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Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 327
RIN 3064–AD35
Assessments
Federal Deposit Insurance
Corporation (FDIC).
ACTION: Notice of proposed rulemaking
and request for comment.
AGENCY:
SUMMARY: The FDIC is proposing to
amend 12 CFR part 327 to: Alter the
way in which it differentiates for risk in
the risk-based assessment system; revise
deposit insurance assessment rates,
including base assessment rates; and
make technical and other changes to the
rules governing the risk-based
assessment system.
DATES: Comments must be received on
or before November 17, 2008.
ADDRESSES: You may submit comments,
identified by RIN number, by any of the
following methods:
• Agency Web Site: https://
www.fdic.gov/regulations/laws/federal/
propose.html. Follow instructions for
submitting comments on the Agency
Web Site.
• E-mail: Comments@FDIC.gov.
Include the RIN number in the subject
line of the message.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments, Federal
Deposit Insurance Corporation, 550 17th
Street, NW., Washington, DC 20429.
• Hand Delivery/Courier: Guard
station at the rear of the 550 17th Street
Building (located on F Street) on
business days between 7 a.m. and 5 p.m.
Instructions: All submissions received
must include the agency name and RIN
for this rulemaking. All comments
received will be posted without change
to https://www.fdic.gov/regulations/laws/
federal/propose.html including any
personal information provided.
FOR FURTHER INFORMATION CONTACT:
Munsell W. St. Clair, Chief, Banking and
Regulatory Policy Section, Division of
Insurance and Research, (202) 898–
8967; and Christopher Bellotto, Counsel,
Legal Division, (202) 898–3801.
SUPPLEMENTARY INFORMATION:
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I. Background
The Reform Act
On February 8, 2006, the President
signed the Federal Deposit Insurance
Reform Act of 2005 into law; on
February 15, 2006, he signed the Federal
Deposit Insurance Reform Conforming
Amendments Act of 2005 (collectively,
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the Reform Act).1 The Reform Act
enacted the bulk of the
recommendations made by the FDIC in
2001.2 The Reform Act, among other
things, required that the FDIC,
‘‘prescribe final regulations, after notice
and opportunity for comment * * *
providing for assessments under section
7(b) of the Federal Deposit Insurance
Act, as amended * * *,’’ thus giving the
FDIC, through its rulemaking authority,
the opportunity to better price deposit
insurance for risk.3
The Federal Deposit Insurance Act, as
amended by the Reform Act, continues
to require that the assessment system be
risk-based and allows the FDIC to define
risk broadly. It defines a risk-based
system as one based on an institution’s
probability of causing a loss to the
deposit insurance fund due to the
composition and concentration of the
institution’s assets and liabilities, the
amount of loss given failure, and
revenue needs of the Deposit Insurance
Fund (the fund or DIF).4
Before passage of the Reform Act, the
deposit insurance funds’ target reserve
ratio—the designated reserve ratio
(DRR)—was generally set at 1.25
percent. Under the Reform Act,
however, the FDIC may set the DRR
within a range of 1.15 percent to 1.50
percent of estimated insured deposits. If
the reserve ratio drops below 1.15
percent—or if the FDIC expects it to do
so within six months—the FDIC must,
within 90 days, establish and
implement a plan to restore the DIF to
1.15 percent within five years (absent
extraordinary circumstances).5
The FDIC may restrict the use of
assessment credits during any period
that a restoration plan is in effect. By
statute, however, institutions may apply
credits towards any assessment
imposed, for any assessment period, in
an amount equal to the lesser of (1) the
amount of the assessment, or (2) the
1 Federal Deposit Insurance Reform Act of 2005,
Public Law 109–171, 120 Stat. 9; Federal Deposit
Insurance Conforming Amendments Act of 2005,
Public Law 109–173, 119 Stat. 3601.
2 After a year long review of the deposit insurance
system, the FDIC made several recommendations to
Congress to reform the deposit insurance system.
See https://www.fdic.gov/deposit/insurance/
initiative/direcommendations.html for details.
3 Section 2109(a)(5) of the Reform Act. Section
7(b) of the Federal Deposit Insurance Act (12 U.S.C.
1817(b)).
4 12 Section 7(b)(1)(C) of the Federal Deposit
Insurance Act (12 U.S.C. 1817(b)(1)(C)). The Reform
Act merged the former Bank Insurance Fund and
Savings Association Insurance Fund into the
Deposit Insurance Fund.
5 Section 7(b)(3)(E) of the Federal Deposit
Insurance Act (12 U.S.C. 1817(b)(3)(E)).
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amount equal to three basis points of the
institution’s assessment base.6
The Reform Act also restored to the
FDIC’s Board of Directors the discretion
to price deposit insurance according to
risk for all insured institutions
regardless of the level of the fund
reserve ratio.7
The Reform Act left in place the
existing statutory provision allowing the
FDIC to ‘‘establish separate risk-based
assessment systems for large and small
members of the Deposit Insurance
Fund.’’ 8 Under the Reform Act,
however, separate systems are subject to
a new requirement that ‘‘[n]o insured
depository institution shall be barred
from the lowest-risk category solely
because of size.’’ 9
The 2006 Assessments Rule
Overview
On November 30, 2006, the FDIC
published in the Federal Register a final
rule on the risk-based assessment
system (the 2006 assessments rule).10
The rule became effective on January 1,
2007.
The 2006 assessments rule created
four risk categories and named them
Risk Categories I, II, III and IV. These
four categories are based on two criteria:
capital levels and supervisory ratings.
Three capital groups—well capitalized,
adequately capitalized, and
undercapitalized—are based on the
leverage ratio and risk-based capital
ratios for regulatory capital purposes.
Three supervisory groups, termed A, B,
and C, are based upon the FDIC’s
consideration of evaluations provided
by the institution’s primary federal
6 Section 7(b)(3)(E)(iii) of the Federal Deposit
Insurance Act (12 U.S.C. 1817(b)(E)(iii)).
7 The Reform Act eliminated the prohibition
against charging well-managed and well-capitalized
institutions when the deposit insurance fund is at
or above, and is expected to remain at or above, the
designated reserve ratio (DRR). This prohibition
was included as part of the Deposit Insurance
Funds Act of 1996. Public Law 104–208, 110 Stat.
3009, 3009–479. However, while the Reform Act
allows the DRR to be set between 1.15 percent and
1.50 percent, it also generally requires dividends of
one-half of any amount in the fund in excess of the
amount required to maintain the reserve ratio at
1.35 percent when the insurance fund reserve ratio
exceeds 1.35 percent at the end of any year. The
Board can suspend these dividends under certain
circumstances. The Reform Act also requires
dividends of all of the amount in excess of the
amount needed to maintain the reserve ratio at 1.50
when the insurance fund reserve ratio exceeds 1.50
percent at the end of any year. 12 U.S.C. 1817(e)(2).
8 Section 7(b)(1)(D) of the Federal Deposit
Insurance Act (12 U.S.C. 1817(b)(1)(D)).
9 Section 2104(a)(2) of the Reform Act amending
Section 7(b)(2)(D) of the Federal Deposit Insurance
Act (12 U.S.C. 1817(b)(2)(D)).
10 71 FR 69282. The FDIC also adopted several
other final rules implementing the Reform Act,
including a final rule on operational changes to part
327. 71 FR 69270.
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regulator and other information the
FDIC deems relevant.11 Group A
consists of financially sound
institutions with only a few minor
weaknesses; Group B consists of
institutions that demonstrate
weaknesses which, if not corrected,
could result in significant deterioration
of the institution and increased risk of
loss to the insurance fund; and Group C
consists of institutions that pose a
substantial probability of loss to the
insurance fund unless effective
corrective action is taken.12 Under the
2006 assessments rule, an institution’s
capital and supervisory groups
determine its risk category as set forth
in Table 1 below. (Risk categories
appear in Roman numerals.)
TABLE 1—DETERMINATION OF RISK CATEGORY
Supervisory group
Capital category
A
Well Capitalized ...........................................................................
Adequately Capitalized ................................................................
Undercapitalized ..........................................................................
The 2006 assessments rule established
the following base rate schedule and
allowed the FDIC Board to adjust rates
uniformly from one quarter to the next
B
C
I
II
III
III
IV
up to three basis points above or below
the base schedule, provided that no
single change from one quarter to the
next can exceed three basis points.13
Base assessment rates within Risk
Category I vary from 2 to 4 basis points,
as set forth in Table 2 below.
TABLE 2—CURRENT BASE ASSESSMENT RATES
Risk category
I*
II
Annual Rates (in basis points) .............................................
7
4
IV
25
40
III
IV
10
28
43
Maximum
2
III
II
Minimum
* Rates for institutions that do not pay the minimum or maximum rate vary between these rates.
The 2006 assessments rule set actual
rates beginning January 1, 2007, as set
out in Table 3 below.
TABLE 3—CURRENT ASSESSMENT RATES
Risk category
I*
Minimum
Annual Rates (in basis points) .............................................
Maximum
5
7
*Rates for institutions that do not pay the minimum or maximum rate vary between these rates.
These rates remain in effect. Any
increase in rates above the actual rates
in effect requires a new notice-andcomment rulemaking.
Within Risk Category I, the 2006
assessments rule charges those
institutions that pose the least risk a
minimum assessment rate and those
that pose the greatest risk a maximum
assessment rate two basis points higher
than the minimum rate. The rule
charges other institutions within Risk
Category I a rate that varies
incrementally by institution between
the minimum and maximum.
Within Risk Category I, the 2006
assessments rule combines supervisory
ratings with other risk measures to
further differentiate risk and determine
assessment rates. The financial ratios
method determines the assessment rates
for most institutions in Risk Category I
using a combination of weighted
CAMELS component ratings and the
following financial ratios:
• The Tier 1 Leverage Ratio;
• Loans past due 30–89 days/gross
assets;
• Nonperforming assets/gross assets;
• Net loan charge-offs/gross assets;
and
11 The term ‘‘primary federal regulator’’ is
synonymous with the statutory term ‘‘appropriate
federal banking agency.’’ Section 3(q) of the Federal
Deposit Insurance Act (12 U.S.C. 1813(q)).
12 The capital groups and the supervisory groups
have been in effect since 1993. In practice, the
supervisory group evaluations are generally based
on an institution’s composite CAMELS rating, a
rating assigned by the institution’s supervisor at the
end of a bank examination, with 1 being the best
rating and 5 being the lowest. CAMELS is an
acronym for component ratings assigned in a bank
examination: Capital adequacy, Asset quality,
Management, Earnings, Liquidity, and Sensitivity to
market risk. A composite CAMELS rating combines
these component ratings, which also range from 1
(best) to 5 (worst). Generally speaking, institutions
with a CAMELS rating of 1 or 2 are put in
supervisory group A, those with a CAMELS rating
of 3 are put in group B, and those with a CAMELS
rating of 4 or 5 are put in group C.
13 The Board cannot adjust rates more than 2 basis
points below the base rate schedule because rates
cannot be less than zero.
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Risk Category I
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• Net income before taxes/riskweighted assets.
The weighted CAMELS components and
financial ratios are multiplied by
statistically derived pricing multipliers
and the products, along with a uniform
amount applicable to all institutions
subject to the financial ratios method,
are summed to derive the assessment
rate under the base rate schedule. If the
rate derived is below the minimum for
Risk Category I, however, the institution
will pay the minimum assessment rate
for the risk category; if the rate derived
is above the maximum rate for Risk
Category I, then the institution will pay
the maximum rate for the risk category.
The multipliers and uniform amount
were derived in such a way to ensure
that, as of June 30, 2006, 45 percent of
small Risk Category I institutions (other
than institutions less than 5 years old)
would have been charged the minimum
rate and approximately 5 percent would
have been charged the maximum rate.
While the FDIC has not changed the
multipliers and uniform amount since
adoption of the 2006 assessments rule,
the percentages of institutions that have
been charged the minimum and
maximum rates have changed over time
as institutions’ CAMELS component
ratings and financial ratios have
changed. Based upon June 30, 2008
data, approximately 28 percent of small
Risk Category I institutions (other than
institutions less than 5 years old) were
charged the minimum rate and
approximately 19 percent were charged
the maximum rate.
The debt issuer rating method
determines the assessment rate for large
institutions that have a long-term debt
issuer rating.14 Long-term debt issuer
ratings are converted to numerical
values between 1 and 3 and averaged.
The weighted average of an institution’s
CAMELS components and the average
converted value of its long-term debt
issuer ratings are multiplied by a
common multiplier and added to a
uniform amount applicable to all
institutions subject to the supervisory
and debt ratings method to derive the
assessment rate under the base rate
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14 The
final rule defined a large institution as an
institution (other than an insured branch of a
foreign bank) that has $10 billion or more in assets
as of December 31, 2006 (although an institution
with at least $5 billion in assets may also request
treatment as a large institution). If, after December
31, 2006, an institution classified as small reports
assets of $10 billion or more in its reports of
condition for four consecutive quarters, the FDIC
will reclassify the institution as large beginning the
following quarter. If, after December 31, 2006, an
institution classified as large reports assets of less
than $10 billion in its reports of condition for four
consecutive quarters, the FDIC will reclassify the
institution as small beginning the following quarter.
12 CFR 327.8(g) and (h) and 327.9(d)(6).
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schedule. Again, if the rate derived is
below the minimum for Risk Category I,
the institution will pay the minimum
assessment rate for the risk category; if
the rate derived is above the maximum
for Risk Category I, then the institution
will pay the maximum rate for the risk
category.
The multipliers and uniform amount
were derived in such a way to ensure
that, as of June 30, 2006, about 45
percent of Risk Category I large
institutions (other than institutions less
than 5 years old) would have been
charged the minimum rate and
approximately 5 percent would have
been charged the maximum rate. These
percentages have changed little from
quarter to quarter thereafter even though
industry conditions have changed.
Based upon June 30, 2008, data, and
ignoring the large bank adjustment
(described below), approximately 45
percent of Risk Category I large
institutions (other than institutions less
than 5 years old) were charged the
minimum rate and approximately 11
percent were charged the maximum
rate.
Assessment rates for insured branches
of foreign banks in Risk Category I are
determined using ROCA components.15
For any Risk Category I large
institution or insured branch of a
foreign bank, initial assessment rate
determinations may be modified up to
half a basis point upon review of
additional relevant information (the
large bank adjustment).16
With certain exceptions, beginning in
2010, the 2006 assessments rule charges
new institutions (those established for
less than five years) in Risk Category I,
regardless of size, the maximum rate
applicable to Risk Category I
institutions. Until then, new institutions
are treated like all others, except that a
well-capitalized institution that has not
yet received CAMELS component
ratings is assessed at one basis point
above the minimum rate applicable to
Risk Category I institutions until it
receives CAMELS component ratings.
The Need for a Restoration Plan
As part of a separate rulemaking in
November 2006, the FDIC also set the
15 ROCA stands for Risk Management,
Operational Controls, Compliance, and Asset
Quality. Like CAMELS components, ROCA
component ratings range from 1 (best rating) to a
5 rating (worst rating). Risk Category 1 insured
branches of foreign banks generally have a ROCA
composite rating of 1 or 2 and component ratings
ranging from 1 to 3.
16 The FDIC has issued additional Guidelines for
Large Institutions and Insured Foreign Branches in
Risk Category I (the large bank guidelines)
governing the large bank adjustment. 72 FR 27122
(May 14, 2007).
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DRR at 1.25 percent, effective January 1,
2007. In November 2007, the Board
voted to maintain the DRR at 1.25
percent for 2008.17 In November 2006,
the FDIC projected that the assessment
rate schedule established by the 2006
assessments rule would raise the reserve
ratio from 1.23 percent at the end of the
second quarter of 2006 to 1.25 percent
by 2009.18 At the time, insured
institution failures were at historic lows
(no insured institution had failed in
almost two-and-a-half years prior to the
rulemaking, the longest period in the
FDIC’s history without a failure) and
industry returns on assets (ROAs) were
near all time highs. The FDIC’s
projection assumed the continued
strength of the industry. By March 2008,
the condition of the industry had
deteriorated, and FDIC projected higher
insurance losses compared to recent
years. However, even with this increase
in projected failures and losses, the
reserve ratio was still estimated to reach
the Board’s target of 1.25 percent in
2009. Therefore, the Board voted in
March 2008 to maintain the existing
assessment rate schedule.
Recent failures, as well as
deterioration in banking and economic
conditions, however, have significantly
increased the fund’s loss provisions,
resulting in a decline in the reserve
ratio. As of June 30, 2008, the reserve
ratio stood at 1.01 percent, 18 basis
points below the reserve ratio as of
March 31, 2008. The FDIC expects a
higher rate of insured institution
failures in the next few years compared
to recent years; thus, the reserve ratio
may continue to decline. Because the
reserve ratio has fallen below 1.15
percent and is expected to remain below
1.15 percent, the FDIC must establish
and implement a restoration plan to
restore the reserve ratio to 1.15 percent.
Absent extraordinary circumstances, the
reserve ratio must be restored to 1.15
percent within five years. The FDIC has
adopted a restoration plan (the
Restoration Plan), the critical
component of which is this notice of
proposed rulemaking (NPR).19 To fulfill
17 71 FR 69325 (Nov. 30, 2006) and 72 FR 65576
(Nov. 21, 2007).
18 Beginning in 2007, assessment rates ranged
between 5 and 43 cents per $100 in assessable
deposits. When setting the rate schedule, the FDIC
projects future changes to the fund balance from
losses, operating expenses, assessment and
investment revenue, as well as the outlook for
insured deposit growth. Since the final rule was
issued, the Board has opted to leave rates
unchanged.
19 On October 7, 2008, the FDIC established and
implemented the Restoration Plan, which is being
published in the Federal Register as a companion
to this NPR. To determine whether the reserve ratio
has returned to the statutory range within five
years, the FDIC will rely on the December 31, 2013
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the requirements of the Restoration
Plan, the FDIC must increase the
assessment rates it currently charges.
Since the current rates are already 3
basis points uniformly above the base
rate schedule established in the 2006
assessments rule, a new rulemaking is
required. The FDIC is also proposing
other changes to the assessment system,
primarily to ensure that riskier
institutions will bear a greater share of
the proposed increase in assessments.
II. Overview of the Proposal
In this notice of proposed rulemaking,
the FDIC proposes to improve the way
the assessment system differentiates risk
among insured institutions by drawing
upon measures of risk that were not
included when the FDIC first revised its
assessment system pursuant to the
Reform Act. The FDIC believes that the
proposal will make the assessment
system more sensitive to risk. The
proposal should also make the riskbased assessment system fairer, by
limiting the subsidization of riskier
institutions by safer ones. In addition,
the FDIC proposes to change assessment
rates, including base assessment rates,
to raise assessment revenue required
under the Restoration Plan.
The FDIC’s proposals are set out in
detail in ensuing sections, but are
briefly summarized here. These
changes, except for the proposed rate
increase for the first quarter of 2009,
which is discussed below, would take
effect April 1, 2009.
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Risk Category I
The FDIC proposes to introduce a new
financial ratio into the financial ratios
method. This new ratio would capture
brokered deposits (in excess of 10
percent of domestic deposits) that are
used to fund rapid asset growth. In
addition, the FDIC proposes to update
the uniform amount and the pricing
multipliers for the weighted average
CAMELS rating and financial ratios.
The FDIC proposes that the
assessment rate for a large institution
with a long-term debt issuer rating be
determined using a combination of the
institution’s weighted average CAMELS
component rating, its long-term debt
issuer ratings (converted to numbers
and averaged) and the financial ratios
method assessment rate, each equally
weighted. The new method would be
known as the large bank method.
reserve ratio, which is the first date after October
7, 2013 for which the reserve ratio will be known.
20 Long-term unsecured debt includes senior
unsecured and subordinated debt.
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Under the proposal, the financial
ratios method or the large bank method,
whichever is applicable, would
determine a Risk Category I institution’s
initial base assessment rate. The FDIC
proposes to broaden the spread between
minimum and maximum initial base
assessment rates in Risk Category I from
the current 2 basis points to an initial
range of 4 basis points and to adjust the
percentage of institutions subject to
these initial minimum and maximum
rates.
Adjustments
Under the proposal, an institution’s
total base assessment rate could vary
from the initial base rate as the result of
possible adjustments. The FDIC
proposes to increase the maximum
possible Risk Category I large bank
adjustment from one-half basis point to
one basis point. Any such adjustment
up or down would be made before any
other adjustment and would be subject
to certain limits, which are described in
detail below.
The FDIC proposes to lower an
institution’s base assessment rate based
upon its ratio of long-term unsecured
debt and, for small institutions, certain
amounts of Tier 1 capital to domestic
deposits (the unsecured debt
adjustment).20 Any decrease in base
assessment rates would be limited to
two basis points.
The FDIC proposes to raise an
institution’s base assessment rate based
upon its ratio of secured liabilities to
domestic deposits (the secured liability
adjustment). An institution’s ratio of
secured liabilities to domestic deposits
(if greater than 15 percent), would
increase its assessment rate, but the
resulting base assessment rate after any
such increase could be no more than
50 percent greater than it was before the
adjustment. The secured liability
adjustment would be made after any
large bank adjustment or unsecured debt
adjustment.
An institution in Risk Category II, III
or IV would be subject to the unsecured
debt adjustment and secured liability
adjustment. In addition, the FDIC
proposes a final adjustment for brokered
deposits (the brokered deposit
adjustment) for institutions in these risk
categories. An institution’s ratio of
brokered deposits to domestic deposits
(if greater than 10 percent) would
increase its assessment rate, but any
21 Subject to exceptions, a new insured
depository institution is a bank or thrift that has not
been chartered for at least five years as of the last
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increase would be limited to no more
than 10 basis points.
Insured Branches of Foreign Banks
The FDIC proposes to make
conforming changes to the pricing
multipliers and uniform amount for
insured branches of foreign banks in
Risk Category I. The insured branch of
a foreign bank’s initial base assessment
rate would be subject to any large bank
adjustment, but not to the unsecured
debt adjustment or secured liability
adjustment.
New Institutions
The FDIC also proposes to make
conforming changes in the treatment of
new insured depository institutions.21
For assessment periods beginning on or
after January 1, 2010, any new
institutions in Risk Category I would be
assessed at the maximum initial base
assessment rate applicable to Risk
Category I institutions, as under the
current rule.
Effective for assessment periods
beginning before January 1, 2010, until
a Risk Category I new institution
received CAMELS component ratings, it
would have an initial base assessment
rate that was two basis points above the
minimum initial base assessment rate
applicable to Risk Category I
institutions, rather than one basis point
above the minimum rate, as under the
current rule. All other new institutions
in Risk Category I would be treated as
are established institutions, except as
provided in the next paragraph.
Either before or after January 1, 2010:
No new institution, regardless of risk
category, would be subject to the
unsecured debt adjustment; any new
institution, regardless of risk category,
would be subject to the secured liability
adjustment; and a new institution in
Risk Categories II, III or IV would be
subject to the brokered deposit
adjustment. After January 1, 2010, no
new institution in Risk Category I would
be subject to the large bank adjustment.
Assessment Rates
To implement the proposed changes
to risk-based assessments described
above and to raise sufficient revenue to
ensure that the goals of the Restoration
Plan are accomplished within 5 years as
required by statute, initial base
assessment rates would be as set forth
in Table 4 below.
day of any quarter for which it is being assessed.
12 CFR 327.8(l)
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TABLE 4—PROPOSED INITIAL BASE ASSESSMENT RATES
Risk category
I*
II
14
IV
30
45
Maximum
10
III
20
Minimum
Annual Rates (in basis points) .............................................................................
* Initial base rates that were not the minimum or maximum rate would vary between these rates.
After applying all possible
adjustments, minimum and maximum
total base assessment rates for each risk
category would be as set out in Table 5
below.
TABLE 5—TOTAL BASE ASSESSMENT RATES
Risk
category
I
Risk
category
II
Risk
category
III
Risk
category
IV
Initial base assessment rate ................................................................
Unsecured debt adjustment .................................................................
Secured liability adjustment .................................................................
Brokered deposit adjustment ...............................................................
10–14 ...............
¥2–0 ................
0–7 ...................
......................
20 .....................
¥2–0 ................
0–10 .................
0–10 .................
30 .....................
¥2–0 ................
0–15 .................
0–10 .................
45
¥2–0
0–22.5
0–10
Total base assessment rate .........................................................
8–21.0 ..............
18–40.0 ............
28–55.0 ............
43–77.5
* All amounts for all risk categories are in basis points annually. Total base rates that were not the minimum or maximum rate would vary between these rates.
The FDIC proposes that these rates
and other revisions to the assessment
rules take effect for the quarter
beginning April 1, 2009, and be
reflected in the fund balance as of June
30, 2009, and assessments due
September 30, 2009. However, at the
time of the issuance of the final rule the
FDIC may need to set a higher base rate
schedule based on information available
at that time, including any intervening
institution failures and updated failure
and loss projections. A higher base rate
schedule may also be necessary because
of changes to the proposal in the final
rule, if these changes have the overall
effect of changing revenue for a given
rate schedule.
The proposed rule would continue to
allow the FDIC Board to adopt actual
rates that were higher or lower than
total base assessment rates without the
necessity of further notice and comment
rulemaking, provided that: (1) The
Board could not increase or decrease
rates from one quarter to the next by
more than three basis points without
further notice-and-comment
rulemaking; and (2) cumulative
increases and decreases could not be
more than three basis points higher or
lower than the total base rates without
further notice-and-comment
rulemaking.
The FDIC also proposes to raise the
current rates uniformly by seven basis
points for the assessment for the quarter
beginning January 1, 2009, which would
be reflected in the fund balance as of
March 31, 2009, and assessments due
June 30, 2009. Rates for the first quarter
of 2009 only would be as follows:
TABLE 6—PROPOSED ASSESSMENT RATES FOR THE FIRST QUARTER OF 2009
Risk category
I*
II
14
Annual Rates (in basis points) .............................................................................
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*Rates
IV
35
50
Maximum
12
III
17
Minimum
for institutions that did not pay the minimum or maximum rate would vary between these rates.
The proposed rates for the first quarter
of 2009 would raise almost as much
assessment revenue as under the rates
proposed beginning April 1, 2009. Data
and system requirements do not make it
feasible to adopt the proposed changes
to the risk-based assessment system
discussed in previous paragraphs until
the second quarter of 2009.
Technical and Other Changes
The FDIC also proposes to make
technical changes and one minor non-
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technical change to existing assessment
rules. These changes, which would be
effective April 1, 2009, are detailed
below.
risk factors should be used to determine riskbased assessments or that a new method of
differentiating for risk should be used. In any
of these events, changes would be made
through notice-and-comment rulemaking.22
III. Risk Category I: Financial Ratios
Method
The FDIC has reached such a
conclusion and proposes to add a new
financial measure to the financial ratios
method. This new financial measure,
the adjusted brokered deposit ratio,
would measure the extent to which
Brokered Deposits and Asset Growth
The FDIC stated in the 2006
assessments rule that it:
[M]ay conclude that additional or
alternative financial measures, ratios or other
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brokered deposits are funding rapid
asset growth. The adjusted brokered
deposit ratio would affect only those
established Risk Category I institutions
whose total assets were more than 20
percent greater than they had been four
years previously, after adjusting for
mergers and acquisitions, and whose
brokered deposits made up more than
10 percent of domestic deposits.23 24
Generally speaking, the greater an
institution’s asset growth and the greater
its percentage of brokered deposits, the
greater would be the increase in its
initial base assessment rate.
If an institution’s ratio of brokered
deposits to domestic deposits were 10
percent or less or if the institution’s
asset growth over the previous four
years were less than 20 percent, the
adjusted brokered deposit ratio would
be zero and would have no effect on the
institution’s assessment rate. If an
institution’s ratio of brokered deposits
to domestic deposits exceeded 10
percent and its asset growth over the
previous four years were more than 40
percent, the adjusted brokered deposit
ratio would equal the institution’s ratio
of brokered deposits to domestic
deposits less the 10 percent threshold.
If an institution’s ratio of brokered
deposits to domestic deposits exceeded
10 percent but its asset growth over the
previous four years were between 20
percent and 40 percent, the adjusted
brokered deposit ratio would be equal to
a gradually increasing fraction of the
ratio of brokered deposits to domestic
deposits (minus the 10 percent
threshold), so that small increases in
asset growth rates would lead to only
small increases in assessment rates.
Overall asset growth rates of 20 to 40
percent would be transformed into a
fraction between 0 and 1 by multiplying
an amount equal to the overall rate of
growth minus 20 percent by 5 and
expressing the result as a number rather
than as a percentage (so that, for
example, 5 times 10 percent would
equal 0.500).25 The adjusted brokered
deposit ratio would never be less than
zero. Appendix A contains a detailed
mathematical definition of the ratio.
Table 7 gives examples of how the
adjusted brokered deposit ratio would
be determined.
TABLE 7—ADJUSTED BROKERED DEPOSIT RATIO
A
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C
D
E
F
Example
1
2
3
4
5
B
Ratio of brokered
deposits to
domestic deposits
Ratio of brokered
deposits to domestic
deposits minus 10
percent threshold
(Column B minus
10 percent)
Cumulative asset
growth rate over four
years
Asset growth rate
factor
Adjusted brokered
deposit ratio
(Column C times
column E)
...............................
...............................
...............................
...............................
...............................
5.0%
15.0%
5.0%
35.0%
25.0%
0.0%
5.0%
0.0%
25.0%
15.0%
5.0%
5.0%
25.0%
30.0%
50.0%
....................................
....................................
0.250
0.500
1.000
0.0%
0.0%
0.0%
12.5%
15.0%
In Examples 1, 2 and 3, either the
institution has a ratio of brokered
deposits to domestic deposits that is less
than 10 percent (Column B) or its fouryear asset growth rate is less than 20
percent (Column D). Consequently, the
adjusted brokered deposit ratio is zero
(Column F). In Example 4, the
institution has a ratio of brokered
deposits to domestic deposits of 35
percent (Column B), which, after
subtracting the 10 percent threshold,
leaves 25 percent (Column C). Its assets
are 30 percent greater than they were
four years previously (Column D), so the
fraction applied to obtain the adjusted
brokered deposit ratio is 0.5 (Column E)
(calculated as 5 · (30 percent¥20
percent, with the result expressed as a
number rather than as a percentage)). Its
adjusted brokered deposit ratio is,
therefore, 12.5 percent (Column F)
(which is 0.5 times 25 percent). In
Example 5, the institution has a lower
ratio of brokered deposits to domestic
deposits (25 percent in Column B) than
in Example 4 (35 percent). However, its
adjusted brokered deposit ratio (15
percent in Column F) is larger than in
Example 4 (12.5 percent) because its
assets are more than 40 percent greater
than they were four years previously
(Column D). Therefore, its adjusted
brokered deposit ratio is equal to its
brokered deposit to domestic deposit
ratio of 25 percent minus the 10 percent
threshold (Column F).
The FDIC is proposing this new risk
measure for a couple of reasons. A
number of costly institution failures,
including some recent failures, have
experienced rapid asset growth before
failure and have funded this growth
through brokered deposits. Moreover,
statistical analysis reveals a significant
correlation between rapid asset growth
funded by brokered deposits and the
probability of an institution’s being
downgraded from a CAMELS composite
1 or 2 rating to a CAMELS composite 3,
4 or 5 rating within a year. A significant
correlation is the standard the FDIC
used when it adopted the financial
ratios method in the 2006 assessments
rule.
The proposed rule would adopt the
definition of brokered deposit in Section
29 of the Federal Deposit Insurance Act
(12 U.S.C. 1831f), which is the
definition used in banks’ quarterly
Reports of Condition and Income (Call
Reports) and thrifts’ quarterly Thrift
Financial Reports (TFRs). The FDIC is
proposing that all brokered deposits be
included in an institution’s ratio of
brokered deposits to domestic deposits
used to determine its adjusted brokered
deposit ratio, including brokered
deposits that consist of balances swept
into an insured institution by another
institution, such as balances swept from
a brokerage account. At present, it
would be impossible to exclude these
deposits, since institutions do not
separately report them in the Call
23 Generally, an established institution is a bank
or thrift that has been chartered for at least five
years as of the last day of any quarter for which it
is being assessed. 12 CFR 327.8(m).
24 An institution that four years previously had
filed no report of condition or had reported no
assets would be treated as having no growth unless
it was a participant in a merger or acquisition
(either as the acquiring or acquired institution) with
an institution that had reported assets four years
previously.
25 The ratio of brokered deposits to domestic
deposits and four-year asset growth rate would
remain unrounded (to the extent of computer
capabilities) when calculating the adjusted brokered
deposit ratio. The adjusted brokered deposit ratio
itself (expressed as a percentage) would be rounded
to three digits after the decimal point prior to being
used to calculate the assessment rate.
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Report or TFR. Moreover, sweep
programs may be structured so that
swept balances are not brokered
deposits.26 Nevertheless, the FDIC is
particularly interested in comments on
whether brokered deposits that consist
of swept balances should be excluded
from the ratio and, if so, how they
should be excluded.
The proposed definition of brokered
deposits would also include amounts an
institution receives through a network
that divides large deposits and places
them at more than one institution to
ensure that the deposit is fully insured,
even where the institution accepts these
deposits only on a reciprocal basis, such
that, for any deposit received, the
institution places the same amount (but
held by a different depositor) with
another institution through the network.
At present, it would again be impossible
to exclude these deposits, since
institutions do not separately report
them in the Call Report or TFR. The
FDIC is also particularly interested in
comments on whether these deposits
should be excluded from the ratio and,
if so, how they should be excluded.
The proposed definition would
exclude amounts not defined as a
brokered deposit by statute. Thus, many
high cost deposits would be excluded
from the definition, potentially
including those received through listing
services or the Internet. At present, it
would be impossible to include these
deposits, since institutions do not
separately report them in the Call
Report or TFR. Nevertheless, the FDIC is
particularly interested in comments on
whether these deposits should be
included in the definition of brokered
deposits for purposes of the adjusted
brokered deposit ratio and, if so, how
they should be included.
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Pricing Multipliers and the Uniform
Amount
The FDIC also proposes to recalculate
the uniform amount and the pricing
multipliers for the weighted average
26 For example, a swept deposit may not be a
brokered deposit if: (1) Balances are swept for the
primary purposes of facilitating customers’
purchase and sale of securities, rather than the
placement of funds with depository institutions; (2)
swept amounts do not exceed 10 percent of the
brokerage’s cash management account and
retirement account assets; and (3) fees are paid on
a per customer or account basis, rather than size of
account basis, and are for administrative services,
rather than for placement of deposits. Are Funds
Held in ‘‘Cash Management Accounts’’ Viewed as
Brokered Deposits by the FDIC? (FDIC Advisory
Opinion 05–02 Feb. 3, 2005).
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CAMELS component rating and
financial ratios. The existing uniform
amount and pricing multipliers were
derived from a statistical estimate of the
probability that an institution will be
downgraded to CAMELS 3, 4 or 5 at its
next examination using data from the
end of the years 1984 to 2004.27 These
probabilities were then converted to
pricing multipliers for each risk
measure. The proposed new pricing
multipliers were derived using
essentially the same statistical
techniques, but based upon data from
the end of the years 1988 to 2006.28 The
proposed new pricing multipliers are set
out in Table 8 below.
TABLE 8—PROPOSED NEW PRICING
MULTIPLIERS
Pricing
multipliers**
Risk measures*
Tier 1 Leverage Ratio .............
Loans Past Due 30—89 Days/
Gross Assets .......................
Nonperforming Assets/Gross
Assets .................................
Net Loan Charge-Offs/Gross
Assets .................................
Net Income before Taxes/
Risk-Weighted Assets .........
Adjusted Brokered Deposit
Ratio ....................................
Weighted Average CAMELS
Component Rating ..............
(0.056)
0.576
1.073
1.213
(0.762)
0.055
1.088
* Ratios are expressed as percentages.
** Multipliers are rounded to three decimal
places.
To determine an institution’s initial
assessment rate under the base
assessment rate schedule, each of these
risk measures (that is, each institution’s
financial measures and weighted
average CAMELS component rating)
would continue to be multiplied by the
corresponding pricing multipliers. The
sum of these products would be added
to (or subtracted from) a new uniform
amount, 9.872.29 The new uniform
27 Data on downgrades to CAMELS 3, 4 or 5 is
from the years 1985 to 2005. The ‘‘S’’ component
rating was first assigned in 1997. Because the
statistical analysis relies on data from before 1997,
the ‘‘S’’ component rating was excluded from the
analysis.
28 For the adjusted brokered deposit ratio, assets
at the end of each year are compared to assets at
the end of the year four years earlier, so assets at
the end of 1988, for example, are compared to assets
at the end of 1984.
29 Appendix A provides the derivation of the
pricing multipliers and the uniform amount to be
added to compute an assessment rate. The rate
derived will be an annual rate, but will be
determined every quarter.
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amount is also derived from the same
statistical analysis.30 As at present, no
initial base assessment rate within Risk
Category I would be less than the
minimum initial base assessment rate
applicable to the category or higher than
the initial base maximum assessment
rate applicable to the category. The
proposed rule would set the initial
minimum base assessment rate for Risk
Category I at 10 basis points and the
maximum initial base assessment rate
for Risk Category I at 14 basis points.
To compute the values of the uniform
amount and pricing multipliers shown
above, the FDIC chose cutoff values for
the predicted probabilities of
downgrade such that, using June 30,
2008 Call Report and TFR data: (1) 25
percent of small institutions in Risk
Category I (other than institutions less
than 5 years old) would have been
charged the minimum initial assessment
rate; and (2) 15 percent of small
institutions in Risk Category I (other
than institutions less than 5 years old)
would have been charged the maximum
initial assessment rate.31 These cutoff
values would be used in future periods,
which could lead to different
percentages of institutions being
charged the minimum and maximum
rates.
In comparison, under the current
system: (1) Approximately 28 percent of
small institutions in Risk Category I
(other than institutions less than 5 years
old) were charged the existing minimum
assessment rate; and (2) approximately
19 percent of small institutions in Risk
Category I (other than institutions less
than 5 years old) were charged the
existing maximum assessment rate
based on June 30, 2008 data.
Table 9 gives initial base assessment
rates for three institutions with varying
characteristics, assuming the proposed
new pricing multipliers given above,
using initial base assessment rates for
institutions in Risk Category I of 10
basis points to 14 basis points.32
30 The uniform amount would be the same for all
institutions in Risk Category I (other than large
institutions that have long-term debt issuer ratings,
insured branches of foreign banks and, beginning in
2010, new institutions).
31 The cutoff value for the minimum assessment
rate is a predicted probability of downgrade of
approximately 2 percent. The cutoff value for the
maximum assessment rate is approximately 15
percent.
32 These are the initial base rates for Risk Category
I proposed below.
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61567
TABLE 9—INITIAL BASE ASSESSMENT RATES FOR THREE INSTITUTIONS *
Institution 1
Pricing
multiplier
A
Institution 3
Risk measure value
Contribution
to assessment rate
Risk measure value
Contribution
to assessment rate
Risk measure value
Contribution
to assessment rate
C
D
E
F
G
H
B
Uniform Amount .......................................
Tier 1 Leverage Ratio (%) .......................
Loans Past Due 30–89 Days/Gross Assets (%) ................................................
Nonperforming Loans/Gross Assets (%)
Net Loan Charge-Offs/Gross Assets(%)
Net Income Before Taxes/Risk-Weighted
Assets (%) ............................................
Adjusted Brokered Deposit Ratio (%) ......
Weighted Average CAMELS Component
Ratings .................................................
Sum of contributions ................................
Initial Base Assessment Rate ..................
Institution 2
9.872
(0.056)
....................
9.590
9.872
(0.537)
....................
8.570
9.872
(0.480)
....................
7.500
9.872
(0.420)
0.576
1.073
1.213
0.400
0.200
0.147
0.230
0.215
0.178
0.600
0.400
0.079
0.345
0.429
0.096
1.000
1.500
0.300
0.576
1.610
0.364
(0.762)
0.055
2.500
0.000
(1.905)
0.000
1.951
12.827
(1.487)
0.705
0.518
24.355
(0.395)
1.340
1.088
....................
....................
1.200
....................
....................
1.306
9.36
10.00
1.450
....................
....................
1.578
11.06
11.06
2.100
....................
....................
2.285
15.23
14.00
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* Figures may not multiply or add to totals due to rounding.33
The initial base assessment rate for an
institution in the table is calculated by
multiplying the pricing multipliers
(Column B) by the risk measure values
(Column C, E or G) to produce each
measure’s contribution to the
assessment rate. The sum of the
products (Column D, F or H) plus the
uniform amount (the first item in
Column D, F and H) yields the initial
base assessment rate. For Institution 1 in
the table, this sum actually equals 9.36
basis points, but the table reflects the
proposed initial base minimum
assessment rate of 10 basis points. For
Institution 3 in the table, the sum
actually equals 15.23 basis points, but
the table reflects the proposed initial
base maximum assessment rate of 14
basis points.
Under the proposed rule, the FDIC
would continue to have the flexibility to
update the pricing multipliers and the
uniform amount annually, without
further notice-and-comment
rulemaking. In particular, the FDIC
would be able to add data from each
new year to its analysis and could, from
time to time, exclude some earlier years
from its analysis. Because the analysis
would continue to use many earlier
years’ data as well, pricing multiplier
changes from year to year should
usually be relatively small.
On the other hand, as a result of the
annual review and analysis, the FDIC
may conclude, as it has in the proposed
rule, that additional or alternative
financial measures, ratios or other risk
33 Under the proposed rule, pricing multipliers,
the uniform amount, and financial ratios would
continue to be rounded to three digits after the
decimal point. Resulting assessment rates would be
rounded to the nearest one-hundredth (1/100th) of
a basis point.
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factors should be used to determine
risk-based assessments or that a new
method of differentiating for risk should
be used. In any of these events, the FDIC
would again make changes through
notice-and-comment rulemaking.
Financial measures for any given
quarter would continue to be calculated
from the report of condition filed by
each institution as of the last day of the
quarter.34 CAMELS component rating
changes would continue to be effective
as of the date that the rating change is
transmitted to the institution for
purposes of determining assessment
rates for all institutions in Risk Category
I.35
IV. Risk Category I: Large Bank Method
For large Risk Category I institutions
now subject to the debt issuer rating
method, the FDIC proposes to derive
assessment rates from the financial
ratios method as well as long-term debt
issuer ratings and CAMELS component
ratings. The new method would be
known as the large bank method. The
rate using the financial ratios method
would first be converted from the range
of initial base rates (10 to 14 basis
points) to a scale from 1 to 3 (financial
34 Reports of condition include Reports of Income
and Condition and Thrift Financial Reports.
35 Pursuant to existing supervisory practice, the
FDIC does not assign a different component rating
from that assigned by an institution’s primary
federal regulator, even if the FDIC disagrees with a
CAMELS component rating assigned by an
institution’s primary federal regulator, unless: (1)
the disagreement over the component rating also
involves a disagreement over a CAMELS composite
rating; and (2) the disagreement over the CAMELS
composite rating is not a disagreement over whether
the CAMELS composite rating should be a 1 or a
2. The FDIC has no plans to alter this practice.
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ratios score).36 The financial ratios score
would be given a 331⁄3 percent weight in
determining the large bank method
assessment rate, as would both the
weighted average CAMELS component
rating and debt-agency ratings.
The weights of the CAMELS
components would remain the same as
in the current rule. The values assigned
to the debt issuer ratings would also
remain the same. The weighted
CAMELS components and debt issuer
ratings would continue to be converted
to a scale from 1 to 3, as they are
currently.
The initial base assessment rate under
the large bank method would be derived
as follows: (1) An assessment rate
computed using the financial ratios
method would be converted to a
financial ratios score; (2) the weighted
average CAMELS rating, converted longterm debt issuer ratings, and the
financial ratios score would each be
multiplied by a pricing multiplier and
the products summed; and (3) a uniform
amount would be added to the result.
The resulting initial base assessment
rate would be subject to a minimum and
a maximum assessment rate. The
pricing multiplier for the weighted
average CAMELS ratings, converted
long-term debt issuer rating and
financial ratios score would be 1.764,
36 The assessment rate computed using the
financial ratios method would be converted to a
financial ratios score by first subtracting 8 from the
financial ratios method assessment rate and then
multiplying the result by one-half. For example, if
an institution had an initial base assessment rate of
11, 8 would be subtracted from 11 and the result
would be multiplied by one-half to produce a
financial ratios score of 1.5.
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and the uniform amount would be
1.651.37
In recent periods, assessment rates for
some large institutions have not
responded in a timely manner to rapid
changes in these institutions’ financial
conditions. Based on June 30, 2008 data
and ignoring large bank adjustments,
under the current system: (1) 45 percent
of large institutions in Risk Category I
(other than institutions less than 5 years
old) would have been charged the
existing minimum assessment rate,
compared with 28 percent of small
institutions; and (2) 11 percent of large
institutions in Risk Category I (other
than institutions less than 5 years old)
would have been charged the existing
maximum assessment rate, compared
with 19 percent of small institutions.
The FDIC’s proposed values for pricing
multipliers and the uniform amount are
such that, using June 30, 2008 data, the
percentages of large institutions in Risk
Category I (other than new institutions
less than 5 years old) that would have
been charged the minimum and
maximum initial base assessment rates
would be the same as the percentages of
small institutions that would have been
charged these rates (25 percent at the
minimum rate and 15 percent at the
maximum rate).38 39 These cutoff values
would be used in future periods, which
could lead to different percentages of
institutions being charged the minimum
and maximum rates.
Large institutions that lack a longterm debt issuer rating are currently
assessed using the financial ratios
method by itself. This will continue
under the proposed rule.
Under the proposed rule, the initial
base assessment rate for an institution
with a weighted average CAMELS
converted value of 1.70, a debt issuer
ratings converted value of 1.65 and a
financial ratios method assessment rate
of 11.50 basis points would be
computed as follows:
• The financial ratios method
assessment rate less 8 basis points
37 Appendix 1 provides the derivation of the
pricing multipliers and the uniform amount.
38 The cutoff value for the minimum assessment
rate is an average score of approximately 1.578. The
cutoff value for the maximum assessment rate is
approximately 2.334.
39 A ‘‘new’’ institution, as defined in 12 CFR
327.8(l) is generally one that is less than 5 years old,
but there are several exceptions, including, for
example, certain otherwise new institutions in
certain holding company structures. 12 CFR
327.9(d)(7). The calculation of percentages of small
institutions, however, was determined strictly by
excluding institutions less than 5 years old, rather
than by using the definition of a ‘‘new’’ institution
and its regulatory exceptions, since determination
of whether an institution meets an exception to the
definition of ‘‘new’’ requires a case-by-case
investigation.
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would be multiplied by one-half
(calculated as (11.5 basis points ¥ 8
basis points) · 0.5) to produce a financial
ratios score of 1.75.
• The weighted average CAMELS
score, debt ratings score and financial
ratios score would each be multiplied
by 1.764 and summed (calculated as
1.70 · 1.764 + 1.65 · 1.764 + 1.75 · 1.764)
to produce 8.996.
• A uniform amount of 1.651 would
be added, resulting in an initial base
assessment rate of 10.65 basis points.
The FDIC anticipates that
incorporating the financial ratios score
into the large bank method assessment
rate would result in a more accurate
distribution of initial assessment rates
and in timelier assessment rate
responses to changing risk profiles,
while retaining the market and
supervisory perspectives that debt and
CAMELS ratings provide. A more
accurate distribution of initial
assessment rates should require fewer
large bank adjustments to rates based
upon reviews of additional relevant
information.40
V. Adjustment for Large Institutions
and Insured Branches of Foreign Banks
in Risk Category I
Under current rules, within Risk
Category I, large institutions and
insured branches of foreign banks are
subject to an assessment rate adjustment
(the large bank adjustment). In
determining whether to make such an
adjustment for a large institution or an
insured branch of a foreign bank, the
FDIC may consider such information as
financial performance and condition
information, other market or
supervisory information, potential loss
severity, and stress considerations. Any
large bank adjustment is limited to a
change in assessment rate of up to 0.5
basis points higher or lower than the
rate determined using the supervisory
ratings and financial ratios method, the
supervisory and debt ratings method, or
the weighted average ROCA component
rating method, whichever is applicable.
Adjustments are meant to preserve
consistency in the orderings of risk
indicated by assessment rates, to ensure
fairness among all large institutions, and
to ensure that assessment rates take into
account all available information that is
relevant to the FDIC’s risk-based
assessment decision.
The FDIC proposes to increase the
maximum possible large bank
adjustment to one basis point and to
40 The FDIC has issued additional Guidelines for
Large Institutions and Insured Foreign Branches in
Risk Category I (the large bank guidelines)
governing these large bank adjustments. 72 FR
27122 (May 14, 2007).
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make the adjustment to an institution’s
base assessment rate before any other
adjustments are made. The adjustment
could not: (1) Decrease any rate so that
the resulting rate would be less than the
minimum initial base assessment rate;
or (2) increase any rate above the
maximum initial base assessment rate.
The FDIC makes this proposal for two
primary reasons. First, at present, the
difference between the minimum and
maximum base assessment rates in Risk
Category I is two basis points. The
maximum one-half basis point large
bank adjustment represents 25 percent
of the difference between the minimum
and maximum rates. While an
adjustment of this size is generally
sufficient to preserve consistency in the
orderings of risk indicated by
assessment rates and to ensure fairness,
there have been circumstances where
more than a half a basis point
adjustment would have been warranted.
The difference between the minimum
and maximum base assessment rates
would increase from two basis points
under the current system to four basis
points under the proposal. A half basis
point large bank adjustment would
represent only 12.5 percent of the
difference between the minimum and
maximum rates and would not be
sufficient to preserve consistency in the
orderings of risk indicated by
assessment rates or to ensure fairness.
The proposed increase in the maximum
possible large bank adjustment would
continue to represent 25 percent of the
difference between the minimum and
maximum rates.
The FDIC expects that, under the
proposed rule, large bank adjustments
would be made infrequently and for a
limited number of institutions.41 The
FDIC’s view is that the use of
supervisory ratings, financial ratios and
agency ratings (when available) would
sufficiently reflect the risk profile and
rank orderings of risk in large Risk
Category I institutions in most (but not
all) cases.
The FDIC expects to revise its large
bank guidelines. Until then, the
guidelines would be applied taking into
account the changes resulting from this
rulemaking.
41 In the six quarters since the 2006 assessment
rule went into effect, the total number of
adjustments in any one quarter has ranged from 2
to 13. For the second quarter of 2008, the FDIC
continued or implemented assessment rate
adjustments for 13 large Risk Category I institutions,
12 to increase an institution’s assessment rate, and
1 to decrease an institution’s assessment rate.
Additionally, the FDIC sent four institutions
advance notification of a potential upward
adjustment in their assessment rate.
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VI. Adjustment for Unsecured Debt for
all Risk Categories
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The FDIC proposes to lower an
institution’s initial base assessment rate
(after making any large bank
adjustment) using its ratio of long-term
unsecured debt (and, for small
institutions, certain amounts of Tier 1
capital) to domestic deposits.42 Any
decrease in base assessment rates as a
result of this unsecured debt adjustment
would be limited to two basis points.
For a large institution, the unsecured
debt adjustment would be determined
by multiplying the institution’s longterm unsecured debt as a percentage of
domestic deposits by 20 basis points.
For example, a large institution with a
long-term unsecured debt to domestic
deposits ratio of 3.0 percent would see
its initial base assessment rate reduced
by 0.60 basis points (calculated as 20
basis points · 0.03). An institution with
a long-term unsecured debt ratio to
domestic deposits of 11.0 percent would
have its assessment rate reduced by two
basis points, since the maximum
possible reduction would be two basis
points. (20 basis points · 0.11 = 2.20
basis points, which exceeds the
maximum possible reduction.)
For a small institution, the unsecured
debt adjustment would factor in a
certain amount of Tier 1 capital
(qualified Tier 1 capital) in addition to
long-term unsecured debt. The amount
of qualified Tier 1 capital would be the
sum of one-half of the amount between
10 percent and 15 percent of adjusted
average assets (between 2 and 3 times
the minimum Tier 1 leverage ratio
requirement to be a well-capitalized
institution) and the full amount of Tier
1 capital exceeding 15 percent of
adjusted average assets (above 3 times
the minimum Tier 1 leverage ratio
requirement to be a well-capitalized
institution).43 The sum of qualified Tier
1 capital and long-term unsecured debt
as a percentage of domestic deposits
would be multiplied by 20 basis points
to produce the unsecured debt
adjustment.44
42 For this purpose, an institution would be
‘‘small’’ if it met the definition of a small institution
in 12 CFR 327.8(g)—generally, an institution with
less than $10 billion in assets—except that it would
not include an institution that would otherwise
meet the definition for which the FDIC had granted
a request to be treated as a large institution
pursuant to 12 CFR 327.9(d)(6).
43 Adjusted average assets would be used for Call
Report filers; adjusted total assets would be used for
TFR filers.
44 The percentage of qualified Tier 1 capital and
long-term unsecured debt to domestic deposits will
remain unrounded (to the extent of computer
capabilities). The unsecured debt adjustment will
be rounded to two digits after the decimal point
prior to being applied to the base assessment rate.
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For example, consider a small
institution with no long-term unsecured
debt and a Tier 1 leverage ratio of 17
percent. Assume that each percentage
point of the Tier 1 capital ratio equated
to a ratio of Tier 1 capital to domestic
deposits of 1.1 percent. The unsecured
debt adjustment for the portion of
capital between 10 percent and 15
percent of adjusted average assets would
be 0.55 basis points (calculated as 20
basis points · (1.1 · 0.5 · (0.15—0.10)).45
The unsecured debt adjustment for the
portion of capital above 15 percent of
adjusted gross assets would be 0.44
basis points (calculated as 20 basis
points · (1.1 · (0.17–0.15)). The sum of
the two portions of the adjustment
equals 0.99 basis points.
Ratios for any given quarter would be
calculated from the report of condition
filed by each institution as of the last
day of the quarter.
As noted above, unsecured debt
would include senior unsecured and
subordinated debt. A senior unsecured
liability would be defined as the
unsecured portion of other borrowed
money.46 Subordinated debt would be
as defined in the report of condition for
the reporting period.47 Long-term
unsecured debt would be defined as
unsecured debt with at least one year
Appendix 2 describes the unsecured debt
adjustment for a small institution mathematically.
45 Adjusted average assets would be used for Call
Report filers; adjusted total assets would be used for
TFR filers.
46 Other borrowed money is reported on the Call
Report in Schedule RC, item 16 and on the Thrift
Financial Report as the sum of items SC720, SC740,
and SC760.
47 The definition of ‘‘subordinated debt’’ in the
Call Report is contained in the Glossary under
‘‘Subordinated Notes and Debentures.’’ For the June
30, 2008 Call Report, the definition read, in
pertinent part, as follows:
Subordinated Notes and Debentures: A
subordinated note or debenture is a form of debt
issued by a bank or a consolidated subsidiary.
When issued by a bank, a subordinated note or
debenture is not insured by a federal agency, is
subordinated to the claims of depositors, and has
an original weighted average maturity of five years
or more. Such debt shall be issued by a bank with
the approval of, or under the rules and regulations
of, the appropriate federal bank supervisory agency
* * *
When issued by a subsidiary, a note or debenture
may or may not be explicitly subordinated to the
deposits of the parent bank * * *
For purposes of the proposed rule, subordinated
debt would also include limited-life preferred stock
as defined in the report of condition for the
reporting period. The definition of ‘‘limited-life
preferred stock’’ in the Call Report is contained in
the Glossary under ‘‘Preferred Stock.’’ For the June
30, 2008 Call Report, the definition read, in
pertinent part, as follows:
Limited-life preferred stock is preferred stock that
has a stated maturity date or that can be redeemed
at the option of the holder. It excludes those issues
of preferred stock that automatically convert into
perpetual preferred stock or common stock at a
stated date.
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remaining until maturity. However,
institutions separately report neither
long-term senior unsecured liabilities
nor long-term subordinated debt in the
report of condition. In a separate notice
of proposed rulemaking, the Federal
Financial Institution Examination
Council has proposed revising the Call
Report to report separately long-term
senior unsecured liabilities and
subordinated debt that meet this
definition. The Office of Thrift
Supervision (OTS) has also published a
notice of proposed rulemaking that
would adopt similar reporting
requirements. Until banks separately
report these amounts in the Call Report,
the FDIC will use subordinated debt
included in Tier 2 capital and will not
include any amount of senior unsecured
liabilities. These adjustments will also
be made for TFR filers until thrifts
separately report these amounts in the
TFR.
When an institution fails, holders of
unsecured claims, including
subordinated debt, receive distributions
from the receivership estate only if all
secured claims, administrative claims
and deposit claims have been paid in
full. Consequently, greater amounts of
long-term unsecured claims provide a
cushion that can reduce the FDIC’s loss
in the event of failure.
The FDIC’s proposed definition of a
long-term senior unsecured liability,
however, ignores features that may
affect whether the liability would, in
fact, reduce the FDIC’s loss in the event
of failure. The definition would include
liabilities with put options or other
provisions that would allow the holder
to accelerate payment (for example, if
capital fell below a certain level). Any
kind of put or acceleration feature could
undermine the long-term nature of the
liability. The FDIC is particularly
interested in comment on whether longterm senior unsecured liabilities should
exclude those liabilities with put or
other acceleration provisions.
The FDIC is proposing that for small
institutions (but not large ones) the
unsecured debt adjustment include a
portion of Tier 1 capital. The FDIC has
two primary reasons for this proposal.
First, cost concerns and lack of demand
generally make it difficult for small
institutions to issue unsecured debt in
the market. For reasons of fairness, the
FDIC believes that small institutions
that have large amounts of Tier 1 capital
should receive an equivalent benefit for
that capital. Second, the FDIC does not
want to create an incentive for small
institutions to convert existing Tier 1
capital into subordinated debt, for
example, by having a shareholder in a
closely held corporation redeem shares
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and receive subordinated debt. The
FDIC is greatly interested in comments
on this part of its proposal, including
comments on whether the portion of a
small institution’s Tier 1 capital to be
included in the unsecured debt
adjustment should include more capital.
The FDIC is also particularly
interested in comments on the size of
the unsecured debt adjustment and
whether it should be larger or smaller.
The FDIC believes that the proposed
two basis points is sufficient to
encourage a significant number of
institutions to issue additional
subordinated debt or senior unsecured
debt, but is interested in the views of
commenters.
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VII. Adjustment for Secured Liabilities
for All Risk Categories
The FDIC proposes to raise an
institution’s base assessment rates based
upon its ratio of secured liabilities to
domestic deposits (the secured liability
adjustment). An institution’s ratio of
secured liabilities to domestic deposits
(if greater than 15 percent) would
increase its assessment rate, but the
resulting base assessment rate after any
such increase could be no more than 50
percent greater than it was before the
adjustment. The secured liability
adjustment would be made after any
large bank adjustment or unsecured debt
adjustment.
Specifically, for an institution that
had a ratio of secured liabilities to
domestic deposits of greater than 15
percent, the secured liability adjustment
would be the institution’s base
assessment rate (after taking into
account previous adjustments)
multiplied by the ratio of its secured
liabilities to domestic deposits minus
0.15. However, the resulting adjustment
could not be more than 50 percent of the
institution’s base assessment rate (after
taking into account previous
adjustments). For example, if an
institution had a ratio of secured
liabilities to domestic deposits of 25
percent, and a base assessment rate
before the secured liability adjustment
of 12 basis points, the secured liability
adjustment would be the base rate
multiplied by 0.10 (calculated as 0.25—
0.15), resulting in an adjustment of 1.2
basis points. However, if the institution
had a ratio of secured liabilities to
domestic deposits of 70 percent, its base
rate before the secured liability
adjustment of 12 basis points would be
multiplied by 0.50 rather than 0.55
(calculated as 0.70—0.15), since the
resulting adjustment could be only 50
percent of the base assessment rate
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before the secured liability
adjustment.48
Ratios of secured liabilities to
domestic deposits for any given quarter
would be calculated from the report of
condition filed by each institution as of
the last day of the quarter. For banks,
secured liabilities would include
Federal Home Loan Bank advances,
securities sold under repurchase
agreements, secured Federal funds
purchased and ‘‘other secured
borrowings,’’ as reported in banks’
quarterly Call Reports. Thrifts also
report Federal Home Loan Bank
advances in their quarterly TFR, but, at
present, do not separately report
securities sold under repurchase
agreements, secured Federal funds
purchased or ‘‘other secured
borrowings.’’ The OTS has also
published a notice of proposed
rulemaking to revise the TFR so that
thrifts will separately report these items.
Until the TFR is revised, any of these
secured amounts not reported separately
from unsecured or other liabilities by a
thrift in its TFR would be imputed
based on simple averages for Call Report
filers as of June 30, 2008. As of that
date, on average, 63.0 percent of the
sum of Federal funds purchased and
securities sold under repurchase
agreements reported by Call Report
filers were secured, and 49.4 percent of
other borrowings were secured.
At present, an institution’s secured
liabilities do not directly affect its
assessments. The exclusion of secured
liabilities can lead to inequity. An
institution with secured liabilities in
place of another’s deposits pays a
smaller deposit insurance assessment,
even if both pose the same risk of failure
and would cause the same losses to the
FDIC in the event of failure.
To illustrate with a simple example,
assume that Bank A has $100 million in
insured deposits, while Bank B has $50
million in insured deposits and $50
million in secured liabilities. Each poses
the same risk of failure and is charged
the same assessment rate. At failure,
each has assets with a market value of
$80 million. The loss to the DIF would
be identical for Bank A and Bank B ($20
million each). The total assessments
paid by Bank A and Bank B, however,
would not be identical. Because secured
liabilities do not currently figure into an
institution’s assessment, the DIF would
receive twice as much assessment
revenue from Bank A as from Bank B
48 Under the proposed rule, the ratio of secured
deposits to domestic deposits would be rounded to
three digits after the decimal point. The resulting
amount and adjusted assessment rate would be
rounded to the nearest one-hundredth (1/100th) of
a basis point.
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over a given period (despite identical
FDIC losses at failure).
In general, under the current rules,
substituting secured liabilities for
unsecured liabilities (including
subordinated debt) raises the FDIC’s loss
in the event of failure without providing
increased assessment revenue.
Substituting secured liabilities for
deposits can also lower an institution’s
franchise value in the event of failure,
which increases the FDIC’s losses, all
else equal.49
VIII. Adjustment for Brokered Deposits
for Risk Categories II, III and IV
In addition to the unsecured debt
adjustment and the secured liability
adjustment, the FDIC is proposing that
an institution in Risk Category II, III, or
IV also be subject to an assessment rate
adjustment for brokered deposits (the
brokered deposit adjustment). This
adjustment would be limited to those
institutions whose ratio of brokered
deposits to domestic deposits was
greater than 10 percent; asset growth
rates would not affect the adjustment.
The adjustment would be determined by
multiplying 25 basis points times the
difference between an institution’s ratio
of brokered deposits to domestic
deposits and 0.10.50 However, the
adjustment would never be more than
10 basis points. The adjustment would
be added to the base assessment rate
after all other adjustments had been
made. Ratios for any given quarter
would be calculated from the Call
Reports or TFRs filed by each institution
as of the last day of the quarter.
A brokered deposit would again be as
defined in Section 29 of the Federal
Deposit Insurance Act (12 U.S.C. 1831f),
which is the definition used in banks’
quarterly Call Reports and thrifts
quarterly TFRs. However, the FDIC is
again particularly interested in
comments on whether the definition of
a brokered deposit for purposes of the
brokered deposit ratio should exclude
sweep accounts or deposits received
through a network on a reciprocal basis
that meet the statutory definition of a
brokered deposit or should include high
cost deposits, including those received
through a listing service and the
49 Overall, whether substituting secured liabilities
for deposits increases, decreases, or leaves
unchanged the FDIC’s loss given failure also
depends on how the substitution affects the
proportion of insured and uninsured deposits, but
FDIC’s assessment revenue will always decline with
a substitution.
50 Under the proposed rule, the ratio of brokered
deposits to domestic deposits would be rounded to
three digits after the decimal point. The resulting
brokered deposit charge would be rounded to the
nearest one-hundredth (1/100th) of a basis point.
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Internet, that do not meet the statutory
definition.
Significant reliance on brokered
deposits tends to increase an
institution’s risk profile, particularly as
the institution’s financial condition
weakens. Insured institutionsparticularly weaker ones-typically pay
higher rates of interest on brokered
deposits. When an institution becomes
noticeably weaker or its capital
declines, the market or statutory
restrictions may limit its ability to
attract, renew or roll over these
deposits, which can create significant
liquidity challenges.51
Also, significant reliance on brokered
deposits tends to decrease greatly the
franchise value of a failed institution. In
a typical failure, the FDIC seeks to find
a buyer for a failed institution’s
branches among the institutions located
in or around the service area of the
failed institution. A potential buyer
usually seeks to increase its market
share in the service area of the failed
institution through the acquisition of
the failed institution and its assets and
deposits, but most brokered deposits
originate from outside an institution’s
market area. The more core deposits that
the buyer can obtain through the
acquisition of the failed institution, the
greater the market share of deposits (and
the loans and other products that
typically follow the core deposits) it can
capture. Furthermore, brokered deposits
may not be part of many potential
buyers’ business plans, limiting the field
of buyers. Thus, the lower franchise
value of the failed institution created by
its reliance on brokered deposits leads
to a lower price for the failed
institution, which increases the FDIC’s
losses upon failure.
In addition, as noted earlier, several
institutions that have recently failed
have experienced rapid asset growth
before failure and have funded this
growth through brokered deposits. The
FDIC believes that these reasons warrant
the additional charge for significant
levels of brokered deposits.
To illustrate the brokered deposit
adjustment with a simple example, take
a Risk Category II institution with an
initial base assessment rate of 20 basis
points and a ratio of brokered deposits
to domestic deposits of 40 percent.
Multiplying 25 basis points times the
difference between the institution’s ratio
of brokered deposits to domestic
51 An adequately capitalized institution can
accept, renew and rollover brokered deposits only
by obtaining a waiver from the FDIC. Even then,
interest rate restrictions apply. An undercapitalized
institution may not accept, renew or rollover
brokered deposits at all. Section 29 of the Federal
Deposit Insurance Act (12 U.S.C. 1831f).
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deposits and 10 percent yields 7.5 basis
points (calculated as 25 basis points ·
(0.4–0.1)). Because this amount is less
than the maximum possible brokered
deposit adjustment of 10 basis points,
the brokered deposit adjustment would
be as calculated, 7.5 basis points.
Assuming that the secured liabilities
adjustment for this institution is 2 basis
points and that the institution has no
other assessment rate adjustments, the
total base assessment rate would be 29.5
basis points (calculated as (20 basis
points + 2 basis points + 7.5 basis
points).
IX. Insured Branches of Foreign Banks
Because the base assessment rates
would be higher and the difference
between the minimum and maximum
initial base assessment rates would
increase from two to four basis points
under the proposal, the FDIC proposes
to make a conforming change for
insured branches of foreign banks in
Risk Category I. Under the proposal, an
insured branch of a foreign bank’s
weighted average of ROCA component
ratings would be multiplied by 5.291
(which would be the pricing multiplier)
and 1.651 (which would be a uniform
amount for all insured branches of
foreign banks) would be added to the
product.52 The resulting sum would
equal a Risk Category I insured branch
of a foreign bank’s initial base
assessment rate, provided that the
amount could not be less than the
minimum initial base assessment rate
nor greater than the maximum initial
assessment rate. A Risk Category I
insured branch of a foreign bank’s initial
base assessment rate would be subject to
any large bank adjustment. Total base
assessment rates could not be less than
the minimum initial base assessment
rate applicable to Risk Category I
institutions nor greater than the
maximum initial base assessment rate
applicable to Risk Category I
institutions. Insured branches of a
foreign bank not in Risk Category I are
charged the initial base assessment rate
52 An insured branch of a foreign bank’s weighted
average ROCA component rating would continue to
equal the sum of the products that result from
multiplying ROCA component ratings by the
following percentages: Risk Management—35%,
Operational Controls—25%, Compliance—25%,
and Asset Quality—15%. The uniform amount for
insured branches is identical to the uniform amount
under the large bank method. The pricing
multiplier for insured branches is three times the
amount of the pricing multiplier under the large
bank method, since the initial base rate for an
insured branch depends only on one factor
(weighted average ROCA ratings), while the initial
base rate under the large bank method depends on
three factors, each equally weighted.
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for the risk category in which they are
assigned.
No insured branch of a foreign bank
in any risk category would be subject to
the unsecured debt adjustment, secured
liability adjustment or brokered deposit
adjustment. Insured branches of foreign
banks are branches, not independent
depository institutions. In the event of
failure, the FDIC would not necessarily
have access to the institution’s capital or
be protected by its subordinated debt or
unsecured liabilities. Consequently, an
unsecured debt adjustment would
appear to be inappropriate. At present,
these branches do not report
comprehensively on secured liabilities.
In the FDIC’s view, the burden of
increased reporting on secured
liabilities would outweigh any benefit.
X. New Institutions
The FDIC also proposes to make
conforming changes in the treatment of
new insured depository institutions.53
For assessment periods beginning on or
after January 1, 2010, any new
institutions in Risk Category I would be
assessed at the maximum initial base
assessment rate applicable to Risk
Category I institutions, as under the
current rule.
Effective for assessment periods
beginning before January 1, 2010, until
a Risk Category I new institution
received CAMELS component ratings, it
would have an initial base assessment
rate that was two basis points above the
minimum initial base assessment rate
applicable to Risk Category I
institutions, rather than one basis point
above the minimum rate, as under the
current rule.54 All other new
institutions in Risk Category I would be
treated as are established institutions,
except as provided in the next
paragraph.
Either before or after January 1, 2010:
no new institution, regardless of risk
category, would be subject to the
unsecured debt adjustment; any new
institution, regardless of risk category,
would be subject to the secured liability
adjustment; and a new institution in
Risk Categories II, III or IV would be
subject to the brokered deposit
53 Subject to exceptions, a new insured
depository institution is a bank or thrift that has not
been chartered for at least five years as of the last
day of any quarter for which it is being assessed.
12 CFR 327.8(l)
54 Certain credit unions that convert to a bank or
thrift charter and certain otherwise new insured
institutions in a holding company structure may be
considered established institutions. Both before and
after January 1, 2010, any such institution that is
well capitalized but has not yet received CAMELS
component ratings will be assessed at two basis
points above the minimum initial base assessment
rate applicable to Risk Category I institutions.
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adjustment. After January 1, 2010, no
new institution in Risk Category I would
be subject to the large bank adjustment.
XI. Assessment Rate Schedule
Recent failures have significantly
increased the fund’s loss provisions,
resulting in a decline in the reserve
ratio. As of June 30, 2008, the reserve
ratio stood at 1.01 percent, 18 basis
points below the reserve ratio as of
March 31, 2008. This is the lowest
reserve ratio for a combined bank and
thrift insurance fund since March 31,
1995. The FDIC expects a higher rate of
insured institution failures in the next
few years compared to recent years;
thus, the reserve ratio may continue to
decline. Because the reserve ratio has
fallen below 1.15 percent and is
expected to remain below 1.15 percent,
the FDIC is required to establish and
implement a Restoration Plan to restore
the reserve ratio to 1.15 percent within
five years, that is, by October 7, 2013.55
To fulfill the requirements of the
Restoration Plan that the FDIC is
adopting simultaneously with the
proposed rule, the FDIC must increase
the average assessment rates it currently
charges. Since the current rates are
already 3 basis points uniformly above
the base rate schedule established in the
2006 assessments rule, a new
rulemaking is required. The other
proposed changes to the assessment
system described above also require
new rulemaking.
Base Rate Schedule
Effective April 1, 2009, the FDIC
proposes to set initial base assessment
rates as described in Table 10 below.
TABLE 10—PROPOSED INITIAL BASE ASSESSMENT RATES
Risk category
I*
II
Annual Rates (in basis points) .............................................
14
IV
30
45
Maximum
10
III
20
Minimum
* Rates for institutions that did not pay the minimum or maximum rate would vary between these rates.
After making all possible adjustments
under the proposed rule, total base
assessment rates for each risk category
would be within the ranges set forth in
Table 11 below.
TABLE 11—TOTAL BASE ASSESSMENT RATES AFTER ADJUSTMENTS *
Risk category
I
Risk category
II
Risk category
III
Risk category
IV
Initial base assessment rate ................................................................
Unsecured debt adjustment .................................................................
Secured liability adjustment .................................................................
Brokered deposit adjustment ...............................................................
10–14 ...............
¥2–0 ................
0–7 ...................
...........................
20 .....................
¥2–0 ................
0–10 .................
0–10 .................
30 .....................
¥2–0 ................
0–15 .................
0–10 .................
45
¥2–0
0–22.5
0–10
Total base assessment rate .........................................................
8–21.0 ..............
18–40.0 ............
28–55.0 ............
43–77.5
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* All amounts for all risk categories are in basis points annually. Rates for institutions that did not pay the minimum or maximum rate would
vary between these rates. Adjustments would be applied in the order listed in the table. The large bank adjustment would be made before any
other adjustment.
The proposed base rates are intended
to improve the way the assessment
system differentiates risk among insured
institutions and make the risk-based
assessment system fairer, by limiting the
subsidization of riskier institutions by
safer ones. They are also intended to
increase assessment revenue while the
Restoration Plan is in effect in order to
raise the reserve ratio to the minimum
threshold of 1.15 percent within 5 years
of the Plan’s implementation. As
explained in the next Section, given the
FDIC’s projections (described below),
the proposed rate schedule would raise
the reserve ratio to 1.26 percent by the
end of 2013.
Actual Rate Schedule, Ability To Adjust
Rates and Effective Date
55 Data on estimated insured deposits and the
reserve ratio are available only for each quarter-end;
therefore, the reserve ratio for the end of the fourth
quarter of 2013 will be the first reserve ratio
available after October 7 to measure compliance
with the Restoration Plan’s requirements. Deposit
data needed to compute the reserve ratio will be
available in February of the following year.
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Based on the information currently
available, the FDIC proposes setting
actual rates at the proposed total base
assessment rate schedule effective April
1, 2009. The FDIC projects that this
schedule would raise the overall average
assessment rate to 13.5 basis points
beginning in April 2009 and 12.6 basis
points in 2010 and thereafter, from a 6.3
basis point average assessment rate
(before accounting for credit use) as of
June 30, 2008. For institutions in Risk
Category I, the projected average rate
would be 11.6 basis points beginning in
April 2009 and 11.9 basis points in 2010
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and thereafter, up from 5.5 basis points
as of June 30, 2008.56
However, at the time of the issuance
of the final rule, the FDIC may need to
set a higher base rate schedule based on
information available at that time,
including any intervening institution
failures and updated failure and loss
projections. A higher base rate schedule
may also be necessary because of
changes to the proposal in the final rule,
if these changes have the overall effect
of changing revenue for a given rate
schedule. In order to fulfill the statutory
requirement to return the fund reserve
ratio to 1.15 percent, the base rate
schedule in the final rule could be
substantially higher than the proposed
56 Changes in the projected average rates under
the proposed schedule over time reflect projected
changes in the migration of institutions within and
across risk categories.
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The proposed rule would continue to
allow the FDIC Board to adopt actual
rates that were higher or lower than
total base assessment rates without the
necessity of further notice-and-comment
rulemaking, provided that: (1) The
Board could not increase or decrease
rates from one quarter to the next by
more than three basis points; and (2)
cumulative increases and decreases
could not be more than three basis
points higher or lower than the adjusted
base rates. Continued retention of this
flexibility would enable the Board to act
in a timely manner to fulfill its mandate
base assessment rate schedule (for
example, if projected or actual losses at
the time of the final rule greatly exceed
the FDIC’s current estimates). The base
rate schedule in the final rule could
possibly be lower than the proposed
base rate schedule. The FDIC seeks
particular comment on possible
alternative base rate schedules.
The rate schedule and the other
revisions to the assessment rules would
take effect for the quarter beginning
April 1, 2009, which would be reflected
in the June 30, 2009 fund balance and
the invoices for assessments due
September 30, 2009.
61573
to raise the reserve ratio to at least 1.15
percent within the 5-year timeframe.
Assessment Rates for the First Quarter
of 2009
The FDIC also proposes to raise the
current rates uniformly by seven basis
points for the assessment for the quarter
beginning January 1, 2009, which would
be reflected in the fund balance as of
March 31, 2009, and assessments due
June 30, 2009. Rates for the first quarter
of 2009 only would be as set forth in
Table 12:
TABLE 12—PROPOSED ASSESSMENT RATES FOR THE FIRST QUARTER OF 2009
Risk category
I*
II
Minimum
Annual Rates (in basis points) .............................................
12
14
III
IV
17
35
50
Maximum
* Rates for institutions that did not pay the minimum or maximum rate would vary between these rates.
The proposed rates for the first
quarter of 2009 would raise almost as
much assessment revenue as under the
rates proposed beginning April 1, 2009.
Data and system requirements do not
make it feasible to adopt the proposed
changes to the risk-based assessment
system discussed above until the second
quarter of 2009.
XII. Assessment Revenue Needs Under
the Restoration Plan
Summary
Table 13 shows projected minimum
initial base assessment rates needed to
raise the reserve ratio to 1.15 percent
(the lower bound under the
requirements for the Restoration Plan)
in 2013 for alternative average annual
insured deposit growth rates and total
costs of bank failures from 2008 through
2013.
TABLE 13—MINIMUM INITIAL BASE ASSESSMENT RATES (IN BASIS POINTS) NEEDED TO RAISE THE RESERVE RATIO TO
1.15 PERCENT IN 2013
If institution failures from 2008 to 2013 cost in total: *
Insured deposit growth rate
$20 Billion
3%
4%
5%
6%
7%
$30 Billion
$40 Billion
$50 Billion
$60 Billion
$70 Billion
5
5
5
5
5
5
6
7
7
8
8
9
9
9
10
11
11
11
12
12
13
14
14
14
15
16
16
16
17
17
............................................................
............................................................
............................................................
............................................................
............................................................
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* Costs include $12.8 billion for actual and projected failures in 2008.
Under the FDIC’s proposed rate
schedule, the average rate is projected to
be 13.5 basis points in 2009 (once the
rates become effective in April) and 12.6
basis points in 2010 and beyond. For
institutions in Risk Category I, the
average rate is projected to be 11.6 basis
points beginning in April 2009, rising to
11.9 basis points in 2010 and beyond.
Given the FDIC’s projections, the
proposed rates would increase the
reserve ratio to 1.26 percent by year-end
2013.
Current and emerging economic
difficulties, particularly in the housing
and construction sector, financial
markets and commercial real estate,
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contribute to the FDIC’s expectation of
higher losses for the insurance fund.
The insurance fund balance and reserve
ratio are likely to experience further
declines before recovering as the current
problems confronting the banking
industry abate. The FDIC projects that
the reserve ratio will continue to fall for
the remainder of this year and early
2009 to a low of 0.65 to 0.70 percent, as
the fund’s loss reserves for anticipated
failures increase. Higher assessment
revenue should begin to increase the
reserve ratio gradually in the latter part
of 2009. As described in more detail
below, the FDIC’s best estimate is that
institution failures could cost the
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insurance fund approximately $40
billion from 2008 to 2013, of which
approximately $13 billion represent
actual and projected costs incurred this
year (including almost $9 billion for the
failure in July of one institution with
over $30 billion in assets). The FDIC
bases its loss projections on: Analysis of
specific troubled institutions and risk
factors that may adversely affect other
institutions; analysis of recent and
expected loss rates given failure; stress
analyses of the effects of housing price
declines and an economic slowdown in
specific geographic areas on loan losses
and bank capital; and recent and
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Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules
historic supervisory rating downgrade
and failure rates.
The FDIC also assumes that insured
deposits would increase on average 5
percent per year from 2008 to 2013. This
assumption is in line with the most
recent 12-month growth rate and
average annual growth rates over the
past 5 and 10 years.
Table 13 shows that an initial
minimum rate of 9 basis points is
necessary for the reserve ratio to reach
1.15 percent by 2013 assuming that
failures between 2008 and 2013 cost $40
billion and that insured deposits
increase on average by 5 percent
annually. With an initial minimum rate
of 9 basis points, the FDIC projects that
the reserve ratio would equal 1.18
percent by the end of 2013.57 The
FDIC’s proposed rates, with an initial
minimum rate of 10 basis points, would
raise the reserve ratio to 1.26 percent by
2013. The FDIC believes that it would
be prudent to provide this margin for
error in the event that losses exceed the
FDIC’s best estimate or insured deposit
growth is more rapid than expected.
The FDIC had previously expected
that the reserve ratio would reach the
1.25 percent DRR by 2009, consistent
with the Board’s objectives for the
insurance fund. The recent decline in
the reserve ratio and projected higher
rate of bank failures over the next few
years make the possibility of reaching
the DRR next year remote absent very
high assessment rates, which the FDIC
believes would be inappropriate under
current conditions. Nonetheless, the
goal of reaching the 1.25 percent DRR
remains in effect. Under the proposed
rates, the reserve ratio is projected to
reach 1.26 percent by the end of 2013.
The FDIC recognizes that there is
considerable uncertainty about its
projections for losses and insured
deposit growth, and that changes in
assumptions about these and other
factors could lead to different
assessment revenue needs and rates.
Under the terms of the Restoration Plan,
the FDIC must update its projections for
the insurance fund balance and reserve
ratio at least semiannually while the
Restoration Plan is in effect and adjust
rates as necessary. In the event that
losses exceed the FDIC’s best estimate or
insured deposit growth is more rapid
than expected, the Board will be able to
adjust assessment rates.
57 If the minimum initial rate was 8 basis points
or less, the reserve ratio is projected to fall short of
the 1.15 percent threshold.
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Factors Considered in Setting the Level
of Assessment Rates
In setting assessment rates, the FDIC’s
Board of Directors has considered the
following factors required by statute:
(i) The estimated operating expenses
of the Deposit Insurance Fund.
(ii) The estimated case resolution
expenses and income of the Deposit
Insurance Fund.
(iii) The projected effects of the
payment of assessments on the capital
and earnings of insured depository
institutions.
(iv) The risk factors and other factors
taken into account pursuant to section
7(b)(1) of the Federal Deposit Insurance
Act (12 U.S.C. Section 1817(b)(1)) under
the risk-based assessment system,
including the requirement under section
7(b)(1)(A) of the Federal Deposit
Insurance Act (12 U.S.C. 1817(b)(1)(A))
to maintain a risk-based system.
(v) Other factors the Board of
Directors has determined to be
appropriate.58
The factors considered in setting
assessment rates are discussed in more
detail below.
Case Resolution Expenses (Insurance
Fund Losses)
Insurance fund losses from recent
insured institution failures and an
expected higher rate of failures over the
next few years will tend to reduce the
fund balance and reserve ratio.
The FDIC expects that housing price
declines, financial market turmoil, and
generally weaker economic conditions
will continue to exert stress on banking
industry earnings and credit quality in
the near term, most notably in
residential real estate and construction
and development lending. Significant
uncertainty remains about the outlook
for a recovery in mortgage securitization
markets and the return of confidence to
financial markets overall. Economic
activity in the industrial Midwest has
especially suffered from higher energy
58 Section 2104 of the Reform Act (amending
section 7(b)(2) of the Federal Deposit Insurance Act,
12 U.S.C. 1817(b)(2)(B)). The risk factors referred to
in factor (iv) include:
(i) The probability that the Deposit Insurance
Fund will incur a loss with respect to the
institution, taking into consideration the risks
attributable to—
(I) Different categories and concentrations of
assets;
(II) different categories and concentrations of
liabilities, both insured and uninsured, contingent
and noncontingent; and
(III) any other factors the Corporation determines
are relevant to assessing such probability;
(ii) the likely amount of any such loss; and
(iii) the revenue needs of the Deposit Insurance
Fund.
Section 7(b)(1)(C) of the Federal Deposit
Insurance Act (12 U.S.C. 1817(b)(1)(C)).
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and commodity prices. Housing market
downturns in Arizona, California,
Nevada, Florida, and other coastal areas
are contributing to declines in
construction and consumer spending
and economic downturns in those areas.
Regional disparities in housing market
and economic conditions, as well as
financial market difficulties, have led in
turn to variation in prospects among
banks. Institutions most at risk include:
(1) Those with large volumes of
subprime and nontraditional mortgages,
particularly those heavily reliant on
securitization; and (2) those with heavy
concentrations of residential real estate
and construction and development
loans in markets with the greatest
housing price declines. Within each of
these groups, those heavily reliant on
non-core funding incur additional risks
should the availability of these funds
decline as conditions deteriorate.
In developing its projections of losses
to the insurance fund, the FDIC drew
from several sources. First, the FDIC
relied heavily on supervisory analysis of
troubled institutions. Supervisors also
identified risk factors present in
currently troubled institutions (or that
were present in institutions that
recently failed) to help analyze the
potential for other institutions with
those risk factors to cause losses to the
insurance fund. Second, the FDIC drew
on its analysis of losses to the fund in
the event of failure. Current financial
market and economic difficulties make
simple reliance on the historical average
or model estimates based on historical
data inappropriate for projecting loss
rates given failure, particularly in the
near term.
The FDIC also relied on stress
analysis designed to evaluate the effect
of a large and widespread decline in
housing prices and related deterioration
in overall economic conditions on the
capital positions and earnings of
insured institutions. The stress test
simulated the effects of high and rising
loan loss rates directly resulting from
falling housing prices and rising
unemployment rates in various
geographic areas to identify institutions
most vulnerable to these types of stress.
Under the stress test, institutions
operating in those areas with the worst
housing and economic conditions
experience the largest increase in loss
rates.
The FDIC categorized well-capitalized
institutions into various groups based
on stress test results and supervisory
analysis. Based on recent and historical
downgrade and failure experience, the
FDIC then applied downgrade and
failure assumptions for each group to
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Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules
project the cost of failure to the fund
over the next few years.59
Based on the various sources of
information described above, the FDIC
projects that the costs of institution
failures from 2008 through 2013 may be
approximately $40 billion. This figure
includes almost $13 billion for the costs
of actual and projected failures in 2008.
The FDIC recognizes the considerable
degree of uncertainty surrounding these
projections and its analyses reveal that
either higher or lower losses are
plausible. This uncertainty underscores
the need to update the outlook for
insurance fund losses on a regular
basis—at least semiannually—while the
Restoration Plan is in effect and to
consider adjustments to assessment
rates.
Operating Expenses and Investment
Income
The FDIC estimates that its operating
expenses in 2008 will be $1 billion.
Thereafter, the FDIC projects that
operating expenses will increase on
average by 5 percent annually.
The FDIC projects that its investment
contributions (investment income plus
or minus unrealized gains or losses on
available-for-sale securities) this year
will total $3.7 billion, or 7 percent of the
start-of-year fund balance. A one-time
unrealized gain of $1.6 billion from
reclassifying the fund’s held-to-maturity
securities as available for sale as of June
30, 2008 bolsters this figure. Projected
increases in interest rates, which will
reduce the value of these securities, will
partly offset this gain next year.60 In
addition, the FDIC expects that it will
invest new funds in short-term
securities (primarily overnight
investments) to accommodate increased
bank failure activity. The FDIC generally
expects that these investments will earn
lower rates than the longer-term
securities that they are replacing and
will therefore result in less interest
income to the fund. Accounting for all
of these factors, the FDIC projects
investments to contribute an amount
equal to 2.0 percent of the starting fund
balance in 2009, rising gradually to 3.5
percent by 2011 and thereafter.
Assessment Revenue, Credit Use, and
the Distribution of Assessments
The FDIC expects that assessment
revenue in 2008 will total $3.0 billion:
$4.4 billion in gross assessments
charged less $1.4 billion in credits used.
By the end of 2008, the projections
indicate that only 4 percent of the
original $4.7 billion in credits awarded
will be remaining. As part of the
Restoration Plan, the FDIC has the
authority to restrict credit use while the
plan is in effect, providing that
institutions may still apply credits
against their assessments equal to the
lesser of their assessment or 3 basis
points.61 The FDIC has decided not to
restrict credit use in the Restoration
Plan. The FDIC projects that the amount
of credits remaining at the time that the
proposed new rates go into effect will be
61575
very small and that their continued use
will have very little effect on the
assessment rates necessary to meet the
requirements of the plan.62
Accounting for the use of remaining
credits, proposed uniform increase to
current rates for the first quarter of 2009
and the proposed assessment rates
effective April 1, 2009, and assuming 5
percent annual growth in the
assessment base (which is
approximately domestic deposits), the
FDIC projects that the fund will earn
assessment revenue of $10.3 billion for
all of 2009.
For the quarter beginning April 1,
2009, the FDIC has derived gross
assessment revenue (i.e., before
applying any remaining credits) by
assigning each insured institution to an
assessment rate based on the proposed
rate schedule and factors described
above. Table 14 shows the distribution
of institutions and domestic deposits by
risk category (divided into four parts for
Risk Category I) under the proposed
initial base rate schedule (effective April
1, 2009) based on data as of June 30,
2008; Table 15 shows the distribution of
institutions and domestic deposits by
bands of proposed total base assessment
rates.63 For purposes of assessment
revenue projections beginning next
April, the FDIC relied on the proposed
assessment rates based on data as of
June 30, 2008, but also accounted for
projected migration of institutions
across risk categories as supervisory
ratings change.
TABLE 14—DISTRIBUTION OF INITIAL BASE ASSESSMENT RATES AND DOMESTIC DEPOSITS*
[Data as of June 30, 2008]
Initial
assessment
rate
Risk category
I ............................................................................................
II ...........................................................................................
III ..........................................................................................
IV ..........................................................................................
Number of
institutions
10
10.01–12.00
12.01–13.99
14
20
30
45
Percent of
institutions
1,775
2,976
1,758
1,219
588
121
14
21
35
21
14
7
1
0
Domestic
deposits
(in billions of
$)
823.0
2,945.7
1,714.4
593.3
896.5
27.1
29.1
Percent of
domestic
deposits
12
42
24
8
13
0
0
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* This table and the following two tables exclude insured branches of foreign banks.
59 For those institutions that were well rated one
year ago but performed poorly under the stress
simulations when applied to their balance sheets
from last year, the FDIC identified the extent to
which these institutions received supervisory
ratings downgrades over the following year. To look
beyond what may happen over one year, the FDIC
supplemented this information with data from the
late 1980s and early 1990s (a period of many bank
failures) on ratings downgrades over a five-year
horizon for institutions with financial
characteristics similar to those performing poorly
under the stress analysis. With this information, the
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FDIC developed projections of the volume of wellrated institutions likely to be downgraded over the
next few years. The FDIC then considered data on
failure rates from the late 1980s and early 1990s to
project failure rates for those institutions that may
be downgraded over the next few years, as well as
those that are currently not well rated.
60 Future interest rate assumptions are based on
consideration of recent Blue Chip Financial
Forecasts as well as recent forward rate curves.
Forward rates are expected yields on securities of
varying maturities for specific future points in time
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that are derived from the term structure of interest
rates. (The term structure of interest rates refers to
the relationship between current yields on
comparable securities with different maturities.)
61 Section 7(b)(3)(E)(iv) of the Federal Deposit
Insurance Act (12 U.S.C. 1817(b)(3)(E)(iv)).
62 For 2008, 2009 and 2010, credits may not offset
more than 90 percent of an institution’s assessment.
Section 7(e)(3)(D)(ii) of the Federal Deposit
Insurance Act (12 U.S.C. 1817(e)(3)(D)(ii)).
63 The assessment base is almost equal to total
domestic deposits.
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Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules
TABLE 15—DISTRIBUTION OF TOTAL BASE ASSESSMENT RATES AND DOMESTIC DEPOSITS *
[Data as of June 30, 2008]
Total base
assessment
rate
Risk category
I ........................................................................................
II .......................................................................................
III ......................................................................................
IV ......................................................................................
Number of
institutions
8.00–10.00
10.01–12.00
12.01–14.00
14.01–21.00
18.00–20.00
20.01–40.00
28.00–30.00
30.01–55.00
43.00–45.00
45.01–77.5
Domestic
deposits
(in billions
of $)
Percent of
institutions
1,834
2,674
2,588
632
346
242
72
49
9
5
22
32
31
7
4
3
1
1
0
0
806.6
3,047.6
1,632.5
589.7
204.7
691.8
8.0
19.1
5.8
23.3
Percent of
domestic
deposits
11
43
23
8
3
10
0
0
0
0
* Because of data limitations, secured liability adjustments for TFR filers are calculated using imputed values based on simple averages of Call
Report filers as of June 30, 2008 (discussed below). Unsecured debt adjustments are calculated using ‘‘Qualifying subordinated debt and redeemable preferred stock’’ included in Tier 2 capital.
As noted earlier, the proposed
changes to risk-based assessments are
intended to better capture differences in
risk and impose a greater share of the
necessary increase in overall
assessments on riskier institutions.
Table 16 shows how institutions would
have fared if the FDIC had proposed
leaving the current risk-based
assessment system unchanged except
for a uniform increase in rates that
would have produced the same revenue
as under the proposed schedule. To
produce the same revenue, the FDIC
would have had to increase the current
rates uniformly by 7.6 basis points,
based upon data as of June 30, 2008. As
the table shows, 85 percent of
institutions, with 74 percent of domestic
deposits, would pay a lower rate under
the proposed assessment rate schedule
than under a uniform increase of 7.6
basis points to the current rate schedule.
TABLE 16—DIFFERENCE BETWEEN PROPOSED ASSESSMENT RATES AND A UNIFORM INCREASE IN CURRENT RATES TO
RAISE THE SAME REVENUE
[Data as of June 30, 2008]
Number of
institutions
Compared to a uniform increase in current rates, proposed rates are:
Over 4 bp lower ...............................................................................................
2–4 bp lower ....................................................................................................
0–2 bp lower ....................................................................................................
0–2 bp higher ...................................................................................................
2–4 bp higher ...................................................................................................
4–6 bp higher ...................................................................................................
6–8 bp higher ...................................................................................................
8–10 bp higher .................................................................................................
Over 10 bp higher ............................................................................................
Estimated Insured Deposits
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The FDIC believes that it is reasonable
to plan for annual insured deposit
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339
3,070
3,819
463
541
110
49
18
42
growth of 5 percent. Over the 12 months
ending June 30, 2008, estimated insured
deposits increased by 5.4 percent. The
most recent five and ten year average
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Percent of
institutions
4
36
45
5
6
1
1
0
0
Domestic
deposits
(in billions
of $)
64
1,551
3,551
785
321
121
244
245
146
Percentage of
total domestic
deposits
1
22
51
11
5
2
3
3
2
growth rates are also approximately 5
percent. Chart 1 depicts insured deposit
growth since 1990.
E:\FR\FM\16OCP2.SGM
16OCP2
Projections of insured deposits are
subject to considerable uncertainty.
Insured deposit growth over the near
term could rise more rapidly due to a
‘‘flight to quality’’ attributable to
financial and economic uncertainties.
On the other hand, as the experience of
the late 1980s and early 1990s
demonstrated, lower overall growth in
the banking industry and the economy
could depress rates of growth of total
domestic and insured deposits. As Table
13 shows, a one percentage point
increase or decrease in average annual
insured deposit growth rates will not
have a significant effect on the
assessment rates necessary to meet the
requirements of the Restoration Plan,
other factors equal.
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Effect on Capital and Earnings
Appendix 3 contains an analysis of
the effect of proposed rates on the
capital and earnings of insured
institutions. Given the assumptions in
the analysis, for the industry as a whole,
projected total assessments in 2009
would result in capital that would be
0.3 percent lower than if the FDIC did
not charge assessments and 0.1 percent
lower than if current assessment rates
remained in effect. The proposed
assessments would cause 6 institutions
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whose equity-to-assets ratio would have
exceeded 4 percent in the absence of
assessments to fall below that
percentage and 5 institutions to fall
below 2 percent. The proposed increase
in assessments would cause 3
institutions whose equity-to-assets ratio
would have exceeded 4 percent under
current assessments to fall below that
threshold and 1 institution to fall below
2 percent.
For the industry as a whole,
assessments in 2009 would result in
pre-tax income that would be 11 percent
lower than if the FDIC did not charge
assessments and 5.6 percent lower than
if current assessment rates remained in
effect. Appendix 3 also provides an
analysis of the range of effects on capital
and earnings.
Other Factors That the Board May
Consider
In its consideration of proposed rates,
the FDIC Board has considered other
factors that it deems appropriate, as
permitted by law.
Flexibility to accommodate economic
and industry conditions. The Reform
Act generally provides up to 5 years for
the FDIC to raise the fund’s reserve ratio
to at least 1.15 percent under the
Restoration Plan. The FDIC Board had
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61577
previously set rates with an objective of
raising the reserve ratio to the 1.25
percent DRR by next year. The recent
decline in the reserve ratio and an
anticipated higher rate of bank failures
over the next few years make the
possibility of reaching the 1.25 percent
DRR—or even 1.15 percent—next year
remote absent very high assessment
rates. The FDIC believes that such high
rates would be inappropriate under
current and projected economic and
financial conditions. The FDIC’s
proposed rates take advantage of the
flexibility to raise rates more gradually.
Reaching the DRR. The FDIC had
previously expected that the reserve
ratio would reach the 1.25 percent DRR
by 2009, consistent with the Board’s
objectives for the insurance fund. The
recent decline in the reserve ratio and
an anticipated increase in bank failures
make the possibility of reaching the
DRR next year remote absent very high
assessment rates, which the FDIC
believes would be inappropriate under
current conditions. Nonetheless, the
goal of reaching the 1.25 percent DRR
remains in effect. Under the proposed
rates, the reserve ratio is projected to
reach 1.26 by the end of 2013.
Updating projections regularly. The
FDIC recognizes that there is
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considerable uncertainty about its
projections for losses and insured
deposit growth, and that changes in
assumptions about these and other
factors could lead to different
assessment revenue needs and rates.
The FDIC projects that, under its
proposed rates, the reserve ratio will
increase to 1.26 percent by year-end
2013, providing a margin for error in the
event that losses exceed the FDIC’s best
estimate or insured deposit growth is
more rapid than expected. Nonetheless,
the FDIC expects to update its
projections for the insurance fund
balance and reserve ratio at least
semiannually while the Restoration Plan
is in effect and adjust rates as necessary.
XIII. Technical and Other Changes
The FDIC is proposing to change the
way assessment rates are determined for
a large institution that is subject to the
large bank method (or an insured branch
of a foreign bank) when it moves from
Risk Category I to Risk Category II, III or
IV during a quarter.
At present, if, during a quarter, a
CAMELS (or ROCA) rating change
occurs that results in a large institution
that is subject to the supervisory and
debt ratings method or an insured
branch of a foreign bank moving from
Risk Category I to Risk Category II, III or
IV, the institution’s assessment rate for
the portion of the quarter that it was in
Risk Category I is based upon its
assessment rate for the prior quarter. No
new Risk Category I assessment rate is
developed for the quarter in which the
institution moves to Risk Category II, III
or IV.64
The opposite holds true for a small
institution or a large institution subject
to the financial ratios method when it
moves from Risk Category I to Risk
Category II, III or IV during a quarter. A
new Risk Category I assessment rate is
developed for the quarter in which the
institution moves to Risk Category II, III
or IV.65
The FDIC proposes that when a large
institution subject to the large bank
method or an insured branch of a
foreign bank moves from Risk Category
I to Risk Category II, III or IV during a
quarter, a new Risk Category I
64 12
CFR 327.9(d)(5).
CFR 327.9(d)(1)(ii). In fact, the FDIC had
provided in the preamble to the 2006 assessments
rule that no new Risk Category I assessment rate
would be determined for any large institution for
the quarter in which it moved to Risk Category II,
III or IV, but, as the result of a drafting
inconsistency, this intention was not realized in the
regulatory text. 71 FR 69,282, 69,293 (Nov. 30,
2006). The FDIC now believes that a new Risk
Category I assessment rate should be determined for
any large institution for the quarter in which it
moves to Risk Category II, III or IV.
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assessment rate be developed for that
quarter. That rate for the portion of the
quarter that the institution was in Risk
Category I would be determined as for
any other institution in Risk Category I
subject to the same pricing method,
except that the rate would only apply
for the portion of the quarter that the
institution was actually in Risk Category
I.
Since implementation of the 2006
assessments rule in 2007, several large
institutions that were subject to the
supervisory and debt ratings method
have moved from Risk Category I to a
Risk Category II or III. More than once,
changes occurred in these institutions’
debt ratings or CAMELS component
ratings while the institution was in Risk
Category I, but the institutions’
assessment rates for the quarter did not
reflect these changes. In one case, an
institution received a debt rating
downgrade early in the quarter, but,
because it fell to Risk Category II on the
89th day of the quarter, this debt rating
downgrade did not affect its assessment
rate. The FDIC’s proposal is intended to
correct these outcomes and better
ensure that an institution’s assessment
rate reflects the risk that it poses.
The FDIC is also proposing to amend
its assessment regulations to correct
technical errors and make clarifications
to the regulatory language in several
sections of Part 327 for the reasons set
forth below.
A technical correction is proposed to
the language of 12 CFR 327.3(a), the
regulatory requirement that each
depository institution pay an
assessment to the Corporation. Language
creating an exception ‘‘as provided in
paragraph (b) of this section’’ was
inadvertently retained in the initial
clause of section 327.3(a) when the
assessment regulations were amended
in 2006. Formerly, paragraph (b)
excepted newly insured institutions
from payment of assessments for the
semiannual period in which they
became insured institutions; that
exception was eliminated in 2006.
Paragraph (b) now addresses quarterly
certified statement invoices and
payment dates. Accordingly, the FDIC
proposes to amend section 327.3(a) to
eliminate the reference to paragraph (b).
12 CFR 327.6(b)(1) addresses
assessments for the quarter in which a
terminating transfer occurs when the
acquiring institution uses average daily
balances to calculate its assessment
base. In that situation, section
327.6(b)(1) provides that the terminating
institution’s assessment for that quarter
is reduced by the percentage of the
quarter remaining after the terminating
transfer occurred, and calculated at the
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acquiring institution’s assessment rate.
Although it can be inferred that the
terminating institution’s assessment
base for that quarter is to be used in the
reduction calculation, the section is not
explicit. Accordingly, the FDIC
proposes to amend the section to clarify
that the reduction calculation is
accomplished by applying the acquirer’s
rate to the terminating institution’s
assessment base for that quarter.
12 CFR 327.8(i) defines Long Term
Debt Issuer Rating as the ‘‘current
rating’’ of an insured institution’s longterm debt obligations by one of the
named ratings companies. ‘‘Current
rating’’ is defined in § 327.8(i) as ‘‘one
that has been confirmed or assigned
within 12 months before the end of the
quarter for which the assessment rate is
being determined.’’ The section also
provides: ‘‘If no current rating is
available, the institution will be deemed
to have no long-term debt issuer rating.’’
The language of § 327.8(i) requires the
FDIC to disregard a long-term debt
issuer rating that is still in effect—that
is, it has not been withdrawn and
replaced by another rating—if it is
greater than 12 months old when the
FDIC calculates an institution’s
assessment rate. To remedy this, the
FDIC proposes to amend § 327.8(i) to
read as follows:
(i) Long-Term Debt Issuer Rating. A longterm debt issuer rating shall mean a rating of
an insured depository institution’s long-term
debt obligations by Moody’s Investor
Services, Standard & Poor’s, or Fitch Ratings
that has not been withdrawn before the end
of the quarter being assessed. A withdrawn
rating shall mean one that has been
withdrawn by the rating agency and not
replaced with another rating by the same
agency. A long-term debt issuer rating does
not include a rating of a company that
controls an insured depository institution, or
an affiliate or subsidiary of the institution.
Consistent with this amendment, the
FDIC proposes to amend two references
to long-term debt issuer rating, as
defined in § 327.8(i), ‘‘in effect at the
end of the quarter being assessed’’ that
appear in 12 CFR 327.9(d) and 12 CFR
327.9(d)(2). The proposal is to amend
these sections by deleting the phrase ‘‘in
effect at the end of the quarter being
assessed’’ and to add ‘‘as defined in
§ 327.8(i)’’ to section 327.9(d)(2) so that
its construction parallels section
327.9(d).
12 CFR 327.8(l) and (m) define ‘‘New
depository institution’’ and ‘‘Established
depository institution.’’ The former is ‘‘a
bank or thrift that has not been
chartered for at least five years as of the
last day of any quarter for which it is
being assessed’’; the latter is ‘‘a bank or
thrift that has been chartered for at least
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five years as of the last day of any
quarter for which it is being assigned.’’
In the FDIC’s view, this regulatory
language allows a previously uninsured
institution to be treated as an
established institution based on charter
date. To remedy this, the FDIC proposes
to amend sections 327.8(l) and (m) to
read as follows:
(l) New depository institution. A new
insured depository institution is a bank or
thrift that has been federally insured for less
than five years as of the last day of any
quarter for which it is being assessed.
(m) Established depository institution. An
established insured depository institution is
a bank or thrift that has been federally
insured for at least five years as of the last
day of any quarter for which it is being
assessed.
12 CFR 327.9(d)(7)(viii), which
addresses rates applicable to institutions
subject to the subsidiary or credit union
exception, contains language making the
section applicable ‘‘[o]n or after January
1, 2010. * * *’’ This language is
redundant of language in section
327.9(d)(7)(i)(A) and the FDIC proposes
to delete it.
XIV. Effective Date
The FDIC proposes that a final rule
following this proposed rule would
become effective on April 1, 2009,
except for the proposed uniform
increase of seven basis points to current
assessment rates, which would take
effect January 1, 2009, for the
assessment for the first quarter of 2009
only.
XV. Request for Comments
The FDIC seeks comment on every
aspect of this proposed rulemaking. In
particular, the FDIC seeks comment on
the issues set out below. The FDIC asks
that commenters include reasons for
their positions.
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Brokered Deposits
1. Under the proposal, the definition
of brokered deposits for purposes of
both the adjusted brokered deposit ratio
and the brokered deposit adjustment
would include sweep accounts and
deposits received through a network on
a reciprocal basis that meet the statutory
definition of a brokered deposit, but
would exclude high cost deposits,
including those received through a
listing service and the Internet, that do
not meet the statutory definition of a
brokered deposit.
a. Should sweep accounts that meet
the statutory definition of brokered
deposits be excluded from the definition
of brokered deposits for purposes of the
adjusted brokered deposit ratio or the
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brokered deposit adjustment? If so,
how?
b. Should deposits received through a
network on a reciprocal basis that meet
the statutory definition of brokered
deposits be excluded from the definition
of brokered deposits for purposes of the
adjusted brokered deposit ratio or the
brokered deposit adjustment? If so,
how?
c. Should high cost deposits,
including those received through a
listing service and the Internet, that do
not meet the statutory definition of a
brokered deposit be included in the
definition of brokered deposits for
purposes of the adjusted brokered
deposit ratio or the brokered deposit
adjustment? If so, how?
The Adjusted Brokered Deposit Ratio
2. Should the proposed new adjusted
brokered deposit ratio be included in
the financial ratios method?
3. Under the proposal, only brokered
deposits in excess of 10 percent of
domestic deposits would be considered.
Is this the proper amount or should the
percentage be higher or lower?
4. Under the proposal, asset growth
over the previous 4 years would have to
be greater than 20 percent to potentially
trigger the adjusted brokered deposit
ratio.
a. Should this amount be higher or
lower? Should a different time period be
used?
b. Under the proposal, asset growth
rates would be determined using data
adjusted for mergers and acquisitions.
An institution that acquires a new
institution (one less than five years old)
or that acquires branches from another
institution would, in effect, be treated as
if its assets had grown from internal
growth (since its assets four years
previously would not increase, but its
current assets would).
i. Should asset growth rates be
determined using data adjusted for
mergers and acquisitions? An argument
can be made that growth from mergers
and acquisitions is still growth.
ii. Should growth arising from merger
with or the acquisition of or by an
institution with no assets four years
previously be excluded from the asset
growth determination?
iii. Should growth arising from the
acquisition of branches from another
institution be excluded from the asset
growth determination? If so, how could
this be done, given that institutions do
not report branch acquisitions in the
Call Report or TFR?
The Large Bank Method
5. Under the proposal, the assessment
rate for a large institution with a long-
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61579
term debt issuer rating would be
determined using a combination of the
institution’s weighted average CAMELS
component rating, its long-term debt
issuer ratings (converted to numbers
and averaged) and the financial ratios
method assessment rate, each equally
weighted.
a. Should the financial ratios method
be incorporated in this manner?
b. Should the weight assigned to each
of the three measures be equal, as
proposed, or should different weights be
assigned?
The Large Bank Adjustment
6. Under the proposal, the maximum
large bank adjustment would be
increased to one basis point. Should it
be increased? Should it be increased
further?
The Unsecured Debt Adjustment—
7. Under the proposal, an institution’s
base assessment rate could be lowered
for the unsecured debt adjustment.
a. Should there be an unsecured debt
adjustment?
b. For a large institution, the
unsecured debt adjustment would be
determined by multiplying the
institution’s long-term unsecured debts
as a percentage of domestic deposits by
20 basis points.
i. Is this the proper way to calculate
an unsecured debt adjustment for a large
institution?
ii. Should other amounts be included
in the unsecured debt adjustment?
iii. Should any amounts be excluded
from the adjustment?
c. Are the proposed definitions of
long-term unsecured debts the right
definitions or should they be changed?
i. Should a long-term senior
unsecured or subordinated debt that has
put options or other provisions that
would allow the holder to accelerate
payment (for example, if capital fell
below a certain level) be excluded from
the definition? (Under the proposal, it
would not be.)
d. Under the proposal, for senior
unsecured or subordinated debt to be
considered ‘‘long-term,’’ it must have a
remaining maturity of at least one year.
Should this period be longer? If so, how
long should it be?
e. For a small institution, the
unsecured debt adjustment would factor
in qualified amounts of Tier 1 capital in
addition to long-term unsecured debt.
The amount of qualified Tier 1 capital
would be the sum of one-half of the Tier
1 capital amount between 10 percent
and 15 percent of adjusted average
assets (for Call Report filers) or adjusted
total assets (for TFR filers) and the full
amount of Tier 1 capital amount
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exceeding 15 percent of adjusted
average assets (for Call Report filers) or
adjusted total assets (for TFR filers).
i. Should Tier 1 capital be included in
the unsecured debt adjustment for a
small institution?
ii. Some may be concerned that this
proposal might, in effect, establish new
capital standards. An alternative would
be to count some portion of all Tier 1
capital above 5 percent (the minimum
amount needed for an institution to be
well capitalized) in the unsecured debt
adjustment for small institutions. Is this
alternative preferable to the proposal? If
so, what portion of Tier 1 capital above
5 percent should be included in the
unsecured debt adjustment?
iii. Should the definition of qualified
Tier 1 capital be otherwise expanded to
include larger amounts of capital or
reduced to exclude more capital?
iv. Should other amounts be included
in the unsecured debt adjustment?
8. Under the proposal, any decrease in
base assessment rates resulting from an
unsecured debt adjustment would be
limited to two basis points. Is this
amount sufficient to encourage a
significant number of institutions to
issue additional subordinated debt or
senior unsecured debt? Should the
maximum possible adjustment be larger
or smaller?
ii. Should the multiplication factor be
25 basis points or some higher or lower
amount?
c. Should the adjustment be limited to
10 basis points?
9. Under the proposal, the unsecured
debt adjustment could lower an
institution’s rate below the minimum
initial base assessment rate for its risk
category. Should this be allowed?
The Secured Liability Adjustment
10. Under the proposal, an
institution’s base assessment rates could
be increased by the secured liability
adjustment.
a. Should there be a secured liabilities
adjustment?
b. Should the 15 percent ratio of
secured liabilities to domestic deposits
be increased or decreased?
c. Should any increase in assessment
rates resulting from the secured liability
adjustment be limited to 50 percent or
should another limit or no limit apply?
Assessment Rates
12. Under the proposal, effective
April 1, 2009, the spread between
minimum and maximum initial base
assessment rates in Risk Category I
would increase from the current 2 basis
points to an initial range of 4 basis
points. Is this the appropriate spread or
should it be greater or less?
13. Under the proposal, effective
April 1, 2009, based upon June 30, 2008
data, the percentage of both large and
small established Risk Category I
institutions subject to: (a) The minimum
initial base assessment rate would be set
at 25 percent; and (b) the maximum
initial base assessment rate would be set
at 15 percent. (These percentages would
change over time as institution’s risk
measures change.) Are these the proper
percentages or should they be higher or
lower?
14. Under the proposal, effective
April 1, 2009, initial base assessment
rates would be as set forth in Table 17
below.
Brokered Deposit Adjustment
11. Under the proposal, an institution
in Risk Category II, III or IV would also
be subject to an adjustment for brokered
deposits.
a. Should a brokered deposit
adjustment be made?
b. Is the manner of calculating the
adjustment appropriate or should it be
changed?
i. Should the threshold ratio of
brokered deposits to domestic deposits
be 10 percent or some higher or lower
amount?
TABLE 17—PROPOSED INITIAL BASE ASSESSMENT RATES
Risk category
I*
II
Annual Rates (in basis points) .............................................
14
IV
30
45
Maximum
10
III
20
Minimum
* Initial base rates that were not the minimum or maximum rate would vary between these rates.
Should these be the initial base
assessment rates or should they be
decreased or increased?
15. Under the proposal, effective
April 1, 2009, after applying all possible
adjustments, total base assessment rates
for each risk category would be as set
out in Table 18 below.
TABLE 18—RANGE OF TOTAL BASE ASSESSMENT RATES*
Risk category
II
Risk category
III
Initial base assessment rate ................................................................
Unsecured debt adjustment .................................................................
Secured liability adjustment .................................................................
Brokered deposit adjustment ...............................................................
10—14 ..............
¥2–0 ................
0–7 ...................
...........................
20 .....................
¥2–0 ................
0–10 .................
0–10 .................
30 .....................
¥2–0 ................
0–15 .................
0–10 .................
45
¥2–0
0–22.5
0–10
Total base assessment rate .........................................................
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Risk category
I
Risk category
IV
8–21.0 ..............
18–40.0 ............
28–55.0 ............
43–77.5
* All amounts for all risk categories are in basis points annually. Initial base rates that were not the minimum or maximum rate would vary between these rates.
a. Are these the appropriate rates or
should they be decreased or increased?
b. Is the maximum assessment rates
applicable to Risk Categories III and IV
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so high that they might cause the failure
of an institution that might not
otherwise fail? Should rates for Risk
Categories III or IV be capped at lower
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amounts? If so, what should the cap(s)
be?
c. Under the proposal, an institution’s
initial base assessment rate would be
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calculated and adjustments made in the
following order: First, any large bank
adjustment; second, any unsecured debt
adjustment; third, any secured liability
adjustment; and, finally, any brokered
deposit adjustment. Is this the
appropriate order or should it be
changed?
16. The proposed rule would continue
to allow the FDIC Board to adopt actual
rates that were higher or lower than
total base assessment rates without the
necessity of further notice-and-comment
rulemaking, provided that: (1) The
Board could not thereafter increase or
decrease rates from one quarter to the
next by more than three basis points;
and (2) cumulative increases and
decreases could not be more than three
basis points higher or lower than the
adjusted base rates without further
notice-and-comment rulemaking.
Should the Board the FDIC should
retain this authority to make changes
within prescribed limits to assessment
rates, as proposed, without the necessity
of additional notice-and-comment
rulemaking?
Assessment Rates for the First Quarter
of 2009
17. Should the FDIC uniformly
increase current assessment rates by
seven basis points for the first quarter of
2009 as proposed? Should the increase
be greater or less? Should any rate
increase be postponed until the second
quarter of 2009 when the proposed
changes to the assessment system would
take effect?
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Definition of well capitalized for
assessment purposes
18. Recently, some institutions have
had to write down or write off the value
of stock in Fannie Mae and Freddie
Mac. If an institution is adequately or
undercapitalized for assessment
purposes, but would be well capitalized
absent such a write-down or write-off,
should it be treated as well capitalized
for assessment purposes? If an
institution is undercapitalized for
assessment purposes, but would be
adequately capitalized absent such a
write-down or write-off, should it be
treated as adequately capitalized for
assessment purposes? If so, how would
the institution receive such different
capital treatment? Should it have to file
a request for review with the FDIC?
66 See
5 U.S.C. 603, 604 and 605.
U.S.C. 601.
68 Throughout this regulatory flexibility analysis
(unlike the rest of the notice of proposed
rulemaking), a ‘‘small institution’’ refers to an
institution with assets of $165 million or less.
67 5
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XVI. Regulatory Analysis and
Procedure
A. Solicitation of Comments on Use of
Plain Language
Section 722 of the Gramm-LeachBliley Act, Public Law 106–102, 113
Stat. 1338, 1471 (Nov. 12, 1999),
requires the federal banking agencies to
use plain language in all proposed and
final rules published after January 1,
2000. The FDIC invites your comments
on how to make this proposal easier to
understand. For example:
• Has the FDIC organized the material
to suit your needs? If not, how could
this material be better organized?
• Are the requirements in the
proposed regulation clearly stated? If
not, how could the regulation be more
clearly stated?
• Does the proposed regulation
contain language or jargon that is not
clear? If so, which language requires
clarification?
• Would a different format (grouping
and order of sections, use of headings,
paragraphing) make the regulation
easier to understand? If so, what
changes to the format would make the
regulation easier to understand?
• What else could the FDIC do to
make the regulation easier to
understand?
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
requires that each federal agency either
certify that a proposed rule would not,
if adopted in final form, have a
significant economic impact on a
substantial number of small entities or
prepare an initial regulatory flexibility
analysis of the proposal and publish the
analysis for comment.66 Certain types of
rules, such as rules of particular
applicability relating to rates or
corporate or financial structures, or
practices relating to such rates or
structures, are expressly excluded from
the definition of ‘‘rule’’ for purposes of
the RFA.67 The proposed rule relates
directly to the rates imposed on insured
depository institutions for deposit
insurance, and to the risk-based
assessment system components that
measure risk and weigh that risk in
determining each institution’s
assessment rate, and includes proposed
technical and other changes to the
FDIC’s assessment regulations.
Nonetheless, the FDIC is voluntarily
69 An institution’s total revenue is defined as the
sum of its annual net interest income and noninterest income. An institution’s profit is defined as
income before taxes and extraordinary items, gross
of loan loss provisions.
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61581
undertaking an initial regulatory
flexibility analysis of the proposal and
seeking comment on it.
As of June 30, 2008, of the 8,451
insured commercial banks and savings
institutions, there were 4,758 small
insured depository institutions as that
term is defined for purposes of the RFA
(i.e., those with $165 million or less in
assets).
For purposes of this analysis, whether
the FDIC were to collect needed
assessments under the existing rule or
under the proposed rule, the total
amount of assessments collected would
be the same. The FDIC’s total
assessment needs are driven by the
statutory requirement that the FDIC
adopt a restoration plan that provides
that the fund reserve ratio reach at least
1.15 percent within five years (absent
extraordinary circumstances) and by the
FDIC’s aggregate insurance losses,
expenses, investment income, and
insured deposit growth, among other
factors. In this analysis, each
institution’s existing rate is increased
uniformly so that total FDIC assessment
revenue would equal that provided
under the proposed rates. Therefore,
beginning April 1, 2009, the proposed
rule would merely alter the distribution
of assessments among insured
institutions compared to the adjusted
existing rates. Using the data as of June
30, 2008, the FDIC calculated the total
assessments that would be collected
under the base rate schedule in the
proposed rule.
The economic impact of the proposal
on each small institution for RFA
purposes (i.e., institutions with assets of
$165 million or less) was then
calculated as the difference in annual
assessments under the proposed rule
compared to the existing rule as a
percentage of the institution’s annual
revenue and annual profits, assuming
the same total assessments collected by
the FDIC from the banking
industry.68 69 70
Based on the June 2008 data, of the
total of 4,758 small institutions, five
percent would have experienced an
increase in assessments equal to five
percent or more of their total revenue.
These figures do not reflect a significant
economic impact on revenues for a
substantial number of small insured
institutions. Table 19 below sets forth
the results of the analysis in more detail.
70 The proposed rates for the first of 2009 would
not alter the present distribution of rates, but would
uniformly raise the rates for all institutions,
including all small institutions for RFA purposes.
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TABLE 19—PROPOSED ASSESSMENTS COMPARED TO A UNIFORM INCREASE IN ASSESSMENTS AS A PERCENTAGE OF
INSTITUTION TOTAL REVENUE
Number of
institutions
Change
Percent of
institutions
More than 10 percent lower ....................................................................................................................
5 to 10 percent lower ...............................................................................................................................
0 to 5 percent lower .................................................................................................................................
0 to 5 percent higher ...............................................................................................................................
5 to 10 percent higher .............................................................................................................................
More than 10 percent higher ...................................................................................................................
142
1,150
2,975
253
167
71
2.98
24.17
62.53
5.32
3.51
1.49
Total ..................................................................................................................................................
4,758
100.00
The FDIC performed a similar
analysis to determine the impact on
profits for small institutions. Based on
June 2008 data, of those small
institutions with reported profits, about
6 percent would have an increase in
assessments equal to 10 percent or more
of their profits. Again, these figures do
not reflect a significant economic
impact on profits for a substantial
number of small insured institutions.
Table 20 sets forth the results of the
analysis in more detail.
TABLE 20—PROPOSED ASSESSMENTS COMPARED TO A UNIFORM INCREASE IN ASSESSMENTS AS A PERCENTAGE OF
INSTITUTION PROFITS*
Number of
institutions
Change
Percent of
institutions
More than 30 percent lower ....................................................................................................................
20 to 30 percent lower .............................................................................................................................
10 to 20 percent lower .............................................................................................................................
5 to 10 percent lower ...............................................................................................................................
0 to 5 percent lower .................................................................................................................................
0 to 10 percent more ...............................................................................................................................
Greater than 10 percent ..........................................................................................................................
496
471
1,666
624
227
63
218
13.17
12.51
44.25
16.57
6.03
1.67
5.79
Total ..................................................................................................................................................
3,765
100.00
* Institutions with negative or no profit were excluded. These institutions are shown separately in Table 21.
Table 20 excludes small institutions
that either show no profit or show a
loss, because a percentage cannot be
calculated. The FDIC analyzed the effect
of the proposal on these institutions by
determining the annual assessment
change (either an increase or a decrease)
that would result. Table 21 below shows
that just over 6 percent (61) of the 991
small insured institutions with negative
or no reported profits would have an
increase of $20,000 or more in their
annual assessments.
TABLE 21—PROPOSED ASSESSMENTS COMPARED TO A UNIFORM INCREASE IN ASSESSMENTS FOR INSTITUTIONS WITH
NEGATIVE OR NO REPORTED PROFIT
Number of
institutions
Change in assessments
Percent of
institutions
62
100
213
349
63
89
54
61
6.26
10.09
21.49
35.22
6.36
8.98
5.45
6.16
Total ..................................................................................................................................................
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$20,000 decrease or more ......................................................................................................................
$10,000–$20,000 decrease .....................................................................................................................
$5,000–$10,000 decrease .......................................................................................................................
$1,000–$5,000 decrease .........................................................................................................................
$0–$1,000 decrease ................................................................................................................................
$0–$10,000 increase ...............................................................................................................................
$10,000–$20,000 increase ......................................................................................................................
$20,000 increase or more .......................................................................................................................
991
100.0
The proposed rule does not directly
impose any ‘‘reporting’’ or
‘‘recordkeeping’’ requirements within
the meaning of the Paperwork
Reduction Act. The compliance
requirements for the proposed rule
would not exceed existing compliance
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requirements for the present system of
FDIC deposit insurance assessments,
which, in any event, are governed by
separate regulations.
The FDIC is unaware of any
duplicative, overlapping or conflicting
federal rules.
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The initial regulatory flexibility
analysis set forth above demonstrates
that, if adopted in final form, the
proposed rule would not have a
significant economic impact on a
substantial number of small institutions
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within the meaning of those terms as
used in the RFA.71
Commenters are invited to provide
the FDIC with any information they may
have about the likely quantitative effects
of the proposal on small insured
depository institutions (those with $165
million or less in assets).
XVII. Paperwork Reduction Act
No collections of information
pursuant to the Paperwork Reduction
Act (44 U.S.C. 3501 et seq.) are
contained in the proposed rule.
A. The Treasury and General
Government Appropriations Act, 1999—
Assessment of Federal Regulations and
Policies on Families
The FDIC has determined that the
proposed rule will not affect family
well-being within the meaning of
section 654 of the Treasury and General
Government Appropriations Act,
enacted as part of the Omnibus
Consolidated and Emergency
Supplemental Appropriations Act of
1999 (Pub. L. 105–277, 112 Stat. 2681).
List of Subjects in 12 CFR Part 327
Bank deposit insurance, Banks,
banking, Savings associations.
For the reasons set forth in the
preamble, the FDIC proposes to amend
chapter III of title 12 of the Code of
Federal Regulations as follows:
PART 327—ASSESSMENTS
1. The authority citation for part 327
continues to read as follows:
Authority: 12 U.S.C. 1441, 1813, 1815,
1817–1819, 1821; Sec. 2101–2109, Pub. L.
109–171, 120 Stat. 9–21, and Sec. 3, Pub. L.
109–173, 119 Stat. 3605.
2. Revise § 327.3(a)(1) to read as
follows:
§ 327.3
Payment of assessments.
(a) Required. (1) In general. Each
insured depository institution shall pay
to the Corporation for each assessment
period an assessment determined in
accordance with this part 327.
*
*
*
*
*
3. Revise § 327.6(b)(1) to read as
follows:
§ 327.6 Terminating transfers; other
terminations of insurance.
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*
*
*
*
*
(b) Assessment for quarter in which
the terminating transfer occurs—(1)
Acquirer using Average Daily Balances.
If an acquiring institution’s assessment
base is computed using average daily
balances pursuant to § 327.5, the
71 5
U.S.C. 605.
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terminating institution’s assessment for
the quarter in which the terminating
transfer occurs shall be reduced by the
percentage of the quarter remaining after
the terminating transfer and calculated
at the acquiring institution’s rate and
using the assessment base reported in
the terminating institution’s report of
condition for that quarter.
*
*
*
*
*
4. Revise § 327.8(g), (h), (i), (l), and
(m), and add paragraphs (o), (p), (q) and
(r) to read as follows:
§ 327.8
Definitions.
*
*
*
*
*
(g) Small Institution. An insured
depository institution with assets of less
than $10 billion as of December 31,
2006 (other than an insured branch of a
foreign bank or an institution classified
as large for purposes of § 327.9(d)(8))
shall be classified as a small institution.
If, after December 31, 2006, an
institution classified as large under
paragraph (h) of this section reports
assets of less than $10 billion in its
reports of condition for four consecutive
quarters, the FDIC will reclassify the
institution as small beginning the
following quarter.
(h) Large Institution. An institution
classified as large for purposes of
§ 327.9(d)(8) or an insured depository
institution with assets of $10 billion or
more as of December 31, 2006 (other
than an insured branch of a foreign
bank) shall be classified as a large
institution. If, after December 31, 2006,
an institution classified as small under
paragraph (g) of this section reports
assets of $10 billion or more in its
reports of condition for four consecutive
quarters, the FDIC will reclassify the
institution as large beginning the
following quarter.
(i) Long-Term Debt Issuer Rating. A
long-term debt issuer rating shall mean
a rating of an insured depository
institution’s long-term debt obligations
by Moody’s Investor Services, Standard
& Poor’s, or Fitch Ratings that has not
been withdrawn before the end of the
quarter being assessed. A withdrawn
rating shall mean one that has been
withdrawn by the rating agency and not
replaced with another rating by the
same agency. A long-term debt issuer
rating does not include a rating of a
company that controls an insured
depository institution, or an affiliate or
subsidiary of the institution.
*
*
*
*
*
(l) New depository institution. A new
insured depository institution is a bank
or thrift that has been federally insured
for less than five years as of the last day
of any quarter for which it is being
assessed.
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(m) Established depository institution.
An established insured depository
institution is a bank or thrift that has
been federally insured for at least five
years as of the last day of any quarter
for which it is being assessed.
(1) Merger or consolidation involving
new and established institution(s).
Subject to paragraphs (m)(2), (3), (4), (5)
of this section and § 327.9(d)(10)(ii),
(iii), when an established institution
merges into or consolidates with a new
institution, the resulting institution is a
new institution unless:
(i) The assets of the established
institution, as reported in its report of
condition for the quarter ending
immediately before the merger,
exceeded the assets of the new
institution, as reported in its report of
condition for the quarter ending
immediately before the merger; and
(ii) Substantially all of the
management of the established
institution continued as management of
the resulting or surviving institution.
(2) Consolidation involving
established institutions. When
established institutions consolidate into
a new institution, the resulting
institution is an established institution.
(3) Grandfather exception. If a new
institution merges into an established
institution, and the merger agreement
was entered into on or before July 11,
2006, the resulting institution shall be
deemed to be an established institution
for purposes of this section.
(4) Subsidiary exception. Subject to
paragraph (m)(5) of this section, a new
institution will be considered
established if it is a wholly owned
subsidiary of:
(i) A company that is a bank holding
company under the Bank Holding
Company Act of 1956 or a savings and
loan holding company under the Home
Owners’ Loan Act, and:
(A) At least one eligible depository
institution (as defined in 12 CFR
303.2(r)) that is owned by the holding
company has been chartered as a bank
or savings association for at least five
years as of the date that the otherwise
new institution was established; and
(B) The holding company has a
composite rating of at least ‘‘2’’ for bank
holding companies or an above average
or ‘‘A’’ rating for savings and loan
holding companies and at least 75
percent of its insured depository
institution assets are assets of eligible
depository institutions, as defined in 12
CFR 303.2(r); or
(ii) An eligible depository institution,
as defined in 12 CFR 303.2(r), that has
been chartered as a bank or savings
association for at least five years as of
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the date that the otherwise new
institution was established.
(5) Effect of credit union conversion.
In determining whether an insured
depository institution is new or
established, the FDIC will include any
period of time that the institution was
a federally insured credit union.
*
*
*
*
*
(o) Unsecured debt—For purposes of
the unsecured debt adjustment as set
forth in § 327.9(d)(5), unsecured debt
shall include senior unsecured
liabilities and subordinated debt.
(p) Senior unsecured liability—For
purposes of the unsecured debt
adjustment as set forth in § 327.9(d)(5),
senior unsecured liabilities shall be the
unsecured portion of other borrowed
money as reported on reports of
condition (Call Reports and Thrift
Financial Reports).
(q) Subordinated debt—For purposes
of the unsecured debt adjustment as set
forth in § 327.9(d)(5), subordinated debt
shall be as defined in the report of
condition for the reporting period;
however, subordinated debt shall also
include limited-life preferred stock as
defined in the report of condition for the
reporting period.
(r) Long-term unsecured debt—For
purposes of the unsecured debt
adjustment as set forth in § 327.9(d)(5),
long-term unsecured debt shall be
unsecured debt with at least one year
remaining until maturity.
5. Revise §§ 327.9 and 327.10 to read
as follows:
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§ 327.9 Assessment risk categories and
pricing methods.
(a) Risk Categories.—Each insured
depository institution shall be assigned
to one of the following four Risk
Categories based upon the institution’s
capital evaluation and supervisory
evaluation as defined in this section.
(1) Risk Category I. All institutions in
Supervisory Group A that are Well
Capitalized;
(2) Risk Category II. All institutions in
Supervisory Group A that are
Adequately Capitalized, and all
institutions in Supervisory Group B that
are either Well Capitalized or
Adequately Capitalized;
(3) Risk Category III. All institutions
in Supervisory Groups A and B that are
Undercapitalized, and all institutions in
Supervisory Group C that are Well
Capitalized or Adequately Capitalized;
and
(4) Risk Category IV. All institutions
in Supervisory Group C that are
Undercapitalized.
(b) Capital evaluations. An institution
will receive one of the following three
capital evaluations on the basis of data
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reported in the institution’s
Consolidated Reports of Condition and
Income, Report of Assets and Liabilities
of U.S. Branches and Agencies of
Foreign Banks, or Thrift Financial
Report dated as of March 31 for the
assessment period beginning the
preceding January 1; dated as of June 30
for the assessment period beginning the
preceding April 1; dated as of
September 30 for the assessment period
beginning the preceding July 1; and
dated as of December 31 for the
assessment period beginning the
preceding October 1.
(1) Well Capitalized. (i) Except as
provided in paragraph (b)(1)(ii) of this
section, a Well Capitalized institution is
one that satisfies each of the following
capital ratio standards: Total risk-based
ratio, 10.0 percent or greater; Tier 1 riskbased ratio, 6.0 percent or greater; and
Tier 1 leverage ratio, 5.0 percent or
greater.
(ii) For purposes of this section, an
insured branch of a foreign bank will be
deemed to be Well Capitalized if the
insured branch:
(A) Maintains the pledge of assets
required under § 347.209 of this chapter;
and
(B) Maintains the eligible assets
prescribed under § 347.210 of this
chapter at 108 percent or more of the
average book value of the insured
branch’s third-party liabilities for the
quarter ending on the report date
specified in paragraph (b) of this
section.
(2) Adequately Capitalized. (i) Except
as provided in paragraph (b)(2)(ii) of
this section, an Adequately Capitalized
institution is one that does not satisfy
the standards of Well Capitalized under
this paragraph but satisfies each of the
following capital ratio standards: Total
risk-based ratio, 8.0 percent or greater;
Tier 1 risk-based ratio, 4.0 percent or
greater; and Tier 1 leverage ratio, 4.0
percent or greater.
(ii) For purposes of this section, an
insured branch of a foreign bank will be
deemed to be Adequately Capitalized if
the insured branch:
(A) Maintains the pledge of assets
required under § 347.209 of this chapter;
and
(B) Maintains the eligible assets
prescribed under § 347.210 of this
chapter at 106 percent or more of the
average book value of the insured
branch’s third-party liabilities for the
quarter ending on the report date
specified in paragraph (b) of this
section; and
(C) Does not meet the definition of a
Well Capitalized insured branch of a
foreign bank.
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(3) Undercapitalized. An
undercapitalized institution is one that
does not qualify as either Well
Capitalized or Adequately Capitalized
under paragraphs (b)(1) and (b)(2) of this
section.
(c) Supervisory evaluations. Each
institution will be assigned to one of
three Supervisory Groups based on the
Corporation’s consideration of
supervisory evaluations provided by the
institution’s primary federal regulator.
The supervisory evaluations include the
results of examination findings by the
primary federal regulator, as well as
other information that the primary
federal regulator determines to be
relevant. In addition, the Corporation
will take into consideration such other
information (such as state examination
findings, as appropriate) as it
determines to be relevant to the
institution’s financial condition and the
risk posed to the Deposit Insurance
Fund. The three Supervisory Groups
are:
(1) Supervisory Group ‘‘A.’’ This
Supervisory Group consists of
financially sound institutions with only
a few minor weaknesses;
(2) Supervisory Group ‘‘B.’’ This
Supervisory Group consists of
institutions that demonstrate
weaknesses which, if not corrected,
could result in significant deterioration
of the institution and increased risk of
loss to the Deposit Insurance Fund; and
(3) Supervisory Group ‘‘C.’’ This
Supervisory Group consists of
institutions that pose a substantial
probability of loss to the Deposit
Insurance Fund unless effective
corrective action is taken.
(d) Determining Initial Base
Assessment Rates for Risk Category I
Institutions. Subject to paragraphs
(d)(2)(i), (4), (5), (6), (8), (9) and (10) of
this section, an insured depository
institution in Risk Category I, except for
a large institution that has at least one
long-term debt issuer rating, as defined
in § 327.8(i), shall have its initial base
assessment rate determined using the
financial ratios method set forth in
paragraph (d)(1) of this section. A large
insured depository institution in Risk
Category I that has at least one long-term
debt issuer rating shall have its initial
base assessment rate determined using
the large bank method set forth in
paragraph (d)(2) of this section (subject
to paragraphs (d)(2)(i), (4), (5), (6), (8),
(9) and (10) of this section). The initial
base assessment rate for a large
institution whose assessment rate in the
prior quarter was determined using the
large bank method, but which no longer
has a long-term debt issuer rating, shall
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be determined using the financial ratios
method.
(1) Financial ratios method. Under the
financial ratios method for Risk
Category I institutions, each of six
financial ratios and a weighted average
of CAMELS component ratings will be
multiplied by a corresponding pricing
multiplier. The sum of these products
will be added to or subtracted from a
uniform amount. The resulting sum
shall equal the institution’s initial base
assessment rate; provided, however, that
no institution’s initial base assessment
rate shall be less than the minimum
initial base assessment rate in effect for
Risk Category I institutions for that
quarter nor greater than the maximum
initial base assessment rate in effect for
Risk Category I institutions for that
quarter. An institution’s initial base
assessment rate, subject to adjustment
pursuant to paragraphs (d)(4), (5) and (6)
of this section, as appropriate (which
will produce the total base assessment
rate), and adjusted for the actual
assessment rates set by the Board under
§ 327.10(c), will equal an institution’s
assessment rate; provided, however, that
no institution’s total base assessment
rate will be less than the minimum total
base assessment rate in effect for Risk
Category I institutions for that quarter
nor greater than the maximum total base
assessment rate in effect for Risk
Category I institutions for that quarter.
The six financial ratios are: Tier 1
Leverage Ratio; Loans past due 30—89
days/gross assets; Nonperforming
assets/gross assets; Net loan charge-offs/
gross assets; Net income before taxes/
risk-weighted assets; and the Adjusted
brokered deposit ratio. The ratios are
defined in Table A.1 of Appendix A to
this subpart. The ratios will be
determined for an assessment period
based upon information contained in an
institution’s report of condition filed as
of the last day of the assessment period
as set out in § 327.9(b). The weighted
average of CAMELS component ratings
is created by multiplying each
component by the following percentages
and adding the products: Capital
adequacy—25%, Asset quality—20%,
Management—25%, Earnings—10%,
Liquidity—10%, and Sensitivity to
market risk—10%. Appendix A to this
subpart contains the initial values of the
pricing multipliers and uniform
amount, describes their derivation, and
explains how they will be periodically
updated.
(i) Publication and uniform amount
and pricing multipliers. The FDIC will
publish notice in the Federal Register
whenever a change is made to the
uniform amount or the pricing
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multipliers for the financial ratios
method.
(ii) Implementation of CAMELS rating
changes—(A) Changes between risk
categories. If, during a quarter, a
CAMELS composite rating change
occurs that results in an institution
whose Risk Category I assessment rate is
determined using the financial ratios
method moving from Risk Category I to
Risk Category II, III or IV, the
institution’s initial base assessment rate
for the portion of the quarter that it was
in Risk Category I shall be determined
using the supervisory ratings in effect
before the change and the financial
ratios as of the end of the quarter,
subject to adjustment pursuant to
paragraphs (d)(4), (5), and (6) of this
section, as appropriate, and adjusted for
the actual assessment rates set by the
Board under § 327.10(c). For the portion
of the quarter that the institution was
not in Risk Category I, the institution’s
initial base assessment rate, which shall
be subject to adjustment pursuant to
paragraphs (d)(5), (6) and (7), shall be
determined under the assessment
schedule for the appropriate Risk
Category. If, during a quarter, a
CAMELS composite rating change
occurs that results in an institution
whose initial base assessment rate is
determined using the financial ratios
method moving from Risk Category II,
III or IV to Risk Category I, the
institution’s initial base assessment rate
for the portion of the quarter that it was
in Risk Category I shall be determined
using the financial ratios method,
subject to adjustment pursuant to
paragraphs (d)(4), (5), and (6) of this
section, as appropriate, and adjusted for
the actual assessment rates set by the
Board under § 327.10(c). For the portion
of the quarter that the institution was
not in Risk Category I, the institution’s
initial base assessment rate, which shall
be subject to adjustment pursuant to
paragraphs (d)(5), (6) and (7), shall be
determined under the assessment
schedule for the appropriate Risk
Category.
(B) Changes within Risk Category I. If,
during a quarter, an institution’s
CAMELS component ratings change in a
way that would change the institution’s
initial base assessment rate within Risk
Category I, the initial base assessment
rate for the period before the change
shall be determined under the financial
ratios method using the CAMELS
component ratings in effect before the
change. Beginning on the date of the
CAMELS component ratings change, the
initial base assessment rate for the
remainder of the quarter shall be
determined using the CAMELS
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61585
component ratings in effect after the
change.
(2) Large bank method. A large
insured depository institution in Risk
Category I that has at least one long-term
debt issuer rating, as defined in
§ 327.8(i), shall have its initial base
assessment rate determined using the
large bank method. The initial base
assessment rate under the large bank
method shall be derived from three
components, each given a 331⁄3 percent
weight: A component derived using the
financial ratios method, a component
derived using long-term debt issuer
ratings, and a component derived using
CAMELS component ratings. An
institution’s initial base assessment rate
using the financial ratios method will be
converted from the range of initial base
assessment rates to a scale of from 1 to
3 by subtracting 8 from its initial base
assessment rate (expressed in basis
points) and dividing the result by 2. The
quotient will equal an institution’s
financial ratios score. Its CAMELS
component ratings will be weighted to
derive a weighted average CAMELS
rating using the same weights applied in
the financial ratios method as set forth
under paragraph (d)(1) of this section.
Long-term debt issuer ratings will be
converted to numerical values between
1 and 3 as provided in Appendix B to
this subpart and the converted values
will be averaged. The financial ratios
score, the weighted average CAMELS
rating and the average of converted
long-term debt issuer ratings each will
be multiplied by 1.764 (which shall be
the pricing multiplier), and the products
will be summed. To this result will be
added 1.651 (which shall be a uniform
amount for all institutions subject to the
large bank method). The resulting sum
shall equal the institution’s initial base
assessment rate; provided, however, that
no institution’s initial base assessment
rate shall be less than the minimum
initial base assessment rate in effect for
Risk Category I institutions for that
quarter nor greater than the maximum
initial base assessment rate in effect for
Risk Category I institutions for that
quarter. An institution’s initial base
assessment rate, subject to adjustment
pursuant to paragraphs (d)(4), (5), and
(6) of this section, as appropriate (which
will produce the total base assessment
rate), and adjusted for the actual
assessment rates set by the Board
pursuant to § 327.10(c), will equal an
institution’s assessment rate; provided,
however, that no institution’s total base
assessment rate will be less than the
minimum total base assessment rate in
effect for Risk Category I institutions for
that quarter nor greater than the
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maximum total base assessment rate in
effect for Risk Category I institutions for
that quarter.
(i) Implementation of Large Bank
Method Changes between Risk
Categories. If, during a quarter, a
CAMELS rating change occurs that
results in an institution whose Risk
Category I initial base assessment rate is
determined using the large bank method
or an insured branch of a foreign bank
moving from Risk Category I to Risk
Category II, III or IV, the institution’s
initial base assessment rate for the
portion of the quarter that it was in Risk
Category I shall be determined as for
any other institution in Risk Category I
whose initial base assessment rate is
determined using the large bank
method, subject to adjustments pursuant
to paragraph (d)(4), (5), and (6) of this
section, as appropriate, and adjusted for
the actual assessment rates set by the
Board under § 327.10(c). If, during a
quarter, a CAMELS rating change occurs
that results in a large institution with a
long-term debt issuer rating or an
insured branch of a foreign bank moving
from Risk Category II, III or IV to Risk
Category I, the institution’s assessment
rate for the portion of the quarter that
it was in Risk Category I shall equal the
rate determined under paragraphs (d)(2)
(and (d)(4), (5), and (6)) or (d)(3) (and
(d)(4), (5), and (6)) of this section, as
appropriate.
(ii) Implementation of Large Bank
Method Changes within Risk Category I.
If, during a quarter, an institution whose
Risk Category I initial base assessment
rate is determined using the large bank
method remains in Risk Category I, but
the financial ratios score, a CAMELS
component or a long-term debt issuer
rating changes that would affect the
institution’s initial base assessment rate,
or if, during a quarter, an insured
branch of a foreign bank remains in Risk
Category I, but a ROCA component
rating changes that would affect the
institution’s initial base assessment rate,
separate assessment rates for the
portion(s) of the quarter before and after
the change(s) shall be determined under
paragraphs (d)(2) (and (d)(4), (5), and
(6)) or (d)(3) (and (d)(4) , (5), and (6)) of
this section, as appropriate.
(3) Assessment rate for insured
branches of foreign banks—(i) Insured
branches of foreign banks in Risk
Category I. Insured branches of foreign
banks in Risk Category I shall be
assessed using the weighted average
ROCA component rating, as determined
under paragraph (d)(3)(ii) of this
section.
(ii) Weighted average ROCA
component rating. The weighted
average ROCA component rating shall
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equal the sum of the products that result
from multiplying ROCA component
ratings by the following percentages:
Risk Management—35%, Operational
Controls—25%, Compliance—25%, and
Asset Quality—15%. The weighted
average ROCA rating will be multiplied
by 5.291 (which shall be the pricing
multiplier). To this result will be added
1.651 (which shall be a uniform amount
for all insured branches of foreign
banks). The resulting sum—the initial
base assessment rate—subject to
adjustments pursuant to paragraph
(d)(4) of this section and adjusted for
assessment rates set by the FDIC
pursuant to § 327.10(c), will equal an
institution’s total base assessment rate;
provided, however, that no institution’s
total base assessment rate will be less
than the minimum total base assessment
rate in effect for Risk Category I
institutions for that quarter nor greater
than the maximum total base
assessment rate in effect for Risk
Category I institutions for that quarter.
(iii) No insured branch of a foreign
bank in any risk category shall be
subject to the unsecured debt
adjustment, the secured liability
adjustment, or the brokered deposit
adjustment.
(4) Adjustment for large banks or
insured branches of foreign banks—(i)
Basis for and size of adjustment. Within
Risk Category I, large institutions and
insured branches of foreign banks
except new institutions as provided
under paragraph (d)(9)(i)(A) of this
section, are subject to adjustment of
their initial base assessment rate. Any
such large bank adjustment shall be
limited to a change in assessment rate
of up to one basis point higher or lower
than the rate determined using the
financial ratios method, the large bank
method, or the weighted average ROCA
component rating method, whichever is
applicable. In determining whether to
make this assessment rate adjustment
for a large institution or an insured
branch of a foreign bank, the FDIC may
consider other relevant information in
addition to the factors used to derive the
risk assignment under paragraphs (d)(1),
(2), or (3) of this section. Relevant
information includes financial
performance and condition information,
other market or supervisory
information, potential loss severity, and
stress considerations, as described in
Appendix C to this subpart.
(ii) Adjustment subject to maximum
and minimum rates. No adjustment to
the initial base assessment rate for large
banks shall decrease any rate so that the
resulting rate would be less than the
minimum initial base assessment rate,
or increase any rate above the maximum
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initial base assessment rate in effect for
the quarter.
(iii) Prior notice of adjustments—(A)
Prior notice of upward adjustment. Prior
to making any upward large bank
adjustment to an institution’s initial
base assessment rate because of
considerations of additional risk
information, the FDIC will formally
notify the institution and its primary
federal regulator and provide an
opportunity to respond. This
notification will include the reasons for
the adjustment and when the
adjustment will take effect.
(B) Prior notice of downward
adjustment. Prior to making any
downward large bank adjustment to an
institution’s initial base assessment rate
because of considerations of additional
risk information, the FDIC will formally
notify the institution’s primary federal
regulator and provide an opportunity to
respond.
(iv) Determination whether to adjust
upward; effective period of adjustment.
After considering an institution’s and
the primary federal regulator’s
responses to the notice, the FDIC will
determine whether the large bank
adjustment to an institution’s initial
base assessment rate is warranted,
taking into account any revisions to
weighted average CAMELS component
ratings, long-term debt issuer ratings,
and financial ratios, as well as any
actions taken by the institution to
address the FDIC’s concerns described
in the notice. The FDIC will evaluate the
need for the adjustment each
subsequent assessment period, until it
determines that an adjustment is no
longer warranted. The amount of
adjustment will in no event be larger
than that contained in the initial notice
without further notice to, and
consideration of, responses from the
primary federal regulator and the
institution.
(v) Determination whether to adjust
downward; effective period of
adjustment. After considering the
primary federal regulator’s responses to
the notice, the FDIC will determine
whether the large bank adjustment to an
institution’s initial base assessment rate
is warranted, taking into account any
revisions to weighted average CAMELS
component ratings, long-term debt
issuer ratings, and financial ratios, as
well as any actions taken by the
institution to address the FDIC’s
concerns described in the notice. Any
downward adjustment in an
institution’s assessment rate will remain
in effect for subsequent assessment
periods until the FDIC determines that
an adjustment is no longer warranted.
Downward adjustments will be made
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without notification to the institution.
However, the FDIC will provide
advance notice to an institution and its
primary federal regulator and give them
an opportunity to respond before
removing a downward adjustment.
(vi) Adjustment without notice.
Notwithstanding the notice provisions
set forth above, the FDIC may change an
institution’s initial base assessment rate
without advance notice under this
paragraph, if the institution’s
supervisory or agency ratings or the
financial ratios set forth in Appendix A
to this subpart deteriorate.
(5) Unsecured debt adjustment to
initial base assessment rate for all
institutions. All institutions within all
risk categories, except new institutions
as provided under paragraph (d)(9)(i)(C)
of this section and insured branches of
foreign banks as provided under
paragraph (d)(3)(iii) of this section, are
subject to downward adjustment of their
initial base assessment rates for
unsecured debt, based on the ratio of
long-term unsecured debt (and, for
small institutions as defined in
paragraph (d)(5)(ii) of this section,
specified amounts of Tier 1 capital) to
domestic deposits. Any such adjustment
shall be made after any adjustment
under paragraph (d)(4) of this section.
(i) Large institutions—The unsecured
debt adjustment for large institutions
shall be determined by multiplying the
institution’s ratio of long-term
unsecured debt to domestic deposits by
20 basis points.
(ii) Small institutions—The unsecured
debt adjustment for small institutions
will factor in an amount of Tier 1 capital
(qualified Tier 1 capital) in addition to
any long-term unsecured debt: the
amount of qualified Tier 1 capital will
be the sum of one-half of the amount
between 10 percent and 15 percent of
adjusted average assets (for institutions
that file Call Reports) or adjusted total
assets (for institutions that file Thrift
Financial Reports) and the full amount
of Tier 1 capital exceeding 15 percent of
adjusted average assets (for institutions
that file Call Reports) or adjusted total
assets (for institutions that file Thrift
Financial Reports). The ratio of the sum
of qualified Tier 1 capital and long-term
unsecured debt to domestic deposits
will be multiplied by 20 basis points to
produce the unsecured debt adjustment
for small institutions.
(iii) Limitation—No unsecured debt
adjustment for any institution shall
exceed two basis points.
(iv) Applicable reports of condition—
Ratios for any given quarter shall be
calculated from reports of condition
(Call Reports and Thrift Financial
Reports) filed by each institution as of
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the last day of the quarter. Until
institutions separately report long-term
senior unsecured liabilities and longterm subordinated debt in their reports
of condition, the FDIC will use
subordinated debt included in Tier 2
capital and will not include any amount
of senior unsecured liabilities in
calculating the unsecured debt
adjustment.
(6) Secured liabilities adjustment for
all institutions. All institutions within
all risk categories, except insured
branches of foreign banks as provided
under paragraph (d)(3)(iii) of this
section, are subject to upward
adjustment of their initial base
assessment rate based upon the ratio of
their secured liabilities to domestic
deposits. Any such adjustment shall be
made after any applicable large bank
adjustment or unsecured debt
adjustment.
(i) Secured liabilities for banks—
Secured liabilities for banks include
Federal Home Loan Bank advances,
securities sold under repurchase
agreements, secured Federal funds
purchased and other borrowings that are
secured as reported in banks’ quarterly
Call Reports.
(ii) Secured liabilities for thrifts—
Secured liabilities for thrifts include
Federal Home Loan Bank advances as
reported in quarterly thrift financial
reports. Secured liabilities for thrifts
also include securities sold under
repurchase agreements, secured Federal
funds purchased or other borrowings
that are secured when those items are
separately reported in thrift financial
reports. Until that time, any of these
secured amounts not reported separately
from unsecured or other liabilities in the
TFR will be imputed based on simple
averages for Call Report filers as of June
30, 2008. As of that date, on average,
63.0 percent of the sum of Federal funds
purchased and securities sold under
repurchase agreements reported by Call
Report filers were secured, and 49.4
percent of other borrowings were
secured.
(iii) Calculation—An institution’s
ratio of secured liabilities to domestic
deposits will, if greater than 15 percent,
increase its assessment rate, but any
such increase shall not exceed 50
percent of its assessment rate before the
secured liabilities adjustment. For an
institution that has a ratio of secured
liabilities (as defined in paragraph (ii)
above) to domestic deposits of greater
than 15 percent, the institution’s initial
base assessment rate (after taking into
account any adjustment under
paragraphs (d)(5) or (6) of this section)
will be multiplied by one plus the ratio
of its secured liabilities to domestic
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61587
deposits minus 0.15. Ratios of secured
liabilities to domestic deposits shall be
calculated from the report of condition
filed by each institution as of the last
day of the quarter.
(7) Brokered Deposit Adjustment for
Risk Categories II, III, and IV. All
institutions in Risk Categories II, III, and
IV, except insured branches of foreign
banks as provided under paragraph
(d)(3)(iii) of this section, shall be subject
to an initial base assessment rate
adjustment for brokered deposits. Any
such brokered deposit adjustment shall
be made after any adjustment under
paragraph (d)(5) or (6). A brokered
deposit is as defined in Section 29 of the
Federal Deposit Insurance Act (12
U.S.C. 1831f). The adjustment under
this paragraph is limited to those
institutions whose ratio of brokered
deposits to domestic deposits is greater
than 10 percent; asset growth rates do
not affect the adjustment. The
adjustment is determined by
multiplying the difference between an
institution’s ratio of brokered deposits
to domestic deposits and 0.10 by 25
basis points. The maximum brokered
deposit adjustment will be 10 basis
points. Brokered deposit ratios for any
given quarter are calculated from the
reports of condition filed by each
institution as of the last day of the
quarter.
(8) Request to be treated as a large
institution—(i) Procedure. Any
institution in Risk Category I with assets
of between $5 billion and $10 billion
may request that the FDIC determine its
initial base assessment rate as a large
institution. The FDIC will grant such a
request if it determines that it has
sufficient information to do so. The
absence of long-term debt issuer ratings
alone will not preclude the FDIC from
granting a request. The initial base
assessment rate for an institution
without a long-term debt issuer rating
will be derived using the financial ratios
method, but will be subject to
adjustment as a large institution under
paragraph (d)(4) of this section. Any
such request must be made to the FDIC’s
Division of Insurance and Research.
Any approved change will become
effective within one year from the date
of the request. If an institution whose
request has been granted subsequently
reports assets of less than $5 billion in
its report of condition for four
consecutive quarters, the FDIC will
consider such institution to be a small
institution subject to the financial ratios
method.
(ii) Time limit on subsequent request
for alternate method. An institution
whose request to be assessed as a large
institution is granted by the FDIC shall
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not be eligible to request that it be
assessed as a small institution for a
period of three years from the first
quarter in which its approved request to
be assessed as a large bank became
effective. Any request to be assessed as
a small institution must be made to the
FDIC’s Division of Insurance and
Research.
(iii) An institution that disagrees with
the FDIC’s determination that it is a
large or small institution may request
review of that determination pursuant to
§ 327.4(c).
(9) New and established institutions
and exceptions—(i) New Risk Category
I institutions—(A) Rule as of January 1,
2010. Effective for assessment periods
beginning on or after January 1, 2010, a
new institution shall be assessed the
Risk Category I maximum initial base
assessment rate for the relevant
assessment period, except as provided
in § 327.8(m)(1), (2), (3), (4), (5) and
paragraphs (d)(9)(ii) and (iii) of this
section. No new institution in Risk
Category I shall be subject to the large
bank adjustment as determined under
paragraph (d)(4) of this section.
(B) Rule prior to January 1, 2010.
Prior to January 1, 2010, a new
institution’s initial base assessment rate
shall be determined under paragraph
(d)(1) or (2) of this section, as
appropriate. Prior to January 1, 2010, a
Risk Category I institution that has no
CAMELS component ratings shall be
assessed at two basis points above the
minimum initial base assessment rate
applicable to Risk Category I institutions
until it receives CAMELS component
ratings. The initial base assessment rate
will be determined by annualizing,
where appropriate, financial ratios
obtained from the reports of condition
that have been filed, until the institution
files four reports of condition.
(C) Applicability of adjustments to
new institutions prior to and as of
January 1, 2010. No new institution in
any risk category shall be subject to the
unsecured debt adjustment as
determined under paragraph (d)(5) of
this section. All new institutions in any
Risk Category shall be subject to the
secured liability adjustment as
determined under paragraph (d)(6) of
this section. All new institutions in Risk
Categories II, III, and IV shall be subject
to the brokered deposit adjustment as
determined under paragraph (d)(7) of
this section.
(ii) CAMELS ratings for the surviving
institution in a merger or consolidation.
When an established institution merges
with or consolidates into a new
institution, if the FDIC determines the
resulting institution to be an established
institution under § 327.8(m)(1), its
CAMELS ratings for assessment
purposes will be based upon the
established institution’s ratings prior to
the merger or consolidation until new
ratings become available.
(iii) Rate applicable to institutions
subject to subsidiary or credit union
exception. If an institution is considered
established under § 327.8(m)(4) and (5),
but does not have CAMELS component
ratings, it shall be assessed at two basis
points above the minimum initial base
assessment rate applicable to Risk
Category I institutions until it receives
CAMELS component ratings. The
assessment rate will be determined by
annualizing, where appropriate,
financial ratios obtained from all reports
of condition that have been filed, until
it receives a long-term debt issuer rating.
(iv) Request for review. An institution
that disagrees with the FDIC’s
determination that it is a new institution
may request review of that
determination pursuant to § 327.4(c).
(10) Assessment rates for bridge
depository institutions and
conservatorships. Institutions that are
bridge depository institutions under 12
U.S.C. 1821(n) and institutions for
which the Corporation has been
appointed or serves as conservator shall,
in all cases, be assessed at the Risk
Category I minimum initial base
assessment rate, which shall not be
subject to adjustment under paragraphs
(d)(4), (5), (6) or (7) of this section.
§ 327.10
Assessment rate schedules.
(a) Assessment Rate Schedule for First
Quarter of 2009 and Initial Base
Assessment Rate Schedule Beginning
April 1, 2009. The annual assessment
rate for an insured depository
institution for the quarter beginning
January 1, 2009 shall be the rate
prescribed in the following schedule:
TABLE 1 TO PARAGRAPH (A)—ASSESSMENT RATE SCHEDULE FOR FIRST QUARTER OF 2009
Risk category
I*
II
Minimum
Annual Rates (in basis points) .............................................
The annual initial base assessment rate
for an insured depository institution
beginning April 1, 2009, shall be the
12
14
III
IV
17
35
50
Maximum
rate prescribed in the following
schedule:
TABLE 2 TO PARAGRAPH (A)—INITIAL BASE ASSESSMENT RATE SCHEDULE BEGINNING APRIL 1, 2009
Risk category
I*
II
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Minimum
Annual Rates (in basis points) .............................................
10
14
III
IV
20
30
45
Maximum
* Initial base rates that are not the minimum or maximum rate will vary between these rates.
(1) Risk Category I Initial Base
Assessment Rate Schedule. The annual
initial base assessment rates for all
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institutions in Risk Category I shall
range from 10 to 14 basis points.
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(2) Risk Category II, III, and IV Initial
Base Assessment Rate Schedule. The
annual initial base assessment rates for
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Risk Categories II, III, and IV shall be 20,
30, and 45 basis points, respectively.
(3) All institutions in any one risk
category, other than Risk Category I, will
be charged the same initial base
assessment rate, subject to adjustment as
appropriate.
(b) Total Base Assessment Rate
Schedule after Adjustments. For
assessment periods beginning on or after
April 1, 2009, the total base assessment
rates after adjustments for an insured
depository institution shall be the rate
prescribed in the following schedule.
TABLE 1 TO PARAGRAPH (b)—TOTAL BASE ASSESSMENT RATE SCHEDULE (AFTER ADJUSTMENTS) *
Risk category
I
Risk category
II
Risk category
III
Risk category
IV
Initial base assessment rate ................................................................
Unsecured debt adjustment .................................................................
Secured liability adjustment .................................................................
Brokered deposit adjustment ...............................................................
10–14 ...............
¥2–0 ................
0–7 ...................
...........................
20 .....................
¥2–0 ................
0–10 .................
0–10 .................
30 .....................
¥2–0 ................
0–15 .................
0–10 .................
45
¥2–0
0–22.5
0–10
Total base assessment rate .........................................................
8–21.0 ..............
18–40.0 ............
28–55.0 ............
43–77.5
* All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum or maximum rate will vary between
these rates.
mstockstill on PROD1PC66 with PROPOSALS2
(1) Risk Category I Total Base
Assessment Rate Schedule. The annual
total base assessment rates for all
institutions in Risk Category I shall
range from 8 to 21 basis points.
(2) Risk Category II Total Base
Assessment Rate Schedule. The annual
total base assessment rates for Risk
Category II shall range from 18 to 40
basis points.
(3) Risk Category III Total Base
Assessment Rate Schedule. The annual
total base assessment rates for Risk
Category III shall range from 28 to 55
basis points.
(4) Risk Category IV Total Base
Assessment Rate Schedule. The annual
total base assessment rates for Risk
Category IV shall range from 43 to 77.5
basis points.
(c) Total Base Assessment Rate
Schedule adjustments and procedures—
(1) Board Rate Adjustments. The Board
may increase or decrease the total base
assessment rate schedule up to a
maximum increase of 3 basis points or
a fraction thereof or a maximum
decrease of 3 basis points or a fraction
thereof (after aggregating increases and
decreases), as the Board deems
necessary. Any such adjustment shall
apply uniformly to each rate in the total
base assessment rate schedule. In no
case may such Board rate adjustments
result in a total base assessment rate that
is mathematically less than zero or in a
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total base assessment rate schedule that,
at any time, is more than 3 basis points
above or below the total base assessment
schedule for the Deposit Insurance
Fund, nor may any one such Board
adjustment constitute an increase or
decrease of more than 3 basis points.
(2) Amount of revenue. In setting
assessment rates, the Board shall take
into consideration the following:
(i) Estimated operating expenses of
the Deposit Insurance Fund;
(ii) Case resolution expenditures and
income of the Deposit Insurance Fund;
(iii) The projected effects of
assessments on the capital and earnings
of the institutions paying assessments to
the Deposit Insurance Fund;
(iv) The risk factors and other factors
taken into account pursuant to 12 U.S.C.
1817(b)(1); and
(v) Any other factors the Board may
deem appropriate.
(3) Adjustment procedure. Any
adjustment adopted by the Board
pursuant to this paragraph will be
adopted by rulemaking, except that the
Corporation may set assessment rates as
necessary to manage the reserve ratio,
within set parameters not exceeding
cumulatively 3 basis points, pursuant to
paragraph (c)(1) of this section, without
further rulemaking.
(4) Announcement. The Board shall
announce the assessment schedules and
the amount and basis for any adjustment
thereto not later than 30 days before the
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quarterly certified statement invoice
date specified in § 327.3(b) of this part
for the first assessment period for which
the adjustment shall be effective. Once
set, rates will remain in effect until
changed by the Board.
6. Revise Appendices A, B, and C to
Subpart A of Part 327 to read as follows:
Appendix A to Subpart A
Method To Derive Pricing Multipliers and
Uniform Amount
I. Introduction
The uniform amount and pricing
multipliers are derived from:
• A model (the Statistical Model) that
estimates the probability that a Risk Category
I institution will be downgraded to a
composite CAMELS rating of 3 or worse
within one year;
• Minimum and maximum downgrade
probability cutoff values, based on data from
June 30, 2008, that will determine which
small institutions will be charged the
minimum and maximum initial base
assessment rates applicable to Risk Category
I;
• The minimum initial base assessment
rate for Risk Category I, equal to 10 basis
points, and
• The maximum initial base assessment
rate for Risk Category I, which is four basis
points higher than the minimum rate.
II. The Statistical Model
The Statistical Model is defined in
equations 1 and 3 below.
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Equation 1
Downgrade(0,1)i,t = β0 + β1 ( Tier 1 Leverage RatioT ) +
β2 ( Loans past due 30 to 89 days ratioi,t ) +
β3 ( Nonperforming asset ratioi,t ) +
β4 ( Net loan charge-off ratioi,t ) +
β5 ( Net income before taxes ratioi,t ) +
β6 ( Adjusted brokered deposit ratioi,t ) +
β7 ( Weighted average CAMELS component rating i,t )
where Downgrade(0,1)i,t (the dependent
variable—the event being explained) is the
incidence of downgrade from a composite
rating of 1 or 2 to a rating of 3 or worse
during an on-site examination for an
institution i between 3 and 12 months after
time t. Time t is the end of a year within the
multi-year period over which the model was
estimated (as explained below). The
dependent variable takes a value of 1 if a
downgrade occurs and 0 if it does not.
The explanatory variables (regressors) in
the model are six financial ratios and a
weighted average of the ‘‘C,’’ ‘‘A,’’ ‘‘M,’’ ‘‘E’’
and ‘‘L’’ component ratings. The six financial
ratios included in the model are:
• Tier 1 leverage ratio
• Loans past due 30–89 days/Gross assets
• Nonperforming assets/Gross assets
• Net loan charge-offs/Gross assets
• Net income before taxes/Risk-weighted
assets
• Brokered deposits/domestic deposits
above the 10 percent threshold, adjusted for
the asset growth rate factor
Table A.1 defines these six ratios along
with the weighted average of CAMELS
component ratings. The adjusted brokered
deposit ratio (Bi,T) is calculated by
multiplying the ratio of brokered deposits to
domestic deposits above the 10 percent
threshold by an assets growth rate factor that
ranges from 0 to 1 as shown in Equation 2
below. The assets growth rate factor (Ai,T) is
calculated by subtracting 0.2 from the fouryear cumulative asset growth rate (expressed
as a number rather than as a percentage),
adjusted for mergers and acquisitions, and
multiplying the remainder by 5. The factor
cannot be less than 0 or greater than 1.
Equation 2
Brokered Depositsi,T
1
Bi,T =
Domestic Deposits − 0.10 ∗ Ai,T
i,T
Assetsi,T − Assetsi,T − 4
where Ai,T =
− 0.2 ∗ 5 , subject to 0 ≤ Ai,T ≤ 1 and Bi,T ≥ 0.
Assetsi,T − 4
The component rating for sensitivity to
market risk (the ‘‘S’’ rating) is not available
for years prior to 1997. As a result, and as
described in Table A.1, the Statistical Model
is estimated using a weighted average of five
component ratings excluding the ‘‘S’’
component. In addition, delinquency and
non-accrual data on government guaranteed
loans are not available before 1993 for Call
Report filers and before the third quarter of
2005 for TFR filers. As a result, and as also
described in Table A.1, the Statistical Model
is estimated without deducting delinquent or
past-due government guaranteed loans from
either the loans past due 30–89 days to gross
assets ratio or the nonperforming assets to
gross assets ratio.
TABLE A.1—DEFINITIONS OF REGRESSORS
Tier 1 Leverage Ratio (%) ..............
Tier 1 capital for Prompt Corrective Action (PCA) divided by adjusted average assets based on the definition for prompt corrective action.
Total loans and lease financing receivables past due 30 through 89 days and still accruing interest divided
by gross assets (gross assets equal total assets plus allowance for loan and lease financing receivable
losses and allocated transfer risk).
Sum of total loans and lease financing receivables past due 90 or more days and still accruing interest,
total nonaccrual loans and lease financing receivables, and other real estate owned divided by gross assets.
Total charged-off loans and lease financing receivables debited to the allowance for loan and lease losses
less total recoveries credited to the allowance to loan and lease losses for the most recent twelve
months divided by gross assets.
Income before income taxes and extraordinary items and other adjustments for the most recent twelve
months divided by risk-weighted assets.
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Loans Past Due 30–89 Days/Gross
Assets (%).
Nonperforming
Assets (%).
Net
Loan
Assets (%).
Assets/Gross
Charge-Offs/Gross
Net Income before Taxes/RiskWeighted Assets (%).
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EP16OC08.022</MATH>
Description
EP16OC08.021</MATH>
Regressor
Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules
61591
TABLE A.1—DEFINITIONS OF REGRESSORS—Continued
Regressor
Description
Adjusted Brokered Deposits/Domestic Deposits (%).
Brokered deposits divided by domestic deposits less 0.10 multiplied by the asset growth rate factor (four
year cumulative asset growth rate (expressed as a number rather than as a percentage) divided by 5
less one).
The weighted sum of the ‘‘C,’’ ‘‘A,’’ ‘‘M,’’ ‘‘E’’ and ‘‘L’’ CAMELS components, with weights of 28 percent
each for the ‘‘C’’ and ‘‘M’’ components, 22 percent for the ‘‘A’’ component, and 11 percent each for the
‘‘E’’ and ‘‘L’’ components. (For the regression, the ‘‘S’’ component is omitted.)
Weighted Average of C, A, M, E
and L Component Ratings.
The financial variable regressors used to
estimate the downgrade probabilities are
obtained from quarterly reports of condition
(Reports of Condition and Income and Thrift
Financial Reports). The weighted average of
the ‘‘C,’’ ‘‘A,’’ ‘‘M,’’ ‘‘E’’ and ‘‘L’’ component
ratings regressor is based on component
ratings obtained from the most recent bank
examination conducted within 24 months
before the date of the report of condition.
The Statistical Model uses ordinary least
squares (OLS) regression to estimate
downgrade probabilities. The model is
estimated with data from a multi-year period
(as explained below) for all institutions in
Risk Category I, except for institutions
established within five years before the date
of the report of condition.
The OLS regression estimates coefficients,
bj for a given regressor j and a constant
amount, b0, as specified in equation 1. As
shown in equation 3 below, these coefficients
are multiplied by values of risk measures at
time T, which is the date of the report of
condition corresponding to the end of the
quarter for which the assessment rate is
computed. The sum of the products is then
added to the constant amount to produce an
estimated probability, diT, that an institution
will be downgraded to 3 or worse within 3
to 12 months from time T.
The risk measures are financial ratios as
defined in Table A.1, except that the loans
past due 30 to 89 days ratio and the
nonperforming asset ratio are adjusted to
exclude the maximum amount recoverable
from the U.S. Government, its agencies or
government-sponsored agencies, under
guarantee or insurance provisions. Also, the
weighted sum of six CAMELS component
ratings is used, with weights of 25 percent
each for the ‘‘C’’ and ‘‘M’’ components, 20
percent for the ‘‘A’’ component, and 10
percent each for the ‘‘E,’’ ‘‘L,’’ and ‘‘S’’
components.
Equation 3
Downgrade(0,1)iT = β0 + β1 ( Tier 1 Leverage RatioiT ) +
β2 ( Loans past due 30 to 89 days ratioiT ) +
β3 ( Nonperforming asset ratioiT ) +
β4 ( Net loan charge-off ratioiT ) +
β5 ( Net income before taxes ratioiT ) +
β6 ( Adjusted brokered deposit ratioiT ) +
β7 ( Weighted average CAMELS component rating iT )
III. Minimum and Maximum Downgrade
Probability Cutoff Values
The pricing multipliers are also
determined by minimum and maximum
downgrade probability cutoff values, which
will be computed as follows:
• The minimum downgrade probability
cutoff value will be the maximum downgrade
probability among the twenty-five percent of
all small insured institutions in Risk
Category I (excluding new institutions) with
the lowest estimated downgrade
probabilities, computed using values of the
risk measures as of June 30, 2008.72 73 The
minimum downgrade probability cutoff value
is approximately 2 percent.
• The maximum downgrade probability
cutoff value will be the minimum downgrade
probability among the fifteen percent of all
small insured institutions in Risk Category I
(excluding new institutions) with the highest
estimated downgrade probabilities,
computed using values of the risk measures
as of June 30, 2008. The maximum
downgrade probability cutoff value is
approximately 15 percent.
IV. Derivation of Uniform Amount and
Pricing Multipliers
The uniform amount and pricing
multipliers used to compute the annual base
assessment rate in basis points, PiT, for any
such institution i at a given time T will be
determined from the Statistical Model, the
minimum and maximum downgrade
probability cutoff values, and minimum and
maximum initial base assessment rates in
Risk Category I as follows:
72 As used in this context, a ‘‘new institution’’
means an institution that has been chartered as a
bank or thrift for less than five years.
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73 For purposes of calculating the minimum and
maximum downgrade probability cutoff values,
institutions that have less than $100,000 in
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EP16OC08.024</MATH>
PiT = α 0 + α1 ∗ d iT subject to Min ≤ PiT ≤ Min+ 4
EP16OC08.023</MATH>
mstockstill on PROD1PC66 with PROPOSALS2
Equation 4
61592
Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules
where a0 and a1 are a constant term and a
scale factor used to convert diT (the estimated
downgrade probability for institution i at a
given time T from the Statistical Model) to
an assessment rate, respectively, and Min is
the minimum initial base assessment rate
expressed in basis points. ( PiT is expressed
as an annual rate, but the actual rate applied
in any quarter will be PiT/4.) The maximum
initial base assessment rate is 4 basis points
above the minimum (Min + 4)
Solving equation 4 for minimum and
maximum initial base assessment rates
simultaneously,
Min = a0 + a1 * 0.0181 and Min + 4 = a0 +
a1 * 0.1505
where 0.0181 is the minimum downgrade
probability cutoff value and 0.1505 is the
maximum downgrade probability cutoff
value, results in values for the constant
amount, a0, and the scale factor, a1:
Equation 5
α 0 = Min −
4 ∗ 0.0181
= Min − 0.547
(0.1505 − 0.0181)
and Equation 6
α1 =
Substituting equations 3, 5 and 6 into
equation 4 produces an annual initial base
assessment rate for institution i at time T, PiT,
4
= 30.211
(0.1505 − 0.0181)
in terms of the uniform amount, the pricing
multipliers and the ratios and weighted
average CAMELS component rating referred
to in 12 CFR 327.9(d)(2)(i):
Equation 7
PiT = ( Min − 0.547 ) + 30.211 ∗ β0 + 30.211 ∗ β1 ( Tier 1 Leverage RatioT ) +
v
30.211∗ β2 ( Loans past due 30 to 89 days ratio T ) +
30.211 ∗ β3 ( Nonperforming asset ratioT ) +
30.211 ∗ β4 ( Net loan charge-off ratioT ) +
30.211 ∗ β5 ( Net income before taxes ratio T ) +
30.211 ∗ β6 ( Weighted average CAMELS component rating T ) +
30.211 ∗ β7 ( Brokered Deposit-AssetGrowth Interaction Term T )
again subject to Min ≤ PiT ≤ Min + 4
where (Min¥0.547) + 30.211* b0 equals the
uniform amount, 30.211* b is a pricing
multiplier for the associated risk measure j,
and T is the date of the report of condition
corresponding to the end of the quarter for
which the assessment rate is computed.
EP16OC08.026</MATH>
multipliers. However, the minimum and
maximum downgrade probability cutoff
values will not change without additional
notice-and-comment rulemaking. The period
covered by the analysis will be lengthened by
one year each year; however, from time to
time, the FDIC may drop some earlier years
from its analysis.
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V. Updating the Statistical Model, Uniform
Amount, and Pricing Multipliers
The initial Statistical Model is estimated
using year-end financial ratios and the
weighted average of the ‘‘C,’’ ‘‘A,’’ ‘‘M,’’ ‘‘E’’
and ‘‘L’’ component ratings over the 1988 to
2006 period and downgrade data from the
1989 to 2007 period. The FDIC may, from
time to time, but no more frequently than
annually, re-estimate the Statistical Model
with updated data and publish a new
formula for determining initial base
assessment rates—Equation 7—based on
updated uniform amounts and pricing
Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules
Appendix B to Subpart A
NUMERICAL CONVERSION OF LONGTERM DEBT ISSUER RATINGS—Continued
NUMERICAL CONVERSION OF LONGTERM DEBT ISSUER RATINGS
Current long-term debt issuer
rating
Standard & Poor’s:
AAA ...................................
AA+ ....................................
AA ......................................
AA¥ ..................................
A+ ......................................
A ........................................
A¥ .....................................
BBB+ .................................
BBB or worse ....................
1.00
1.05
1.15
1.30
1.50
1.80
2.20
2.70
3.00
Current long-term debt issuer
rating
Converted
value
Moody’s:
Aaa ....................................
Aa1 .....................................
Aa2 .....................................
Aa3 .....................................
A1 ......................................
A2 ......................................
A3 ......................................
Baa 1 ..................................
Baa 2 or worse ...................
Fitch’s:
Converted
value
1.00
1.05
1.15
1.30
1.50
1.80
2.20
2.70
3.00
61593
NUMERICAL CONVERSION OF LONGTERM DEBT ISSUER RATINGS—Continued
Current long-term debt issuer
rating
AAA ...................................
AA+ ....................................
AA ......................................
AA¥ ..................................
A+ ......................................
A ........................................
A¥ .....................................
BBB+ .................................
BBB or worse ....................
Converted
value
1.00
1.05
1.15
1.30
1.50
1.80
2.20
2.70
3.00
Appendix C to Subpart A
ADDITIONAL RISK CONSIDERATIONS FOR LARGE RISK CATEGORY I INSTITUTIONS
Information Source
Examples of associated risk indicators or information
Financial Performance and Condition Information.
Market Information ..........................
Capital Measures (Level and Trend).
• Regulatory capital ratios.
• Capital composition.
• Dividend payout ratios.
• Internal capital growth rates relative to asset growth.
Profitability Measures (Level and Trend).
• Return on assets and return on risk-adjusted assets.
• Net interest margins, funding costs and volumes, earning asset yields and volumes.
• Noninterest revenue sources.
• Operating expenses.
• Loan loss provisions relative to problem loans.
• Historical volatility of various earnings sources.
Asset Quality Measures (Level and Trend).
• Loan and securities portfolio composition and volume of higher risk lending activities (e.g., sub-prime
lending).
• Loan performance measures (past due, nonaccrual, classified and criticized, and renegotiated loans)
and portfolio characteristics such as internal loan rating and credit score distributions, internal estimates
of default, internal estimates of loss given default, and internal estimates of exposures in the event of
default.
• Loan loss reserve trends.
• Loan growth and underwriting trends.
• Off-balance sheet credit exposure measures (unfunded loan commitments, securitization activities,
counterparty derivatives exposures) and hedging activities.
Liquidity and Funding Measures (Level and Trend).
• Composition of deposit and non-deposit funding sources.
• Liquid resources relative to short-term obligations, undisbursed credit lines, and contingent liabilities.
Interest Rate Risk and Market Risk (Level and Trend).
• Maturity and repricing information on assets and liabilities, interest rate risk analyses.
• Trading book composition and Value-at-Risk information.
• Subordinated debt spreads.
• Credit default swap spreads.
• Parent’s debt issuer ratings and equity price volatility.
• Market-based measures of default probabilities.
• Rating agency watch lists.
• Market analyst reports.
mstockstill on PROD1PC66 with PROPOSALS2
Information Source
Examples of associated risk indicators or information
Stress Considerations .....................
Ability to Withstand Stress Conditions.
• Internal analyses of portfolio composition and risk concentrations, and vulnerabilities to changing economic and financial conditions.
• Stress scenario development and analyses.
• Results of stress tests or scenario analyses that show the degree of vulnerability to adverse economic,
industry, market, and liquidity events. Examples include:
i. An evaluation of credit portfolio performance under varying stress scenarios.
ii. An evaluation of non-credit business performance under varying stress scenarios.
iii. An analysis of the ability of earnings and capital to absorb losses stemming from unanticipated adverse events.
• Contingency or emergency funding strategies and analyses.
• Capital adequacy assessments.
Loss Severity Indicators.
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61594
Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules
ADDITIONAL RISK CONSIDERATIONS FOR LARGE RISK CATEGORY I INSTITUTIONS—Continued
Information Source
Examples of associated risk indicators or information
• Nature of and breadth of an institution’s primary business lines and the degree of variability in valuations
for firms with similar business lines or similar portfolios.
• Ability to identify and describe discreet business units within the banking legal entity.
• Funding structure considerations relating to the order of claims in the event of liquidation (including the
extent of subordinated claims and priority claims).
• Extent of insured institutions assets held in foreign units.
• Degree of reliance on affiliates and outsourcing for material mission-critical services, such as management information systems or loan servicing, and products.
• Availability of sufficient information, such as information on insured deposits and qualified financial contracts, to resolve an institution in an orderly and cost-efficient manner.
Equation 3
mstockstill on PROD1PC66 with PROPOSALS2
where a0 and a1 are, respectively, a constant
term and a scale factor used to convert i,T (an
institution’s score at time T) to an assessment
rate, and Min is the minimum initial base
assessment rate expressed in basis points.
(Under the proposal, the minimum initial
base assessment rate is 10 basis points, so
Min equals 10.)
Substituting minimum and maximum
score cutoff values (1.578 and 2.334,
respectively) for Si,T and minimum and
maximum initial base assessment rates (Min
and Min + 4, respectively) for Pi,T in equation
3 produces equations 4 and 5 below.
EP16OC08.031</MATH>
Pi,T = α 0 + α1 ∗ Si,T subject to Min ≤ Pi,T ≤ Min + 4
Equation 6
Equation 4
Min = α 0 + α1 ∗1.578
α 0 = Min −
4 ∗1.578
= Min − 8.349
(2.334 − 1.578)
Equation 5
Equation 7
Min + 4 = α 0 + α1 ∗ 2.334
Solving both equations simultaneously
results in:
α1 =
4
= 5.291
(2.334 − 1.578)
74 As used in this context, a ‘‘new institution’’
means an institution that has been chartered as a
bank or thrift for less than five years.
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EP16OC08.033</MATH>
Each institution’s score (Si) was calculated
by dividing its weighted average CAMELS
rating (Sw), long-term issuer score (Sd) and
financial ratios score (Sf) by 1/3 each, and
summing the resulting values as shown in
Equation 2:
EP16OC08.032</MATH>
S f = ( Af − 8 ) ∗ 0.5
The pricing multipliers were determined
by minimum and maximum score cutoff
values, which were computed as follows:
• The minimum score cutoff value is the
maximum score among the twenty-five
percent of all large insured institutions in
Risk Category I (excluding new institutions)
with the lowest scores, computed as of June
30, 2008.74 The minimum score cut-off value
is 1.578.
• The maximum score cutoff value is the
minimum score among the fifteen percent of
all large insured institutions in Risk Category
I (excluding new institutions) with the
highest scores, computed as of June 30, 2008.
The maximum score cut-off value is 2.334.
The uniform amount and pricing
multipliers used to compute the annual base
assessment rate in basis points, PiT, for a large
institution i (with a long-term debt rating) at
a given time T were determined based on the
minimum and maximum score cut-off values,
and the minimum and maximum initial base
assessment rates in Risk Category I as
follows:
16OCP2
EP16OC08.030</MATH>
Equation 1
Si = (1 / 3) ∗ S w,i + (1 / 3) ∗ Sd,i + (1 / 3) ∗ S f,i
EP16OC08.029</MATH>
Uniform Amount and Pricing Multipliers for
Large Risk Category I Institutions Where
Long-Term Debt Issuer Ratings Are
Available
The uniform amount and pricing
multipliers for large Risk Category I
institutions with long-term debt issuer
ratings were derived from:
• The average long-term debt issuer rating,
converted into a numeric value (the longterm debt score) ranging from 1 to 3;
• The weighted average CAMELS rating, as
defined in Appendix A;
• The assessment rate calculated using the
financial ratios method described in
Appendix A, converted to a value ranging
from 1 to 3 (the financial ratios score);
• Minimum and maximum cutoff values
for an institution’s score (the average of the
long-term debt score, weighted average
Equation 2
EP16OC08.028</MATH>
Appendix 1
CAMELS rating and financial ratios score),
based on data from June 30, 2008, which was
used to determine the proportion of large
banks charged the minimum and maximum
initial base assessment rates applicable to
Risk Category I; and
• Minimum and maximum initial base
assessment rates for Risk Category I
The financial ratios assessment rate (Af)
calculated using the pricing multipliers and
uniform amount described in Appendix A
was converted to a financial ratios score (Sf),
with a value ranging from 1 to 3 as shown
in Equation 1:
EP16OC08.027</MATH>
Dated at Washington, DC, this 7th day of
October, 2008.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie Best,
Assistant Executive Secretary.
Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules
61595
Substituting equations 6 and 7 into
equation 2 produces the following equation
for PiT
Equation 8
Pi,T = ( Min − 8.349) + 5.291 ∗ (1 / 3) ∗ S w,iT + (1 / 3) ∗ Sd,iT + (1 / 3) ∗ S f,iT
= ( Min − 8.349) + 1.764 ∗ S w,iT + 1.764 ∗ Sd,iT + 1.764 ∗ S f,iT
where Min ¥8.349 is the uniform amount
and 1.764 is a pricing multiplier. Since Min
equals 10 under the proposal, the uniform
amount equals 1.651.
Appendix 2
Unsecured Debt Adjustment for a Small
Institution
The unsecured debt adjustment for a small
institution would be calculated based on the
sum of the institution’s long-term senior
unsecured debt, long-term subordinated debt
and qualified Tier 1 capital as a percentage
of total domestic deposits.
Qualified Tier 1 capital depends on the
institution’s Tier 1 capital and adjusted
average or total assets and would be
calculated in one of two ways. If the
institution’s Tier 1 leverage ratio were greater
than 15 percent, qualified Tier 1 capital
would be calculated as:
Equation 1
Qi = Ci − ( Gi ∗ 0.125 ) , subject to Qi > 0
where Q is qualified Tier 1 capital, C is total
Tier 1 capital and G is the adjusted average
or total assets for an institution i. If the
institution’s Tier 1 leverage ratio were greater
than 10 percent but less than 15 percent, then
qualified Tier 1 capital would be calculated
as:
Equation 2
Qi = 0.5 ∗ Ci − ( Gi ∗ 0.10 ) , subject to Qi > 0
The unsecured debt adjustment would
then be calculated as:
Equation 3
mstockstill on PROD1PC66 with PROPOSALS2
I. Introduction
This analysis estimates the effect in 2009
of proposed deposit insurance assessments
on the equity capital and profitability of all
insured institutions, assuming that the Board
adopts the proposed rule.75 The analysis
assumes that each institution’s pre-tax, preassessment income in 2009 is equivalent to
the amount reported over the four quarters
ending in June 2008. Each institution’s rate
75 Beginning
April 1, 2009, initial minimum base
assessment rates would range from 10 to 45 basis
points under the proposal. After adjustments to the
base rates, total base rates would range from 8 to
77.5 basis points. For the first quarter of 2009,
assessment rates would range from 12 to 50 basis
points.
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II. Analysis of the Projected Effects on
Capital and Earnings
While deposit insurance assessment rates
generally will result in reduced institution
profitability and capitalization compared to
the absence of assessments, the reduction
will not necessarily equal the full amount of
the assessment. Two factors can mitigate the
effect of assessments on institutions’ profits
and capital. First, a portion of the assessment
may be transferred to customers in the form
of higher borrowing rates, increased service
76 For purposes of this analysis, the assessment
base (like income) is not assumed to increase, but
is assumed to remain at June 2008 levels. All
income statement items used in this analysis were
adjusted for the effect of mergers. Institutions for
which four quarters of earnings data were
unavailable, including insured branches of foreign
banks, were excluded from this analysis.
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77 The analysis does not incorporate any tax
effects from an operating loss carry forward or carry
back.
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EP16OC08.037</MATH>
Analysis of the Projected Effects of the
Payment of Assessments on the Capital and
Earnings of Insured Depository Institutions
fees and lower deposit interest rates. Since
information is not readily available on the
extent to which institutions are able to share
assessment costs with their customers,
however, this analysis assumes that
institutions bear the full after-tax cost of the
assessment. Second, deposit insurance
assessments are a tax-deductible operating
expense; therefore, the assessment expense
can lower taxable income. This analysis
considers the effective after-tax cost of
assessments in calculating the effect on
capital.77
An institution’s earnings retention and
dividend policies also influence the extent to
which assessments affect equity levels. If an
institution maintains the same dollar amount
of dividends when it pays a deposit
insurance assessment as when it does not,
equity (retained earnings) will be less by the
full amount of the after-tax cost of the
assessment. This analysis instead assumes
that an institution will maintain its dividend
EP16OC08.036</MATH>
Appendix 3
under the proposed rate schedule is based on
data as of June 30, 2008.76 In addition, the
projected use of one-time credits authorized
under the Reform Act is taken into
consideration in determining the effective
assessment for an institution.
EP16OC08.035</MATH>
where Adj is the unsecured debt adjustment,
U is long-term unsecured senior debt, S is
long-term subordinated debt and D is
domestic deposits for institution i.
o
∗ 20 basis points, subject to Adji ≤ 2 basis points
EP16OC08.034</MATH>
U + Si + Qi
Adji = i
Di
61596
Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules
rate (that is, dividends as a fraction of net
income) unchanged from the weighted
average rate reported over the four quarters
ending June 30, 2008. In the event that the
ratio of equity to assets falls below 4 percent,
however, this assumption is modified such
that an institution retains the amount
necessary to achieve a 4 percent minimum
and distributes any remaining funds
according to the dividend payout rate.
The equity capital of insured institutions
as of June 30, 2008 was $1.35 trillion.78
Based on the assumptions for earnings
described above, year-end 2009 equity capital
is projected to equal $1.373 trillion if the
recommended assessment rates are adopted.
In the absence of an assessment, total equity
would be an estimated $5 billion higher.
Alternatively, total equity would be an
estimated $2 billion higher if current rates
remained in effect.
Table A.1 shows the distribution of the
effects of assessments (net of credits) on 2009
equity capital levels across the banking
industry compared to no assessments. On an
industry weighted average basis, projected
total assessments in 2009 would result in
capital that is 0.3 percent less than in the
absence of assessments. Table A.2 shows the
distribution of the effects of the proposed
increase in assessments on 2009 equity
capital levels across the banking industry. On
an industry weighted average basis, the
projected increases in assessments in 2009
would result in capital that is 0.1 percent less
than if current assessment rates remained in
effect.
The analysis indicates that assessments
would cause 6 institutions whose equity-toassets ratio would have exceeded 4 percent
in the absence of assessments to fall below
that percentage and 5 institutions to have
below 2 percent equity-to-assets that
otherwise would not have. Alternatively,
compared to current assessments, the
proposed increase in assessments would
cause 3 institutions whose equity-to-assets
ratio would otherwise have exceeded 4
percent to fall below that threshold and 1
institution to fall below 2 percent equity-toassets.
TABLE A.1—PERCENTAGE REDUCTION IN EQUITY CAPTAL DUE TO ASSESSMENTS
[$ in billions]
Number of institutions
Percent of institutions (percent)
0.0–0.1 .....................................................................................................
0.1–0.2 .....................................................................................................
0.2–0.3 .....................................................................................................
0.3–0.4 .....................................................................................................
0.4–0.5 .....................................................................................................
0.5–1.0 .....................................................................................................
>1.0 ..........................................................................................................
785
835
914
928
896
2,770
1,210
9
10
11
11
11
33
15
2,527
1,191
1,253
4,617
620
1,573
1,515
19
9
9
35
5
12
11
Total ..................................................................................................
8,338
100
13,296
100
Reduction in capital (percent)
Total assets
Percent of assets
TABLE A.2—PERCENTAGE REDUCTION IN EQUITY CAPITAL DUE TO PROPOSED INCREASES IN ASSESSMENTS
[$ in billions]
Number of institutions
Percent of institutions (percent)
0.0–0.1 .....................................................................................................
0.1–0.2 .....................................................................................................
0.2–0.3 .....................................................................................................
0.3–0.4 .....................................................................................................
0.4–0.5 .....................................................................................................
0.5–1.0 .....................................................................................................
> 1.0 .........................................................................................................
1,893
2,427
1,940
956
444
547
131
23
29
23
11
5
7
2
4,348
5,662
995
954
580
436
322
33
43
7
7
4
3
2
Total ..................................................................................................
8,338
100
13,296
100
Reduction in capital (percent)
Total assets
Percent of assets (percent)
11 insured branches of foreign banks and 113 institutions having less than 4 quarters of reported earnings were excluded from this analysis.
Equity capital referred to in this analysis is the same as defined under Generally Accepted Accounting Principles.
mstockstill on PROD1PC66 with PROPOSALS2
The effect of assessments on institution
income is measured by deposit insurance
assessments as a percent of income before
assessments, taxes, and extraordinary items
(hereafter referred to as ‘‘income’’). This
income measure is used in order to eliminate
the potentially transitory effects of
extraordinary items and taxes on
profitability. Table A.3 shows that, under the
proposed rate schedule, approximately 56
percent of profitable institutions are
projected to owe assessments that are less
than 8 percent of income in 2009. The
median projected reduction in income for
profitable institutions under the
recommended rates is 7.3 percent, while the
weighted average reduction for the same
institutions is 4.4 percent. For the industry
as a whole (including profitable and
unprofitable institutions), assessments in
2009 would reduce income by 11 percent.
Table A.4 shows that the proposed increase
in assessments from current levels exceeds 5
percent of income in 2009 for approximately
33 percent of profitable institutions. The
median projected reduction in income for
profitable institutions from the proposed
increase in rates under the proposal is 3.6
percent, while the weighted average
reduction for the same institutions is 2.2
percent. For the industry as a whole
(including profitable and unprofitable
institutions), the increase in assessments in
2009 would reduce income by 5.6 percent
compared to current rates.
78 This excludes equity for those mentioned in the
note to Tables A.1 and A.2.
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Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules
61597
TABLE A.3—ASSESSMENTS AS A PERCENT OF INCOME FOR PROFITABLE INSTITUTIONS
[$ in billions]
Number of
profitable
institutions
Assessments as pct. of income
Percent of
institutions
(percent)
Assets of
profitable
institutions
Percent of
assets
(percent)
0.0–4.0 .....................................................................................................
4.0–6.0 .....................................................................................................
6.0–8.0 .....................................................................................................
8.0–10.0 ...................................................................................................
10.0–12.0 .................................................................................................
12.0–15.0 .................................................................................................
15.0–20.0 .................................................................................................
> 20.0 .......................................................................................................
1,036
1,618
1,303
768
475
497
428
1,001
15
23
18
11
7
7
6
14
4,021
1,293
2,367
336
396
311
274
621
42
13
25
3
4
3
3
6
Total ..................................................................................................
7,126
100
9,618
100
TABLE A.4—PROPOSED INCREASES IN ASSESSMENTS AS A PERCENT OF INCOME FOR PROFITABLE INSTITUTIONS
[$ in billions]
Number of
profitable
institutions
Assessments as pct. of income
Percent of
institutions
(percent)
Assets of
profitable
institutions
Percent of
assets
(percent)
0.0–0.5 .....................................................................................................
0.5–1.0 .....................................................................................................
1.0–2.0 .....................................................................................................
2.0–3.0 .....................................................................................................
3.0–4.0 .....................................................................................................
4.0–5.0 .....................................................................................................
5.0–10.0 ...................................................................................................
> 10.0 .......................................................................................................
126
87
768
1,702
1,345
754
1,382
962
2
1
11
24
19
11
19
13
723
573
2,529
1,185
2,616
437
919
636
8
6
26
12
27
5
10
7
Total ..................................................................................................
7,126
100
9,618
100
Income is defined as income before taxes, extraordinary items, and deposit insurance assessments. Assessments are adjusted for the use of
one-time credits. Unprofitable institutions are defined as those having negative merger-adjusted income (as defined above) over the 4 quarters
ending June 30, 2008, and, by assumption, in 2009. There were 1212 unprofitable institutions excluded from Tables A.3 and A.4. 11 insured
branches of foreign banks and 113 institutions having less than 4 quarters of reported earnings were excluded from this analysis. Figures may
not sum to totals due to rounding.
Dated at Washington DC, this 7th day of
October, 2008.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. E8–24186 Filed 10–8–08; 4:15 pm]
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]]>Agencies
[Federal Register Volume 73, Number 201 (Thursday, October 16, 2008)]
[Proposed Rules]
[Pages 61560-61597]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-24186]
[[Page 61559]]
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Part V
Federal Deposit Insurance Corporation
-----------------------------------------------------------------------
12 CFR Part 327
Assessments; Proposed Rule; Establishment of FDIC Restoration Plan;
Notice
Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 /
Proposed Rules
[[Page 61560]]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
RIN 3064-AD35
Assessments
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking and request for comment.
-----------------------------------------------------------------------
SUMMARY: The FDIC is proposing to amend 12 CFR part 327 to: Alter the
way in which it differentiates for risk in the risk-based assessment
system; revise deposit insurance assessment rates, including base
assessment rates; and make technical and other changes to the rules
governing the risk-based assessment system.
DATES: Comments must be received on or before November 17, 2008.
ADDRESSES: You may submit comments, identified by RIN number, by any of
the following methods:
Agency Web Site: https://www.fdic.gov/regulations/laws/
federal/propose.html. Follow instructions for submitting comments on
the Agency Web Site.
E-mail: Comments@FDIC.gov. Include the RIN number in the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m.
Instructions: All submissions received must include the agency name
and RIN for this rulemaking. All comments received will be posted
without change to https://www.fdic.gov/regulations/laws/federal/
propose.html including any personal information provided.
FOR FURTHER INFORMATION CONTACT: Munsell W. St. Clair, Chief, Banking
and Regulatory Policy Section, Division of Insurance and Research,
(202) 898-8967; and Christopher Bellotto, Counsel, Legal Division,
(202) 898-3801.
SUPPLEMENTARY INFORMATION:
I. Background
The Reform Act
On February 8, 2006, the President signed the Federal Deposit
Insurance Reform Act of 2005 into law; on February 15, 2006, he signed
the Federal Deposit Insurance Reform Conforming Amendments Act of 2005
(collectively, the Reform Act).\1\ The Reform Act enacted the bulk of
the recommendations made by the FDIC in 2001.\2\ The Reform Act, among
other things, required that the FDIC, ``prescribe final regulations,
after notice and opportunity for comment * * * providing for
assessments under section 7(b) of the Federal Deposit Insurance Act, as
amended * * *,'' thus giving the FDIC, through its rulemaking
authority, the opportunity to better price deposit insurance for
risk.\3\
---------------------------------------------------------------------------
\1\ Federal Deposit Insurance Reform Act of 2005, Public Law
109-171, 120 Stat. 9; Federal Deposit Insurance Conforming
Amendments Act of 2005, Public Law 109-173, 119 Stat. 3601.
\2\ After a year long review of the deposit insurance system,
the FDIC made several recommendations to Congress to reform the
deposit insurance system. See https://www.fdic.gov/deposit/insurance/
initiative/direcommendations.html for details.
\3\ Section 2109(a)(5) of the Reform Act. Section 7(b) of the
Federal Deposit Insurance Act (12 U.S.C. 1817(b)).
---------------------------------------------------------------------------
The Federal Deposit Insurance Act, as amended by the Reform Act,
continues to require that the assessment system be risk-based and
allows the FDIC to define risk broadly. It defines a risk-based system
as one based on an institution's probability of causing a loss to the
deposit insurance fund due to the composition and concentration of the
institution's assets and liabilities, the amount of loss given failure,
and revenue needs of the Deposit Insurance Fund (the fund or DIF).\4\
---------------------------------------------------------------------------
\4\ 12 Section 7(b)(1)(C) of the Federal Deposit Insurance Act
(12 U.S.C. 1817(b)(1)(C)). The Reform Act merged the former Bank
Insurance Fund and Savings Association Insurance Fund into the
Deposit Insurance Fund.
---------------------------------------------------------------------------
Before passage of the Reform Act, the deposit insurance funds'
target reserve ratio--the designated reserve ratio (DRR)--was generally
set at 1.25 percent. Under the Reform Act, however, the FDIC may set
the DRR within a range of 1.15 percent to 1.50 percent of estimated
insured deposits. If the reserve ratio drops below 1.15 percent--or if
the FDIC expects it to do so within six months--the FDIC must, within
90 days, establish and implement a plan to restore the DIF to 1.15
percent within five years (absent extraordinary circumstances).\5\
---------------------------------------------------------------------------
\5\ Section 7(b)(3)(E) of the Federal Deposit Insurance Act (12
U.S.C. 1817(b)(3)(E)).
---------------------------------------------------------------------------
The FDIC may restrict the use of assessment credits during any
period that a restoration plan is in effect. By statute, however,
institutions may apply credits towards any assessment imposed, for any
assessment period, in an amount equal to the lesser of (1) the amount
of the assessment, or (2) the amount equal to three basis points of the
institution's assessment base.\6\
---------------------------------------------------------------------------
\6\ Section 7(b)(3)(E)(iii) of the Federal Deposit Insurance Act
(12 U.S.C. 1817(b)(E)(iii)).
---------------------------------------------------------------------------
The Reform Act also restored to the FDIC's Board of Directors the
discretion to price deposit insurance according to risk for all insured
institutions regardless of the level of the fund reserve ratio.\7\
---------------------------------------------------------------------------
\7\ The Reform Act eliminated the prohibition against charging
well-managed and well-capitalized institutions when the deposit
insurance fund is at or above, and is expected to remain at or
above, the designated reserve ratio (DRR). This prohibition was
included as part of the Deposit Insurance Funds Act of 1996. Public
Law 104-208, 110 Stat. 3009, 3009-479. However, while the Reform Act
allows the DRR to be set between 1.15 percent and 1.50 percent, it
also generally requires dividends of one-half of any amount in the
fund in excess of the amount required to maintain the reserve ratio
at 1.35 percent when the insurance fund reserve ratio exceeds 1.35
percent at the end of any year. The Board can suspend these
dividends under certain circumstances. The Reform Act also requires
dividends of all of the amount in excess of the amount needed to
maintain the reserve ratio at 1.50 when the insurance fund reserve
ratio exceeds 1.50 percent at the end of any year. 12 U.S.C.
1817(e)(2).
---------------------------------------------------------------------------
The Reform Act left in place the existing statutory provision
allowing the FDIC to ``establish separate risk-based assessment systems
for large and small members of the Deposit Insurance Fund.'' \8\ Under
the Reform Act, however, separate systems are subject to a new
requirement that ``[n]o insured depository institution shall be barred
from the lowest-risk category solely because of size.'' \9\
---------------------------------------------------------------------------
\8\ Section 7(b)(1)(D) of the Federal Deposit Insurance Act (12
U.S.C. 1817(b)(1)(D)).
\9\ Section 2104(a)(2) of the Reform Act amending Section
7(b)(2)(D) of the Federal Deposit Insurance Act (12 U.S.C.
1817(b)(2)(D)).
---------------------------------------------------------------------------
The 2006 Assessments Rule
Overview
On November 30, 2006, the FDIC published in the Federal Register a
final rule on the risk-based assessment system (the 2006 assessments
rule).\10\ The rule became effective on January 1, 2007.
---------------------------------------------------------------------------
\10\ 71 FR 69282. The FDIC also adopted several other final
rules implementing the Reform Act, including a final rule on
operational changes to part 327. 71 FR 69270.
---------------------------------------------------------------------------
The 2006 assessments rule created four risk categories and named
them Risk Categories I, II, III and IV. These four categories are based
on two criteria: capital levels and supervisory ratings. Three capital
groups--well capitalized, adequately capitalized, and
undercapitalized--are based on the leverage ratio and risk-based
capital ratios for regulatory capital purposes. Three supervisory
groups, termed A, B, and C, are based upon the FDIC's consideration of
evaluations provided by the institution's primary federal
[[Page 61561]]
regulator and other information the FDIC deems relevant.\11\ Group A
consists of financially sound institutions with only a few minor
weaknesses; Group B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the
insurance fund; and Group C consists of institutions that pose a
substantial probability of loss to the insurance fund unless effective
corrective action is taken.\12\ Under the 2006 assessments rule, an
institution's capital and supervisory groups determine its risk
category as set forth in Table 1 below. (Risk categories appear in
Roman numerals.)
---------------------------------------------------------------------------
\11\ The term ``primary federal regulator'' is synonymous with
the statutory term ``appropriate federal banking agency.'' Section
3(q) of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)).
\12\ The capital groups and the supervisory groups have been in
effect since 1993. In practice, the supervisory group evaluations
are generally based on an institution's composite CAMELS rating, a
rating assigned by the institution's supervisor at the end of a bank
examination, with 1 being the best rating and 5 being the lowest.
CAMELS is an acronym for component ratings assigned in a bank
examination: Capital adequacy, Asset quality, Management, Earnings,
Liquidity, and Sensitivity to market risk. A composite CAMELS rating
combines these component ratings, which also range from 1 (best) to
5 (worst). Generally speaking, institutions with a CAMELS rating of
1 or 2 are put in supervisory group A, those with a CAMELS rating of
3 are put in group B, and those with a CAMELS rating of 4 or 5 are
put in group C.
Table 1--Determination of Risk Category
----------------------------------------------------------------------------------------------------------------
Supervisory group
Capital category -----------------------------------------------------------------------------
A B C
----------------------------------------------------------------------------------------------------------------
Well Capitalized.................. I
Adequately Capitalized............ II III
Undercapitalized.................. III IV
----------------------------------------------------------------------------------------------------------------
The 2006 assessments rule established the following base rate
schedule and allowed the FDIC Board to adjust rates uniformly from one
quarter to the next up to three basis points above or below the base
schedule, provided that no single change from one quarter to the next
can exceed three basis points.\13\ Base assessment rates within Risk
Category I vary from 2 to 4 basis points, as set forth in Table 2
below.
---------------------------------------------------------------------------
\13\ The Board cannot adjust rates more than 2 basis points
below the base rate schedule because rates cannot be less than zero.
Table 2--Current Base Assessment Rates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category
------------------------------------------------------------------------------------
I*
---------------------------------- II III IV
Minimum Maximum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)..................................... 2 4 7 25 40
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Rates for institutions that do not pay the minimum or maximum rate vary between these rates.
The 2006 assessments rule set actual rates beginning January 1, 2007,
as set out in Table 3 below.
Table 3--Current Assessment Rates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category
------------------------------------------------------------------------------------
I*
---------------------------------- II III IV
Minimum Maximum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)..................................... 5 7 10 28 43
--------------------------------------------------------------------------------------------------------------------------------------------------------
*Rates for institutions that do not pay the minimum or maximum rate vary between these rates.
These rates remain in effect. Any increase in rates above the actual
rates in effect requires a new notice-and-comment rulemaking.
Risk Category I
Within Risk Category I, the 2006 assessments rule charges those
institutions that pose the least risk a minimum assessment rate and
those that pose the greatest risk a maximum assessment rate two basis
points higher than the minimum rate. The rule charges other
institutions within Risk Category I a rate that varies incrementally by
institution between the minimum and maximum.
Within Risk Category I, the 2006 assessments rule combines
supervisory ratings with other risk measures to further differentiate
risk and determine assessment rates. The financial ratios method
determines the assessment rates for most institutions in Risk Category
I using a combination of weighted CAMELS component ratings and the
following financial ratios:
The Tier 1 Leverage Ratio;
Loans past due 30-89 days/gross assets;
Nonperforming assets/gross assets;
Net loan charge-offs/gross assets; and
[[Page 61562]]
Net income before taxes/risk-weighted assets.
The weighted CAMELS components and financial ratios are multiplied by
statistically derived pricing multipliers and the products, along with
a uniform amount applicable to all institutions subject to the
financial ratios method, are summed to derive the assessment rate under
the base rate schedule. If the rate derived is below the minimum for
Risk Category I, however, the institution will pay the minimum
assessment rate for the risk category; if the rate derived is above the
maximum rate for Risk Category I, then the institution will pay the
maximum rate for the risk category.
The multipliers and uniform amount were derived in such a way to
ensure that, as of June 30, 2006, 45 percent of small Risk Category I
institutions (other than institutions less than 5 years old) would have
been charged the minimum rate and approximately 5 percent would have
been charged the maximum rate. While the FDIC has not changed the
multipliers and uniform amount since adoption of the 2006 assessments
rule, the percentages of institutions that have been charged the
minimum and maximum rates have changed over time as institutions'
CAMELS component ratings and financial ratios have changed. Based upon
June 30, 2008 data, approximately 28 percent of small Risk Category I
institutions (other than institutions less than 5 years old) were
charged the minimum rate and approximately 19 percent were charged the
maximum rate.
The debt issuer rating method determines the assessment rate for
large institutions that have a long-term debt issuer rating.\14\ Long-
term debt issuer ratings are converted to numerical values between 1
and 3 and averaged. The weighted average of an institution's CAMELS
components and the average converted value of its long-term debt issuer
ratings are multiplied by a common multiplier and added to a uniform
amount applicable to all institutions subject to the supervisory and
debt ratings method to derive the assessment rate under the base rate
schedule. Again, if the rate derived is below the minimum for Risk
Category I, the institution will pay the minimum assessment rate for
the risk category; if the rate derived is above the maximum for Risk
Category I, then the institution will pay the maximum rate for the risk
category.
---------------------------------------------------------------------------
\14\ The final rule defined a large institution as an
institution (other than an insured branch of a foreign bank) that
has $10 billion or more in assets as of December 31, 2006 (although
an institution with at least $5 billion in assets may also request
treatment as a large institution). If, after December 31, 2006, an
institution classified as small reports assets of $10 billion or
more in its reports of condition for four consecutive quarters, the
FDIC will reclassify the institution as large beginning the
following quarter. If, after December 31, 2006, an institution
classified as large reports assets of less than $10 billion in its
reports of condition for four consecutive quarters, the FDIC will
reclassify the institution as small beginning the following quarter.
12 CFR 327.8(g) and (h) and 327.9(d)(6).
---------------------------------------------------------------------------
The multipliers and uniform amount were derived in such a way to
ensure that, as of June 30, 2006, about 45 percent of Risk Category I
large institutions (other than institutions less than 5 years old)
would have been charged the minimum rate and approximately 5 percent
would have been charged the maximum rate. These percentages have
changed little from quarter to quarter thereafter even though industry
conditions have changed. Based upon June 30, 2008, data, and ignoring
the large bank adjustment (described below), approximately 45 percent
of Risk Category I large institutions (other than institutions less
than 5 years old) were charged the minimum rate and approximately 11
percent were charged the maximum rate.
Assessment rates for insured branches of foreign banks in Risk
Category I are determined using ROCA components.\15\
---------------------------------------------------------------------------
\15\ ROCA stands for Risk Management, Operational Controls,
Compliance, and Asset Quality. Like CAMELS components, ROCA
component ratings range from 1 (best rating) to a 5 rating (worst
rating). Risk Category 1 insured branches of foreign banks generally
have a ROCA composite rating of 1 or 2 and component ratings ranging
from 1 to 3.
---------------------------------------------------------------------------
For any Risk Category I large institution or insured branch of a
foreign bank, initial assessment rate determinations may be modified up
to half a basis point upon review of additional relevant information
(the large bank adjustment).\16\
---------------------------------------------------------------------------
\16\ The FDIC has issued additional Guidelines for Large
Institutions and Insured Foreign Branches in Risk Category I (the
large bank guidelines) governing the large bank adjustment. 72 FR
27122 (May 14, 2007).
---------------------------------------------------------------------------
With certain exceptions, beginning in 2010, the 2006 assessments
rule charges new institutions (those established for less than five
years) in Risk Category I, regardless of size, the maximum rate
applicable to Risk Category I institutions. Until then, new
institutions are treated like all others, except that a well-
capitalized institution that has not yet received CAMELS component
ratings is assessed at one basis point above the minimum rate
applicable to Risk Category I institutions until it receives CAMELS
component ratings.
The Need for a Restoration Plan
As part of a separate rulemaking in November 2006, the FDIC also
set the DRR at 1.25 percent, effective January 1, 2007. In November
2007, the Board voted to maintain the DRR at 1.25 percent for 2008.\17\
In November 2006, the FDIC projected that the assessment rate schedule
established by the 2006 assessments rule would raise the reserve ratio
from 1.23 percent at the end of the second quarter of 2006 to 1.25
percent by 2009.\18\ At the time, insured institution failures were at
historic lows (no insured institution had failed in almost two-and-a-
half years prior to the rulemaking, the longest period in the FDIC's
history without a failure) and industry returns on assets (ROAs) were
near all time highs. The FDIC's projection assumed the continued
strength of the industry. By March 2008, the condition of the industry
had deteriorated, and FDIC projected higher insurance losses compared
to recent years. However, even with this increase in projected failures
and losses, the reserve ratio was still estimated to reach the Board's
target of 1.25 percent in 2009. Therefore, the Board voted in March
2008 to maintain the existing assessment rate schedule.
---------------------------------------------------------------------------
\17\ 71 FR 69325 (Nov. 30, 2006) and 72 FR 65576 (Nov. 21,
2007).
\18\ Beginning in 2007, assessment rates ranged between 5 and 43
cents per $100 in assessable deposits. When setting the rate
schedule, the FDIC projects future changes to the fund balance from
losses, operating expenses, assessment and investment revenue, as
well as the outlook for insured deposit growth. Since the final rule
was issued, the Board has opted to leave rates unchanged.
---------------------------------------------------------------------------
Recent failures, as well as deterioration in banking and economic
conditions, however, have significantly increased the fund's loss
provisions, resulting in a decline in the reserve ratio. As of June 30,
2008, the reserve ratio stood at 1.01 percent, 18 basis points below
the reserve ratio as of March 31, 2008. The FDIC expects a higher rate
of insured institution failures in the next few years compared to
recent years; thus, the reserve ratio may continue to decline. Because
the reserve ratio has fallen below 1.15 percent and is expected to
remain below 1.15 percent, the FDIC must establish and implement a
restoration plan to restore the reserve ratio to 1.15 percent. Absent
extraordinary circumstances, the reserve ratio must be restored to 1.15
percent within five years. The FDIC has adopted a restoration plan (the
Restoration Plan), the critical component of which is this notice of
proposed rulemaking (NPR).\19\ To fulfill
[[Page 61563]]
the requirements of the Restoration Plan, the FDIC must increase the
assessment rates it currently charges. Since the current rates are
already 3 basis points uniformly above the base rate schedule
established in the 2006 assessments rule, a new rulemaking is required.
The FDIC is also proposing other changes to the assessment system,
primarily to ensure that riskier institutions will bear a greater share
of the proposed increase in assessments.
---------------------------------------------------------------------------
\19\ On October 7, 2008, the FDIC established and implemented
the Restoration Plan, which is being published in the Federal
Register as a companion to this NPR. To determine whether the
reserve ratio has returned to the statutory range within five years,
the FDIC will rely on the December 31, 2013 reserve ratio, which is
the first date after October 7, 2013 for which the reserve ratio
will be known.
---------------------------------------------------------------------------
II. Overview of the Proposal
In this notice of proposed rulemaking, the FDIC proposes to improve
the way the assessment system differentiates risk among insured
institutions by drawing upon measures of risk that were not included
when the FDIC first revised its assessment system pursuant to the
Reform Act. The FDIC believes that the proposal will make the
assessment system more sensitive to risk. The proposal should also make
the risk-based assessment system fairer, by limiting the subsidization
of riskier institutions by safer ones. In addition, the FDIC proposes
to change assessment rates, including base assessment rates, to raise
assessment revenue required under the Restoration Plan.
The FDIC's proposals are set out in detail in ensuing sections, but
are briefly summarized here. These changes, except for the proposed
rate increase for the first quarter of 2009, which is discussed below,
would take effect April 1, 2009.
Risk Category I
The FDIC proposes to introduce a new financial ratio into the
financial ratios method. This new ratio would capture brokered deposits
(in excess of 10 percent of domestic deposits) that are used to fund
rapid asset growth. In addition, the FDIC proposes to update the
uniform amount and the pricing multipliers for the weighted average
CAMELS rating and financial ratios.
The FDIC proposes that the assessment rate for a large institution
with a long-term debt issuer rating be determined using a combination
of the institution's weighted average CAMELS component rating, its
long-term debt issuer ratings (converted to numbers and averaged) and
the financial ratios method assessment rate, each equally weighted. The
new method would be known as the large bank method.
Under the proposal, the financial ratios method or the large bank
method, whichever is applicable, would determine a Risk Category I
institution's initial base assessment rate. The FDIC proposes to
broaden the spread between minimum and maximum initial base assessment
rates in Risk Category I from the current 2 basis points to an initial
range of 4 basis points and to adjust the percentage of institutions
subject to these initial minimum and maximum rates.
Adjustments
Under the proposal, an institution's total base assessment rate
could vary from the initial base rate as the result of possible
adjustments. The FDIC proposes to increase the maximum possible Risk
Category I large bank adjustment from one-half basis point to one basis
point. Any such adjustment up or down would be made before any other
adjustment and would be subject to certain limits, which are described
in detail below.
The FDIC proposes to lower an institution's base assessment rate
based upon its ratio of long-term unsecured debt and, for small
institutions, certain amounts of Tier 1 capital to domestic deposits
(the unsecured debt adjustment).\20\ Any decrease in base assessment
rates would be limited to two basis points.
---------------------------------------------------------------------------
\20\ Long-term unsecured debt includes senior unsecured and
subordinated debt.
---------------------------------------------------------------------------
The FDIC proposes to raise an institution's base assessment rate
based upon its ratio of secured liabilities to domestic deposits (the
secured liability adjustment). An institution's ratio of secured
liabilities to domestic deposits (if greater than 15 percent), would
increase its assessment rate, but the resulting base assessment rate
after any such increase could be no more than 50 percent greater than
it was before the adjustment. The secured liability adjustment would be
made after any large bank adjustment or unsecured debt adjustment.
An institution in Risk Category II, III or IV would be subject to
the unsecured debt adjustment and secured liability adjustment. In
addition, the FDIC proposes a final adjustment for brokered deposits
(the brokered deposit adjustment) for institutions in these risk
categories. An institution's ratio of brokered deposits to domestic
deposits (if greater than 10 percent) would increase its assessment
rate, but any increase would be limited to no more than 10 basis
points.
Insured Branches of Foreign Banks
The FDIC proposes to make conforming changes to the pricing
multipliers and uniform amount for insured branches of foreign banks in
Risk Category I. The insured branch of a foreign bank's initial base
assessment rate would be subject to any large bank adjustment, but not
to the unsecured debt adjustment or secured liability adjustment.
New Institutions
The FDIC also proposes to make conforming changes in the treatment
of new insured depository institutions.\21\ For assessment periods
beginning on or after January 1, 2010, any new institutions in Risk
Category I would be assessed at the maximum initial base assessment
rate applicable to Risk Category I institutions, as under the current
rule.
---------------------------------------------------------------------------
\21\ Subject to exceptions, a new insured depository institution
is a bank or thrift that has not been chartered for at least five
years as of the last day of any quarter for which it is being
assessed. 12 CFR 327.8(l)
---------------------------------------------------------------------------
Effective for assessment periods beginning before January 1, 2010,
until a Risk Category I new institution received CAMELS component
ratings, it would have an initial base assessment rate that was two
basis points above the minimum initial base assessment rate applicable
to Risk Category I institutions, rather than one basis point above the
minimum rate, as under the current rule. All other new institutions in
Risk Category I would be treated as are established institutions,
except as provided in the next paragraph.
Either before or after January 1, 2010: No new institution,
regardless of risk category, would be subject to the unsecured debt
adjustment; any new institution, regardless of risk category, would be
subject to the secured liability adjustment; and a new institution in
Risk Categories II, III or IV would be subject to the brokered deposit
adjustment. After January 1, 2010, no new institution in Risk Category
I would be subject to the large bank adjustment.
Assessment Rates
To implement the proposed changes to risk-based assessments
described above and to raise sufficient revenue to ensure that the
goals of the Restoration Plan are accomplished within 5 years as
required by statute, initial base assessment rates would be as set
forth in Table 4 below.
[[Page 61564]]
Table 4--Proposed Initial Base Assessment Rates
----------------------------------------------------------------------------------------------------------------
Risk category
---------------------------------------------------------------
I*
---------------------------- II III IV
Minimum Maximum
----------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points).................. 10 14 20 30 45
----------------------------------------------------------------------------------------------------------------
* Initial base rates that were not the minimum or maximum rate would vary between these rates.
After applying all possible adjustments, minimum and maximum total
base assessment rates for each risk category would be as set out in
Table 5 below.
Table 5--Total Base Assessment Rates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category I Risk category II Risk category III Risk category IV
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial base assessment rate........ 10-14...................... 20......................... 30......................... 45
Unsecured debt adjustment........... -2-0....................... -2-0....................... -2-0....................... -2-0
Secured liability adjustment........ 0-7........................ 0-10....................... 0-15....................... 0-22.5
Brokered deposit adjustment......... ........................... 0-10....................... 0-10....................... 0-10
-------------------------------------------------------------------------------------------------------------------
Total base assessment rate...... 8-21.0..................... 18-40.0.................... 28-55.0.................... 43-77.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Total base rates that were not the minimum or maximum rate would vary between these
rates.
The FDIC proposes that these rates and other revisions to the
assessment rules take effect for the quarter beginning April 1, 2009,
and be reflected in the fund balance as of June 30, 2009, and
assessments due September 30, 2009. However, at the time of the
issuance of the final rule the FDIC may need to set a higher base rate
schedule based on information available at that time, including any
intervening institution failures and updated failure and loss
projections. A higher base rate schedule may also be necessary because
of changes to the proposal in the final rule, if these changes have the
overall effect of changing revenue for a given rate schedule.
The proposed rule would continue to allow the FDIC Board to adopt
actual rates that were higher or lower than total base assessment rates
without the necessity of further notice and comment rulemaking,
provided that: (1) The Board could not increase or decrease rates from
one quarter to the next by more than three basis points without further
notice-and-comment rulemaking; and (2) cumulative increases and
decreases could not be more than three basis points higher or lower
than the total base rates without further notice-and-comment
rulemaking.
The FDIC also proposes to raise the current rates uniformly by
seven basis points for the assessment for the quarter beginning January
1, 2009, which would be reflected in the fund balance as of March 31,
2009, and assessments due June 30, 2009. Rates for the first quarter of
2009 only would be as follows:
Table 6--Proposed Assessment Rates for the First Quarter of 2009
----------------------------------------------------------------------------------------------------------------
Risk category
---------------------------------------------------------------
I\*\
---------------------------- II III IV
Minimum Maximum
----------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points).................. 12 14 17 35 50
----------------------------------------------------------------------------------------------------------------
\*\Rates for institutions that did not pay the minimum or maximum rate would vary between these rates.
The proposed rates for the first quarter of 2009 would raise almost as
much assessment revenue as under the rates proposed beginning April 1,
2009. Data and system requirements do not make it feasible to adopt the
proposed changes to the risk-based assessment system discussed in
previous paragraphs until the second quarter of 2009.
Technical and Other Changes
The FDIC also proposes to make technical changes and one minor non-
technical change to existing assessment rules. These changes, which
would be effective April 1, 2009, are detailed below.
III. Risk Category I: Financial Ratios Method
Brokered Deposits and Asset Growth
The FDIC stated in the 2006 assessments rule that it:
[M]ay conclude that additional or alternative financial
measures, ratios or other risk factors should be used to determine
risk-based assessments or that a new method of differentiating for
risk should be used. In any of these events, changes would be made
through notice-and-comment rulemaking.\22\
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\22\ 71 FR 69,282, 69,290.
The FDIC has reached such a conclusion and proposes to add a new
financial measure to the financial ratios method. This new financial
measure, the adjusted brokered deposit ratio, would measure the extent
to which
[[Page 61565]]
brokered deposits are funding rapid asset growth. The adjusted brokered
deposit ratio would affect only those established Risk Category I
institutions whose total assets were more than 20 percent greater than
they had been four years previously, after adjusting for mergers and
acquisitions, and whose brokered deposits made up more than 10 percent
of domestic deposits.23 24 Generally speaking, the greater
an institution's asset growth and the greater its percentage of
brokered deposits, the greater would be the increase in its initial
base assessment rate.
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\23\ Generally, an established institution is a bank or thrift
that has been chartered for at least five years as of the last day
of any quarter for which it is being assessed. 12 CFR 327.8(m).
\24\ An institution that four years previously had filed no
report of condition or had reported no assets would be treated as
having no growth unless it was a participant in a merger or
acquisition (either as the acquiring or acquired institution) with
an institution that had reported assets four years previously.
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If an institution's ratio of brokered deposits to domestic deposits
were 10 percent or less or if the institution's asset growth over the
previous four years were less than 20 percent, the adjusted brokered
deposit ratio would be zero and would have no effect on the
institution's assessment rate. If an institution's ratio of brokered
deposits to domestic deposits exceeded 10 percent and its asset growth
over the previous four years were more than 40 percent, the adjusted
brokered deposit ratio would equal the institution's ratio of brokered
deposits to domestic deposits less the 10 percent threshold. If an
institution's ratio of brokered deposits to domestic deposits exceeded
10 percent but its asset growth over the previous four years were
between 20 percent and 40 percent, the adjusted brokered deposit ratio
would be equal to a gradually increasing fraction of the ratio of
brokered deposits to domestic deposits (minus the 10 percent
threshold), so that small increases in asset growth rates would lead to
only small increases in assessment rates. Overall asset growth rates of
20 to 40 percent would be transformed into a fraction between 0 and 1
by multiplying an amount equal to the overall rate of growth minus 20
percent by 5 and expressing the result as a number rather than as a
percentage (so that, for example, 5 times 10 percent would equal
0.500).\25\ The adjusted brokered deposit ratio would never be less
than zero. Appendix A contains a detailed mathematical definition of
the ratio. Table 7 gives examples of how the adjusted brokered deposit
ratio would be determined.
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\25\ The ratio of brokered deposits to domestic deposits and
four-year asset growth rate would remain unrounded (to the extent of
computer capabilities) when calculating the adjusted brokered
deposit ratio. The adjusted brokered deposit ratio itself (expressed
as a percentage) would be rounded to three digits after the decimal
point prior to being used to calculate the assessment rate.
Table 7--Adjusted Brokered Deposit Ratio
--------------------------------------------------------------------------------------------------------------------------------------------------------
A B C D E F
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ratio of brokered
deposits to domestic Adjusted brokered
Ratio of brokered deposits minus 10 Cumulative asset Asset growth rate deposit ratio
Example deposits to percent threshold growth rate over factor (Column C times
domestic deposits (Column B minus 10 four years column E)
percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1......................................... 5.0% 0.0% 5.0% .................... 0.0%
2......................................... 15.0% 5.0% 5.0% .................... 0.0%
3......................................... 5.0% 0.0% 25.0% 0.250 0.0%
4......................................... 35.0% 25.0% 30.0% 0.500 12.5%
5......................................... 25.0% 15.0% 50.0% 1.000 15.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
In Examples 1, 2 and 3, either the institution has a ratio of
brokered deposits to domestic deposits that is less than 10 percent
(Column B) or its four-year asset growth rate is less than 20 percent
(Column D). Consequently, the adjusted brokered deposit ratio is zero
(Column F). In Example 4, the institution has a ratio of brokered
deposits to domestic deposits of 35 percent (Column B), which, after
subtracting the 10 percent threshold, leaves 25 percent (Column C). Its
assets are 30 percent greater than they were four years previously
(Column D), so the fraction applied to obtain the adjusted brokered
deposit ratio is 0.5 (Column E) (calculated as 5 [middot] (30 percent-
20 percent, with the result expressed as a number rather than as a
percentage)). Its adjusted brokered deposit ratio is, therefore, 12.5
percent (Column F) (which is 0.5 times 25 percent). In Example 5, the
institution has a lower ratio of brokered deposits to domestic deposits
(25 percent in Column B) than in Example 4 (35 percent). However, its
adjusted brokered deposit ratio (15 percent in Column F) is larger than
in Example 4 (12.5 percent) because its assets are more than 40 percent
greater than they were four years previously (Column D). Therefore, its
adjusted brokered deposit ratio is equal to its brokered deposit to
domestic deposit ratio of 25 percent minus the 10 percent threshold
(Column F).
The FDIC is proposing this new risk measure for a couple of
reasons. A number of costly institution failures, including some recent
failures, have experienced rapid asset growth before failure and have
funded this growth through brokered deposits. Moreover, statistical
analysis reveals a significant correlation between rapid asset growth
funded by brokered deposits and the probability of an institution's
being downgraded from a CAMELS composite 1 or 2 rating to a CAMELS
composite 3, 4 or 5 rating within a year. A significant correlation is
the standard the FDIC used when it adopted the financial ratios method
in the 2006 assessments rule.
The proposed rule would adopt the definition of brokered deposit in
Section 29 of the Federal Deposit Insurance Act (12 U.S.C. 1831f),
which is the definition used in banks' quarterly Reports of Condition
and Income (Call Reports) and thrifts' quarterly Thrift Financial
Reports (TFRs). The FDIC is proposing that all brokered deposits be
included in an institution's ratio of brokered deposits to domestic
deposits used to determine its adjusted brokered deposit ratio,
including brokered deposits that consist of balances swept into an
insured institution by another institution, such as balances swept from
a brokerage account. At present, it would be impossible to exclude
these deposits, since institutions do not separately report them in the
Call
[[Page 61566]]
Report or TFR. Moreover, sweep programs may be structured so that swept
balances are not brokered deposits.\26\ Nevertheless, the FDIC is
particularly interested in comments on whether brokered deposits that
consist of swept balances should be excluded from the ratio and, if so,
how they should be excluded.
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\26\ For example, a swept deposit may not be a brokered deposit
if: (1) Balances are swept for the primary purposes of facilitating
customers' purchase and sale of securities, rather than the
placement of funds with depository institutions; (2) swept amounts
do not exceed 10 percent of the brokerage's cash management account
and retirement account assets; and (3) fees are paid on a per
customer or account basis, rather than size of account basis, and
are for administrative services, rather than for placement of
deposits. Are Funds Held in ``Cash Management Accounts'' Viewed as
Brokered Deposits by the FDIC? (FDIC Advisory Opinion 05-02 Feb. 3,
2005).
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The proposed definition of brokered deposits would also include
amounts an institution receives through a network that divides large
deposits and places them at more than one institution to ensure that
the deposit is fully insured, even where the institution accepts these
deposits only on a reciprocal basis, such that, for any deposit
received, the institution places the same amount (but held by a
different depositor) with another institution through the network. At
present, it would again be impossible to exclude these deposits, since
institutions do not separately report them in the Call Report or TFR.
The FDIC is also particularly interested in comments on whether these
deposits should be excluded from the ratio and, if so, how they should
be excluded.
The proposed definition would exclude amounts not defined as a
brokered deposit by statute. Thus, many high cost deposits would be
excluded from the definition, potentially including those received
through listing services or the Internet. At present, it would be
impossible to include these deposits, since institutions do not
separately report them in the Call Report or TFR. Nevertheless, the
FDIC is particularly interested in comments on whether these deposits
should be included in the definition of brokered deposits for purposes
of the adjusted brokered deposit ratio and, if so, how they should be
included.
Pricing Multipliers and the Uniform Amount
The FDIC also proposes to recalculate the uniform amount and the
pricing multipliers for the weighted average CAMELS component rating
and financial ratios. The existing uniform amount and pricing
multipliers were derived from a statistical estimate of the probability
that an institution will be downgraded to CAMELS 3, 4 or 5 at its next
examination using data from the end of the years 1984 to 2004.\27\
These probabilities were then converted to pricing multipliers for each
risk measure. The proposed new pricing multipliers were derived using
essentially the same statistical techniques, but based upon data from
the end of the years 1988 to 2006.\28\ The proposed new pricing
multipliers are set out in Table 8 below.
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\27\ Data on downgrades to CAMELS 3, 4 or 5 is from the years
1985 to 2005. The ``S'' component rating was first assigned in 1997.
Because the statistical analysis relies on data from before 1997,
the ``S'' component rating was excluded from the analysis.
\28\ For the adjusted brokered deposit ratio, assets at the end
of each year are compared to assets at the end of the year four
years earlier, so assets at the end of 1988, for example, are
compared to assets at the end of 1984.
Table 8--Proposed New Pricing Multipliers
------------------------------------------------------------------------
Pricing
Risk measures* multipliers**
------------------------------------------------------------------------
Tier 1 Leverage Ratio.................................... (0.056)
Loans Past Due 30--89 Days/Gross Assets.................. 0.576
Nonperforming Assets/Gross Assets........................ 1.073
Net Loan Charge-Offs/Gross Assets........................ 1.213
Net Income before Taxes/Risk-Weighted Assets............. (0.762)
Adjusted Brokered Deposit Ratio.......................... 0.055
Weighted Average CAMELS Component Rating................. 1.088
------------------------------------------------------------------------
* Ratios are expressed as percentages.
** Multipliers are rounded to three decimal places.
To determine an institution's initial assessment rate under the
base assessment rate schedule, each of these risk measures (that is,
each institution's financial measures and weighted average CAMELS
component rating) would continue to be multiplied by the corresponding
pricing multipliers. The sum of these products would be added to (or
subtracted from) a new uniform amount, 9.872.\29\ The new uniform
amount is also derived from the same statistical analysis.\30\ As at
present, no initial base assessment rate within Risk Category I would
be less than the minimum initial base assessment rate applicable to the
category or higher than the initial base maximum assessment rate
applicable to the category. The proposed rule would set the initial
minimum base assessment rate for Risk Category I at 10 basis points and
the maximum initial base assessment rate for Risk Category I at 14
basis points.
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\29\ Appendix A provides the derivation of the pricing
multipliers and the uniform amount to be added to compute an
assessment rate. The rate derived will be an annual rate, but will
be determined every quarter.
\30\ The uniform amount would be the same for all institutions
in Risk Category I (other than large institutions that have long-
term debt issuer ratings, insured branches of foreign banks and,
beginning in 2010, new institutions).
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To compute the values of the uniform amount and pricing multipliers
shown above, the FDIC chose cutoff values for the predicted
probabilities of downgrade such that, using June 30, 2008 Call Report
and TFR data: (1) 25 percent of small institutions in Risk Category I
(other than institutions less than 5 years old) would have been charged
the minimum initial assessment rate; and (2) 15 percent of small
institutions in Risk Category I (other than institutions less than 5
years old) would have been charged the maximum initial assessment
rate.\31\ These cutoff values would be used in future periods, which
could lead to different percentages of institutions being charged the
minimum and maximum rates.
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\31\ The cutoff value for the minimum assessment rate is a
predicted probability of downgrade of approximately 2 percent. The
cutoff value for the maximum assessment rate is approximately 15
percent.
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In comparison, under the current system: (1) Approximately 28
percent of small institutions in Risk Category I (other than
institutions less than 5 years old) were charged the existing minimum
assessment rate; and (2) approximately 19 percent of small institutions
in Risk Category I (other than institutions less than 5 years old) were
charged the existing maximum assessment rate based on June 30, 2008
data.
Table 9 gives initial base assessment rates for three institutions
with varying characteristics, assuming the proposed new pricing
multipliers given above, using initial base assessment rates for
institutions in Risk Category I of 10 basis points to 14 basis
points.\32\
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\32\ These are the initial base rates for Risk Category I
proposed below.
[[Page 61567]]
Table 9--Initial Base Assessment Rates for Three Institutions *
--------------------------------------------------------------------------------------------------------------------------------------------------------
Institution 1 Institution 2 Institution 3
--------------------------------------------------------------------------------
Pricing Contribution Contribution Contribution
multiplier Risk to Risk to Risk to
measure assessment measure assessment measure assessment
value rate value rate value rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
A B C D E F G H
--------------------------------------------------------------------------------------------------------------------------------------------------------
Uniform Amount............................................ 9.872 ........... 9.872 ........... 9.872 ........... 9.872
Tier 1 Leverage Ratio (%)................................. (0.056) 9.590 (0.537) 8.570 (0.480) 7.500 (0.420)
Loans Past Due 30-89 Days/Gross Assets (%)................ 0.576 0.400 0.230 0.600 0.345 1.000 0.576
Nonperforming Loans/Gross Assets (%)...................... 1.073 0.200 0.215 0.400 0.429 1.500 1.610
Net Loan Charge-Offs/Gross Assets(%)...................... 1.213 0.147 0.178 0.079 0.096 0.300 0.364
Net Income Before Taxes/Risk-Weighted Assets (%).......... (0.762) 2.500 (1.905) 1.951 (1.487) 0.518 (0.395)
Adjusted Brokered Deposit Ratio (%)....................... 0.055 0.000 0.000 12.827 0.705 24.355 1.340
Weighted Average CAMELS Component Ratings................. 1.088 1.200 1.306 1.450 1.578 2.100 2.285
Sum of contributions...................................... ........... ........... 9.36 ........... 11.06 ........... 15.23
Initial Base Assessment Rate.............................. ........... ........... 10.00 ........... 11.06 ........... 14.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Figures may not multiply or add to totals due to rounding.\33\
The initial base assessment rate for an institution in the table is
calculated by multiplying the pricing multipliers (Column B) by the
risk measure values (Column C, E or G) to produce each measure's
contribution to the assessment rate. The sum of the products (Column D,
F or H) plus the uniform amount (the first item in Column D, F and H)
yields the initial base assessment rate. For Institution 1 in the
table, this sum actually equals 9.36 basis points, but the table
reflects the proposed initial base minimum assessment rate of 10 basis
points. For Institution 3 in the table, the sum actually equals 15.23
basis points, but the table reflects the proposed initial base maximum
assessment rate of 14 basis points.
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\33\ Under the proposed rule, pricing multipliers, the uniform
amount, and financial ratios would continue to be rounded to three
digits after the decimal point. Resulting assessment rates would be
rounded to the nearest one-hundredth (1/100th) of a basis point.
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Under the proposed rule, the FDIC would continue to have the
flexibility to update the pricing multipliers and the uniform amount
annually, without further notice-and-comment rulemaking. In particular,
the FDIC would be able to add data from each new year to its analysis
and could, from time to time, exclude some earlier years from its
analysis. Because the analysis would continue to use many earlier
years' data as well, pricing multiplier changes from year to year
should usually be relatively small.
On the other hand, as a result of the annual review and analysis,
the FDIC may conclude, as it has in the proposed rule, that additional
or alternative financial measures, ratios or other risk factors should
be used to determine risk-based assessments or that a new method of
differentiating for risk should be used. In any of these events, the
FDIC would again make changes through notice-and-comment rulemaking.
Financial measures for any given quarter would continue to be
calculated from the report of condition filed by each institution as of
the last day of the quarter.\34\ CAMELS component rating changes would
continue to be effective as of the date that the rating change is
transmitted to the institution for purposes of determining assessment
rates for all institutions in Risk Category I.\35\
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\34\ Reports of condition include Reports of Income and
Condition and Thrift Financial Reports.
\35\ Pursuant to existing supervisory practice, the FDIC does
not assign a different component rating from that assigned by an
institution's primary federal regulator, even if the FDIC disagrees
with a CAMELS component rating assigned by an institution's primary
federal regulator, unless: (1) the disagreement over the component
rating also involves a disagreement over a CAMELS composite rating;
and (2) the disagreement over the CAMELS composite rating is not a
disagreement over whether the CAMELS composite rating should be a 1
or a 2. The FDIC has no plans to alter this practice.
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IV. Risk Category I: Large Bank Method
For large Risk Category I institutions now subject to the debt
issuer rating method, the FDIC proposes to derive assessment rates from
the financial ratios method as well as long-term debt issuer ratings
and CAMELS component ratings. The new method would be known as the
large bank method. The rate using the financial ratios method would
first be converted from the range of initial base rates (10 to 14 basis
points) to a scale from 1 to 3 (financial ratios score).\36\ The
financial ratios score would be given a 33\1/3\ percent weight in
determining the large bank method assessment rate, as would both the
weighted average CAMELS component rating and debt-agency ratings.
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\36\ The assessment rate computed using the financial ratios
method would be converted to a financial ratios score by first
subtracting 8 from the
