregating increases and decreases), as the
Board deems necessary. Any such adjustment shall apply uniformly to
each rate in the total base assessment rate schedule. In no case may
such Board rate adjustments result in a total base assessment rate
that is mathematically less than zero or in a total base assessment
rate schedule that, at any time, is more than 3 basis points above
or below the total base assessment schedule for the Deposit
Insurance Fund, nor may any one such Board adjustment constitute an
increase or decrease of more than 3 basis points.
12 CFR 327.10(c). On October 19, 2010, the FDIC adopted a new
Restoration Plan that foregoes a uniform 3 basis point increase in
assessment rates scheduled to go into effect on January 1, 2011.
Thus, the assessment rates in this final rule reflect that change.
---------------------------------------------------------------------------
An institution's assessment is determined by multiplying its
assessment rate by its assessment base. Its assessment base is, and has
historically been, domestic deposits, with some adjustments. (These
adjustments have changed over the years.)
B. The Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank), enacted in July 2010, revised the statutory authorities
governing the FDIC's management of the Deposit Insurance Fund (the DIF
or the fund). Dodd-Frank granted the FDIC the ability to achieve goals
for fund management that it has sought to achieve for decades but
lacked the tools to accomplish: maintaining a positive fund balance
even during a banking crisis and maintaining moderate, steady
assessment rates throughout economic and credit cycles.
Among other things, Dodd-Frank: (1) Raised the minimum designated
reserve ratio (DRR), which the FDIC must set each year, to 1.35 percent
(from the former minimum of 1.15 percent) and removed the upper limit
on the DRR (which was formerly capped at 1.5 percent) and therefore on
the size of the fund; \6\ (2) required that the fund reserve ratio
reach 1.35 percent by September 30, 2020 (rather than 1.15 percent by
the end of 2016, as formerly required); \7\ (3) required that, in
setting assessments, the FDIC ``offset the effect of [requiring that
the reserve ratio reach 1.35 percent by September 30, 2020 rather than
1.15 percent by the end of 2016] on insured depository institutions
with total consolidated assets of less than $10,000,000,000''; \8\ (4)
eliminated the requirement that the FDIC provide dividends from the
fund when the reserve ratio is between 1.35 percent and 1.5 percent;
\9\ and (5) continued the FDIC's authority to declare dividends when
the reserve ratio at the end of a calendar year is at least 1.5
percent, but granted the FDIC sole discretion in determining whether to
suspend or limit
[[Page 10674]]
the declaration or payment of dividends.\10\
---------------------------------------------------------------------------
\6\ Public Law 111-203, Sec. 334(a), 124 Stat. 1376, 1539 (to
be codified at 12 U.S.C. 1817(b)(3)(B)).
\7\ Public Law 111-203, Sec. 334(d), 124 Stat. 1376, 1539 (to
be codified at 12 U.S.C. 1817(nt)).
\8\ Public Law 111-203, Sec. 334(e), 124 Stat. 1376, 1539 (to
be codified at 12 U.S.C. 1817(nt)).
\9\ Public Law 111-203, Sec. 332(d), 124 Stat. 1376, 1539 (to
be codified at 12 U.S.C. 1817(e)).
\10\ Public Law 111-203, Sec. 332, 124 Stat. 1376, 1539 (to be
codified at 12 U.S.C. 1817(e)(2)(B)).
---------------------------------------------------------------------------
Dodd-Frank also required that the FDIC amend its regulations to
redefine the assessment base used for calculating deposit insurance
assessments. Under Dodd-Frank, the assessment base must, with some
possible exceptions, equal average consolidated total assets minus
average tangible equity.\11\
---------------------------------------------------------------------------
\11\ Public Law 111-203, Sec. 331(b), 124 Stat. 1376, 1538 (to
be codified at 12 U.S.C. 1817(nt)).
---------------------------------------------------------------------------
C. Notice of Proposed Rulemaking on Assessment Dividends, Assessment
Rates and the Designated Reserve Ratio
Given the greater discretion to manage the DIF granted by Dodd-
Frank, the FDIC developed a comprehensive, long-range management plan
for the DIF. In October 2010, the FDIC adopted a Notice of Proposed
Rulemaking on Assessment Dividends, Assessment Rates and the Designated
Reserve Ratio (the October NPR) setting out the plan, which is designed
to: (1) Reduce the pro-cyclicality in the existing risk-based
assessment system by allowing moderate, steady assessment rates
throughout economic and credit cycles; and (2) maintain a positive fund
balance even during a banking crisis by setting an appropriate target
fund size and a strategy for assessment rates and dividends.\12\
---------------------------------------------------------------------------
\12\ 75 FR 66262 (Oct. 27, 2010). Pursuant to the comprehensive
plan, the FDIC also adopted a new Restoration Plan to ensure that
the DIF reserve ratio reaches 1.35 percent by September 30, 2020, as
required by the Dodd-Frank Wall Street Reform and Consumer
Protection Act. 75 FR 66293 (Oct. 27, 2010).
---------------------------------------------------------------------------
In developing the comprehensive plan, the FDIC analyzed historical
fund losses and used simulated income data from 1950 to the present to
determine how high the reserve ratio would have to have been before the
onset of the two banking crises that occurred during this period to
maintain a positive fund balance and stable assessment rates. Based on
this analysis and the statutory factors that the FDIC must consider
when setting the DRR, the FDIC proposed setting the DRR at 2 percent.
The FDIC also proposed that a moderate assessment rate schedule, based
on the long-term average rate needed to maintain a positive fund
balance, take effect when the fund reserve ratio exceeds 1.15
percent.\13\ This schedule would be lower than the current schedule.
Finally, the FDIC proposed suspending dividends when the fund reserve
ratio exceeds 1.5 percent.\14\ In lieu of dividends, the FDIC proposed
to adopt progressively lower assessment rate schedules when the reserve
ratio exceeds 2 percent and 2.5 percent.
---------------------------------------------------------------------------
\13\ Under section 7 of the Federal Deposit Insurance Act, the
FDIC has authority to set assessments in such amounts as it
determines to be necessary or appropriate. In setting assessments,
the FDIC must consider certain enumerated factors, including the
operating expenses of the DIF, the estimated case resolution
expenses and income of the DIF, and the projected effects of
assessments on the capital and earnings of insured depository
institutions.
\14\ 12 U.S.C. 1817(e)(2), as amended by Sec. 332 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act.
---------------------------------------------------------------------------
D. Final Rule Setting the Designated Reserve Ratio
In December 2010, the FDIC adopted a final rule setting the DRR at
2 percent (the DRR final rule), but deferred action on the other
subjects of the October NPR (dividends and assessment rates) until this
final rule. The FDIC's decision to set the DRR at 2 percent was based
partly on additional historical analysis, which is described below.
E. Notice of Proposed Rulemaking on the Assessment Base, Assessment
Rate Adjustments and Assessment Rates
In a notice of proposed rulemaking adopted by the FDIC Board on
November 9, 2010 (the Assessment Base NPR), the FDIC proposed to amend
the definition of an institution's deposit insurance assessment base
consistent with the requirements of Dodd-Frank, modify the unsecured
debt adjustment and the brokered deposit adjustment in light of the
changes to the assessment base, add an adjustment for long-term debt
held by an insured depository institution where the debt is issued by
another insured depository institution, and eliminate the secured
liability adjustment. The Assessment Base NPR also proposed revising
the current deposit insurance assessment rate schedule in light of the
larger assessment base required by Dodd-Frank and the revised
adjustments. The FDIC's goal was to determine a rate schedule that
would have generated approximately the same revenue as that generated
under the current rate schedule in the second quarter of 2010 under the
current assessment base. The Assessment Base NPR also proposed
revisions to the rate schedules proposed in the October NPR, in light
of the changes to the assessment base and the adjustments. These
revised rate schedules were also intended to generate the same revenue
as the corresponding rates in the October NPR.
F. Notices of Proposed Rulemaking on the Assessment System Applicable
to Large Insured Depository Institutions
In April 2010, the FDIC adopted a notice of proposed rulemaking
with request for comment to revise the risk-based assessment system for
all large insured depository institutions to better capture risk at the
time large institutions assume the risk, to better differentiate among
institutions for risk and take a more forward-looking view of risk, to
better take into account the losses that the FDIC may incur if such an
insured depository institution fails, and to make technical and other
changes to the rules governing the risk-based assessment system (the
April NPR).\15\
---------------------------------------------------------------------------
\15\ The preamble to the Large Bank NPR incorrectly summarized
the definition of a ``large institution''; however, the definition
was correct in the proposed regulation. The final rule, like the
proposed regulation, defines a large institution as an insured
depository institution: (1) That had assets of $10 billion or more
as of December 31, 2006 (unless, by reporting assets of less than
$10 billion for four consecutive quarters since then, it has become
a small institution); or (2) that had assets of less than $10
billion as of December 31, 2006, but has since had $10 billion or
more in total assets for at least four consecutive quarters, whether
or not the institution is new. In almost all cases, an insured
depository institution 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 institution has not yet
received a CAMELS rating, it will be given a weighted average CAMELS
rating of 2 for assessment purposes until actual CAMELS ratings are
assigned. An insured branch of a foreign bank is excluded from the
definition of a large institution.
---------------------------------------------------------------------------
Largely as a result of changes made by Dodd-Frank and the
Assessment Base NPR, the FDIC reissued its proposal applicable to large
insured depository institutions for comment on November 9, 2010 (the
Large Bank NPR), taking into account comments received on the April
NPR.
In the Large Bank NPR, the FDIC proposed eliminating risk
categories and the use of long-term debt issuer ratings for large
institutions, using a scorecard method to calculate assessment rates
for large and highly complex institutions, and retaining the ability to
make a limited adjustment after considering information not included in
the scorecard. In the Large Bank NPR, the FDIC stated that it would not
make adjustments until the guidelines for making such adjustments are
published for comment and subsequently adopted by the FDIC Board.
G. Update of Historical Analysis of Loss, Income and Reserve Ratios
The analysis set out in the October NPR to determine how high the
reserve ratio would have had to have been to have maintained both a
positive fund
[[Page 10675]]
balance and stable assessment rates from 1950 through 2010 assumed
assessment rates based upon an assessment base related to domestic
deposits rather than the assessment base required by Dodd-Frank
(average consolidated total assets minus average tangible equity).\16\
The FDIC undertook additional analysis (described in the DRR final rule
and repeated here) to determine how the results of the original
analysis would change had the new assessment base been in place from
1950 to 2010. Due to the larger assessment base resulting from Dodd-
Frank, the constant nominal assessment rate required to maintain a
positive fund balance from 1950 to 2010 would have been 5.29 basis
points (compared with 8.47 basis points using a domestic-deposit-
related assessment base). (See Chart 1.)
---------------------------------------------------------------------------
\16\ The historical analysis contained in the October NPR is
incorporated herein by reference.
---------------------------------------------------------------------------
The assessment base resulting from Dodd-Frank, had it been applied
to prior years, would have been larger than the domestic-deposit-
related assessment base, and the rates of growth of the two assessment
bases would have differed both over time and from each other. At any
given time, therefore, applying a constant nominal rate of 8.47 basis
points to the domestic-deposit-related assessment base would not
necessarily have yielded exactly the same revenue as applying 5.29
basis points to the Dodd-Frank assessment base.
Despite these differences, the new analysis applying a 5.29 basis
point assessment rate to the Dodd-Frank assessment base resulted in
peak reserve ratios prior to the two crises similar to those seen when
applying an 8.47 basis point assessment rate to a domestic- deposit-
related assessment base.\17\ (See Chart 2.) Both analyses show that the
fund reserve ratio would have needed to be approximately 2 percent or
more before the onset of the 1980s and 2008 crises to maintain both a
positive fund balance and stable assessment rates, assuming, in lieu of
dividends, that the long-term industry average nominal assessment rate
would have been reduced by 25 percent when the reserve ratio reached 2
percent, and by 50 percent when the reserve ratio reached 2.5
percent.\18\ Eliminating dividends and reducing rates would have
successfully limited rate volatility, whichever assessment base was
used.
---------------------------------------------------------------------------
\17\ Using the domestic-deposit-related assessment base, reserve
ratios would have peaked at 2.31 percent and 2.01 percent before the
two crises. (See Chart G in the October NPR.) Using the Dodd-Frank
assessment base, reserve ratios would have peaked at 2.27 percent
and 1.95 percent before the two crises.
\18\ Dodd-Frank provides that the assessment base be changed to
average consolidated total assets minus average tangible equity. See
Public Law 111-203, Sec. 331(b). For this simulation, from 1990 to
2010, the assessment base equals year-end total industry assets
minus Tier 1 capital. For earlier years (before the Tier 1 capital
measure existed) it equals year-end total industry assets minus
total equity. Other than as noted, the methodology used in the
additional analysis was the same as that used in the October NPR.
[GRAPHIC] [TIFF OMITTED] TR25FE11.001
[[Page 10676]]
[GRAPHIC] [TIFF OMITTED] TR25FE11.002
H. Scope of the Final Rule
This final rule encompasses all of the proposals contained in the
October NPR, the Assessment Base NPR and the Large Bank NPR, except the
proposal setting the DRR, which was covered in the DRR final rule.
I. Structure of the Next Sections of the Preamble
The next sections of this preamble are structured as follows:
Section II briefly discusses the number of comments
received;
Section III discusses the portion of the final rule
related to changes to the assessment base and adjustments to assessment
rates proposed in the Assessment Base NPR;
Subsection IV discusses the portion of the final rule
related to dividends and assessment rates proposed in the Assessment
Base NPR and the October NPR; and
Subsection V discusses the portion of the final rule
related to the assessment system applicable to large insured depository
institutions proposed in the Large Bank NPR.
III. Comments Received
The FDIC sought comments on every aspect of the proposed rules. The
FDIC received a total of 55 written comments on the October NPR, the
Assessment Base NPR and the Large Bank NPR, although some were
duplicative. Comments are discussed in the relevant sections below.
IV. The Final Rule: The Assessment Base and Adjustments to Assessment
Rates
A. Assessment Base
As stated above, Dodd-Frank requires that the FDIC amend its
regulations to redefine the assessment base used for calculating
deposit insurance assessments. Specifically, Dodd-Frank directs the
FDIC:
To define the term ``assessment base'' with respect to an
insured depository institution * * * as an amount equal to--
(1) the average consolidated total assets of the insured
depository institution during the assessment period; minus
(2) the sum of--
(A) the average tangible equity of the insured depository
institution during the assessment period, and
(B) in the case of an insured depository institution that is a
custodial bank (as defined by the Corporation, based on factors
including the percentage of total revenues generated by custodial
businesses and the level of assets under custody) or a banker's bank
(as that term is used in * * * (12 U.S.C. 24)), an amount that the
Corporation determines is necessary to establish assessments
consistent with the definition under section 7(b)(1) of the Federal
Deposit Insurance Act (12 U.S.C. 1817(b)(1)) for a custodial bank or
a banker's bank.\19\
---------------------------------------------------------------------------
\19\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, Sec. 331(b), 124 Stat. 1376, 1538 (codified at
12 U.S.C. 1817(nt)).
To implement this requirement, the FDIC, in this final rule,
defines ``average consolidated total assets,'' ``average tangible
equity,'' and ``tangible equity,'' and sets forth the basis for
reporting consolidated total assets and tangible equity.
To establish assessments consistent with the definition of the
``risk-based assessment system'' under the Federal Deposit Insurance
Act (the FDI Act), Dodd-Frank also requires the FDIC to determine
whether and to what extent adjustments to the assessment base are
appropriate for banker's banks and custodial banks. The final rule
outlines these adjustments and provides a definition of ``custodial
bank.''
1. Average Consolidated Total Assets
The final rule, like the proposed rule, requires that all insured
depository institutions report their average consolidated total assets
using the accounting methodology established for reporting total assets
as applied to Line 9 of Schedule RC-K of the Consolidated
[[Page 10677]]
Reports of Condition and Income (Call Report) (that is, the methodology
established by Schedule RC-K regarding when to use amortized cost,
historical cost, or fair value, and how to treat deferred tax effects).
The final rule differs from the proposed rule, however, by allowing
certain institutions to report average consolidated total assets on a
weekly, rather than daily, basis. The final rule requires institutions
with total assets greater than or equal to $1 billion and all
institutions that are newly insured after March 31, 2011, to average
their balances as of the close of business for each day during the
calendar quarter. Institutions with less than $1 billion in quarter-end
consolidated total assets on their March 31, 2011 Call Report or Thrift
Financial Report (TFR) may report an average of the balances as of the
close of business on each Wednesday during the calendar quarter or may,
at any time, permanently opt to calculate average consolidated total
assets on a daily basis. Once an institution that reports average
consolidated total assets using a weekly average reports average
consolidated total assets of $1 billion or more for two consecutive
quarters, it shall permanently report average consolidated total assets
using daily averaging starting in the next quarter.
While some commenters supported the requirement that all
institutions average their assets using daily balances, one trade group
requested that all institutions be allowed to choose between daily and
weekly averages. In the FDIC's view, institutions with at least $1
billion in assets should be able to compute averages using daily
balances. (Many already do so.) However, to avoid imposing transition
costs on smaller institutions (those with less than $1 billion in
assets), the final rule allows these institutions to calculate an
average of Wednesday asset balances, unless they opt permanently to
report daily averages.\20\ Newly insured institutions incur no
transition costs (since they have no existing systems) and, thus, must
average using daily balances.
---------------------------------------------------------------------------
\20\ Institutions currently may report a daily average or an
average of Wednesday assets on Call Report Schedule RC-K.
---------------------------------------------------------------------------
Under the final rule, an institution's daily average consolidated
total assets equal the sum of the gross amount of consolidated total
assets for each calendar day during the quarter divided by the number
of calendar days in the quarter. An institution's weekly average
consolidated total assets equal the sum of the gross amount of
consolidated total assets for each Wednesday during the quarter divided
by the number of Wednesdays 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 will be used. An office is considered
closed if there are no transactions posted to the general ledger as of
that date.
In the case of a merger or consolidation, the calculation of the
average assets of the surviving or resulting institution must include
the assets of all the merged or consolidated institutions for the days
in the quarter prior to the merger or consolidation, regardless of the
method used to account for the merger or consolidation.
In the case of an insured depository institution that is the parent
company of other insured depository institutions, the final rule, like
the proposed rule, requires that the parent insured depository
institution report its daily or weekly, average consolidated total
assets without consolidating its insured depository institution
subsidiaries into the calculations.\21\ Because of intercompany
transactions, a simple subtraction of the subsidiary insured depository
institutions' assets and equity from the parent insured depository
institution's assets and equity will not usually result in an accurate
statement of the parent insured depository institution's assets and
equity. This treatment is consistent with current assessment base
practice and ensures that all parent insured depository institutions
are assessed only for their own assessment base and not that of their
subsidiary insured depository institutions, which will be assessed
separately.
---------------------------------------------------------------------------
\21\ The amount of the institution's average consolidated total
assets without consolidating its insured depository institution
subsidiaries determines whether the institution may report a weekly
average.
---------------------------------------------------------------------------
For all other subsidiaries, assets, including those eliminated in
consolidation, will also be calculated using a daily or weekly
averaging method, corresponding to the daily or weekly averaging
requirement of the parent institution. The final rule clarifies that
Call Report instructions in effect for the quarter being reported will
govern calculation of the average amount of subsidiaries' assets,
including those eliminated in consolidation. Current Call Report
instructions state that the calculation should be for the same quarter
as the assets reported by the parent institution to the extent
practicable, but in no case differ by more than one quarter. However,
under the final rule, once an institution reports the average amount of
subsidiaries' assets, including those eliminated in consolidation,
using concurrent data, the institution must do so for all subsequent
quarters.
Finally, for insured branches of foreign banks, as in the proposed
rule, average consolidated total assets are 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,
but using the accounting methodology for reporting total assets
established in Schedule RC-K of the Call Report, and calculated using
the appropriate daily or weekly averaging method as described above.
In choosing to require all but smaller insured institutions to
report ``average consolidated total assets'' using daily averaging, the
FDIC sought to develop a measure that would be a truer reflection of
the assessment base during the entire quarter.\22\ By using a
methodology already established in the Call Report, the FDIC believes
the reporting requirements for the new assessment base will be
minimized. Finally, by using the Call Report methodology for reporting
average consolidated total assets, all institutions will report average
consolidated total assets consistently.
---------------------------------------------------------------------------
\22\ In this way, the daily averaging requirement is consistent
with the actions taken by the FDIC in 2006 when it determined that
using quarter-end deposit data as a proxy for balances over an
entire quarter did not accurately reflect an insured depository
institution's typical deposit level. As a result, the FDIC required
certain institutions to report a daily average deposit assessment
base.
---------------------------------------------------------------------------
2. Comments
Commenters favored the use of an existing measure for average
consolidated total assets because it will minimize the burden of the
rulemaking on institutions.
A few commenters suggested that the FDIC deduct goodwill and
intangibles from average consolidated total assets. According to one
commenter, a loss in value or write-off of goodwill (unlike other
assets) poses no additional risk of loss to the FDIC in the event of a
failure of an insured institution; goodwill is not an asset for which
the FDIC as receiver could have any expectation of recovery. Moreover,
failing to deduct goodwill could lead to anomalous results--two
institutions that merge and create goodwill would have a combined
assessment base greater than the sum of the two assessment bases
separately. The FDIC is not persuaded by these
[[Page 10678]]
arguments. Dodd-Frank specifically states that the assessment base
should be ``average consolidated total assets minus average tangible
equity.'' Subtracting intangibles from assets as well as equity negates
the purposeful use of the word ``tangible'' in the definition of the
new assessment base and, in the FDIC's view, is counter to the intent
of Congress.
A number of commenters stated that the FDIC should exclude
transactions between affiliated banks from the assessment base to avoid
double counting the assets associated with these transactions in the
assessment base. Commenters acknowledge that the FDIC currently
assesses deposits received from affiliated banks, but believe that,
with the requirement to change the assessment base, the FDIC should now
exclude transactions between affiliated banks. The FDIC has generally
assessed risk at the insured institution level and is not persuaded to
change this practice.
3. Tangible Equity
The final rule, like the proposed rule, uses Tier 1 capital as the
definition of tangible equity. Although this measure does not eliminate
all intangibles, it eliminates many of them, and it requires no
additional reporting by insured depository institutions. The FDIC may
reconsider the definition of tangible equity once new Basel capital
definitions have been implemented.
The final rule, like the proposed rule, defines the averaging
period for tangible equity to be monthly; however, institutions that
report less than $1 billion in quarter-end consolidated total assets on
their March 31, 2011 Call Report or TFR may report average tangible
equity using an end-of-quarter balance or may, at any time, opt to
report average tangible equity using a monthly average balance
permanently. Once an institution that reports average tangible equity
using an end-of-quarter balance reports average consolidated total
assets of $1 billion or more for two consecutive quarters, it shall
permanently report average tangible equity using monthly averaging
starting in the next quarter. Newly insured institutions must report
monthly averages. Monthly averaging means the average of the three
month-end balances within the quarter. For the surviving institution in
a merger or consolidation, Tier 1 capital must be calculated as if the
merger occurred on the first day of the quarter in which the merger or
consolidation actually occurred.
Under the final rule, as in the proposed rule, an insured
depository institution with one or more consolidated insured depository
institution subsidiaries must report average tangible equity (or end-
of-quarter tangible equity, as appropriate) without consolidating its
insured depository institution subsidiaries into the calculations. This
requirement conforms to the method for reporting consolidated total
assets above and ensures that all parent insured depository
institutions will be assessed only on their own assessment base and not
that of their subsidiary insured depository institutions.
As in the proposed rule, an insured depository institution that
reports average tangible equity using a monthly averaging method and
that has subsidiaries that are not insured depository institutions must
use monthly average data for the subsidiaries. The monthly average data
for these subsidiaries, however, may be calculated for the current
quarter or for the prior quarter consistent with the method used to
report average consolidated total assets.
As in the proposed rule, for insured branches of foreign banks,
tangible equity is defined as eligible assets (determined in accordance
with Section 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). This value is to be calculated on a monthly average or
end-of-quarter basis, according to the branch's size.
The FDIC does not foresee a need for any institution to report
daily average balances for tangible equity, since the components of
tangible equity appear to be subject to less fluctuation than are
consolidated total assets. Thus, the definition of average tangible
equity in the final rule achieves a true reflection of tangible equity
over the entire quarter by requiring monthly averaging of capital for
institutions that account for the majority of industry assets and end-
of-quarter balances for all other institutions.
Defining tangible equity as Tier 1 capital provides a clearly
understood capital buffer for the DIF in the event of the institution's
failure, while avoiding an increase in regulatory burden that a new
definition of capital could cause.\23\ This methodology should not
increase regulatory burden, since institutions with assets of $1
billion or more generally compute their regulatory capital ratios no
less frequently than monthly. To minimize regulatory burden for small
institutions, the proposal allows these institutions to report an end-
of-quarter balance.
---------------------------------------------------------------------------
\23\ The changes needed to implement the new assessment base
will require the FDIC to collect some information from insured
depository institutions that is not currently collected on the Call
Report or TFR. However, the burden of requiring new data will be
partly offset by allowing some assessment data that are currently
collected to be deleted from the Call Report or TFR.
---------------------------------------------------------------------------
4. Comments
A number of commenters explicitly supported the use of Tier 1
capital for average tangible equity because this would minimize the
burden of the rulemaking on institutions. One trade group asked that
institutions with less than $10 billion in assets (as opposed to less
than $1 billion) be allowed to report end-of-quarter balances rather
than an average of month-end balances on the grounds that these
institutions experience few fluctuations in capital and allowing them
to report end-of-quarter balances would reduce burden. The FDIC
believes that many institutions of this size already determine their
capital more frequently than once a quarter, so that the requested
change is not needed.
5. Banker's Bank Adjustment
Like the proposed rule, the final rule will require a banker's bank
to certify on its Call Report or TFR that it meets the definition of
``banker's bank'' as that term is used in 12 U.S.C. 24. The self-
certification will be subject to verification by the FDIC. The final
rule, however, clarifies that banker's banks that have funds from
government capital infusion programs (such as TARP and the Small
Business Lending Fund), stock owned by the FDIC resulting from bank
failures or stock that is issued as part of an equity compensation
program will not be excluded from the definition of banker's bank
solely for these reasons.\24\ As in the proposed rule, for an
institution that meets the definition (with the exception noted below),
the FDIC will exclude from its assessment base the average amount of
reserve balances ``passed through'' to the Federal Reserve, the average
amount of reserve balances held at the Federal Reserve for the
institution's own account, and the average amount of the institution's
federal funds sold. (In each case, the average is to be calculated
daily or weekly depending on how the
[[Page 10679]]
institution calculates its average consolidated total assets.) The
collective amount of this exclusion, however, cannot exceed the sum of
the bank's average amount of total deposits of commercial banks and
other depository institutions in the United States and the average
amount of its federal funds purchased. (Again, in each case, the
average is to be calculated daily or weekly depending on how the
institution calculates its average consolidated total assets.) Thus,
for example, if a banker's bank has a total average balance of $300
million of federal funds sold plus reserve balances (including pass-
through reserve balances), and it has a total average balance of $200
million of deposits from commercial banks and other depository
institutions and federal funds purchased, it can deduct $200 million
from its assessment base. Federal funds purchased and sold on an agency
basis will not be included in these calculations as they are not
reported on the balance sheet of a banker's bank.
---------------------------------------------------------------------------
\24\ Some commenters had asked that the FDIC use the definition
of banker's bank contained in 12 U.S.C. 461(b)(9) (which is repeated
verbatim in the implementing regulation, 12 CFR 204.121) in lieu of
12 U.S.C. 24. The definition of banker's bank in the final rule
adheres to the requirement in Dodd-Frank that the potential
assessment base reduction apply to banker's banks ``as that term is
used in * * * 12 U.S.C. 24.'' However, in the FDIC's view, the
clarification in the preamble should meet the concerns of these
commenters.
---------------------------------------------------------------------------
As in the proposed rule, the assessment base adjustment applicable
to a banker's bank is only available to an institution that conducts
less than 50 percent of its business with affiliates (as defined in
section 2(k) of the Bank Holding Company Act (12 U.S.C. 1841(k)) and
section 2 of the Home Owners' Loan Act (12 U.S.C. 1462)). Providing a
benefit to a banker's bank that primarily serves affiliated companies
would undermine the intent of the benefit by providing a way for
banking companies to reduce deposit insurance assessments simply by
establishing a subsidiary for that purpose.
Currently, the corresponding deposit liabilities that result in
``pass-through'' reserve balances are excluded from the assessment
base. The final rule, like the proposal, retains this exception for
banker's banks.
A typical banker's bank provides liquidity and other services to
its member banks that may result in higher than average amounts of
federal funds purchased and deposits from other insured depository
institutions and financial institutions on a banker's bank's balance
sheet. To offset its relatively high levels of these short-term
liabilities, a banker's bank often holds a relatively high amount of
federal funds sold and reserve balances for its own account. The final
rule, therefore, like the proposed rule, adjusts the assessment base of
a banker's bank to reflect its greater need to maintain liquidity to
service its member banks.
6. Comments
Several commenters addressed the issue of providing an adjustment
to banker's banks. The most common comment among the respondents was a
concern that the adjustment for federal funds sold may have unintended
consequences for the federal funds market. The commenters argued that
federal funds are generally sold on thin margins and that, if non-
banker's banks pay even a few basis points of FDIC assessments on
federal funds sold when banker's banks do not, the non-banker's banks
will not be able to compete in this market. The comments further state
that banker's banks alone cannot provide sufficient funding to maintain
the federal funds market at its current size and that by providing a
deduction from assets solely for banker's banks, the proposal could
potentially lead to a considerable contraction of the federal funds
market with detrimental implications for bank liquidity. The comments
suggested that the FDIC provide a deduction for federal funds sold for
all insured depository institutions or, alternatively, assign a zero
premium weight to federal funds sold for all institutions.
The FDIC recognizes that, by allowing banker's banks to subtract
federal funds sold from their assessment base, the cost of providing
those funds for banker's banks will be reduced relative to other banks
that are not afforded such a deduction. However, there is no uniform
assessment rate for all banks, and since assessment rates will now be
applied to an assessment base of average consolidated total assets, the
cost--due to the assessment rate--of providing federal funds will
potentially differ for every institution. While banker's banks may gain
an incentive to sell more federal funds than they currently have and
may gain a larger profit from doing so than would some other banks, it
is not clear, a priori, what their total cost of funding will be, given
that the assessment rate is only one factor in the cost of providing
federal funds. Further, it is not likely that non-banker's banks will
completely withdraw from providing federal funds as long as the market
finds such funding more attractive than the alternatives.
Three commenters called for all excess reserve balances maintained
by banker's banks to be included in the banker's bank deduction; some
also called for the FDIC to allow a deduction for balances due from
other banks. The FDIC clarifies that the proposed deduction for reserve
balances held at the Federal Reserve would include all balances due
from the Federal Reserve as reported on Schedule RC-A, line 4 of the
Call Report. Balances due from other banks include assets that are
relatively less liquid, such as time deposits. The FDIC does not
believe it is appropriate to include these balances in the banker's
bank deduction.
One banker's bank argues that banker's banks are subject to
``double taxation'' because every dollar on deposit has been received
from another bank that is also being assessed a deposit insurance
premium on its deposits. In the FDIC's view, there is no double
assessment, since each institution is receiving the benefit of deposit
insurance and is paying for it. This view is consistent with the
treatment of interbank deposits under the current deposit insurance
assessment system, which includes these deposits in an institution's
assessment base.
Another bank argues that there is no reasonable basis to deny the
banker's bank assessment base deduction to banker's banks that conduct
business primarily with affiliated insured depository institutions.
This bank also argues that the interaffiliate transactions that such a
banker's bank engages in result in counting the same assets twice, once
at the banker's bank and again at its affiliate, although overall risk
is not increased because of cross-guarantees. The FDIC believes that,
while such a bank may meet the technical definition of a banker's bank,
it does not serve the same function as a true banker's bank. Moreover,
as discussed above, the FDIC has generally assessed risk at the insured
depository institution level (for example, it currently assesses
separately on interaffiliate deposits) and is not persuaded to change
this practice. The FDIC cannot invariably collect on cross-guarantees
from affiliated institutions, since the guarantor may also be insolvent
or could be made insolvent by fulfilling the guarantee.
7. Custodial Bank Definition
The final rule identifies custodial banks as insured depository
institutions with previous calendar year-end trust assets (that is,
fiduciary and custody and safekeeping assets, as reported on Schedule
RC-T of the Call Report) of at least $50 billion or those insured
depository institutions that derived more than 50 percent of their
revenue (interest income plus non-interest income) from trust activity
over the previous calendar year. Using this definition, the FDIC
estimates that 62 insured depository institutions would have qualified
as custodial banks for deposit insurance purposes using data as of
December 31, 2009.
[[Page 10680]]
This definition differs from the definition in the Assessment Base
NPR, in that it expands the definition to include fiduciary assets and
revenue as well as custody and safekeeping assets and revenue.
Commenters have convinced the FDIC that fiduciary accounts have a
custodial component, which, in many cases, is the primary reason for
the account. This change will mean that more institutions will qualify
under the definition.
8. Custodial Bank Adjustment
The final rule states that the assessment base adjustment for
custodial banks should be the daily or weekly average--in accordance
with the way the bank reports its average consolidated total assets--of
a certain amount of low-risk assets--designated as assets with a Basel
risk weighting of 0 percent, regardless of maturity,\25\ plus 50
percent of those assets with a Basel risk weighting of 20 percent,
again regardless of maturity \26\--subject to the limitation that the
daily or weekly average value of these assets cannot exceed the daily
or weekly average value of those deposits classified as transaction
accounts (as reported on Schedule RC-E of the Call Report) and
identified by the institution as being directly linked to a fiduciary
or custodial and safekeeping account.
---------------------------------------------------------------------------
\25\ Specifically, all asset types described in the instructions
to lines 34, 35, 36, and 37 of Schedule RC-R of the Call Report as
of December 31, 2010 with a Basel risk weight of 0 percent,
regardless of maturity. These types of assets are also currently
reported on corresponding line items in the TFR. These same asset
types will be used regardless of changes to the Call Report or TFR.
\26\ Specifically, 50 percent of those asset types described in
the instructions to lines 34, 35, 36, and 37 of Schedule RC-R of the
Call Report (or corresponding items in the TFR) with a Basel risk
weighting of 20 percent. These types of assets are also currently
reported on corresponding line items in the TFR. These same asset
types will be used regardless of changes to the Call Report or TFR.
---------------------------------------------------------------------------
The final rule differs from the Assessment Base NPR in that it
allows the deduction of all 0 percent risk-weighed assets and 50
percent of 20 percent risk-weighted assets without regard to specific
maturity (although the purpose of the 50 percent reduction in the 20
percent risk weighted assets is to apply a sufficient haircut to those
assets to account for the risk posed by longer-term maturities). Again
based upon comments, the FDIC has concluded that transaction accounts
associated with fiduciary and custody and safekeeping assets generally
display the characteristics of core deposits, justifying a relaxation
of the maturity length requirement in the proposal.\27\
---------------------------------------------------------------------------
\27\ All of the commenters on the issue disagreed with limiting
the assets eligible for the deduction to those with a stated
maturity of 30 days or less. Most of the comments noted that assets
with 20 percent or lower Basel risk weightings are high-quality and
liquid, regardless of maturity, and one commenter stated that any
breakdown of these assets by maturity would require additional
reporting as such information is not currently collected. A number
of the comments noted that the maturity of an asset is not the only
indicator of the asset's liquidity. Comments from the banks
generally argued that custodial deposits are relatively stable--akin
to core deposits, rather than wholesale deposits--and, as such, it
would be imprudent for them to manage their portfolios by matching
these deposits strictly to assets with a maturity of 30 days or
less.
---------------------------------------------------------------------------
The final rule also differs from the proposed rule in two other
ways. First, it allows a deduction up to the daily or weekly average
value of those deposits classified as transaction accounts that are
identified by the institution as being linked to a fiduciary or
custodial and safekeeping account. The final rule includes fiduciary
accounts, rather than just custodial and safekeeping accounts, for the
reasons stated above. Second, the final rule limits the deduction to
transaction accounts, rather than all deposit accounts, because
deposits generated in the course of providing custodial services
(regardless of whether there is a fiduciary aspect to the account) are
used for payments and clearing purposes, as opposed to deposits held in
non-transaction accounts, which may be part of a wealth management
strategy.
B. Assessment Rate Adjustments
In February 2009, the FDIC adopted a final rule incorporating three
adjustments into the risk-based pricing system.\28\ These adjustments--
the unsecured debt adjustment, the secured liability adjustment, and
the brokered deposit adjustment--were added to better account for risk
among insured depository institutions based on their funding sources.
In light of the changes to the deposit insurance assessment base
required by Dodd-Frank, the final rule modifies these adjustments. In
addition, the final rule adds an adjustment for long-term debt held by
an insured depository institution where the debt is issued by another
insured depository institution.
---------------------------------------------------------------------------
\28\ 74 FR 9525 (March 4, 2009).
---------------------------------------------------------------------------
1. Unsecured Debt Adjustment
The final rule maintains the long-term unsecured debt adjustment,
but the amount of the adjustment is now equal to the amount of long-
term unsecured liabilities \29\ an insured depository institution
reports times the sum of 40 basis points plus the institution's initial
base assessment rate divided by the amount of the institution's new
assessment base; that is: \30\
---------------------------------------------------------------------------
\29\ Unsecured debt remains as defined in the 2009 Final Rule on
Assessments, with the exceptions (discussed below) of the exclusion
of Qualified Tier 1 capital and certain redeemable debt. See 74 FR
9537 (March 4, 2009).
\30\ The IBAR is the institution's initial base assessment rate.
UDA = (Long-term unsecured liabilities/New assessment base) * (40 basis
---------------------------------------------------------------------------
points + IBAR)
Thus, if an institution with a $10 billion assessment base issued
$100 million in long-term unsecured liabilities and had an initial base
assessment rate of 20 basis points, its unsecured debt adjustment would
be 0.6 basis points, which would result in an annual reduction in the
institution's assessment of $600,000.
All other things equal, greater amounts of long-term unsecured debt
can reduce the FDIC's loss in the event of a failure, thus reducing the
risk to the DIF. Because of this, under the current assessment system,
an insured depository institution's assessment rate is reduced through
the unsecured debt adjustment, which is based on the amount of long-
term, unsecured liabilities the insured depository institution issues.
Adding the initial base assessment rate to the adjustment formula
maintains the value of the incentive to issue long-term unsecured debt,
providing insured depository institutions with the same incentive to
issue long-term unsecured debt that they have under the current
assessment system.
Unless this revision is made, the cost of issuing long-term
unsecured liabilities will rise (as will the cost of funding for all
other liabilities except, in most cases, domestic deposits) as there
will no longer be a distinction, in terms of the cost of deposit
insurance, among the types of liabilities funding the new assessment
base. The FDIC remains concerned that this will reduce the incentive
for insured depository institutions to issue long-term unsecured debt.
Therefore, the final rule, like the proposed rule, revises the
adjustment so that the relative cost of issuing long-term unsecured
debt will not rise with the implementation of the new assessment base.
The final rule, like the proposed rule, also changes the cap on the
unsecured debt adjustment from the current 5 basis points to the lesser
of 5 basis points or 50 percent of the institution's initial base
assessment rate. This cap will apply to the new assessment base. This
change allows the maximum dollar amount of the unsecured debt
adjustment to increase because the assessment base is larger, but
ensures that the assessment rate after the
[[Page 10681]]
adjustment is applied does not fall to zero.
In addition, the final rule, like the proposed rule, eliminates
Qualified Tier 1 capital from the definition of unsecured debt. Under
the current assessment system, the unsecured debt adjustment includes
certain amounts of Tier 1 capital (Qualified Tier 1 capital) for
insured depository institutions with less than $10 billion in assets.
Since the new assessment base excludes Tier 1 capital, defining long-
term, unsecured liabilities to include Qualified Tier 1 capital would
have the effect of providing a double deduction for this capital.
Finally, the final rule, unlike the proposed rule, slightly alters
the definition of long-term unsecured debt. At present, and under the
proposed rule, long-term unsecured debt is defined as long-term if the
unsecured debt has at least one year remaining until maturity. The
final rule provides that long-term unsecured debt is long-term if the
debt has at least one year remaining until maturity, unless the
investor or holder of the debt has a redemption option that is
exercisable within one year of the reporting date. Such a redemption
option negates the benefit of long-term debt to the DIF.
2. Comments
Some commenters expressed support for increasing the adjustment to
40 basis points plus the initial base assessment rate.
A number of commenters believed that the long-term unsecured
liability definition should be expanded to include short-term unsecured
liabilities, uninsured deposits and foreign office deposits or all
liabilities subordinate to the FDIC. A few commenters also stated that
the original, rather than remaining, maturity of unsecured debt should
be used to determine whether unsecured debt qualifies as long term.
The FDIC does not believe that the definition of long-term
liabilities should be expanded. Short-term unsecured liabilities
(including those that were long-term at issuance) provide less
protection to the DIF in the event of failure. By the time an
institution fails, unsecured debt remaining at an institution is
primarily longer-term debt that has not yet come due. Thus, providing a
benefit for short-term unsecured debt does not make sense, since this
kind of debt is unlikely to provide any cushion to absorb losses in the
event of failure. Similarly, the FDIC does not agree that unsecured
debt should include foreign office deposits, since there is likely to
be a significant reduction in these deposits by the time of failure. In
addition, while, under U.S. law, foreign deposits are subordinate to
domestic deposits in the event an institution fails, they can be
subject to asset ring-fencing that effectively makes them similar to
secured liabilities.
One commenter stated that the long-term unsecured liability
definition should include goodwill and other intangibles. The FDIC does
not agree. The purpose of this adjustment is to provide an incentive
for insured depository institutions to issue long-term unsecured debt
to absorb losses in the event an institution fails. Goodwill and other
intangibles are assets (rather than liabilities) and they provide
little to no value to the FDIC in a resolution.
One commenter recommended that the unsecured debt adjustment cap
should be increased or removed. The commenter argued that all long-term
unsecured claims subordinate to the FDIC reduce the FDIC's risk equally
and the cap artificially and arbitrarily mutes the effect. Further, the
commenter noted that a bank with a lower initial base assessment rate
and arguably less risk to the FDIC should not have a lower cap simply
due to its lower initial base assessment rate. The FDIC disagrees. An
excessive deduction could create moral hazard. While the FDIC
acknowledges that an institution with a lower initial base assessment
rate may have a lower cap than one with a higher initial base
assessment rate, the FDIC believes that, to avoid the potential for
moral hazard that would ensue from an assessment rate at or near zero,
all institutions should pay some assessment. Thus, setting the cap at
half of the initial base assessment rate is appropriate.
3. Depository Institution Debt Adjustment
Like the proposed rule, the final rule creates a new adjustment,
the depository institution debt adjustment (DIDA), which is meant to
offset the benefit received by institutions that issue long-term,
unsecured liabilities when those liabilities are held by other insured
depository institutions.\31\ However, in response to comments, the
final rule allows an institution to exclude from the unsecured debt
amount used in calculating the DIDA an amount equal to no more than 3
percent of the institution's Tier 1 capital as posing de minimis risk.
Therefore, the final rule will apply a 50 basis point DIDA to every
dollar (above 3 percent of an institution's Tier 1 capital) of long-
term unsecured debt held by an insured depository institution when that
debt is issued by another insured depository institution.\32\
Specifically, the adjustment will be determined according to the
following formula:
---------------------------------------------------------------------------
\31\ For this reason, the long-term unsecured debt that is
subject to the DIDA is defined in the same manner as the long-term
unsecured debt that qualifies for the unsecured debt adjustment.
\32\ Debt issued by an entity other than an insured depository
institution, including such an uninsured entity that owns or
controls, either directly or indirectly, an insured depository
institution, is not subject to the DIDA.
DIDA = [(Long-term unsecured debt issued by another insured depository
institution--3% * Tier 1 capital) * 50 basis points]/New assessment
---------------------------------------------------------------------------
base
An institution should use the same valuation methodology to
calculate the amount of long-term unsecured debt issued by another
insured depository institution that it holds as it uses to calculate
the amount of such debt for reporting on the asset side of the balance
sheets.
Although issuance of unsecured debt by an insured depository
institution lessens the potential loss to the DIF in the event of an
insured depository institution's failure, when this debt is held by
other insured depository institutions, the overall risk to the DIF is
not reduced as much. For this reason, the final rule increases the
assessment rate of an insured depository institution that holds this
debt. The FDIC considered reducing the benefit from the unsecured debt
adjustment received by insured depository institutions when their long-
term unsecured debt is held by other insured depository institutions,
but debt issuers generally do not track which entities hold their debt.
The FDIC believes that the magnitude of the DIDA will approximately
offset the decrease in the assessment rate of the issuing institution,
and will discourage insured depository institutions from holding
excessive amounts of other insured depository institutions' debt.
4. Comments
A number of commenters noted that the proposed level of 50 basis
points for the DIDA is excessive relative to the risk presented to the
FDIC. The FDIC disagrees. A fixed level of 50 basis points was
established to generally offset the deduction received by the issuing
institution of 40 basis points plus the initial base assessment rate.
While the initial base assessment rate for the issuing institution may
be less or greater than 10 basis points, the FDIC believes that 50
basis points is an appropriate approximation to offset the deduction to
the issuing insured depository institution and to discourage insured
depository institutions from
[[Page 10682]]
holding excessive amounts of each other's debt, which leaves the risk
from such debt within the banking system.
A few commenters noted that a 50 basis point increase is punitive
towards insured depository institutions that wish to manage a
diversified portfolio of earning assets, including unsecured debt
issued by strong depository insured institutions. The FDIC recognizes
that the 50 basis point charge represents a disincentive to insured
depository institutions to purchase the unsecured debt of another
insured institution. That is one of the goals of the adjustment.
However, the FDIC concedes that a small amount of debt that would
otherwise be subject to the DIDA could be held to facilitate prudent
portfolio management activities and, as discussed above, has created a
de minimis exception.
Another commenter noted that the implementation of the 50-basis
point adjustment could cause banks that issue unsecured debt to face
reduced access to liquidity and funding, resulting from an increased
cost of issuing unsecured debt to insured depository institutions. The
FDIC believes that an increase, if any, in the cost of funding as the
result of this adjustment will be significantly less than the long-term
unsecured debt reduction an issuer receives. Further, the FDIC's
exclusion of a de minimis amount of debt issued by insured depository
institutions should minimize or eliminate any potential effect. The
FDIC's intent is only to permit a net reduction in insurance premiums
in the event that the risk of default on unsecured debt issued by an
insured depository institution has limited or no effect on any other
insured depository institution.
A few commenters stated that a cap should be set for the DIDA. The
FDIC disagrees, since a cap would undermine the purpose of the DIDA.
A few commenters stated that the DIDA will result in a reporting
burden for insured depository institutions, particularly since CUSIP
numbers do not identify industries. The FDIC disagrees. The FDIC
believes that a bank should know and understand the attributes of its
investments, including, among other things, the name of the issuer and
the industry that the issuer operates in. While the FDIC acknowledges
some reporting modifications may have to be made at some institutions,
the FDIC believes those changes can be accomplished at minimal time and
cost.
5. Secured Liability Adjustment
The final rule, like the proposed rule, discontinues the secured
liability adjustment. In arguing for the secured liability adjustment
the FDIC stated that, ``[t]he exclusion of secured liabilities can lead
to inequity. An institution with secured liabilities in place of
another's deposits pays a smaller deposit insurance assessment, even if
both pose the same risk of failure and would cause the same losses to
the FDIC in the event of failure.'' The change in the assessment base
will eliminate the advantage of funding with secured liabilities
associated with the current assessment base (domestic deposits), thus
eliminating the rationale for continuing the adjustment.
6. Comments
A few commenters stated support for the removal of the secured
liability adjustment, although one commenter opined that FHLB funding
is more damaging to the FDIC than brokered deposits. On balance, the
FDIC believes that including secured liabilities in the assessment base
has removed the need for the secured liability adjustment.
7. Brokered Deposit Adjustment
The final rule, like the proposed rule, retains the current
adjustment for brokered deposits, but scales the adjustment to the new
assessment base by the insured depository institution's ratio of
domestic deposits to the new assessment base. The new formula for
brokered deposits is the following:
BDA = ((Brokered deposits - (Domestic deposits * 10%))/New assessment
base) * 25 basis points
As discussed below, the final rule changes the assessment system
for large institutions and eliminates risk categories for these
institutions. Based on comments, however, the final rule provides an
exemption from the brokered deposit adjustment for certain large
institutions. The brokered deposit adjustment will not apply to those
large institutions that are well-capitalized and have a composite
CAMELS rating of 1 or 2. The FDIC believes that this exemption will
result in a more equitable distribution of assessments. The brokered
deposit adjustment does not apply to small institutions that are well-
capitalized and have a composite CAMELS rating of 1 or 2. The brokered
deposit adjustment will continue to apply to all other large
institutions and to small institutions in risk categories II, III, and
IV when the ratio of brokered deposits to domestic deposits exceeds 10
percent. As discussed, small Risk Category I institutions will continue
to be excluded.
The final rule, like the proposed rule, maintains a cap on the
adjustment of 10 basis points. The FDIC recognizes that keeping the cap
constant could result in an increase in the amount an institution is
assessed due to the adjustment, since the cap will apply to a larger
assessment base. However, the FDIC remains concerned that significant
reliance on brokered deposits tends to increase an institution's risk
profile, particularly as its financial condition weakens.
8. Comments
A few commenters noted that the FDIC has not demonstrated a
positive correlation between bank failures and the use of brokered
deposits, which is inconsistent with a risk-based assessment system.
The FDIC disagrees. A number of costly institution failures, including
some recent failures, involved rapid asset growth funded through
brokered deposits. Moreover, the presence of brokered deposits in a
failed institution tends to reduce its franchise value, resulting in
increased losses to the DIF.
Numerous comment letters argued that certain types of brokered
deposits, including reciprocal deposits and sweeps, should be excluded
from the brokered deposit adjustment because they are more stable than
other types of brokered deposits. The FDIC considered the substance of
these comments when it originally adopted the brokered deposit
adjustment and remains unpersuaded. The final rule does not apply the
brokered deposit adjustment to a well-capitalized, CAMELS 1- or 2-rated
institution. When an institution's condition declines and it becomes
less than well capitalized or is not rated CAMELS 1 or 2, statutory and
market restrictions on brokered deposits become much more relevant. For
this reason, the FDIC has decided to continue to include all brokered
deposits above 10 percent of an institution's domestic deposits in the
brokered deposit adjustment.
A few commenters noted that Dodd-Frank directs the FDIC to study
the definition of brokered deposits. The commenters contend that
determining the definition of brokered deposit prior to completion of
the study is counter to the intent of Congress. The FDIC will continue
to use its current definition for the present, but will examine the
definition in light of the completed study and will consider changes
then, if appropriate.
One commenter argued for a reduction of the cap from 10 basis
points to 6.5 basis points given the increase in assessment base. While
the FDIC acknowledges that maintaining the 10 basis point cap could
increase the size of the adjustment as a result in the
[[Page 10683]]
change in assessment base, the FDIC believes this increase is
appropriate. The FDIC remains concerned that significant reliance on
brokered deposits tends to increase an institution's risk profile,
particularly as it weakens.
V. The Final Rule: Dividends and Assessment Rates
A. Dividends
1. Final Rule
As proposed in the October NPR and consistent with the FDIC's long-
term, comprehensive plan for fund management, the final rule suspends
dividends indefinitely whenever the fund reserve ratio exceeds 1.5
percent to increase the probability that the fund reserve ratio will
reach a level sufficient to withstand a future crisis.\33\ In lieu of
dividends, and pursuant to its authority to set risk-based assessments,
the final rule adopts progressively lower assessment rate schedules
when the reserve ratio exceeds 2 percent and 2.5 percent, as discussed
below. These lower assessment rate schedules serve much the same
function as dividends in preventing the DIF from growing unnecessarily
large but, as discussed in the October NPR, provide more stable and
predictable effective assessment rates, a feature that industry
representatives said was very important at the September 24, 2010
roundtable organized by the FDIC.
---------------------------------------------------------------------------
\33\ As discussed above, Dodd-Frank continued the FDIC's
authority to declare dividends when the reserve ratio at the end of
a calendar year is at least 1.5 percent, but granted the FDIC sole
discretion in determining whether to suspend or limit the
declaration or payment of dividends. Dodd-Frank Wall Street Reform
and Consumer Protection Act, Public Law 111-203, Sec. 332, 124
Stat. 1376, 1539 (codified at 12 U.S.C. 1817(e)(2)(B)).
---------------------------------------------------------------------------
2. Comments
In the October NPR, the FDIC had proposed suspending dividends
``permanently.'' One trade group, representing community banks, agreed
that permanently foregoing dividends:
[I]s much more likely to ensure steady, predictable assessment
rates. While we think that the FDIC should never completely rule out
the possibility of paying a dividend from the DIF, we believe that
at least until the DIF reserve ratio reaches 2.5 percent, it is
prudent to forego a dividend in favor of steady, predictable
assessment rates.
Another trade group argued that a permanent suspension of dividends
is an unnecessary limitation on the FDIC's discretion under Dodd-Frank.
The trade group argued that decisions on dividends should be based on
facts and circumstances whenever the reserve ratio exceeds 1.5 percent.
If the suspension is adopted, the trade group believes that the FDIC
should provide that it could be lifted in appropriate circumstances.
The FDIC is persuaded that the word ``indefinitely'' should be used
in place of the word ``permanently,'' although the distinction is
semantic. The rule is not intended to, and in any event, could not
abrogate the authority of future FDIC Boards of Directors to adopt a
different rule governing dividends.
Another trade group argued that the FDIC should establish a
dividend policy to slow the growth of the insurance fund as it
approaches an upper limit. In the FDIC's view, the historical analysis
set out in the October NPR and updated in the DRR final rule, as
described above, reveals that lower rates, like dividends, can
effectively slow the growth of the reserve ratio, but can lead to less
volatility in effective assessment rates.
B. Assessment Rate Schedules
1. Rate Schedule Effective April 1, 2011
Pursuant to the FDIC's authority to set assessments, the initial
and total base assessment rates described in Table 3 below will become
effective April 1, 2011. These rates are identical to those proposed in
the Assessment Base NPR. (The rate schedule does not include the
depository institution debt adjustment.)
Table 3--Initial and Total Base Assessment Rates *
----------------------------------------------------------------------------------------------------------------
Large and
Risk category Risk category Risk category Risk category highly complex
I II III IV 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
----------------------------------------------------------------------------------------------------------------
* Total base assessment rates do not include the depository institution debt adjustment.
** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured
depository institution's initial base assessment rate; thus for example, an insured depository institution
with an initial base assessment rate of 5 basis points will have a maximum unsecured debt adjustment of 2.5
basis points and cannot have a total base assessment rate lower than 2.5 basis points.
The FDIC believes that the change to a new, expanded assessment
base should not change the overall amount of assessment revenue that
the FDIC would otherwise have collected using the assessment rate
schedule under the Restoration Plan adopted by the Board on October 19,
2010.\34\ Several industry trade groups and insured institutions
supported this approach. Based on the FDIC's estimations, the rate
schedule in Table 3 above will result in the collection of assessment
revenue that is approximately revenue neutral.35 36 Because
the new assessment base under Dodd-Frank is larger than the current
assessment base, the assessment rates in Table 3 above are lower than
current rates.
---------------------------------------------------------------------------
\34\ 75 FR 66293 (October 27, 2010).
\35\ Specifically, the FDIC has attempted to determine a rate
schedule that would have generated approximately the same revenue as
that generated under the current rate schedule in the second and
third quarters of 2010 using the current assessment base.
\36\ As discussed earlier, under Dodd-Frank, the FDIC is
required to offset the effect on small institutions (those with less
than $10 billion in assets) of the statutory requirement that the
fund reserve ratio increase from 1.15 percent to 1.35 percent by
September 30, 2020. Thus, assessment rates applicable to all insured
depository institutions need only be set high enough to reach 1.15
percent. The Restoration Plan postpones until later this year
rulemaking regarding the method that will be used to reach 1.35
percent by the statutory deadline of September 30, 2020, and the
manner of offset.
---------------------------------------------------------------------------
The rate schedule in Table 3 includes a column for institutions
with at least $10 billion in total assets. This column represents the
assessment rates that will be applied to institutions of this size
pursuant to the changes to the large institution pricing system
discussed below. The range of total base assessment rates (2.5 basis
points to 45 basis points) is the same for institutions of all sizes;
however, institutions with at least $10 billion in total assets will
not be assigned to risk categories.
[[Page 10684]]
The final rule retains the FDIC Board's flexibility to adopt actual
rates that are higher or lower than total base assessment rates without
the necessity of further notice-and-comment rulemaking, but provides
that: (1) The Board cannot increase or decrease rates from one quarter
to the next by more than 2 basis points (rather than the current and
proposed 3 basis points); and (2) cumulative increases and decreases
cannot be more than 2 basis points higher or lower than the total base
assessment rates. Retention of this flexibility (with the proportionate
reduction in the size of the adjustment) will continue to allow the
Board to act in a timely manner to fulfill its mandate to raise the
reserve ratio in accordance with the Restoration Plan, particularly in
light of the increased uncertainty about expected revenue resulting
from the change in the assessment base. The reduction from 3 to 2 basis
points was prompted by an industry trade group, which noted that 2
basis points of the new assessment base is approximately equal to 3
basis points of the domestic deposit assessment base.
2. Analysis of Statutory Factors for the New Rate Schedule
In setting assessment rates, the FDIC's Board of Directors is
authorized to set assessments for insured depository institutions in
such amounts as the Board of Directors may determine to be necessary or
appropriate.\37\ In setting assessment rates, the FDIC's Board of
Directors is required by statute to consider the following factors:
---------------------------------------------------------------------------
\37\ 12 U.S.C. 1817(b)(2)(A).
---------------------------------------------------------------------------
(i) The estimated operating expenses of the Deposit Insurance Fund.
(ii) The estimated case resolution expenses and income of the
Deposit Insurance Fund.
(iii) The projected effects of the payment of assessments on the
capital and earnings of insured depository institutions.
(iv) The risk factors and other factors taken into account pursuant
to section 7(b)(1) of the Federal Deposit Insurance Act (12 U.S.C
Section 1817(b)(1)) under the risk-based assessment system, including
the requirement under section 7(b)(1)(A) of the Federal Deposit
Insurance Act (12 U.S.C Section 1817(b)(1)(A)) to maintain a risk-based
system.\38\
---------------------------------------------------------------------------
\38\ The risk factors referred to in factor (iv) include:
(i) The probability that the Deposit Insurance Fund will incur a
loss with respect to the institution, taking into consideration the
risks attributable to--
(I) Different categories and concentrations of assets;
(II) Different categories and concentrations of liabilities,
both insured and uninsured, contingent and noncontingent; and
(III) Any other factors the Corporation determines are relevant
to assessing such probability;
(ii) The likely amount of any such loss; and
(iii) The revenue needs of the Deposit Insurance Fund.
Section 7(b)(1)(C) of the Federal Deposit Insurance Act (12
U.S.C. 1817(b)(1)(C)).
---------------------------------------------------------------------------
(v) Other factors the Board of Directors has determined to be
appropriate.
Section 7(b)(2) of the Federal Deposit Insurance Act, 12 U.S.C.
1817(b)(2)(B).
When the Board adopted the most recent Restoration Plan, it left
the current assessment rate schedule in effect and took these statutory
factors into account. The Restoration Plan requires that the FDIC
update income and loss projections semiannually. The Board's decision
to leave current assessment rates in effect was based on the FDIC's
most recent projections, which projected lower expected losses for the
period 2010 through 2014 than the FDIC's projections in June 2010
(approximately $50 billion rather than approximately $60 billion as
projected in June 2010).\39\ Because of the lower expected losses and
the additional time provided by Dodd-Frank to meet the minimum (albeit
higher) required reserve ratio, the FDIC opted, in the new Restoration
Plan, to forego the uniform 3 basis point increase in assessment rates
previously scheduled to go into effect on January 1, 2011. The FDIC
estimated that the fund reserve ratio will reach 1.15 percent in 2018,
even without the 3 basis point uniform increase in rates. As stated
above, the final rule changes the current assessment rate schedule such
that the new assessment rate schedule (applied against the new
assessment base) will result in the collection of about the same amount
of assessment revenue as the current assessment rate schedule applied
against the domestic deposit assessment base.
---------------------------------------------------------------------------
\39\ The projections also cover expenses and the reserve ratio.
The FDIC anticipates that the next semiannual update of projections
will occur in the first half of 2011.
---------------------------------------------------------------------------
For this reason, as stated in the Assessment Base NPR, the new
assessment rates and assessment base should, overall, have no effect on
the capital and earnings of the banking industry, although the new
rates and base will affect the earnings and capital of individual
institutions. The great majority of institutions will pay assessments
at least 5 percent lower than currently and would thus have higher
earnings and capital. However, 117 insured depository institutions,
comprising 71 small institutions and 46 large institutions, would pay
assessments at least 5 percent higher than they currently do. Appendix
1 contains additional detail on the projected effects of increases or
decreases in assessments on the capital and earnings of insured
depository institutions.
3. Comments on New Rate Schedule
Comments on the new rate schedule effective April 1, 2011, focused
on two areas: The appropriateness of the shift in the rate schedule due
to the new assessment base and the speed at which these rates would
restore the DIF to 1.15 percent. As stated above, commenters generally
supported the rate schedule in light of the new assessment base, since
it maintains approximate revenue neutrality.
Several trade groups believed that the FDIC's projection for how
quickly the reserve ratio will recover was too pessimistic and, thus,
the rate schedule to restore the DIF was too high. A trade group
believed that the revenue from the Temporary Liquidity Guarantee
Program will allow the reserve ratio to reach 1.35 percent by 2017. A
trade group also suggested basing reserve ratio projections on loss
rates from the recovery period after the crisis of the early 1990s.
Some commenters urged the FDIC to monitor progress of the Restoration
Plan and reduce rates if the DIF reserve ratio reaches 1.35 percent
more quickly than the FDIC has projected.
The FDIC has projected that the reserve ratio will reach 1.15
percent at the end of 2018. This projection was based on approximately
$50 billion in losses from bank failures in 2010 through 2014 with
markedly lower losses thereafter. (In fact, losses for 2017 and each
year thereafter were assumed to equal average annual losses from 1995
to 2004, a period of very low fund losses.) The FDIC did not include
income from the TLGP, because it believes that it is too early to
determine the amount that may be transferred to the DIF when the TLGP
ends at the end of 2012.
The FDIC does not believe that its projections are too pessimistic.
Given the uncertainty of the pace of recovery in the economy and
banking industry, as well as the uncertainty inherent in projecting
reserve ratios eight years in advance, the FDIC believes that lowering
assessment rates now (in addition to foregoing the 3 basis point rate
increase previously scheduled to take effect in 2011) would not be
prudent. However, under the Restoration Plan, the FDIC is required to
update its loss and income projections
[[Page 10685]]
for the fund at least semiannually and, if necessary--for example, if
there is a change in the projected losses from bank failures--increase
or decrease assessment rates to meet the statutory minimum reserve
ratio by September 2020. (Such an increase or decrease would not affect
the assessment rate schedules below.)
An industry trade group commented that, given the FDIC's decision
in October 2010 to forego the uniform 3 basis point increase in
assessment rates scheduled to go into effect on January 1, 2011, the
FDIC should reassess its cash needs and return excess prepaid
assessments earlier, such as by December 2011. The FDIC will continue
to monitor its cash resources to determine whether to undertake a
rulemaking to return unused portions of the prepayments before the
scheduled return date.
4. Rate Schedule Once the Reserve Ratio Reaches 1.15 Percent
Pursuant to the FDIC's authority to set assessments, the initial
base and total base assessment rates set forth in Table 4 below will
take effect beginning the assessment period after the fund reserve
ratio first meets or exceeds 1.15 percent, without the necessity of
further action by the FDIC's Board. These rates are identical to those
proposed in the Assessment Base NPR. The rates will remain in effect
unless and until the reserve ratio meets or exceeds 2 percent. The
FDIC's Board will retain its authority to uniformly adjust the total
base rate assessment schedule up or down without further rulemaking,
but the adjustment cannot exceed 2 basis points.
---------------------------------------------------------------------------
\40\ The Assessment Base NPR contained a typographical error in
the lower range of the total base assessment rates for Risk Category
IV. It stated that the range of rates was 29 basis points to 40
basis points; it should have stated that the range was 25 basis
points to 40 basis points. The final rule corrects the error.
Table 4--Initial and Total Base Assessment Rates *
[Once the reserve ratio reaches 1.15 percent and the reserve ratio for the immediately prior assessment period
Is less than 2 percent \40\]
----------------------------------------------------------------------------------------------------------------
Large and
Risk category Risk category Risk category Risk category highly complex
I II III IV 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 25-40 1.5-40
----------------------------------------------------------------------------------------------------------------
* Total base assessment rates do not include the depository institution debt adjustment.
** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured
depository institution's initial base assessment rate; thus, for example, an insured depository institution
with an initial base assessment rate of 3 basis points will have a maximum unsecured debt adjustment of 1.5
basis points and cannot have a total base assessment rate lower than 1.5 basis points.
When the reserve ratio reaches 1.15 percent, the FDIC believes that
it is appropriate to lower assessment rates so that the average
assessment rate will approximately equal the long-term moderate, steady
assessment rate--5.29 basis points, as discussed in the October NPR and
the DRR final rule--that would have been needed to maintain a positive
fund balance throughout past crises.\41\ Doing so is consistent with
the goals of the FDIC's comprehensive, long-term fund management plan,
which are to: (1) Reduce the pro-cyclicality in the existing risk-based
assessment system by allowing moderate, steady assessment rates
throughout economic and credit cycles; and (2) maintain a positive fund
balance even during a banking crisis by setting an appropriate target
fund size and a strategy for assessment rates and dividends.
---------------------------------------------------------------------------
\41\ The FDIC arrived at the rate schedule in Table 4 as
follows. First, the FDIC determined the rate schedule that would
have been needed during a period when insured depository
institutions had strong earnings to achieve approximately an 8.5
basis point average assessment rate, which is the long-term,
moderate, steady assessment rate that would have been needed to
maintain a positive fund balance throughout past crises using a
domestic deposit assessment base. Based on the FDIC's analysis of
weighted average assessment rates paid immediately prior to the
current crisis (when the industry was relatively prosperous, and had
both good CAMELS ratings and substantial capital), weighted average
rates during times of industry prosperity tend to be somewhat less
than 1 basis point greater than the minimum initial base assessment
rate applicable to Risk Category I (for rates applicable to a
domestic deposit assessment base). The first year in which rates
applicable to Risk Category I spanned a range (as opposed to being a
single rate) was 2007, when initial assessment rates ranged between
5 and 7 basis points. During that year, weighted average annualized
industry assessment rates for the first three quarters varied
between 5.41 and 5.44 basis points. (By the end of 2007,
deterioration in the industry became more marked and weighted
average rates began increasing.) The difference between the minimum
rate and the weighted average rate (approximately 0.4 basis points)
is 20 percent of the 2 basis point difference between the then
existing minimum and maximum rates. 20 percent of the 4 basis point
difference between the current, domestic deposit minimum and maximum
rates is 0.8 basis points. By analogy, in 2007 the current
assessment schedule would have produced average assessment rates of
about 12.8 basis points. Thus, to achieve, during prosperous times,
approximately an 8.5 basis point average assessment rate, initial
base rates would have to be set about 4 basis points lower than
current initial base assessment rates (applied against the domestic
deposit assessment base). This analysis underlay the rate schedule
in the October NPR that was proposed to become effective when the
reserve ratio reaches 1.15 percent. As of June 30, 2010, the rate
schedule in Table 4 applied against the Dodd-Frank mandated
assessment base would have produced approximately the same amount of
revenue as the October NPR's proposed rate schedule applied against
the domestic deposit assessment base.
---------------------------------------------------------------------------
The FDIC considers these goals important for several reasons.
During an economic and banking downturn, insured institutions can least
afford to pay high deposit insurance assessment rates. Moreover, high
assessment rates during a downturn reduce the amount that banks can
lend when the economy most needs new lending. Consequently, it is
important to reduce pro-cyclicality in the assessment system and allow
moderate, steady assessment rates throughout economic and credit
cycles. As discussed above, at a September 24, 2010 roundtable
organized by the FDIC, bank executives and industry trade group
representatives uniformly favored steady, predictable assessments and
objected to high assessment rates during crises.
It is also important that the fund not decline to a level that
could risk undermining public confidence in federal deposit insurance.
Furthermore, although the FDIC has significant authority to borrow from
the Treasury to cover losses when the fund balance approaches zero, the
FDIC views the Treasury line of credit as available to cover unforeseen
losses, not as a source of financing projected losses. A sufficiently
large fund is a necessary precondition to maintaining a positive fund
balance during a banking crisis
[[Page 10686]]
and allowing for long-term, steady assessment rates.
5. Rate Schedule Once the Reserve Ratio Reaches 2.0 Percent
In lieu of dividends, and pursuant to the FDIC's authority to set
assessments, the initial base and total base assessment rates set forth
in Table 5 below will come into effect without further action by the
FDIC Board when the fund reserve ratio at the end of the prior
assessment period meets or exceeds 2 percent, but is less than 2.5
percent.\42\ These rates are identical to those proposed in the
Assessment Base NPR. The FDIC's Board will retain its authority to
uniformly adjust the total base rate assessment schedule up or down
without further rulemaking, but the adjustment cannot exceed 2 basis
points.\43\
---------------------------------------------------------------------------
\42\ New institutions will remain subject to the assessment
schedule in Table 4 when the reserve ratio reaches 2 percent.
Subject to exceptions, a new insured depository institution is a
bank or savings association that has been federally insured for less
than five years as of the last day of any quarter for which it is
being assessed. 12 CFR 327.8(j).
\43\ However, the lowest total base assessment rate cannot be
negative.
Table 5--Initial and Total Base Assessment Rates *
[If the reserve ratio for prior assessment period is equal to or greater than 2 percent and less than 2.5
percent]
----------------------------------------------------------------------------------------------------------------
Large and
Risk category Risk category Risk category Risk category highly complex
I II III IV institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate.... 2-6 10 17 28 2-28
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
----------------------------------------------------------------------------------------------------------------
* Total base assessment rates do not include the depository institution debt adjustment.
** The unsecured debt adjustment could not exceed the lesser of 5 basis points or 50 percent of an insured
depository institution's initial base assessment rate; thus, for example, an insured depository institution
with an initial assessment rate of 2 basis points will have a maximum unsecured debt adjustment of 1 basis
point and could not have a total base assessment rate lower than 1 basis point.
The historical analysis discussed above revealed that, in lieu of
dividends, reducing the 5.29 basis point weighted average assessment
rate by 25 percent when the reserve ratio reached 2 percent allowed the
fund to remain positive during prior banking crises and successfully
limited rate volatility. The assessment rates in Table 5 should produce
a weighted average assessment rate approximately 25 percent lower than
the assessment rates in Table 4 during periods of industry
prosperity.\44\
---------------------------------------------------------------------------
\44\ The FDIC arrived at the rate schedule in Table 5 as
follows. As described in an earlier footnote, based on the FDIC's
analysis of weighted average assessment rates paid immediately prior
to the current crisis (when the industry was relatively prosperous,
and had both good CAMELS ratings and substantial capital), weighted
average rates during times of industry prosperity tend to be
somewhat less than 1 basis point greater than the minimum initial
base assessment rate applicable to Risk Category I (for rates
applicable to a domestic deposit assessment base). Given this
relationship, as described in an earlier footnote, the FDIC
determined that the rate schedule that would have been needed during
prosperous times to achieve approximately an 8.5 basis point average
assessment rate would have had a minimum initial base assessment
rate of 8 basis points. Similarly, the assessment rate schedule
that, when applied to the domestic deposit assessment base would
reduce the weighted average assessment rate by approximately 25
percent, would have had a minimum initial base assessment rate of 6
basis points (Table 4 in the October NPR). The FDIC then determined
the relative diminution in assessment revenue that would have
occurred using Table 4, rather than current assessment rates,
applied against the domestic deposit assessment base as of June 30,
2010. Applying the rates in Table 5 rather than those in Table 4
against the Dodd-Frank assessment base as of June 30, 2010, would
have produced a similar relative diminution in assessment revenue.
---------------------------------------------------------------------------
6. Rate Schedule Once the Reserve Ratio Reaches 2.5 Percent
Also in lieu of dividends, and pursuant to the FDIC's authority to
set assessments, the initial base and total base assessment rates set
forth in Table 6 below will come into effect without further action by
the FDIC Board when the fund reserve ratio at the end of the prior
assessment period meets or exceeds 2.5 percent.\45\ These rates are
identical to those proposed in the Assessment Base NPR. The FDIC's
Board will retain its authority to uniformly adjust the total base rate
assessment schedule up or down without further rulemaking, but the
adjustment cannot exceed 2 basis points.\46\
---------------------------------------------------------------------------
\45\ New institutions will remain subject to the assessment
schedule in Table 4 when the reserve ratio reaches 2.5 percent.
\46\ However, the lowest initial base assessment rate cannot be
negative.
Table 6--Initial and Total Base Assessment Rates *
[If the reserve ratio for the prior assessment period is equal to or greater than 2.5 percent]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Large and
Risk category Risk category Risk category Risk category highly complex
I II III IV 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
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Total base assessment rates do not include the depository institution debt adjustment.
** The unsecured debt adjustment could not exceed the lesser of 5 basis points or 50 percent of an insured depository institution's initial base
assessment rate; thus, for example, an insured depository institution with an initial assessment rate of 1 basis point will have a maximum unsecured
debt adjustment of 0.5 basis points and could not have a total base assessment rate lower than 0.5 basis points.
[[Page 10687]]
The historical analysis discussed above revealed that, in lieu of
dividends, further reducing the 5.29 basis point weighted average
assessment rate by 25 percent when the reserve ratio reached 2 percent
and by 50 percent when the reserve ratio reached 2.5 percent allowed
the fund to remain positive during prior banking crises and
successfully limited rate volatility. The assessment rates in Table 6
should produce a weighted average assessment rate approximately 50
percent lower than the assessment rates in Table 4 during periods of
industry prosperity.\47\
---------------------------------------------------------------------------
\47\ The FDIC arrived at the rate schedule in Table 6 as
follows. As described in an earlier footnote, based on the FDIC's
analysis of weighted average assessment rates paid immediately prior
to the current crisis (when the industry was relatively prosperous,
and had both good CAMELS ratings and substantial capital), weighted
average rates during times of industry prosperity tend to be
somewhat less than 1 basis point greater than the minimum initial
base assessment rate applicable to Risk Category I (for rates
applicable to a domestic deposit assessment base). Given this
relationship, as described in an earlier footnote, the FDIC
determined that the rate schedule that would have been needed during
prosperous times to achieve approximately an 8.5 basis point average
assessment rate would have had a minimum initial base assessment
rate of 8 basis points. Similarly, the assessment rate schedule
that, when applied to the domestic deposit assessment base would
reduce the weighted average assessment rate by approximately 50
percent, would have had a minimum initial base assessment rate of 4
basis points (Table 5 in the October NPR). The FDIC then determined
the relative diminution in assessment revenue that would have
occurred using Table 5, rather than current assessment rates,
applied against the domestic deposit assessment base as of June 30,
2010. Applying the rates in Table 6 rather than those in Table 4
against the Dodd-Frank assessment base as of June 30, 2010, would
have produced a similar relative diminution in assessment revenue.
---------------------------------------------------------------------------
7. Analysis of Statutory Factors for Future Rate Schedules
The FDIC Board took into account the required statutory factors
when adopting the rate schedules that will take effect when the reserve
ratio reaches 1.15 percent, 2 percent and 2.5 percent.\48\ These rate
schedules were based on the historical analysis in the October NPR and
the updated historical analysis in the DRR final rule. These analyses
took into account fund operating expenses, resolution expenses and
income over many decades to determine assessment rates that would keep
the fund positive and assessment rates stable even during crises like
those that have occurred within the past 30 years.
---------------------------------------------------------------------------
\48\ As noted earlier, in setting assessment rates, the FDIC's
Board of Directors is authorized to set assessments for insured
depository institutions in such amounts as the Board of Directors
may determine to be necessary. 12 U.S.C. 1817(b)(2)(A). In so doing,
the Board must consider certain statutorily defined factors. 12
U.S.C. 1817(b)(2)(B). As reflected in the text, the FDIC has taken
into account all of these statutory factors.
---------------------------------------------------------------------------
As the FDIC stated in the October NPR, it anticipates that when the
reserve ratio exceeds 1.15 percent, and particularly when it exceeds 2
or 2.5 percent, the industry is likely to be prosperous. Consequently,
to determine the effect on earnings and capital of lowering rates (once
the reserve ratio thresholds are met) after taking into account the new
assessment base, the FDIC examined the effect of the lower rates on the
industry at the end of 2006, when the industry was prosperous. Under
that scenario, reducing assessment rates when the reserve ratio reaches
1.15 percent would have increased average after-tax income by 1.25
percent and average capital by 0.14 percent. Reducing assessment rates
when the reserve ratio reaches 2 percent would have further increased
average after-tax income by 0.62 percent and average capital by 0.07
percent. Similarly, reducing assessment rates when the reserve ratio
reaches 2.5 percent would have further increased average after-tax
income by 0.61 percent and average capital by 0.07 percent. Decreasing
assessment rates as provided in the final rule would not negatively
affect the capital or earnings of any insured depository institution.
8. Comments on Future Rate Schedules
Commenters generally favored the establishment of a long-term,
steady, predictable rate schedule that does not fluctuate with economic
and credit cycles. One trade group stated that ``[t]he more consistent
and steady the premiums can be, the better bankers are able to plan and
continue their work in their local communities.'' The FDIC agrees that
setting this long-term rate schedule now will bring more stability and
transparency to the deposit insurance system.
However, an industry trade group argued that, by maintaining the 4
basis point difference between minimum and maximum Risk Category I
initial base assessment rates and applying these rates to a larger
assessment base, the proposed assessment rates would effectively widen
the assessment spread within Risk Category I. The trade group
recommended that the spread be reduced when the FDIC lowers the overall
assessment schedule in the future. The FDIC is not convinced. In the
FDIC's view, risk differentiation becomes more important during times
of banking prosperity, particularly when an expansion continues for a
long period. During these periods, insured depository institutions are
lending more and taking on more risk and greater risk differentiation
allows this risk to be captured.
One trade group argued that these assessment rates would cause the
reserve ratio to increase from 1.15 percent to 2 percent within 3 years
and were therefore too high. The FDIC disagrees. The FDIC projects that
it will take about 9 years for the fund to grow from 1.15 percent to 2
percent, assuming very low fund losses (the average loss rate from 1995
to 2004, a period of very low fund losses) and forward interest rates
as of the date the projection was made.\49\
---------------------------------------------------------------------------
\49\ Using forward interest rates as of December 3, 2010, when
forward rates were slightly higher than those used in the original
projection, the FDIC still projects that it will take 8 years for
the fund to grow from 1.15 percent to 2 percent.
---------------------------------------------------------------------------
This trade group also stated that the rate reductions at 2 and 2.5
percent do not effectively restrict the growth of the insurance fund
and instead create an ``effective floor'' for the fund. The trade group
also argued that the FDIC's analysis ignored the large amount of
interest income that would be generated by a fund with a reserve ratio
of 2 percent, and that this would be particularly significant during
periods of stability and low losses to the fund.
As described in the section on dividends above, the FDIC believes
the rate decreases do effectively limit the growth of the insurance
fund while preventing the moral hazard that would occur if institutions
paid no assessments at all. Furthermore, the FDIC's analysis reveals
that it would require very low losses over many years for the fund to
reach 2.5 percent. Given the experience of the past 30 years, the FDIC
considers it unlikely that the fund would experience such a prolonged
period of low losses. Moreover, in the FDIC's 75 year history, the fund
reserve ratio has never reached 2 percent.\50\
---------------------------------------------------------------------------
\50\ In addition, the rule does not create an effective floor
above 2 percent. In the analysis, when the reserve ratio fell below
2 percent, rates did not need to rise above the necessary long-term
assessment rate to keep the fund from becoming negative. Instead,
rates could be held constant at the long-term assessment rate in
keeping with the goal of reducing pro-cyclicality.
---------------------------------------------------------------------------
Moreover, the FDIC's analysis did not ignore interest income. The
analysis simulated fund growth by combining assessment income and
investment income earned based on historical interest rates. The
analysis covered periods of stability and low losses as well as crisis
periods accompanied by high losses. It covered periods of high interest
rates as well as low rates. The simulated fund also covered an extended
period during which the fund reached or exceeded a reserve ratio of 2
percent. This period was not
[[Page 10688]]
accompanied by rapid fund growth, and fund growth was limited by
assessment rate reductions. Had fund growth not been interrupted by
periods of high losses during the 60-year period, the fund might
gradually have reached a much larger size, but, historically, unbroken
periods of stability are not the norm--rather they are interrupted by
periods of high losses when the fund's growth decreases significantly.
VI. The Final Rule: Risk-Based Assessment System for Large Insured
Depository Institutions
A. Overview of the Large Bank Risk-Based Assessment System
The final rule amends the assessment system applicable to large
insured depository institutions to better capture risk at the time the
institution assumes the risk, to better differentiate risk among large
insured depository institutions during periods of good economic and
banking conditions based on how they would fare during periods of
stress or economic downturns, and to better take into account the
losses that the FDIC may incur if a large insured depository
institution fails. Except where noted, the final rule adopts the
proposals in the Large Bank NPR.
The final rule eliminates risk categories and the use of long-term
debt issuer ratings for calculating risk-based assessments for large
institutions.\51\ Instead, assessment rates will be calculated using a
scorecard that combines CAMELS ratings and certain forward-looking
financial measures to assess the risk a large institution poses to the
DIF. One scorecard will apply to most large institutions and another to
institutions that are structurally and operationally complex or that
pose unique challenges and risk in the case of failure (highly complex
institutions).\52\
---------------------------------------------------------------------------
\51\ 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 (15 U.S.C. 78o-7 note).
\52\ 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 U.S. parent holding company that has had $500
billion or more in total assets for four consecutive quarters, or is
controlled by one or more intermediate U.S. parent holding companies
that are controlled by a U.S. holding company that has had $500
billion or more in assets for four consecutive quarters, and (2) a
processing bank or trust company. A processing bank or trust company
is an insured depository institution whose last three years' non-
lending interest income, fiduciary revenues, and investment banking
fees, combined, exceed 50 percent of total revenues (and its last
three years fiduciary revenues are non-zero), whose total fiduciary
assets total $500 billion or more and whose total assets for at
least four consecutive quarters have been $10 billion or more. The
final rule clarifies that only U.S. holding companies come within
the definition of highly complex institution. Control has the same
meaning as in section 3(w)(5) of the FDI Act. See 12 USC
1813(w)(5)(2001). A credit card bank is defined as a bank for which
credit card plus securitized receivables exceed 50 percent of assets
plus securitized receivables. The final rule makes a technical
change to the definition of a highly complex institution to avoid
including certain non-complex institutions by requiring, among other
things, that for an institution to be defined as a processing bank
or trust company (one type of highly complex institution), it must
have total fiduciary assets total $500 billion or more.
---------------------------------------------------------------------------
The scorecards use quantitative measures that are readily available
and useful in predicting a large institution's long-term
performance.\53\ These measures are meant to differentiate risk based
on how large institutions would fare during periods of economic stress.
Experience during the recent crisis shows that periods of stress reveal
risks that remained hidden during periods of prosperity. As discussed
in the Large Bank NPR and shown in Chart 3, over the 2005 to 2008
period, the new measures were useful in predicting performance of large
institutions in 2009.
---------------------------------------------------------------------------
\53\ 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 not. The FDIC proposes that insured
depository institutions 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.
---------------------------------------------------------------------------
[[Page 10689]]
[GRAPHIC] [TIFF OMITTED] TR25FE11.003
B. Scorecard for Large Insured Depository Institutions (Other Than
Highly Complex Insured Depository Institutions)
The scorecard for large institutions (other than highly complex
institutions) produces two scores--a performance score and a loss
severity score--that are combined and converted to an initial base
assessment rate.
The performance score measures a large institution's financial
performance and its ability to withstand stress. To arrive at a
performance score, the scorecard combines a weighted average of CAMELS
component ratings and certain 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 a large institution's
failure. The scorecard converts a loss severity measure into a 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 can be up to 20 percent
higher or lower than the performance score. Any score less than 30 will
be set at 30; any score greater than 90 will be set at 90. As discussed
below, the FDIC will have a limited ability to alter a large
institution's total score based on quantitative or qualitative measures
not captured in the scorecard. The resulting total score after
adjustment cannot be less than 30 or more than 90. The total score is
converted to an initial base assessment rate.
Table 7 shows scorecard measures and components, and their relative
contribution to the performance score or loss severity score. Scorecard
measures (other than the weighted average CAMELS rating) are converted
to scores between 0 and 100 based on minimum and maximum cutoff values
for each measure. A score of 100 reflects the highest risk and a score
of 0 reflects the lowest risk. 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 reflects the highest risk and 25 reflects the lowest risk.
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 institutions 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.\56\ \57\
---------------------------------------------------------------------------
\54\ The rank ordering of risk for large 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 government support over the period
are assigned the worst risk ranking and are included in the
statistical analysis. Appendix 1 to the NPR describes the
statistical analysis.
\55\ The percentage approximated by factors is based on the
statistical model for that particular 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).
\56\ Appendix 2 shows selected percentile values of each
scorecard measure over this period. The detailed results of the
statistical analysis used to select risk measures and the weights
are also provided. An online calculator is available on the FDIC's
Web site to allow institutions to determine how their assessment
rates will be calculated under this final rule.
\57\ Some cutoff values have been updated since the Large Bank
NPR to reflect data updates.
---------------------------------------------------------------------------
Appendix B describes how each scorecard measure is converted to a
score.
[[Page 10690]]
Table 7--Scorecard for Large Institutions
------------------------------------------------------------------------
Measure Component
Scorecard measures weights weights
and components (percent) (percent)
------------------------------------------------------------------------
P................ Performance Score.... .............. ..............
P.1.............. Weighted Average 100 30
CAMELS Rating.
P.2.............. Ability to Withstand .............. 50
Asset-Related Stress.
Tier 1 Leverage 10 ..............
Ratio.
Concentration 35 ..............
Measure.
Core Earnings/ 20 ..............
Average Quarter-End
Total Assets *.
Credit Quality 35 ..............
Measure.
P.3.............. Ability to Withstand .............. 20
Funding-Related
Stress.
Core Deposits/Total 60 ..............
Liabilities.
Balance Sheet 40 ..............
Liquidity Ratio.
L................ Loss Severity Score.. .............. ..............
L.1.............. Loss Severity Measure .............. 100
------------------------------------------------------------------------
* Average of five quarter-end total assets (most recent and four prior
quarters).
1. Performance Score
The performance score for large institutions is a weighted average
of the scores for three components: (1) Weighted average CAMELS rating
score; (2) ability to withstand asset-related stress score; and (3)
ability to withstand funding-related stress score. Table 7 shows the
weight given to the score for each of these components.
a. Weighted Average CAMELS Rating Score
To compute the weighted average CAMELS rating score, a weighted
average of the large institution's CAMELS component ratings is first
calculated using the weights shown in Table 8. These weights are the
same as the weights used in the financial ratios method, which is
currently used to determine assessment rates for all insured depository
institutions in Risk Category I.\58\
---------------------------------------------------------------------------
\58\ 12 CFR part 327, Subpt. A, App. A (2010).
Table 8--Weights for CAMELS Component Ratings
------------------------------------------------------------------------
Weight
CAMELS component (percent)
------------------------------------------------------------------------
C....................................................... 25
A....................................................... 20
M....................................................... 25
E....................................................... 10
L....................................................... 10
S....................................................... 10
------------------------------------------------------------------------
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 describes how the FDIC
converts a weighted average CAMELS rating to a score.
b. Ability To Withstand Asset-Related Stress Score
The score for the ability to withstand asset-related stress is a
weighted average of the scores for the four measures that the FDIC
finds most relevant to assessing a large institution's ability to
withstand such stress; they are:
Tier 1 leverage ratio;
Concentration measure (the greater of the higher-risk
assets to the sum of Tier 1 capital and reserves score or the growth-
adjusted portfolio concentrations score);
The ratio of core earnings to average quarter-end total
assets; and
Credit quality measure (the greater of the criticized and
classified items to the sum of Tier 1 capital and reserves score or the
underperforming assets to the sum of Tier 1 capital and reserves
score).
In general, these measures proved to be the most statistically
significant measures of a large institution's ability to withstand
asset-related stress, as described in Appendix 2. Appendix A describes
these measures.
The method for calculating the scores for the Tier 1 leverage ratio
and the ratio of core earnings to average quarter-end total assets is
described in Appendix B.
The score for the concentration measure is the greater of the
higher-risk assets to Tier 1 capital and reserves score or the growth-
adjusted portfolio concentrations score.\59\ Appendix B describes the
conversion of these ratios to scores. Appendix C describes the ratios.
---------------------------------------------------------------------------
\59\ 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, along with growth of the concentration.
---------------------------------------------------------------------------
The score for the credit quality measure is the greater of the
criticized and classified items to Tier 1 capital and reserves score or
the underperforming assets to Tier 1 capital and reserves score.\60\
Appendix B describes conversion of the credit quality measure into a
credit quality score.
---------------------------------------------------------------------------
\60\ The criticized and classified items ratio measures
commercial credit quality while the underperforming assets ratio is
often a better indicator for consumer portfolios.
---------------------------------------------------------------------------
Table 9 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. Appendix B describes how
each of the risk measures is converted to a score between 0 and 100
based upon the minimum and maximum cutoff values.\61\
---------------------------------------------------------------------------
\61\ Most of the minimum and maximum cutoff values for each risk
measure equal the 10th and 90th percentile values of the measure
among large institutions 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 ratio and the criticized and classified items
ratio due to data availability. Data on the higher-risk assets to
Tier 1 capital and reserves ratio are available consistently since
second quarter 2008, while criticized and classified items are
available consistently since first quarter 2007. The maximum cut off
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 based on recent experience since
earlier data is unavailable. Appendix 2 includes information
regarding the percentile values for each risk measure.
[[Page 10691]]
Table 9--Cutoff Values and Weights for Measures To Calculate Ability To Withstand Asset-Related Stress Score
----------------------------------------------------------------------------------------------------------------
Cutoff values
-------------------------------- Weights
Measures of the ability to withstand asset-related stress Minimum Maximum (percent)
(percent) (percent)
----------------------------------------------------------------------------------------------------------------
Tier 1 Leverage Ratio........................................... 6 13 10
Concentration Measure........................................... .............. .............. 35
Higher-Risk Assets to Tier 1 Capital and Reserves; or....... 0 135 ..............
Growth-Adjusted Portfolio Concentrations.................... 4 56 ..............
Core Earnings/Average Quarter-End Total Assets*................. 0 2 20
Credit Quality Measure.......................................... .............. .............. 35
Criticized and Classified Items/Tier 1 Capital and Reserves; 7 100 ..............
or.........................................................
Underperforming Assets/Tier 1 Capital and Reserves.......... 2 35 ..............
----------------------------------------------------------------------------------------------------------------
* Average of five quarter-end total assets (most recent and four prior quarters).
The score for each measure is multiplied by its respective weight
and the resulting weighted score is summed to arrive at a score for an
ability to withstand asset-related stress, which can range from 0 to
100.
Table 10 illustrates how the score for the ability to withstand
asset-related stress is calculated for a hypothetical bank, Bank A.
Table 10--Calculation of Bank A's Ability To Withstand Asset-Related Stress Score
----------------------------------------------------------------------------------------------------------------
Measures of the ability to withstand asset- Value Weight
related stress (percent) Score * (percent) Weighted 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 162.00 100.00 .............. ..............
Reserves; or...............................
Growth-Adjusted Portfolio Concentrations.... 43.62 76.19 .............. ..............
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 1 114.00 100.00 .............. ..............
Capital and Reserves; or...................
Underperforming Assets/Tier 1 Capital and 34.25 97.73 .............. ..............
Reserves...................................
---------------------------------------------------------------
Total ability to withstand asset-related .............. .............. .............. 91.90
stress score...............................
----------------------------------------------------------------------------------------------------------------
* In the example, scores are rounded to two decimal points for Bank A. In actuality, scores will be rounded to
three decimal places.
Bank A's higher risk assets to Tier 1 capital and reserves score
(100.00) is higher than its growth-adjusted portfolio concentration
score (76.19). 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 (100.00) is higher than its
underperforming assets to Tier 1 capital and reserves score (97.73).
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 (8.60) 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. Comments on Ability To Withstand Asset-Related Stress
The FDIC received a number of comments that relate to scorecard
measures used to assess an institution's ability to withstand asset-
related stress.
Criticized and Classified Items Ratio
The FDIC received several comments suggesting that the FDIC
discount or exclude certain items, such as purchased credit impaired
(PCI) loans or performing restructured loans, from the definition of
criticized and classified items, since these items do not result in the
same degree of loss as other, typical, classified and criticized items.
The FDIC acknowledges that losses associated with various items
included in criticized and classified items may vary, depending on
collateral, the degree of previous loss recognition and other factors.
However, relying on greater detail on these types of assets would
increase, not decrease, the complexity of the model and would require
additional data elements to be collected from institutions. The FDIC
believes that the added complexity and burden of collecting more
detailed data outweighs the additional benefit, but, relying upon data
obtained through the examination process, will consider the
idiosyncratic and qualitative factors that may influence potential
losses associated with various criticized and classified items in
determining whether to apply a large bank adjustment (discussed below).
One commenter cautioned against potential inconsistencies in
reported criticized and classified items, particularly when examination
classifications differ from an institution's internal classifications.
For the purpose of the large bank scorecard, criticized and classified
items are defined as those items that the institution has internally
identified as Special Mention, Substandard, Doubtful, or Loss on its
own management reports or items identified as Special Mention or worse
by an institution's primary federal regulator.
[[Page 10692]]
Appendix A of the final rule describes the definition.
Growth-Adjusted Portfolio Concentrations Ratio
Several commenters stated that the growth-adjusted portfolio
concentrations ratio unfairly captures growth attributed to the
Statement of Financial Accounting Standards No. 166, Accounting for
Transfers of Financial Assets, an Amendment of FASB Statement No. 140,
and Statement of Financial Accounting Standards No. 167, Amendments to
FASB Interpretation No. 46(R), which are one-time accounting
adjustments (FAS 166/167).
FDIC analysis shows that asset growth associated with FAS 166/167
guidelines has a one-time effect on only a small number of
institutions. Weighing the benefit of collecting additional information
on the effect of FAS 166/167 against the added complexity and
associated data collection burden, the FDIC has concluded that it would
be better to consider the effect of FAS 166/167 as it determines
whether to apply a large bank adjustment.
Higher-Risk Assets Ratio
A number of commenters stated that certain elements of the higher-
risk assets ratio contain data items that are not Call Report items and
could lead to inconsistent reporting among banks. As proposed in the
Large Bank NPR, the FDIC will collect all data elements, other than
CAMELS ratings, directly from institutions through the Call Reports and
TFRs. These measures are defined in Appendix A.
The FDIC also received a number of comments suggesting changes in
the definition of leveraged lending, subprime loans and nontraditional
mortgages, which are used in the higher-risk assets ratio. These
comments are discussed below.
Leveraged Lending
Several commenters asked for a change in the definition of
leveraged lending to exclude small business loans, real estate loans or
loans for buyout, acquisition, and recapitalization that do not
otherwise meet the definition of leveraged lending. Commenters also
cautioned against using specific ``bright line'' financial metrics to
determine whether a loan is leveraged. In addition, commenters stated
that regular updating of loan data for the purposes of identifying
leveraged loans is burdensome and costly.
The FDIC agrees that several of these comments have merit. For the
purpose of this rule, leveraged loans exclude all real estate loans and
those small business loans with an original amount of $1 million or
less.\62\ The FDIC believes that some bright-line metrics are necessary
to ensure consistency in reporting among institutions; however, the
final rule removes the total liabilities to asset ratio test from the
definition of leveraged loans.\63\ Any other commercial loan or
security, regardless of the stated purpose, will be considered
leveraged only if it meets one of the two remaining criteria described
in Appendix C.
---------------------------------------------------------------------------
\62\ The original amount is defined in Appendix C.
\63\ The remaining tests for determining whether a loan is
leveraged are consistent with the Office of the Comptroller of the
Currency's Handbook, http://www.occ.gov/static/publications/handbook/LeveragedLending.pdf.
---------------------------------------------------------------------------
Subprime Loans
Several commenters asked that the definition of a subprime loan be
revised to comport with the 2001 Interagency Guidance and to exclude
loans that have deteriorated subsequent to origination, citing the
burden and cost associated with regular updating of borrower
information.\64\ One commenter argued against referencing the FICO
score in defining subprime loans, stating that the rule should not
endorse a specific brand. A couple of commenters cautioned about
potential inconsistencies among institutions in identifying subprime
loans.
---------------------------------------------------------------------------
\64\ FDIC Press Release PR-9-2001 01-31-2001, http://www.fdic.gov/news/news/press/2001/pr0901a.html.
---------------------------------------------------------------------------
To reduce any potential burden, the final rule defines subprime
loans as those that meet the criteria for being subprime at origination
or refinancing. The definition in the final rule deletes the reference
to FICO and other credit bureau scores. While the FDIC is aware that
originators often use credit scores in the loan underwriting process,
the FDIC has decided not to use a credit score threshold as a potential
characteristic of a subprime borrower. Such a definition would require
reliance on credit scoring models that are controlled by credit rating
bureaus; thus, the models may change materially at the discretion of
the credit rating bureaus. There also may be inconsistencies among the
various models that the credit rating bureaus use. Research has
consistently found that borrower credit history is among the most
important predictors of default.\65\ The final rule focuses on credit
history as a characteristic of a subprime borrower, but, to avoid
underreporting of subprime loans, the definition now includes loans
that an institution itself identifies as subprime based upon similar
borrower characteristics. Appendix A describes the definition.
---------------------------------------------------------------------------
\65\ See, e.g., Board of Governors of the Federal Reserve
System, Report to the Congress on Credit Scoring and Its Effects on
the Availability and Affordability of Credit, August 2007, http://www.federalreserve.gov/boarddocs/rptcongress/creditscore/creditscore.pdf.
---------------------------------------------------------------------------
Nontraditional Mortgages
A number of commenters argued that interest-only loans should not
be included in the definition of non-traditional mortgages for the
higher risk concentration measure, given that the risk they pose
differs from other non-traditional mortgages. The FDIC disagrees. The
FDIC believes that interest-only loans generally exhibit higher risk
than traditional amortizing mortgage loans, particularly in a stressful
economic environment. The FDIC understands that qualitative factors
such as credit underwriting or credit administration are important in
determining potential losses associated with interest-only loans;
however, these factors can influence potential losses for any type of
loan and, in addition, are not easily measurable systematically. The
FDIC will consider these qualitative factors in determining whether to
apply a large bank adjustment.
One comment asked for a specific definition of a teaser rate
mortgage. For the purpose of the final rule, a teaser-rate mortgage is
a mortgage with a discounted initial rate and lower payments for part
of the mortgage term.
Averaging the Credit Quality and Concentration Scores
A number of commenters suggested that the FDIC should average the
two concentration scores and the two credit quality scores, rather than
using the greater of the two scores in each case. The FDIC disagrees.
The two credit quality ratios capture credit risk in different ways:
the criticized and classified items ratio is more relevant for the
performance of an institution's commercial portfolio; the
underperforming asset ratio is more relevant for the performance of an
institution's retail portfolio. Depending on an institution's asset
composition, one measure may better capture the institution's credit
quality than another. Therefore, averaging the two scores could
understate credit quality concerns.
Similarly, the two concentration ratios are designed to capture
different concentration risk. The high-risk asset concentration ratio
captures the risk associated with concentrated lending in high-risk
areas that directly contributed to the failure of a number of large
[[Page 10693]]
institutions during the recent economic downturn. The FDIC recognizes,
however, that other types of concentrations may lead to failure in the
future, particularly if the concentrations are accompanied by rapid
growth, which is what the growth-adjusted portfolio concentration ratio
is designed to measure. Recent experience shows that many institutions
that subsequently experienced problems eased underwriting standards and
expanded beyond their traditional areas of expertise to grow rapidly.
Since these two concentration ratios are designed to capture different
types of concentration risk, averaging the two scores could reduce the
scorecard's ability to differentiate risk.
d. Ability To Withstand Funding-Related Stress Score
The ability to withstand funding-related stress component contains
two measures that are most relevant to assessing a large institution'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 needed to cover potential cash outflows in the
event of stress.66 67 These ratios are significant in
predicting a large institution's long-term performance in the
statistical test described in Appendix 2. Appendix A describes these
risk measures. Appendix B describes how each of these measures is
converted to a score between 0 and 100.
---------------------------------------------------------------------------
\66\ The final rule clarifies that all securities included in
the definition of liquid assets are measured at fair value.
\67\ The deposit runoff assumptions proposed in the Large Bank
NPR were based on the Basel liquidity measure. The final rule
modified deposit runoff rates for the balance sheet liquidity ratio
to reflect changes issued by the Basel Committee on Banking
Supervision in its December 2010 document, ``Basel III:
International framework for liquidity risk measurement, standards
and monitoring,'' http://www.bis.org/publ/bcbs188.pdf.
---------------------------------------------------------------------------
The score for the ability to withstand funding-related stress is
the weighted average of the scores for two measures. Table 11 shows the
cutoff values and weights for these measures. Weights assigned to each
of these two risk measures are based on a statistical analysis
described in Appendix 2.
Table 11--Cutoff Values and Weights To Calculate Ability To Withstand Funding-Related Stress Score
----------------------------------------------------------------------------------------------------------------
Cutoff values
-------------------------------- Weight
Measures of the ability to withstand funding-related stress Minimum Maximum (percent)
(percent) (percent)
----------------------------------------------------------------------------------------------------------------
Core Deposits/Total Liabilities................................. 5 87 60
Balance Sheet Liquidity Ratio................................... 7 243 40
----------------------------------------------------------------------------------------------------------------
Table 12 illustrates how the score for the ability to withstand
funding-related stress for hypothetical bank, Bank A, is calculated.
Table 12--Calculation of Bank A's Score for Ability To Withstand Funding-Related Stress
----------------------------------------------------------------------------------------------------------------
Measures of the ability to Value Weight
withstand funding-related stress (percent) Score * (percent) Weighted score
--------------------------------------------------------------------------------------------------
Core Deposits/Total Liabilities... 60.25 32.62 60 19.57
Balance Sheet Liquidity Ratio..... 69.58 73.48 40 29.39
-----------------------------------------------------------------------------
Total ability to withstand .............. .............. .............. 48.96
funding-related stress score.
----------------------------------------------------------------------------------------------------------------
* In the example, scores are rounded to two decimal points for Bank A. In actuality, scores will be rounded to
three decimal places.
e. Comments on the Ability To Withstand Funding-Related Stress
Definition of Core Deposits and Brokered Deposits
Several commenters stated that the definitions for core deposits
and brokered deposits as used in the core deposits to total liabilities
ratio are outdated and should be revised. These commenters stated that
reciprocal deposits, affiliated broker-dealer sweeps and long-term
brokered deposits are stable deposits, and therefore, should be
included in the definition of core deposits. In the final rule, for
this purpose, core deposits exclude all brokered deposits. However, as
mentioned in Section III, Dodd-Frank mandated that the FDIC conduct a
study to evaluate the existing brokered deposit and core deposit
definitions. The FDIC will examine the definition in light of the
completed study and will consider changes then, if appropriate.
Balance Sheet Liquidity Ratio
Several commenters argued that unencumbered agency mortgage-backed
securities (MBSs) should be included as liquid assets in calculating
the balance sheet liquidity ratio, arguing that they are a reliable
source of liquidity. These commenters also pointed to the Basel
liquidity measures, which include unencumbered agency MBSs as highly
liquid assets, with appropriate haircuts.
The FDIC believes that an institution's ability to withstand
funding-related stress can be best measured by highly liquid assets
that can be readily converted to cash with little or no loss in value,
relative to potential short-term funding outflows. While agency MBSs
are generally liquid, they are not as highly liquid as other assets
included as liquid assets in the definition of balance sheet liquidity
ratio, particularly given the greater interest rate risk inherent in
these securities.
One commenter noted that deposits owned by a parent should not be
subjected to the same runoff rates as other deposits for the purpose of
the balance sheet liquidity ratio, given that these deposits behave
similarly to long-term unsecured debt. The same comment was made in the
context of loss severity. The FDIC disagrees. Parent companies, as well
as other creditors, can have incentives to withdraw deposits from a
troubled institution. Deposits are not equivalent to long-term
unsecured debt.
[[Page 10694]]
Calculation of Performance Score
The scores for the weighted average CAMELS rating, the ability to
withstand asset-related stress component, and the ability to withstand
funding-related stress component are multiplied by their respective
weights and the results are summed to arrive at the performance score.
The performance score cannot be less than 0 or more than 100, where a
score of 0 reflects the lowest risk and a score of 100 reflects the
higher risk. In the example in Table 13, Bank A's performance score
would be 70.92, assuming that Bank A's score for its weighted average
CAMELS score of 50.60, which results from a weighted average CAMELS
rating of 2.2.
Table 13--Performance Score for Bank A
----------------------------------------------------------------------------------------------------------------
Weight
Performance score components (percent) Score * Weighted score
----------------------------------------------------------------------------------------------------------------
Weighted Average CAMELS Rating.................................. 30 50.60 15.18
Ability to Withstand Asset-Related Stress....................... 50 91.90 45.95
Ability to Withstand Funding-Related Stress..................... 20 48.96 9.79
-----------------------------------------------
Total Performance Score..................................... .............. .............. 70.92
----------------------------------------------------------------------------------------------------------------
* In the example, scores are rounded to two decimal points for Bank A. In actuality, scores will be rounded to
three decimal places.
2. Loss Severity Score
The loss severity score is based on a loss severity measure that
estimates the relative magnitude of potential losses to the FDIC in the
event of a large institution's failure. 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 describes the
calculation of this measure.) Asset loss rate assumptions are based on
estimates of recovery values for insured depository institutions that
either failed or came close to failure. Run-off assumptions are based
on the actual experience of insured depository institutions that either
failed or came close to failure during the 2007 through 2009 period.
The loss severity measure is a quantitative measure that is derived
from readily available data. Appendix A defines this measure. Appendix
B describes how the loss severity measure is converted to a loss
severity score between 0 and 100. Table 14 shows cutoff values for the
loss severity measure. The loss severity score cannot be less than 0 or
more than 100.
Table 14--Cutoff Values To Calculate Loss Severity Score
------------------------------------------------------------------------
Cutoff values
---------------------------
Measure of loss severity Minimum Maximum
(percent) (percent)
------------------------------------------------------------------------
Loss Severity............................... 0 28
------------------------------------------------------------------------
In the example in Table 15, Bank A's loss severity measure is 23.62
percent, which represents potential losses in the event of Bank A's
failure relative to its domestic deposits. This measure would result in
a loss severity score of 84.36.
Table 15--Loss Severity Score for Bank A
------------------------------------------------------------------------
Ratio
Measure of loss severity (percent) Score *
------------------------------------------------------------------------
Potential Losses/Total Domestic Deposits 23.62 84.36
(Loss severity measure)....................
------------------------------------------------------------------------
* In the example, the score is rounded to two decimal points for Bank A.
In actuality, scores will be rounded to three decimal places.
3. Comments on Loss Severity Score
In general, commenters did not oppose including loss severity in
the initial base assessment rate calculation. However, many commenters
questioned the proposed assumptions regarding the loss rates applied to
various asset types and regarding liability runoff rates, arguing that
they were too harsh or lacked empirical support. These comments are
discussed below.
a. Loss Rate Assumptions
Some commenters disagreed with the loss rates assigned to various
asset categories and argued that:
The FDIC should not discount asset values;
Using the same loss rates for all institutions is not
reasonable and the loan-to-value ratio should be considered in
determining the loss rate;
A zero loss rate should be applied to government-
guaranteed loans;
Loss rates applied to acquired loans booked at fair value
are too high; and
Asset categories (e.g., leases, first-lien home equities,
all other loans, all other assets) should be further subdivided to
provide the less-risky assets within those categories a lower loss
rate.
The FDIC disagrees with these comments. The current value of an
institution's assets is not a good indicator of the recovery value of
these assets in the event of failure. To estimate potential recovery
values, the loss severity measure applies a standardized set of loss
rates to various asset categories, based on independent valuations
obtained by the FDIC in 2009 on assets expected to be taken into
receivership.
The FDIC recognizes that collateral value, the loan-to-value ratio
and the existence of a government guarantee may have a bearing on
recovery rates; however, data on collateral value and other risk
mitigants are not systematically available for all institutions. Also,
government guarantees may or may not reduce the FDIC's risk of loss,
depending on the agency issuing the guaranty and the transferability of
the guaranty in the event of failure. In these cases, the FDIC will
consider available information on collateral and other risk mitigants,
including the materiality of guarantees, in determining whether to
apply a large bank adjustment.
The FDIC does not believe the loss severity measure should
systematically try to adjust for loans booked at fair value. Loans
booked at fair value are typically not material for most institutions,
and, even when they are, their recovery values in the event of failure
are often well below current fair values.
The FDIC recognizes that the loss rates applied to broad categories
of assets may overstate or understate potential losses, depending on
the composition of those assets. However, the FDIC believes that
further subdividing asset categories introduces greater complexity and
is not practical without imposing undue burden.
[[Page 10695]]
b. Runoff Assumptions
A number of commenters stated that the proposed insured deposit
growth assumption used in the loss severity measure is too high and
unrealistic given the supervisory constraint that will restrict growth
as an institution nears failure. The FDIC agrees. Runoff and growth
assumptions for deposits proposed in the Large Bank NPR were based on
the actual experience of eleven large institutions that failed between
2007 and 2009 over a two-year period leading up to their failure. The
FDIC has re-estimated deposit runoffs based on data for all insured
depository institutions that failed since 2007--including small
institutions, which were added to improve the robustness of the
analysis--over a one-year period leading up to their failure, and
reduced the growth rate for insured deposits from 32 percent to 10
percent while increasing the run-off rate for uninsured deposits from
28.6 percent to 58 percent.\68\ The changes are primarily due to
shorter time-to-failure, not the inclusion of small institutions in the
sample. The FDIC believes that data based on shorter time-to-failure
(one year) better reflect changes in deposit composition experienced by
failed institutions as they approach failure.
---------------------------------------------------------------------------
\68\ This updated analysis also resulted in changing the runoff
assumptions for Federal funds purchased and for repurchase
agreements. These new assumptions are set forth in Appendix D.
---------------------------------------------------------------------------
c. Foreign Deposits
Several commenters stated that runoff and ring-fencing assumptions
applied to foreign deposits are excessive and unsupported. Foreign
deposits are not insured by the FDIC and would be treated as unsecured
claims in a receivership. Unsecured claims in a receivership rarely
receive any payment since they have a lower priority than domestic
deposits. The FDIC believes that these deposits were more stable during
the recent crisis primarily because of extraordinary government action,
both by the U.S. and European governments. In the absence of ``too big
to fail'' perceptions or policies, the FDIC believes that foreign
deposits are more likely to run off than domestic deposits. Moreover,
foreign governments may ring-fence assets to protect these deposits and
reduce their own losses. As a result, the final rule retains the Large
Bank NPR's assumptions regarding foreign deposit runoff.
d. Noncore Funding
In the Large Bank NPR, the FDIC proposed including a noncore
funding ratio in the loss severity scorecard as a potential proxy for
franchise value. Most commenters stated that the noncore funding ratio
should not be included because this risk is considered elsewhere. They
also questioned the weight assigned to the measure. The FDIC continues
to believe that potential franchise value is an important factor to
consider in the overall assessment of loss severity. However, given
that liability composition is explicitly considered in the loss
severity measure, the final rule eliminates the noncore funding ratio
from the loss severity scorecard. Instead, qualitative factors that
affect an institution's franchise value will be considered in
determining whether to apply a large bank adjustment.
e. Capital
One commenter stated that assuming capital will fall to 2 percent
and that assets will be reduced pro rata is unreasonable. The FDIC
disagrees. Path-to-failure assumptions are a necessary feature of a
potential loss severity calculation, particularly for institutions that
are not close to failure. Using assumptions regarding reductions in
specific categories of assets introduces significant complexity. The
FDIC believes that the pro rata assumption is both reasonable and
practical. This may be an area, however, that lends itself to further
research and analysis as the FDIC continues to pursue improvements to
the risk-based assessment system.
C. 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 have a different scorecard with measures tailored to the
risks these institutions pose.
The structure and much of the scorecard for a highly complex
institution are, however, similar to the scorecard for other large
institutions. Like the scorecard for other large institutions, the
scorecard for highly complex institutions contains a performance score
and a loss severity score. Table 16 shows the measures and components
and their relative contribution to a highly complex institution's
performance score and loss severity score. As with the scorecard for
large institutions, most of the minimum and maximum cutoff values for
each scorecard measure used in the highly complex institution's
scorecard equal the 10th and 90th percentile values of the particular
measure among these institutions based upon data from the period
between the first quarter of 2000 and the fourth quarter of 2009.\69\
---------------------------------------------------------------------------
\69\ Three measures used in the highly complex institution's
scorecard (that are not used in the scorecard for other large
institutions) do not use the 10th and 90th percentile values as
cutoffs due to lack of historical data. The cutoffs for these
measures are based partly upon recent experience; the maximum
cutoffs range from approximately the 75th through the 78th
percentile of these measures among only highly complex institutions.
Table 16--Scorecard for Highly Complex Institutions
------------------------------------------------------------------------
Measure Component
Measures and components weights weights
(percent) (percent)
------------------------------------------------------------------------
P.............. Performance Score...... .............. ..............
P.1............ Weighted Average CAMELS 100 30
Rating.
P.2............ Ability to Withstand .............. 50
Asset-Related Stress.
Tier 1 Leverage 10 ..............
Ratio.
Concentration 35 ..............
Measure.
Core Earnings/ 20 ..............
Average Quarter-End
Total Assets.
Credit Quality 35 ..............
Measure and Market
Risk Measure.
P.3............ Ability to Withstand .............. 20
Funding-Related Stress.
Core Deposits/Total 50 ..............
Liabilities.
Balance Sheet 30 ..............
Liquidity Ratio.
Average Short-Term 20 ..............
Funding/Average
Total Assets.
L.............. Loss Severity Score.... .............. ..............
L.1............ Loss Severity Measure.. .............. 100
------------------------------------------------------------------------
[[Page 10696]]
1. Performance Score
The performance score for highly complex institutions is the
weighted average of the scores for three components: weighted average
CAMELS rating score, weighted at 30 percent; ability to withstand
asset-related stress score, weighted at 50 percent; and ability to
withstand funding-related stress score, weighted at 20 percent.
a. Weighted Average CAMELS Rating Score
The score for the weighted average CAMELS rating for highly complex
institutions is derived in the same manner as in the scorecard for
other large institutions.
b. Ability To Withstand Asset-Related Stress Score
The ability to withstand asset-related stress score contains
measures that the FDIC finds most relevant to assessing a highly
complex institution's ability to withstand such stress:
Tier 1 leverage ratio;
Concentration measure (the greatest of the higher-risk
assets to the sum of Tier 1 capital and reserves score, the top 20
counterparty exposure to the sum of Tier 1 capital and reserves score,
or the largest counterparty exposure to the sum of Tier 1 capital and
reserves score);
The ratio of core earnings to average quarter-end total
assets;
Credit quality measure (the greater of the criticized and
classified items to the sum of Tier 1 capital and reserves score or the
underperforming assets to the sum of Tier 1 capital and reserves score)
and market risk measure (the weighted average of the four-quarter
trading revenue volatility to Tier 1 capital score, the market risk
capital to Tier 1 capital score, and the level 3 trading assets to Tier
1 capital score).
Two of the four measures used to assess a highly complex
institution'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 institutions. However, the method used to calculate the
score for 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 institutions, the concentration
measure for highly complex institutions includes the higher-risk assets
to Tier 1 capital and reserves ratio described in Appendix C. However,
the concentration measure in the highly complex institution's 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 institutions.
The highly complex institution's scorecard uses these measures because
recent experience shows that the concentration of a highly complex
institution's exposures to a small number of counterparties--either
through lending or trading activities--significantly increases the
institution's vulnerability to unexpected market events. The FDIC uses
the top 20 counterparty exposure and the largest counterparty exposure
to capture this risk.
Credit Quality Measure and Market Risk Measure Scores
As in the scorecard for large institutions, the ability to
withstand asset-related stress component includes a credit quality
measure. However, the highly complex institution scorecard also
includes a market risk measure that considers trading revenue
volatility, market risk capital, and level 3 trading assets. All three
risk measures are calculated relative to a highly complex institution's
Tier 1 capital and multiplied by their respective weights to calculate
the score for the market risk measure. All three risk measures can be
calculated using data from an insured depository institution's
quarterly Call Reports or TFRs. The FDIC believes that combining these
three risk measures better captures a highly complex institution's
market risk than any single measure.
The trading revenue volatility ratio measures the sensitivity of a
highly complex institution's trading revenue to market volatility. The
market risk capital ratio uses historical experience to estimate the
effect on capital of potential losses in the trading portfolio due to
market volatility.\70\ However, this ratio may not be a good measure of
market risk when an institution holds a large volume of hard-to-value
trading assets. Therefore, the level 3 trading assets ratio is included
as an indicator of the volume of hard-to-value trading assets held by
an institution.
---------------------------------------------------------------------------
\70\ Market risk capital is defined in Appendix C of Part 325 of
the FDIC Rules and Regulations,. 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 institution's vulnerability to
stress depends on an institution's asset composition. A highly complex
institution with a significant amount of trading assets can be as risky
as an institution that focuses on lending even though the primary
source of risk may differ. In order to treat both types of institutions
fairly, the FDIC allocates an overall weight of 35 percent between the
credit risk measure and the market risk measure. The allocation will
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 18 shows cutoff values and weights for the ability to
withstand asset-related stress measures.
Table 18--Cutoff Values and Weights for Measures To Calculate Ability To Withstand Asset-Related Stress Score
----------------------------------------------------------------------------------------------------------------
Cutoff values
Measures of the ability to withstand -------------------------------- Market risk
asset-related stress Minimum Maximum measures Weight
(percent) (percent)
----------------------------------------------------------------------------------------------------------------
Tier 1 Leverage Ratio................. 6 13 .............. 10%.
Concentration Measure................. .............. .............. .............. 35%.
Higher Risk Assets/Tier 1 Capital 0 135
and Reserves.
Top 20 Counterparty Exposure/Tier 0 125
1 Capital and Reserves; or
[[Page 10697]]
Largest Counterparty Exposure/Tier 0 20
1 Capital and Reserves.
Core Earnings/Average Quarter-end 0 2 .............. 20%.
Total Assets.
Credit Quality Measure*............... .............. .............. .............. 35% * (1 - Trading Asset
Ratio).
Criticized and Classified Items to 7 100
Tier 1 Capital and Reserves; or
Underperforming Assets/Tier 1 2 35
Capital and Reserves.
Market Risk Measure*.................. .............. .............. .............. 35% * Trading Asset
Ratio.
Trading Revenue................... 0 2 60
Volatility/Tier 1 Capital
Market Risk Capital/Tier 1 Capital 0 10 20
Level 3 Trading Assets/Tier 1 0 35 20
Capital.
----------------------------------------------------------------------------------------------------------------
* Combined, the credit quality measure and the market risk measure will be assigned a 35 percent weight. The
relative weight of each of 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 Score
The score for the ability to withstand funding-related stress
contains three measures that are most relevant to assessing a highly
complex institution's ability to withstand such stress--a core deposits
to total liabilities ratio, a balance sheet liquidity ratio, and an
average short-term funding to average total assets ratio.
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 score are determined in the same manner as in
the scorecard for large institutions, although their weights differ.
The FDIC has added the average short-term funding to average total
assets ratio to the ability to withstand funding-related stress
component of the highly complex institution scorecard because
experience during the recent crisis shows that heavy reliance on short-
term funding significantly increases a highly complex institution's
vulnerability to unexpected adverse developments in the funding market.
Table 19 shows cutoff values and weights for the ability to
withstand funding-related stress measures.
Table 19--Cutoff Values and Weights To Calculate Ability To Withstand Funding-Related Stress Measures
----------------------------------------------------------------------------------------------------------------
Cutoff values
-----------------------------------------------
Measures of the ability to withstand funding-related stress Minimum Maximum Weight
(percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
Core Deposits/Total Liabilities................................. 5 87 50
Balance Sheet Liquidity Ratio................................... 7 243 30
Average Short-term Funding/Average Total Assets................. 2 19 20
----------------------------------------------------------------------------------------------------------------
d. Calculating the Performance Score
To calculate the performance score for a highly complex
institution, the scores for 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.
2. The Loss Severity Score
The loss severity score for highly complex institutions is
calculated the same way as the loss severity score for other large
institutions.
D. Total Score
1. Calculating the Total Score
The method for calculating the total score for large institutions
and highly complex institutions is the same. Once the performance and
loss severity scores are calculated for these institutions, their
scores are converted to a total score. Each institution'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 at or below the minimum cutoff of 5 receive a loss
severity factor of 0.8 and scores at or above the maximum cutoff of 85
receive a loss severity factor of 1.2. Again, a linear interpolation is
used to convert loss severity scores between the cutoffs into a loss
severity factor. 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 factor). Since the loss severity factor ranges from 0.8 to
1.2, the total score can be up to 20 percent higher or lower than the
performance score but cannot be less than 30 or more than 90. For
[[Page 10698]]
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
Extreme values for certain risk measures make an institution more
vulnerable to risk, which the FDIC believes should be addressed on a
bank-by-bank basis. To do this, the FDIC can adjust a large
institution's or highly complex institution's total score, up or down,
by a maximum of 15 points, based upon significant risk factors that are
not adequately captured in the scorecard. The FDIC will use a process
similar to the current large bank adjustment to determine the amount of
the adjustment to the total score.\71\ The resulting total score cannot
be less than 30 or more than 90. This adjustment is discussed in more
detail below.
---------------------------------------------------------------------------
\71\ 12 CFR 327.9(d)(4) (2010).
---------------------------------------------------------------------------
2. Comments on Total Score
Some commenters stated that limiting the effect of the loss
severity score on the total score to 20 percent has no support and that
loss severity should have a greater effect to account for institutions
that pose little to no risk to the insurance fund. The FDIC believes
that loss severity should be considered in determining an insured
institution's deposit assessments; this rulemaking is the first time
that the FDIC has explicitly incorporated loss severity in the
calculation of an institution's assessment rate. While the FDIC
believes that the loss severity measure provides a reasonable risk
ranking of institutions' potential losses to the DIF, the FDIC believes
that it is prudent at this time to incorporate this measure in a
limited way and evaluate it further before increasing its effect on the
assessment rate. Furthermore, the loss severity measure does not yet
incorporate off-balance sheet obligations, complex funding structures
and other qualitative factors that can have a significant effect on DIF
losses in the event of failure.
E. Initial Base Assessment Rate
A large institution or highly complex institution with a total
score of 30 will pay the minimum initial base assessment rate and a
large institution or highly complex institution with a total score of
90 will pay the maximum initial base assessment rate; for total scores
between 30 and 90, initial base assessment rates will rise at an
increasing rate as the total score increases.72 73 The
initial base assessment rate (in basis points) is calculated using the
following formula: \74\
---------------------------------------------------------------------------
\72\ Scores of 30 and 90 equal about the 13th and about the 99th
percentile values, respectively, based on scorecard results as of
first quarter 2006 through fourth quarter 2007.
\73\ The assessment rates that the FDIC will apply to large and
highly complex insured depository institutions pursuant to this
final rule are set out in Section IV above.
\74\ The initial base assessment rate (in basis points) will be
rounded to two decimal points.
[GRAPHIC] [TIFF OMITTED] TR25FE11.004
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).
The calculation of an initial base assessment rate is based on an
approximated statistical relationship between large institutions' total
scores and their estimated three-year cumulative failure probabilities,
as shown in Appendix 3.
Chart 4 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 10699]]
[GRAPHIC] [TIFF OMITTED] TR25FE11.005
The initial base assessment rate of a large or highly complex
institution can be adjusted as a result of the unsecured debt
adjustment, the depository institution debt adjustment, and the
brokered deposit adjustment, as discussed above.
F. Large Bank Adjustment to the Total Score
1. Adjustment to Total Score for Large or Highly Complex Institutions
The FDIC will retain the ability to adjust the total score for
large institutions and highly complex institutions by a maximum of 15
points, up or down, based upon significant risk factors that are not
captured in the scorecards. While the scorecards should improve the
relative risk ranking of large institutions, the FDIC believes that it
is important that it have the ability to consider idiosyncratic factors
or other relevant risk factors that are not adequately captured in the
scorecards. This large bank adjustment will be similar to the
assessment rate adjustment that large institutions and insured branches
of foreign banks within Risk Category I have been subject to in recent
years.\75\
---------------------------------------------------------------------------
\75\ 12 CFR 327.9(d)(4) (2010).
---------------------------------------------------------------------------
In general, the adjustments to the total score will have a
proportionally greater effect on the assessment rate of those
institutions with a higher total score since the assessment rate rises
at an increasing rate as the total score rises.
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 will
also consult with an institution's primary federal regulator and, for
state chartered institutions, state banking supervisor.
The FDIC acknowledges the need to clarify its processes for making
adjustments to ensure fair treatment and accountability and plans to
propose and seek comment on updated guidelines. As noted in the Large
Bank NPR, the FDIC will not adjust assessment rates until the updated
guidelines are published for comment and approved by the Board. In
addition, the FDIC will publish aggregate statistics on adjustments
each quarter.
Similar to the current adjustment process, the FDIC will notify a
large institution or highly complex institution before an upward
adjustment to the institution's assessment rate takes effect, so that
the institution will have an opportunity to respond to the FDIC's
rationale for proposing an upward adjustment. An adjustment will be
implemented only after considering the institution's response and any
subsequent changes to the inputs or other risk factors that informed
the FDIC's decision.\76\
---------------------------------------------------------------------------
\76\ The final rule does not affect the procedures or timetable
for appealing assessment rates. The procedures and timetable are
described on the FDIC's Web site: http://www.fdic.gov/deposit/insurance/assessments/requests_review.html.
---------------------------------------------------------------------------
2. Comments on the Large Bank Adjustment
Several commenters voiced concern that the large bank adjustment is
disproportionately large, given the detail and complexity of the
scorecard. Two commenters questioned the need for any large bank
adjustment. Two commenters recommended that the adjustment should be
only used to lower an institution's score.
The FDIC disagrees. Based on statistical analysis, the FDIC
believes that the scorecard will generally improve the relative risk
ranking of
[[Page 10700]]
large institutions, particularly based on their long-term performance.
However, the scorecard relies on only a limited number of quantitative
ratios and applies a standardized set of assumptions, and it does not
consider firm-specific idiosyncratic or qualitative factors that can
have significant bearing on an institution's probability of failure or
loss given failure. In fact, many commenters criticized the scorecard
for not considering qualitative factors such as underwriting,
collateral, or other risk mitigants. The FDIC agrees that these
qualitative factors should be considered in assessments, and believes
that it needs the flexibility to consider them. In addition, the FDIC
believes that the complexity and the dynamic nature of many large
institutions warrant a large bank adjustment that is significant enough
for the FDIC to consider current or future risk factors not adequately
captured in the scorecard.
Several commenters maintained that the large bank adjustment is too
subjective and not transparent. The FDIC disagrees. Currently, the FDIC
determines the large bank adjustment following the process set forth in
the guidelines that were adopted in 2007.\77\ The guidelines detail
broad-based and focused benchmarks used to determine whether the
adjustment should be made to an institution's assessment rate and set
out adjustment processes. The FDIC consults with an institution's
primary federal regulator and notifies the institution one quarter in
advance of the FDIC's intent to make an upward adjustment to the
institution's rate, so that the institution will have an opportunity to
respond and provide additional information. The FDIC implements the
adjustment only after considering the response and any subsequent
changes to the inputs or other risk factors that informed the FDIC's
decision.\78\ This process will remain unchanged in this rulemaking. In
addition, as proposed in the Large Bank NPR, the FDIC will not adjust a
large or highly complex institution's assessment rates until the
updated guidelines are published for comment and approved by the Board.
---------------------------------------------------------------------------
\77\ 72 FR 27122 (May 14, 2007); http://edocket.access.gpo.gov/2007/pdf/E7-9196.pdf.
\78\ The final rule does not affect the procedures or timetable
for appealing assessment rates. The procedures and timetable are
described on the FDIC's Web site: http://www.fdic.gov/deposit/insurance/assessments/requests_review.html.
---------------------------------------------------------------------------
G. Data Sources
1. Data Sources in Final Rule
In most cases, the FDIC will use data that are 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 and classified items--
are gathered during the examination process. Rather than relying on the
examination process, the FDIC will collect the data elements for these
four scorecard measures directly from each institution. The FDIC
anticipates that the necessary changes will be made to Call Reports and
TFRs beginning with second quarter of 2011. These data elements will
remain confidential.
2. Comments on the Data Sources
A bank commented that the data reported for use in scorecard
calculations may not be consistent among banks and is subject to
definitional interpretation. The final rule incorporates detailed
definitions and industry recommendations for various data elements,
which should eliminate any significant inconsistencies among the data
collected. Another commenter stated that nonpublic data used in the
scorecard may be incorrect. The FDIC will collect all data through the
Call Reports and TFRs, and each institution's management will attest to
the accuracy of the information.
H. Updating the Scorecard
The FDIC will 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. The FDIC can add new data for subsequent years to its
analysis and can, 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.
If, as a result of its review and analysis, the FDIC concludes that
measures should be used to determine risk-based assessments, that the
method of additional or alternative 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 institutions or highly complex institutions, changes will
be made through a future rulemaking.
The data used to calculate scorecard measures for any given quarter
will be calculated from the Call Reports and TFRs filed by each insured
depository institution as of the last day of the quarter. CAMELS
component rating changes will be effective as of the date that the
rating change is transmitted to the insured depository institution for
purposes of determining assessment rates.\79\
---------------------------------------------------------------------------
\79\ 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.
---------------------------------------------------------------------------
I. Additional Comments
The FDIC received approximately 25 comments related to the Large
Bank NPR. Most commenters opposed the rule because they claimed it is
not risk-based when combined with the proposed new assessment base, is
too complex and is not transparent. Two commenters expressed support
for the proposal, including the elimination of long-term debt issuer
ratings and risk-based categories for large banks. In addition to the
comments described above, responders also commented on other issues
discussed below.
1. Risk-Based Assessment System
Some commenters stated that the rule unfairly penalizes large
insured depository institutions without demonstrating that they pose
greater risk to the DIF. Several commenters argued that the FDIC should
lower rates applicable to large banks because the proposed rates, when
applied to the new assessment base, increase large banks' assessments
and misrepresent the actual risk posed by large banks and, therefore,
violate the statutory requirement that the assessment system be risk-
based. One commenter argued that large banks should not be penalized
with a greater share of overall assessments because large banks caused
little of the recent losses to the DIF. Some commenters argued that the
assessment rates and the new large bank pricing system result in
assessments for small banks that are too low, thus underpricing risk
and creating moral hazard.
In the FDIC's view, the final rule preserves and improves the risk-
based assessment system. Under the FDI Act, the FDIC's Board of
Directors must establish a risk-based assessment system so that a
depository institution's deposit insurance assessment is calculated
based on the probability that the DIF will incur a loss with respect to
the institution (taking into consideration the
[[Page 10701]]
risks attributable to different categories and concentrations of
assets, different categories and concentrations of liabilities, and any
other relevant factors regarding loss); the likely amount of any loss
to the DIF; and the revenue needs of the DIF.
The assessment system complies with this requirement. For a large
insured depository institution, the performance score (which explicitly
takes into consideration the risks attributable to different categories
and concentrations of assets, different categories and concentrations
of liabilities, and many other relevant factors regarding loss), the
loss severity score, the assessment rate adjustments (the unsecured
debt adjustment, the depository institution debt adjustment and the
brokered deposit adjustment) and the Dodd-Frank-required assessment
base, taken together, reasonably represent both the probability that
the DIF will incur a loss with respect to the institution and the
likely amount of any such loss.
For a small institution, capital levels and CAMELS ratings (both of
which correlate with probability of failure) and, if the institution is
well capitalized and well managed, the financial ratios method (which
measures the probability that an institution's supervisory CAMELS
rating will decline to a CAMELS 3, 4 or 5), combined with the
assessment rate adjustments and the new assessment base determine the
probability that the DIF will incur a loss with respect to the
institution and the likely amount of any such loss.\80\
---------------------------------------------------------------------------
\80\ This system is simpler than the system that will be applied
to large insured depository institutions, but large depository
institutions are much more complex and pose more complex risks. The
FDI Act explicitly allows the FDIC to create different risk-based
assessment systems for small and large insured depository
institutions. 12 U.S.C. 1817(b)(1)(D).
---------------------------------------------------------------------------
For several reasons, the FDIC disagrees with any implication that
new assessment base mandated by Dodd-Frank is a poorer measure of
exposure to loss than domestic deposits. In most instances, when an
institution fails, the great majority of its liabilities are insured
deposits and secured liabilities, both of which expose the FDIC to
loss. Unlike the old assessment base, the new assessment base captures
both types of liabilities. In addition, the new assessment base
includes other liabilities (uninsured deposits, foreign deposits, and
short-term unsecured liabilities) that, in large part, are either paid
before the institution fails, reducing the assets available to the DIF
to cover losses, or are replaced by insured deposits or secured
liabilities. Thus, including short-term unsecured debt and foreign
deposits in the assessment base makes sense, since this kind of debt
provides no cushion to absorb losses in the event of failure. While
Congress also included long-term unsecured debt in the assessment base,
the unsecured debt adjustment for long-term debt recognizes that this
form of liability provides a cushion to absorb losses ahead of the FDIC
in the event of failure.
Using data as of September 30, 2010, under the current assessment
system, the 110 large insured depository institutions hold about 70
percent of the assessment base and pay about 70 percent of total
assessments. Under the new assessment base and large bank pricing
system, they will hold about 78 percent of the assessment base and pay
about 79 percent of total assessments.
Congress expressly intended this result and viewed the new
assessment base as a better measure of risk than the previous base of
domestic deposits:
Community banks with less than $10 billion in assets rely
heavily on customer deposits for funding. This penalizes safe
institutions by forcing them to pay deposit insurance premiums above
and beyond the risk they pose to the banking system.
Despite making up just 20 percent of the Nation's assets, these
community banks contribute 30 percent of the premiums to the deposit
insurance fund. At the same time, large banks hold 80 percent of the
banking industry's assets. Yet they just pay 70 percent of the
premiums. There is no reason for community banks to have to make up
this gap.
What we need is a level playing field. * * * Community banks
didn't cause the problems. To have them pay more proportionately in
FDIC insurance than the big banks do is unfair.
Statements of Senator Hutchison, 156 Cong. Rec. S3154 (May 5, 2010)
(Co-Sponsor of Amendment No. 3749, which contains the new assessment
base).
We must fix this inequality. That is what the Tester-Hutchison
measure does. It will do so by requiring the FDIC to change the
assessment base to a more accurate measure: a bank's total assets,
less tangible capital. This change will broaden the assessment base
and will better measure the risk a bank poses.
A bank's assets include its loans outstanding and securities
held. One need only look back to the last 2 years to know those are
the assets that are more likely to show a bank's exposure to risk
than just plain deposits. It wasn't a bank's deposits that
contributed to the financial meltdown. The meltdown was caused by
bad mortgages which were packaged into risky mortgage-backed
securities which were used to create derivatives. These risky
financial instruments and the large institutions that created and
held them are what led to our financial crisis.
Statements of Senator Hutchison, 156 Cong. Rec. S3297 (May 6,
2010).\81\
---------------------------------------------------------------------------
\81\ Similar arguments in favor of the amendment were made by
co-sponsor Senator Tester and Senators Johanns and Brown. Statements
of Senators Tester, Senator Johanns and Senator Brown, 156 Cong.
Rec. S3296, S3297, S3298 (May 6, 2010).
---------------------------------------------------------------------------
Consequently, the FDIC's assessment system fully comports with the
requirements of the FDI Act.\82\ Furthermore, the combined effect of
the new assessment base, assessment rates and the large bank pricing
system does not result in uniformly higher assessments for all large
institutions. Based on September 30, 2010 data, for 59 of the 110 large
depository institutions, assessments will decline as a result of this
combined effect of changes to the assessment base, assessment rates,
and the large bank pricing system.
---------------------------------------------------------------------------
\82\ As discussed earlier, the assessment system also takes into
account the DIF's revenue needs.
---------------------------------------------------------------------------
The changes in the assessment system applicable to large insured
depository institutions are intended to increase risk differentiation,
with safer institutions paying less and riskier ones paying more. As a
result of the recent financial crisis, the FDIC is now better able to
measure and price for risks that result in failures and losses at large
institutions. Higher assessments for some of these institutions are
entirely consistent with the express intent of Congress that Dodd-Frank
would revise ``the FDIC's assessment base for deposit insurance,
maintaining the risk-based nature of the assessment structure but
transitioning to a broader assessment base for bank premiums based on
total assets (minus tangible equity).'' U.S. House. Dodd-Frank Wall
Street Reform and Consumer Protection Act, Conference Report (to
Accompany H.R. 4173) (111 H. Rpt. 517).
2. Complexity of the Scorecard
Several commenters, including an industry trade group, criticized
the proposed scorecard for being overly complex, making it difficult to
make meaningful suggestions on how to improve the model and to
accurately predict assessments. An industry trade group stated that,
given the overall complexity, the FDIC should demonstrate that the
model fairly differentiates risk consistent with the risk-based model
for small banks.
The FDIC recognizes that the scorecards remain somewhat complex
despite simplifying revisions made in response to comments on the April
NPR. However, many large insured depository institutions themselves use
a scorecard approach to assess
[[Page 10702]]
counterparty risk. Moreover, given the complexity of large
institutions--both in terms of their operations and activities--the
FDIC believes that further simplifying the scorecard would materially
reduce its ability to differentiate risk among large institutions.
The FDIC also believes that the measures that best assess a large
institution's ability to withstand stress are different from those for
small institutions. As discussed above and in the Large Bank NPR,
statistical analysis supports the conclusion that scorecard measures
predict the long-term performance of large institutions significantly
better than the measures included in the small bank model, which is
calibrated on the performance of smaller institutions.
3. Weights of the Scorecard Measures
Several commenters suggested that several of the weights assigned
to a scorecard measure or a scorecard component should be altered.
Scorecard measures and the weights assigned to each measure are based
on the statistical analysis of historical performance over the 2005 to
2008 period, focusing on how well these measures predict a large
institution's long-term performance. Altering the weights without
empirical support would reduce the scorecard's ability to differentiate
institution's long-term risk to the DIF and add subjectivity to the
model. If future statistical analysis should indicate that the weights
assigned to the scorecard measures should be recalibrated,
recalibration will be undertaken through rulemaking.
4. Lack of Transparency
Several comments mentioned the lack of transparency in the model,
stating that validation is difficult given that all of the information
in the scorecard is not publicly available. Another comment stated that
the FDIC should periodically seek bids in the reinsurance market (for
aggregate and large bank exposures) as an independent verification of
the accuracy of the FDIC's deposit insurance pricing.
While most of the measures used to calculate an institution's score
are publicly available, a few are not. Nevertheless, each institution
has the information it needs to determine the effect of the scorecard
on its own assessment. In addition, the FDIC has published the
assessment calculator so that a large institution can determine how its
assessment rate is calculated and analyze the sensitivity of its
assessments to changes in scorecard measure values. Appendix 2 contains
the detailed description of the scorecard model, the result of
statistical analysis, and the derivation of weights.
The FDIC has previously investigated the possibility of seeking
bids in the reinsurance market, and has not found a practicable way to
implement it for large institutions.
5. Pro-Cyclicality
Several commenters stated that although the FDIC's stated intent is
to reduce pro-cyclicality in the assessment system, the proposed system
remains pro-cyclical since many of the scorecard measures, including
the CAMELS ratings, would be worse under adverse economic conditions.
In selecting scorecard measures and assigning respective weights,
the FDIC relied on statistical analysis that identified how well each
measure predicts a large institution's long-term performance. While
some of scorecard measures have pro-cyclical features, the FDIC
believes that, by focusing on long-term performance, the scorecard,
which combines these measures with other more forward looking measures,
is less procyclical than the system it replaces.
6. Request to Extend the Comment Period and Delay Implementation
Several commenters stated that the FDIC should extend the comment
period and delay implementation of this rulemaking so that the industry
can fully analyze the complex proposed system and study the effects
that the proposed pricing and assessment base rules would have on the
banking industry and the economy. The FDIC believes that the industry
has had ample time to analyze the proposal given that the Large Bank
NPR is very similar to the April NPR, on which institutions had an
opportunity to review and provide comments. Furthermore, delaying
implementation would adversely affect those institutions that will
benefit from lower assessments under the new system.
7. Ceiling on Dollar Amount of Assessments
Two commenters stated that the dollar amount of assessments paid
should not exceed the amount of insured deposits. Another commenter
noted that the proposed assessment base and scorecard are causing
unreasonably high assessments for banks with small deposit bases.
The FDIC believes that a ceiling on the assessment rate or total
assessment is not consistent with the intent of Congress to change the
assessment base from one based on deposits to one based on assets. In
addition, it could create an incentive for an institution to hold risky
assets or to move assets among its various affiliates to avoid higher
deposit insurance assessments. Therefore, the final rule does not
include a ceiling on the total assessment payment.
8. Cliff Effect
Two commenters criticized the proposal for unfairly punishing
institutions that are close to the $10 billion asset threshold,
claiming that assessments increase significantly once the institution's
assets exceed $10 billion. The same commenters suggested that the FDIC
should develop a plan that incrementally increases assessment rates for
banks that exceed the $10 billion asset threshold.
The FDIC disagrees. Analysis based on September 2010 data show that
under the final rule, as under the existing system, some institutions'
assessment rates would increase, while others would decrease, when
changing size classification. However, movement from one size category
to another will not occur without warning. To reduce potential
volatility in assessment rates, a small institution does not become
large until it reports assets of $10 billion or greater for four
consecutive quarters; similarly, a large institution does not become
small until it reports assets of less than $10 billion for four
consecutive quarters.
9. Statistical Analysis
Several commenters questioned the validity of the statistical
analysis used to support the proposed changes. In particular,
commenters expressed concern that the scorecard was calibrated using
data on small bank failures and CAMELS downgrades, which would not
reflect the risks and behaviors of large institutions. Commenters also
noted that, since the analysis only covers the most recent period of
heightened bank failures, it may fail to identify or adequately weight
factors that are likely to lead to problems in the future. One
commenter was critical of including failures in the sample that did not
result in a loss to the DIF.
The FDIC agrees that using the recent experience of small banks to
determine the scorecard factors and weights would likely result in a
system that misprices the risk posed by large institutions. For this
reason, the FDIC chose not to use small bank failures or downgrades as
the basis for its statistical analysis. Instead, as described in
Appendix 1 of the NPR, the risk measures included in the performance
score and the weights assigned to those measures were generally based
on results from a
[[Page 10703]]
regression (OLS) model using FDIC expert judgment rankings of large
institutions. In addition, the FDIC tested the robustness of scorecard
measures in predicting a large institution's long-term performance
using a logistic regression model that estimates the ability of those
same measures to predict whether a large institution would fail or
receive significant government support prior to year-end 2009. The
analysis included institutions that failed but did not cause a loss to
the DIF in the sample, since these models were used to select measures
and assign appropriate weights for the performance score, not the loss
severity score.
The FDIC recognizes that any statistical analysis is necessarily
backward looking and that risks may arise in the future that are not
adequately captured in the scorecard. However, the FDIC feels that the
proposed framework is more comprehensive and reduces the likelihood of
such an occurrence compared to the current system, which was less
effective in capturing the risks that resulted in recent failures. The
FDIC believes that the scorecard should allow us to differentiate risk
during periods of good economic and banking conditions based on how
institutions would fare during periods of economic stress. To achieve
that goal, the FDIC focused on risk measures that best predicted how
institutions fared during the period of most recent stress using the
data during the period of favorable economic conditions.
A few commenters suggested that regression results provided in
Appendix 1 of the Large Bank NPR actually undermine support for the
performance score factors. In particular, one commenter stated that the
estimated OLS coefficients for several ratios had the wrong sign, and
concluded that the regression was mis-specified. Further, the commenter
stated that the relationship between the expert judgment rankings and
true risk to the DIF was unsupported. Another commenter stated that
Chart 2.1 in Appendix 2 to the Large Bank NPR (showing the relationship
between total scores and failures) demonstrates that the scorecard does
a poor job of discriminating between failures and non-failures, and
should, therefore, be abandoned until a more robust model is developed.
The FDIC disagrees with this assessment. As described in Appendix B
to this final rule, the FDIC normalized all scorecard measures into a
score that ranges between 0 and 100--0 indicating the lowest risk and
100 indicating the highest risk, before conducting the statistical
analysis--both OLS and logistic regression. Once normalized in such a
way, all scorecard measures should be and were positively correlated
with risk, that is, a high score indicates high risk and a low score
indicates low risk, and the relative difference in coefficients can be
easily converted to weights.
In addition, Chart 3.1 in Appendix 3 to this final rule shows that
large institutions with a total score in the top decile as of year-end
2006 represented a disproportionately high percentage of failures
between 2006 and 2009. Given that the performance score factors and
weights were largely calibrated to the FDIC's expert judgment rankings,
this result also provides indirect support for a relationship between
the FDIC's expert view and actual risk to.
VII. Effective Date
Except as specifically noted above, the final rule will take effect
for the quarter beginning April 1, 2011, and will be reflected in the
invoices for assessments due September 30, 2011. The FDIC has
considered the possibility of making the application of the new
assessment base, the revised assessment rates, and the changes to the
assessment rate adjustments retroactive to passage of Dodd-Frank.
However, as this rule details, implementation of Dodd-Frank requires
that a number of changes be made to the Call Report and TFR that render
a retroactive application operationally infeasible. Additionally,
retroactively applying these changes would introduce significant legal
complexity as well as unacceptable levels of litigation risk. The FDIC
is committed to implementing Dodd-Frank in the most expeditious manner
possible and is contemporaneously pursuing necessary changes to the
Call Report and TFR. The effective date is contingent upon these
changes being made; if there is a delay in changing the Call Report and
TFR, the effective date of this rule may be delayed.
VIII. Regulatory Analysis and Procedure
A. Regulatory Flexibility Act
Under the Regulatory Flexibility Act (RFA), each federal agency
must prepare a final regulatory flexibility analysis in connection with
the promulgation of a final rule,\83\ or certify that the final rule
will not have a significant economic impact on a substantial number of
small entities.\84\ Certain types of rules, such as rules of particular
applicability relating to rates or corporate or financial structures,
or practices relating to such rates or structures, are expressly
excluded from the definition of ``rule'' for purposes of the RFA.\85\
The final rule relates to the rates imposed on insured depository
institutions for deposit insurance, to the risk-based assessment system
components that measure risk and weigh that risk in determining an
insured depository institution's assessment rate and to the assessment
base on which rates are charged. Consequently, a regulatory flexibility
analysis is not required. Nevertheless, the FDIC is voluntarily
undertaking a regulatory flexibility analysis.
---------------------------------------------------------------------------
\83\ 5 U.S.C. 604.
\84\ See 5 U.S.C. 605(b).
\85\ See 5 U.S.C. 601.
---------------------------------------------------------------------------
As of September 30, 2010, of the 7,770 insured commercial banks and
savings associations, there were 4,229 small insured depository
institutions as that term is defined for purposes of the RFA (i.e.,
institutions with $175 million or less in assets).
The final rule will adopt the Dodd-Frank definition of assessment
base and alter assessment rates and the adjustments to those rates at
the same time that the new assessment base takes effect. Under this
part of the rule, 99 percent of small institutions will be subject to
lower assessments. In effect, the rule will decrease small institution
assessments by an average of $10,320 per quarter and will alter the
present distribution of assessments by reducing the percentage of the
assessments borne by small institutions. As of September 30, 2010,
small institutions, as that term is defined for purposes of the RFA,
actually accounted for 3.7 percent of total assessments. Also as of
that date, but applying the new assessment rates against an estimate of
the new assessment base, small institutions would have accounted for
2.4 percent of the total cost of insurance assessments.
Other parts of the final rule will progressively lower assessment
rates when the reserve ratio reaches 1.15 percent, 2 percent and 2.5
percent. Pursuant to section 605(b) of the RFA, the FDIC certifies that
the rule will not have a significant economic effect on small entities
unless and until the DIF reserve ratio exceeds specific thresholds of
1.15, 1.5, 2, and 2.5 percent. The reserve ratio is unlikely to reach
these levels for many years. When it does, the overall effect of the
rule will be positive for entities of all sizes. All entities,
including small entities, will receive a net benefit as a result of
lower assessments paid. The rate reductions in the rule should not
alter the distribution of the assessment burden between small entities
and all others. It is difficult to realistically quantify the benefit
at the
[[Page 10704]]
present time. However, the initial magnitude of the benefit (when the
reserve ratio reaches 1.15 percent) is likely to be less than a 2
percent increase in after-tax income and less than a 20 basis point
increase in capital.
The portion of the final rule that relates to the assessment system
applicable to large insured depository institutions applies only to
institutions with $10 billion or greater in total assets. Consequently,
small institutions will experience no significant economic impact as
the result of this portion of the final rule.
B. Small Business Regulatory Enforcement Fairness Act
The Office of Management and Budget has determined that the final
rule is not a ``major rule'' within the meaning of the relevant
sections of the Small Business Regulatory Enforcement Act of 1996
(SBREFA) Public Law 110-28 (1996). As required by law, the FDIC will
file the appropriate reports with Congress and the Government
Accountability Office so that the final rule may be reviewed.
C. Paperwork Reduction Act
No collections of information pursuant to the Paperwork Reduction
Act (44 U.S.C. Ch. 3501 et seq.) are contained in the final rule.
D. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113
Stat. 1338, 1471 (Nov. 12, 1999), requires the federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The FDIC invited comments on how to make this proposal
easier to understand. No comments addressing this issue were received.
E. The Treasury and General Government Appropriation Act, 1999--
Assessment of Federal Regulations and Policies on Families
The FDIC has determined that the final 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
0
1. The authority citation for part 327 continues to read as follows:
Authority: 12 U.S.C. 1441, 1813, 1815, 1817-19, 1821.
0
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(e)(3))
or a determination by the FDIC that the institution is a new
institution (Sec. 327.9(f)(5)). 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 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.
* * * * *
0
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 are defined in the schedule of
quarterly averages in the Consolidated Reports of Condition and Income,
using either a daily averaging method or a weekly averaging method as
described in paragraphs (a)(1)(i) or (ii) of this section. 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. The amounts to
be reported as weekly averages are the sum of the gross amounts of
consolidated total assets for each Wednesday during the quarter divided
by the number of Wednesdays 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 will 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
[[Page 10705]]
operating during the quarter divided by the number of calendar days the
institution was operating during the quarter.
(i) Institutions that must report average consolidated total assets
using a daily averaging method. All insured depository institutions
that report $1 billion or more in quarter-end consolidated total assets
on their March 31, 2011 Consolidated Report of Condition and Income or
Thrift Financial Report (or successor report), and all institutions
that become insured after March 31, 2011, shall report average
consolidated total assets as of the close of business for each day of
the calendar quarter.
(ii) Institutions that may report average consolidated total assets
using a weekly averaging method. All insured depository institutions
that report less than $1 billion in quarter-end consolidated total
assets on their March 31, 2011, Consolidated Report of Condition and
Income or Thrift Financial Report may report average consolidated total
assets as an average of the balances as of the close of business on
each Wednesday during the calendar quarter, or may at any time opt
permanently to report average consolidated total assets on a daily
basis as set forth in paragraph (a)(1)(i) of this section. Once an
institution that reports average consolidated total assets using a
weekly average reports average consolidated total assets equal to or
greater than $1 billion for two consecutive quarters, it shall
permanently report average consolidated total assets using daily
averaging starting in the next quarter.
(iii) Mergers and consolidations. The average calculation of the
assets of the surviving or resulting institution in a merger or
consolidation shall include the assets of all the merged or
consolidated institutions for the days in the quarter prior to the
merger or consolidation, whether reported by the daily or weekly
method.
(2) Average tangible equity defined and calculated. Tangible equity
is defined as Tier 1 capital.
(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 report less than $1 billion in quarter-end consolidated total
assets on their March 31, 2011 Consolidated Reports of Condition and
Income 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 or weekly 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. Newly insured institutions shall report using monthly
averaging.
(iii) Calculation of average tangible equity for the surviving
institution in a merger or consolidation. For the surviving institution
in a merger or consolidation, Tier 1 capital shall be calculated as if
the merger occurred on the first day of the quarter in which the merger
or consolidation occurred.
(3) Consolidated subsidiaries--(i) Reporting for insured depository
institutions with consolidated subsidiaries that are not insured
depository institutions. For insured institutions with consolidated
subsidiaries that are not insured depository institutions, assets,
including assets eliminated in consolidation, shall be calculated using
a daily or weekly averaging method, corresponding to the daily or
weekly averaging requirement of the parent institution. The
Consolidated Reports of Condition and Income instructions in effect for
the quarter for which data is being reported shall govern calculation
of the average amount of subsidiaries' assets, including those assets
eliminated in consolidation. An insured depository institution that
reports average tangible equity using a monthly averaging method and
that has subsidiaries that are not insured depository institutions
shall use monthly average reporting for the subsidiaries. The monthly
average data for these subsidiaries, however, may be calculated for the
current quarter or for the prior quarter consistent with the method
used to report average consolidated total assets and in conformity with
Consolidated Reports of Condition and Income requirements. Once the
method of reporting the subsidiaries' assets and tangible equity is
chosen, however (current quarter or prior quarter), insured depository
institutions cannot change the reporting method from quarter to
quarter. An institution that reports consolidated assets and tangible
equity using data for the prior quarter may switch to concurrent
reporting on a permanent basis.
(ii) Reporting for insured depository institutions with
consolidated insured depository subsidiaries. Insured depository
institutions that consolidate with other insured depository
institutions for financial reporting purposes shall report for the
parent and for each subsidiary individually, daily average consolidated
total assets or weekly average consolidated total assets, as
appropriate under paragraph (a)(1)(i) or (ii) above, 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 as that term is used in 12
U.S.C. 24. Banker's banks that have funds from government capital
infusion programs (such as TARP and the Small Business Lending Fund),
and stock owned by the FDIC resulting from banks failures, as well as
non-bank-owned stock resulting from equity compensation programs, are
not thereby excluded from the definition of banker's banks.
(2) Self-certification. Institutions that meet the requirements of
paragraph (b)(1) of this section shall so certify to that effect each
quarter on the Consolidated Reports of Condition and Income or Thrift
Financial Report or successor report.
(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 (control has
the same meaning as in section 3(w)(5) of the FDI Act) either directly
or indirectly by its parent holding company. The assessment base will
exclude the average (daily or weekly depending on how the institution
calculates its average consolidated total assets) amount of reserve
balances passed through to the Federal Reserve, the average amount of
reserve balances held at the Federal Reserve for its own account
(including all balances due from the Federal Reserve as described in
the instructions to line 4 of Schedule RC-A of the Consolidated Report
of Condition and Income as of December 31, 2010), and the average
amount of the institution's federal funds sold, but in no case shall
the amount excluded exceed the sum of the bank's average amount of
total deposits of commercial
[[Page 10706]]
banks and other depository institutions in the United States and the
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 trust assets (fiduciary and custody and safekeeping
assets, as described in the instructions to Schedule RC-T of the
Consolidated Report of Condition and Income as of December 31, 2010) of
at least $50 billion or an insured depository institution that derived
more than 50 percent of its total revenue (interest income plus non-
interest income) from trust activity 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 or weekly average (depending on how
the bank reports its average consolidated total assets) of all asset
types described in the instructions to lines 34, 35, 36, and 37 of
Schedule RC-R of the Consolidated Report of Condition and Income as of
December 31, 2010 with a Basel risk weighting of 0 percent, regardless
of maturity, plus 50 percent of those asset types described in lines
34, 35, 36, and 37 of Schedule RC-R as of December 31, 2010 with a
Basel risk weighting of 20 percent regardless of maturity subject to
the limitation that the daily or weekly average value of these assets
cannot exceed the daily or weekly average value of those deposits
classified as transaction accounts in the instructions to Schedule RC-E
of the Consolidated Report of Condition and Income as of December 31,
2010, and identified by the institution as being directly linked to a
fiduciary or custodial and safekeeping account asset.
(d) Assessment base for insured branches of foreign banks. Average
consolidated total assets for an insured branch of a foreign bank are
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
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 the
appropriate daily or weekly averaging method under paragraph (a)(1)(i)
or (ii) of this section. 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, according to the branch's size.
(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.
0
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, consolidated total assets for the surviving or resulting
institution shall include the consolidated total 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
assessment period. 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
[[Page 10707]]
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.
0
5. Amend Sec. 327.8 by:
0
A. Removing paragraphs (e) and (f);
0
B. Redesignating paragraphs (g) through (s) as paragraphs (e) through
(q) respectively;
0
C. Revising newly redesignated paragraphs (e), (f), (g), (k), (l), (m),
(n), (o), and (p); and
0
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(e)) 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(e) or an insured depository institution with
assets of $10 billion or more as of December 31, 2006 (other than an
insured branch of a foreign bank or a highly complex institution) shall
be classified as a large institution. If, after December 31, 2006, an
institution classified as small under paragraph (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. (1) A highly complex institution
is:
(i) An insured depository institution (excluding a credit card
bank) that has had $50 billion or more in total assets for at least
four consecutive quarters that is controlled by a U.S. parent holding
company that has had $500 billion or more in total assets for four
consecutive quarters, or controlled by one or more intermediate U.S.
parent holding companies that are controlled by a U.S. holding company
that has had $500 billion or more in assets for four consecutive
quarters; or
(ii) A processing bank or trust company.
(2) Control has the same meaning as in section 3(w)(5) of the FDI
Act. A U.S. parent holding company is a parent holding company
incorporated or organized under the laws of the United States or any
State, as the term ``State'' is defined in section 3(a)(3) of the FDI
Act. If, after December 31, 2010, an institution classified as highly
complex under paragraph (g)(1)(i) of this section falls below $50
billion in total assets in its quarterly reports of condition for four
consecutive quarters, or its parent holding company or companies fall
below $500 billion in total assets for four consecutive quarters, the
FDIC will reclassify the institution beginning the following quarter.
If, after December 31, 2010, an institution classified as highly
complex under paragraph (a)(1)(ii) of this section falls below $10
billion in total assets 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(f)(3) and (4), 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.
[[Page 10708]]
(m) Unsecured debt--For purposes of the unsecured debt adjustment
as set forth in Sec. 327.9(d)(1) and the depository institution debt
adjustment as set forth in Sec. 327.9(d)(2), 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)(1) and the depository
institution debt adjustment as set forth in Sec. 327.9(d)(2), 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)(1) and the depository
institution debt adjustment as set forth in Sec. 327.9(d)(2),
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)(1) and the depository
institution debt adjustment as set forth in Sec. 327.9(d)(2), long-
term unsecured debt shall be unsecured debt with at least one year
remaining until maturity; however, any such debt where the holder of
the debt has a redemption option that is exercisable within one year of
the reporting date shall not be deemed long-term unsecured debt.
* * * * *
(r) Parent holding company--A parent holding company has the same
meaning as ``depository institution holding company,'' as defined in
Sec. 3(w) of the FDI Act.
(s) Processing bank or trust company--A processing bank or trust
company is an institution whose last three years' non-lending interest
income, fiduciary revenues, and investment banking fees, combined,
exceed 50 percent of total revenues (and its last three years fiduciary
revenues are non-zero), and whose total fiduciary assets total $500
billion or more, and whose total assets for at least four consecutive
quarters have been $10 billion or more.
(t) Credit Card Bank--A credit card bank is a bank for which credit
card receivables 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).
0
6. Revise Sec. 327.9 to read as follows:
Sec. 327.9 Assessment pricing methods.
(a) Small institutions--(1) Risk Categories. Each small insured
depository institution shall be assigned to one of the following four
Risk Categories based upon the institution's capital evaluation and
supervisory evaluation as defined in this section.
(i) Risk Category I. Small institutions in Supervisory Group A that
are Well Capitalized will be assigned to Risk Category I.
(ii) Risk Category II. Small institutions in Supervisory Group A
that are Adequately Capitalized, and small institutions in Supervisory
Group B that are either Well Capitalized or Adequately Capitalized will
be assigned to Risk Category II.
(iii) Risk Category III. Small institutions in Supervisory Groups A
and B that are Undercapitalized, and small institutions in Supervisory
Group C that are Well Capitalized or Adequately Capitalized will be
assigned to Risk Category III.
(iv) Risk Category IV. Small institutions in Supervisory Group C
that are Undercapitalized will be assigned to Risk Category IV.
(2) Capital evaluations. Each small institution will receive one of
the following three capital evaluations on the basis of data reported
in the institution's Consolidated Reports of Condition and Income or
Thrift Financial Report (or successor report, as appropriate) 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.
(i) Well Capitalized. 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) Adequately Capitalized. 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.
(iii) Undercapitalized. An undercapitalized institution is one that
does not qualify as either Well Capitalized or Adequately Capitalized
under paragraphs (a)(2)(i) and (ii) of this section.
(3) Supervisory evaluations. Each small institution will be
assigned to one of three Supervisory Groups based on the Corporation's
consideration of supervisory evaluations provided by the institution's
primary federal regulator. The supervisory evaluations include the
results of examination findings by the primary federal regulator, as
well as other information that the primary federal regulator determines
to be relevant. In addition, the Corporation will take into
consideration such other information (such as state examination
findings, as appropriate) as it determines to be relevant to the
institution's financial condition and the risk posed to the Deposit
Insurance Fund. The three Supervisory Groups are:
(i) Supervisory Group ``A.'' This Supervisory Group consists of
financially sound institutions with only a few minor weaknesses;
(ii) Supervisory Group ``B.'' This Supervisory Group consists of
institutions that demonstrate weaknesses which, if not corrected, could
result in significant deterioration of the institution and increased
risk of loss to the Deposit Insurance Fund; and
(iii) 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.
(4) Financial ratios method. A small insured depository institution
in Risk Category I shall have its initial base assessment rate
determined using the financial ratios method.
(i) Under the financial ratios method, 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
[[Page 10709]]
assessment rate, subject to adjustment pursuant to paragraphs (d)(1),
(2), and (3) 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 paragraph (a)(2) of this section. The weighted average of
CAMELS component ratings is created by multiplying each component by
the following percentages and adding the products: Capital adequacy--
25%, Asset quality--20%, Management--25%, Earnings--10%, Liquidity--
10%, and Sensitivity to market risk--10%. The following table sets
forth the initial values of the pricing multipliers:
------------------------------------------------------------------------
Pricing
Risk measures * multipliers **
------------------------------------------------------------------------
Tier 1 Leverage Ratio............................... (0.056)
Loans Past Due 30-89 Days/Gross Assets.............. 0.575
Nonperforming Assets/Gross Assets................... 1.074
Net Loan Charge-Offs/Gross Assets................... 1.210
Net Income before Taxes/Risk-Weighted Assets........ (0.764)
Adjusted brokered deposit ratio..................... 0.065
Weighted Average CAMELS Component Rating............ 1.095
------------------------------------------------------------------------
* Ratios are expressed as percentages.
** Multipliers are rounded to three decimal places.
(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 a Risk Category I institution 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)(1), (2), and
(3) 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)(1), (2), and (3), 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, then the financial ratios method shall apply for
the portion of the quarter that it was in Risk Category I, subject to
adjustment pursuant to paragraphs (d)(1), (2) and (3) 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)(1), (2), and (3) 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)(1), (2), and (3) 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)(1), (2), and (3) of this section, as appropriate.
(b) Large and Highly Complex institutions--(1) Assessment scorecard
for large institutions (other than highly complex institutions). (i) A
large institution other than a highly complex institution shall have
its initial base assessment rate determined using the scorecard for
large institutions.
[[Page 10710]]
Scorecard for Large Institutions
------------------------------------------------------------------------
Measure Component
Scorecard measures weights weights
and components (percent) (percent)
------------------------------------------------------------------------
P................ Performance Score .............. ..............
P.1.............. Weighted Average 100 30
CAMELS Rating.
P.2.............. Ability to Withstand .............. 50
Asset-Related Stress.
Tier 1 Leverage 10 ..............
Ratio.
Concentration 35 ..............
Measure.
Core Earnings/ 20 ..............
Average Quarter-End
Total Assets *.
Credit Quality 35 ..............
Measure.
P.3.............. Ability to Withstand .............. 20
Funding-Related
Stress.
Core Deposits/Total 60 ..............
Liabilities.
Balance Sheet 40 ..............
Liquidity Ratio.
L................ Loss Severity Score.. .............. ..............
L.1.............. Loss Severity Measure .............. 100
------------------------------------------------------------------------
* Average of five quarter-end total assets (most recent and four prior
quarters)
(ii) The scorecard for large institutions produces two scores:
performance score and loss severity score.
(A) Performance score for large institutions. The performance score
for large institutions is a weighted average of the scores for three
measures: the weighted average CAMELS rating score, weighted at 30
percent; the ability to withstand asset-related stress score, weighted
at 50 percent; and the ability to withstand funding-related stress
score, weighted at 20 percent.
(1) Weighted average CAMELS rating score. (i) To compute the
weighted average CAMELS rating score, a weighted average of an
institution's CAMELS component ratings is calculated using the
following weights:
[GRAPHIC] [TIFF OMITTED] TR25FE11.006
(ii) 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 of this subpart
describes the conversion of a weighted average CAMELS rating to a
score.
(2) Ability to withstand asset-related stress score. (i) The
ability to withstand asset-related stress score is a weighted average
of the scores for four measures: Tier 1 leverage ratio; concentration
measure; the ratio of core earnings to average quarter-end total
assets; and the credit quality measure. Appendices A and C of this
subpart define these measures.
(ii) The Tier 1 leverage ratio and the ratio of core earnings to
average quarter-end total assets are described in Appendix A and the
method of calculating the scores is described in Appendix C of this
subpart.
(iii) The score for the concentration measure is the greater of the
higher-risk assets to Tier 1 capital and reserves score or the growth-
adjusted portfolio concentrations score. Both ratios are described in
Appendix C.
(iv) The score for the credit quality measure is the greater of the
criticized and classified items to Tier 1 capital and reserves score or
the underperforming assets to Tier 1 capital and reserves score.
(v) The following table shows the cutoff values and weights for the
measures used to calculate the ability to withstand asset-related
stress score. Appendix B of this subpart describes how each measure is
converted to a score between 0 and 100 based upon the minimum and
maximum cutoff values, where a score of 0 reflects the lowest risk and
a score of 100 reflects the highest risk.
Cutoff Values and Weights for Measures To Calculate Ability To Withstand Asset-Related Stress Score
----------------------------------------------------------------------------------------------------------------
Cutoff values
-------------------------------- Weights
Measures of the ability to withstand asset-related stress Minimum Maximum (percent)
(percent) (percent)
----------------------------------------------------------------------------------------------------------------
Tier 1 Leverage Ratio........................................... 6 13 10
[[Page 10711]]
Concentration Measure........................................... .............. .............. 35
Higher-Risk Assets to Tier 1 Capital and Reserves; or....... 0 135 ..............
Growth-Adjusted Portfolio Concentrations.................... 4 56 ..............
Core Earnings/Average Quarter-End Total Assets *................ 0 2 20
Credit Quality Measure.......................................... .............. .............. 35
Criticized and Classified Items/Tier 1 Capital and Reserves; 7 100 ..............
or.........................................................
Underperforming Assets/Tier 1 Capital and Reserves.......... 2 35 ..............
----------------------------------------------------------------------------------------------------------------
* Average of five quarter-end total assets (most recent and four prior quarters).
(vi) The score for each measure in the table in paragraph
(b)(1)(ii)(A)(2)(v) is multiplied by its respective weight and the
resulting weighted score is summed to arrive at the score for an
ability to withstand asset-related stress, which can range from 0 to
100, where a score of 0 reflects the lowest risk and a score of 100
reflects the highest risk.
(3) Ability to withstand funding-related stress score. Two measures
are used to compute the ability to withstand funding-related stress
score: a core deposits to total liabilities ratio, and a balance sheet
liquidity ratio. Appendix A of this subpart describes these measures.
Appendix B of this subpart describes how these measures are converted
to a score between 0 and 100, where a score of 0 reflects the lowest
risk and a score of 100 reflects the highest risk. The ability to
withstand funding-related stress score is the weighted average of the
scores for the two measures. In the following table, cutoff values and
weights are used to derive an institution's ability to withstand
funding-related stress score:
Cutoff Values and Weights To Calculate Ability To Withstand Funding-Related Stress Score
----------------------------------------------------------------------------------------------------------------
Cutoff values
-------------------------------- Weights
Measures of the ability to withstand funding-related stress Minimum Maximum (percent)
(percent) (percent)
----------------------------------------------------------------------------------------------------------------
Core Deposits/Total Liabilities................................. 5 87 60
Balance Sheet Liquidity Ratio................................... 7 243 40
----------------------------------------------------------------------------------------------------------------
(4) Calculation of Performance Score. In paragraph
(b)(1)(ii)(A)(3), the scores for the weighted average CAMELS rating,
the ability to withstand asset-related stress, and the ability to
withstand funding-related stress are multiplied by their respective
weights (30 percent, 50 percent and 20 percent, respectively) and the
results are summed to arrive at the performance score. The performance
score cannot be less than 0 or more than 100, where a score of 0
reflects the lowest risk and a score of 100 reflects the highest risk.
(B) Loss severity score. The loss severity score is based on a loss
severity measure that is described in Appendix D of this subpart.
Appendix B also describes how the loss severity measure is converted to
a score between 0 and 100. The loss severity score cannot be less than
0 or more than 100, where a score of 0 reflects the lowest risk and a
score of 100 reflects the highest risk. Cutoff values for the loss
severity measure are:
Cutoff Values To Calculate Loss Severity Score
------------------------------------------------------------------------
Cutoff values
-------------------------------
Measure of loss severity Minimum Maximum
(percent) (percent)
------------------------------------------------------------------------
Loss Severity........................... 0 28
------------------------------------------------------------------------
(C) 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 at or below the minimum cutoff
of 5 receive a loss severity factor of 0.8, and scores at or above the
maximum cutoff of 85 receive a loss severity factor 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 can be up to 20 percent higher or lower than
the performance score but 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 paragraph (b)(3) of this section. The resulting
total score after adjustment cannot be less than 30 or more than 90.
(D) 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
[[Page 10712]]
scores between 30 and 90, initial base assessment rates rise at an
increasing rate as the total score increases, calculated according to
the following formula:
[GRAPHIC] [TIFF OMITTED] TR25FE11.007
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 (b)(3), (d)(1), (d)(2), of this section; large
institutions that are not well capitalized or have a CAMELS composite
rating of 3, 4 or 5 shall be subject to the adjustment at paragraph
(d)(3); these adjustments shall result 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.
(2) Assessment scorecard for highly complex institutions. (i) A
highly complex institution shall have its initial base assessment rate
determined using the scorecard for highly complex institutions.
Scorecard for Highly Complex Institutions
------------------------------------------------------------------------
Measure Component
Measures and components weights weights
(percent) (percent)
------------------------------------------------------------------------
P.............. Performance Score
P.1............ Weighted Average CAMELS 100 30
Rating.
P.2............ Ability To Withstand .............. 50
Asset-Related Stress.
Tier 1 Leverage Ratio. 10 ..............
Concentration Measure. 35 ..............
Core Earnings/Average 20 ..............
Quarter-End Total
Assets.
Credit Quality Measure 35 ..............
and Market Risk
Measure.
P.3............ Ability To Withstand .............. 20
Funding-Related Stress.
Core Deposits/Total 50 ..............
Liabilities.
Balance Sheet 30 ..............
Liquidity Ratio.
Average Short-Term 20 ..............
Funding/Average Total
Assets.
L.............. Loss Severity Score.... .............. ..............
L.1............ Loss Severity.......... .............. 100
------------------------------------------------------------------------
(ii) The scorecard for highly complex institutions produces two
scores: performance and loss severity.
(A) Performance score for highly complex institutions. The
performance score for highly complex institutions is the weighted
average of the scores for three components: weighted average CAMELS
rating, weighted at 30 percent; ability to withstand asset-related
stress score, weighted at 50 percent; and ability to withstand funding-
related stress score, weighted at 20 percent.
(1) Weighted average CAMELS rating score. (i) To compute the score
for the weighted average CAMELS rating, a weighted average of an
institution's CAMELS component ratings is calculated using the
following weights:
[GRAPHIC] [TIFF OMITTED] TR25FE11.008
(ii) 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 of this subpart
describes the conversion of a weighted average CAMELS rating to a
score.
(2) Ability to withstand asset-related stress score. (i) The
ability to withstand asset-related stress score is a weighted average
of the scores for four measures:
[[Page 10713]]
Tier 1 leverage ratio; concentration measure; ratio of core earnings to
average quarter-end total assets; credit quality measure and market
risk measure. Appendix A of this subpart describes these measures.
(ii) The Tier 1 leverage ratio and the ratio of core earnings to
average quarter-end total assets are described in Appendix A and the
method of calculating the scores is described in Appendix B of this
subpart.
(iii) The score for the concentration measure for highly complex
institutions is the greatest of the higher-risk assets to the sum of
Tier 1 capital and reserves score, the top 20 counterparty exposure to
the sum of Tier 1 capital and reserves score, or the largest
counterparty exposure to the sum of Tier 1 capital and reserves score.
Each ratio is described in Appendix A of this subpart. The method used
to convert the concentration measure into a score is described in
Appendix C of this subpart.
(iv) The credit quality score is the greater of the criticized and
classified items to Tier 1 capital and reserves score or the
underperforming assets to Tier 1 capital and reserves score. The market
risk score is the weighted average of three scores--the trading revenue
volatility to Tier 1 capital score, the market risk capital to Tier 1
capital score, and the level 3 trading assets to Tier 1 capital score.
All of these ratios are described in Appendix A of this subpart and the
method of calculating the scores is described in Appendix B. Each score
is multiplied by its respective weight, and the resulting weighted
score is summed to compute the score for the market risk measure. An
overall weight of 35 percent is allocated between the scores for the
credit quality measure and market risk measure. The allocation depends
on the ratio of average trading assets to the sum of average
securities, loans and trading assets (trading asset ratio) as follows:
(v) Weight for credit quality score = 35 percent * (1--trading
asset ratio); and,
(vi) Weight for market risk score = 35 percent * trading asset
ratio.
(vii) Each of the measures used to calculate the ability to
withstand asset-related stress score is assigned the following cutoff
values and weights:
Cutoff Values and Weights for Measures To Calculate the Ability To Withstand Asset-Related Stress Score
----------------------------------------------------------------------------------------------------------------
Cutoff values
Measures of the ability to withstand asset- ---------------------- Market risk
related stress Minimum Maximum measure Weights (percent)
(percent) (percent) (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 Tier 7 100 ............ ..............................
1 Capital and Reserves; or.
Underperforming Assets/Tier 1 Capital 2 35 ............ ..............................
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 are assigned a 35 percent weight. The
relative weight of each of the two scores depends on the ratio of average trading assets to the sum of average
securities, loans and trading assets (trading asset ratio).
(ix) The score of each measure is multiplied by its respective
weight and the resulting weighted score is summed to compute the
ability to withstand asset-related stress score, which can range from 0
to 100, where a score of 0 reflects the lowest risk and a score of 100
reflects the highest risk.
(3) Ability to withstand funding related stress score. Three
measures are used to calculate the score for the ability to withstand
funding-related stress: a core deposits to total liabilities ratio, a
balance sheet liquidity ratio, and average short-term funding to
average total assets ratio. Appendix A of this subpart describes these
ratios. Appendix B of this subpart describes how each measure is
converted to a score. The ability to withstand funding-related stress
score is the weighted average of the scores for the three measures. In
the following table, cutoff values and weights are used to derive an
institution's ability to withstand funding-related stress score:
Cutoff Values and Weights To Calculate Ability To Withstand Funding-Related Stress Measures
----------------------------------------------------------------------------------------------------------------
Cutoff values
-------------------------------- Weights
Measures of the ability to withstand funding-related stress Minimum Maximum (percent)
(percent) (percent)
----------------------------------------------------------------------------------------------------------------
Core Deposits/Total Liabilities................................. 5 87 50
Balance Sheet Liquidity Ratio................................... 7 243 30
Average Short-term Funding/Average Total Assets................. 2 19 20
----------------------------------------------------------------------------------------------------------------
[[Page 10714]]
(4) 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 respective weights (30 percent, 50 percent and 20 percent,
respectively) and the results are summed to arrive at the performance
score, which cannot be less than 0 or more than 100.
(B) Loss severity score. The loss severity score is based on a loss
severity measure described in Appendix D of this subpart. Appendix B of
this subpart also describes how the loss severity measure is converted
to a score between 0 and 100. Cutoff values for the loss severity
measure are:
Cutoff Values for Loss Severity Measure
------------------------------------------------------------------------
Cutoff values
-------------------------------
Measure of loss severity Minimum Maximum
(percent) (percent)
------------------------------------------------------------------------
Loss Severity........................... 0 28
------------------------------------------------------------------------
(C) 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 at or below the minimum cutoff
of 5 receive a loss severity factor of 0.8, and scores at or above the
maximum cutoff of 85 receive a loss severity factor 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 can
be up to 20 percent higher or lower than the performance score but
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
paragraph (b)(3) of this section. The resulting total score after
adjustment cannot be less than 30 or more than 90.
(D) Initial base assessment rate. A highly complex 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:
[GRAPHIC] [TIFF OMITTED] TR25FE11.009
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 (b)(3), (d)(1), and (d)(2) of this section;
highly complex institutions that are not well capitalized or have a
CAMELS composite rating of 3, 4 or 5 shall be subject to the adjustment
at paragraph (d)(3); these adjustments shall result 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.
(3) 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. The FDIC will also consult with an institution's primary
federal regulator and, for state chartered institutions, state banking
supervisor.
(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 and when the adjustment 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 (b)(3)(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.
(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. Any downward adjustment in an institution's total score will
remain in effect for subsequent assessment periods until the FDIC
determines that an
[[Page 10715]]
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.
(c) Insured branches of foreign banks--(1) Risk categories for
insured branches of foreign banks. Insured branches of foreign banks
shall be assigned to risk categories as set forth in paragraph (a)(1)
of this section.
(2) Capital evaluations for insured branches of foreign banks. 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 Report of Assets and Liabilities of U.S. Branches and
Agencies of Foreign Banks 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.
(i) Well Capitalized. An insured branch of a foreign bank is 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 (c)(2) of this section.
(ii) Adequately Capitalized. An insured branch of a foreign bank is
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 (c)(2) of this section; and
(C) Does not meet the definition of a Well Capitalized insured
branch of a foreign bank.
(iii) Undercapitalized. An insured branch of a foreign bank is
undercapitalized institution if it does not qualify as either Well
Capitalized or Adequately Capitalized under paragraphs (c)(2)(i) and
(ii) of this section.
(3) Supervisory evaluations for insured branches of foreign banks.
Each insured branch of a foreign bank will be assigned to one of three
supervisory groups as set forth in paragraph (a)(3) of this section.
(4) Assessment method for 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.
(i) 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.
(ii) 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.
(iii) Insured branches of foreign banks not subject to certain
adjustments. No insured branch of a foreign bank in any risk category
shall be subject to the adjustments in paragraphs (b)(3), (d)(1), or
(d)(3) of this section.
(iv) Implementation of changes between Risk Categories for insured
branches of foreign banks. If, during a quarter, a ROCA rating change
occurs that results in an insured branch of a foreign bank moving from
Risk Category I to Risk Category II, III or IV, the institution's
initial base assessment rate for the portion of the quarter that it was
in Risk Category I shall be determined using the weighted average ROCA
component rating. For the portion of the quarter that the institution
was not in Risk Category I, the institution's initial base assessment
rate shall be determined under the assessment schedule for the
appropriate Risk Category. If, during a quarter, a ROCA rating change
occurs that results in an insured branch of a foreign bank moving from
Risk Category II, III or IV to Risk Category I, the institution's
assessment rate for the portion of the quarter that it was in Risk
Category I shall equal the rate determined as provided using the
weighted average ROCA component rating. For the portion of the quarter
that the institution was not in Risk Category I, the institution's
initial base assessment rate shall be determined under the assessment
schedule for the appropriate Risk Category.
(v) Implementation of changes within Risk Category I for insured
branches of foreign banks. If, during a quarter, an insured branch of a
foreign bank remains in Risk Category I, but a ROCA component rating
changes that 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
(c)(4) of this section.
(d) Adjustments--(1) Unsecured debt adjustment to initial base
assessment rate for all institutions. All institutions, except new
institutions as provided under paragraphs (f)(1) and (2) of this
section and insured branches of foreign banks as provided under
paragraph (c)(4)(iii) of this section, shall be subject to an
adjustment of assessment rates for unsecured debt. Any unsecured debt
adjustment shall be made after any adjustment under paragraph (b)(3) 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
[[Page 10716]]
adjustment divided by the amount of the assessment base.
(ii) Limitation--No unsecured debt adjustment 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 (Consolidated Reports of Condition and
Income and Thrift Financial Reports, or any successor reports to
either, as appropriate) filed by each institution as of the last day of
the quarter.
(2) 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 (b)(3) and (d)(1) of this section.
(i) Application of depository institution debt adjustment. An
insured depository institution shall pay a 50 basis point adjustment on
the amount of unsecured debt it holds that was issued by another
insured depository institution to the extent that such debt exceeds 3
percent of the institution's Tier 1 capital. The amount of long-term
unsecured debt issued by another insured depository institution shall
be calculated using the same valuation methodology used to calculate
the amount of such debt for reporting on the asset side of the balance
sheets.
(ii) Applicable quarterly reports of condition. Depository
institution debt adjustment ratios for any given quarter shall be
calculated from quarterly reports of condition (Consolidated Reports of
Condition and Income and Thrift Financial Reports, or any successor
reports to either, as appropriate) filed by each institution as of the
last day of the quarter.
(3) Brokered Deposit Adjustment. All small institutions in Risk
Categories II, III, and IV, all large institutions and all highly
complex institutions, except large and highly complex institutions
(including new large and new highly complex institutions) that are well
capitalized and have a CAMELS composite rating of 1 or 2, shall be
subject to an assessment rate adjustment for brokered deposits. Any
such brokered deposit adjustment shall be made after any adjustment
under paragraphs (b)(3), (d)(1), and (d)(2) 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 from 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 (c)(4)(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 to either, as appropriate) filed by each institution
as of the last day of the quarter.
(e) Request to be treated as a large institution--(1) 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 institution shall be deemed a small institution for
assessment purposes.
(2) 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.
(3) 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).
(f) New and established institutions and exceptions--(1) 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)(1) 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)(2) 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)(3) of this section.
(2) 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 (b)(1) or
(2) of this section and subject to the adjustments provided at
paragraphs (b)(3), (d)(2), and (d)(3) of this section. No new highly
complex or large institutions are entitled to adjustment under
paragraph (d)(1) of this section. If a large or highly complex
institution has not yet received CAMELS ratings, it will be given a
weighted CAMELS rating of 2 for assessment purposes until actual CAMELS
ratings are assigned.
(3) 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.
(4) 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) or (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
[[Page 10717]]
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) or (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.
(5) 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).
(g) 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 (b)(3),
(d)(1), (2) or (3) of this section.
0
7. Revise Sec. 327.10 to read as follows:
Sec. 327.10 Assessment rate schedules.
(a) Assessment rate schedules before the reserve ratio of the DIF
reaches 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.
(2) Initial Base Assessment Rate Schedule. Before the reserve ratio
of the DIF reaches 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 Before the Reserve Ratio of the DIF Reaches 1.15 Percent
----------------------------------------------------------------------------------------------------------------
Large and
Risk category Risk category Risk category Risk category highly complex
I II III IV 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. Before
the reserve ratio of the DIF reaches 1.15 percent, the total base
assessment rates after adjustments for an insured depository
institution shall be as prescribed in the following schedule.
Total Base Assessment Rate Schedule (After Adjustments)* Before the Reserve Ratio of the DIF Reaches 1.15
Percent **
----------------------------------------------------------------------------------------------------------------
Large and
Risk category Risk category Risk category Risk category highly complex
I II III IV 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.
(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, and the reserve ratio for the immediately
prior assessment period is less than 2 percent-- (1) Initial Base
Assessment Rate Schedule. 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:
[[Page 10718]]
Initial Base Assessment Rate Schedule Once the Reserve Ratio of the DIF Reaches 1.15 Percent and the Reserve
Ratio for the Immediately Prior Assessment Period Is Less Than 2 Percent
----------------------------------------------------------------------------------------------------------------
Large and
Risk category Risk category Risk category Risk category highly complex
I II III IV 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. 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 as prescribed in the following
schedule.
Total Base Assessment Rate Schedule (After Adjustments) * Once the Reserve Ratio of the DIF Reaches 1.15 Percent
and the Reserve Ratio for the Immediately Prior Assessment Period Is Less Than 2 Percent **
----------------------------------------------------------------------------------------------------------------
Large and
Risk category Risk category Risk category Risk category highly complex
I II III IV 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 25-40 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 25 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 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 category Risk category Risk category Risk category highly complex
I II III IV 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.
[[Page 10719]]
(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 as 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 category Risk category Risk category Risk category highly complex
I II III IV 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:
Initial Base Assessment Rate Schedule if Reserve Ratio for Prior Assessment Period Is Greater Than or Equal to
2.5 Percent
----------------------------------------------------------------------------------------------------------------
Large and
Risk category Risk category Risk category Risk category highly complex
I II III IV 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 category Risk category Risk category Risk category highly complex
I II III IV institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate.... 1-5 9 15 25 1-25
[[Page 10720]]
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 2 basis points
or a fraction thereof or a maximum decrease of 2 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 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 2 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
adjustment constitute an increase or decrease of more than 2 basis
points.
(2) Amount of revenue. In setting assessment rates, the Board shall
take into consideration the following:
(i) Estimated operating expenses of the Deposit Insurance Fund;
(ii) Case resolution expenditures and income of the Deposit
Insurance Fund;
(iii) The projected effects of assessments on the capital and
earnings of the institutions paying assessments to the Deposit
Insurance Fund;
(iv) The risk factors and other factors taken into account pursuant
to 12 U.S.C. 1817(b)(1); and
(v) Any other factors the Board may deem appropriate.
(3) Adjustment procedure. Any adjustment adopted by the Board
pursuant to this paragraph will be adopted by rulemaking, except that
the Corporation may set assessment rates as necessary to manage the
reserve ratio, within set parameters not exceeding cumulatively 2 basis
points, pursuant to paragraph (f)(1) of this section, without further
rulemaking.
(4) Announcement. The Board shall announce the assessment schedules
and the amount and basis for any adjustment thereto not later than 30
days before the quarterly certified statement invoice date specified in
Sec. 327.3(b) of this part for the first assessment period for which
the adjustment shall be effective. Once set, rates will remain in
effect until changed by the Board.
0
8. Revise appendices A, B, and C to subpart A of part 327 to read as
follows:
Appendix A to Subpart A of Part 327--Description of Scorecard Measures
------------------------------------------------------------------------
------------------------------------------------------------------------
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 Insured The concentration score for
depository institutions (excluding large institutions is the
Highly Complex Institutions). higher of the following two
scores:
(1) Higher-Risk Assets/Tier 1 Capital Sum of construction and land
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 for the detailed
description of the ratio.
(2) Growth-Adjusted Portfolio The measure is calculated in
Concentrations. the following steps:
(1) Concentration levels (as a
ratio to Tier 1 capital and
reserves) are calculated for
each broad portfolio category:
[[Page 10721]]
C&D,
Other commercial
real estate loans,
First lien
residential mortgages
(including non-agency
residential mortgage-backed
securities),
Closed-end junior
liens and home equity lines
of credit (HELOCs),
Commercial and
industrial loans,
Credit card loans,
and
Other consumer
loans.
(2) Risk weights are assigned
to each loan category based on
historical loss rates.
(3) Concentration levels are
multiplied by risk weights and
squared to produce a risk-
adjusted concentration ratio
for each portfolio.
(4) Three-year merger-adjusted
portfolio growth rates are
then scaled to a growth factor
of 1 to 1.2 where a 3-year
cumulative 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.
(5) The risk-adjusted
concentration ratio for each
portfolio is multiplied by the
growth factor and resulting
values are summed.
See Appendix C for the detailed
description of the measure.
Concentration Measure for Highly Concentration score for highly
Complex Institutions. complex institutions is the
highest of the following three
scores:
(1) Higher-Risk Assets/Tier 1 Capital Sum of C&D loans (funded and
and Reserves. unfunded), leveraged loans
(funded and unfunded),
nontraditional mortgages, and
subprime consumer loans
divided by Tier 1 capital and
reserves. See Appendix C for
the detailed description of
the measure.
(2) Top 20 Counterparty Exposure/Tier 1 Sum of the total exposure
Capital and Reserves. amount to the largest 20
counterparties (in terms of
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.\1\
(3) Largest Counterparty Exposure/Tier The amount of exposure to the
1 Capital and Reserves. largest counterparty (in terms
of 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.
Core Earnings/Average Quarter-End Total Core earnings are defined as
Assets. net income less extraordinary
items and tax-adjusted
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................. The credit quality score is the
higher of the following two
scores:
(1) Criticized and Classified Items/ Sum of criticized and
Tier 1 Capital and Reserves. classified items divided by
the sum of Tier 1 capital and
reserves. Criticized and
classified items include items
an institution or its primary
federal regulator have graded
``Special Mention'' or worse
and include retail items under
Uniform Retail Classification
Guidelines, securities, funded
and unfunded loans, other real
estate owned (ORE), other
assets, and marked-to-market
counterparty positions, less
credit valuation
adjustments.\2\ Criticized and
classified items exclude loans
and securities in trading
books, and the 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 days
Capital and Reserves. or more past due and still
accruing interest, 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.
Core Deposits/Total Liabilities........ Total domestic deposits
excluding brokered deposits
and uninsured non-brokered
time deposits divided by total
liabilities.
[[Page 10722]]
Balance Sheet Liquidity Ratio.......... Sum of cash and balances due
from depository institutions,
federal funds sold and
securities purchased under
agreements to resell, and the
market value of available for
sale and held to maturity
agency securities (excludes
agency mortgage-backed
securities but includes all
other agency 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,
5 percent of insured domestic
deposits, and 10 percent of
uninsured domestic and foreign
deposits.\3\
Potential Losses/Total Domestic Potential losses to the DIF in
Deposits (Loss Severity Measure). the event of failure divided
by total domestic deposits.
Appendix D describes the
calculation of the loss
severity measure in detail.
Market Risk Measure for Highly Complex The market risk score is a
Institutions. weighted average of the
following three scores:
(1) Trading Revenue Volatility/Tier 1 Trailing 4-quarter standard
Capital. deviation of quarterly trading
revenue (merger-adjusted)
divided by Tier 1 capital.
(2) Market Risk Capital/Tier 1 Capital. Market risk capital divided by
Tier 1 capital.\4\
(3) Level 3 Trading Assets/Tier 1 Level 3 trading assets divided
Capital. by Tier 1 capital.
Average Short-term Funding/Average Quarterly average of federal
Total Assets. funds purchased and repurchase
agreements divided by the
quarterly average of total
assets as reported on Schedule
RC-K of the Call Reports.
------------------------------------------------------------------------
\1\ 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.
http://www.bis.org/publ/bcbs128.pdf.
\2\ A marked-to-market counterparty position is equal to the sum of the
net marked-to-market derivative exposures for each counterparty. The
net marked-to-market derivative exposure equals the sum of all
positive marked-to-market exposures net of legally enforceable netting
provisions and net of all collateral held under a legally enforceable
CSA plus any exposure where excess collateral has been posted to the
counterparty. For purposes of the Criticized and Classified Items/Tier
1 Capital and Reserves definition a marked-to-market counterparty
position less any credit valuation adjustment can never be less than
zero.
\3\ Deposit runoff rates for the balance sheet liquidity ratio reflect
changes issued by the Basel Committee on Banking Supervision in its
December 2010 document, ``Basel III: International Framework for
liquidity risk measurement, standards, and monitoring,'' http://www.bis.org/publ/bcbs188.pdf.
\4\ Market risk capital is defined in Appendix C of Part 325 of the FDIC
Rules and Regulations,. http://www.fdic.gov/regulations/laws/rules/2000-4800.html#fdic2000appendixctopart325.
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) * (C2 -1)],
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; and
Potential losses to total domestic deposits ratio (loss
severity measure).
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.
Appendix C to Subpart A to Part 327--Concentration Measures
The concentration score is the higher of the higher-risk assets
to Tier 1 capital and reserves score or the growth-adjusted
portfolio concentrations score. The concentration score for highly
complex institutions is the highest of the higher-risk assets to
Tier 1 capital and reserves score, the Top 20 counterparty exposure
to Tier 1 capital and reserves score, or the largest counterparty to
Tier 1 capital and reserves score. The higher-risk assets to Tier 1
capital and reserve ratio and the growth-adjusted portfolio
concentration measure are described below.
A. 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] TR25FE11.010
[[Page 10723]]
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 ratio is rounded to two decimal
points.
Construction and land development loans (funded and
unfunded);
Leveraged loans (funded and unfunded); \2\
---------------------------------------------------------------------------
\2\ Unfunded amounts include irrevocable and revocable
commitments.
---------------------------------------------------------------------------
Nontraditional mortgage loans; and
Subprime consumer loans.\3\
---------------------------------------------------------------------------
\3\ Each loan concentration category should include purchased
credit impaired loans and should exclude the amount 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: (1) All commercial
loans (funded and unfunded) with an original amount greater than $1
million that meet any one of the conditions below at either
origination or renewal, except real estate loans; (2) securities
issued by commercial borrowers that meet any one of the conditions
below at either origination or renewal, except securities classified
as trading book; and (3) and securitizations that are more than 50
percent collateralized by assets that meet any one of the conditions
below at either origination or renewal, except securities classified
as trading book.4 5
---------------------------------------------------------------------------
\4\ The following guidelines should be used to determine the
``original amount'' of a loan:
(1) For loans drawn down under lines of credit or loan
commitments, the ``original amount'' of the loan is the size of the
line of credit or loan commitment when the line of credit or loan
commitment was most recently approved, extended, or renewed prior to
the report date. However, if the amount currently outstanding as of
the report date exceeds this size, the ``original amount'' is the
amount currently outstanding on the report date.
(2) For loan participations and syndications, the ``original
amount'' of the loan participation or syndication is the entire
amount of the credit originated by the lead lender.
(3) For all other loans, the ``original amount'' is the total
amount of the loan at origination or the amount currently
outstanding as of the report date, whichever is larger.
\5\ Leveraged loans criteria are consistent with guidance issued
by the Office of the Comptroller of the Currency in its
Comptroller's Handbook, http://www.occ.gov/static/publications/handbook/LeveragedLending.pdf, but do not include all of the
criteria in the handbook.
---------------------------------------------------------------------------
Loans or securities where borrower's total or senior
debt to trailing twelve-month EBITDA \6\ (i.e. operating leverage
ratio) is greater than 4 or 3 times, respectively. For purposes of
this calculation, the only permitted EBITDA adjustments are those
adjustments specifically permitted for that borrower in its credit
agreement; or
---------------------------------------------------------------------------
\6\ Earnings before interest, taxes, depreciation, and
amortization.
---------------------------------------------------------------------------
Loans or securities that are designated as highly
leveraged transactions (HLT) by syndication agent.\7\
---------------------------------------------------------------------------
\7\ http://www.fdic.gov/news/news/press/2001/pr2801.html.
---------------------------------------------------------------------------
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.8 9 10
---------------------------------------------------------------------------
\8\ For purposes of this rule making, a teaser-rate mortgage
loan is defined as a mortgage with a discounted initial rate where
the lender offers a lower rate and lower payments for part of the
mortgage term.
\9\ http://www.fdic.gov/regulations/laws/federal/2006/06noticeFINAL.html.
\10\ A mortgage loan is no longer considered a nontraditional
mortgage once the teaser rate has expired. An interest only loan is
no longer considered nontraditional once the loan begins to
amortize.
---------------------------------------------------------------------------
For purposes of the higher-risk concentration ratio,
nontraditional mortgage loans include securitizations where more
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 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) at origination or upon
refinancing, whichever is more recent.
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; 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.\11\
---------------------------------------------------------------------------
\11\ http://www.fdic.gov/news/news/press/2001/pr0901a.html;
however, the definition in the text above excludes any reference to
FICO or other credit bureau scores.
---------------------------------------------------------------------------
Subprime loans also include loans identified by an insured
depository institution as subprime loans based upon similar borrower
characteristics and 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.
B. Growth-Adjusted Portfolio Concentration Measure
The growth-adjusted concentration measure is the sum of the
concentration ratio for each of seven portfolios, adjusted for risk
weights and growth. The product of the risk weight and the
concentration ratio for each portfolio is first squared and then
multiplied by the growth factor for each. The measure is calculated
as:
[GRAPHIC] [TIFF OMITTED] TR25FE11.011
where:
N is institution i's growth-adjusted portfolio concentration
measure; \12\
---------------------------------------------------------------------------
\12\ 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:
Construction and land development loans;
Other commercial real estate loans;
First-lien residential mortgages and non-agency
residential mortgage-backed securities (excludes CMOs, REMICS, CMO
and REMIC residuals, and stripped MBS issued by non-U.S. Government
issuers for which the collateral consists of MBS issued or
guaranteed by U.S. government agencies);
Closed-end junior liens and home equity lines of credit
(HELOCs);
Commercial and industrial loans;
Credit card loans; and
Other consumer loans.13 14
---------------------------------------------------------------------------
\13\ All loan concentrations should include the fair value of
purchased credit impaired loans.
\14\ Each loan concentration category should exclude the 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.\15\ 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:
---------------------------------------------------------------------------
\15\ The growth factor is rounded to two decimal points.
---------------------------------------------------------------------------
[[Page 10724]]
[GRAPHIC] [TIFF OMITTED] TR25FE11.012
The risk weight for each portfolio reflects relative peak loss
rates for banks at the 90th percentile during the 1990-2009
period.\16\ These loss rates were converted into equivalent risk
weights as shown in Table C.1.
---------------------------------------------------------------------------
\16\ 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
(90th
Portfolio percentile) Risk weights
(percent)
------------------------------------------------------------------------
First-Lien Mortgages................ 2.3 0.5
Second/Junior Lien Mortgages........ 4.6 0.9
Commercial and Industrial (C&I) 5.0 1.0
Loans..............................
Construction and Development (C&D) 15.0 3.0
Loans..............................
Commercial Real Estate Loans, 4.3 0.9
excluding C&D......................
Credit Card Loans................... 11.8 2.4
Other Consumer Loans................ 5.9 1.2
------------------------------------------------------------------------
0
9. Add appendix D to subpart A of part 327 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 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
applies 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\ In both cases, assets are adjusted pro
rata 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 of
data available.
---------------------------------------------------------------------------
\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............................... (10)
Uninsured Deposits............................. 58
Foreign Deposits............................... 80
Federal Funds Purchased........................ 100
Repurchase Agreements.......................... 75
Trading Liabilities............................ 50
Unsecured Borrowings <= 1 Year................. 75
Secured Borrowings <= 1 Year................... 25
Subordinated Debt and Limited Liability 15
Preferred Stock...............................
------------------------------------------------------------------------
* 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
[[Page 10725]]
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
and repurchase agreements are assumed to be fully secured. Foreign
deposits are treated as fully secured because of the potential for
ring fencing.
Loss Severity Ratio Calculation
The FDIC's loss given failure (LGD) is calculated as:
[GRAPHIC] [TIFF OMITTED] TR25FE11.013
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 ratios
for three most recent quarters.
0
10. Revise Sec. 327.50 to read as follows:
Sec. 327.50 Dividends.
(a) Suspension of Dividends. The Board will suspend dividends
indefinitely whenever the DIF reserve ratio exceeds 1.50 percent at the
end of any year.
(b) Assessment Rate Schedule if DIF Reserve Ratio Exceeds 1.50
Percent. In lieu of dividends, when the DIF reserve ratio exceeds 1.50
percent, assessment rates shall be determined as set forth in section
327.10, as appropriate.
Sec. Sec. 327.51 through 327.54 [Removed]
0
11. Remove Sec. Sec. 327.51 through 327.54.
Note: The following appendices will not appear in the Code of
Federal Regulations:
Appendices
Appendix 1--Analysis of the Projected Effects of the Payment of
Assessments on the Capital and Earnings of Insured Depository
Institutions
I. Introduction
This analysis estimates the effect of the changes in deposit
insurance assessments adopted in the final rule on the equity
capital and profitability of insured institutions. These changes
include the new assessment base and assessment rates effective April
1, 2011. The FDIC set the rates in the final rule (shown in Table 4)
to maintain approximate revenue neutrality upon adoption of the new
assessment base required by Dodd-Frank. Therefore, for insured
institutions in aggregate, the changes in assessment rates and the
assessment base will not affect aggregate earnings and capital. This
analysis, therefore, focuses on the magnitude of increases or
decreases to individual institutions' earnings and capital resulting
from the adoption of the final rule.
II. Assumptions and Data
The analysis assumes that pre-tax income for the next four
quarters (beginning in the fourth quarter of 2010) for each
institution is equal to annualized income in the second and third
quarters of 2010, adjusted for mergers. The analysis also assumes
that the effects of changes in assessments are not transferred to
customers in the form of changes in borrowing rates, deposit rates,
or service fees. Since deposit insurance assessments are a tax-
deductible operating expense, increases in the assessment expense
can lower taxable income and decreases in the assessment expense can
increase taxable income. Therefore, the analysis considers the
effective after-tax cost of assessments in calculating the effect on
capital.\3\
---------------------------------------------------------------------------
\3\ The analysis does not incorporate any tax effects from an
operating loss carry forward or carry back.
---------------------------------------------------------------------------
The effect of the change in assessments on an institution's
income is measured by the change in deposit insurance assessments as
a percent of income before assessments, taxes, and extraordinary
items (hereafter referred to as ``income''). This income measure is
used in order to eliminate the potentially transitory effects of
extraordinary items and taxes on profitability. In order to
facilitate a comparison of the impact of assessment changes,
institutions were assigned to one of two groups: Those that were
profitable and those that were unprofitable in the period covering
the second and third quarters of 2010.
For this analysis, data as of September 30, 2010 are used to
calculate each bank's assessment base and risk-based assessment
rate, both absent the changes in the final rule and under the final
rule. The base and rate
[[Page 10726]]
are assumed to remain constant throughout the one year projection
period.\4\
---------------------------------------------------------------------------
\4\ All income statement items used in this analysis were
adjusted for the effect of mergers. Institutions for which four
quarters of non-zero earnings data were unavailable, including
insured branches of foreign banks, were excluded from this analysis.
---------------------------------------------------------------------------
An institution's earnings retention and dividend policies also
influence the extent to which assessments affect equity levels. If
an institution maintains the same dollar amount of dividends when it
pays a higher deposit insurance assessment under the final rule,
equity (retained earnings) will be less by the full amount of the
after-tax cost of the increase in the assessment. This analysis
instead assumes that an institution will maintain its dividend rate
(that is, dividends as a fraction of net income) unchanged from the
weighted average rate reported over the four quarters ending
September 30, 2010. In the event that the ratio of equity to assets
falls below 4 percent, however, this assumption is modified such
that an institution retains the amount necessary to achieve a 4
percent minimum and distributes any remaining funds according to the
dividend payout rate.\5\
---------------------------------------------------------------------------
\5\ The analysis uses 4 percent as the threshold because an
insured institution generally needs to maintain Tier 1 capital of at
least 4 percent of assets to be considered ``adequately
capitalized'' under Prompt Corrective Action standards (12 CFR
325.103). In this analysis, equity to assets is used as the measure
of capital adequacy.
---------------------------------------------------------------------------
III. Projected Effects on Capital and Earnings
The analysis indicates that projected decreases in assessments
prevent 3 institutions from becoming under-capitalized (i.e., from
falling below 4 percent equity to assets) that were projected to do
so otherwise. Lower assessments would also prevent 1 institution
from declining below 2 percent equity to assets that would have
otherwise. No bank facing an increase in assessments would, as a
result of the assessment increase, fall below the 4 percent or 2
percent thresholds.
Table 1.1 shows that approximately 84 percent of profitable
institutions are projected to have a decrease in assessments in an
amount between 0 and 10 percent of income. Another 14 percent of
profitable institutions would have a reduction in assessments
exceeding 10 percent of their income. Only 91 institutions would
have an increase in assessments, with all but 12 of them between
facing assessment increases between 0 and 10 percent of their
income.
[GRAPHIC] [TIFF OMITTED] TR25FE11.014
Table 1.2 provides the same analysis for institutions that were
unprofitable during the period covering the second and third
quarters of 2010. Table 1.2 shows that about 65 percent of
unprofitable institutions are projected to have a decrease in
assessments in an amount between 0 and 10 percent of their losses.
Another 33 percent will have lower assessments in amounts exceeding
10 percent income. Only 42 unprofitable banks will face assessment
increases, all but 10 of them in amounts between 0 and 10 percent of
losses.
[[Page 10727]]
[GRAPHIC] [TIFF OMITTED] TR25FE11.015
Appendix 2--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] TR25FE11.016
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] TR25FE11.017
where:
Fail is whether an institution i failed on or prior to year-end
2009 or not.\1\
---------------------------------------------------------------------------
\1\ For the purpose of regression analysis, large institutions
that received significant government support or that came close to
failure are deemed to have failed.
---------------------------------------------------------------------------
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 2.1 provides descriptive statistics for all risk measures
used in the large institution scorecard and highly complex
institution scorecard. 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 10728]]
[GRAPHIC] [TIFF OMITTED] TR25FE11.018
Table 2.2 provides the same statistics for each of the scored
risk measures used in the expert judgment ranking and failure
prediction models.\2\ The figures are based on data from 2005
through 2008. The loss severity measure was 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
are defined in Appendix A. The concentration measure is described in
detail in Appendix C.
---------------------------------------------------------------------------
\2\ The FDIC has conducted a number of robustness tests with
alternative ratios for capital and earnings, a log transformation of
several variables--the balance sheet liquidity and growth-adjusted
concentration measures--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.
[GRAPHIC] [TIFF OMITTED] TR25FE11.019
OLS Model Results and Derivation of Weights
Table 2.3 shows the results of the OLS model using the scored
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 5
percent level. Three of the seven measures--the weighted average
CAMELS rating, concentration measure, and core deposits ratio--are
significant at the 1 percent level in all years. All of the
estimated coefficients have a positive sign, which is consistent
with expectations since each measure was normalized into a score
that increases with risk.
[[Page 10729]]
[GRAPHIC] [TIFF OMITTED] TR25FE11.020
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 0.56, which is about 32 percent of the sum
of the average coefficients (1.74). The current proposal assigns a
weight of 30 percent to this measure. Similarly, the average
coefficient of 0.37 on the concentration measure implies a weight of
21 percent (0.37/1.74 = 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 2.4 shows the average coefficients and
implied and actual weights.
[GRAPHIC] [TIFF OMITTED] TR25FE11.021
Logistic Model Results
Table 2.5 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, concentration measure, and core deposits
ratio are significant at the 5 percent level in all years and have
the expected sign. The core earnings ratio, credit quality measure,
and balance sheet liquidity
[[Page 10730]]
ratio are not statistically significant in several years.
[GRAPHIC] [TIFF OMITTED] TR25FE11.022
OLS Regression Results: CAMELS and the Current Small Bank Financial
Ratios
Table 2.6 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] TR25FE11.023
Table 2.7 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
significant as in the model with scorecard model. For example, in
2006, the model using small bank financial ratios explained 21
percent of the variation in the current expert judgment ranking.
This compares to 46 percent for the scorecard.
[[Page 10731]]
[GRAPHIC] [TIFF OMITTED] TR25FE11.024
Appendix 3--Conversion of Total Score into Initial Base Assessment Rate
The formula for converting an insured depository institution
(IDI's) total score into an initial assessment rate is based on a
single-variable logistic regression model, which uses a large IDI's
total score as of year-end 2006 to predict whether the large IDI has
failed on or before year-end 2009. The logistic model is estimated
as:
[GRAPHIC] [TIFF OMITTED] TR25FE11.025
where
Fail is whether a large IDI i. failed on or before year-end 2009
or not; and \1\
---------------------------------------------------------------------------
\1\ For the purpose of regression analysis, large institutions
that received significant government support or that came close to
failure are deemed to have failed.
---------------------------------------------------------------------------
Score is a large IDI i's total score as of year-end 2006.
Chart 3.1 below shows that the total score can reasonably
differentiate large insured depository institutions that failed
after 2006. The worst 12 percent of insured depository institutions
in terms of their total score as of year-end 2006 accounted for more
than 60 percent of failures over the next three years. This
indicates a high correlation between the year-end 2006 total score
and risk of failure, as results show that the failure rate was five
times higher for institutions in the top 12 percent.
[[Page 10732]]
[GRAPHIC] [TIFF OMITTED] TR25FE11.026
The plotted points in Chart 3.2 show the large bank failure
probabilities estimated from the total scores using the logistic
model and the results are nonlinear.
[[Page 10733]]
[GRAPHIC] [TIFF OMITTED] TR25FE11.027
The calculation of the initial assessment rates approximates
this nonlinear relationship for scores between 30 and 90.\2\ 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:
---------------------------------------------------------------------------
\2\ The initial assessment rate formula is simplified while
maintaining the nonlinear relationship.
[GRAPHIC] [TIFF OMITTED] TR25FE11.028
Dated at Washington, DC, this 7th day of February 2011.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2011-3086 Filed 2-24-11; 8:45 am]
BILLING CODE 6714-01-P