[Federal Register Volume 76, Number 73 (Friday, April 15, 2011)]
[Proposed Rules]
[Pages 21256-21265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-9209]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 76, No. 73 / Friday, April 15, 2011 /
Proposed Rules
[[Page 21256]]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
Proposed Assessment Rate Adjustment Guidelines for Large and
Highly Complex Institutions
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Request for comment.
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SUMMARY: The FDIC seeks comment on proposed guidelines that would be
used to determine how adjustments could be made to the total scores
that are used in calculating the deposit insurance assessment rates of
large and highly complex insured institutions. Total scores are
determined according to the Assessments and Large Bank Pricing approved
by the FDIC Board on February 7, 2011.
DATES: Comments must be received on or before May 31, 2011.
ADDRESSES: You may submit comments, identified by ``Adjustment
Guidelines,'' by any of the following methods:
Agency Web site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on
the Agency Web site.
E-mail: [email protected]. Include ``Adjustment
Guidelines'' in the subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m.
Instructions: All submissions received must include the agency name and
``Adjustment Guidelines'' in the heading. All comments received will be
posted to the extent practicable and, in some instances, the FDIC may
post summaries of categories of comments, with the comments themselves
available in the FDIC's reading room. Comments will be posted at http://www.fdic.gov/regulations/laws/federal/propose.html, including any
personal information provided.
FOR FURTHER INFORMATION CONTACT: Lisa Ryu, Chief, Large Bank Pricing
Section, Division of Insurance and Research, (202) 898-3538; Andrew
Felton, Acting Chief, Large Bank Pricing Section, Division of Insurance
and Research, (202) 898-3823; Mike Anas, Senior Financial Analyst,
Division of Insurance and Research, (630) 241-0359 x 8252; and
Christopher Bellotto, Counsel, Legal Division, (202) 898-3801, 550 17th
Street, NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Background
On February 7, 2011 (76 FR 10672 (Feb. 25, 2011)), the FDIC Board
amended its assessment regulations (the Amended Assessment
Regulations), by, among other things, adopting a new methodology for
determining assessment rates for large institutions.1 2 The
Amended Assessment Regulations eliminate risk categories for large
institutions and combine CAMELS ratings and forward-looking financial
measures into one of two scorecards, one for highly-complex
institutions and another for all other large institutions.\3\ Each of
the two scorecards produces two scores--a performance score and a loss
severity score--that are combined into a total score, which cannot be
greater than 90 or less than 30. The FDIC can adjust a bank's total
score up or down by no more than 15 points, but the resulting score
cannot be greater than 90 or less than 30. The score is then converted
to an initial base assessment rate, which, after application of other
possible adjustments, results in a total assessment rate.\4\ The total
assessment rate is multiplied by the bank's assessment base to
calculate the amount of its assessment obligation.
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\1\ Assessments, Large Bank Pricing, 76 FR 10672 (February 25,
2011) (to be codified at 12 CFR 327.9).
\2\ A large institution is defined 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.
\3\ A ``highly complex institution'' is defined as: (1) 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 and 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.
\4\ These adjustments are the unsecured debt adjustment, the
depository institution debt adjustment, and the brokered deposit
adjustment.
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Tables 1 and 2 show the scorecards for large and highly complex
institutions, respectively.
Table 1--Scorecard for Large Institutions
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Measure weights Component weights
Scorecard measures and components (percent) (percent)
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P Performance Score
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P.1 Weighted Average CAMELS Rating 100 30
P.2 Ability to Withstand Asset- ................. 50
Related Stress:..................
Tier 1 Leverage Ratio......... 10 .................
Concentration Measure......... 35 .................
Core Earnings/Average Quarter- 20 .................
End Total Assets *...........
[[Page 21257]]
Credit Quality Measure........ 35 .................
P.3 Ability to Withstand Funding- ................. 20
Related Stress:..................
Core Deposits/Total 60 .................
Liabilities..................
Balance Sheet Liquidity Ratio. 40 .................
------------------------------------------------------------------------
L Loss Severity Score
------------------------------------------------------------------------
L.1 Loss Severity Measure......... ................. 100
------------------------------------------------------------------------
* Average of five quarter-end total assets (most recent and four prior
quarters).
Table 2--Scorecard for Highly Complex Institutions
------------------------------------------------------------------------
Measure weights Component weights
Measures and components (percent) (percent)
------------------------------------------------------------------------
P Performance Score
------------------------------------------------------------------------
P.1 Weighted Average CAMELS Rating 100 30
P.2 Ability to Withstand Asset- ................. 50
Related Stress:..................
Tier 1 Leverage Ratio......... 10 .................
Concentration Measure......... 35 .................
Core Earnings/Average Quarter- 20 .................
End Total Assets.............
Credit Quality Measure and 35 .................
Market Risk Measure..........
P.3 Ability to Withstand Funding- ................. 20
Related Stress:..................
Core Deposits/Total 50 .................
Liabilities..................
Balance Sheet Liquidity Ratio. 30 .................
Average Short-Term Funding/ 20 .................
Average Total Assets.........
L Loss Severity Score
------------------------------------------------------------------------
L.1 Loss Severity................. ................. 100
------------------------------------------------------------------------
* Average of five quarter-end total assets (most recent and four prior
quarters).
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 and 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.
In most cases, the total score produced by the applicable scorecard
will correctly reflect an institution's overall risk relative to other
large institutions; however, the scorecard includes assumptions that
may not be appropriate for all institutions. Therefore, the FDIC
believes that it is important that it have the ability to consider
idiosyncratic or other relevant risk factors that are not adequately
captured in the scorecards and make appropriate adjustments to an
institution's total score. The Amended Assessment Regulations state
that, after consultation with an institution's primary Federal
regulator, the FDIC may make a limited adjustment to an institution's
total score based upon risks that are not adequately captured in the
scorecard. The Amended Assessment Regulations provide that no new
adjustments will be made until new guidelines have been published for
comment and approved by the FDIC's Board of Directors.\5\
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\5\ The Amended Assessment Regulations also require that the
FDIC publish aggregate statistics on adjustments each quarter once
the guidelines are adopted. 76 FR 10699.
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The proposed guidelines describe the process the FDIC would follow
to determine whether to make an adjustment and to determine the size of
any adjustment. This request for comments also outlines the process the
FDIC would use when notifying an institution regarding an adjustment.
These proposed guidelines would supersede the large bank pricing
adjustment guidelines published by the FDIC on May 14, 2007 (the 2007
Guidelines).\6\ The 2007 Guidelines outline the adjustment process for
the large bank assessment system then in effect. The Amended Assessment
Regulations include scorecards that explicitly incorporate some of the
risks that were previously captured primarily through large bank
adjustments. The proposed guidelines take these changes into account;
however, the processes for communicating with affected institutions and
implementing adjustments once determined remain largely unchanged from
the 2007 Guidelines, except that the FDIC is now explicitly allowing
institutions to request a large bank adjustment.
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\6\ Assessment Rate Adjustment Guidelines for Large Institutions
and Insured Foreign Branches in Risk Category I, 72 FR 27122 (May
14, 2007).
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The FDIC seeks comments on the proposed guidelines and the
procedures for making an adjustment to an institution's score. Although
the FDIC has in this instance chosen to publish the proposed guidelines
and solicit comment from the industry, notice and comment are not
required and need not be employed to make future changes to the
guidelines.
[[Page 21258]]
II. Overview of Proposed Guidelines on Large Bank Adjustment
The proposed large bank adjustment process would be based on a set
of guidelines designed to ensure that the adjustment process is fair
and transparent and that any decision to adjust a score is well
supported. The following general guidelines would govern the adjustment
process, which is described in greater detail below.
Analytical Guidelines
The FDIC would focus on identifying institutions for which
a combination of risk measures and other information suggests either
materially higher or lower risk than their total scores indicate. The
FDIC would consider all available material information relating to the
likelihood of failure or loss severity in the event of failure.
The FDIC would primarily consider two types of information
in determining whether to make a large bank adjustment: A scorecard
ratio or measure that exceeds the maximum cutoff value for a ratio or
measure or is less than the minimum cutoff value for a ratio or measure
along with the degree to which the ratio or measure differs from the
cutoff value (scorecard measure outliers); or information not directly
captured in the scorecard, including complementary quantitative risk
measures and qualitative risk considerations.
If an institution has one or more scorecard measure
outliers, the FDIC would conduct further analysis to determine whether
underlying scorecard ratios are materially higher or lower than the
established cutoffs for a given scorecard measure and whether other
mitigating or supporting information exists.
The FDIC would use complementary quantitative risk
measures to determine whether a given scorecard measure is an
appropriate measure for a particular institution.
When qualitative risk considerations materially affect the
FDIC's view of an institution's probability of failure or loss given
failure, these considerations could be the primary factor supporting
the adjustment. Qualitative risk considerations include, but are not
limited to, underwriting practices related to material concentrations,
risk management practices, strategic risk, the use and management of
government support programs, and factors affecting loss severity.
Specific risk measures would vary in importance for
different types of institutions. In some cases, a single risk factor or
indicator may support an adjustment if the factor suggests a
significantly higher or lower likelihood of failure, or loss given
failure, than the total score reflects.
To the extent possible in comparing risk measures, the
FDIC would consider the performance of similar institutions, taking
into account that variations in risk measures exist among institutions
with substantially different business models.
Adjustments would be made only if the comprehensive
analysis of an institution's risk, generally based on the two types of
information listed above, and the institution's relative risk ranking
warrant a meaningful adjustment of the institution's total score
(generally, an adjustment of five points or more).
Procedural Guidelines
The processes for communicating with affected institutions and
implementing adjustments once determined would remain largely unchanged
by this proposal, except that the FDIC would now explicitly allow
institutions to request an adjustment.
The FDIC would consult with an institution's primary
Federal regulator and appropriate state banking supervisor before
making any decision to adjust an institution's total score (and before
removing a previously implemented adjustment).
The FDIC would give institutions advance notice of any
decision to make an upward adjustment to a total score, or to remove a
previously implemented downward adjustment. The notice would include
the reasons for the proposed adjustment or removal, the size of the
proposed adjustment or removal, specify when the adjustment or removal
would take effect, and provide institutions with up to 60 days to
respond.
The FDIC would re-evaluate the need for total score
adjustments on a quarterly basis.
Institutions could make written request to the FDIC for an
adjustment, but must support the request with evidence of a material
risk or risk-mitigating factor that is not adequately accounted for in
the scorecard.
An institution could request review of or appeal an upward
adjustment, the magnitude of an upward adjustment, removal of a
previously implemented downward adjustment or an increase in a
previously implemented upward adjustment pursuant to 12 CFR 327.4(c).
An institution could similarly request review of or appeal a decision
not to apply an adjustment following a request by the institution for
an adjustment.
III. The Assessment Rate Adjustment Process
A. Identifying the Need for an Adjustment
The FDIC believes that any adjustment should improve the rank
ordering of institutions according to risk. Institutions with similar
risk profiles should have similar total scores and corresponding
initial assessment rates, and institutions with higher or lower risk
profiles should have higher or lower total scores and initial
assessment rates, respectively. The FDIC would evaluate scorecard
results each quarter to identify institutions with a score that is
clearly too high or too low when considered in light of risks or risk-
mitigating factors that are inadequately accounted for by the
scorecard. Some examples of these types of risks and risk-mitigating
factors include considerations for purchased credit impaired (PCI)
loans, accounting rule changes such as FAS 166/167, credit underwriting
and credit administration practices, collateral and other risk
mitigants, including the materiality of guarantees and franchise value.
Commenters on the proposed large bank pricing rule published on
November 9, 2010 (the Large Bank NPR) \7\ suggested that these factors
be considered in determining an institution's assessment rate. As
discussed in the preamble to the Final Rule on Assessments and Large
Bank Pricing approved by the FDIC Board in February 2011, the FDIC
stated that it would consider these factors in the large bank
assessment rate adjustments.\8\
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\7\ 75 FR 72612 (Nov. 24, 2010).
\8\ 76 FR 10672 (Feb. 25, 2011).
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In addition to considering an institution's relative risk ranking
among all large institutions, the FDIC would consider how an
institution compares to similar institutions. The comparison would
allow the FDIC to account for variations in risk measures that may
exist among institutions with differing business models. For purposes
of the comparison, the FDIC would, where appropriate, assign an
institution to a peer group. The proposed peer groups are:
Processing Banks and Trust Companies: Large institutions 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
[[Page 21259]]
are non-zero), and whose total fiduciary assets total $500 billion or
more.
Residential Mortgage Lenders: Large institutions not described in
the peer group above whose mortgage loans plus mortgage-backed
securities exceed 50 percent of total assets.
Non-diversified Regional Institutions: Large institutions not
described in a peer group above if: credit card plus securitized
receivables exceed 50 percent of assets plus securitized receivables;
or the sum of residential mortgage loans, credit card loans, and other
loans to individuals exceeds 50 percent of assets.
Large Diversified Institutions: Large institutions not described in
a peer group above with over $150 billion in assets.
Diversified Regional Institutions: Large institutions not described
in a peer group above with less than $150 billion in assets.
An institution can also request that the FDIC make an adjustment to
its score by submitting a written request to the FDIC's Director of the
Division of Insurance and Research in Washington, DC. Similar to FDIC-
initiated adjustments, an institution's request for an adjustment would
be considered only if it is supported by evidence of a material risk or
risk-mitigating factor that is not adequately accounted for in the
scorecard. The FDIC would consider these requests as part of its
ongoing effort to identify and adjust scores that require adjustment.
An institution-initiated request would not preclude a subsequent
request for review (12 CFR 327.4(c)) or appeal pursuant to the
assessment appeals process.\9\
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\9\ See Guidelines for Appeals of Deposit Insurance Assessment
Determinations, 75 FR 20362 (April 19, 2010).
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B. Determining the Adjustment Amount
Once it determines that an adjustment may be warranted, the FDIC
would determine the adjustment amount necessary to bring an
institution's total score into better alignment with those of other
institutions that pose similar levels of risk. The FDIC would initiate
adjustments only when a combination of risk measures and other
information suggests either materially higher or lower risk than their
total scores indicate, generally resulting in an adjustment of an
institution's total score by five points or more. The FDIC believes
that the adjustment process should be used to address material
idiosyncratic issues in a small number of institutions rather than as a
fine-tuning mechanism for a large number of institutions. If the size
of the adjustment required to align an institution's total score with
institutions of similar risk is not material, no adjustment would be
made.
B. Further Analysis and Consultation With Primary Federal Regulator
As under the 2007 Guidelines, before making an adjustment, the FDIC
would consult with an institution's primary Federal regulator and state
banking supervisor to obtain further information and comment.
C. Advance Notice
Decisions to lower an institution's total score would not be
communicated to institutions in advance. Rather, as under the 2007
Guidelines, they would be reflected in the invoices for a given
assessment period along with the reasons for the adjustment.
To give an institution an opportunity to respond, the FDIC would
give advance notice to an institution when proposing to make an upward
adjustment to the institution's total score.\10\ Consistent with the
2007 Guidelines, the timing of the notice would correspond
approximately to the invoice date for an assessment period. For
example, an institution would be notified of a proposed upward
adjustment to its assessment rates covering the period April 1 through
June 30 by approximately June 15, which is the invoice date for the
January 1 through March 31 assessment period.\11\
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\10\ The institution would also be given advance notice when the
FDIC determines to eliminate any downward adjustment to an
institution's total score.
\11\ The invoice covering the assessment period January 1
through March 31 in this example would not reflect the upward
adjustment.
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D. Institution's Opportunity To Respond
Before implementing an upward adjustment to a total score, the FDIC
would review the institution's response to the advance notice, along
with any subsequent changes to supervisory ratings, scorecard measures,
or other relevant risk factors. Similar to the 2007 Guidelines, if the
FDIC decided to implement the upward adjustment, it would notify an
institution of its decision along with the invoice for the quarter in
which the adjustment would become effective.
Extending the example above, if the FDIC notified an institution of
a proposed upward adjustment on June 15, the institution would have 60
days from this date to respond to the notification. If, after
evaluating the institution's response and updated information for the
quarterly assessment period ending June 30, the FDIC decided to proceed
with the adjustment, it would communicate this decision to the
institution by approximately September 15, which is the invoice date
for the April 1 through June 30 assessment period. In this case, the
adjusted rate would be reflected in the September 15 invoice.
The time frames and example above also apply to a decision by the
FDIC to remove a previously implemented downward adjustment as well as
a decision to increase a previously implemented upward adjustment.
E. Duration of the Adjustment
Consistent with the 2007 Guidelines, the adjustment would remain in
effect for subsequent assessment periods until the FDIC determined
either that the adjustment was no longer warranted or that the
magnitude of the adjustment needed to be reduced or increased (subject
to the 15-point limitation and the requirement for further advance
notification).\12\
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\12\ As noted in the Amended Assessments Regulation, an
institution's assessment rate can increase without notice if the
institution's supervisory, agency ratings, or financial ratios
deteriorate.
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F. Requests for Review and Appeals
An institution could request review of or appeal an upward
adjustment, the magnitude of an upward adjustment, removal of a
previously implemented downward adjustment or an increase in a
previously implemented upward adjustment pursuant to 12 CFR 327.4(c).
An institution could similarly request review of or appeal a decision
not to apply an adjustment following a request by the institution for
an adjustment.
IV. Additional Information on the Adjustment Process, Including
Examples
As discussed above, the FDIC would primarily consider two types of
information in determining whether to make a large bank adjustment:
Scorecard measure outliers or information not directly captured in the
scorecard, including complementary quantitative risk measures and
qualitative risk considerations.
A. Scorecard Measure Outliers
In order to convert each scorecard ratio into a score that ranges
between 0 and 100, the Amended Assessment Regulations use minimum and
maximum cutoff values that generally correspond to the 10th and 90th
percentile values for each ratio based on data for the 2000 to 2009
period. All values less than the 10th percentile or all values greater
than the 90th
[[Page 21260]]
percentile are assigned the same score. This process enables the FDIC
to compare different ratios in a standardized way and assign
statistically-based weights; however, it may mask significant
differences in risk among institutions with the minimum or maximum
score. The FDIC believes that an institution with one or more scorecard
ratios well in excess of the maximum cutoffs or well below the minimum
cutoffs may pose significantly greater or lower risk to the deposit
insurance fund than its score suggests.
The example below illustrates the analytical process the FDIC would
follow in determining to propose a downward adjustment based on
scorecard measure outliers. The example is merely illustrative. As
shown in Chart 1, Bank A has a total score of 45 and two scorecard
measures with a score of 0 (indicating lower risk).
[GRAPHIC] [TIFF OMITTED] TP15AP11.063
Since at least one of the scorecard measures has a score of 0, the
FDIC would further review whether the ratios underlying these measures
materially differ from the cutoff value associated with a score of 0.
Materiality would generally be determined by the amount that the
underlying ratio differed from the relevant cutoff as a percentage of
the overall scoring range (the maximum cutoff minus the minimum
cutoff). Table 3 shows that Bank A's Tier 1 Leverage ratio (17 percent)
far exceeds the cutoff value associated with a score of 0 (13 percent),
with the difference representing 57 percent of the associated scoring
range. Based on this additional information and assuming no other
mitigating factors, the FDIC could determine that the Bank A's loss
absorbing capacity is not fully recognized, particularly when compared
with other institutions receiving the same overall score. By contrast,
Bank A's Core ROA ratio is much closer to its cutoff values, suggesting
that an adjustment based on consideration of those factors may not be
justified.
Table 3--Outlier Analysis for Bank A
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Cutoffs Outlier
-------------------------- amount
(value
minus
cutoff) as
Scorecard measure Score Minimum Maximum Value (percent) percentage
(percent) (percent) of the
scoring
range
(percent)
----------------------------------------------------------------------------------------------------------------
Core ROA................................... 0 0 2 2.08 4
Tier 1 Capital Ratio....................... 0 6 13 17 57
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[[Page 21261]]
Before initiating an adjustment, however, the FDIC would consider
whether Bank A had significant risks that were not captured in the
scorecard. If no information on such risks existed, the FDIC would
initiate a downward adjustment to Bank A's total score.
The amount of the adjustment would be the amount needed to make the
total score consistent with those of banks of comparable overall risk,
with particular emphasis on institutions of the same institution type
(e.g., diversified regional institutions), as described above.
Typically, however, adjustments supported by only one extreme outlier
value would be less than the FDIC's potential adjustment authority of
15 points. In the case of multiple outlier values, inconsistent outlier
values, or outlier values that are exceptionally beyond the scoring
range, an overall analysis of each measure's relative importance may
call for higher or lower adjustment amounts. For Bank A, a 5-point
adjustment may be most appropriate.
The next example illustrates the analytical process the FDIC would
follow in determining to propose an upward adjustment based on
scorecard measure outliers. As in the example above, the example is
merely illustrative; an institution with less extreme values could also
receive an upward adjustment. As shown in Chart 2, Bank B has a total
score of 72 and three scorecard measures with a score of 100
(indicating higher risk).
[GRAPHIC] [TIFF OMITTED] TP15AP11.064
Since at least one of the scorecard measures has a score of 100,
the FDIC would further review whether the ratios underlying these
measures materially exceed the cutoff value associated with a score of
100. Table 4 shows that Bank B's Criticized and Classified Items to
Tier 1 Capital and Reserves ratio (198 percent) far exceeds the cutoff
value associated with a score of 100 (100 percent), with the difference
representing 105 percent of the associated scoring range. Based on this
additional information and assuming no other mitigating factors, the
FDIC could determine that the risk associated with Bank B's ability to
withstand asset-related stress and, therefore, its overall risk, may be
materially greater than its score suggests, particularly when compared
with other institutions receiving the same overall score. By contrast,
the Core ROA and Underperforming Assets to Tier 1 Capital and Reserves
values are much closer to their respective cutoff values, suggesting
that an adjustment based on these factors may not be justified.
Table 4--Outlier Analysis for Bank B
----------------------------------------------------------------------------------------------------------------
Cutoffs Outlier amount
-------------------------- (value minus
Value cutoff) as
Scorecard measure Score Minimum Maximum (percent) percentage of
(percent) (percent) the scoring
range (percent)
----------------------------------------------------------------------------------------------------------------
Core ROA.................................. 100 0 2 -0.05 -3
Criticized and Classified to Tier 1 100 7 100 198 105
Capital & Reserves.......................
Underperforming Assets to Tier 1 Capital & 100 2 35 36 3
Reserves.................................
----------------------------------------------------------------------------------------------------------------
[[Page 21262]]
After considering any risk-mitigating factors, the FDIC would
determine the amount of adjustment needed to make the total score
consistent with those of banks of comparable overall risk. For Bank B,
a 5-point adjustment may be most appropriate.
B. Information Not Directly Captured by the Scorecard
1. Complementary Risk Measures
Complementary risk measures are measures that are not included in
the scorecard, but that can inform the appropriateness of a given
scorecard measure for a particular institution. These measures are
readily available for all institutions and include quantitative metrics
and market indicators that provide further insights into an
institution's ability to withstand financial adversity, and the
severity of losses in the event of failure.\13\
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\13\ In the context of large institution insurance pricing, loss
severity refers to the relative loss, scaled to its current domestic
deposits, that an institution poses to the Deposit Insurance Fund in
the event of a failure.
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Analyzing complementary risk measures would help the FDIC determine
whether the assumptions applied to a scorecard measure are appropriate
for a particular institution. For example, as detailed in the Amended
Assessments Regulation, the scorecard includes a loss severity measure
based on the FDIC's loss severity model that applies a standard set of
assumptions to all large banks to estimate potential losses to the
insurance fund. These assumptions, including liability runoffs and
asset recovery rates, are derived from actual bank failures; however,
the FDIC recognizes that a large bank may have unique attributes that
could have a bearing on the appropriateness of those assumptions. When
data or quantitative metrics exist that support materially different
runoff assumptions or asset recovery rates for a particular
institution, the FDIC may consider an adjustment to the total score,
particularly if such information is further supported by qualitative
loss severity considerations as discussed below.
The example below illustrates the analytical process the FDIC would
follow in determining to propose an upward adjustment based on
complementary risk measures. Again, the example is merely illustrative.
Chart 3 shows that Bank C has a total score of 66. Some of Bank C's
risk measure scores are significantly higher than the total score,
while others, including the Tier 1 leverage ratio score (42), are
significantly lower.
[GRAPHIC] [TIFF OMITTED] TP15AP11.065
After reviewing complementary measures for all financial ratios
contained in the scorecard, in the hypothetical example, the
complementary measures for Tier 1 leverage ratio showed that the level
and quality of capital protection may not be correctly reflected in the
Tier 1 leverage ratio score. Chart 4 shows that two other complementary
capital measures for Bank C--the total equity ratio and the ratio of
other comprehensive income (OCI) to Tier 1 capital--suggest higher risk
than the Tier 1 leverage ratio score suggests. Additional review
reveals that sizeable unrealized losses in the securities portfolio
account for these differences and that Bank C's loss absorbing capacity
is potentially overstated by the Tier 1 leverage ratio.
[[Page 21263]]
[GRAPHIC] [TIFF OMITTED] TP15AP11.066
An upward adjustment to Bank C's total score may be appropriate,
again assuming that no significant risk mitigants are evident. An
adjustment of 5 points would be likely since the underlying level of
unrealized losses is extremely high (greater than 25% of Tier 1
capital). While the adjustment in this case would likely be limited to
5 points because the bank's concentration measure and credit quality
measure already receive the maximum possible score, in other cases
modest unrealized losses could lead to a higher overall adjustment
amount, if the concentration and credit quality measures are
understated as well.\14\
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\14\ The concentration measure and the credit quality measure
are expressed as a percent of Tier 1 capital plus the allowance for
loan loss reserves.
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2. Qualitative Risk Considerations
The FDIC believes that it is important to consider all relevant
qualitative risk considerations in determining whether to apply a large
bank adjustment. Qualitative information often provides significant
insights into institution-specific or idiosyncratic risk factors that
cannot be captured in the scorecard. Similar to scorecard outliers and
complementary risk measures, the FDIC would use the qualitative
information to consider whether potential discrepancies exist between
the risk ranking of institutions based on their total score and the
relative risk ranking suggested by a combination of risk measures and
qualitative risk considerations. Such information includes, but is not
limited to, analysis based on information obtained through the
supervisory process, such as underwriting practices, interest rate risk
exposure and other information obtained through public filings.
Another example of qualitative information that the FDIC would
consider is available information pertaining to an institution's
ability to withstand adverse events. Sources of this information are
varied but may include analyses produced by the institution or
supervisory authorities, such as stress test results, capital adequacy
assessments, or information detailing the risk characteristics of the
institution's lending portfolios and other businesses. Information
pertaining to internal stress test results and internal capital
adequacy assessment would be used qualitatively to help inform the
relative importance of other risk measures, especially concentrations
of credit exposures and other material non-lending business activities.
As an example, in cases where an institution has a significant
concentration of credit risk, results of internal stress tests and
internal capital adequacy assessments could obviate FDIC concerns about
this risk and therefore provide support for a downward adjustment, or
alternatively, provide additional mitigating information to forestall a
pending upward adjustment. In some cases, stress testing results may
suggest greater risk than would normally be evident through the
scorecard methodology alone.
Qualitative risk considerations would also include information that
could have a bearing on potential loss severity, and could include, for
example, the ease with which the FDIC could make quick deposit
insurance determinations and depositor payments, or the availability of
sufficient information on qualified financial contracts to allow the
FDIC to make timely and correct determinations on these contracts in
the event of failure.
In general, qualitative factors would become more important in
determining whether to apply an adjustment when an institution has high
performance risk
[[Page 21264]]
or if the institution has high asset, earnings, or funding
concentrations. For example, if a bank is near failure, qualitative
loss severity information becomes more important in the adjustment
process. Further, if a bank has material concentrations in some asset
classes, the quality of underwriting becomes more important in the
adjustment process.
Additionally, engaging in certain business lines may warrant
further consideration of qualitative factors. For instance, supervisory
assessments of operational risk and controls at processing banks are
likely to be important regardless of the institution's performance.
The specific example below illustrates the analytical process the
FDIC would follow to determine whether to make an adjustment based on
qualitative information. Chart 5 shows that Bank D has a high score of
82 that is largely driven by a high score for the ability to withstand
asset-related stress component, which is, in turn, largely driven by
the higher-risk asset concentration score and the underperforming asset
score. The ability to withstand asset-related stress component is
heavily weighted in the scorecard (50 percent weight), and, as a
result, significant qualitative information that is not considered in
the scorecard could lead to an adjustment to the institution's total
score.
[GRAPHIC] [TIFF OMITTED] TP15AP11.067
The FDIC would review qualitative information pertaining to the
higher-risk asset concentration measure and the underperforming asset
measure for Bank D to determine whether there are one or more important
risk mitigants that are not factored into the scorecard. We assume that
the further review revealed that, while Bank D has concentrations in
non-traditional mortgages, its mortgage portfolio has the following
characteristics that suggest lower risk:
a. Most of the loan portfolio is composed of bank-originated
residential real estate loans on owner-occupied properties;
b. The portfolio has strong collateral protection (e.g., few or no
loans with a high loan-to-value ratio) compared to the rest of the
industry;
c. Debt service coverage ratios are favorable (e.g., few or no
loans with a high debt-to-income ratio) compared to the institution's
peers;
d. The primary Federal regulator notes in its examination report
that the institution has strong collection practices and reports no
identified risk management deficiencies.
Additionally, these qualitative factors surrounding the bank's real
estate portfolio suggest loss rate assumptions applied to Bank D's
residential mortgage portfolio may be too severe, resulting in a loss
severity score that is too high relative to its risk.
Based on the information above, the bank would be a strong
candidate for a 10- to 15-point reduction in total score, primarily
since the ability to withstand asset-related stress score and loss
severity score do not reflect a number of significant qualitative risk
mitigants that suggest lower risk.
V. Request for Comment
The FDIC seeks comment on all aspects of the proposed guidelines
for determining how to make potential adjustments to the initial total
score of large institutions. In particular, the FDIC seeks comment on:
1. Whether the proposed guidelines governing the adjustment process
are appropriate and sufficient to ensure fairness and consistency in
deposit insurance pricing determinations. More specifically the FDIC
seeks comment on the appropriateness of the following:
a. Reviewing outlier values on scorecard risk measures;
b. Augmenting the analysis of scorecard risk measures with a review
of additional complementary and qualitative risk measures;
c. Basing adjustment decisions on considerations of multiple risk
indicators;
d. Assessing financial performance risk measures relative to other
institutions engaged in similar business activities; and
[[Page 21265]]
e. Using additional risk information, including qualitative
information, to determine the magnitude of adjustment to an
institution's total score that would be necessary to bring its total
score into better alignment with institutions with similar risk
profiles.
2. Are there additional guidelines that should govern the
analytical process to ensure fairness and consistency in deposit
insurance pricing determinations?
3. What qualitative information should the FDIC use to best
evaluate loss severity?
4. Are the proposed guidelines for controlling the assessment rate
adjustment process sufficient to ensure that adjustment decisions are
justified, fully supported, and take into account the views of the
primary Federal regulator and the institution?
VI. Paperwork Reduction Act
A. Request for Comment on Proposed Information Collection
In accordance with the Paperwork Reduction Act (44 U.S.C. 3501 et
seq.) the FDIC may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid Office of Management and Budget (OMB) control number.
The collection of information contained in this proposed rule is being
submitted to OMB for review.
Interested parties may submit written comments to the FDIC
concerning the Paperwork Reduction Act (PRA) implications of this
proposal. Commenters should refer to ``PRA Comments--Adjustment
Guidelines'' in the subject line. Comments may be submitted by any of
the following methods:
Agency Web site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on
the Agency Web site.
E-mail: [email protected]. Include ``PRA Comments--
Adjustment Guidelines, 3064-ADXX'' in the subject line of the message.
Mail: Gary A. Kuiper, Counsel, F-1086, Federal Deposit
Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m.
A copy of the comments may also be submitted to the OMB desk
officer for the FDIC, Office of Information and Regulatory Affairs,
Office of Management and Budget, New Executive Office Building,
Washington, DC 20503.
Comment is solicited on:
(1) Whether the proposed collection of information is necessary for
the proper performance of the functions of the agency, including
whether the information will have practical utility;
(2) The accuracy of the agency's estimate of the burden of the
proposed collection of information, including the validity of the
methodology and assumptions used;
(3) The quality, utility, and clarity of the information to be
collected;
(4) Ways to minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology; e.g., permitting
electronic submission of responses; and
(5) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchases of services to provide information.
B. Proposed Information Collection
An information collection would occur when a large or highly
complex insured depository institution makes a written request that the
FDIC make an adjustment to its total score. An institution's request
for adjustment would be considered only if it is supported by evidence
of a material risk or risk-mitigating factor that is not adequately
accounted for in the scorecard.
Respondents: Large and Highly Complex insured depository
institutions.
Number of responses: 0-11 per year.
Frequency of response: Occasional.
Average number of hours to prepare a response: 8 hours.
Total annual burden: 0-88 hours.
Dated at Washington, DC, this 12th day of April 2011.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2011-9209 Filed 4-14-11; 8:45 am]
BILLING CODE 6714-01-P