Assessment Rate Adjustment Guidelines for Large Institutions and Insured Foreign Branches in Risk Category I, 27122-27132 [E7-9196]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 72, Number 92 (Monday, May 14, 2007)]
[Notices]
[Pages 27122-27132]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-9196]


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FEDERAL DEPOSIT INSURANCE CORPORATION


Assessment Rate Adjustment Guidelines for Large Institutions and 
Insured Foreign Branches in Risk Category I

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final guidelines.

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SUMMARY: The FDIC is publishing the guidelines it will use for 
determining how adjustments of up to 0.50 basis points would be made to 
the quarterly assessment rates of insured institutions defined as large 
Risk Category I institutions, and insured foreign branches in Risk 
Category I, according to the Assessments Regulation. These guidelines 
are intended to further clarify the analytical processes, and the

[[Page 27123]]

controls applied to these processes, in making assessment rate 
adjustment determinations.

DATES: Effective Date: May 8, 2007.

FOR FURTHER INFORMATION CONTACT: Miguel Browne, Associate Director, 
Division of Insurance and Research, (202) 898-6789; Steven Burton, 
Senior Financial Analyst, Division of Insurance and Research, (202) 
898-3539; and Christopher Bellotto, Counsel, Legal Division, (202) 898-
3801.

SUPPLEMENTARY INFORMATION:

I. Background

    Under the Assessments Regulation (12 CFR 327.9 \1\), assessment 
rates of large Risk Category I institutions are first determined using 
either supervisory and long-term debt issuer ratings, or supervisory 
ratings and financial ratios for large institutions that have no 
publicly available long-term debt issuer ratings. While the resulting 
assessment rates are largely reflective of the rank ordering of risk, 
the Assessments Regulation indicates that FDIC may determine, after 
consultation with the primary federal regulator, whether limited 
adjustments to these initial assessment rates are warranted based upon 
consideration of additional risk information. Any adjustments will be 
limited to no more than 0.50 basis points higher or lower than the 
initial assessment rate and in no case would the resulting rate exceed 
the maximum rate or fall below the minimum rate in effect for an 
assessment period. In the Assessments Regulation, the FDIC acknowledged 
the need to further clarify its processes for making adjustments to 
assessment rates and indicated that no adjustments would be made until 
additional guidelines were approved by the FDIC's Board.
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    \1\ 71 FR 69282 (November 30, 2006).
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    On February 21, 2007, the FDIC published in the Federal Register, 
for a 30-day comment period, a set of proposed guidelines that would be 
used by the FDIC to evaluate when an assessment rate adjustment is 
warranted as well as the magnitude of that adjustment. 72 FR 7878 (Feb. 
21, 2007). The FDIC sought public comment on the proposed guidelines 
and received seven comment letters: three from trade organizations 
whose membership is comprised of banks and savings associations (one of 
these letters was submitted jointly on behalf of three trade 
organizations), three from large banking organizations, and one from a 
small community bank.\2\ The comments received and the final guidelines 
governing the assessment rate adjustment process are discussed in later 
sections.
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    \2\ The trade organizations included the American Bankers 
Association, America's Community Bankers, the Financial Services 
Roundtable, the Clearing House, and the Committee for Sound Lending.
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II. Summary

    For purposes of making assessment rate adjustment decisions as 
transparent as possible, the final guidelines describe in detail the 
steps that will be used by the FDIC to identify possible 
inconsistencies between the rank orderings of risk suggested by initial 
assessment rates and other risk information, the types of risk measures 
that will be considered in these comparisons, the relative importance 
that the FDIC will attach to various types of risk measures, and the 
controls to ensure any decision to make an adjustment is justified and 
well-informed.
    The first six guidelines describe the analytical processes and 
considerations that will determine whether an assessment rate 
adjustment is warranted as well as the magnitude of any adjustment. In 
brief, the FDIC will compare the risk ranking of an institution's 
initial assessment rate, as compared to the assessment rates of other 
large Risk Category I institutions, with the risk rankings suggested by 
other risk measures. The purpose of these comparisons is to identify 
possible material inconsistencies in the rank orderings of risk 
suggested by the initial assessment rate and these other risk measures. 
Comparisons will encompass risk measures that relate to both the 
likelihood of failure and loss severity in the event of failure. The 
analytical process will consider all available risk information 
pertaining to an institution's risk profile including supervisory, 
market, and financial performance information as well as quantitative 
loss severity estimates, qualitative indicators that pertain to 
potential resolutions costs in the event of failure, and information 
pertaining to the ability of an institution to withstand adverse 
conditions.
    The next four guidelines described the controls that will govern 
the analytical process to ensure adjustment decisions are justified, 
well supported, and appropriately take into account additional 
information and views held by the primary federal regulator, the 
appropriate state banking supervisor, and the institution itself. These 
guidelines include a requirement to consult with an institution's 
primary federal regulator and appropriate state banking supervisor 
before making an adjustment, and to provide an institution with advance 
notice of, and an opportunity to respond to a pending upward 
adjustment.
    The timing of an assessment rate adjustment will depend on whether 
it is an upward or a downward adjustment. Any upward adjustment would 
not be reflected in an institution's assessment rates immediately, but 
rather in the first assessment period after the assessment period that 
prompted the notification of an upward adjustment. The purpose of this 
advance notice is to provide an institution being considered for an 
upward adjustment an opportunity to respond with additional information 
should the institution disagree with the stated reasons for the upward 
adjustment. Downward adjustments will be applied immediately within the 
assessment period being considered. Any implemented upward or downward 
adjustment will remain in effect until the FDIC determines the 
adjustment is no longer warranted. The removal of a downward adjustment 
is subject to the same advance notification requirements as an upward 
adjustment.
    Underlying the FDIC's adjustment authority is the need to preserve 
consistency in the orderings of risk indicated by these assessment 
rates, the need to ensure fairness among all large institutions, and 
the need to ensure that assessment rates take into account all 
available information that is relevant to the FDIC's risk-based 
assessment decision. As noted in the proposed guidelines, the FDIC 
expects that such adjustments will be made relatively infrequently and 
for a limited number of institutions. This expectation reflects the 
FDIC's view that the use of agency and supervisory ratings, or the use 
of supervisory ratings and financial ratios when agency ratings are not 
available, will sufficiently reflect the risk profile and rank 
orderings of risk in large Risk Category I institutions in most cases.

Comments on the General Intent of the Adjustment Guidelines

    A joint letter submitted on behalf of three trade organizations 
(referred to hereafter as the ``joint letter'') agrees that it is 
critical for the FDIC to identify inconsistencies and anomalies between 
initial assessment rates and relative risk levels posed by large Risk 
Category I institutions. The joint letter also urges the FDIC to 
closely monitor assessment rates produced by the Assessment Rule and to 
consider modifying the base methodology for determining initial 
assessment rates if a large number of assessment rate adjustments were 
deemed necessary. The FDIC agrees

[[Page 27124]]

with these observations and has stated that it would likely reevaluate 
the assessment rate methodology applied to large Risk Category I 
institutions if assessment rate adjustments were to occur frequently 
and for more than a limited number of institutions.
    A comment from a small community bank indicates its opposition to 
further reductions in the assessment rates of large banks. The 
guidelines discussed below allow for both increases and decreases in 
assessment rates of large Risk Category I institutions.

III. The Assessment Rate Adjustment Process

    The process for determining whether an assessment rate adjustment 
is appropriate, and the magnitude of that adjustment, entails a number 
of steps. In the first step, an initial risk ranking will be developed 
for all large institutions in Risk Category I based on their initial 
assessment rates as derived from agency and supervisory ratings, or the 
use of supervisory ratings and financial ratios when agency ratings are 
not available, in accordance with the Assessment Rule.
    In the second step, the FDIC will compare the risk rankings 
associated with these initial assessment rates with the risk rankings 
associated with broad-based and focused risk measures as well as the 
risk rankings associated with other market indicators such as spreads 
on subordinated debt. Broad-based risk measures include each of the 
inputs to the initial assessment rate considered separately, other 
summary risk measures such as alternative publicly available debt 
issuer ratings, and loss severity estimates, which are not always 
sufficiently reflected in the inputs to the initial assessment rate or 
in other debt issuer ratings. Focused risk measures include financial 
performance measures, measures of an institution's ability to withstand 
financial adversity, and individual factors relating to the severity of 
losses to the insurance fund in the event of failure.
    In the third step, the FDIC will perform further analysis and 
review in those cases where the risk rankings from multiple measures 
(such as broad-based risk measures, focused risk measures, and other 
market indicators) appear to be inconsistent with the risk rankings 
associated with the initial assessment rate. This step will include 
consultation with an institution's primary federal regulator and state 
banking supervisor. Although information or feedback provided by the 
primary federal regulator or state banking supervisor will be 
considered in the FDIC's ultimate decision concerning such adjustments, 
participation by the primary federal regulator or state banking 
supervisory in this consultation process should not be construed as 
concurrence with the FDIC's deposit insurance pricing decisions.
    In the final step, the FDIC will notify an institution when it 
proposes to make an upward adjustment to that institution's assessment 
rate. Notifications involving an upward adjustment in an institution's 
initial assessment rate will be made in advance of implementing such an 
adjustment so that the institution has an opportunity to respond to or 
address the FDIC's rationale for proposing an upward adjustment.\3\ 
Adjustments will be implemented after considering institution responses 
to this notification along with any subsequent changes either to the 
inputs to the initial assessment rate or any other risk factor that 
relates to the decision to make an assessment rate adjustment.
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    \3\ The institution will also be given advance notice when the 
FDIC determines to eliminate any downward adjustment to an 
institution's assessment rate.
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IV. Final Guidelines Governing Assessment Rate Adjustment 
Determinations

    To ensure consistency, fairness, and transparency, the FDIC will 
apply the following guidelines to its processes for determining when an 
assessment rate adjustment appears warranted, the magnitude of the 
adjustment, and controls to ensure adjustments are justified and take 
into consideration any additional information or views held by the 
primary federal regulator, state banking supervisor, and the 
institutions themselves. Guidelines 1 through 6 relate to the 
analytical process that will govern assessment rate adjustment 
decisions. Guidelines 7 through 10 relate to the operational controls 
that will govern assessment rate adjustment decisions.

Analytical Guidelines

    Guideline 1: The analytical process will focus on identifying 
inconsistencies between the rank orderings of risk associated with 
initial assessment rates and the rank orderings of risk indicated by 
other risk measures. This process will consider all available 
information relating to the likelihood of failure and loss severity in 
the event of failure.
The Rank Ordering Analysis
    The purpose of the analytical process is to identify institutions 
whose risk measures appear to be significantly different than other 
institutions with similarly assigned initial assessment rates. The 
analytical process will identify possible inconsistencies between the 
rank orderings of risk associated with the initial assessment rate and 
the risk rankings associated with other risk measures. The intent of 
this analysis is not to override supervisory evaluations or to question 
the validity of agency ratings or financial ratios when applicable. 
Rather, the analysis is meant to ensure that the assessment rates, 
produced from the combination of either supervisory ratings and long-
term debt issuer ratings (the debt rating method), or supervisory 
ratings and financial ratios (the financial ratio method) result in a 
reasonable rank ordering of risk that is consistent with risk profiles 
of large Risk Category I institutions with similar assessment rates.
    The FDIC will consider adjusting an institution's initial 
assessment rate when there is sufficient information from a combination 
of broad-based risk measures, focused risk measures, and other market 
indicators to support an adjustment. An adjustment will be most likely 
when: (1) The rank orderings of risk suggested by multiple broad-based 
measures are directionally consistent and materially different from the 
rank ordering implied by the initial assessment rate; (2) there is 
sufficient corroborating information from focused risk measures and 
other market indicators to support differences in risk levels suggested 
by broad-based risk measures; (3) information pertaining to loss 
severity considerations raise prospects that an institution's 
resolution costs, when scaled by size, would be materially higher or 
lower than those of other large institutions; or (4) additional 
qualitative information from the supervisory process or other feedback 
provided by the primary federal regulator or state banking supervisor 
is consistent with differences in risk suggested by the combination of 
broad-based risk measures, focused risk measures, and other market 
indicators.
    A detailed listing of the types of broad-based risk measures, 
focused risk measures, and other market indicators that will be 
considered during the analysis process are described in detail in the 
Appendix. The listing of risk measures in the Appendix is not intended 
to be exhaustive, but represents the FDIC's view of the most important 
focused risk measures to consider in the adjustment process. The 
development of risk measurement and monitoring capabilities is an 
ongoing and evolving process. As a result, the FDIC may revise the risk 
measures considered in its analytical processes over time as a result 
of these

[[Page 27125]]

development activities and consistent with the objective to consider 
all available risk information pertaining to an institution's risk 
profile in its assessment rate decisions. The FDIC will inform the 
industry if there are material changes in the types of information it 
considers for purposes of making assessment rate adjustment decisions.

General Comments on Analytical Guideline 1

    A comment from a large banking organization indicates that the 
market and supervisory ratings already encompass many of the risk 
measures that will be considered by the FDIC in making assessment rate 
adjustment decisions. As a result, the commenter questions why the 
FDIC's judgment about the risk inherent in these measures should ever 
be substituted in place of the views of the market or supervisors. 
Another comment from a large banking organization suggests that the 
guidelines are redundant with supervisory evaluations from the primary 
federal regulator.
    The analytical approach described in these guidelines does not 
substitute FDIC views of risk in place of either market or supervisory 
ratings. The initial assessment rates of large Risk Category I 
institutions are determined from a combination of supervisory ratings 
and long-term debt issuer ratings or from a combination of supervisory 
ratings and financial ratios when long-term debt issuer ratings are not 
available. Combining these risk measures can produce risk rank 
orderings of assessment rates that do not align with the risk rank 
orderings of supervisory ratings considered in isolation. As a result, 
the consideration of additional risk factors is not redundant with 
supervisory risk measurement processes and will, in the FDIC's view, 
help preserve a reasonable and consistent ordering of risk among large 
Risk Category I institutions as indicated by the range of assessment 
rates applied to these institutions.
Consideration of Quantitative Loss Severity Factors
    The loss severity factors the FDIC will consider include both 
quantitative and qualitative information. Quantitative information will 
be used to develop estimates of deposit insurance claims and the extent 
of coverage of those claims by an institution's assets. These 
quantitative estimates can in turn be converted into a relative risk 
ranking and compared with the risk rankings produced by the initial 
assessment rate. Factors that will be used to produce loss severity 
estimates include: estimates for the amount of insured and non-insured 
deposit funding at the time of failure; estimates of the extent of an 
institution's obligations that would be subordinated to depositor 
claims in the event of failure; estimates of the extent of an 
institution's obligations that would be secured or would otherwise take 
priority over depositor claims in the event of failure; and the 
estimated value of assets in the event of failure.

Comments on Quantitative Loss Severity Considerations

    One comment letter, the joint letter, objects to the inclusion of 
Federal Home Loan Bank (FHLB) borrowings in producing loss severity 
estimates and requests that the FDIC not include these funding sources 
in the calculation of secured liabilities for purposes of making such 
estimates. While acknowledging that such advances reduce the level of 
assets available to the FDIC to satisfy depositor claims in the event 
of failure, the commenter argues that FHLB borrowings provide a stable 
and reliable source of funding that reduces the likelihood of failure.
    The final guidelines do not single out FHLB borrowings, either as a 
negative or a positive risk factor. The FDIC recognizes that while 
larger volumes of such funding could result in a lower level of 
recoveries on failed institution assets, the presence of such funding 
can also reduce liquidity risks. The FDIC believes it is appropriate to 
take both factors into account. Specifically, the FDIC believes it 
should include FHLB borrowings in its calculation of secured borrowings 
since their exclusion would lead to incomplete and possibly erroneous 
loss severity estimates. However, the FDIC agrees with the point raised 
in the joint letter that it is also appropriate to consider the 
stabilizing influence of such funding while evaluating liquidity risks. 
Accordingly, the Appendix to the final guidelines makes such liquidity 
risk considerations more explicit (see qualitative and mitigating 
liquidity factors under the Liquidity and Market Risk Indicators 
section).
    Another comment from a large banking organization argues that the 
FDIC's Assessment Rule assumes a worst-case scenario that all deposits 
will be insured and therefore that any adjustments should result in 
lower not higher assessment rates.
    The FDIC acknowledges that uninsured deposits would serve to reduce 
the level of losses sustained by the insurance funds in the event of 
failure. However, the FDIC believes that meaningful loss severity 
estimates need to take into account a number of considerations beyond 
determining current levels of insured and uninsured deposits. These 
considerations include the prospects for ring-fencing of uninsured 
foreign deposits (discussed further below) and how the mix of deposit 
and non-deposit liabilities might change from current levels in a 
failure scenario. To the extent the FDIC uses loss severity estimates 
to support an adjustment decision, either up or down, it will document 
and support the assumptions and the bases for these estimates.
Consideration of Qualitative Loss Severity Factors
    In addition to quantitative loss severity factors, the FDIC will 
also consider other qualitative information that would have a bearing 
on the resolution costs of a failed institution. These qualitative 
factors include, but are not limited to, the following:
     The ease with which the FDIC could make quick deposit 
insurance determinations and depositor payments as evidenced by the 
capabilities of an institution's deposit accounting systems to place 
and remove holds on deposit accounts en masse as well as the ability of 
an institution to readily identify the owner(s) of each deposit account 
(for example, by using a unique identifier) and identify the ownership 
category of each deposit account;
     The ability of the FDIC to isolate and control the main 
assets and critical business functions of a failed institution without 
incurring high costs;
     The level of an institution's foreign assets relative to 
its foreign deposits and prospects of foreign governments using these 
assets to satisfy local depositors and creditors in the event of 
failure; and
     The availability of sufficient information on qualified 
financial contracts to allow the FDIC to identify the counterparties 
to, and other details about, such contracts in the event of failure.
    As with other risk measures, the FDIC will evaluate these 
qualitative loss severity considerations by gauging the prospects for 
higher resolutions costs posed by a given institution relative to the 
same type of risks posed by other large Risk Category I institutions. 
Where the FDIC lacks sufficient information to make such comparisons, 
assessment rate adjustment decisions will not incorporate these 
considerations.

Comments on Qualitative Loss Severity Considerations

Deposit Accounting System Capabilities
    Three comment letters (the joint letter, a trade organization, and 
a large

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banking organization) object to the inclusion of qualitative loss 
severity considerations pertaining to the capabilities of deposit 
accounting systems in the assessment rate adjustment analysis process. 
Each commenter indicates that it was premature for the FDIC to 
incorporate such considerations given the separate proposed rulemaking 
process under way--the Large-Bank Deposit Insurance Determination 
Modernization Proposal (the modernization proposal).\4\ All three 
letters suggest that such considerations in the assessment rate 
adjustment process presume the final outcome of this other rulemaking 
process. The joint letter also suggests that the consideration of these 
factors may encourage some institutions to undertake costly systems 
enhancements that may ultimately prove to be inconsistent with 
requirements imposed by a final rule stemming from the modernization 
proposal. The joint letter further argues that such considerations do 
not lend themselves to risk-measurement and would necessarily involve a 
high degree of subjectivity.
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    \4\ 71 FR 74857 (December 13, 2006). This modernization proposal 
discusses the need to establish requirements relating to deposit 
accounting systems capabilities to ensure prompt deposit insurance 
determinations and prompt payments to insured depositors in the 
event of failure.
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    As noted in the proposed guidelines, the FDIC believes that 
institutions that have the deposit accounting capabilities described 
above (placing holds en masse and the ability to uniquely identify 
depositors) present a lower level of resolutions risk irrespective of 
the existence or absence of deposit accounting system requirements 
imposed by final rules stemming from the modernization proposal. The 
FDIC will compare and contrast these capabilities across large Risk 
Category I institutions and will incorporate such information in 
adjustment decisions.
    Finally, a comment from a trade organization contends that 
considerations pertaining to the capabilities of institutions' deposit 
accounting systems are not consistent with the objective of achieving 
fairness in deposit insurance pricing between large and small 
institutions since only large institutions would be subject to these 
types of considerations. The FDIC does not agree that such 
considerations will necessarily impose a penalty on large institutions 
relative to small institutions since the evaluation of such factors 
involves comparisons of the capabilities of one institution's deposit 
accounting systems relative to those of other large Risk Category I 
institutions. On the contrary, consideration of this factor could 
possibly result in lower assessment rates for institutions that possess 
these capabilities when the systems of other large institutions with 
similar assessment rates do not have these capabilities.
Foreign Deposits
    One comment, the joint letter, indicated that the level of foreign 
deposits should not be a consideration for adjusting premium rates. 
While acknowledging the existence of ring-fencing risks, the commenter 
indicated that a mere ranking of foreign deposits does not provide 
sufficient information with which to evaluate this risk.
    The FDIC agrees that the level of foreign deposits by itself offers 
limited information as to the prospects for ring-fencing risk in the 
event of failure. Rather, the FDIC believes that an evaluation of 
foreign assets held relative to foreign deposits is a better measure of 
potential ring-fencing risks since such a measure identifies the upper 
boundary of assets that could be obtained by foreign governments to 
satisfy local deposit claims in the event of failure. If available, the 
information about the level of foreign assets to foreign deposits on a 
country-by-country basis would be better still in evaluating prospects 
for ring-fencing. Although the FDIC believes it is appropriate to 
consider such prospects in its loss severity estimates, these estimates 
would never be the sole determinant of an assessment rate adjustment 
according to Guideline 4 (described below). Moreover, any loss severity 
estimates used in support of assessment rate adjustment would need to 
fully support this estimate and any assumptions underlying the 
estimate, including any assumptions relating to foreign assets and 
deposits.
Stress Considerations
    To the extent possible, the FDIC will consider information 
pertaining to the ability of institutions to withstand adverse events 
(stress considerations). Sources of this information are varied but 
might include analyses produced by the institution or the primary 
federal regulator, such as stress test results and capital adequacy 
assessments, as well as detailed information about the risk 
characteristics of institution's lending portfolios and other 
businesses. Because of the difficulties in comparing this type of 
information across institutions, those stress considerations pertaining 
to internal stress test results and internal capital adequacy 
assessments will not be used to develop quantitative analyses of 
relative risk levels. Rather, such information will be used in a more 
qualitative sense to help inform judgments pertaining to the relative 
importance of other risk measures, especially information that pertains 
to the risks inherent in concentrations of credit exposures and other 
material non-lending business activities. As an example, in cases where 
an institution had 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 
addition, the FDIC will not use the results of internal stress tests 
and internal adequacy assessments to support upward adjustments in 
assessment rates. It must be reemphasized that despite the availability 
of information pertaining to these stress consideration factors, the 
FDIC expects that assessment rate adjustments will be made relatively 
infrequently and for a limited number of institutions.

Comments on Stress Considerations

    One comment, the joint letter, indicates that difficult-to-quantify 
subjective risk factors, such as those pertaining to stress 
considerations and loss severity, should never be used to increase 
rates, but only to decrease rates. The FDIC agrees that some of the 
stress consideration risk factors contained in the proposed guidelines, 
those pertaining to measures of an institution's ability to withstand 
financial stress, are difficult to incorporate into an analytical 
construct that relies on comparisons of ordinal rankings of risk. This 
difficulty stems from the range of different approaches and different 
methodologies used to assess capital needs and the ability to withstand 
financial shocks.
    Because of these difficulties, the FDIC agrees with the need to 
modify its approach for certain stress consideration risk factors. 
Specifically, rate adjustment decisions in the near term will not rely 
on quantitative measures involving internal stress test results or 
internal capital adequacy assessments. Nevertheless, the FDIC believes 
its assessment rate adjustment process would be incomplete if it did 
not consider both the extent to which institutions have sufficient 
capital, earnings, and liquidity to buffer against adverse financial 
conditions; and the types of risk management processes used by 
institutions to determine the appropriate level of these buffers. At a 
minimum, information from an internal

[[Page 27127]]

stress testing exercise or an internal capital adequacy assessment 
would provide useful, albeit nonquanitifiable, insights into 
management's perspective on the types and magnitude of the risks faced 
by the institution. Specifically, the FDIC believes that this type of 
information, considered in a more qualitative than quantitative sense, 
will lead to more informed deposit insurance pricing decisions by 
enhancing its understanding of the relative importance of other, more 
quantifiable risk measures and especially those risk measures relating 
to credit, market, and operational risk concentrations.
    To illustrate, some institutions may occasionally wish to provide 
stress testing results and internal capital adequacy evaluations to the 
FDIC to help foster a better understanding of the relative risk levels 
inherent in a specific portfolio with concentrated credit risk 
exposures. The FDIC would evaluate this information, not for purposes 
of initiating an assessment rate adjustment, but to gain further 
insights into the nature of the underlying credit concentration. If the 
information presented effectively mitigates concerns over the 
concentration risk, the FDIC may decide either not to proceed with a 
pending upward adjustment being contemplated or to proceed with a 
downward adjustment.
    Guideline 2: Broad-based indicators and other market information 
that represent an overall view of an institution's risk will be 
weighted more heavily in adjustment determinations than focused 
indicators as will loss severity information that has bearing on the 
ability of the FDIC to resolve institutions in a cost effective and 
timely manner.
    The FDIC will accord more weight to risk-ranking comparisons 
involving broad-based or comprehensive risk measures than focused risk 
measures. Examples of comprehensive or broad-based risk measures 
include, but are not limited to, each of the inputs to the initial 
assessment rate (that is, weighted average CAMELS ratings, long-term 
debt issuer ratings, and the combination of weighted average CAMELS 
ratings and the five financial ratios used to determine assessment 
rates for institutions when long-term debt issuer ratings are not 
available), and other ratings intended to provide a comprehensive view 
of an institution's risk profile.\5\ Likewise, spreads on subordinated 
debt will be accorded more weight than other market indicators since 
these spreads represent an evaluation of risk from institution 
investors whose risks are similar to those faced by the FDIC.\6\ To the 
extent that sufficient information exists, the FDIC will also accord 
more weight to the qualitative loss severity factors discussed in 
Guideline 1 since these have a direct bearing on the resolutions costs 
that would be incurred by the FDIC in the event of failure and since 
these factors are generally not taken into account by other risk 
measures.
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    \5\ The Appendix contains additional descriptions of broad-based 
risk measures.
    \6\ The FDIC will take into account considerations relating to 
the liquidity of a given issue, differing maturities, and other 
bond-specific characteristics, when making such comparisons.
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    The FDIC received no specific comments on Guideline 2.
    Guideline 3: Focused risk measures and other market indicators will 
be used to compare with and supplement the comparative analysis using 
broad-based risk measures.
    Financial performance and condition risk measures, such as those 
listed in the Appendix, will generally not be as heavily relied upon as 
the broad-based risk measures previously discussed in making assessment 
rate adjustment decisions. Rather, the FDIC will use these focused risk 
measures, along with other market indicators, to supplement the risk 
comparisons of broad-based risk measures with initial assessment rates 
and to provide corroborating evidence of material differences in risk 
suggested by such comparisons.
    The FDIC received no specific comments on Guideline 3.
    Guideline 4: Generally, no single risk factor or indicator will 
control the decision on whether to make an adjustment. The absence of 
certain types of information shall not be construed as indicating 
higher risks relative to other institutions.
    In general, no single risk indicator will be used as the basis for 
decisions to adjust a large Risk Category I institution's assessment 
rates. In certain cases, the FDIC may determine that an assessment rate 
adjustment is appropriate when certain qualitative risk factors 
pertaining to loss severity suggest materially higher or lower risk 
relative to the same types of risks posed by other institutions. As 
noted above, the FDIC intends to place greater weight on these factors 
since they have a direct bearing on resolution costs and since these 
factors are generally not considered in other risk measures.
    The FDIC will not interpret the absence of certain types of 
information that are not normal and necessary components of risk 
management and measurement processes, or financial reporting, to be 
indicative of higher risks for a given institution relative to other 
institutions. For example, the FDIC will not construe the lack of a 
debt issuer rating as being indicative of higher risk.

Comments on Guideline 4

    A comment from a large banking organization requests that the FDIC 
revise the guidelines to eliminate any negative implications to the 
nonexistence of a risk indicator, such as the absence of an agency 
rating. The FDIC agrees with this comment. The FDIC will not interpret 
the absence of certain types of information for a given risk indicator 
(such as agency ratings, where the institution has no ratings) as 
evidence of higher risk, and has revised Guideline 4 accordingly.
    Guideline 5: Comparisons of risk information will consider normal 
variations in performance measures and other risk indicators that exist 
among institutions with differing business lines.
    The FDIC will consider the effect of business line concentrations 
in its risk ranking comparisons. The FDIC's notice of proposed 
rulemaking for deposit insurance assessments, issued in July 2006, 
referenced a set of business line groupings that included processing 
institutions and trust companies, residential mortgage lenders, non-
diversified regional institutions, large diversified institutions, and 
diversified regional institutions.\7\ When making assessment rate 
adjustment decisions, the FDIC will employ risk ranking comparisons 
within these business line groupings to account for normal variations 
in risk measures that exist among institutions with differing business 
line concentrations.
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    \7\ See 71 FR 41910 (July 24, 2006).
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    The FDIC received no specific comments on Guideline 5.
    Guideline 6: Adjustment will be made only if additional analysis 
suggests a meaningful risk differential, to include both differences in 
risk rankings and differences in the underlying risk measures, between 
the institution's initial and adjusted assessment rates.
    Where material inconsistencies between initial assessment rates and 
other risk indicators are present, additional analysis will determine 
the magnitude of adjustment necessary to align the assessment rate 
better with the rates of other institutions with similar risk profiles. 
The objective of this analysis will be to determine the amount of 
assessment rate adjustment that would be necessary to bring an 
institution's assessment rate into better alignment with those of other

[[Page 27128]]

institutions that pose similar levels or risk. This process will entail 
a number of considerations, including: (1) The number of rank ordering 
comparisons that identify the institution as a potential outlier 
relative to institutions with similar assessment rates; (2) the 
direction and magnitude of differences in rank ordering comparisons; 
(3) a qualitative assessment of the relative importance of any apparent 
outlier risk indicators to the overall risk profile of the institution, 
(4) an identification of any mitigating factors, and (5) the 
materiality of actual differences in the underlying risk measures.
    Based upon these considerations, the FDIC will determine the 
magnitude of adjustment that would be necessary to better align its 
assessment rate with institutions that pose similar levels of risk. 
When the assessment rate adjustment suggested by these considerations 
is not material, or when there are a number of risk comparisons that 
offer conflicting or inconclusive evidence of material inconsistencies 
in either risk rankings or the underlying risk measures, no assessment 
rate adjustment will be made.

Comments on Guideline 6

    A comment from a large banking organization indicates that in order 
to gauge the significance of an outlier condition, one would need to 
know the relative levels of the risk indicator being measured in 
addition to the differences in risk rankings along that measure. The 
FDIC acknowledges that for a given risk indicator, differences in risk 
rankings across institutions could represent either a material or an 
immaterial difference in risk. Although, in general, adjustments would 
only be considered when a preponderance of risk information indicates 
the need for an adjustment, the FDIC agrees that it is important to 
consider both the differences in risk rankings and the magnitude of 
differences in underlying risk measures, and has revised Guideline 6 
accordingly.

Other Comments on Analytical Guidelines 1 Through 6

    A comment from a large banking organization supported the 
guidelines as well reasoned, comprehensive, and consistent with other 
assessment frameworks used by credit rating agencies and credit risk 
analyses processes used within many financial institutions. The 
commenter suggests that the FDIC consider the inclusion of certain 
additional risk factors in the analytical process such as the 
diversification and volatility of earnings from major business lines, 
and the level of net charge-offs to pre-provision earnings. The FDIC 
agrees with these suggestions and has modified the risk factors in the 
Appendix accordingly.
    A comment from a trade organization objected to the blanket 
inclusion of ``commercial real estate'' in the definition of one of the 
risk factors included in the Appendix entitled higher risk loans to 
tier 1 capital. The FDIC agrees that risks associated with commercial 
real estate lending can vary considerably depending on such factors as 
property type, collateral, the degree of pre-leasing, etc. As with any 
of the measures listed in the Appendix, the FDIC does not consider any 
single financial ratio as representative of an institution's risk 
profile. Rather, each set of financial performance factors is 
accompanied by a description of qualitative and mitigating risk 
considerations. More specifically, the qualitative considerations 
accompanying the asset quality measures in the Appendix indicate that 
the FDIC will consider mitigating factors, including the degree of 
collateral coverage and differences in underwriting standards, when 
evaluating credit risks related to commercial real estate holdings. 
These second-order considerations, coupled with any additional 
information obtained pertaining to the specific risk characteristics of 
a given portfolio, will help better distinguish the risk contained 
within any commercial real estate concentrations.
    A comment from a large banking organization recommends that the 
FDIC's risk ranking analyses be performed without respect to the 
assessment rate floors in effect for large Risk Category I institutions 
(i.e., the risk rankings encompassing approximately the 1st through the 
46th percentile).\8\ The FDIC agrees that the application of the 
assessment rate floor to the ranking of risk factors results in some 
loss of information about the magnitude of differences in risk rank 
levels between institutions in the peer group. Accordingly, the FDIC 
will initially assign risk rankings to risk measures without respect to 
how these percentile rankings align with the assessment rate floor. 
However, the FDIC will continue to view a rank ordering analysis that 
supports an overall assessment rate risk ranking falling approximately 
between the lowest 1st and 46th percentiles,\9\ as being indicative of 
minimum risk. The FDIC does not believe this modification to risk 
ranking comparisons will alter the resulting assessment rate decisions 
from the analytical process described in the proposed guidelines.
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    \8\ The proposed guidelines indicated that comparisons of risk 
measures will generally treat as indicative of low risk that portion 
of the risk rankings falling within the lowest X percentage of 
assessment rate rankings, with X being the proportion of large Risk 
Category I institutions assigned the minimum assessment rate. As of 
June 30, 2006, 46 percent of large Risk Category I institutions 
would have been assigned a minimum assessment rate. Therefore, as of 
June 30, 2006, risk rankings from the 1st to the 46th percentile for 
any given risk measure would generally have been considered 
suggestive of low risk, and all risk rankings for risk measures in 
this range would be set at the 46th percentile for risk ranking 
comparison purposes.
    \9\ The 46th percentile corresponds to the proportion of large 
Risk Category I institutions that would have paid the minimum 
assessment rate if the final assessment rules would have been in 
place as of June 30, 2006.
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Control Guidelines

    Guideline 7: Decisions to adjust an institution's assessment rate 
must be well supported.
    The FDIC will perform internal reviews of pending adjustments to an 
institution's assessment rate to ensure the adjustment is justified, 
well supported, based on the most current information available, and 
results in an adjusted assessment rate that is consistent with rates 
paid by other institutions with similar risk profiles.

Comments on Guideline 7

    One comment, the joint letter, agreed that adjustment decisions 
should be well supported by the preponderance of factors that suggest a 
change is required. The FDIC believes the final guidelines establish an 
analytical process and controls over that process that are consistent 
with this comment.
    Guideline 8: The FDIC will consult with an institution's primary 
federal regulator and appropriate state banking supervisor prior to 
making any decision to adjust an institution's initial assessment rate 
(or prior to removing a previously implemented adjustment). 
Participation by the primary federal regulator or state banking 
supervisor in this consultation process should not be construed as 
concurrence with the FDIC's deposit insurance pricing decisions.
    Consistent with existing practices, the FDIC will continue to 
maintain an ongoing dialogue with primary federal regulator concerning 
large institution risks. When assessment rate adjustments are 
contemplated, the FDIC will notify the primary federal regulator and 
the appropriate state banking supervisor of the pending adjustment in 
advance of the first opportunity to implement any adjustment. This 
notification will include a discussion of why the adjusted assessment 
rate is more consistent with the risk profiles

[[Page 27129]]

represented by institutions with similar assessment rates. The FDIC 
will consider any additional information provided by either the primary 
federal regulator or state banking supervisor prior to proceeding with 
an adjustment of an institution's assessment rate.

Comments on Guideline 8

    A comment from a trade organization indicates that the guidelines 
do not apply a significant and explicit weight to the views of the 
primary federal regulator. The FDIC agrees that its adjustment 
decisions should weigh heavily the views of the primary federal 
regulator, as well as the views of the appropriate state banking 
supervisor. As noted under Guideline 1, the intent of any assessment 
rate adjustment is not to override supervisory evaluations. Rather, the 
consideration of additional risk information is meant to ensure that 
assessment rates, produced from a combination of supervisory ratings 
and agency ratings or supervisory ratings and financial ratios (when 
applicable), result in a reasonable rank ordering of risk. Guideline 8 
also indicates that no adjustment decision will be made until the FDIC 
consults with the primary federal regulator and the appropriate state 
banking supervisor. If the primary federal regulator or state banking 
supervisor choose to express a view on the appropriateness of the 
adjustment, the FDIC will accord such views significant weight in its 
decision of whether to proceed with an adjustment.
    Guideline 9: The FDIC will give institutions advance notice of any 
decision to make an upward adjustment to its initial assessment rate, 
or to remove a previously implemented downward adjustment.
    The FDIC will notify institutions when it intends to make an upward 
adjustment to its initial assessment rate (or remove a downward 
adjustment). This notification will include the reasons for the 
adjustment, when the adjustment would take effect, and provide the 
institution up to 60 days to respond. Adjustments would not become 
effective until the first assessment period after the assessment period 
that prompted the notification of an upward adjustment. During this 
subsequent assessment period, the FDIC will determine whether an 
adjustment is still warranted based on an institution's response to the 
notification. The FDIC will also take into account any subsequent 
changes to an institution's weighted average CAMELS, long-term debt 
issuer ratings, financial ratios (when applicable), or other risk 
measures used to support the adjustment. In other words, both an 
adjustment determination and a determination of the amount of the 
adjustment will be made with respect to information and risk factors 
pertaining to the assessment period being assessed--that is, the first 
assessment period after the assessment period that prompted the 
notification. The FDIC will also consider any actions taken by the 
institution, during the period for which the institution is being 
assessed, in response to the FDIC's concerns described in the notice.

Comments on Guideline 9

    One comment, the joint letter, supported this advance notification 
requirement for upward adjustments, which will give institutions an 
opportunity to respond to and address the FDIC's concerns.
    Guideline 10: The FDIC will continually re-evaluate the need for an 
assessment rate adjustment.
    The FDIC will re-evaluate the need for the adjustment during each 
subsequent quarterly assessment period. These evaluations will be based 
on any new information that becomes available, as well as any changes 
to an institution's weighted average CAMELS, long-term debt issuer 
ratings, financial ratios (when applicable), or other risk measures 
used to support the adjustment. Re-evaluations will also consider the 
appropriateness of the magnitude of an implemented adjustment, for 
example, in cases where changes to the initial assessment rate inputs 
result in a change to the initial assessment rate. Consistent with 
Guideline 9, the FDIC will not increase the magnitude of an adjustment 
without first notifying the institution of the proposed increase.
    The institution can request a review of the FDIC's decision to 
adjust its assessment rate.\10\ It would do so by submitting a written 
request for review of the assessment rate assignment, as adjusted, in 
accordance with 12 CFR 327.4(c). This same section allows an 
institution to bring an appeal before the FDIC's Assessment Appeals 
Committee if it disagrees with determinations made in response to a 
submitted request for review.
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    \10\ The institution can also request a review of the FDIC's 
decision to remove a previous downward adjustment.
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    The FDIC received no specific comment on Guideline 10.

Comments on Control Guidelines

    One comment, the joint letter, indicated that institutions should 
have the opportunity to petition the FDIC for a reduction in assessment 
rates. The commenter argues that the guidelines only allow the FDIC to 
initiate changes in assessment rates, and that institutions may have 
evidence of lower risk that is not captured in either the initial 
assessment rate or the risk information considered for purposes of 
determining whether an adjustment is appropriate.
    The FDIC believes that the final guidelines, coupled with existing 
assessment rate rules, give institutions a number of opportunities to 
argue for lower assessment rates.\11\ For instance, institutions have 
90 days from the date of receiving an assessment rate invoice to 
request a review of that rate. This request for review procedure is 
available whether or not an adjustment is reflected in the assessment 
rate. Additionally, institutions can appeal decisions made in response 
to these requests for review to the FDIC's Assessment Appeals 
Committee.
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    \11\ Any requests for review or appeals would be subject to the 
limitations contained within the Assessment Rule, namely that 
assessment rate adjustments would be limited to no more than \1/2\ 
basis point, and that no adjustment may cause an institution's rate 
to fall below the minimum assessment rate or rise above the maximum 
assessment rate in effect for a given assessment period.
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    Another comment from a large banking organization argues that the 
guidelines should include a greater level of due process for upward 
adjustments than is available under the existing Assessment Rule to 
include the opportunity to have objections heard by a neutral third 
party.
    The FDIC agrees that the imposition of an upward assessment rate 
adjustment should afford institutions opportunities to present counter 
arguments. The FDIC believes the guidelines provide multiple such 
opportunities, which are consistent in many respects with the 
commenter's recommendation. First, an institution will receive advance 
notification of the FDIC's grounds for considering an upward 
adjustment. At this point, an institution will have the opportunity to 
provide information that challenges the appropriateness of an upward 
assessment rate adjustment. Second, once the FDIC has considered an 
institution's response to the advance notice of a pending upward 
adjustment, the FDIC will provide the institution with a written 
response and rationale for any decision to proceed with the upward 
adjustment. At this point, the institution will have an opportunity to 
request a review of a decision to impose a higher assessment rate and 
will be able to present evidence to challenge the decision in 
accordance with the Assessment Rule. Third, an institution

[[Page 27130]]

will be able to appeal the outcome of this request for review to the 
FDIC's Assessment Appeals Committee. In short, institutions will have 
multiple opportunities to dispute an upward adjustment, and the 
institution's position will be considered at increasingly higher levels 
within the Corporation. The FDIC believes it is neither necessary nor 
appropriate for it to provide for third party review of decisions made 
by the FDIC under its statutory authority.

Other Comments on the Guidelines

Incorporation of Basel II Information Into Assessment Rate Adjustment 
Decisions
    One comment, from a large banking organization, recommends that the 
FDIC table its guidelines pending finalization of rulemaking for the 
new risk-based capital framework (Basel II). The commenter argues that 
a risk-differentiation system using Basel II information may produce 
different results than a system that does not incorporate this 
information.
    The underlying objective of the guidelines is to evaluate all 
available information for purposes of ensuring a reasonable and 
consistent rank ordering of risk. The FDIC does not believe that the 
adoption of Basel II will produce information that conflicts with the 
risk information being evaluated as part of these guidelines. Rather, 
the FDIC believes that risk information obtained from advanced risk 
measurement systems should serve to complement the analysis process 
described in these final guidelines.
Considerations of Parent Company or Affiliate Support
    Two comments (the joint letter and a large banking organization) 
recommended that the FDIC consider parent company support in its 
assessment rate adjustment determinations. Both comments suggested that 
the existence of a financially strong parent should be a consideration 
only in reducing rates.
    The FDIC believes it is appropriate to take into account all 
available information in its assessment rate adjustment decisions. 
Accordingly, the FDIC will consider both the willingness and ability of 
a parent company to support an insured institution in its adjustment 
decisions. The willingness of a company to support an insured 
subsidiary can be demonstrated by historical and ongoing financial and 
managerial support provided to an institution. The ability of a company 
to support an insured subsidiary can be evaluated through a review of a 
company's financial strength, supervisory and debt ratings, market-
based views of risk, and a review of the company's operating 
environment and affiliate structure. Although the FDIC will take into 
account considerations of parent company support, these considerations 
will not be accorded any greater or lesser weight than other risk 
considerations. Rather, these considerations will be evaluated in 
conjunction with the analysis of other risk measures as indicated in 
the final guidelines. Because many institutions' initial assessment 
rates already reflect considerations of parent company support (when it 
is subject to the debt rating method),\12\ the FDIC does not believe it 
would be appropriate to automatically lower an institution's assessment 
rate when an institution is owned by a financially strong parent.
---------------------------------------------------------------------------

    \12\ Moody's and Fitch debt issuer ratings explicitly take into 
account parent company support.
---------------------------------------------------------------------------

Considerations of Additional Supervisory Information
    The proposed guidelines posed a question about whether the FDIC 
should consider certain additional supervisory information when 
determining whether a downward adjustment in assessment rates is 
appropriate. In response to this question, one comment, the joint 
letter, indicated that only risk-related considerations should be 
reflected in assessment rate adjustments. More specifically, the 
commenter argues that technical violations that the commenter believes 
do not relate to the risk of failure should not preclude a downward 
assessment rate adjustment.
    The FDIC believes that its assessment rate adjustment decisions 
should be based on risk-related considerations and will incorporate all 
available supervisory information that has a bearing on the risks posed 
to the insurance funds into its adjustment decisions.
Disclosure of Assessment Rate Adjustments
    One comment, the joint letter, recommends that the FDIC disclose 
the number (but not the names) of institutions whose assessment rate 
adjustments have been adjusted and the magnitude of these adjustments. 
This same comment indicates that it would be appropriate to give the 
results of the FDIC's analysis, each time it is performed, to each 
large Risk Category I institution in order to enhance the dialogue 
between the FDIC and the institution.
    The FDIC plans to provide information about the number of and 
amount of implemented assessment rate adjustments. The FDIC also 
intends to determine the appropriate form and extent of analytical 
results pertaining to its adjustment decisions that will be given to 
large Risk Category I institutions. At a minimum, the FDIC intends to 
provide institutions with a summary of its analyses in cases where an 
adjustment is contemplated.
Need for Further Notice and Comment on Future Modifications
    One comment, the joint letter, believes that any modification in 
the risk factors considered in the adjustment decision should be 
subject to further notice and comment.
    The FDIC believes it would be impractical and inefficient to 
subject every modification in the risk factors considered as part of 
the adjustment analysis process to further notice and comment. As noted 
in the proposed guidelines, the risk measures listed in the Appendix 
are not intended to be either an exhaustive or a static representation 
of all risk information that might be considered in adjustment 
decisions. Rather, the list identified what the FDIC believes at this 
time to be the most important risk elements to consider in its 
assessment rate adjustment determinations. These elements are likely to 
change and evolve over time due to changes in reported financial 
variables (e.g., Call Report changes) and changes in access to new 
types of risk information. The FDIC believes it is appropriate to seek 
additional notice and comment for material changes in the methodologies 
or processes used to make assessment rate adjustment decisions. A 
material change would be one that is expected to result in a 
significant change to the frequency of assessment rate adjustments.
Relationship Between Adjustment Decisions and Revenues
    A comment from a large banking organization suggests that the lack 
of transparency in the guidelines give the appearance that the FDIC 
intends to extract additional premiums from large institutions. To 
avoid this appearance, the commenter recommends that that the FDIC 
impose revenue neutrality on its adjustment decisions by implementing 
upward adjustments in amounts not greater than the amount of downward 
adjustments.
    The FDIC has no intent to use its adjustment authority for revenue 
generation purposes. The guidelines are intended to provide as much

[[Page 27131]]

transparency as possible on how the FDIC's assessment rate adjustment 
decisions will be made. Moreover, the guidelines allow for both upward 
and downward assessment rate adjustments. The FDIC believes that the 
final guidelines, coupled with the multiple opportunities afforded to 
institutions to challenge the FDIC's assessment rate determinations, 
ensure a sufficient degree of objectivity and fairness without imposing 
additional constraints, such as revenue neutrality, over these 
decisions. Such a revenue neutrality constraint would limit the ability 
of the FDIC to meet its main objective, which is to ensure a reasonable 
and consistent rank ordering of risk in the range of assessment rates.

V. Timing of Notifications and Adjustments

Upward Adjustments

    As noted above, institutions will be given advance notice when the 
FDIC determines that an upward adjustment in its assessment rate 
appears to be warranted. The timing of this advance notification will 
correspond approximately to the invoice date for an assessment period. 
For example, an institution would be notified of a pending upward 
adjustment to its assessment rates covering the period April 1st 
through June 30th sometime around June 15th. June 15th is the invoice 
date for the January 1st through March 31st assessment period.\13\ 
Institutions will have up to 60 days to respond to notifications of 
pending upward adjustments.
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    \13\ Since the intent of the notification is to provide advance 
notice of a pending upward adjustment, the invoice covering the 
assessment period January 1st through March 31st in this case would 
not reflect the upward adjustment.
---------------------------------------------------------------------------

    The FDIC would notify an institution of its decision either to 
proceed with or not to proceed with the upward adjustment approximately 
90 days following the initial notification of a pending upward 
adjustment. If a decision were made to proceed with the adjustment, the 
adjustment would be reflected in the institution's next assessment rate 
invoice. Extending the example above, if an institution were notified 
of a proposed upward adjustment on June 15th, it would have up to 60 
days from this date t