Assessments, 9525-9563 [E9-4584]
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Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations
Holding Company Act of 1956, as
amended, the Home Owners’ Loan Act,
as amended, or the Change in Bank
Control Act, as amended, have been
submitted to the applicant’s appropriate
Federal banking agency in connection
with the proposed issuance; and
(F) any other relevant information that
the FDIC deems appropriate.
(3) The factors to be considered by the
FDIC in evaluating applications filed
pursuant to paragraphs (h)(1)(i) through
(h)(1)(iii) and (h)(1)(v) of this section
include: the financial condition and
supervisory history of the eligible/
surviving entity. * * *
(4) * * * Applications made pursuant
to paragraph (h)(1)(v) of this section
must be filed with the FDIC no later
than June 30, 2009.
*
*
*
*
*
■ 4. In part 370, amend § 370.5 as
follows:
■ a. At the end of paragraph (h)(2),
remove the last italicized sentence and
add in its place two new sentences; and
■ b. Add new paragraph (j) as follows:
§ 370.5
Participation.
*
*
*
*
*
(h) * * *
(2) * * * [If the debt being issued is
mandatory convertible debt, add: The
expiration date of the FDIC’s guarantee
is the earlier of the mandatory
conversion date or June 30, 2012]. [If the
debt being issued is any other senior
unsecured debt, add: The expiration
date of the FDIC’s guarantee is the
earlier of the maturity date of the debt
or June 30, 2012.]
*
*
*
*
*
(j) No mandatory convertible debt
may be issued without obtaining the
FDIC’s prior written approval.
■ 5. In part 370, amend § 370.6 as
follows:
■ a. Revise paragraphs (d)(1).
■ b. Revise the first sentence of (d)(3).
■ c. Revise (d)(5) as follows:
§ 370.6 Assessments under the Debt
Guarantee Program.
For debt with a maturity or
time period to conversion
date of—
SUMMARY: The FDIC is amending our
regulation 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
50 technical and other changes to the rules
75 governing the risk-based assessment
100 system.
The
annualized
assessment
rate (in basis
points) is—
180 days or less (excluding
overnight debt) ..................
181–364 days .......................
365 days or greater ..............
*
*
*
*
*
(3) The amount of assessment for an
eligible entity, other than an insured
depository institution, that controls,
directly or indirectly, or is otherwise
affiliated with, at least one insured
depository institution will be
determined by multiplying the amount
of FDIC-guaranteed debt times the term
of the debt or, in the case of mandatory
convertible debt, the time period from
issuance to the mandatory conversion
date, times an annualized assessment
rate determined in accordance with the
rates set forth in the table in paragraph
(d)(1) of this section, except that each
such rate shall be increased by 10 basis
points, if the combined assets of all
insured depository institutions affiliated
with such entity constitute less than 50
percent of consolidated holding
company assets. * * *
*
*
*
*
*
(5) No assessment reduction for early
retirement of guaranteed debt. A
participating entity’s assessment shall
not be reduced if guaranteed debt is
retired prior to its scheduled maturity
date or conversion date.
*
*
*
*
*
■ 6. In part 370, amend § 370.12 to add
a new sentence immediately after the
first sentence in paragraph (b)(2); as
follows:
§ 370.12
Payment on the guarantee.
*
*
*
*
*
(b) * * *
(2) * * * For purposes of mandatory
convertible debt, principal payment
shall be limited to amounts paid by
holders under the issuance. * * *
*
*
*
*
*
[FR Doc. E9–4586 Filed 2–27–09; 4:15 pm]
BILLING CODE 6714–01–P
*
*
*
*
(d) * * *
(1) Calculation of assessment. Except
as provided in paragraph (d)(3) of this
section, the amount of assessment will
be determined by multiplying the
amount of FDIC-guaranteed debt times
the term of the debt or, in the case of
mandatory convertible debt, the time
period from issuance to the mandatory
conversion date, times an annualized
assessment rate determined in
accordance with the following table.
*
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FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 327
RIN 3064–AD35
Assessments
AGENCY: Federal Deposit Insurance
Corporation (FDIC).
ACTION: Final rule.
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DATES:
Effective Date: April 1, 2009.
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 reform
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
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.
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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 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.6
The Reform Act left in place the
existing statutory provision allowing the
FDIC to ‘‘establish separate risk-based
assessment systems for large and small
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
regulator and other information the
FDIC deems relevant.10 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.11 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.)
members of the Deposit Insurance
Fund.’’ 7 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.’’ 8
The 2006 Assessments Rule
Overview
On November 30, 2006, pursuant to
the requirements of the Reform Act, the
FDIC published in the Federal Register
a final rule on the risk-based assessment
system (the 2006 assessments rule).9
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
TABLE 1—DETERMINATION OF RISK CATEGORY
Supervisory group
Capital category
A
Well Capitalized ...........................................................................................................................
B
I
III
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
up to three basis points above or below
II
III
the base schedule without further
notice-and-comment rulemaking,
provided that no single change from one
quarter to the next can exceed three
basis points.12 Base assessment rates
C
IV
within Risk Category I varied from 2 to
4 basis points, as set forth in Table 2
below.
TABLE 2—2007–08 BASE ASSESSMENT RATES
Risk category
I*
II
Minimum
Annual Rates (in basis points) .............................................
2
4
III
IV
7
25
40
Maximum
* Rates for institutions that do not pay the minimum or maximum rate vary between these rates.
5 Section 7(b)(3)(E) of the Federal Deposit
Insurance Act (12 U.S.C. 1817(b)(3)(E)).
6 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
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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).
7 Section 7(b)(1)(D) of the Federal Deposit
Insurance Act (12 U.S.C. 1817(b)(1)(D)).
8 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)).
9 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.
10 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)).
11 The capital groups and the supervisory groups
have been in effect since 1993. In practice, the
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supervisory group evaluations are 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, institutions with a CAMELS
rating of 1 or 2 are assigned to supervisory group
A, those with a CAMELS rating of 3 to group B, and
those with a CAMELS rating of 4 or 5 to group C.
12 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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9527
TABLE 2—2007–08 BASE ASSESSMENT RATES
Risk category
I*
II
Annual Rates (in basis points) .............................................
IV
7
25
40
III
IV
10
28
43
Maximum
2
III
II
Minimum
4
* 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—2007–08 ACTUAL 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.
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
• 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
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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.13
The supervisory and debt ratings
method (or debt ratings method)
determines the assessment rate for large
institutions that have a long-term debt
issuer rating.14 Long-term debt issuer
13 Based upon September 30, 2008 data,
approximately 26 percent of small Risk Category I
institutions (other than institutions less than 5 years
old) were charged the minimum rate and
approximately 23 percent were charged the
maximum rate.
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
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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.
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
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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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.15
Assessment rates for insured branches
of foreign banks in Risk Category I are
determined using ROCA components.16
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).17
With certain exceptions, beginning in
2010, the 2006 assessments rule charges
new institutions in Risk Category I
(those established for less than five
years), 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 rule making in
November 2006, the FDIC also set the
DRR at 1.25 percent, effective January 1,
2007.18 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. 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
15 Based upon September 30, 2008, data, and
ignoring the large bank adjustment (described
below), approximately 41 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.
16 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.
17 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).
18 In November 2007 and October 2008, the Board
again voted to maintain the DRR at 1.25 percent for
2008 and 2009, respectively. 71 FR 69325 (Nov. 30,
2006) and 72 FR 65576 (Nov. 21, 2007).
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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 then
existing assessment rate schedule.
Recent failures of FDIC-insured
institutions caused the reserve ratio of
the Deposit Insurance Fund (DIF) to
decline from 1.19 percent as of March
30, 2008, to 1.01 percent as of June 30,
0.76 percent as of September 30, and
0.40 percent (preliminary) as of
December 31. Twenty-five institutions
failed in 2008, and the FDIC expects a
substantially higher rate of institution
failures in the next few years, leading to
a further decline in the reserve ratio.
Already, 14 institutions have failed in
2009. Because the fund reserve ratio fell
below 1.15 percent as of June 30, 2008,
and was expected to remain below 1.15
percent, the Reform Act required the
FDIC to establish and implement a
Restoration Plan to restore the reserve
ratio to at least 1.15 percent within five
years.
The Proposed Rule
On October 7, 2008, the FDIC
established a Restoration Plan for the
DIF.19 In the FDIC’s view, restoring the
reserve ratio to at least 1.15 percent
within five years required an increase in
assessment rates. Since rates were
already three basis points above the base
rate schedule, a new rulemaking was
required. Consequently, on October 7,
2008, the FDIC Board of Directors also
adopted a notice of proposed
rulemaking with request for comments
on revisions to the FDIC’s assessment
regulations (the proposed rule or
NPR).20 The NPR proposed that,
effective January 1, 2009, assessment
rates would increase uniformly by seven
basis points for the first quarter 2009
assessment period. Effective April 1,
2009, the NPR proposed to alter the way
in which the FDIC’s risk-based
assessment system differentiates for risk
and set new deposit insurance
assessment rates. Also effective on April
1, 2009, the NPR proposed to make
technical and other changes to the rules
governing the risk-based assessment
system. The proposed rule was
published concurrently with the
Restoration Plan on October 16, 2008,
19 73
20 12
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CFR 327.
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with a comment period scheduled to
end on November 17, 2008.21
On November 7, 2008, the FDIC Board
approved an extension of the comment
period until December 17, 2008, on the
parts of the proposed rulemaking that
would become effective on April 1,
2009. The comment period for the
proposed 7 basis point rate increase for
the first quarter of 2009, with its
separate proposed effective date of
January 1, 2009, was not extended and
expired on November 17, 2008. The
final rule on the rate increase for the
first quarter of 2009 was approved as
proposed by the FDIC Board on
December 16, 2008.22
The FDIC received almost 5,000
comments on the parts of the proposed
rule that would become effective on
April 1, 2009, including proposed
changes in how the FDIC’s risk-based
assessment system differentiates for risk
and corresponding new assessment
rates. This final rule implements the
remaining changes that the FDIC
proposed in the October notice of
proposed rulemaking, with some
alteration.
II. Overview of the Final Rule
In this rulemaking, the FDIC seeks 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 rulemaking will make
the assessment system more sensitive to
risk. The rulemaking should also make
the risk-based assessment system fairer,
by limiting the subsidization of riskier
institutions by safer ones. The
assessment rate schedule established in
this rule should provide sufficient
revenue to cover losses resulting from a
large volume of institution failures and
raise the insurance fund’s reserve ratio
over time. However, as explained below,
the FDIC is simultaneously issuing an
interim rule to impose a 20 basis point
special assessment (and possible
additional special assessments of up to
10 basis points thereafter). The final
rule, which differs in several ways from
the proposed rule, is set out in detail in
ensuing sections, but is briefly
summarized here. The final rule will
take effect April 1, 2009, and will apply
to assessments for the second quarter of
2009 (which will be collected in
September 2009) and thereafter.
21 See
22 73
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73 FR 61,560 (Oct. 16, 2008).
FR 78,155 (Dec. 22, 2008).
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The final rule introduces a new
financial ratio into the financial ratios
method. This new ratio will capture
certain brokered deposits (in excess of
10 percent of domestic deposits) that are
used to fund rapid asset growth. The
new financial ratio in the final rule
differs from the one proposed in the
NPR in two ways. It excludes deposits
that an insured depository institution
receives through a deposit placement
network on a reciprocal basis, such that:
(1) For any deposit received, the
institution (as agent for depositors)
places the same amount with other
insured depository institutions through
the network; and (2) each member of the
network sets the interest rate to be paid
on the entire amount of funds it places
with other network members
(henceforth referred to as reciprocal
deposits). It also raises the asset growth
threshold from that proposed in the
NPR. The final rule also updates the
uniform amount and the pricing
multipliers for the weighted average
CAMELS component ratings and
financial ratios.
The final rule provides that the
assessment rate for a large institution
with a long-term debt issuer rating will
be determined using a combination of
the institution’s weighted average
CAMELS component ratings, its longterm debt issuer ratings (converted to
numbers and averaged) and the
financial ratios method assessment rate,
each equally weighted. The new method
will be known as the large bank method.
Under the final rule, the financial
ratios method or the large bank method,
whichever is applicable, will determine
a Risk Category I institution’s initial
base assessment rate. The final rule will
broaden the spread between minimum
and maximum initial base assessment
rates in Risk Category I from 2 basis
points to an initial range of 4 basis
points and adjust the percentage of
institutions subject to these initial
minimum and maximum rates.
Adjustments
Under the final rule, an institution’s
total base assessment rate can vary from
the initial base rate as the result of
possible adjustments. The final rule also
increases the maximum possible Risk
Category I large bank adjustment from
one-half basis point to one basis point.
Any such adjustment up or down will
be made before any other adjustment
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and will be subject to certain limits,
which are described in detail below.
Under the final rule, an institution’s
unsecured debt adjustment—the
institution’s ratio of long-term
unsecured debt (and, for small
institutions, certain amounts of its Tier
1 capital) to domestic deposits—will
lower the institution’s base assessment
rate.23 Any decrease in base assessment
rates will be limited to five basis points.
The unsecured debt adjustment differs
from the adjustment proposed in the
NPR in several ways. The adjustment is
larger for a given amount of unsecured
debt (and, for small institutions, Tier 1
capital) and the maximum adjustment of
five basis points is larger than the
proposed maximum of two basis points
in the NPR. The adjustment excludes
senior unsecured debt that the FDIC has
guaranteed under its Temporary
Liquidity Guarantee Program. Finally,
the adjustment lowers the threshold for
inclusion of a small institution’s Tier 1
capital.
Also, under the final rule, an
institution’s secured liability
adjustment—which is based on the
institution’s ratio of secured liabilities
to domestic deposits—will raise its base
assessment rate. An institution’s ratio of
secured liabilities to domestic deposits
(if greater than 25 percent), will increase
its assessment rate, but the resulting
base assessment rate after any such
increase can be no more than 50 percent
greater than it was before the
adjustment. The secured liability
adjustment will be made after any large
bank adjustment or unsecured debt
adjustment. This adjustment also differs
from the adjustment proposed in the
NPR in that an institution’s ratio of
secured liabilities to domestic deposits
must be greater than 25 percent for an
adjustment to exist, rather than 15
percent as proposed in the NPR.
Institutions in all risk categories will
be subject to the unsecured debt
adjustment and secured liability
adjustment. In addition, the final rule
makes a final adjustment for brokered
deposits (the brokered deposit
adjustment) for institutions in Risk
Category II, III or IV. An institution’s
ratio of brokered deposits to domestic
deposits (if greater than 10 percent) will
increase its assessment rate, but any
increase will be limited to no more than
10 basis points. The brokered deposit
adjustment is as proposed in the NPR
and will include reciprocal deposits.
Insured Branches of Foreign Banks
24 As discussed below, subject to exceptions, the
final rule defines a new insured depository
institution as a bank or thirft that has not been
Risk Category I
23 Long-term unsecured debt includes senior
unsecured and subordinated debt.
9529
federally insured for at least five years as of the last
day of any quarter for which it is being assessed.
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The final rule makes 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 will be subject to
any large bank adjustment, but not to
the unsecured debt adjustment or
secured liability adjustment. In fact, no
insured branch of a foreign bank in any
risk category will be subject to the
unsecured debt adjustment, secured
liability adjustment or brokered deposit
adjustment.
New Institutions
The final rule makes conforming
changes in the treatment of new insured
depository institutions.24 For
assessment periods beginning on or after
January 1, 2010, any new institutions in
Risk Category I will be assessed at the
maximum initial base assessment rate
applicable to Risk Category I
institutions.
For assessments for the last three
quarters of 2009, until a Risk Category
I new institution received CAMELS
component ratings, it will have an
initial base assessment rate that is 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 final rule adopted in 2006.
For these three quarters, all other new
institutions in Risk Category I will be
treated as established institutions,
except as provided in the next
paragraph.
Either before or after January 1, 2010:
no new institution, regardless of risk
category, will be subject to the
unsecured debt adjustment; any new
institution, regardless of risk category,
will be subject to the secured liability
adjustment; and a new institution in
Risk Categories II, III or IV will be
subject to the brokered deposit
adjustment. After January 1, 2010, no
new institution in Risk Category I will
be subject to the large bank adjustment.
Assessment Rates
As explained below, estimated losses
from projected institution failures have
risen considerably since the NPR was
published last fall. Consequently, initial
base assessment rates as of April 1,
2009, which are set forth in Table 4
below, are slightly higher than proposed
in the NPR.
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TABLE 4—INITIAL BASE ASSESSMENT RATES AS OF APRIL 1, 2009
Risk category
I*
II
III
IV
22
32
45
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 ...........................................................................
12–16
¥5–0
0–8
........................
22
¥5–0
0–11
0–10
32
¥5–0
0–16
0–10
45
¥5–0
0–22.5
0–10
Total base assessment rate .....................................................................
7–24.0
17–43.0
27–58.0
40–77.5
Minimum
Annual Rates (in basis points) .............................................
Maximum
12
16
* Initial base rates that were not the minimum or maximum rate will vary between these rates.
After applying all possible
adjustments, minimum and maximum
total base assessment rates for each risk
category will be as set out in Table 5
below.
TABLE 5—TOTAL BASE ASSESSMENT RATES
* 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.
These rates and other revisions to the
assessment rules take effect for the
quarter beginning April 1, 2009, and
will be reflected in the fund balance as
of June 30, 2009, and assessments due
September 30, 2009 and thereafter.
Because the outlook for losses to the
insurance fund has deteriorated
significantly since publication of the
NPR last fall, the FDIC is
simultaneously issuing an interim rule
that provides for a 20 basis point special
assessment on June 30, 2009. The
interim rule also provides that the Board
may impose additional special
assessments of up to 10 basis points
thereafter if the reserve ratio of the DIF
is estimated to fall to a level that that
the Board believes would adversely
affect public confidence or to a level
which shall be close to zero or negative
at the end of a calendar quarter.
The final rule continues to allow the
FDIC Board to adopt actual rates that are
higher or lower than total base
assessment rates without the necessity
of further notice and comment
rulemaking, provided that: (1) the Board
cannot increase or decrease total 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
cannot be more than three basis points
higher or lower than the total base rates
without further notice-and-comment
rulemaking.
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Technical and Other Changes
The final rule also makes technical
changes and one minor non-technical
change to the assessments rules. These
changes are detailed below.
III. Risk Category I: Financial Ratios
Method
Brokered Deposits and Asset Growth
The final rule adds a new financial
measure to the financial ratios method.
This new financial measure, the
adjusted brokered deposit ratio, will
measure the extent to which brokered
deposits are funding rapid asset growth.
The adjusted brokered deposit ratio will
affect only those established Risk
Category I institutions whose total gross
assets are more than 40 percent greater
than they were four years previously,
after adjusting for mergers and
acquisitions, rather than 20 percent
greater as proposed in the NPR, and
whose brokered deposits (less reciprocal
deposits) make up more than 10 percent
of domestic deposits.25 26 27 Generally
25 As discussed below, subject to exceptions, the
final rule defines an established depository
institution as 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.
26 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.
27 References hereafter to ‘‘asset growth’’ or
‘‘growth in assets’’ refer to growth in gross assets.
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speaking, the greater an institution’s
asset growth and the greater its
percentage of brokered deposits, the
greater will be the increase in its initial
base assessment rate. Small changes in
asset growth rate or brokered deposits as
a percentage of domestic deposits will
lead to small changes in assessment
rates.
If an institution’s ratio of brokered
deposits to domestic deposits is 10
percent or less or if the institution’s
asset growth over the previous four
years is less than 40 percent, the
adjusted brokered deposit ratio will be
zero and will have no effect on the
institution’s assessment rate. If an
institution’s ratio of brokered deposits
to domestic deposits exceeds 10 percent
and its asset growth over the previous
four years is more than 70 percent
(rather than 40 percent as proposed in
the NPR), the adjusted brokered deposit
ratio will 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 exceeds 10 percent
but its asset growth over the previous
four years is between 40 percent and 70
percent, overall asset growth rates will
be converted into an asset growth rate
factor ranging between 0 and 1, so that
the adjusted brokered deposit ratio will
equal a gradually increasing fraction of
the ratio of brokered deposits to
domestic deposits (minus the 10 percent
threshold). The asset growth rate factor
is derived by multiplying by 31⁄3 an
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amount equal to the overall rate of
growth minus 40 percent and expressing
the result as a decimal fraction rather
than as a percentage (so that, for
example, 31⁄3 times 10 percent equals
0.33 * * *).28 The adjusted brokered
deposit ratio will never be less than
zero. Appendix A contains a detailed
mathematical definition of the ratio.
Table 6 gives examples of how the
adjusted brokered deposit ratio would
be determined.
TABLE 6—ADJUSTED BROKERED DEPOSIT RATIO
A
C
D
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
0.0%
5.0%
0.0%
25.0%
15.0%
5.0%
5.0%
35.0%
55.0%
80.0%
...........................................................................................
...........................................................................................
...........................................................................................
...........................................................................................
...........................................................................................
5.0%
15.0%
5.0%
35.0%
25.0%
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 40
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 55 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 31⁄3 (55 percent—40
percent, with the result expressed as a
decimal fraction 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
70 percent greater than they were four
years previously (Column D). Therefore,
its adjusted brokered deposit ratio is
equal to its ratio of brokered deposits to
domestic deposits of 25 percent minus
the 10 percent threshold (Column F).
The FDIC is adding this new risk
measure for a couple of reasons. A
number of costly institution failures,
including some recent failures, involved
rapid asset growth funded 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 adjusted brokered deposit ratio
generally will include brokered deposits
as defined in Section 29 of the Federal
Deposit Insurance Act (12 U.S.C. 1831f),
and as implemented in 12 CFR 337.6,
which is the definition used in banks’
quarterly Reports of Condition and
Income (Call Reports) and thrifts’
quarterly Thrift Financial Reports
(TFRs). However, for assessment
purposes in Risk Category I, the ratio
will not include reciprocal deposits
(that is, deposits that an insured
depository institution receives through a
deposit placement network on a
reciprocal basis, such that: (1) for any
deposit received, the institution (as
agent for depositors) places the same
amount with other insured depository
institutions through the network; and
(2) each member of the network sets the
interest rate to be paid on the entire
amount of funds it places with other
network members. All other brokered
deposits will be included in an
institution’s ratio of brokered deposits
to domestic deposits used to determine
28 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.
29 These estimates do not exclude deposits that an
institution receives through a deposit placement
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E
F
Asset growth
rate factor
Adjusted
brokered
deposit ratio
(column C
times
column E)
........................
........................
........................
0.500
1.000
0.0%
0.0%
0.0%
12.5%
15.0%
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.
Based on data as of September 30,
2008, approximately 8.7 percent of
institutions in Risk Category I would
have exceeded both the 10 percent
brokered deposit threshold and 40
percent minimum 4-year cumulative
asset growth threshold, so that their
adjusted brokered deposit ratio would
be greater than zero. A smaller
percentage of institutions would
actually have been charged a higher rate
solely due to the adjusted brokered
deposit ratio because the minimum or
maximum initial rates applicable to Risk
Category I would continue to apply to
some institutions both before and after
accounting for the effect of this ratio.
Only 1.1 percent of Risk Category I
institutions would have had an initial
base assessment rate more than 1 basis
point higher as a result of the adjusted
brokered deposit ratio.29
Comments
The FDIC received many comments
arguing that brokered deposits should
not increase assessment rates for Risk
Category I institutions and that the
brokered deposit provisions in the NPR
do not account for the use to which
institutions put these deposits. The
FDIC is not persuaded by the arguments.
Recent data show that institutions with
a combination of brokered deposit
reliance and robust asset growth tend to
network on a reciprocal basis and, thus, might
overstate the effects on assessment rates for some
institutions.
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have a greater concentration in higher
risk assets. In addition, there is a
statistically significant correlation
between the adjusted brokered deposit
ratio, on the one hand, and the
probability that an institution will be
downgraded to a CAMELS rating of 3,
4, or 5 within a year, on the other,
independent of the other measures of
asset quality contained in the financial
ratios method.
The FDIC received several comments,
including comments from several
industry trade groups, arguing that
institutions should be able to have a
ratio of brokered deposits to domestic
deposits greater than 10 percent without
triggering the adjusted brokered deposit
ratio and that the minimum asset
growth rate required to trigger the
adjusted brokered deposit ratio should
be greater than 20 percent. The
comments disputed the characterization
of 20 percent cumulative asset growth
over four years as ‘‘rapid.’’ One trade
association noted that the proposed
minimum growth rate (20 percent) was
lower than the nominal GDP growth
between third quarter 2004 and third
quarter 2007.
The FDIC is persuaded in part. The
final rule raises the minimum 4-year
asset growth rate required to trigger the
adjusted brokered deposit ratio from 20
percent to 40 percent. The final rule also
increases from 40 percent to 70 percent
the asset growth rate required to make
an institution’s adjusted brokered
deposit ratio equal to its institution’s
ratio of brokered deposits to domestic
deposits less the 10 percent threshold.
Additional analysis has revealed that
these growth rates are as predictive of
downgrade probabilities as those
originally proposed and are more
consistent with the intent of the ratio,
which was to capture only those
institutions with rapid asset growth.
However, in the FDIC’s view, a ratio
of brokered deposits to domestic
deposits greater than 10 percent is a
significant amount of brokered deposits.
Still, for institutions in Risk Category I,
brokered deposits alone will not trigger
higher rates, but must be combined with
significant asset growth.
The FDIC received over 3,300
comment letters arguing that certain
reciprocal deposits should not be
included in the adjusted brokered
deposit ratio.30 Most of the comments
30 When an institution receives a deposit through
a network on a reciprocal basis, it must place the
same amount (but owed to a different depositor)
with another institution through the network. Many
of the comment letters also argued that these
reciprocal deposits should not be included in the
brokered deposit adjustment applicable to
institutions in Risk Categories II, III and IV. The
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were form letters. Commenters argued
that these reciprocal deposits are a
stable source of funding. According to
the comments, most customers (83
percent) are not seeking the highest rate
of interest available and choose to keep
their deposit at the same institution
when it matures. The commenters also
argued that these deposits are local
deposits and not out-of-market funds
and stated that 80 percent of these
deposits are placed with an insured
institution within 25 miles of a branch
location of the relationship bank. The
commenters further argued that the
interest rate on these deposits reflects
that of local markets since the insured
institution that originates the deposit
sets the interest rate, rather than a thirdparty broker. Commenters also argued
that these deposits may have franchise
value in the event of a bank failure.
The FDIC is persuaded that reciprocal
deposits like those described in the
comment letters should not be included
in the adjusted brokered deposit ratio
applicable to institutions in Risk
Category I.31 (However, as discussed
below, reciprocal deposits will be
included in the brokered deposits
adjustment applicable to institutions in
Risk Categories II, III and IV.) The FDIC
recognizes that reciprocal deposits may
be a more stable source of funding for
healthy banks than other types of
brokered deposits and that they may not
be as readily used to fund rapid asset
growth.
The FDIC also received several
comments arguing that brokered
deposits that consist of balances swept
into an insured institution by a
nondepository institution, such as
balances swept into an insured
institution from a brokerage account at
a broker-dealer, should be excluded
from the adjusted brokered deposit
ratio.32 Commenters argued that these
sweep accounts are stable, relationshipbased accounts. Commenters also stated
that the aggregate flows in and out of the
sweep accounts tend to offset one
another and are thus predictable. Some
commenters differentiated between
sweeps from affiliated brokerage firms
and those from non-affiliated firms.
These commenters argued that brokerbrokered deposit adjustment applicable to these risk
categories is discussed below.
31 Excluding these deposits from the Call Report
and TFR will require changes to these forms. The
FDIC anticipates that the necessary changes will be
made beginning with the June 30, 2009 reports of
condition.
32 Many of these comment letters also argued that
these swept deposits should not be included in the
brokered deposit adjustment applicable to
institutions in Risk Categories II, III and IV. The
brokered deposit adjustment for these risk
categories is discussed below.
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dealer affiliated sweeps are not ratesensitive accounts and are not designed
to compete with the high rates of
interest paid by other insured
institutions and, therefore, do not raise
the same concerns as other brokered
deposits about the high cost of funding
of risky banks. The commenters
maintained that these accounts are
typically used for idle investment funds
or as a safe investment and are designed
to better manage excess cash. Some
commenters suggested that bankers
would be willing to separately report
sweep balances from an affiliated
brokerage.
Some commenters supported
excluding brokered deposits swept from
unaffiliated brokerages through a sweep
program, since the deposits have the
characteristics of core deposits and are
not driven by yield. According to the
commenters, there is no price
competition; deposits from unaffiliated
brokerages are used for the convenience
and safety of the customer.
The FDIC is not persuaded by these
arguments. In the FDIC’s view, deposits
swept from broker-dealers can and have
contributed to high rates of insured
depository institution asset growth and,
thus, fall squarely within the type of
brokered deposits that the adjusted
brokered deposit ratio was meant to
capture. In addition, as noted in the
NPR, many sweep programs can be
structured so that swept balances are
not brokered deposits.
Pricing Multipliers, the Uniform
Amount, and the Range of Rates
The final rule contains a recalculated
uniform amount and recalculated
pricing multipliers for the weighted
average CAMELS component rating and
financial ratios. The uniform amount
and pricing multipliers under the final
rule adopted in 2006 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 2004.33 These
probabilities were then converted to
pricing multipliers for each risk
measure. The new pricing multipliers
were derived using essentially the same
statistical techniques, but based upon
data from the end of the years 1988 to
2006.34 The new pricing multipliers are
set out in Table 7 below.
33 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.
34 For the adjusted brokered deposit ratio, assets
at the end of each year are compared to assets at
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9533
TABLE 7—NEW PRICING MULTIPLIERS—Continued
Pricing multipliers **
Risk measures *
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 ..............................................................................................................................
0.575
1.074
1.210
(0.764)
0.065
1.095
* 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)
will continue to be multiplied by the
corresponding pricing multipliers. The
sum of these products will be added to
a new uniform amount, 11.861.35 The
new uniform amount is also derived
from the same statistical analysis.36 As
under the final rule adopted in 2006, no
initial base assessment rate within Risk
Category I will 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 final
rule sets the initial minimum base
assessment rate for Risk Category I at 12
basis points and the maximum initial
base assessment rate for Risk Category I
at 16 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.37 These cutoff
values will be used in future periods,
which could lead to different
percentages of institutions being
charged the minimum and maximum
rates.
In comparison, under the system in
place on June 30, 2008: (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.38
Table 8 gives initial base assessment
rates for three institutions with varying
characteristics, given the new pricing
multipliers above, using initial base
assessment rates for institutions in Risk
Category I of 12 basis points to 16 basis
points.39
TABLE 8—INITIAL BASE ASSESSMENT RATES FOR THREE INSTITUTIONS *
C
A
D
E
F
G
H
B
Institution 1
Pricing
multiplier
Uniform Amount .......................................
Tier 1 Leverage Ratio (%) .......................
Loans Past Due 30–89 Days/Gross Assets (%) ................................................
Nonperforming Loans/Gross Assets (%)
Net Loan Charge-Offs/Gross Asset (%) ..
Net Income before Taxes/Risk-Weighted
Assets (%) ............................................
Adjusted Brokered Deposit Ratio (%) ......
Weighted Average CAMELS Component
Ratings .................................................
Sum of Contributions ........................
Initial Base Assessment Rate ...........
Risk
measure
value
Contribution
to assessment rate
Institution 2
Risk
measure
value
Contribution
to assessment rate
Institution 3
Risk
measure
value
Contribution
to assessment rate
11.861
(0.056)
9.590
11.861
(0.537)
8.570
11.861
(0.480)
7.500
11.861
(0.420)
0.575
1.074
1.210
0.400
0.200
0.147
0.230
0.215
0.177
0.600
0.400
0.079
0.345
0.430
0.096
1.000
1.500
0.300
0.575
1.611
0.363
(0.764)
0.065
2.500
0.000
(1.910)
0.000
1.951
12.827
(1.491)
0.834
0.518
24.355
(0.396)
1.583
1.095
1.200
1.314
1.450
1.588
2.100
2.300
....................
....................
....................
....................
11.35
12.00
....................
....................
13.18
13.18
....................
....................
17.48
16.00
*Figures may not multiply or add to totals due to rounding.40
35 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.
36 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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37 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.
38 For the assessment period ending September
30, 2008, approximately 26 percent of small Risk
Category I institutions (other than institutions less
than 5 years old) were charged the minimum rate
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and approximately 23 percent were charged the
maximum rate.
39 These are the initial base rates for Risk Category
I proposed below.
40 Under the proposed rule, pricing multipliers,
the uniform amount, and financial ratios will
continue to be rounded to three digits after the
decimal point. Resulting assessment rates will be
rounded to the nearest one-hundredth (1/100th) of
a basis point.
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TABLE 8—INITIAL BASE ASSESSMENT RATES FOR THREE INSTITUTIONS *—Continued
C
A
D
E
F
G
H
B
Institution 1
Pricing
multiplier
Initial Base Assessment Rate ...........
Risk
measure
value
....................
....................
Contribution
to assessment rate
12.00
Institution 2
Risk
measure
value
Institution 3
Contribution
to assessment rate
Risk measure value
Contribution
to assessment rate
13.18
....................
16.00
....................
*Figures may not multiply or add to totals due to rounding.40
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 11.35
basis points, but the table reflects the
initial base minimum assessment rate of
12 basis points. For Institution 3 in the
table, the sum actually equals 17.48
basis points, but the table reflects the
initial base maximum assessment rate of
16 basis points.
Under the final rule, the FDIC will
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 will
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 will
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 this
rulemaking, 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 will continue to be calculated
from the report of condition filed by
each institution as of the last day of the
quarter.41 CAMELS component rating
changes will continue to be effective as
of the date that the rating change is
transmitted to the institution for
41 Reports of condition include Reports of Income
and Condition and Thrift Financial Reports.
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purposes of determining assessment
rates for all institutions in Risk Category
I.42
Comments
One industry trade group noted that
some banks expressed a concern that the
expanded range of rates for Risk
Category I, particularly in combination
with the proposed adjustment for
secured liabilities (discussed below),
could result in differences in rates
among institutions that are too large
compared to differences in risk. This
could lead to some institutions bearing
disproportionate costs and being
competitively disadvantaged. However,
another trade group expressed concerns
that the range of rates for Risk Category
I is too narrow, insufficiently reflecting
differences in risk and creating a cross
subsidy within the risk category.43 The
FDIC considers the 4-basis point range
for the initial base assessment rate in
Risk Category I to be appropriate.
IV. Risk Category I: Large Bank Method
For large Risk Category I institutions
now subject to the debt ratings method,
the final rule derives assessment rates
from the financial ratios method as well
as long-term debt issuer ratings and
CAMELS component ratings. The new
method is known as the large bank
method. The rate using the financial
ratios method is first converted from the
range of initial base rates (12 to 16 basis
points) to a scale from 1 to 3 (financial
ratios score).44 The financial ratios score
42 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.
43 The same trade group argued that rates for Risk
Categories III and IV should be higher than
proposed.
44 The assessment rate computed using the
financial ratios method would be converted to a
financial ratios score by first subtracting 10 from the
financial ratios method assessment rate and then
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is then given a 331⁄3 percent weight in
determining the large bank method
assessment rate, as are both the
weighted average CAMELS component
rating and debt-agency ratings.
The weights of the CAMELS
components remain the same as in the
final rule adopted in 2006. The values
assigned to the debt issuer ratings also
remain the same. The weighted
CAMELS components and debt issuer
ratings will continue to be converted to
a scale from 1 to 3.
The initial base assessment rate under
the large bank method will be derived
as follows: (1) An assessment rate
computed using the financial ratios
method will be converted to a financial
ratios score; (2) the weighted average
CAMELS rating, converted long-term
debt issuer ratings, and the financial
ratios score will each be multiplied by
a pricing multiplier and the products
summed; and (3) a uniform amount will
be added to the result. The resulting
initial base assessment rate will 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 is 1.692,
and the uniform amount is 3.873.45
In recent periods, assessment rates for
some large institutions have not
responded in a timely manner to rapid
changes in these institutions’ financial
conditions. For the assessment period
ending June 30, 2008, under the
assessment system then in place: (1) 45
percent of large institutions in Risk
Category I (other than institutions less
than 5 years old) were charged the
minimum assessment rate (ignoring
large bank adjustments), 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) were charged the
maximum assessment rate (ignoring
multiplying the result by one-half. For example, if
an institution had an initial base assessment rate of
13, 10 would be subtracted from 13 and the result
would be multiplied by one-half to produce a
financial ratios score of 1.5.
45 Appendix 1 provides the derivation of the
pricing multipliers and the uniform amount.
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large bank adjustments), compared with
19 percent of small institutions.46 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).47 48 These cutoff values
would be used in future periods, which
could lead to different percentages of
institutions being charged the minimum
and maximum rates.
Under the final rule adopted in 2006,
large institutions that lack a long-term
debt issuer rating are assessed using the
financial ratios method by itself, subject
to the large bank adjustment. This will
continue under the final rule.
Under the final 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 13.50
basis points would be computed as
follows:
• The financial ratios method
assessment rate less 10 basis points
would be multiplied by one-half
(calculated as (13.5 basis points—10
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 will each be multiplied by
1.692 and summed (calculated as 1.70 ×
1.692 + 1.65 × 1.692 + 1.75 × 1.692) to
produce 8.629.
46 For
the assessment period ending September
30, 2008, under the assessment system then in
place: (1) 41 percent of large institutions in Risk
Category I (other than institutions less than 5 years
old) were charged the minimum assessment rate
(again ignoring large bank adjustments), compared
with 26 percent of small institutions; and (2) 11
percent of large institutions in Risk Category I
(other than institutions less than 5 years old) were
charged the maximum assessment rate (ignoring
large bank adjustments), compared with 23 percent
of small institutions.
47 The cutoff value for the minimum assessment
rate is an average score of approximately 1.601. The
cutoff value for the maximum assessment rate is
approximately 2.389.
48 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, an exception for 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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• A uniform amount of 3.873 would
be added, resulting in an initial base
assessment rate of 12.50 basis points.
The FDIC anticipates that
incorporating the financial ratios score
into the large bank method assessment
rate will 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. While the
number of potential discretionary
adjustments under this revised large
bank method cannot be known with
certainty, the revised method should
create a more accurate distribution of
initial rates and, thus, should minimize
the number of necessary discretionary
adjustments.49
Comments
One trade group supported the
proposal and specifically noted that the
FDIC should move away from the debt
rating method. Other comments,
including comments from trade groups,
argued that the proposed rule would
make it harder for a large bank to be
eligible for the lowest assessment rates.
A commenting bank argued that:
Structuring the rules with a goal to
maintain parity between large and small
banks would be in violation of [12 U.S.C.
1817(b)(2)(D)]. Arbitrarily establishing targets
for percentages of institutions that fall into a
given assessment rate is inconsistent with not
only the governing statute but the whole
concept of risk-based pricing. * * * The fact
that, under objective criteria, large banks may
have a greater percentage of institutions that
qualify for the lowest rate is not an indication
that the rule is flawed and needs to change,
but may just be a factual representation of the
strength of large banks.50
The FDIC disagrees with the
commenting bank. The purpose of the
new large bank method is to create an
assessment system for large Risk
Category I institutions that will respond
more timely to changing risk profiles,
will improve the accuracy of initial
assessment rates, relative risk rankings,
and will create a greater parity between
small and large Risk Category I
institutions. The recalibration of the
percentages of large institutions that
would have been charged the minimum
and maximum rates applicable to Risk
Category I is intended to better reflect
the actual risk posed by large
49 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).
50 12 U.S.C. 1817(b)(2)(D) provides that, ‘‘No
insured depository institution shall be barred from
the lowest-risk category solely because of size.’’
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9535
institutions. Under the debt ratings
method, the percentage of large Risk
Category I institutions that were charged
the minimum assessment rate changed
little over time despite deteriorating
financial conditions. If the financial
ratios method, which is based on a
combination of objective financial ratios
and supervisory ratings, were applied to
large Risk Category I institutions, only
about 19 percent would have been
charged the minimum assessment rate.
While the FDIC continues to believe that
the financial ratios method alone does
not adequately provide the appropriate
risk ranking for large and complex
institutions, the deterioration in
financial ratios is highly indicative of
rapidly changing risk profiles, which are
not fully reflected in the debt ratings
method on a timely basis.
Furthermore, 12 U.S.C. 1817(b)(2)(D)
does not prohibit the FDIC from
calibrating a risk-based assessment
system so that, at a given point in time,
an equal percentage of small and large
institutions would have been charged
the minimum assessment rate, provided
that the risks posed were equal, as, in
the FDIC’s view, they were.
V. Adjustment for Large Institutions
and Insured Branches of Foreign Banks
in Risk Category I
Under the final rule adopted in 2006,
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 final rule will increase the
maximum possible large bank
adjustment to one basis point. The
adjustment will be made to an
institution’s initial base assessment rate
before any other adjustments are made.
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The adjustment cannot: (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 is amending the maximum
size of the adjustment for two primary
reasons. First, under the final rule
adopted in 2006, the difference between
the minimum and maximum base
assessment rates in Risk Category I is
two basis points. The maximum onehalf 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 will increase from two
basis points to four basis points under
the final rule. 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 increase in the
maximum possible large bank
adjustment will continue to represent 25
percent of the difference between the
minimum and maximum rates,
minimizing the potential number of
instances where the large bank
adjustment is insufficient to fully and
accurately reflect the risk that an
institution poses.
The purpose of the large bank
adjustment is to improve the relative
risk ranking of large Risk Category I
institutions with respect to their initial
assessment rates, not total assessment
rates. The FDIC expects that, under the
final rule, large bank adjustments will
continue to be made infrequently and
for a limited number of institutions.51
The FDIC’s view is that the use of
supervisory ratings, financial ratios and
agency ratings (when available) will
sufficiently reflect the risk profile and
rank orderings of risk in large Risk
51 In the seven quarters for which institutions
have been assessed since the 2006 assessment rule
went into effect, the total number of adjustments in
any one quarter has ranged from 2 to 16. For the
third quarter of 2008, the FDIC continued or
implemented assessment rate adjustments for 16
large Risk Category I institutions, 14 to increase an
institution’s assessment rate, and 2 to decrease an
institution’s assessment rate. Additionally, the FDIC
sent 2 institutions advance notification of a
potential upward adjustment in their assessment
rate.
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Category I institutions in most (but not
all) cases.
The FDIC expects to further clarify its
Assessment Rate Adjustment Guidelines
for Large Institutions and Insured
Foreign Branches in Risk Category I (the
Guidelines).52 The Guidelines will
discuss in detail the quantitative and
qualitative factors that the FDIC will
rely upon when deciding whether to
make a large bank adjustment. Until
then, the Guidelines will be applied
taking into account the changes
resulting from this rulemaking.
Comments
An industry trade group and a bank
objected to the increase in the large
bank adjustment, arguing that the
adjustment is arbitrary and subjective.
The FDIC disagrees. The large bank
method appropriately recognizes the
need for subjective, expert judgmentbased risk assessments for large banks.
Because large institutions are usually
complex and often have unique
operations, an entirely formulaic
approach, while objective, has yielded a
distribution of assessment rates that is
not sufficiently reflective of the risk.
When the FDIC decides to increase or
decrease a large institution’s assessment
rate based upon the large bank
adjustment, it does so after reviewing a
large set of financial and performance
data in addition to making qualitative
assessments. While the decision to
apply an adjustment cannot be reduced
to a formula, the set of data that the
FDIC reviews is consistent from one
institution to the next and the FDIC
strives to make its decisions based on
the data as consistent as possible and
the reasons for the decisions as clear as
possible for the institutions affected. As
stated above, the FDIC intends to
publish revised Guidelines to further
clarify the large bank adjustment
process.
Despite the existence of a longestablished appeals process for
assessment rates, one industry trade
group stated that ‘‘[B]ankers felt that
they were not allowed to effectively
challenge the adjustments through the
FDIC’s appeals process.’’ The FDIC
notes, however, that no institution has
yet appealed an adjustment (or the lack
thereof) to the Assessment Appeals
Committee.53
52 72
FR 27,122 (May 14, 2007).
53 Only one institution has requested review of its
assessment rate; it asked for an adjustment when
the FDIC had not given one. However, this
institution did not appeal the denial of its request
for review to the Assessment Appeals Committee.
The FDIC has also received 9 responses to the 29
advance notices of intent to increase an assessment
rate using the large bank adjustment that the FDIC
has sent out.
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VI. Adjustment for Unsecured Debt for
all Risk Categories
Under the final rule, an institution’s
base assessment rate (after making any
large bank adjustment) will be reduced
from the initial rate using the
institution’s ratio of long-term
unsecured debt (and, for small
institutions, certain amounts of Tier 1
capital) to domestic deposits.54 Any
decrease in base assessment rates as a
result of this unsecured debt adjustment
will be limited to five basis points
(rather than two basis points as
proposed in the NPR). Unsecured debt
will not include any senior unsecured
debt that the FDIC has guaranteed under
the Temporary Liquidity Guarantee
Program.
The unsecured debt adjustment will
be determined by multiplying an
institution’s long-term unsecured debt
(plus, if the institution is a small
institution, ‘‘qualified’’ amounts of Tier
1 capital as explained below) as a
percentage of domestic deposits by 40
basis points (rather than 20 basis points
as proposed in the NPR). For example,
an institution with a ratio of long-term
unsecured debt (plus, if the institution
is small, qualified amounts of Tier 1
capital) to domestic deposits of 3.0
percent will see its initial base
assessment rate reduced by 1.20 basis
points (calculated as 40 basis points ×
0.03). An institution with a ratio of longterm unsecured debt (plus, if the
institution is small, qualified amounts
of Tier 1 capital) to domestic deposits of
13.0 percent will have its assessment
rate reduced by five basis points, since
the maximum possible reduction will be
five basis points. (40 basis points × 0.13
= 5.20 basis points, which exceeds the
maximum possible reduction.)
For a small institution, the amount of
qualified Tier 1 capital that will be
added to long-term unsecured debt will
be a portion of the amount of Tier 1
capital that exceeds a ratio of Tier 1
capital to adjusted average assets of
5.0%.55 The percentage of Tier 1 capital
that is qualified increases as the amount
of Tier 1 capital held by a small
institution increases. The qualified
amount is set forth in Table 9.
54 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).
55 Adjusted average assets will be used for Call
Report filers; adjusted total assets will be used for
TFR filers.
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TABLE 9—AMOUNT OF QUALIFIED TIER
1 CAPITAL
Range of Tier 1 capital to
adjusted average assets
≤ 5% .....................................
> 5% and ≤ 6% ....................
> 6% and ≤ 7% ....................
> 7% and ≤ 8% ....................
> 8% and ≤ 9% ....................
> 9% and ≤ 10% ..................
> 10% and ≤ 11% ................
0
10
20
30
40
50
60
determine the total amount of qualified
Tier 1 capital for this institution. The
sum of qualified Tier 1 capital and longterm unsecured debt as a percentage of
domestic deposits will be multiplied by
40 basis points to produce the
unsecured debt adjustment.56
To illustrate the calculation of
qualified Tier 1 capital, consider a small
institution with a Tier 1 leverage ratio
of 20.0 percent and Tier 1 capital of $2.0
million. The amount of qualified Tier 1
capital is illustrated in Table 10.
TABLE 9—AMOUNT OF QUALIFIED TIER
1 CAPITAL—Continued
Amount of Tier
1 capital within
range which is
qualified
(percent)
Range of Tier 1 capital to
adjusted average assets
>
>
>
>
11%
12%
13%
14%
Amount of Tier
1 capital within
range which is
qualified
(percent)
and ≤ 12% ................
and ≤ 13% ................
and ≤ 14% ................
...................................
9537
70
80
90
100
The amount of qualified Tier 1 capital
within each of the ranges is summed to
TABLE 10—EXAMPLE OF QUALIFIED TIER 1 CAPITAL FOR THE UNSECURED DEBT ADJUSTMENT
Tier 1 capital within band ($000)
Leverage ratio band
0–5% ..........................................................................................................
5%–6% .......................................................................................................
6%–7% .......................................................................................................
7%–8% .......................................................................................................
8%–9% .......................................................................................................
9%–10% .....................................................................................................
10%–11% ...................................................................................................
11%–12% ...................................................................................................
12%–13% ...................................................................................................
13%–14% ...................................................................................................
> 14% .........................................................................................................
Qualified
percentage of Tier
1 capital
(percent)
500
100
100
100
100
100
100
100
100
100
600
Total ....................................................................................................
×
0
10
20
30
40
50
60
70
80
90
100
2,000
=
Qualified Tier 1
capital
($000)
0
10
20
30
40
50
60
70
80
90
600
1,050
As can be seen in Table 10, each band
of the Tier 1 leverage ratio (up to the last
band) contains $100,000 in Tier 1
capital and the qualified percentage
increases linearly until it reaches 100
percent for amounts over 14.0 percent.
The total qualified Tier 1 capital for this
small institution is $1.05 million, which
will be added to any long-term
unsecured debt to calculate the
institution’s unsecured debt adjustment.
The final rule includes more Tier 1
capital in qualified Tier 1 capital than
proposed in the NPR. The NPR
proposed including the sum of one-half
of the amount of Tier 1 capital between
10 percent and 15 percent of adjusted
average assets and the full amount of
Tier 1 capital exceeding 15 percent of
adjusted average assets. The FDIC has
concluded, based in part on comments,
that the proposal did not give small
institutions sufficient credit for Tier 1
capital.
Ratios for any given quarter will be
calculated from the report of condition
filed by each institution as of the last
day of the quarter.
Unsecured debt will consist of senior
unsecured liabilities and subordinated
debt. A senior unsecured liability is
defined as the unsecured portion of
other borrowed money.57 Subordinated
debt is defined in the report of
condition for the reporting period.58
Long-term unsecured debt is defined as
unsecured debt with at least one year
remaining until maturity. However,
unsecured debt will not include any
debt that the FDIC has guaranteed
pursuant to the Temporary Liquidity
Guarantee Program, since this kind of
debt will not decrease FDIC losses in the
event an institution fails.
At present, 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
56 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.
Appendix 2 describes the unsecured debt
adjustment for a small institution mathematically.
57 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.
58 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 final 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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notice of proposed rulemaking that
would adopt similar reporting
requirements. The FDIC anticipates that
these revisions will be made beginning
with the June 30, 2009 Call Report and
TFR. However, if they are not, 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.
At present, institutions also do not
report debt that the FDIC has guaranteed
pursuant to the Temporary Liquidity
Guarantee Program.59 The FDIC is
pursuing the necessary changes to the
Call Report and TFR to ensure that these
amounts are excluded from the separate
report of long-term senior unsecured
liabilities and subordinated debt
beginning with the June 30, 2009 Call
Report and 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.
For small institutions (but not large
ones), the unsecured debt adjustment
includes a portion of Tier 1 capital for
two primary reasons. 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 and receive
subordinated debt.
Comments
The FDIC received several comments
on the proposed unsecured debt
adjustment. One commenter found the
proposal fair and appropriate.
59 Institutions report this debt to the FDIC shortly
after issuing it and also file monthly reports on the
amount of this debt outstanding as of the end of
each month. However, neither of these reports
contains all of the information the FDIC needs to
deduct this debt from the unsecured debt
adjustment, since neither uses the definition of
‘‘unsecured debt’’ contained in the text. In addition,
the monthly report does not contain maturity
information.
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Another commenter, however,
claimed that the proposal would
penalize institutions that do not issue
long-term unsecured debt. A commenter
recommended that the FDIC abandon
the separate risk adjustment for
unsecured debt. A commenter argued
that the proposal uses arbitrary
measures when adjusting for risk and
ignores the probability of default. The
FDIC disagrees with these comments. As
noted earlier, greater amounts of longterm unsecured debt provide a cushion
that can reduce the FDIC’s loss in the
event of failure, thus reducing the
FDIC’s risk.
The FDIC specifically sought
comments on the size of the unsecured
debt adjustment and whether it should
be larger or smaller. Several commenters
argued that the proposed two basis
point reduction in base assessment
rates, which was the maximum
reduction possible under the proposal,
was arbitrary and too low. Some also
argued that the proposed 20 basis point
multiplier should be increased. Several
noted that the maximum proposed
unsecured debt adjustment was much
smaller than the maximum proposed
secured liability adjustment.
The FDIC has concluded that the
proposed 20 basis point multiplier and
two basis point maximum reduction
were too small. Spreads on depository
institution unsecured debt have, on
average, approximately doubled since
the NPR was published. The FDIC has,
therefore, doubled the size of the
multiplier, partly to reflect the recent
increase in debt spreads and partly to
create greater parity between the size of
the unsecured debt adjustment and the
size of the secured liability adjustment.
The FDIC has more than doubled the
maximum possible unsecured debt
adjustment to ensure that institutions
will retain an incentive to issue
unsecured debt and, again, to create
greater parity between the unsecured
debt adjustment and the secured
liability adjustment.
Under the final rule, the FDIC
estimates that the reduction in industry
average assessments arising from the
unsecured debt adjustment will exceed
the industry average increase in
assessments arising from the secured
liability adjustment and (for Risk
Categories II, III, and IV) the brokered
deposit adjustment.
An industry trade group
recommended that the unsecured debt
adjustment for small institutions
include larger amounts of Tier 1 capital.
The trade group argued that small
institutions should be rewarded for their
additional capital and that the proposal
did not sufficiently reward them. The
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trade group suggested that the
adjustment include the sum of one-half
of the amount of Tier 1 capital between
8 percent and 12 percent of adjusted
average assets and the full amount of
Tier 1 capital exceeding 12 percent of
adjusted average assets. The FDIC agrees
that small institutions should receive
more credit for Tier 1 capital and, and
discussed above, has so provided in the
final rule.
Another industry trade group
suggested that institutions subject to the
large bank method should also be given
credit for capital in the unsecured debt
adjustment. However, in the FDIC’s
view, doing so would undo the one of
the purposes of including a portion of
Tier 1 capital in the unsecured debt
adjustment for small banks, which was
to give small banks, which generally do
not (and generally cannot) issue much
unsecured debt, a benefit equivalent to
that of large banks. If a large
institution’s assessment rate does not
appropriately factor its capital, the FDIC
can use the large bank adjustment to
alter the rate (although the FDIC
anticipates that the need to do so will
seldom arise).
Some comments suggested that the
FDIC include all unsecured and
subordinated debt in the unsecured debt
adjustment, regardless of maturity. One
suggested using all unencumbered
assets. The FDIC disagrees. Short-term
debt is likely to be paid prior to failure
and, thus, is unlikely to provide a
cushion against FDIC losses.
Some commenters argued that it
would be more appropriate to use a ratio
of long-term unsecured debt (or
unencumbered debt) to insured
deposits, since insured deposits are the
true proxy for the FDIC’s risk. The FDIC
disagrees. Numerous studies have
shown that, as an institution approaches
failure, uninsured depositors tend to
demand payment. In effect, these
uninsured depositors receive full
payment on their claims (as if they were
insured depositors at failure), leaving
the failed institution with fewer assets
to satisfy the FDIC’s claims.
VII. Adjustment for Secured Liabilities
for All Risk Categories
Under the final rule, an institution’s
base assessment rate may increase
depending 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 25
percent (rather than 15 percent as
proposed in the NPR), will increase its
assessment rate, but the resulting base
assessment rate after any such increase
will be no more than 50 percent greater
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than it was before the adjustment. The
secured liability adjustment will be
made after any large bank adjustment or
unsecured debt adjustment.
Specifically, for an institution that has
a ratio of secured liabilities to domestic
deposits of greater than 25 percent, the
secured liability adjustment will 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 0.25. However, the
resulting adjustment cannot 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 35 percent, and a base assessment
rate before the secured liability
adjustment of 14 basis points, the
secured liability adjustment would be
the base rate multiplied by 0.10
(calculated as 0.35 ¥ 0.25), resulting in
an adjustment of 1.4 basis points.
However, if the institution had a ratio of
secured liabilities to domestic deposits
of 80 percent, its base rate before the
secured liability adjustment of 14 basis
points would be multiplied by 0.50
rather than 0.55 (calculated as 0.80 ¥
0.25), since the resulting adjustment can
be no greater than 50 percent of the base
assessment rate before the secured
liability adjustment.60
Ratios of secured liabilities to
domestic deposits for any given quarter
will be calculated from the report of
condition filed by each institution as of
the last day of the quarter. For banks,
secured liabilities 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 published a
notice of proposed rulemaking to revise
the TFR so that thrifts will separately
report these items and the FDIC
anticipates that this revision will be
effective for the June 30, 2009 TFR.
Until the TFR is revised, however, any
of these secured amounts not reported
separately from unsecured or other
liabilities by a thrift in its TFR will be
60 Under
the final rule, the ratio of secured
liabilities to domestic deposits will be rounded to
three digits after the decimal point. The resulting
amount and adjusted assessment rate will be
rounded to the nearest one-hundredth (1/100th) of
a basis point.
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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.
Under the final rule adopted in 2006,
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 figure into an
institution’s assessment under the final
rule adopted in 2006, the DIF would
receive twice as much assessment
revenue from Bank A as from Bank B
over a given period (despite identical
FDIC losses at failure).
In general, under the final rule
adopted in 2006, 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.61
Comments
The vast majority of commenters were
opposed to the secured liability
adjustment. The few commenters that
supported the FDIC’s proposal called
the secured liability adjustment fair and
appropriate, and viewed the logic for
the increased charge as clear and
compelling. One of the supportive
commenters stated that core deposits are
more advantageous to an institution
than secured liabilities, as they are
61 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.
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9539
cheaper and allow cross-selling of
products. As a result, prudent
institutions show a preference for core
funding. The commenter found the
proposed threshold to be reasonable.
Many of the commenters opposed to
the adjustment suggested that the NPR
gave too much weight to risk
adjustments based on arbitrary
measures, and ignored the probability of
default. Commenters argued that the
true risk of a bank lies in the quality of
its assets, rather than how the assets are
funded. Some noted that the presence of
unsecured liabilities (as opposed to
secured liabilities) is no guarantee of the
quality of a bank’s assets or that the
assets would be sufficient to cover a
bank’s deposit liabilities in case of bank
failure. Commenters believe that the
FDIC should abandon the proposed
approach of targeting certain funding
sources.
Some commenters argued that the
proposed secured liability adjustment
appears to run contrary to established
programs that have implied government
support, including borrowings from the
Federal Reserve through the Term
Auction Facility. Commenters viewed
the secured liability adjustment as
unfair to institutions that have limited
options for funding.
Many of the comments (over 1,100)
were particularly concerned about the
effect the FDIC’s proposal would have
on Federal Home Loan Bank (FHLB)
advances. Commenters argued that
FHLB advances are a stable, reliable
source of liquidity, and a key tool for
asset/liability management, interest rate
risk and net interest margin
maintenance. Many commenters
suggested that the secured liability
adjustment was counterproductive since
banks benefit from FHLB dividend
income. Many commenters cautioned
that deterring the use of FHLB advances
(and other secured liabilities) will lead
to increased use of riskier funding
sources, higher funding costs, and
decreased lending. Most of the
commenters viewed the proposal as
unfairly penalizing institutions that use
FHLB advances prudently. Several
commenters suggested that FHLB
advances should be excluded from any
secured liability adjustment for at least
five years since some FHLB advances do
not mature before the effective date of
the proposal.
Many commenters argued against the
proposal because they believe it would
impair the mission of the FHLB system.
The commenters asserted that because
the proposal discourages the use of
FHLB advances, it would lead to a
decline in FHLB earnings. Commenters
representing community service groups
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expressed concern that any decline in
FHLB earnings would undermine FHLB
contributions to community down
payment and closing cost assistance
programs, community investment
programs, affordable housing programs,
and foreclosure prevention programs.
Commenters also noted that FHLBs
already regulate the use of their
advances.
Commenters also noted the effect the
proposal would have on the use of
repurchase agreements (repos). Many
commenters argued that repos are a safe
and effective source to manage liquidity.
Others remarked that repos are an
important tool used to attract
commercial deposits, which can neither
be secured nor bear interest. One
commenter suggested that the definition
of secured liabilities used in the
proposal, exclude repos with state and
local governments where the securities
sold are federal government or agency
securities. In addition, the commenter
expressed concern that the proposal
would put banks at a competitive
disadvantage to non-depository
institutions.
Commenters also expressed concern
that the proposed secured liability
adjustment would harm the covered
bond market at a time when additional
sources of mortgage funding are needed
and when bank regulatory agencies have
supported development of this market.
Many commenters argued that the 15
percent threshold is arbitrary and
simplistic. One commenter suggested
raising the threshold to 30 percent.
Some comments suggested adjusting the
threshold by subtracting the balance
that is secured by agency bonds or
investment grade securities or by
subtracting long-term advances. Other
commenters recommended eliminating
the secured liability adjustment if the
bank has capital above a certain amount.
The FDIC remains generally
unpersuaded by these comments, which
do not respond to the reasons for the
secured liability adjustment. The FDIC
has not argued that secured liability
funding makes a bank more likely to
fail. Rather, as noted above, the primary
purpose of the secured liability
adjustment is to remedy an 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. This result
is not fair to institutions that do not rely
heavily on secured funding.
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. A risk-based system should
take this likelihood into account. These
arguments apply equally whether an
institution’s secured liabilities consist of
FHLB advances, repurchase agreements
or other forms of secured borrowing.
The FDIC intended the secured
liability adjustment to apply only to
those institutions that rely heavily on
secured funding. The revenue loss to the
DIF is relatively small until reliance on
secured funding becomes significant. To
ensure that the adjustment applies only
to those institutions that rely heavily on
secured funding and impose a
significant revenue loss on the DIF, the
final rule raises the ratio of secured
liabilities to domestic deposits that will
trigger the adjustment to 25 percent. As
Table 11 demonstrates, as of September
30, 2008, only 10 percent of insured
institutions would have had a secured
liability adjustment and only 5 percent
would have had an increase in
assessment rate of greater than 10
percent. Consequently, the adjustment
should have no effect on funding
choices for the vast majority of
institutions and is unlikely to have a
significant overall effect on secured
borrowing, the FHLB system, affordable
housing or foreclosure prevention.
TABLE 11—PERCENTAGE OF INSTITUTIONS SUBJECT TO THE SECURED LIABILITY ADJUSTMENT USING DIFFERENT
THRESHOLDS
[As of September 30, 2008]
Minimum ratio of secured
liabilities to domestic
15%
Percentage of all institutions that would have been subject to the secured liability adjustment ............................
Percentage of all institutions that would have had more than a 10% increase in assessment rate due to the
secured liability adjustment ..................................................................................................................................
Some commenters noted that many
states require that banks collateralize
any public funds they have on deposit;
since public funds pose no additional
risk to the DIF, banks should not be
penalized by the secured liability
adjustment when pledging collateral for
the public funds. The FDIC agrees. The
FDIC did not, and did not intend to,
include collateralized public funds
among secured liabilities for purposes of
the adjustment. For purposes of the
secured liability adjustment, deposits,
regardless of whether they are
collateralized, are not considered a
secured liability.
Many comments focused on the
timing of the proposal. Most
commenters noted that discouraging
alternate funding sources would hurt
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bank liquidity and tighten credit
availability, which is inconsistent with
market realities in the current economic
downturn. Comments on the general
timing of the proposal suggested that it
should be delayed until at least the
beginning of 2010; others commented
that a phase-in schedule for the secured
liability adjustment should be used.
Commenters thought that a delay in the
proposal would decrease the likelihood
that the secured liability adjustment
would conflict with other policy
measures currently being used to
increase liquidity. Additionally,
commenters asserted that the proposal
does not give institutions an
opportunity to adjust their funding mix
to account for the new assessment rate
structure.
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25%
24%
10%
10%
5%
In the FDIC’s view, the secured
liability adjustment will not have any
material effect on liquidity and will not
conflict with other measures intended to
increase liquidity. As noted above, the
secured liability adjustment will affect
only about 10 percent of the industry
and will cause more than a 10 percent
increase in assessment rates for only
about 5 percent of the industry. The
FDIC also sees no reason to delay
implementation to allow institutions to
adjust their funding mix. The NPR was
published in October 2008 and the
secured liability adjustment will be
based upon data submitted as of June
30, 2009, which allows institutions over
eight months to adjust their funding
mix.
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Some commenters were concerned
that the proposed secured liability
adjustment would result in sharp
increases in assessments when
amendments take effect to the Statement
of Financial Accounting Standards No.
140, Accounting for Transfers and
Servicing of Financial Assets and
Extinguishments of Liabilities (FAS 140)
in 2010. FAS 140 will require banks to
report assets in special-purpose vehicles
and variable-interest entities, which
often include securitized assets, on their
balance sheets. These assets are
presently accounted for off-balance
sheet. As a result, commenters argue
that the adoption of both FAS 140 and
the proposed secured liability
adjustment would result in an
unintended increase in assessments to
certain insured institutions.
FAS 140 has not yet been adopted. As
proposed, it would not take effect until
2010. If and when FAS 140 is adopted
in final form, the FDIC can then
consider whether the secured liability
adjustment needs to be modified.
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 final rule states that an
institution in Risk Category II, III, or IV
will also be subject to an assessment
rate adjustment for brokered deposits
(the brokered deposit adjustment). This
adjustment will be limited to those
institutions whose ratio of brokered
deposits to domestic deposits is greater
than 10 percent; asset growth rates will
not affect the adjustment. The
adjustment will be determined by
multiplying 25 basis points times the
difference between an institution’s ratio
of brokered deposits to domestic
deposits and 0.10.62 However, the
adjustment will never be more than 10
basis points. The adjustment will be
added to the base assessment rate after
all other adjustments had been made.
Ratios for any given quarter will be
calculated from the Call Reports or TFRs
filed by each institution as of the last
day of the quarter.
Significant reliance on brokered
deposits tends to increase an
institution’s risk profile, particularly as
the institution’s financial condition
weakens. Insured institutions—
particularly weaker ones—typically pay
higher rates of interest on brokered
deposits. When an institution becomes
noticeably weaker or its capital
62 Under the final rule, the ratio of brokered
deposits to domestic deposits will be rounded to
three digits after the decimal point. The resulting
brokered deposit charge will be rounded to the
nearest one-hundredth (1/100th) of a basis point.
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declines, the market or statutory
restrictions may limit its ability to
attract, renew or roll over these
deposits, which can create significant
liquidity challenges.63
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.
The brokered deposit adjustment,
unlike the adjusted brokered deposit
ratio applicable to Risk Category I, will
include all brokered deposits as defined
in Section 29 of the Federal Deposit
Insurance Act (12 U.S.C. 1831f), and
implemented by 12 CFR 337.6, which is
the definition used in banks’ quarterly
Reports of Condition and Income (Call
Reports) and thrifts’ quarterly Thrift
Financial Reports (TFRs), above 10
percent of an institution’s assets. The
adjustment will include reciprocal
deposits, as well as brokered deposits
that consist of balances swept into an
insured institution by another
institution, such as balances swept from
a brokerage account.
The statutory restrictions on
accepting, renewing or rolling over
63 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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9541
brokered deposits when an institution
becomes less than well capitalized
apply to all brokered deposits, including
reciprocal deposits. Market restrictions
may also apply to these reciprocal
deposits when an institution’s condition
declines. For these reasons, the final
rule includes these reciprocal brokered
deposits in the brokered deposit
adjustment.
To illustrate the brokered deposit
adjustment with a simple example, take
a Risk Category II institution with an
initial base assessment rate of 22 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
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 will be
as calculated, 7.5 basis points.
Assuming that the secured liability
adjustment for this institution is 2 basis
points and that the institution has no
other assessment rate adjustments, the
total base assessment rate will be 31.5
basis points (calculated as (22 basis
points + 2 basis points + 7.5 basis
points)).
Comments
Most of the comments on the
proposed adjusted brokered deposit
ratio (applicable to Risk Category I) also
applied to the proposed brokered
deposit adjustment (applicable to the
other risk categories). The FDIC’s
response to these comments is as set out
in the discussion of the comments on
the adjusted brokered deposit ratio, with
one major exception. The FDIC has
decided to include reciprocal deposits
in the brokered deposit adjustment,
unlike the adjusted brokered deposit
ratio, applicable to Risk Category I,
which excludes them. When an
institution’s condition declines and it
falls out of Risk Category I, the statutory
and market restrictions on brokered
deposits become much more relevant.
Even if such an institution remains well
capitalized (and the statutory
restrictions do not apply), the risk that
an institution will become less than
well capitalized has increased. These
statutory restrictions can cause severe
liquidity problems for institutions that
rely heavily on brokered deposits. For
this reason, the FDIC has decided to
include all brokered deposits above 10
percent of an institution’s assets in the
brokered deposit adjustment.
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IX. Insured Branches of Foreign Banks
Because base assessment rates will be
higher and the difference between the
minimum and maximum initial base
assessment rates will increase from two
to four basis points under the final rule,
the FDIC is making a conforming change
for insured branches of foreign banks in
Risk Category I. Under the final rule, an
insured branch of a foreign bank’s
weighted average of ROCA component
ratings will be multiplied by 5.076
(which will be the pricing multiplier)
and 3.873 (which will be a uniform
amount for all insured branches of
foreign banks) will be added to the
product.64 The resulting sum will equal
a Risk Category I insured branch of a
foreign bank’s initial base assessment
rate, provided that the amount cannot
be less than the minimum initial base
assessment rate or greater than the
maximum initial assessment rate. A
Risk Category I insured branch of a
foreign bank’s initial base assessment
rate will be subject to any large bank
adjustment, but total base assessment
rates cannot 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 will be charged the initial base
assessment rate for the risk category in
which they are assigned.
No insured branch of a foreign bank
in any risk category will 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 appears 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 making conforming
changes in the treatment of new insured
depository institutions.65 For
assessment periods beginning on or after
January 1, 2010, new institutions in Risk
Category I will be assessed at the
maximum initial base assessment rate
applicable to Risk Category I
institutions, as under the final rule
adopted in 2006.
Effective for assessment periods
beginning before January 1, 2010, until
a Risk Category I new institution
receives CAMELS component ratings, it
will have an initial base assessment rate
that is 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
final rule adopted in 2006.66 All other
new institutions in Risk Category I will
be treated as established institutions,
except as provided in the next
paragraph.
Either before or after January 1, 2010:
no new institution, regardless of risk
category, will be subject to the
unsecured debt adjustment; any new
institution, regardless of risk category,
will be subject to the secured liability
adjustment; and a new institution in
Risk Categories II, III or IV will be
subject to the brokered deposit
adjustment. After January 1, 2010, no
new institution in Risk Category I will
be subject to the large bank adjustment.
XI. Assessment Rate Schedule
As explained in the next section,
estimated losses from projected
institution failures have risen
considerably since the NPR was
published last fall. Furthermore, certain
changes from the NPR made in response
to public comments would have the
effect of reducing total assessment
revenue generated under the proposed
rates. Consequently, initial base
assessment rates as of April 1, 2009,
which are set forth in Table 12 below,
are slightly higher than proposed in the
NPR.67
TABLE 12—INITIAL BASE ASSESSMENT RATES
Risk category
I*
II
Minimum
Annual Rates (in basis points) .............................................
12
IV
22
16
III
32
45
Maximum
* Rates for institutions that do not pay the minimum or maximum rate will vary between these rates.
The FDIC projects that the minimum
initial assessment rate would have to be
20 basis points beginning in the second
quarter to increase the reserve ratio to
1.15 percent within 5 years (by the end
of 2013). Under the rates shown in table
12 and adopted in this rule, the yearend 2013 reserve ratio is projected to be
0.58 percent. After making all possible
adjustments under the final rule, total
base assessment rates for each risk
64 An insured branch of a foreign bank’s weighted
average ROCA component rating will 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.
65 As discussed below, subject to exceptions, the
final rule defines a new insured depository
institution as a bank or thrift that has not been
federally insured for at least five years as of the last
day of any quarter for which it is being assessed.
66 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.
67 In the NPR, the FDIC noted that:
[A]t 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 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).
FR 61,560, 61,572–61,573 (Oct. 16, 2008).
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9543
category will be within the ranges set
forth in Table 13 below.68
TABLE 13—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 ...........................................................................
12–16
¥5–0
0–8
........................
22
¥5–0
0–11
0–10
32
¥5–0
0–16
0–10
45
¥5–0
0–22.5
0–10
Total base assessment rate ............................................................................
7–24.0
17–43.0
27–58.0
40–77.5
* All amounts for all risk categories are in basis points annually. Rates for institutions that do not pay the minimum or maximum rate will vary
between these rates. Adjustments will be applied in the order listed in the table. The large bank adjustment will be made before any other
adjustment.
The final rule sets actual rates at the
total base assessment rate schedule
effective April 1, 2009. The FDIC
projects an overall average assessment
rate of 15.4 basis points beginning in
April 2009. As of September 30, 2008,
the average assessment rate (before
accounting for credit use) was 6.4 basis
The FDIC received comments from
several industry trade groups and many
banks regarding the proposed increases
in assessment rates. Two comments
supported the proposal to increase riskbased assessments. Many other letters
were critical. Several trade groups and
other commenters argued that the
proposed assessment rates are too high.
Many commenters urged the FDIC to
take advantage of the flexibility that
Congress provided to extend the
restoration period beyond five years
under ‘‘extraordinary circumstances.’’
Among other things, commenters argued
that the FDIC’s invocation of its
systemic risk authority to provide
additional guarantees on non-interest
bearing transaction deposits and senior
unsecured debt is evidence of
‘‘extraordinary circumstances.’’
Commenters argued that rates should be
lower on the grounds that current
economic conditions are severe, that
lower rates would be consistent with the
government’s efforts to restore stability
to the markets and the financial sector
and would make more funds available
to lend in local communities to small
businesses and consumers. One trade
group argued that the FDIC should
assume slower insured deposit growth,
which would support lower rates.
Several commenters urged the FDIC to
withdraw the proposed rule and delay
increasing assessment rates and
overhauling the assessment system until
the end of 2009. They argued that the
delay would allow time for a thorough
evaluation of the effectiveness of
measures recently taken by the federal
government to restore stability to the
banking system.
The FDIC agrees that significant
increases in deposit insurance premium
rates in times of economic and financial
stress are not desirable. However, the
FDIC believes that it is important that
the fund not decline to a level that
could undermine public confidence in
federal deposit insurance. The rates that
the FDIC has set in this final rule,
combined with the 20 basis point
special assessment that the FDIC will
impose on June 30, 2009 (and possible
additional special assessments of up to
10 basis points thereafter), pursuant to
68 These rates would be in addition to the
approximately 1 to 1.2 basis point annual rates that
institutions are assessed to pay the interest on
Financing Corporation (FICO) bonds.
69 12 U.S.C. 1817(b)(5) provides:
Emergency special assessments.—In addition to
the other assessments imposed on insured
depository institutions under this subsection, the
Corporation may impose 1 or more special
assessments on insured depository institutions in
an amount determined by the Corporation if the
amount of any such assessment is necessary—
(A) To provide sufficient assessment income to
repay amounts borrowed from the Secretary of the
Treasury under [12 U.S.C. 1824(a)] in accordance
with the repayment schedule in effect under [12
U.S.C. 1824(c)] during the period with respect to
which such assessment is imposed;
(B) To provide sufficient assessment income to
repay obligations issued to and other amounts
borrowed from insured depository institutions
under [12 U.S.C. 1824(d)]; or
(C) For any other purpose that the Corporation
may deem necessary.
The new base rate schedule is
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.
However, given the FDIC’s estimated
losses from projected institution
failures, the assessment rates adopted in
the final rule raise make it likely that
the DIF balance and reserve ratio will
fall to zero or below this year. The FDIC
believes that it is important that the
fund not decline to a level that could
undermine public confidence in federal
deposit insurance. Therefore, the FDIC
is simultaneously issuing an interim
rule to impose a 20 basis point special
assessment on June 30, 2009.69 The
interim rule also provides that the Board
may impose additional special
assessments of up to 10 basis points
thereafter, if the reserve ratio of the
Deposit Insurance Fund is estimated to
fall to a level that that the Board
believes would adversely affect public
confidence or to a level which shall be
close to zero or negative at the end of
a calendar quarter.
Actual Rate Schedule, Ability To Adjust
Rates and Effective Date
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points for all institutions and 5.5 basis
points for institutions in Risk Category
I.
The rate schedule and the other
revisions to the assessment rules will
take effect for the quarter beginning
April 1, 2009, and will be reflected in
the June 30, 2009 fund balance and the
invoices for assessments due September
30, 2009.
The final rule continues to allow the
FDIC Board to adopt actual rates that are
higher or lower than total base
assessment rates without the necessity
of further notice-and-comment
rulemaking, provided that: (1) the Board
cannot increase or decrease rates from
one quarter to the next by more than
three basis points; and (2) cumulative
increases and decreases can not be more
than three basis points higher or lower
than the adjusted base rates. Continued
retention of this flexibility will enable
the Board to act in a timely manner to
fulfill its mandate to raise the reserve
ratio to at least 1.15 percent within the
5-year timeframe.
Comments
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the interim rule that the FDIC is also
adopting, balance these goals.
A few comments asserted that the
Restoration Plan penalizes safe and
well-run community banks and urged
the FDIC to require the largest
institutions to recapitalize the DIF. In
the FDIC’s view, the final rule equitably
balances assessments from small and
large institutions.
One industry trade group called for
assessments to be calculated on an
individual institution basis for Risk
Categories II, III, and IV. Implementing
this suggestion would require
considerable further investigation, but
might be considered in a future
rulemaking.
One trade group argued that rates for
Risk Categories III and IV should be
higher. Under the final rule, the highest
possible assessment rate (after
adjustments) applicable to Risk Category
IV is 77.5 basis points. The FDIC
believes that rates for these risk
categories are appropriate.
XII. Assessment Revenue Needs Under
the Restoration Plan
Summary
The FDIC projected last fall that
adoption of a rate schedule with a
minimum initial rate of 10 basis points
would increase the reserve ratio to
above 1.25 percent by the end of 2013.
However, a deepening recession and
continued severe problems in the
housing and construction sectors,
financial markets and commercial real
estate, contribute to the FDIC’s
expectation of significantly higher
losses for the insurance fund compared
to the projections of last October
included in the proposed rule. The
insurance fund balance and reserve ratio
are likely to decline significantly in
2009 before beginning a gradual
recovery in subsequent years from the
effects of new revenue and a declining
rate of bank failures. Even under the
rates adopted in the final rule, the FDIC
projects that the reserve ratio may
decline to close to zero—or may turn
negative—by or before the end of 2009.
The 20 basis point special assessment to
be imposed under the interim rule on
June 30, 2009 (and possible additional
special assessments of up to 10 basis
points thereafter) are intended to ensure
that the reserve ratio does not decline to
a level that could undermine public
confidence in federal deposit insurance.
The FDIC’s best estimate is that
institution failures could cost the
insurance fund approximately $65
billion from 2009 to 2013, after
incurring approximately $18 billion in
estimated costs for failures in 2008. The
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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
further housing price declines and a
significant economic downturn in
specific geographic areas on loan losses
and bank capital; and recent and
historic supervisory rating downgrade
and failure rates.
The FDIC also assumes that insured
deposits would increase by 7 percent in
2009 and by 5 percent thereafter. The
annual average growth rate in insured
deposits was almost 7 percent over the
past 5 years and just over 5 percent over
the past 10 years.
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 or fall below the FDIC’s
best estimate or insured deposit growth
is more or less rapid than expected, the
Board will be able to adjust assessment
rates.
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. Section
1817(b)(1)(A)) to maintain a risk-based
system.
(v) Other factors the Board of
Directors has determined to be
appropriate.70
70 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:
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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 significantly reduce
the fund balance and reserve ratio.
The financial market disruptions over
the past year have increased the
likelihood that the recession will be
severe and prolonged. Declining
housing and equity prices, financial
market turmoil, and deteriorating
economic conditions will continue to
exert significant stress on banking
industry earnings and credit quality,
most notably in residential real estate
and construction and development
portfolios. Accelerating job losses and
declining household wealth may
weaken consumer credit performance,
while slowing business activity
increases the risks in commercial loan
portfolios. Significant uncertainty
remains about the outlook for recovery
in securitization markets and the return
of confidence to financial markets.
Regional disparities in housing markets
and economic conditions have led to
variation in prospects among banks.
Institutions most at risk include those
with large volumes of subprime and
nontraditional mortgages, particularly
those heavily reliant on securitization,
and those with heavy concentrations of
residential real estate and construction
and development loans in markets with
the greatest housing price declines.
Institutions that are heavily reliant on
non-core funding are exposed to
additional risks.
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
(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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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 an analysis of
the expected widespread further decline
in housing prices and deterioration in
overall economic conditions on the
capital positions and earnings of
insured institutions. The analysis
simulated high and rising loan loss rates
due to increased non-current loan rates,
rising unemployment rates, and falling
collateral values, especially for loans
backed by real estate. As the result of
recent and expected deterioration in the
U.S. economy and banking conditions,
the projected loss rates have risen
substantially from those contained in
the NPR.
The FDIC projects that the costs of
institution failures from 2009 through
2013 may total $65 billion. These losses
are in addition to the $18 billion for the
estimated costs of failures for 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.
The FDIC projects that its investment
contributions (investment income plus
or minus unrealized gains or losses on
available-for-sale securities) in 2008 will
total $4.7 billion, or 9 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 on June
30, 2008, bolsters this figure. Near-term
projections of investment income reflect
the current outlook of constant to
slightly rising Treasury yields.71 In
addition, the FDIC expects that it will
invest new funds in short-term
securities (primarily overnight
investments) to accommodate increased
bank failure activity. These investments
are expected to earn lower rates than the
longer-term securities that they are
replacing and will therefore result in
less interest income to the fund. The
FDIC projects investments to contribute
an amount equal to 1.3 percent of the
starting fund balance in 2009. The FDIC
projects that investment contributions
as a percent of the fund balance will rise
gradually in later years.
Operating Expenses and Investment
Income
71 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
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.)
The FDIC estimates that its operating
expenses in 2009 will be $1.1 billion.
Thereafter, the FDIC projects that
operating expenses will increase on
average by 5 percent annually.
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Assessment Revenue, Credit Use, and
the Distribution of Assessments
Assessment revenue in 2008 totaled
$3.0 billion: $4.4 billion in gross
assessments charged less $1.4 billion in
credits used. At the end of 2008, only
4 percent of the original $4.7 billion in
credits remained. 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
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9545
points.72 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
new rates go into effect will be very
small and that their continued use will
have very little effect on the assessment
revenue necessary to meet the
requirements of the plan.73
Accounting for the use of remaining
credits, the uniform increase to rates for
the first quarter of 2009, and assuming
that the assessment rates adopted in this
rule were to remain in effect for the
remainder of this year, the FDIC projects
that the fund will earn assessment
revenue of $11.6 billion for all of
2009.74
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 an
assessment rate based on the proposed
rate schedule and factors described
above. Table 16 shows the distribution
of institutions and domestic deposits by
risk category (divided into four parts for
Risk Category I) under the initial base
rate schedule (effective April 1, 2009)
based on data as of September 30, 2008;
Table 17 shows the distribution of
institutions and domestic deposits by
bands of total base assessment rates.75
For purposes of assessment revenue
projections beginning in April, the FDIC
relied on the data reflected in Table 17,
but also accounted for projected
migration of institutions across risk
categories as supervisory ratings change.
72 Section 7(b)(3)(E)(iv) of the Federal Deposit
Insurance Act (12 U.S.C. 1817(b)(3)(E)(iv)).
73 For 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)).
74 The projection assumes 7 percent annual
growth in the assessment base (which is
approximately domestic deposits) in 2009.
75 The assessment base is almost equal to total
domestic deposits.
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TABLE 16—DISTRIBUTION OF INITIAL BASE ASSESSMENT RATES AND DOMESTIC DEPOSITS* DATA AS OF SEPTEMBER 30,
2008
Initial
assessment
rate
Risk category
I ............................................................................................................
II ...........................................................................................................
III ..........................................................................................................
IV ..........................................................................................................
Number of
institutions
12
12.01–14
14.01–15.99
16
22
32
45
Percent of
institutions
1,577
2,637
1,815
1,476
672
185
21
19
31
22
18
8
2
0
Domestic
deposits
(in billions
of $)
860.1
2,863.4
1,765.2
812.4
818.8
83.5
18.8
Percent of
domestic
deposits
12
40
24
11
11
1
0
* This table and the following two tables exclude insured branches of foreign banks.
TABLE 17—DISTRIBUTION OF TOTAL BASE ASSESSMENT RATES AND DOMESTIC DEPOSITS* DATA AS OF SEPTEMBER 30,
2008
Total base
assessment
Risk category
I ............................................................................................................
II ...........................................................................................................
III ..........................................................................................................
IV ..........................................................................................................
Number of
institutions
7–12
12.01–14
14.01–16
16.01–24
17–22
22.01–43
27–32
32.01–58
40–45
45.01–77.5
Percent of
institutions
2,649
2,248
2,367
241
435
237
107
78
9
12
32
27
28
3
5
3
1
1
0
0
Domestic
deposits
(in billions
of $)
3,381.4
1,295.8
1,177.2
446.7
519.7
299.0
44.3
39.2
1.2
17.6
Percent of
domestic
deposits
47
18
16
6
7
4
1
1
0
0
* Because of data limitations, secured liability adjustments for TFR filers are estimated using imputed values based on simple averages of Call
Report filers as of September 30, 2008 (discussed above). Unsecured debt adjustments are estimated using reported subordinated debt and a
portion of non-FHLB other borrowings.
Estimated Insured Deposits
The FDIC believes that it is reasonable
to plan for annual insured deposit
growth of 7 percent in 2009 and 5
percent in subsequent years. During
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2008, insured deposits increased by
about 11 percent, with the troubles in
the economy and financial markets
making the safety of federally insured
deposits an attractive option. The most
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recent five year average growth rate was
6.7 percent and the ten year average
growth rate was 5.3 percent. Chart 1
depicts insured deposit growth since
1992.
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Effect on Capital and Earnings
Appendix 2 contains an analysis of
the effect of the rates adopted in this
rule on the capital and earnings of
insured institutions based on a range of
projected industry earnings. Given the
assumptions in the analysis, for the
industry as a whole, projected total
assessments in 2009 would result in
capital that would be 0.4 to 0.5 percent
lower than if the FDIC did not charge
76 The FDIC estimates of insured deposits and
projections do not consider the effect of the
temporary increase in the deposit insurance
coverage limit to $250,000 or the guarantee of
certain deposits under the Temporary Liquidity
Guarantee Program.
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assessments. Based on the range of
projected industry earnings, the
proposed assessments would cause 8 to
12 institutions whose equity-to-assets
ratio would have exceeded 4 percent in
the absence of assessments to fall below
that percentage and 6 to 9 institutions
to fall below 2 percent.
For profitable institutions,
assessments in 2009 would result in
pre-tax income that would be between
6 and 8 percent lower than if the FDIC
did not charge assessments. For
unprofitable institutions, pre-tax losses
would increase by an average of 3 to 5
percent. Appendix 2 also provides an
analysis of the range of effects on capital
and earnings for these groups of
institutions.
Other Factors that the Board May
Consider
In its consideration of proposed rates,
the FDIC Board has considered another
factor that it deems appropriate, as
permitted by law.
Updating projections regularly. 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.
The FDIC projects that, under these
rates, the reserve ratio will increase to
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0.58 percent by year-end 2013.
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. Additional Comments
One large bank recommended that, in
setting assessment rates, most weight
should be given to probability of
default, with particular emphasis on the
liquidity strength of the bank, as
reflected in its CAMELS. The
commenter argued that if a bank has a
low probability of default, assessments
should be low and risk adjustments
based on potential FDIC losses are not
justified. The FDIC was urged to
reconsider whether risk adjustments
beyond the core measures (debt ratings,
CAMELS, and capital ratios) should be
used at all. Additionally, the writer
criticized the FDIC for using proxies for
unencumbered assets that are flawed
substitutes.
In the FDIC’s view, probability of
default is just one element of the risk
posed by an institution. Loss given
default is equally important. For the
reasons given above, the FDIC is
convinced of the need for the
adjustments contained in the final rule.
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Projections of insured deposits are
subject to considerable uncertainty.76
Insured deposit growth over the near
term could continue to 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. 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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XIV. Technical and Other Changes
The final rule will 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.
Under the final rule adopted in 2006,
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 at the
end of 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.77
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.78
The final rule states 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
assessment rate be developed for that
quarter. That rate for the portion of the
quarter that the institution was in Risk
Category I will be determined as for any
other institution in Risk Category I
subject to the same pricing method,
except that the rate will 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
77 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.
78 12
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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 final rule 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 amending 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.
The final rule makes a technical
correction 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 final
rule amends section 327.3(a) to
eliminate the reference to paragraph (b).
Section 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
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 final rule
amends 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.
Section 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 section 327.8(i) as
‘‘one that has been confirmed or
assigned within 12 months before the
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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 section 327.8(i)
requires the FDIC to disregard a longterm 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 is amending section
327.8(i) to read as follows:
(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.
Consistent with this amendment, the
final rule amends 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 final rule amends 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).
Sections 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
five years as of the last day of any
quarter for which it is being assigned.’’
In the FDIC’s view, this regulatory
language could allow a previously
uninsured institution to be treated as an
established institution based on charter
date. To remedy this, the final rule
amends 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
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Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations
been federally insured for at least five
years as of the last day of any quarter
for which it is being assessed.
Section 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 final rule
deletes it.
XV. Effective Date
This final rule will become effective
on April 1, 2009.
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 invited comments on
how to make this proposal easier to
understand and received one response.
The comment stated that the proposal
was too complicated and should have
included an executive summary in
bullet point format. Making the riskbased assessment system more
responsive to risk entailed some
complexity, which we tried to
minimize.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
requires that each federal agency either
certify that a final rule would not, if
adopted in final form, have a significant
economic impact on a substantial
number of small entities or prepare an
initial regulatory flexibility analysis of
the rule and publish the analysis for
comment.79 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.80 The final 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 technical
and other changes to the FDIC’s
assessment regulations. Nonetheless, the
FDIC is voluntarily undertaking an
initial regulatory flexibility analysis of
the final rule for publication.
As of December 31, 2008, of the 8,305
insured commercial banks and savings
associations, there were 4,567 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 final 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
and by the FDIC’s aggregate insurance
losses, expenses, investment income,
and insured deposit growth, among
other factors. Given the FDIC’s total
assessment needs, the final rule would
merely alter the distribution of
assessments among insured institutions.
Using the data as of December 31, 2008,
the FDIC calculated the total
assessments that would be collected
under the base rate schedule in the final
rule.
The economic impact of the final rule
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 final 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.81 82
Based on the December 2008 data,
under the final rule, for more than 75
percent of small institutions, the change
in the assessment system would result
in assessment changes (up or down)
totaling five percent or less of annual
revenue. Of the total of 4,567 small
institutions, only eight percent would
have experienced an increase equal to
five percent or greater of their total
revenue. These figures do not indicate a
significant economic impact on
revenues for a substantial number of
small insured institutions. Table 18
below sets forth the results of the
analysis in more detail.
TABLE 18—CHANGE IN ASSESSMENTS UNDER THE FINAL RULE AS A PERCENTAGE OF TOTAL REVENUE
Number of
institutions
Change in assessments as a percentage of total revenue
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 ...........................................................................................................................
240
545
2.306
1,120
239
117
5.26
11.93
50.49
24.52
5.23
2.56
Total ..........................................................................................................................................................
4,567
100.00
The FDIC performed a similar
analysis to determine the impact on
profits for small institutions. Based on
December 2008 data, under the final
79 See
5 U.S.C. 603, 604 and 605.
U.S.C. 601.
81 Throughout this regulatory flexibility analysis
(unlike the rest of the final rule), a ‘‘small
80 5
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rule, 81 percent of the small institutions
with reported profits would have
experienced a change in their annual
profits of 5 percent or less. Table 19 sets
forth the results of the analysis in more
detail.
institution’’ refers to an institution with assets of
$165 million or less.
82 An institution’s total revenue is defined as the
sum of its annual net interest income and non-
interest income. An institution’s profit is defined as
income before taxes and extraordinary items, gross
of loan loss provisions.
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Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations
TABLE 19—CHANGE IN ASSESSMENTS UNDER THE PROPOSAL AS A PERCENTAGE OF PROFIT *
Number of
institutions
Change in assessments as a percentage of profit
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 ..................................................................................................................................
451
266
616
654
477
276
313
14.77
8.71
20.18
21.42
15.62
9.04
10.25
Total ......................................................................................................................................................
3,053
100.00
* Institutions with negative or no profit were excluded. These institutions are shown separately in Table 20.
Of those small institutions with
reported profits, only 10 percent would
have experienced a decrease in their
total profits of 10 percent or greater. 65
percent of these small institutions
would have a greater than five percent
increase in their profits. Again, these
figures do not indicate a significant
economic impact on profits for a
substantial number of small insured
institutions.
Table 19 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 final rule on these institutions by
determining the annual assessment
change that would result. Table 20
below shows that only 17 percent (256)
of the 1,514 small insured institutions
in this category would have experienced
an increase in annual assessments of
$10,000 or more. 14% of these
institutions would have experienced a
decrease of $10,000 or more.
TABLE 20—CHANGE IN ASSESSMENTS UNDER THE FINAL RULE FOR INSTITUTIONS WITH NEGATIVE OR NO REPORTED
PROFIT
Number of
institutions
Change in assessments
Percent of
institutions
$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 ...............................................................................................................................
97
108
131
203
78
641
124
132
6.40
7.13
8.65
13.41
5.15
42.43
8.19
8.72
Total ..........................................................................................................................................................
1,514
100.0
The final rule does not directly
impose any ‘‘reporting’’ or
‘‘recordkeeping’’ requirements within
the meaning of the Paperwork
Reduction Act. The compliance
requirements for the final rule would
not exceed existing compliance
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.
The initial regulatory flexibility
analysis set forth above demonstrates
that the final rule would not have a
significant economic impact on a
substantial number of small institutions
within the meaning of those terms as
used in the RFA.83
83 5
U.S.C. 605.
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C. 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.
D. Small Business Regulatory
Enforcement Fairness Act
The Office of Management and Budget
has determined that the final rule is not
a ‘‘major rule’’ within the meaning of
the relevant sections of the Small
Business Regulatory Enforcement Act of
1996 (SBREFA) Public Law No. 110–28
(1996). As required by law, the FDIC
will file the appropriate reports with
Congress and the General Accounting
Office so that the final rule may be
reviewed.
E. 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
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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 amends 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, Public
Law 109–171, 120 Stat. 9–21, and Sec. 3,
Public Law 109–173, 119 Stat. 3605.
2. Revise § 327.3(a)(1) to read as
follows:
■
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§ 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.
*
*
*
*
*
(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
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 quarterly
report of condition for that quarter.
*
*
*
*
*
■ 4. In § 327.8, revise paragraphs (g), (h),
(i), (l) and (m) and add paragraphs (o),
(p), (q), (r) and (s) 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 (other than
an institution classified as large for
purposes of § 327.9(d)(8)) reports assets
of less than $10 billion in its quarterly
reports of condition for four consecutive
quarters, the FDIC will reclassify the
institution as small beginning the
following quarter.
(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
quarterly 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
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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 savings association that has been
federally insured for less than five years
as of the last day of any quarter for
which it is being assessed.
(m) Established depository institution.
An established insured depository
institution is a bank or savings
association that has been federally
insured for at least five years as of the
last day of any quarter for which it is
being assessed.
(1) Merger or consolidation involving
new and established institution(s).
Subject to paragraphs (m)(2), (3), (4),
and (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, the
resulting institution is an established
institution.
(3) Grandfather exception. If a new
institution merges into an established
institution, and the merger agreement
was entered into on or before July 11,
2006, the resulting institution shall be
deemed to be an established institution
for purposes of this part.
(4) Subsidiary exception. Subject to
paragraph (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
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9551
Company Act of 1956 or a savings and
loan holding company under the Home
Owners’ Loan Act, and:
(A) At least one eligible depository
institution (as defined in 12 CFR
303.2(r)) that is owned by the holding
company has been chartered as a bank
or savings association for at least five
years as of the date that the otherwise
new institution was established; and
(B) The holding company has a
composite rating of at least ‘‘2’’ for bank
holding companies or an above average
or ‘‘A’’ rating for savings and loan
holding companies and at least 75
percent of its insured depository
institution assets are assets of eligible
depository institutions, as defined in 12
CFR 303.2(r); or
(ii) An eligible depository institution,
as defined in 12 CFR 303.2(r), that has
been chartered as a bank or savings
association for at least five years as of
the date that the otherwise new
institution was established.
(5) Effect of credit union conversion.
In determining whether an insured
depository institution is new or
established, the FDIC will include any
period of time that the institution was
a federally insured credit union.
*
*
*
*
*
(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 defined in the quarterly report
of condition for the reporting period as
defined in paragraph (b)), but shall not
include any senior unsecured debt that
the FDIC has guaranteed under the
Temporary Liquidity Guarantee
Program, 12 CFR Part 370.
(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 quarterly
report of condition for the reporting
period; however, subordinated debt
shall also include limited-life preferred
stock as defined in the quarterly report
of condition for the reporting period.
(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.
(s) Reciprocal deposits—Deposits that
an insured depository institution
receives through a deposit placement
network on a reciprocal basis, such that:
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(1) for any deposit received, the
institution (as agent for depositors)
places the same amount with other
insured depository institutions through
the network; and (2) each member of the
network sets the interest rate to be paid
on the entire amount of funds it places
with other network members.
■
7. Revise § 327.9 to read as follows:
§ 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
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:
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(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.
(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
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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), (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), (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 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. The six financial ratios
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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
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component by the following percentages
and adding the products: Capital
adequacy—25%, Asset quality—20%,
Management—25%, Earnings—10%,
Liquidity—10%, and Sensitivity to
market risk—10%. The following table
sets forth the initial values of the pricing
multipliers:
Pricing 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)
0.575
1.074
1.210
(0.764)
0.065
1.095
* Ratios are expressed as percentages.
** Multipliers are rounded to three decimal places.
The six financial ratios and the
weighted average CAMELS component
rating will be multiplied by the
respective pricing multiplier, and the
products will be summed. To this result
will be added the uniform amount of
11.861. 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.
Appendix A to this subpart describes
the derivation of the pricing multipliers
and uniform amount 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
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
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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
moving from Risk Category II, III or IV
to Risk Category I, and its initial base
assessment rate would be determined
using the financial ratios method, then
that method shall apply for the portion
of the quarter that it was in Risk
Category I, subject to adjustment
pursuant to paragraphs (d)(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, subject to adjustment pursuant
to paragraphs (d)(4), (5), and (6) of this
section, as appropriate. Beginning on
the date of the CAMELS component
ratings change, the initial base
assessment rate for the remainder of the
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quarter shall be determined using the
CAMELS component ratings in effect
after the change, again subject to
adjustment pursuant to paragraphs
(d)(4), (5), and (6) of this section, as
appropriate.
(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. The
institution’s assessment rate computed
using the financial ratios method shall
be converted to a financial ratios score
by first subtracting 10 from the financial
ratios method assessment rate and then
multiplying the result by 1⁄2. The result
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 1.692 (which shall be
the pricing multiplier), and the products
will be summed. To this result will be
added 3.873 (which shall be a uniform
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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.
(i) Implementation of Large Bank
Method Changes between Risk
Categories. If, during a quarter, a
CAMELS or ROCA 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 or, if the
institution is an insured branch of a
foreign bank, using the weighted
average ROCA component rating,
subject to adjustment pursuant to
paragraph (d)(4). For the portion of the
quarter that the institution was not in
Risk Category I, the institution’s initial
base assessment rate, which, unless the
institution is an insured branch of a
foreign bank, 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 or ROCA 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. For the
portion of the quarter that the
institution was not in Risk Category I,
the institution’s initial base assessment
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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.
(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)) 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
equal the sum of the products that result
from multiplying ROCA component
ratings by the following percentages:
Risk Management—35%, Operational
Controls—25%, Compliance—25%, and
Asset Quality—15%. The weighted
average ROCA rating will be multiplied
by 5.076 (which shall be the pricing
multiplier). To this result will be added
3.873 (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 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.
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(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 the initial base
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 initial
base 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
initial base assessment rate.
(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,
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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 initial base 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 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
assessment rates for unsecured debt,
based on the ratio of long-term
unsecured debt (and, for small
institutions as defined in paragraph (ii)
below, specified amounts of Tier 1
capital) to domestic deposits. Any
unsecured debt adjustment shall be
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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 savings
associations—Secured liabilities for
savings associations include Federal
Home Loan Bank advances as reported
Amount of Tier in quarterly Thrift Financial Reports
1 capital within (‘‘TFRs’’). Secured liabilities for savings
Range of Tier 1 capital to
range which is associations also include securities sold
adjusted average assets
qualified
under repurchase agreements, secured
(percent)
Federal funds purchased or other
≤5% .......................................
0 borrowings that are secured. Any of
>5% and ≤6% .......................
10 these secured amounts not reported
>6% and ≤7% .......................
20 separately from unsecured or other
>7% and ≤8% .......................
30 liabilities in the TFR will be imputed
>8% and ≤9% .......................
40
based on simple averages for Call Report
>9% and ≤10% .....................
50
>10% and ≤11% ...................
60 filers as of June 30, 2008. As of that
>11% and ≤12% ...................
70 date, on average, 63.0 percent of the
>12% and ≤13% ...................
80 sum of Federal funds purchased and
>13% and ≤14% ...................
90 securities sold under repurchase
>14% ....................................
100 agreements reported by Call Report
filers were secured, and 49.4 percent of
For institutions that file Thrift
other borrowings were secured.
Financial Reports, adjusted total assets
(iii) Calculation—An institution’s
will be used in place of adjusted average ratio of secured liabilities to domestic
assets in the preceding table. The sum
deposits will, if greater than 25 percent,
of qualified Tier 1 capital and long-term increase its assessment rate, but any
unsecured debt as a percentage of
such increase shall not exceed 50
domestic deposits will be multiplied by percent of its assessment rate before the
secured liabilities adjustment. For an
40 basis points to produce the
institution that has a ratio of secured
unsecured debt adjustment for small
liabilities (as defined in paragraph (ii)
institutions.
(iii) Limitation—No unsecured debt
above) to domestic deposits of greater
adjustment for any institution shall
than 25 percent, the institution’s
exceed five basis points.
assessment rate (after taking into
(iv) Applicable quarterly reports of
account any adjustment under
condition—Ratios for any given quarter
paragraphs (d)(5) or (6) of this section)
shall be calculated from quarterly
will be multiplied by the following
reports of condition (Call Reports and
amount: The ratio of the institution’s
Thrift Financial Reports) filed by each
secured liabilities to domestic deposits
institution as of the last day of the
minus 0.25. Ratios of secured liabilities
quarter. Until institutions separately
to domestic deposits shall be calculated
report long-term senior unsecured
from the report of condition, or similar
liabilities and long-term subordinated
report, filed by each institution.
(7) Brokered Deposit Adjustment for
debt in their quarterly reports of
Risk Categories II, III, and IV. All
condition, the FDIC will use
institutions in Risk Categories II, III, and
subordinated debt included in Tier 2
capital and will not include any amount IV, except insured branches of foreign
banks as provided under paragraph
of senior unsecured liabilities in
(d)(3)(iii) of this section, shall be subject
calculating the unsecured debt
to an assessment rate adjustment for
adjustment.
(6) Secured liability adjustment for all brokered deposits. Any such brokered
institutions. All institutions within all
deposit adjustment shall be made after
risk categories, except insured branches any adjustment under paragraph (d)(5)
of foreign banks as provided under
or (6). The brokered deposit adjustment
paragraph (d)(3)(iii) of this section, are
includes all brokered deposits as
subject to upward adjustment of their
defined in Section 29 of the Federal
assessment rate based upon the ratio of
Deposit Insurance Act (12 U.S.C. 1831f),
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
40 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 the amounts set forth
below:
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and 12 CFR 337.6, including reciprocal
deposits as defined in § 327.8(r), and
brokered deposits that consist of
balances swept into an insured
institution by another institution. The
adjustment under this paragraph is
limited to those institutions whose ratio
of brokered deposits to domestic
deposits is greater than 10 percent; asset
growth rates do not affect the
adjustment. The adjustment is
determined by multiplying by 25 basis
points the difference between an
institution’s ratio of brokered deposits
to domestic deposits and 0.10. The
maximum brokered deposit adjustment
will be 10 basis points. Brokered deposit
ratios for any given quarter are
calculated from the quarterly 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
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
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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 that is well capitalized
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 (ii) and (iii)
below. 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 is well
capitalized and 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 quarterly reports of condition
that have been filed, until the institution
files four such reports. Prior to January
1, 2010, assessment rates for new
institutions in Risk Category I shall be
subject to the large bank adjustment as
determined under paragraph (d)(4) of
this section.
(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
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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. Thereafter,
the assessment rate will be determined
by annualizing, where appropriate,
financial ratios obtained from all
quarterly reports of condition that have
been filed, until the institution files four
quarterly reports of condition or it
receives a long-term debt issuer rating
and it is a large institution.
(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.
■
8. Revise § 327.10 to read as follows:
§ 327.10
Assessment rate schedules.
(a) Initial Base Assessment Rate
Schedule. The initial base assessment
rate for an insured depository
institution shall be the rate prescribed
in the following schedule:
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9557
INITIAL BASE ASSESSMENT RATE SCHEDULE
Risk category
I*
II
Annual rates (in basis points) ..............................................
16
IV
32
45
Maximum
12
III
22
Minimum
* All amounts for all risk categories are in basis points annually. Initial base rates that are not the minimum or maximum rate will vary between
these rates.
(1) Risk Category I Initial Base
Assessment Rate Schedule. The annual
initial base assessment rates for all
institutions in Risk Category I shall
range from 12 to 16 basis points.
(2) Risk Category II, III, and IV Initial
Base Assessment Rate Schedule. The
annual initial base assessment rates for
Risk Categories II, III, and IV shall be 22,
32, 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. The total
base assessment rates after adjustments
for an insured depository institution
shall be the rate prescribed in the
following schedule.
TOTAL BASE ASSESSMENT RATE SCHEDULE (AFTER ADJUSTMENTS) *
Risk category
I
Risk category
II
Risk category
III
Risk category
IV
12–16
¥5–0
0–8
22
¥5–0
0–11
0–10
17–43.0
32
¥5–0
0–16
0–10
27–58.0
45
¥5–0
0–22.5
0–10
40–77.5
Initial base assessment rate ............................................................................
Unsecured debt adjustment .............................................................................
Secured liability adjustment .............................................................................
Brokered deposit adjustment ...........................................................................
Total base assessment rate ............................................................................
7–24.0
* 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.
(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 7 to 24 basis points.
(2) Risk Category II Total Base
Assessment Rate Schedule. The annual
total base assessment rates for Risk
Category II shall range from 17 to 43
basis points.
(3) Risk Category III Total Base
Assessment Rate Schedule. The annual
total base assessment rates for Risk
Category III shall range from 27 to 58
basis points.
(4) Risk Category IV Total Base
Assessment Rate Schedule. The annual
total base assessment rates for Risk
Category IV shall range from 40 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
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18:51 Mar 03, 2009
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is mathematically less than zero or in a
total base assessment rate schedule that,
at any time, is more than 3 basis points
above or below the total base assessment
schedule for the Deposit Insurance
Fund, nor may any one such Board
adjustment constitute an increase or
decrease of more than 3 basis points.
(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.
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(4) Announcement. The Board shall
announce the assessment schedules and
the amount and basis for any adjustment
thereto not later than 30 days before the
quarterly certified statement invoice
date specified in § 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.
■ 9. Revise Appendix A 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 12 basis
points, and
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• 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.
Equation 1
Downgrade(0,1)i,t = b0 + b1 (Tier 1 Leverage
RatioT) + b2 (Loans past due 30 to 89
days ratioi,t) + b3 (Nonperforming asset
ratioi,t) + b4 (Net loan charge-off ratioi,t)
+ b5 (Net income before taxes ratioi,t) +
b6 (Adjusted brokered deposit ratioi,t) +
b7 (Weighted average CAMELS
component ratingi,t) where
Downgrade(01)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
• 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 asset growth rate factor that
ranges from 0 to 1 as shown in Equation 2
below. The asset growth rate factor (Ai,T) is
calculated by subtracting 0.4 from the fouryear cumulative gross asset growth rate
(expressed as a number rather than as a
percentage), adjusted for mergers and
acquisitions, and multiplying the remainder
by 31⁄3. The factor cannot be less than 0 or
greater than 1.
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
Equation 2
⎛ Brokered Depositsi,T
⎞
Bi,T = ⎜
⎜ Domestic Deposits − 0.10 ⎟ ∗ Ai,T
⎟
i,T
⎝
⎠
⎡⎛ GrossAssetsi,T − GrossAssetsi,T − 4
⎞ 10 ⎤
where Ai,T = ⎢⎜
− 0.4 ⎟ ∗
⎜
⎟ 3 ⎥ , subject to 0 ≤ Ai,T ≤ 1 and Bi,T ≥ 0.
GrossAssetsi,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. 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. Reciprocal deposits are not
presently reported in the Call Report or TFR.
As a result, and as also described in Table
A.1, the Statistical Model is estimated
without deducting reciprocal deposits from
brokered deposits in determining the
adjusted brokered deposit ratio.
TABLE A.1—DEFINITIONS OF REGRESSORS
Description
Tier 1 Leverage Ratio (%) .................................................
Tier 1 capital for Prompt Corrective Action (PCA) divided by adjusted average assets
based on the definition for prompt corrective action.
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.
Brokered deposits divided by domestic deposits less 0.10 multiplied by the asset
growth rate factor (which is the term Ai,T as defined in equation 2 above) that
ranges between 0 and 1.
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.)
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 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
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18:51 Mar 03, 2009
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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
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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
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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, 2008.1 2 The
minimum downgrade probability cutoff value
is 0.0182.
• 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 0.1506.
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
α 0 = Min −
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,
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 ¥ 0.550) + 30.211* b0] + 30.211
* [b1 (Tier 1 Leverage RatioT)] + 30.211
* [b2 (Loans past due 30 to 89 days
ratioT)] + 30.211 * [b3 (Nonperforming
asset ratioT)] + 30.211 * [b4 (Net loan
charge-off ratioT)] + 30.211 * [b5 (Net
income before taxes ratioT)] + 30.211 *
[b6 (Adjusted brokered deposit ratioT)] +
30.211 * [b7 (Weighted average CAMELS
component ratingT)]
again subject to Min ≤ PiT ≤ Min + 4
where (Min ¥ 0.550) + 30.211 * b0 equals the
uniform amount, 30.211 * bj 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.
1 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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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
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.
10. Revise Appendix B to Subpart A
of Part 327 to read as follows:
■
2 For purposes of calculating the minimum and
maximum downgrade probability cutoff values,
institutions that have less than $100,000 in
PO 00000
Equation 4
PiT = a0 + a1 * diT subject to Min ≤ PiT ≤ Min
+4
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 * 0.0182 and Min + 4 = a0 +
a1 * 0.1506
where 0.0182 is the minimum downgrade
probability cutoff value and 0.1506 is the
maximum downgrade probability cutoff
value, results in values for the constant
amount, a0 and the scale factor, a1:
Equation 5
4 ∗ 0.0182
= Min − 0.550
( 0.1506 − 0.0182 )
V. Updating the Statistical Model, Uniform
Amount, and Pricing Multipliers
4
= 30.211
( 0.1506 − 0.0182 )
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:
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Appendix B to Subpart A
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 ........................
Moody’s:
Aaa ........................................
Aa1 ........................................
Aa2 ........................................
Aa3 ........................................
A1 ..........................................
A2 ..........................................
A3 ..........................................
Baa1 ......................................
Baa2 or worse .......................
Fitch’s:
AAA .......................................
AA+ .......................................
AA .........................................
Converted
value
1.00
1.05
1.15
1.30
1.50
1.80
2.20
2.70
3.00
1.00
1.05
1.15
1.30
1.50
1.80
2.20
2.70
3.00
1.00
1.05
1.15
domestic deposits are assumed to have no brokered
deposits.
E:\FR\FM\04MRR2.SGM
04MRR2
ER04MR09.018</MATH>
Equation 3
diT = b0 + b1 (Tier 1 Leverage RatioiT) + b2
(Loans past due 30 to 89 days ratioiT) +
b3 (Nonperforming asset ratioiT) + b4 (Net
loan charge-off ratioiT) + b5 (Net income
before taxes ratioiT) + b6 (Adjusted
brokered deposit ratioiT) + b7 (Weighted
average CAMELS component ratingiT)
III. Minimum and Maximum Downgrade
Probability Cutoff Values
ER04MR09.017</MATH>
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: (1) 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; (2) 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; and (3) reciprocal deposits are
deducted from brokered deposits in
determining the adjusted brokered deposit
ratio.
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NUMERICAL CONVERSION OF LONGTERM DEBT ISSUER RATINGS—Continued
Current long-term debt issuer
rating
Converted
value
AA¥ ......................................
A+ ..........................................
A ............................................
1.30
1.50
1.80
■ 11. Revise Appendix C to Subpart A
NUMERICAL CONVERSION OF LONGTERM DEBT ISSUER RATINGS—Con- of Part 327 to read as follows:
tinued
Appendix C to Subpart A
Current long-term debt issuer
rating
A¥ ........................................
BBB+ .....................................
BBB or worse ........................
Converted
value
2.20
2.70
3.00
ADDITIONAL RISK CONSIDERATIONS FOR LARGE RISK CATEGORY I INSTITUTIONS
Information source
Examples of associated risk indicators or information
Financial Performance and Condition 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., subprime 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.
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
• 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.
Market Information ..........................
Stress Considerations .....................
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*
*
*
*
Appendix 1
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
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
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:
Equation 1
Sf = (Af ¥10) * 0.5
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:
Pi,T = a0 + a1 * Si,T subject to Min ≤ Pi,T ≤
Min + 4
where a0 and a1 are, respectively, a constant
term and a scale factor used to convert Si,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 final rule, the
minimum initial base assessment rate is 12
basis points, so Min equals 12.)
Substituting minimum and maximum
score cutoff values (1.601 and 2.389,
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.
Equation 2
Si = (1/3) * Sw,i + (1/3) * Sd,i + (1/3) * Sf,i
The pricing multipliers were determined
by minimum and maximum score cutoff
values, which were constructed so that
fifteen percent of all large insured
institutions in Risk Category I (excluding
new institutions) are assessed the maximum
base rate, while twenty-five percent are
assessed the minimum base rate, when
computed as of June 2008. The calculated
thresholds are 1.601 for the minimum score
cut-off value, and 2.389 for the maximum
score cut-off value.
The uniform amount and pricing
multipliers used to compute the annual base
assessment rate in basis points, PiT, for a large
α 0 = Min −
Equation 7
α1 =
4
= 5.076
( 2.389 − 1.601)
Substituting equations 6 and 7 into equation
2 produces the following equation for PiT
Equation 8
Pi,T = (Min ¥8.127) + 5.076 * ⎣(1/3) * Sw,iT
+ (1/3) * Sd,iT + (1/3) * Sf,iT⎦ = (Min ¥8.127)
+ 1.692 * Sw.iT + 1.692 * Sd.iT + 1.692 * Sf,iT
where Min ¥8.127 is the uniform amount
and 1.692 is a pricing multiplier. Since Min
equals 12 under the final rule, the uniform
amount equals 3.873.
Appendix 2
Analysis of the Projected Effects of the
Payment of Assessments
On the Capital and Earnings of Insured
Depository Institutions
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the outlook for earnings in 2009. Therefore,
this analysis considers the following two
scenarios for pre-tax, pre-assessment income
in 2009: (1) Income in 2009 is equal to
income for all of 2008, adjusted for mergers;
(2) Income in 2009 is equal to the annualized
income over the second half of 2008, also
adjusted for mergers. The first scenario
would result in an industry pre-tax, preassessment loss of $7.5 billion. The second
scenario would result in an industry pre-tax,
pre-assessment loss of $88.2 billion.
The financial data used in this analysis are
the most recent available as of December 31,
2008. However, since each bank’s risk-based
assessment rate for the fourth quarter has not
yet been finalized, each institution’s rate
under the rate schedule adopted in the final
rule is based on data as of September 30,
2008.1 The projected use of one-time credits
authorized under the Reform Act is taken
into consideration in determining the
effective assessment for an institution.
1 For purposes of this analysis, the assessment
base (like income) is not assumed to increase, but
is assumed to remain at December 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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Equation 4
Min = a0 + a1 * 1.601
Equation 5
Min + 4 = a0 + a1 * 2.389
Solving both equations simultaneously
results in:
Equation 6
4 ∗1.601
= Min − 8.127
( 2.389 − 1.601)
I. Introduction
This analysis estimates the effect in 2009
of deposit insurance assessments on the
equity capital and profitability of all insured
institutions, based on the assessment rates
adopted in the final rule. Current economic,
financial market, and banking industry
conditions lend considerable uncertainty to
Equation 3
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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
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.2
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
2 The analysis does not incorporate any tax effects
from an operating loss carry forward or carry back.
E:\FR\FM\04MRR2.SGM
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ER04MR09.020</MATH>
*
• 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:
ER04MR09.019</MATH>
By order of the Board of Directors.
Dated at Washington, DC, this 27th day of
February, 2009.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
9561
9562
Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations
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
rate (that is, dividends as a fraction of net
income) unchanged from the weighted
average rate reported over the four quarters
ending December 31, 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 December 31, 2008 was $1.3 trillion.3
Based on the assumptions for earnings and
assessments described above, year-end 2009
equity capital is projected to equal between
$1.215 trillion and $1.267 trillion. In the
absence of an assessment, total equity would
be an estimated $6 billion higher.
On an industry weighted average basis,
projected total assessments in 2009 would
result in capital that is between 0.44 percent
and 0.47 percent less than in the absence of
assessments. The analysis indicates that
assessments would cause 8 to 12 institutions
whose equity-to-assets ratio would have
exceeded 4 percent in the absence of
assessments to fall below that percentage and
6 to 9 institutions to have below 2 percent
equity-to-assets that otherwise would not
have.
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. In order to facilitate a
comparison of the impact of assessments
under the two scenarios for earnings,
institutions were assigned to one of three
groups: those who were profitable under both
earnings scenarios, those who were
unprofitable under both earnings scenarios,
and those who were profitable in one
scenario but unprofitable in the other.
Table A.1 shows that approximately 55
percent to 59 percent of profitable
institutions are projected to owe assessments
that are less than 10 percent of income. Table
A.2 shows that profitable institutions facing
an assessment of under 10 percent of income
hold between 43 and 80 percent of all
profitable institution assets, depending on
the income scenario. The overall weighted
average reduction in income for profitable
institutions is between 5.8 percent and 7.7
percent.
TABLE A.1—ASSESSMENTS AS A PERCENT OF INCOME *
[Numbers of profitable institutions]
2009 income based on:
Assessments as percent of
income
Annualized results for 2nd half of
2008
Results for all of 2008
Number of
institutions
Percent of
institutions
Number of
institutions
Percent of
institutions
0.0–5.0 .............................................................................................
5.0–10.0 ...........................................................................................
10.0–20.0 .........................................................................................
20.0–40.0 .........................................................................................
40.0–100.0 .......................................................................................
>100.0 ..............................................................................................
1,087
2,305
1,493
534
200
75
19
40
26
9
4
1
1,029
2,108
1,441
629
316
171
18
37
25
11
6
3
Total ..........................................................................................
5,694
100
5,694
100
TABLE A.2—ASSESSMENTS AS A PERCENT OF INCOME *
[Assets of profitable institutions]
[$ in billions]
2009 income based on:
Assessments as percent of
income
Annualized results for 2nd half of
2008
Results for all of 2008
Assets of
institutions
Percent of assets
Assets of
institutions
Percent of assets
0.0–5.0 .............................................................................................
5.0–10.0 ...........................................................................................
10.0–20.0 .........................................................................................
20.0–40.0 .........................................................................................
40.0–100.0 .......................................................................................
> 100.0 .............................................................................................
1,783
3,303
936
223
45
65
28
52
15
4
1
1
1,479
1,295
2,297
886
288
110
23
20
36
14
5
2
Total ..........................................................................................
6,354
100
6,354
100
Notes:
(1) Income is defined as income before taxes, extraordinary items, and deposit insurance assessments. Assessments are adjusted for the use
of one-time credits.
(2) Profitable institutions are defined as those having positive merger-adjusted income (as defined above) for all of 2008, the second half of
2008, and, by assumption, in 2009.
(3) 10 insured branches of foreign banks and 59 institutions having less than 4 quarters of reported earnings were excluded from this analysis.
3 This excludes equity for those mentioned in the
note to Tables A.1 and A.2.
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Tables A.3 and A.4 provide the same
analysis for institutions that were
unprofitable under both scenarios. Note that
assessments will have a smaller percentage
impact on the losses of unprofitable
institutions as losses rise, so that such
institutions are, in percentage terms, less
adversely affected under the scenario based
on the results for the second half of 2008.
Table A.3 shows that approximately 52
percent to 70 percent of unprofitable
institutions are projected to owe assessments
9563
that are less than 10 percent of losses. Table
A.4 shows the corresponding asset
distribution. The overall weighted average
increase in losses for unprofitable
institutions is between 2.6 and 4.6 percent.
TABLE A.3—ASSESSMENTS AS A PERCENT OF LOSSES *
[Numbers of unprofitable institutions]
2009 income based on:
Annualized results for 2nd half of
2008
Results for all of 2008
Assessments as percent of losses
Number of
institutions
Percent of
institutions
Number of
institutions
Percent of
institutions
0.0–5.0 .............................................................................................
5.0–10.0 ...........................................................................................
10.0–20.0 .........................................................................................
20.0–40.0 .........................................................................................
40.0–100.0 .......................................................................................
> 100.0 .............................................................................................
523
411
401
243
147
93
29
23
22
13
8
5
801
479
312
111
76
39
44
26
17
6
4
2
Total ..........................................................................................
1,818
100
1,818
100
TABLE A.4—ASSESSMENTS AS A PERCENT OF LOSSES *
[Assets of unprofitable institutions]
[$ in billions]
2009 income based on:
Assessments as percent of
income
Annualized results for 2nd half of
2008
Results for all of 2008
Assets of
institutions
Percent of assets
Assets of
institutions
Percent of assets
0.0–5.0 .............................................................................................
5.0–10.0 ...........................................................................................
10.0–20.0 .........................................................................................
20.0–40.0 .........................................................................................
40.0–100.0 .......................................................................................
> 100.0 .............................................................................................
2,235
1,316
626
372
50
100
48
28
13
8
1
2
3,181
1,350
115
32
14
6
68
29
2
1
0
0
Total ..........................................................................................
4,698
100
4,698
100
Notes:
(1) Income is defined as income before taxes, extraordinary items, and deposit insurance assessments. Assessments are adjusted for the use
of one-time credits.
(2) Profitable institutions are defined as those having positive merger-adjusted income (as defined above) for all of 2008, the second half of
2008, and, by assumption, in 2009.
(3) 10 insured branches of foreign banks and 59 institutions having less than 4 quarters of reported earnings were excluded from this analysis.
In addition to those institutions that
remained either profitable or unprofitable in
both earnings scenarios, there were 734
institutions with $2.79 trillion in assets that
changed classification from one scenario to
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the other. Of these 734 institutions, 634 were
profitable when 2009 income equals the
results for all 2008 but unprofitable when
2009 income equals the annualized results
for the second half of 2008, while 100 were
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unprofitable under the former scenario and
profitable under the latter scenario.
[FR Doc. E9–4584 Filed 2–27–09; 4:15 pm]
BILLING CODE 6714–01–P
E:\FR\FM\04MRR2.SGM
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]]>Agencies
[Federal Register Volume 74, Number 41 (Wednesday, March 4, 2009)]
[Rules and Regulations]
[Pages 9525-9563]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-4584]
-----------------------------------------------------------------------
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
RIN 3064-AD35
Assessments
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The FDIC is amending our regulation 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: Effective Date: April 1, 2009.
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 reform 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.
---------------------------------------------------------------------------
[[Page 9526]]
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 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.\6\
---------------------------------------------------------------------------
\6\ 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.'' \7\ 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.'' \8\
---------------------------------------------------------------------------
\7\ Section 7(b)(1)(D) of the Federal Deposit Insurance Act (12
U.S.C. 1817(b)(1)(D)).
\8\ 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, pursuant to the requirements of the Reform
Act, the FDIC published in the Federal Register a final rule on the
risk-based assessment system (the 2006 assessments rule).\9\ The rule
became effective on January 1, 2007.
---------------------------------------------------------------------------
\9\ 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 regulator and
other information the FDIC deems relevant.\10\ 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.\11\ 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.)
---------------------------------------------------------------------------
\10\ 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)).
\11\ The capital groups and the supervisory groups have been in
effect since 1993. In practice, the supervisory group evaluations
are 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, institutions with a CAMELS rating of 1 or 2
are assigned to supervisory group A, those with a CAMELS rating of 3
to group B, and those with a CAMELS rating of 4 or 5 to group C.
Table 1--Determination of Risk Category
----------------------------------------------------------------------------------------------------------------
Supervisory group
Capital category --------------------------------------------------
A B C
----------------------------------------------------------------------------------------------------------------
Well Capitalized............................................. I
III
Adequately Capitalized....................................... II
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 without further notice-and-comment rulemaking, provided that
no single change from one quarter to the next can exceed three basis
points.\12\ Base assessment rates within Risk Category I varied from 2
to 4 basis points, as set forth in Table 2 below.
---------------------------------------------------------------------------
\12\ The Board cannot adjust rates more than 2 basis points
below the base rate schedule because rates cannot be less than zero.
[[Page 9527]]
Table 2--2007-08 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--2007-08 Actual 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.
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
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.\13\
---------------------------------------------------------------------------
\13\ Based upon September 30, 2008 data, approximately 26
percent of small Risk Category I institutions (other than
institutions less than 5 years old) were charged the minimum rate
and approximately 23 percent were charged the maximum rate.
---------------------------------------------------------------------------
The supervisory and debt ratings method (or debt ratings 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).
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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
[[Page 9528]]
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.\15\
---------------------------------------------------------------------------
\15\ Based upon September 30, 2008, data, and ignoring the large
bank adjustment (described below), approximately 41 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.
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Assessment rates for insured branches of foreign banks in Risk
Category I are determined using ROCA components.\16\
---------------------------------------------------------------------------
\16\ 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.
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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).\17\
---------------------------------------------------------------------------
\17\ 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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With certain exceptions, beginning in 2010, the 2006 assessments
rule charges new institutions in Risk Category I (those established for
less than five years), 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 rule making in November 2006, the FDIC also
set the DRR at 1.25 percent, effective January 1, 2007.\18\ 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. 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 then existing assessment rate schedule.
---------------------------------------------------------------------------
\18\ In November 2007 and October 2008, the Board again voted to
maintain the DRR at 1.25 percent for 2008 and 2009, respectively. 71
FR 69325 (Nov. 30, 2006) and 72 FR 65576 (Nov. 21, 2007).
---------------------------------------------------------------------------
Recent failures of FDIC-insured institutions caused the reserve
ratio of the Deposit Insurance Fund (DIF) to decline from 1.19 percent
as of March 30, 2008, to 1.01 percent as of June 30, 0.76 percent as of
September 30, and 0.40 percent (preliminary) as of December 31. Twenty-
five institutions failed in 2008, and the FDIC expects a substantially
higher rate of institution failures in the next few years, leading to a
further decline in the reserve ratio. Already, 14 institutions have
failed in 2009. Because the fund reserve ratio fell below 1.15 percent
as of June 30, 2008, and was expected to remain below 1.15 percent, the
Reform Act required the FDIC to establish and implement a Restoration
Plan to restore the reserve ratio to at least 1.15 percent within five
years.
The Proposed Rule
On October 7, 2008, the FDIC established a Restoration Plan for the
DIF.\19\ In the FDIC's view, restoring the reserve ratio to at least
1.15 percent within five years required an increase in assessment
rates. Since rates were already three basis points above the base rate
schedule, a new rulemaking was required. Consequently, on October 7,
2008, the FDIC Board of Directors also adopted a notice of proposed
rulemaking with request for comments on revisions to the FDIC's
assessment regulations (the proposed rule or NPR).\20\ The NPR proposed
that, effective January 1, 2009, assessment rates would increase
uniformly by seven basis points for the first quarter 2009 assessment
period. Effective April 1, 2009, the NPR proposed to alter the way in
which the FDIC's risk-based assessment system differentiates for risk
and set new deposit insurance assessment rates. Also effective on April
1, 2009, the NPR proposed to make technical and other changes to the
rules governing the risk-based assessment system. The proposed rule was
published concurrently with the Restoration Plan on October 16, 2008,
with a comment period scheduled to end on November 17, 2008.\21\
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\19\ 73 FR 61,598 (Oct. 16, 2008).
\20\ 12 CFR 327.
\21\ See 73 FR 61,560 (Oct. 16, 2008).
---------------------------------------------------------------------------
On November 7, 2008, the FDIC Board approved an extension of the
comment period until December 17, 2008, on the parts of the proposed
rulemaking that would become effective on April 1, 2009. The comment
period for the proposed 7 basis point rate increase for the first
quarter of 2009, with its separate proposed effective date of January
1, 2009, was not extended and expired on November 17, 2008. The final
rule on the rate increase for the first quarter of 2009 was approved as
proposed by the FDIC Board on December 16, 2008.\22\
---------------------------------------------------------------------------
\22\ 73 FR 78,155 (Dec. 22, 2008).
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The FDIC received almost 5,000 comments on the parts of the
proposed rule that would become effective on April 1, 2009, including
proposed changes in how the FDIC's risk-based assessment system
differentiates for risk and corresponding new assessment rates. This
final rule implements the remaining changes that the FDIC proposed in
the October notice of proposed rulemaking, with some alteration.
II. Overview of the Final Rule
In this rulemaking, the FDIC seeks 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 rulemaking will make the assessment system more
sensitive to risk. The rulemaking should also make the risk-based
assessment system fairer, by limiting the subsidization of riskier
institutions by safer ones. The assessment rate schedule established in
this rule should provide sufficient revenue to cover losses resulting
from a large volume of institution failures and raise the insurance
fund's reserve ratio over time. However, as explained below, the FDIC
is simultaneously issuing an interim rule to impose a 20 basis point
special assessment (and possible additional special assessments of up
to 10 basis points thereafter). The final rule, which differs in
several ways from the proposed rule, is set out in detail in ensuing
sections, but is briefly summarized here. The final rule will take
effect April 1, 2009, and will apply to assessments for the second
quarter of 2009 (which will be collected in September 2009) and
thereafter.
[[Page 9529]]
Risk Category I
The final rule introduces a new financial ratio into the financial
ratios method. This new ratio will capture certain brokered deposits
(in excess of 10 percent of domestic deposits) that are used to fund
rapid asset growth. The new financial ratio in the final rule differs
from the one proposed in the NPR in two ways. It excludes deposits that
an insured depository institution receives through a deposit placement
network on a reciprocal basis, such that: (1) For any deposit received,
the institution (as agent for depositors) places the same amount with
other insured depository institutions through the network; and (2) each
member of the network sets the interest rate to be paid on the entire
amount of funds it places with other network members (henceforth
referred to as reciprocal deposits). It also raises the asset growth
threshold from that proposed in the NPR. The final rule also updates
the uniform amount and the pricing multipliers for the weighted average
CAMELS component ratings and financial ratios.
The final rule provides that the assessment rate for a large
institution with a long-term debt issuer rating will be determined
using a combination of the institution's weighted average CAMELS
component ratings, its long-term debt issuer ratings (converted to
numbers and averaged) and the financial ratios method assessment rate,
each equally weighted. The new method will be known as the large bank
method.
Under the final rule, the financial ratios method or the large bank
method, whichever is applicable, will determine a Risk Category I
institution's initial base assessment rate. The final rule will broaden
the spread between minimum and maximum initial base assessment rates in
Risk Category I from 2 basis points to an initial range of 4 basis
points and adjust the percentage of institutions subject to these
initial minimum and maximum rates.
Adjustments
Under the final rule, an institution's total base assessment rate
can vary from the initial base rate as the result of possible
adjustments. The final rule also increases the maximum possible Risk
Category I large bank adjustment from one-half basis point to one basis
point. Any such adjustment up or down will be made before any other
adjustment and will be subject to certain limits, which are described
in detail below.
Under the final rule, an institution's unsecured debt adjustment--
the institution's ratio of long-term unsecured debt (and, for small
institutions, certain amounts of its Tier 1 capital) to domestic
deposits--will lower the institution's base assessment rate.\23\ Any
decrease in base assessment rates will be limited to five basis points.
The unsecured debt adjustment differs from the adjustment proposed in
the NPR in several ways. The adjustment is larger for a given amount of
unsecured debt (and, for small institutions, Tier 1 capital) and the
maximum adjustment of five basis points is larger than the proposed
maximum of two basis points in the NPR. The adjustment excludes senior
unsecured debt that the FDIC has guaranteed under its Temporary
Liquidity Guarantee Program. Finally, the adjustment lowers the
threshold for inclusion of a small institution's Tier 1 capital.
---------------------------------------------------------------------------
\23\ Long-term unsecured debt includes senior unsecured and
subordinated debt.
---------------------------------------------------------------------------
Also, under the final rule, an institution's secured liability
adjustment--which is based on the institution's ratio of secured
liabilities to domestic deposits--will raise its base assessment rate.
An institution's ratio of secured liabilities to domestic deposits (if
greater than 25 percent), will increase its assessment rate, but the
resulting base assessment rate after any such increase can be no more
than 50 percent greater than it was before the adjustment. The secured
liability adjustment will be made after any large bank adjustment or
unsecured debt adjustment. This adjustment also differs from the
adjustment proposed in the NPR in that an institution's ratio of
secured liabilities to domestic deposits must be greater than 25
percent for an adjustment to exist, rather than 15 percent as proposed
in the NPR.
Institutions in all risk categories will be subject to the
unsecured debt adjustment and secured liability adjustment. In
addition, the final rule makes a final adjustment for brokered deposits
(the brokered deposit adjustment) for institutions in Risk Category II,
III or IV. An institution's ratio of brokered deposits to domestic
deposits (if greater than 10 percent) will increase its assessment
rate, but any increase will be limited to no more than 10 basis points.
The brokered deposit adjustment is as proposed in the NPR and will
include reciprocal deposits.
Insured Branches of Foreign Banks
The final rule makes 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 will be subject to any large bank adjustment, but not
to the unsecured debt adjustment or secured liability adjustment. In
fact, no insured branch of a foreign bank in any risk category will be
subject to the unsecured debt adjustment, secured liability adjustment
or brokered deposit adjustment.
New Institutions
The final rule makes conforming changes in the treatment of new
insured depository institutions.\24\ For assessment periods beginning
on or after January 1, 2010, any new institutions in Risk Category I
will be assessed at the maximum initial base assessment rate applicable
to Risk Category I institutions.
---------------------------------------------------------------------------
\24\ As discussed below, subject to exceptions, the final rule
defines a new insured depository institution as a bank or thirft
that has not been federally insured for at least five years as of
the last day of any quarter for which it is being assessed.
---------------------------------------------------------------------------
For assessments for the last three quarters of 2009, until a Risk
Category I new institution received CAMELS component ratings, it will
have an initial base assessment rate that is 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 final rule adopted in 2006. For these three quarters, all
other new institutions in Risk Category I will be treated as
established institutions, except as provided in the next paragraph.
Either before or after January 1, 2010: no new institution,
regardless of risk category, will be subject to the unsecured debt
adjustment; any new institution, regardless of risk category, will be
subject to the secured liability adjustment; and a new institution in
Risk Categories II, III or IV will be subject to the brokered deposit
adjustment. After January 1, 2010, no new institution in Risk Category
I will be subject to the large bank adjustment.
Assessment Rates
As explained below, estimated losses from projected institution
failures have risen considerably since the NPR was published last fall.
Consequently, initial base assessment rates as of April 1, 2009, which
are set forth in Table 4 below, are slightly higher than proposed in
the NPR.
[[Page 9530]]
Table 4--Initial Base Assessment Rates as of April 1, 2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk category
------------------------------------------------------------------------------------
I*
---------------------------------- II III IV
Minimum Maximum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)..................................... 12 16 22 32 45
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Initial base rates that were not the minimum or maximum rate will vary between these rates.
After applying all possible adjustments, minimum and maximum total
base assessment rates for each risk category will be as set out in
Table 5 below.
Table 5--Total Base Assessment Rates
----------------------------------------------------------------------------------------------------------------
Risk category Risk category Risk category Risk category
I II III IV
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate.................... 12-16 22 32 45
Unsecured debt adjustment....................... -5-0 -5-0 -5-0 -5-0
Secured liability adjustment.................... 0-8 0-11 0-16 0-22.5
Brokered deposit adjustment..................... .............. 0-10 0-10 0-10
---------------------------------------------------------------
Total base assessment rate.................. 7-24.0 17-43.0 27-58.0 40-77.5
----------------------------------------------------------------------------------------------------------------
* 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.
These rates and other revisions to the assessment rules take effect
for the quarter beginning April 1, 2009, and will be reflected in the
fund balance as of June 30, 2009, and assessments due September 30,
2009 and thereafter.
Because the outlook for losses to the insurance fund has
deteriorated significantly since publication of the NPR last fall, the
FDIC is simultaneously issuing an interim rule that provides for a 20
basis point special assessment on June 30, 2009. The interim rule also
provides that the Board may impose additional special assessments of up
to 10 basis points thereafter if the reserve ratio of the DIF is
estimated to fall to a level that that the Board believes would
adversely affect public confidence or to a level which shall be close
to zero or negative at the end of a calendar quarter.
The final rule continues to allow the FDIC Board to adopt actual
rates that are higher or lower than total base assessment rates without
the necessity of further notice and comment rulemaking, provided that:
(1) the Board cannot increase or decrease total 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 cannot
be more than three basis points higher or lower than the total base
rates without further notice-and-comment rulemaking.
Technical and Other Changes
The final rule also makes technical changes and one minor non-
technical change to the assessments rules. These changes are detailed
below.
III. Risk Category I: Financial Ratios Method
Brokered Deposits and Asset Growth
The final rule adds a new financial measure to the financial ratios
method. This new financial measure, the adjusted brokered deposit
ratio, will measure the extent to which brokered deposits are funding
rapid asset growth. The adjusted brokered deposit ratio will affect
only those established Risk Category I institutions whose total gross
assets are more than 40 percent greater than they were four years
previously, after adjusting for mergers and acquisitions, rather than
20 percent greater as proposed in the NPR, and whose brokered deposits
(less reciprocal deposits) make up more than 10 percent of domestic
deposits.25 26 27 Generally speaking, the greater an
institution's asset growth and the greater its percentage of brokered
deposits, the greater will be the increase in its initial base
assessment rate. Small changes in asset growth rate or brokered
deposits as a percentage of domestic deposits will lead to small
changes in assessment rates.
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\25\ As discussed below, subject to exceptions, the final rule
defines an established depository institution as 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.
\26\ 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.
\27\ References hereafter to ``asset growth'' or ``growth in
assets'' refer to growth in gross assets.
---------------------------------------------------------------------------
If an institution's ratio of brokered deposits to domestic deposits
is 10 percent or less or if the institution's asset growth over the
previous four years is less than 40 percent, the adjusted brokered
deposit ratio will be zero and will have no effect on the institution's
assessment rate. If an institution's ratio of brokered deposits to
domestic deposits exceeds 10 percent and its asset growth over the
previous four years is more than 70 percent (rather than 40 percent as
proposed in the NPR), the adjusted brokered deposit ratio will 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 exceeds 10 percent but its asset growth
over the previous four years is between 40 percent and 70 percent,
overall asset growth rates will be converted into an asset growth rate
factor ranging between 0 and 1, so that the adjusted brokered deposit
ratio will equal a gradually increasing fraction of the ratio of
brokered deposits to domestic deposits (minus the 10 percent
threshold). The asset growth rate factor is derived by multiplying by
3\1/3\ an
[[Page 9531]]
amount equal to the overall rate of growth minus 40 percent and
expressing the result as a decimal fraction rather than as a percentage
(so that, for example, 3\1/3\ times 10 percent equals 0.33 * * *).\28\
The adjusted brokered deposit ratio will never be less than zero.
Appendix A contains a detailed mathematical definition of the ratio.
Table 6 gives examples of how the adjusted brokered deposit ratio would
be determined.
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\28\ 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 6--Adjusted Brokered Deposit Ratio
----------------------------------------------------------------------------------------------------------------
A B C D E F
----------------------------------------------------------------------------------------------------------------
Ratio of
brokered
deposits to Adjusted
Ratio of domestic Cumulative brokered
brokered deposits minus asset growth Asset growth deposit ratio
Example deposits to 10 percent rate over four rate factor (column C
domestic threshold years times column
deposits (column B E)
minus 10
percent)
----------------------------------------------------------------------------------------------------------------
1............................... 5.0% 0.0% 5.0% .............. 0.0%
2............................... 15.0% 5.0% 5.0% .............. 0.0%
3............................... 5.0% 0.0% 35.0% .............. 0.0%
4............................... 35.0% 25.0% 55.0% 0.500 12.5%
5............................... 25.0% 15.0% 80.0% 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 40 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 55 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 3\1/3\ (55 percent--40
percent, with the result expressed as a decimal fraction 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 70 percent
greater than they were four years previously (Column D). Therefore, its
adjusted brokered deposit ratio is equal to its ratio of brokered
deposits to domestic deposits of 25 percent minus the 10 percent
threshold (Column F).
The FDIC is adding this new risk measure for a couple of reasons. A
number of costly institution failures, including some recent failures,
involved rapid asset growth funded 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 adjusted brokered deposit ratio generally will include brokered
deposits as defined in Section 29 of the Federal Deposit Insurance Act
(12 U.S.C. 1831f), and as implemented in 12 CFR 337.6, which is the
definition used in banks' quarterly Reports of Condition and Income
(Call Reports) and thrifts' quarterly Thrift Financial Reports (TFRs).
However, for assessment purposes in Risk Category I, the ratio will not
include reciprocal deposits (that is, deposits that an insured
depository institution receives through a deposit placement network on
a reciprocal basis, such that: (1) for any deposit received, the
institution (as agent for depositors) places the same amount with other
insured depository institutions through the network; and (2) each
member of the network sets the interest rate to be paid on the entire
amount of funds it places with other network members. All other
brokered deposits will 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.
Based on data as of September 30, 2008, approximately 8.7 percent
of institutions in Risk Category I would have exceeded both the 10
percent brokered deposit threshold and 40 percent minimum 4-year
cumulative asset growth threshold, so that their adjusted brokered
deposit ratio would be greater than zero. A smaller percentage of
institutions would actually have been charged a higher rate solely due
to the adjusted brokered deposit ratio because the minimum or maximum
initial rates applicable to Risk Category I would continue to apply to
some institutions both before and after accounting for the effect of
this ratio. Only 1.1 percent of Risk Category I institutions would have
had an initial base assessment rate more than 1 basis point higher as a
result of the adjusted brokered deposit ratio.\29\
---------------------------------------------------------------------------
\29\ These estimates do not exclude deposits that an institution
receives through a deposit placement network on a reciprocal basis
and, thus, might overstate the effects on assessment rates for some
institutions.
---------------------------------------------------------------------------
Comments
The FDIC received many comments arguing that brokered deposits
should not increase assessment rates for Risk Category I institutions
and that the brokered deposit provisions in the NPR do not account for
the use to which institutions put these deposits. The FDIC is not
persuaded by the arguments. Recent data show that institutions with a
combination of brokered deposit reliance and robust asset growth tend
to
[[Page 9532]]
have a greater concentration in higher risk assets. In addition, there
is a statistically significant correlation between the adjusted
brokered deposit ratio, on the one hand, and the probability that an
institution will be downgraded to a CAMELS rating of 3, 4, or 5 within
a year, on the other, independent of the other measures of asset
quality contained in the financial ratios method.
The FDIC received several comments, including comments from several
industry trade groups, arguing that institutions should be able to have
a ratio of brokered deposits to domestic deposits greater than 10
percent without triggering the adjusted brokered deposit ratio and that
the minimum asset growth rate required to trigger the adjusted brokered
deposit ratio should be greater than 20 percent. The comments disputed
the characterization of 20 percent cumulative asset growth over four
years as ``rapid.'' One trade association noted that the proposed
minimum growth rate (20 percent) was lower than the nominal GDP growth
between third quarter 2004 and third quarter 2007.
The FDIC is persuaded in part. The final rule raises the minimum 4-
year asset growth rate required to trigger the adjusted brokered
deposit ratio from 20 percent to 40 percent. The final rule also
increases from 40 percent to 70 percent the asset growth rate required
to make an institution's adjusted brokered deposit ratio equal to its
institution's ratio of brokered deposits to domestic deposits less the
10 percent threshold. Additional analysis has revealed that these
growth rates are as predictive of downgrade probabilities as those
originally proposed and are more consistent with the intent of the
ratio, which was to capture only those institutions with rapid asset
growth.
However, in the FDIC's view, a ratio of brokered deposits to
domestic deposits greater than 10 percent is a significant amount of
brokered deposits. Still, for institutions in Risk Category I, brokered
deposits alone will not trigger higher rates, but must be combined with
significant asset growth.
The FDIC received over 3,300 comment letters arguing that certain
reciprocal deposits should not be included in the adjusted brokered
deposit ratio.\30\ Most of the comments were form letters. Commenters
argued that these reciprocal deposits are a stable source of funding.
According to the comments, most customers (83 percent) are not seeking
the highest rate of interest available and choose to keep their deposit
at the same institution when it matures. The commenters also argued
that these deposits are local deposits and not out-of-market funds and
stated that 80 percent of these deposits are placed with an insured
institution within 25 miles of a branch location of the relationship
bank. The commenters further argued that the interest rate on these
deposits reflects that of local markets since the insured institution
that originates the deposit sets the interest rate, rather than a
third-party broker. Commenters also argued that these deposits may have
franchise value in the event of a bank failure.
---------------------------------------------------------------------------
\30\ When an institution receives a deposit through a network on
a reciprocal basis, it must place the same amount (but owed to a
different depositor) with another institution through the network.
Many of the comment letters also argued that these reciprocal
deposits should not be included in the brokered deposit adjustment
applicable to institutions in Risk Categories II, III and IV. The
brokered deposit adjustment applicable to these risk categories is
discussed below.
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The FDIC is persuaded that reciprocal deposits like those described
in the comment letters should not be included in the adjusted brokered
deposit ratio applicable to institutions in Risk Category I.\31\
(However, as discussed below, reciprocal deposits will be included in
the brokered deposits adjustment applicable to institutions in Risk
Categories II, III and IV.) The FDIC recognizes that reciprocal
deposits may be a more stable source of funding for healthy banks than
other types of brokered deposits and that they may not be as readily
used to fund rapid asset growth.
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\31\ Excluding these deposits from the Call Report and TFR will
require changes to these forms. The FDIC anticipates that the
necessary changes will be made beginning with the June 30, 2009
reports of condition.
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The FDIC also received several comments arguing that brokered
deposits that consist of balances swept into an insured institution by
a nondepository institution, such as balances swept into an insured
institution from a brokerage account at a broker-dealer, should be
excluded from the adjusted brokered deposit ratio.\32\ Commenters
argued that these sweep accounts are stable, relationship-based
accounts. Commenters also stated that the aggregate flows in and out of
the sweep accounts tend to offset one another and are thus predictable.
Some commenters differentiated between sweeps from affiliated brokerage
firms and those from non-affiliated firms. These commenters argued that
broker-dealer affiliated sweeps are not rate-sensitive accounts and are
not designed to compete with the high rates of interest paid by other
insured institutions and, therefore, do not raise the same concerns as
other brokered deposits about the high cost of funding of risky banks.
The commenters maintained that these accounts are typically used for
idle investment funds or as a safe investment and are designed to
better manage excess cash. Some commenters suggested that bankers would
be willing to separately report sweep balances from an affiliated
brokerage.
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\32\ Many of these comment letters also argued that these swept
deposits should not be included in the brokered deposit adjustment
applicable to institutions in Risk Categories II, III and IV. The
brokered deposit adjustment for these risk categories is discussed
below.
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Some commenters supported excluding brokered deposits swept from
unaffiliated brokerages through a sweep program, since the deposits
have the characteristics of core deposits and are not driven by yield.
According to the commenters, there is no price competition; deposits
from unaffiliated brokerages are used for the convenience and safety of
the customer.
The FDIC is not persuaded by these arguments. In the FDIC's view,
deposits swept from broker-dealers can and have contributed to high
rates of insured depository institution asset growth and, thus, fall
squarely within the type of brokered deposits that the adjusted
brokered deposit ratio was meant to capture. In addition, as noted in
the NPR, many sweep programs can be structured so that swept balances
are not brokered deposits.
Pricing Multipliers, the Uniform Amount, and the Range of Rates
The final rule contains a recalculated uniform amount and
recalculated pricing multipliers for the weighted average CAMELS
component rating and financial ratios. The uniform amount and pricing
multipliers under the final rule adopted in 2006 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.\33\ These probabilities were then
converted to pricing multipliers for each risk measure. The new pricing
multipliers were derived using essentially the same statistical
techniques, but based upon data from the end of the years 1988 to
2006.\34\ The new pricing multipliers are set out in Table 7 below.
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\33\ 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.
\34\ 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. Data on downgrades to CAMELS
3, 4 or 5 is from the years 1989 to 2007.
[[Page 9533]]
Table 7--New Pricing Multipliers
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Pricing
Risk measures * multipliers **
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Tier 1 Leverage Ratio.................................. (0.056)
Loans Past Due 30-89 Days/Gross Assets................. 0.575
Nonperforming Assets/Gross Assets...................... 1.074
Net Loan Charge-Offs/Gross Assets...................... 1.210
Net Income before Taxes/Risk-Weighted Assets........... (0.764)
Adjusted brokered deposit ratio........................ 0.065
Weighted Average CAMELS Component Rating............... 1.095
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* 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) will continue to be multiplied by the corresponding
pricing multipliers. The sum of these products will be added to a new
uniform amount, 11.861.\35\ The new uniform amount is also derived from
the same statistical analysis.\36\ As under the final rule adopted in
2006, no initial base assessment rate within Risk Category I will 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 final rule sets the initial minimum
base assessment rate for Risk Category I at 12 basis points and the
maximum initial base assessment rate for Risk Category I at 16 basis
points.
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\35\ 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.
\36\ 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.\37\ These cutoff values will be used in future periods, which
could lead to different percentages of institutions being charged the
minimum and maximum rates.
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\37\ 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 system in place on June 30, 2008: (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.\38\
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\38\ For the assessment period ending September 30, 2008,
approximately 26 percent of small Risk Category I institutions
(other than institutions less than 5 years old) were charged the
minimum rate and approximately 23 percent were charged the maximum
rate.
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Table 8 gives initial base assessment rates for three institutions
with varying characteristics, given the new pricing multipliers above,
using initial base assessment rates for institutions in Risk Category I
of 12 basis points to 16 basis points.\39\
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\39\ These are the initial base rates for Risk Category I
proposed below.
\40\ Under the proposed rule, pricing multipliers, the uniform
amount, and financial ratios will continue to be rounded to three
digits after the decimal point. Resulting assessment rates will be
rounded to the nearest one-hundredth (1/100th) of a basis point.
Table 8--Initial Base Assessment Rates for Three In
