Assessment Rate Adjustment Guidelines for Large and Highly Complex Institutions, 57992-58003 [2011-23835]
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Federal Register / Vol. 76, No. 181 / Monday, September 19, 2011 / Notices
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updating by the employees and
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maintained in the databases), Bureau/
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RECORD ACCESS PROCEDURES:
Address inquiries to Public Safety and
Homeland Security Bureau (PSHSB),
Federal Communications Commission
(FCC), 445 12th Street, SW.,
Washington, DC 20554.
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CONTESTING RECORD PROCEDURES:
I. Dates
Address inquiries to Public Safety and
Homeland Security Bureau (PSHSB),
Federal Communications Commission
(FCC), 445 12th Street, SW.,
Washington, DC 20554.
These guidelines supersede the
assessment rate adjustment guidelines
published by the FDIC on May 15, 2007
(the 2007 Guidelines).1
RECORD SOURCE CATEGORIES:
II. Background
1. Emergency Contacts: The sources
for the information in this system
include FCC employees, Federal
Government contacts, State, Tribal,
Territorial, Local Government and
private sector contacts along with
institutions, organizations, and
individuals with crisis management and
emergency preparedness functions, etc.;
and
2. COOP Contacts: The sources for
information in this system include FCC
employees and contractors.
On February 7, 2011, the FDIC Board
amended its assessment regulations by,
among other things, adopting a new
methodology for determining
assessment rates for large and highly
complex institutions (the Amended
Assessment Regulations).2 The
Amended Assessment Regulations
eliminated risk categories and combined
CAMELS ratings and forward-looking
financial measures into one of two
scorecards, one for highly-complex
institutions and another for all other
large institutions.3 Each of the two
scorecards produces two scores—a
performance score and a loss severity
score—that are combined into a total
score.4
Tables 1 and 2 show the scorecards
for large and highly complex
institutions, respectively.
EXEMPTIONS CLAIMED FOR THE SYSTEM:
None.
Federal Communications Commission.
Marlene H. Dortch,
Secretary, Office of the Secretary, Office of
Managing Director.
[FR Doc. 2011–23929 Filed 9–16–11; 8:45 am]
BILLING CODE 6712–01–P
FEDERAL DEPOSIT INSURANCE
CORPORATION
Assessment Rate Adjustment
Guidelines for Large and Highly
Complex Institutions
Federal Deposit Insurance
Corporation (FDIC).
ACTION: Final guidelines.
AGENCY:
The FDIC is adopting
guidelines that it will use to determine
how adjustments may be made to an
institution’s total score when
calculating the deposit insurance
assessment rates of large and highly
complex insured institutions. Total
scores are determined according to the
Final Rule on Assessments and Large
Bank Pricing that was approved by the
FDIC Board on February 7, 2011 (76 FR
10672 (Feb. 25, 2011)).
FOR FURTHER INFORMATION CONTACT:
Patrick Mitchell, Acting Chief, Large
Bank Pricing Section, Division of
Insurance and Research, (202) 898–
3943; and Christopher Bellotto, Counsel,
Legal Division, (202) 898–3801, 550
17th Street, NW., Washington, DC
20429.
SUMMARY:
SUPPLEMENTARY INFORMATION:
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1 Assessment Rate Adjustment Guidelines for
Large Institutions and Insured Foreign Branches in
Risk Category I, 72 FR 27122 (May 14, 2007).
2 Assessments, Large Bank Pricing, 76 FR 10672
(Feb. 25, 2011) (codified at 12 CFR 327.9–10).
3 A large institution is defined as an insured
depository institution: (1) That had assets of $10
billion or more as of December 31, 2006 (unless, by
reporting assets of less than $10 billion for four
consecutive quarters since then, it has become a
small institution); or (2) that had assets of less than
$10 billion as of December 31, 2006, but has since
had $10 billion or more in total assets for at least
four consecutive quarters, whether or not the
institution is new. A ‘‘highly complex institution’’
is defined as: (1) An insured depository institution
(excluding a credit card bank) that has had $50
billion or more in total assets for at least four
consecutive quarters and that either is controlled by
a U.S. parent holding company that has had $500
billion or more in total assets for four consecutive
quarters, or is controlled by one or more
intermediate U.S. parent holding companies that
are controlled by a U.S. holding company that has
had $500 billion or more in assets for four
consecutive quarters, and (2) a processing bank or
trust company. A processing bank or trust company
is an insured depository institution whose last three
years’ non-lending interest income, fiduciary
revenues, and investment banking fees, combined,
exceed 50 percent of total revenues (and its last
three years fiduciary revenues are non-zero), whose
total fiduciary assets total $500 billion or more and
whose total assets for at least four consecutive
quarters have been $10 billion or more.
4 In the context of large institution insurance
pricing, the performance score measures a large
institution’s financial performance and its ability to
withstand stress. The loss severity score refers to
the relative loss that an institution poses to the
Deposit Insurance Fund in the event of a failure.
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TABLE 1—SCORECARD FOR LARGE INSTITUTIONS
Measure weights
(percent)
Scorecard measures and components
Component weights
(percent)
P
Performance Score
P.1
P.2
Weighted Average CAMELS Rating .......................................................................................
Ability to Withstand Asset-Related Stress ..............................................................................
Tier 1 Leverage Ratio ............................................................................................................
Concentration Measure ............................................................................................................
Core Earnings/Average Quarter-End Total Assets* .................................................................
Credit Quality Measure .............................................................................................................
100
....................................
10
35
20
35
30
50
....................................
....................................
....................................
....................................
P.3
Ability to Withstand Funding-Related Stress
Core Deposits/Total Liabilities ..................................................................................................
Balance Sheet Liquidity Ratio ..................................................................................................
....................................
60
40
20
....................................
....................................
....................................
100
L
Loss Severity Score
L.1
Loss Severity Measure ...........................................................................................................
* Average of five quarter-end total assets (most recent and four prior quarters).
TABLE 2—SCORECARD FOR HIGHLY COMPLEX INSTITUTIONS
Measure weights
(percent)
Measures and components
P
Component weights
(percent)
Performance Score
P.1
Weighted Average CAMELS Rating .......................................................................................
100
30
P.2 Ability to Withstand Asset-Related Stress ...............................................................................
Tier 1 Leverage Ratio ............................................................................................................
Concentration Measure ............................................................................................................
Core Earnings/Average Quarter-End Total Assets ..................................................................
Credit Quality Measure and Market Risk Measure ..................................................................
....................................
10
35
20
35
50
....................................
....................................
....................................
P.3
....................................
50
30
20
20
....................................
....................................
....................................
....................................
100
L
Ability to Withstand Funding-Related Stress ..........................................................................
Core Deposits/Total Liabilities ..................................................................................................
Balance Sheet Liquidity Ratio ..................................................................................................
Average Short-Term Funding/Average Total Assets ...............................................................
Loss Severity Score
L.1 Loss Severity ............................................................................................................................
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* Average of five quarter-end total assets (most recent and four prior quarters).
In most cases, the total score
produced by an institution’s scorecard
should correctly reflect the institution’s
overall risk relative to other large
institutions; however, the FDIC believes
it is important that it have the ability to
consider idiosyncratic or other relevant
risk factors not reflected in the
scorecards. The Amended Assessment
Regulations, therefore, allow the FDIC to
make a limited adjustment to an
institution’s total score up or down by
no more than 15 points (the large bank
adjustment). The resulting score is then
converted to an initial base assessment
rate, which, after application of other
possible adjustments, results in the
institution’s total assessment rate.5 The
total assessment rate is multiplied by
5 Adjustments to the initial base assessment rate
may include an unsecured debt adjustment,
depository institution debt adjustment, and a
brokered deposit adjustment.
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the institution’s assessment base to
calculate the amount of its assessment
obligation. Adjustments are made to
ensure that the total score produced by
an institution’s scorecard appropriately
reflects the institution’s overall risk
relative to other large institutions.
The FDIC promulgated regulations
allowing for the adjustment of large
institutions’ quarterly assessment rates
in 2006.6 The FDIC set forth the
procedures for these adjustments in
guidelines that were published in 2007
(2007 Guidelines). The 2007 Guidelines
were designed to ensure that the
adjustment process was fair and
transparent and that any decision to
make an adjustment was well
supported. The FDIC has exercised its
adjustment authority when warranted
since that time.
6 71
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FR 69282 (Nov. 30, 2006).
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Following adoption of the Amended
Assessment Regulations in February
2011, the FDIC proposed new guidelines
that reflect the methodology it now uses
to determine assessment rates for large
and highly complex institutions. The
FDIC sought comment on all aspects of
the proposed guidelines.7 The FDIC
received eight comments related to the
guidelines, which are described below
in the relevant portion of the guidelines.
7 76 FR 21256 (April 15, 2011). The Amended
Assessment Regulations provided that the FDIC
would not make any new large bank adjustments
until revised guidelines were published for
comment and approved by the FDIC’s Board of
Directors. Although the FDIC chose in this instance
to publish the proposed guidelines and solicit
comment, notice and comment are not required and
need not be employed to make future changes to the
guidelines.
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In addition to comments on the
Guidelines, the FDIC also received a
number of comments related to the
scorecard methodology and measures
used in the scorecard. The FDIC,
however, previously provided two
opportunities to comment on the
scorecard methodology and all measures
through the publication of two notices
of proposed rulemaking on the large
bank pricing system.8 The FDIC
received a large number of comments on
these issues in response to the two
notices of proposed rulemaking and
carefully considered them before
finalizing the Amended Assessment
Regulations in February 2011. Since the
Amended Assessment Regulations are
final, and the FDIC has not proposed
changing them, suggestions or
comments related to the scorecard
methodology or the measures used
within the scorecard have not been
considered in finalizing these
adjustment guidelines. Rather, the FDIC
has focused on comments related to the
guidelines and how the guidelines will
apply when making a large bank
adjustment.
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III. Overview of the Large Bank
Adjustment Guidelines
The following general guidelines will
govern the large bank adjustment
process.
Analytical Guidelines
• The FDIC will focus on identifying
institutions for which a combination of
risk measures and other information
suggests either materially higher or
lower risk than the total scores indicate.
The FDIC will consider all available
material information relating to an
institution’s likelihood of failure or loss
severity in the event of failure.
• The FDIC will primarily consider
two types of information in determining
whether to make a large bank
adjustment: (a) A scorecard ratio or
measure that exceeds the maximum
cutoff value for a ratio or measure or is
less than the minimum cutoff value for
a ratio or measure, along with the degree
to which the ratio or measure differs
from the cutoff value (scorecard
measure outliers); and (b) information
not directly captured in the scorecard,
including complementary quantitative
risk measures and qualitative risk
considerations.
• If an institution has one or more
scorecard measure outliers, the FDIC
will conduct further analysis to
determine whether underlying
scorecard ratios are materially higher or
8 75 FR 23516 (May 3, 2011); 75 FR 72612 (Nov.
24, 2010).
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lower than the established cutoffs for
the measure and whether other
mitigating or supporting information
exists.
• The FDIC will use complementary
quantitative risk measures to determine
whether a scorecard measure is an
appropriate measure for a particular
institution.
• When qualitative risk
considerations materially affect the
FDIC’s view of an institution’s
probability of failure or loss given
failure, these considerations may be the
primary factor supporting the
adjustment. Qualitative risk
considerations include, but are not
limited to, underwriting practices
related to material concentrations, risk
management practices, strategic risk,
stress test results, interest rate risk
exposure, and factors affecting loss
severity.
• Specific risk measures may vary in
importance for different institutions. In
some cases, a single risk factor or
indicator may support an adjustment if
the factor suggests a significantly higher
or lower likelihood of failure, or loss
given failure, than the total score
reflects.
• To the extent possible when
comparing risk measures, the FDIC will
consider the performance of similar
institutions, taking into account that
variations in risk measures exist among
institutions with substantially different
business models.
• Adjustments to an institution’s total
score will be made only if the
comprehensive analysis of an
institution’s risk generally based on the
two types of information listed above,
and the institution’s relative risk
ranking warrant a material adjustment
of the institution’s score. For purposes
of these guidelines, a material
adjustment is an adjustment of five
points or more to an institution’s total
score.
an upward adjustment, or to remove a
previously implemented downward
adjustment. The notice will include the
reasons for the proposed adjustment or
removal, the size of the proposed
adjustment or removal, specify when
the adjustment or removal will take
effect, and provide institutions with up
to 60 days to respond.
• The FDIC will re-evaluate the need
for an adjustment to an institution’s
total score on a quarterly basis.
• An institution may make a written
request to the FDIC for an adjustment to
its total score no later than 35 days
following the end of the quarter for
which the institution is requesting the
adjustment. Such a request must be
supported with evidence of a material
risk or risk-mitigating factor that is not
adequately captured or considered in
the scorecard. For example, for the
quarter ending March 31, 2012, the
request should be received by the FDIC
no later than May 5, 2012. Institutions
may request an adjustment at any time;
however, those well-supported requests
received after the deadline may not be
considered until the following quarter
and the FDIC may require the institution
to update the supporting evidence at
that time. Further details regarding an
institution-initiated request for
adjustment are provided below.
• An institution may request review
of or appeal an upward adjustment, the
magnitude of an upward adjustment,
removal of a previously implemented
downward adjustment or an increase in
a previously implemented upward
adjustment pursuant to 12 CFR 327.4(c).
An institution may similarly request
review of or appeal a decision not to
apply an adjustment following a request
by the institution for an adjustment.
Procedural Guidelines
The processes for communicating to
affected institutions and implementing a
large bank adjustment remain largely
unchanged from the 2007 Guidelines,
except that the revised guidelines
provide for an adjustment made as a
result of a request by the institution (an
institution-initiated adjustment).
• The FDIC will consult with an
institution’s primary federal regulator
and appropriate state banking
supervisor before making any decision
to adjust an institution’s total score (and
before removing a previously
implemented adjustment).
• The FDIC will give institutions
advance notice of any decision to make
A. Identifying the Need for an
Adjustment
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IV. The Large Bank Adjustment Process
The FDIC will analyze the results of
the large bank methodology under the
Amended Assessment Regulations and
determine the relative risk ranking of
institutions prior to implementing any
large bank adjustments. When an
institution’s total score is consistent
with the total score of other institutions
with similar risk profiles, the resulting
assessment rate of the institutions
should be comparable and a large bank
adjustment should be unnecessary.
When an institution’s total score is not
consistent with the total scores of other
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institutions with similar risk profiles,
the FDIC will consider an adjustment.
The FDIC only intends to pursue
material adjustments (an adjustment of
at least five points) to an institution’s
total score, which should result in only
a limited number of adjustments on a
quarterly basis.
Given the implementation of a new
assessment system and the collection of
new data items, the FDIC does not
intend to use its ability to adjust scores
precipitously. The FDIC expects to take
some time analyzing all institutions’
unadjusted scores, the reporting of new
data items, and the resulting risk
ranking of institutions before making
any adjustments. While the FDIC is not
precluded from making a large bank
adjustment immediately following
adoption of these guidelines, the FDIC
expects that few, if any, adjustments
will be made at that time.
The FDIC will evaluate scorecard
results each quarter to identify
institutions with a score that is
materially too high or too low when
considered in light of risks or riskmitigating factors that are inadequately
captured by the institution’s scorecard.
Examples of the types of risks and riskmitigating factors include
considerations for accounting rule
changes such as FAS 166/167, credit
underwriting and credit administration
practices, collateral and other risk
mitigants, including the materiality of
guarantees and franchise value.
The FDIC received several comments
regarding risk mitigants considered in
the large bank adjustment process. One
commenter agreed that the FDIC should
retain the ability to adjust an
institution’s total score based upon risks
that are not adequately or fully captured
in the scorecard, while another
commenter suggested that loss mitigants
should be directly factored into the
pricing model. Two commenters stated
that more detail should be provided
regarding consideration of mitigants and
the potential impact such mitigants may
have on the large bank adjustment
process. These same two commenters
noted that any adjustment methodology
regarding higher risk concentrations
should include consideration of an
institution’s historical risk and loss
data. One commenter stated that the
FDIC should consider offsetting outliers
as a mitigant when considering whether
an adjustment is warranted for a
different outlier.
Loss mitigants and their effect on
individual institutions tend to be
idiosyncratic. While the FDIC agrees
that it would be ideal for all risk
mitigants to be factored into the
scorecard model for deposit insurance
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assessment purposes, it is impossible in
practice to include all potential risk
mitigants, particularly mitigants of a
qualitative nature, into a quantitative
scoring model. For similar reasons, the
FDIC is unable to provide precise details
of how mitigants will be specifically
considered in the adjustment process.
The FDIC will consider each
institution’s risk profile, including
consideration of loss mitigants,
offsetting outliers, and historical data,
when determining the institution’s
pricing and relative risk ranking among
the universe of large institutions. The
FDIC believes, however, that historical
loss or risk data may be insufficient in
isolation to warrant an adjustment given
the forward looking nature of the
scorecard.
One commenter recommended that
the FDIC use the large bank adjustment
process to eliminate the effect of FAS
166/167 in the growth-adjusted portfolio
concentration measure. As noted in the
Amended Assessments Regulation, the
FDIC will consider exclusion of the
effect of FAS 166/167 through the
adjustment process where the FDIC
receives sufficient information to make
an adjustment and the possible
adjustment would have a material effect
on an institution’s total score.
In addition to considering an
institution’s relative risk ranking among
all large institutions, the FDIC will
consider how an institution’s total score
compares to the total scores of
institutions in a peer group. This
comparison will allow the FDIC to
account for variations in risk measures
that exists among institutions with
differing business models. For purposes
of the comparison, the FDIC will, where
appropriate, assign an institution to a
peer group. The peer groups are:
Processing Banks and Trust
Companies: Large institutions whose
last three years’ non-lending interest
income, fiduciary revenues, and
investment banking fees, combined,
exceed 50 percent of total revenues (and
its last three years’ fiduciary revenues
are non-zero), and whose total fiduciary
assets total $500 billion or more.
Residential Mortgage Lenders: Large
institutions not described in the peer
group above whose residential mortgage
loans, which include home equity lines
of credit plus residential mortgage
backed securities, exceed 50 percent of
total assets.
Non-diversified Regional Institutions:
Large institutions not described in a
peer group above if: (1) Credit card plus
securitized receivables exceed the sum
of 50 percent of assets plus securitized
receivables; or (2) the sum of residential
mortgage loans, credit card loans, and
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57995
other loans to individuals exceeds 50
percent of assets.
Large Diversified Institutions: Large
institutions with over $150 billion in
assets not described in a peer group
above.
Diversified Regional Institutions:
Large institutions with less than $150
billion in assets not described in a peer
group above.
The FDIC received a comment
suggesting that the definition of
Residential Mortgage Lenders as a peer
group should clarify whether the
definition is limited to residential
mortgages and whether home-equity
lines of credit are included. The FDIC
agrees. The definition of has been
clarified to include residential
mortgages, including home-equity lines
of credit and residential mortgagebacked securities.
B. Institution-Initiated Request for a
Large Bank Adjustment
An institution may request a large
bank adjustment by submitting a written
request to the FDIC no later than 35
days following the end of the quarter for
which the institution is requesting the
adjustment. Such a request must be
supported with evidence of a material
risk or risk-mitigating factor that is not
adequately captured or considered in
the scorecard.9 Similar to FDIC-initiated
adjustments, an institution-initiated
request for adjustment will be
considered only if it is supported by
evidence of a material risk or riskmitigating factor that is not adequately
accounted for in the scorecard and
results in a material change to the total
score. Furthermore, the overall risk
profile must be materially higher or
lower than that produced by the
scorecard. The FDIC will consider these
requests as part of its ongoing effort to
identify and adjust scores so that
institutions with similar risk profiles
receive similar total scores.
An institution-initiated request for
adjustment that is received by the FDIC
later than 35 days after the end of the
quarter for which the institution is
requesting the adjustment may not
provide the FDIC with sufficient time to
appropriately assess and respond to the
request for adjustment; therefore, the
FDIC may not be able to consider
adjusting an institution’s assessment for
that quarter if the request is received
after this time. Although institutions
may request an adjustment at any time,
those well-supported requests received
9 A request for adjustment with supporting
evidence should be addressed to Director, Division
of Insurance and Research, Federal Deposit
Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
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after the deadline may not be
considered until the following quarter.
In conjunction with the next quarter’s
consideration, the FDIC may require
that the institution update the
information supporting the institutioninitiated request. The FDIC’s
determination that an adjustment
request was received after the deadline
and there was insufficient time to
appropriately respond to it may be
challenged by the institution in a
request for review pursuant to the
assessment appeals process (12 CFR
327.4(c)).
For example, a request for adjustment
of an institution’s third quarter total
score with supporting evidence must be
received no later than November 4 by
the FDIC’s Director of the Division of
Insurance and Research in Washington,
DC. If the request for adjustment is
received after November 4, it may not be
considered by the FDIC until the fourth
quarter and the FDIC may request
updated information at that time.
Pursuant to 12 CFR 327.4(c), the
institution may file a request for review
challenging the FDIC’s determination to
consider the request in the fourth
quarter or file a request for review of its
third quarter assessment rate once it
receives its invoice for the third quarter
assessment. An institution that files a
request for adjustment more than 35
days after the end of the quarter for
which it is requesting an adjustment is
not precluded from requesting
adjustments for future quarters.
The FDIC received three positive
comments regarding the FDIC’s
willingness to explicitly permit written
requests from institutions for a large
bank adjustment. One commenter
suggested that the FDIC provide the
number of challenges to deposit
insurance assessment adjustments and
rulings for or against such challenges in
its quarterly publication of statistics.
Another commenter recommended that
the FDIC provide a prompt response for
any downward adjustment request.
Finally, one commenter requested
clarification about whether the national
or regional office of the FDIC would
recommend an adjustment to a large
institution’s total score, stating that the
national office is better suited to
consider the entire banking industry
when determining outliers for pricing
purposes.
As noted in the Amended Assessment
Regulations, the FDIC will publish
aggregate statistics on adjustments each
quarter. The FDIC’s Assessment Appeals
Committee publishes all appeals and the
results of such appeals. In addition, the
FDIC will respond promptly to all wellsupported requests for a downward
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large bank adjustment. As noted
previously, a well-supported request
(the requests must also be material, as
defined above) should be received by
the FDIC within 35 days after the end
of the quarter for which the adjustment
is being requested. Finally, the FDIC
will ensure that appropriate staff is
involved in the decision-making process
relevant to large bank adjustments.
C. Determining the Adjustment Amount
Once the FDIC determines that an
adjustment may be warranted, the FDIC
will determine the adjustment necessary
to bring an institution’s total score into
better alignment with those of other
institutions that pose similar levels of
risk. The FDIC will initiate an
adjustment or consider an institutioninitiated request for adjustment only
when a combination of risk measures
and other information suggest either
materially higher or lower risk than an
institution’s total score indicates. The
FDIC expects that the adjustment
process will be needed for only a
relatively small number of institutions.
If the size of the adjustment required to
align an institution’s total score with
institutions of similar risk is not
material, no adjustment will be made.
The FDIC will only initiate adjustments
either upward or downward that
warrant an adjustment of 5 points or
more and adjustments will generally
only be made in 5, 10, or 15 point
increments.
One commenter stated that the proper
size of an adjustment would be subject
to differences of opinion. The FDIC
agrees that there is subjectivity involved
in the large bank adjustment process;
however, the FDIC expects that
differences of opinion on the
appropriate size of the adjustment
should be limited. The FDIC will only
initiate adjustments or consider reviews
for adjustment if the comprehensive
analysis of the institution’s risk and the
institution’s relative risk ranking
warrant a material adjustment of the
institution’s total score. To reduce the
potential subjectivity regarding the
precision of the size of an adjustment,
the FDIC has determined that any
adjustment will be limited to a
minimum of 5 points and generally
limited to 5, 10, or 15 point increments.
The FDIC believes a minimum 5 point
adjustment provides a threshold that
clarifies how the FDIC will determine
whether an adjustment is material. In
addition, the discrete adjustment levels
should reduce potential disagreements
regarding the appropriate size of any
adjustment applied.
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D. Further Analysis and Consultation
With Primary Federal Regulator
As under the 2007 Guidelines, the
FDIC will consult with an institution’s
primary federal regulator and
appropriate state banking supervisor
before making any decision to adjust an
institution’s total score (and before
removing a previously implemented
adjustment).
One commenter recommended that
any adjustment to an institution’s total
score should require concurrence by an
institution’s primary federal regulator,
rather than simply consultation. The
FDIC disagrees. Large bank adjustments
are made only after consideration of the
institution’s relative risk ranking among
the entire large bank universe. Such
consideration requires knowledge and
data of the total scores for every
institution in the large bank universe,
which is information that other primary
federal regulators do not have.
Furthermore, only the FDIC has the
legal authority to assess institutions for
deposit insurance. Therefore, the FDIC
will continue to consult with an
institution’s primary federal regulator
and consider the primary federal
regulator’s comments prior to making a
large bank adjustment, but, ultimately,
the decision concerning any adjustment
will be made by the FDIC. This process
is consistent with the procedure used in
the 2007 Guidelines.
E. Advance Notice
To give an institution an opportunity
to respond, the FDIC will give advance
notice to an institution when proposing
to make an upward adjustment to the
institution’s total score.10 Consistent
with the 2007 Guidelines, the timing of
the notice will correspond
approximately to the invoice date for an
assessment period. For example, an
institution will be notified of a proposed
upward adjustment to its assessment
rates for the period April 1 through June
30 by approximately June 15, which is
the invoice date for the January 1
through March 31 assessment period.11
Decisions to lower an institution’s
total score will not be communicated to
institutions in advance. Rather, as under
the 2007 Guidelines, downward
adjustments will be reflected in the
invoices for a given assessment period
along with the reasons for the
adjustment.
10 The institution will also be given advance
notice when the FDIC determines to eliminate any
downward adjustment to an institution’s total score.
11 The invoice covering the assessment period
January 1 through March 31 in this example would
not reflect the upward adjustment.
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F. Institution’s Opportunity To Respond
An institution that has been notified
of the FDIC’s intent to apply an upward
adjustment will have 60 days to respond
to the notice. Before implementing an
upward adjustment, the FDIC will
review the institution’s response, along
with any subsequent changes to
supervisory ratings, scorecard measures,
or other relevant risk factors. Similar to
the 2007 Guidelines, the FDIC will
notify the institution of its decision to
proceed or not to proceed with the
upward adjustment along with the
invoice for the quarter in which the
adjustment will become effective.
Extending the example above, if the
FDIC notified an institution of a
proposed upward adjustment on June
15, the institution would have 60 days
from that date to respond to the
notification. If, after evaluating the
institution’s response and updated
information for the quarterly assessment
period ending June 30, the FDIC
decided to proceed with the adjustment,
the FDIC would communicate this
decision to the institution by
approximately September 15, which is
the invoice date for the April 1 through
June 30 assessment period. In this case,
the adjusted assessment rate would be
reflected in the September 15 invoice.
The time frames and example above
also apply to a decision by the FDIC to
remove a previously implemented
downward adjustment as well as a
decision to increase a previously
implemented upward adjustment.
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G. Duration of the Adjustment
Consistent with the 2007 Guidelines,
the large bank adjustment will remain in
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effect for subsequent assessment periods
until the FDIC determines either that the
adjustment is no longer warranted or
that the magnitude of the adjustment
needs to be reduced or increased
(subject to the 15 point limitation and
the requirement for further advance
notification).12
H. Requests for Review and Appeals
In making a decision regarding an
adjustment, the FDIC will consider all
material information available to it,
including any information provided by
an institution, but ultimately, all
decisions concerning adjustments will
be made by the FDIC. An institution
may request review of or appeal an
upward adjustment, the magnitude of an
upward adjustment, removal of a
previously implemented downward
adjustment or an increase in a
previously implemented upward
adjustment pursuant to 12 CFR 327.4(c).
An institution may similarly request
review of or appeal a decision not to
apply an adjustment following an
institution-initiated request for an
adjustment.
V. Additional Information on the
Adjustment Process, Including
Examples
As discussed previously, the FDIC
will primarily consider two types of
information in determining whether to
make a large bank adjustment: scorecard
measure outliers and information not
12 As noted in the Amended Assessments
Regulation, an institution’s assessment rate may
increase without notice if the institution’s
supervisory, agency ratings, or financial ratios
deteriorate.
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directly captured in the scorecard,
including complementary quantitative
risk measures and qualitative risk
considerations.
A. Scorecard Measure Outliers
In order to convert each scorecard
ratio into a score that ranges between 0
and 100, the Amended Assessment
Regulations use minimum and
maximum cutoff values that generally
correspond to the 10th and 90th
percentile values for each ratio based on
data for the 2000 to 2009 period. All
values less than the 10th percentile or
all values greater than the 90th
percentile are assigned the same score.
This process enables the FDIC to
compare different ratios in a
standardized way and assign
statistically-based weights; however, the
process may mask significant
differences in risk among institutions
with the minimum or maximum score.
The FDIC believes that an institution
with one or more scorecard ratios well
in excess of the maximum cutoffs or
well below the minimum cutoffs may
pose significantly greater or lower risk
to the deposit insurance fund than its
score suggests.
The example below illustrates the
analytical process the FDIC will follow
in determining to propose a downward
adjustment based on scorecard measure
outliers. The example is merely
illustrative. As shown in Chart 1, Bank
A has a total score of 45 and two
scorecard measures with a score of 0
(indicating lower risk).
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Federal Register / Vol. 76, No. 181 / Monday, September 19, 2011 / Notices
capacity is not fully recognized,
particularly when compared with other
institutions receiving the same overall
score. By contrast, Bank A’s Core Return
on Assets (ROA) ratio is much closer to
its cutoff values, suggesting that an
adjustment based on consideration of
this factor may not be justified.
cutoff minus the minimum cutoff).
Table 3 shows that Bank A’s Tier 1
Leverage ratio (17 percent) far exceeds
the cutoff value associated with a score
of 0 (13 percent), with the difference
representing 57 percent of the
associated scoring range. Based on this
additional information and assuming no
other mitigating factors, the FDIC may
conclude that Bank A’s loss absorbing
Since at least one of the scorecard
measures has a score of 0, the FDIC
would further review whether the ratios
underlying these measures materially
differ from the cutoff value associated
with a score of 0. Materiality will
generally be determined by the amount
that the underlying ratio differs from the
relevant cutoff as a percentage of the
overall scoring range (the maximum
TABLE 3—OUTLIER ANALYSIS FOR BANK A
Scorecard measure
Score
Minimum
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Core ROA ........................................................................................................
Tier 1 Capital Ratio ..........................................................................................
Before initiating an adjustment,
however, the FDIC would consider
whether Bank A had significant risks
that were not captured in the scorecard.
If no information on such risks existed,
the FDIC would initiate a downward
adjustment to Bank A’s total score to the
extent that the FDIC determined that
such a downward adjustment warranted
at least a 5 point adjustment.
The amount of the adjustment will be
the amount needed to make the total
score consistent with those of banks of
comparable overall risk, with particular
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0
0
emphasis on institutions of the same
peer group (e.g., diversified regional
institutions), as described above.
Typically, however, adjustments
supported by only one extreme outlier
value will be less than the FDIC’s
potential adjustment authority of 15
points. In the case of multiple outlier
values, inconsistent outlier values, or
outlier values that are exceptionally
beyond the scoring range, an overall
analysis of each measure’s relative
importance could result in varying
adjustment amounts depending on each
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Maximum
0
6
2
13
Value
(%)
2.08
17
Outlier amount
(value minus
cutoff) as
percentage of
the scoring range
4
57
institution’s unique set of
circumstances. For Bank A, a 5-point
adjustment may be most appropriate.
The next example illustrates the
analytical process the FDIC will follow
in determining to propose an upward
adjustment based on scorecard measure
outliers. As in the example above, the
example is merely illustrative; an
institution with less extreme values may
also receive an upward adjustment. As
shown in Chart 2, Bank B has a total
score of 72 and three scorecard
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Federal Register / Vol. 76, No. 181 / Monday, September 19, 2011 / Notices
57999
measures with a score of 100 (indicating
higher risk).
with other institutions receiving the
same overall score. By contrast, the Core
ROA and Underperforming Assets to
Tier 1 Capital and Reserves values are
much closer to their respective cutoff
values, suggesting that an adjustment
based on these factors may not be
justified.
percent), with the difference
representing 105 percent of the
associated scoring range. Based on this
additional information and assuming no
other mitigating factors, the FDIC may
determine that the risk associated with
Bank B’s ability to withstand assetrelated stress and, therefore, its overall
risk, is materially greater than its score
suggests, particularly when compared
Since at least one of the scorecard
measures has a score of 100, the FDIC
would further review whether the ratios
underlying these measures materially
exceed the cutoff value associated with
a score of 100. Table 4 shows that Bank
B’s Criticized and Classified Items to
Tier 1 Capital and Reserves ratio (198
percent) far exceeds the cutoff value
associated with a score of 100 (100
TABLE 4—OUTLIER ANALYSIS FOR BANK B
Scorecard measure
Score
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Minimum
Core ROA ........................................................................................................
Criticized and Classified to Tier 1 Capital & Reserves ...................................
Underperforming Assets to Tier 1 Capital & Reserves ...................................
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100
100
100
Maximum
0
7
2
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100
35
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(%)
¥0.05
198
36
Outlier amount
(value minus
cutoff) as
percentage of
the scoring range
¥3
105
3
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Federal Register / Vol. 76, No. 181 / Monday, September 19, 2011 / Notices
considered during the large bank
adjustment process. A few commenters
stated that the FDIC has not provided
sufficient detail regarding the factors
that may trigger a large bank adjustment.
The FDIC agrees that providing an
exhaustive list of factors that may be
considered in the large bank adjustment
process would be ideal, but has
concluded that this is not reasonable or
practical. The FDIC will consider all
factors that may affect an institution’s
risk profile, including idiosyncratic
risks and the dynamic nature of the
industry.
The example below illustrates the
analytical process the FDIC will follow
when determining whether to propose
an upward adjustment based on
complementary risk measures. Again,
the example is merely illustrative. Chart
3 shows that Bank C has a total score of
66. Some of Bank C’s risk measure
scores are significantly higher than the
total score, while others, including the
Tier 1 leverage ratio score (42), are
significantly lower.
In this hypothetical, following a
review of complementary measures for
all financial ratios in the scorecard, the
complementary measures for Tier 1
leverage ratio shows that the level and
quality of capital protection may not be
correctly reflected in the Tier 1 leverage
ratio score. Chart 4 shows that two other
complementary capital measures for
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B. Information Not Directly Captured by
the Scorecard
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1. Complementary Risk Measures
Complementary risk measures are
measures that are not included in the
scorecard, but that can inform the
appropriateness of a given scorecard
measure for a particular institution.
These measures are readily available for
all institutions and include quantitative
metrics and market indicators that
provide further insight into an
institution’s ability to withstand
financial adversity, and the severity of
losses in the event of failure.
Analyzing complementary risk
measures will help the FDIC determine
whether the assumptions applied to a
scorecard measure are appropriate for a
particular institution. For example, as
detailed in the Amended Assessments
Regulation, the scorecard includes a loss
severity measure based on the FDIC’s
loss severity model. The measure
applies a standard set of assumptions to
all large banks to estimate potential
losses to the insurance fund. These
assumptions, including liability runoffs
and asset recovery rates, are derived
from actual bank failures; however, the
FDIC recognizes that a large bank may
have unique attributes that could have
a bearing on the appropriateness of
those assumptions. When data or
quantitative metrics exist that support
materially different runoff assumptions
or asset recovery rates for a particular
institution, the FDIC may consider an
adjustment to the total score,
particularly if the information is further
supported by qualitative loss severity
considerations as discussed below.
Two commenters suggested that the
FDIC provide an exhaustive list of
complementary benchmarks or
qualitative factors that may be
After considering any risk-mitigating
factors, the FDIC will determine the
amount of adjustment needed to make
the total score consistent with those of
banks of comparable overall risk. For
Bank B, a 5-point adjustment may be
most appropriate.
Federal Register / Vol. 76, No. 181 / Monday, September 19, 2011 / Notices
58001
absorbing capacity is potentially
overstated by the Tier 1 leverage ratio.
to apply a large bank adjustment.
Qualitative information often provides
significant insights into institutionspecific or idiosyncratic risk factors that
are impossible to capture in the
scorecard. Similar to scorecard outliers
and complementary risk measures, the
FDIC will use the qualitative
information to consider whether
potential discrepancies exist between
the risk ranking of institutions based on
their total score and the relative risk
ranking suggested by a combination of
risk measures and qualitative risk
considerations. Such information
includes, but is not limited to, analysis
based on information obtained through
the supervisory process, including
information gained through the FDIC’s
special examination authority, such as
underwriting practices, interest rate risk
exposure and other information
obtained through public filings.14
Another example of qualitative
information that the FDIC will consider
is available information pertaining to an
institution’s ability to withstand adverse
events. Sources of this information are
varied but may include analyses
produced by the institution or
supervisory authorities, such as stress
test results, capital adequacy
assessments, or information detailing
the risk characteristics of the
institution’s lending portfolios and
other businesses. Information pertaining
to internal stress test results and
internal capital adequacy assessment
will be used qualitatively to help inform
the relative importance of other risk
measures, especially concentrations of
credit exposures and other material nonlending business activities. As an
example, in cases where an institution
has a significant concentration of credit
risk, results of internal stress tests and
14 12 U.S.C. 1820(b)(3); see Interagency
Memorandum of Understanding on Special
Examinations dated July 12, 2010. https://
www.fdic.gov/news/news/press/2010/pr10153.html.
2. Qualitative Risk Considerations
The FDIC believes that it is important
to consider all relevant qualitative risk
considerations in determining whether
13 The concentration measure and the credit
quality measure are expressed as a percent of Tier
1 capital plus the allowance for loan loss reserves.
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suggests. Additional review reveals that
sizeable unrealized losses in the
securities portfolio account for these
differences and that Bank C’s loss
An upward adjustment to Bank C’s
total score may be appropriate, again
assuming that no significant risk
mitigants are evident. An adjustment of
5 points would be likely since the
underlying level of unrealized losses is
extremely high (greater than 25% of Tier
1 capital). While the adjustment in this
case would likely be limited to 5 points
because the bank’s concentration
measure and credit quality measure
already receive the maximum possible
score, in other cases modest unrealized
losses could lead to a higher overall
adjustment amount, if the concentration
and credit quality measures were
understated as well.13
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Bank C—the total equity ratio and the
ratio of other comprehensive income
(OCI) to Tier 1 capital—suggest higher
risk than the Tier 1 leverage ratio score
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Federal Register / Vol. 76, No. 181 / Monday, September 19, 2011 / Notices
timely manner in the event of the
institution’s failure.
In general, qualitative factors will
become more important in determining
whether to apply an adjustment when
an institution has high performance risk
or if the institution has high asset,
earnings, or funding concentrations. For
example, if a bank is near failure,
qualitative loss severity information
becomes more important in the
adjustment process.
Further, if a bank has material
concentrations in some asset classes, the
quality of underwriting becomes more
important in the adjustment process.
Additionally, engaging in certain
business lines may warrant further
consideration of qualitative factors. For
instance, supervisory assessments of
operational risk and controls at
processing banks are likely to be
important regardless of the institution’s
performance.
The specific example below illustrates
the analytical process the FDIC will
follow to determine whether to make an
adjustment based on qualitative
information. Chart 5 shows that Bank D
has a high score of 82 that is largely
driven by a high score for the ability to
withstand asset-related stress
component, which is, in turn, largely
driven by the higher-risk asset
concentration score and the
underperforming asset score. The ability
to withstand asset-related stress
component is heavily weighted in the
scorecard (50 percent weight), and, as a
result, significant qualitative
information that is not considered in the
scorecard could lead to an adjustment to
the institution’s total score.
The FDIC would review qualitative
information pertaining to the higher-risk
asset concentration measure and the
underperforming asset measure for Bank
D to determine whether there are one or
more important risk mitigants that are
not factored into the scorecard. The
example assumes that FDIC’s review
revealed that, while Bank D has
concentrations in non-traditional
mortgages, its mortgage portfolio has the
following characteristics that suggest
lower risk:
a. Most of the loan portfolio is
composed of bank-originated residential
real estate loans on owner-occupied
properties;
b. The portfolio has strong collateral
protection (e.g., few or no loans with a
high loan-to-value ratio) compared to
the rest of the industry;
c. Debt service coverage ratios are
favorable (e.g., few or no loans with a
high debt-to-income ratio) compared to
the institution’s peers;
d. The primary federal regulator notes
in its examination report that the
institution has strong collection
practices and reports no identified risk
management deficiencies.
Additionally, these qualitative factors
surrounding the bank’s real estate
portfolio suggest that the loss rate
assumptions applied to Bank D’s
residential mortgage portfolio may be
too severe, resulting in a loss severity
score that is too high relative to its risk.
Based on the information above, the
bank would be a strong candidate for a
10 to 15 point reduction in total score,
primarily since the ability to withstand
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internal capital adequacy assessments
could alleviate FDIC concerns about this
risk and therefore provide support for a
downward adjustment, or alternatively,
provide additional mitigating
information to forestall a pending
upward adjustment. In some cases,
stress testing results may suggest greater
risk than is normally evident through
the scorecard methodology alone.
Qualitative risk considerations will
also include information that could
have a bearing on potential loss severity,
and could include, for example, the ease
with which the FDIC can make quick
deposit insurance determinations and
depositor payments, or the availability
of sufficient information on qualified
financial contracts to allow the FDIC to
accurately analyze these contracts in a
Federal Register / Vol. 76, No. 181 / Monday, September 19, 2011 / Notices
asset-related stress score and loss
severity score do not reflect a number of
significant qualitative risk mitigants that
suggest lower risk.
VI. Additional Comments
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The FDIC received two comments
stating that including Troubled Debt
Restructurings (TDR) in the Criticized
and Classified items and/or
underperforming assets ratios and/or the
higher-risk concentration measure is
inconsistent with the FDIC’s public
remarks encouraging institutions to
enter into loan modifications. In
particular, the commenter cited remarks
made in ‘‘Supervisory Insights:
Regulatory Actions Related to
Foreclosure Activities by Large
Servicers and Practical Implications for
Community Banks.’’ One commenter
suggested that the FDIC include in the
guidelines a method to adjust
institutions’ scores that actively
demonstrates support for the FDIC’s
guidance on mortgage loan
modifications.
Many loan modifications, such as
those to reduce the interest rate for
competitive reasons, are not TDRs.
However, a loan modification results in
a TDR when a creditor for economic or
legal reasons related to the borrower’s
financial difficulties grants a concession
to the borrower that the creditor would
not otherwise have considered if it were
not for the borrower’s financial
difficulties. Restructured workout loans
typically present an elevated level of
credit risk as the borrowers are not able
to perform according to the original
contractual terms. The FDIC is
interested in pricing for risk; therefore,
TDRs (which display higher risk) are
included in certain scorecard ratios.
The FDIC does not believe the
definitions and the application of those
definitions in the pricing rule for these
higher risk assets is inconsistent with
the FDIC’s guidance to ‘‘avoid
unnecessary foreclosures and consider
mortgage loan modifications or other
workouts that are affordable and
sustainable.’’ To the extent that TDRs
have risk mitigants that materially lower
an institution’s risk profile relative to
that institution’s total score, the FDIC
would consider those specific mitigants
in the adjustment process.
VII. Effective Date: September 13, 2011
VIII. Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501
et seq.), an agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid OMB
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control number. This Notice of
Assessment Rate Adjustment Guidelines
for Large and Highly Complex
Institutions includes a provision
allowing large and highly complex
institutions to make a written request to
the FDIC for an adjustment to an
institution’s total score. An institution’s
request for adjustment is considered
only if it is supported by evidence of a
material risk or risk-mitigating factor
that is not adequately accounted for in
the scorecard.
In conjunction with publication of the
Proposed Assessment Rate Adjustment
Guidelines for Large and Highly
Complex Institutions, the FDIC
submitted to OMB a request for
clearance of the paperwork burden
associated with the request for
adjustment. That request is still
pending. The proposal requested
comment on the estimated paperwork
burden. One comment addressing the
estimated paperwork burden was
received; the commenter stated that the
number of hours required to prepare an
institution-initiated request for
adjustment was underestimated. The
FDIC agrees that there can be significant
variations in the amount of time
required to provide a written request for
an adjustment and has altered its initial
burden estimates accordingly. The
revised estimated burden for the
application requirement is as follows:
Title: ‘‘Assessment Rate Adjustment
Guidelines for Large and Highly
Complex Institutions—Request for
Adjustment.’’
OMB Number: 3064–0179.
Respondents: Large and Highly
Complex insured depository
institutions.
Number of Responses: 0–11 per year.
Frequency of Response: Occasional.
Average number of hours to prepare
a response: 8–80.
Total Annual Burden: 0–880 hours.
Comment Request: The FDIC has an
ongoing interest in public comments on
its collections of information, including
comments on: (1) Whether this
collection of information is necessary
for the proper performance of the FDIC’s
functions, including whether the
information has practical utility; (2) the
accuracy of the estimates of the burden
of the information collection, including
the validity of the methodologies and
assumptions used; (3) ways to enhance
the quality, utility, and clarity of the
information to be collected; and (4)
ways to minimize the burden of the
information collection on respondents,
including through the use of automated
collection techniques or other forms of
information technology. Comments may
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58003
be submitted to the FDIC by any of the
following methods:
• https://www.FDIC.gov/regulations/
laws/federal/propose.html.
• E-mail: comments@fdic.gov:
Include the name and number of the
collection in the subject line of the
message.
• Mail: Gary Kuiper (202–898–3877),
Counsel, Federal Deposit Insurance
Corporation, 550 17th Street, NW.,
Washington, DC 20429.
• Hand Delivery: Comments may be
hand-delivered to the guard station at
the rear of the 550 17th Street Building
(located on F Street), on business days
between 7 a.m. and 5 p.m. A copy of the
comment may also be submitted to the
OMB Desk Officer for the FDIC, Office
of Information and Regulatory Affairs,
Office of Management and Budget, New
Executive Office Building, Room 3208,
Washington, DC 20503. All comments
should refer to the ‘‘Assessment Rate
Adjustment Guidelines for Large and
Highly Complex Institutions—Request
for Adjustment.’’ (OMB No. 3064–0179).
By order of the Board of Directors.
Dated at Washington, DC, this 13th day of
September, 2011.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2011–23835 Filed 9–16–11; 8:45 am]
BILLING CODE 6714–01–P
FEDERAL RESERVE SYSTEM
Proposed Agency Information
Collection Activities; Comment
Request
Board of Governors of the
Federal Reserve System.
SUMMARY: On June 15, 1984, the Office
of Management and Budget (OMB)
delegated to the Board of Governors of
the Federal Reserve System (Board) its
approval authority under the Paperwork
Reduction Act (PRA), pursuant to 5 CFR
1320.16, to approve of and assign OMB
control numbers to collection of
information requests and requirements
conducted or sponsored by the Board
under conditions set forth in 5 CFR Part
1320 Appendix A.1. Board-approved
collections of information are
incorporated into the official OMB
inventory of currently approved
collections of information. Copies of the
Paperwork Reduction Act Submission,
supporting statements and approved
collection of information instruments
are placed into OMB’s public docket
files. The Federal Reserve may not
conduct or sponsor, and the respondent
is not required to respond to, an
AGENCY:
E:\FR\FM\19SEN1.SGM
19SEN1
]]>Agencies
[Federal Register Volume 76, Number 181 (Monday, September 19, 2011)]
[Notices]
[Pages 57992-58003]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-23835]
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FEDERAL DEPOSIT INSURANCE CORPORATION
Assessment Rate Adjustment Guidelines for Large and Highly
Complex Institutions
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final guidelines.
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SUMMARY: The FDIC is adopting guidelines that it will use to determine
how adjustments may be made to an institution's total score when
calculating the deposit insurance assessment rates of large and highly
complex insured institutions. Total scores are determined according to
the Final Rule on Assessments and Large Bank Pricing that was approved
by the FDIC Board on February 7, 2011 (76 FR 10672 (Feb. 25, 2011)).
FOR FURTHER INFORMATION CONTACT: Patrick Mitchell, Acting Chief, Large
Bank Pricing Section, Division of Insurance and Research, (202) 898-
3943; and Christopher Bellotto, Counsel, Legal Division, (202) 898-
3801, 550 17th Street, NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Dates
These guidelines supersede the assessment rate adjustment
guidelines published by the FDIC on May 15, 2007 (the 2007
Guidelines).\1\
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\1\ Assessment Rate Adjustment Guidelines for Large Institutions
and Insured Foreign Branches in Risk Category I, 72 FR 27122 (May
14, 2007).
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II. Background
On February 7, 2011, the FDIC Board amended its assessment
regulations by, among other things, adopting a new methodology for
determining assessment rates for large and highly complex institutions
(the Amended Assessment Regulations).\2\ The Amended Assessment
Regulations eliminated risk categories and combined CAMELS ratings and
forward-looking financial measures into one of two scorecards, one for
highly-complex institutions and another for all other large
institutions.\3\ Each of the two scorecards produces two scores--a
performance score and a loss severity score--that are combined into a
total score.\4\
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\2\ Assessments, Large Bank Pricing, 76 FR 10672 (Feb. 25, 2011)
(codified at 12 CFR 327.9-10).
\3\ A large institution is defined as an insured depository
institution: (1) That had assets of $10 billion or more as of
December 31, 2006 (unless, by reporting assets of less than $10
billion for four consecutive quarters since then, it has become a
small institution); or (2) that had assets of less than $10 billion
as of December 31, 2006, but has since had $10 billion or more in
total assets for at least four consecutive quarters, whether or not
the institution is new. A ``highly complex institution'' is defined
as: (1) An insured depository institution (excluding a credit card
bank) that has had $50 billion or more in total assets for at least
four consecutive quarters and that either is controlled by a U.S.
parent holding company that has had $500 billion or more in total
assets for four consecutive quarters, or is controlled by one or
more intermediate U.S. parent holding companies that are controlled
by a U.S. holding company that has had $500 billion or more in
assets for four consecutive quarters, and (2) a processing bank or
trust company. A processing bank or trust company is an insured
depository institution whose last three years' non-lending interest
income, fiduciary revenues, and investment banking fees, combined,
exceed 50 percent of total revenues (and its last three years
fiduciary revenues are non-zero), whose total fiduciary assets total
$500 billion or more and whose total assets for at least four
consecutive quarters have been $10 billion or more.
\4\ In the context of large institution insurance pricing, the
performance score measures a large institution's financial
performance and its ability to withstand stress. The loss severity
score refers to the relative loss that an institution poses to the
Deposit Insurance Fund in the event of a failure.
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Tables 1 and 2 show the scorecards for large and highly complex
institutions, respectively.
[[Page 57993]]
Table 1--Scorecard for Large Institutions
------------------------------------------------------------------------
Scorecard measures and Measure weights Component weights
components (percent) (percent)
------------------------------------------------------------------------
P Performance Score
------------------------------------------------------------------------
P.1 Weighted Average CAMELS 100 30
Rating.....................
P.2 Ability to Withstand .................... 50
Asset-Related Stress.......
Tier 1 Leverage Ratio... 10 ....................
Concentration Measure... 35 ....................
Core Earnings/Average 20 ....................
Quarter-End Total
Assets*................
Credit Quality Measure.. 35 ....................
------------------------------------------------------------------------
P.3 Ability to Withstand .................... 20
Funding-Related Stress
Core Deposits/Total 60 ....................
Liabilities............
Balance Sheet Liquidity 40 ....................
Ratio..................
------------------------------------------------------------------------
L Loss Severity Score
------------------------------------------------------------------------
L.1 Loss Severity Measure... .................... 100
------------------------------------------------------------------------
* Average of five quarter-end total assets (most recent and four prior
quarters).
Table 2--Scorecard for Highly Complex Institutions
------------------------------------------------------------------------
Measure weights Component weights
Measures and components (percent) (percent)
------------------------------------------------------------------------
P Performance Score
------------------------------------------------------------------------
P.1 Weighted Average CAMELS 100 30
Rating.....................
------------------------------------------------------------------------
P.2 Ability to Withstand .................... 50
Asset-Related Stress.......
Tier 1 Leverage Ratio... 10 ....................
Concentration Measure... 35 ....................
Core Earnings/Average 20 ....................
Quarter-End Total
Assets.................
Credit Quality Measure 35 ....................
and Market Risk Measure
------------------------------------------------------------------------
P.3 Ability to Withstand .................... 20
Funding-Related Stress.....
Core Deposits/Total 50 ....................
Liabilities............
Balance Sheet Liquidity 30 ....................
Ratio..................
Average Short-Term 20 ....................
Funding/Average Total
Assets.................
------------------------------------------------------------------------
L Loss Severity Score
------------------------------------------------------------------------
L.1 Loss Severity........... .................... 100
------------------------------------------------------------------------
* Average of five quarter-end total assets (most recent and four prior
quarters).
In most cases, the total score produced by an institution's
scorecard should correctly reflect the institution's overall risk
relative to other large institutions; however, the FDIC believes it is
important that it have the ability to consider idiosyncratic or other
relevant risk factors not reflected in the scorecards. The Amended
Assessment Regulations, therefore, allow the FDIC to make a limited
adjustment to an institution's total score up or down by no more than
15 points (the large bank adjustment). The resulting score is then
converted to an initial base assessment rate, which, after application
of other possible adjustments, results in the institution's total
assessment rate.\5\ The total assessment rate is multiplied by the
institution's assessment base to calculate the amount of its assessment
obligation. Adjustments are made to ensure that the total score
produced by an institution's scorecard appropriately reflects the
institution's overall risk relative to other large institutions.
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\5\ Adjustments to the initial base assessment rate may include
an unsecured debt adjustment, depository institution debt
adjustment, and a brokered deposit adjustment.
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The FDIC promulgated regulations allowing for the adjustment of
large institutions' quarterly assessment rates in 2006.\6\ The FDIC set
forth the procedures for these adjustments in guidelines that were
published in 2007 (2007 Guidelines). The 2007 Guidelines were designed
to ensure that the adjustment process was fair and transparent and that
any decision to make an adjustment was well supported. The FDIC has
exercised its adjustment authority when warranted since that time.
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\6\ 71 FR 69282 (Nov. 30, 2006).
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Following adoption of the Amended Assessment Regulations in
February 2011, the FDIC proposed new guidelines that reflect the
methodology it now uses to determine assessment rates for large and
highly complex institutions. The FDIC sought comment on all aspects of
the proposed guidelines.\7\ The FDIC received eight comments related to
the guidelines, which are described below in the relevant portion of
the guidelines.
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\7\ 76 FR 21256 (April 15, 2011). The Amended Assessment
Regulations provided that the FDIC would not make any new large bank
adjustments until revised guidelines were published for comment and
approved by the FDIC's Board of Directors. Although the FDIC chose
in this instance to publish the proposed guidelines and solicit
comment, notice and comment are not required and need not be
employed to make future changes to the guidelines.
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[[Page 57994]]
In addition to comments on the Guidelines, the FDIC also received a
number of comments related to the scorecard methodology and measures
used in the scorecard. The FDIC, however, previously provided two
opportunities to comment on the scorecard methodology and all measures
through the publication of two notices of proposed rulemaking on the
large bank pricing system.\8\ The FDIC received a large number of
comments on these issues in response to the two notices of proposed
rulemaking and carefully considered them before finalizing the Amended
Assessment Regulations in February 2011. Since the Amended Assessment
Regulations are final, and the FDIC has not proposed changing them,
suggestions or comments related to the scorecard methodology or the
measures used within the scorecard have not been considered in
finalizing these adjustment guidelines. Rather, the FDIC has focused on
comments related to the guidelines and how the guidelines will apply
when making a large bank adjustment.
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\8\ 75 FR 23516 (May 3, 2011); 75 FR 72612 (Nov. 24, 2010).
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III. Overview of the Large Bank Adjustment Guidelines
The following general guidelines will govern the large bank
adjustment process.
Analytical Guidelines
The FDIC will focus on identifying institutions for which
a combination of risk measures and other information suggests either
materially higher or lower risk than the total scores indicate. The
FDIC will consider all available material information relating to an
institution's likelihood of failure or loss severity in the event of
failure.
The FDIC will primarily consider two types of information
in determining whether to make a large bank adjustment: (a) A scorecard
ratio or measure that exceeds the maximum cutoff value for a ratio or
measure or is less than the minimum cutoff value for a ratio or
measure, along with the degree to which the ratio or measure differs
from the cutoff value (scorecard measure outliers); and (b) information
not directly captured in the scorecard, including complementary
quantitative risk measures and qualitative risk considerations.
If an institution has one or more scorecard measure
outliers, the FDIC will conduct further analysis to determine whether
underlying scorecard ratios are materially higher or lower than the
established cutoffs for the measure and whether other mitigating or
supporting information exists.
The FDIC will use complementary quantitative risk measures
to determine whether a scorecard measure is an appropriate measure for
a particular institution.
When qualitative risk considerations materially affect the
FDIC's view of an institution's probability of failure or loss given
failure, these considerations may be the primary factor supporting the
adjustment. Qualitative risk considerations include, but are not
limited to, underwriting practices related to material concentrations,
risk management practices, strategic risk, stress test results,
interest rate risk exposure, and factors affecting loss severity.
Specific risk measures may vary in importance for
different institutions. In some cases, a single risk factor or
indicator may support an adjustment if the factor suggests a
significantly higher or lower likelihood of failure, or loss given
failure, than the total score reflects.
To the extent possible when comparing risk measures, the
FDIC will consider the performance of similar institutions, taking into
account that variations in risk measures exist among institutions with
substantially different business models.
Adjustments to an institution's total score will be made
only if the comprehensive analysis of an institution's risk generally
based on the two types of information listed above, and the
institution's relative risk ranking warrant a material adjustment of
the institution's score. For purposes of these guidelines, a material
adjustment is an adjustment of five points or more to an institution's
total score.
Procedural Guidelines
The processes for communicating to affected institutions and
implementing a large bank adjustment remain largely unchanged from the
2007 Guidelines, except that the revised guidelines provide for an
adjustment made as a result of a request by the institution (an
institution-initiated adjustment).
The FDIC will consult with an institution's primary
federal regulator and appropriate state banking supervisor before
making any decision to adjust an institution's total score (and before
removing a previously implemented adjustment).
The FDIC will give institutions advance notice of any
decision to make an upward adjustment, or to remove a previously
implemented downward adjustment. The notice will include the reasons
for the proposed adjustment or removal, the size of the proposed
adjustment or removal, specify when the adjustment or removal will take
effect, and provide institutions with up to 60 days to respond.
The FDIC will re-evaluate the need for an adjustment to an
institution's total score on a quarterly basis.
An institution may make a written request to the FDIC for
an adjustment to its total score no later than 35 days following the
end of the quarter for which the institution is requesting the
adjustment. Such a request must be supported with evidence of a
material risk or risk-mitigating factor that is not adequately captured
or considered in the scorecard. For example, for the quarter ending
March 31, 2012, the request should be received by the FDIC no later
than May 5, 2012. Institutions may request an adjustment at any time;
however, those well-supported requests received after the deadline may
not be considered until the following quarter and the FDIC may require
the institution to update the supporting evidence at that time. Further
details regarding an institution-initiated request for adjustment are
provided below.
An institution may request review of or appeal an upward
adjustment, the magnitude of an upward adjustment, removal of a
previously implemented downward adjustment or an increase in a
previously implemented upward adjustment pursuant to 12 CFR 327.4(c).
An institution may similarly request review of or appeal a decision not
to apply an adjustment following a request by the institution for an
adjustment.
IV. The Large Bank Adjustment Process
A. Identifying the Need for an Adjustment
The FDIC will analyze the results of the large bank methodology
under the Amended Assessment Regulations and determine the relative
risk ranking of institutions prior to implementing any large bank
adjustments. When an institution's total score is consistent with the
total score of other institutions with similar risk profiles, the
resulting assessment rate of the institutions should be comparable and
a large bank adjustment should be unnecessary. When an institution's
total score is not consistent with the total scores of other
[[Page 57995]]
institutions with similar risk profiles, the FDIC will consider an
adjustment. The FDIC only intends to pursue material adjustments (an
adjustment of at least five points) to an institution's total score,
which should result in only a limited number of adjustments on a
quarterly basis.
Given the implementation of a new assessment system and the
collection of new data items, the FDIC does not intend to use its
ability to adjust scores precipitously. The FDIC expects to take some
time analyzing all institutions' unadjusted scores, the reporting of
new data items, and the resulting risk ranking of institutions before
making any adjustments. While the FDIC is not precluded from making a
large bank adjustment immediately following adoption of these
guidelines, the FDIC expects that few, if any, adjustments will be made
at that time.
The FDIC will evaluate scorecard results each quarter to identify
institutions with a score that is materially too high or too low when
considered in light of risks or risk-mitigating factors that are
inadequately captured by the institution's scorecard. Examples of the
types of risks and risk-mitigating factors include considerations for
accounting rule changes such as FAS 166/167, credit underwriting and
credit administration practices, collateral and other risk mitigants,
including the materiality of guarantees and franchise value.
The FDIC received several comments regarding risk mitigants
considered in the large bank adjustment process. One commenter agreed
that the FDIC should retain the ability to adjust an institution's
total score based upon risks that are not adequately or fully captured
in the scorecard, while another commenter suggested that loss mitigants
should be directly factored into the pricing model. Two commenters
stated that more detail should be provided regarding consideration of
mitigants and the potential impact such mitigants may have on the large
bank adjustment process. These same two commenters noted that any
adjustment methodology regarding higher risk concentrations should
include consideration of an institution's historical risk and loss
data. One commenter stated that the FDIC should consider offsetting
outliers as a mitigant when considering whether an adjustment is
warranted for a different outlier.
Loss mitigants and their effect on individual institutions tend to
be idiosyncratic. While the FDIC agrees that it would be ideal for all
risk mitigants to be factored into the scorecard model for deposit
insurance assessment purposes, it is impossible in practice to include
all potential risk mitigants, particularly mitigants of a qualitative
nature, into a quantitative scoring model. For similar reasons, the
FDIC is unable to provide precise details of how mitigants will be
specifically considered in the adjustment process. The FDIC will
consider each institution's risk profile, including consideration of
loss mitigants, offsetting outliers, and historical data, when
determining the institution's pricing and relative risk ranking among
the universe of large institutions. The FDIC believes, however, that
historical loss or risk data may be insufficient in isolation to
warrant an adjustment given the forward looking nature of the
scorecard.
One commenter recommended that the FDIC use the large bank
adjustment process to eliminate the effect of FAS 166/167 in the
growth-adjusted portfolio concentration measure. As noted in the
Amended Assessments Regulation, the FDIC will consider exclusion of the
effect of FAS 166/167 through the adjustment process where the FDIC
receives sufficient information to make an adjustment and the possible
adjustment would have a material effect on an institution's total
score.
In addition to considering an institution's relative risk ranking
among all large institutions, the FDIC will consider how an
institution's total score compares to the total scores of institutions
in a peer group. This comparison will allow the FDIC to account for
variations in risk measures that exists among institutions with
differing business models. For purposes of the comparison, the FDIC
will, where appropriate, assign an institution to a peer group. The
peer groups are:
Processing Banks and Trust Companies: Large institutions whose last
three years' non-lending interest income, fiduciary revenues, and
investment banking fees, combined, exceed 50 percent of total revenues
(and its last three years' fiduciary revenues are non-zero), and whose
total fiduciary assets total $500 billion or more.
Residential Mortgage Lenders: Large institutions not described in
the peer group above whose residential mortgage loans, which include
home equity lines of credit plus residential mortgage backed
securities, exceed 50 percent of total assets.
Non-diversified Regional Institutions: Large institutions not
described in a peer group above if: (1) Credit card plus securitized
receivables exceed the sum of 50 percent of assets plus securitized
receivables; or (2) the sum of residential mortgage loans, credit card
loans, and other loans to individuals exceeds 50 percent of assets.
Large Diversified Institutions: Large institutions with over $150
billion in assets not described in a peer group above.
Diversified Regional Institutions: Large institutions with less
than $150 billion in assets not described in a peer group above.
The FDIC received a comment suggesting that the definition of
Residential Mortgage Lenders as a peer group should clarify whether the
definition is limited to residential mortgages and whether home-equity
lines of credit are included. The FDIC agrees. The definition of has
been clarified to include residential mortgages, including home-equity
lines of credit and residential mortgage-backed securities.
B. Institution-Initiated Request for a Large Bank Adjustment
An institution may request a large bank adjustment by submitting a
written request to the FDIC no later than 35 days following the end of
the quarter for which the institution is requesting the adjustment.
Such a request must be supported with evidence of a material risk or
risk-mitigating factor that is not adequately captured or considered in
the scorecard.\9\ Similar to FDIC-initiated adjustments, an
institution-initiated request for adjustment will be considered only if
it is supported by evidence of a material risk or risk-mitigating
factor that is not adequately accounted for in the scorecard and
results in a material change to the total score. Furthermore, the
overall risk profile must be materially higher or lower than that
produced by the scorecard. The FDIC will consider these requests as
part of its ongoing effort to identify and adjust scores so that
institutions with similar risk profiles receive similar total scores.
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\9\ A request for adjustment with supporting evidence should be
addressed to Director, Division of Insurance and Research, Federal
Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC
20429.
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An institution-initiated request for adjustment that is received by
the FDIC later than 35 days after the end of the quarter for which the
institution is requesting the adjustment may not provide the FDIC with
sufficient time to appropriately assess and respond to the request for
adjustment; therefore, the FDIC may not be able to consider adjusting
an institution's assessment for that quarter if the request is received
after this time. Although institutions may request an adjustment at any
time, those well-supported requests received
[[Page 57996]]
after the deadline may not be considered until the following quarter.
In conjunction with the next quarter's consideration, the FDIC may
require that the institution update the information supporting the
institution-initiated request. The FDIC's determination that an
adjustment request was received after the deadline and there was
insufficient time to appropriately respond to it may be challenged by
the institution in a request for review pursuant to the assessment
appeals process (12 CFR 327.4(c)).
For example, a request for adjustment of an institution's third
quarter total score with supporting evidence must be received no later
than November 4 by the FDIC's Director of the Division of Insurance and
Research in Washington, DC. If the request for adjustment is received
after November 4, it may not be considered by the FDIC until the fourth
quarter and the FDIC may request updated information at that time.
Pursuant to 12 CFR 327.4(c), the institution may file a request for
review challenging the FDIC's determination to consider the request in
the fourth quarter or file a request for review of its third quarter
assessment rate once it receives its invoice for the third quarter
assessment. An institution that files a request for adjustment more
than 35 days after the end of the quarter for which it is requesting an
adjustment is not precluded from requesting adjustments for future
quarters.
The FDIC received three positive comments regarding the FDIC's
willingness to explicitly permit written requests from institutions for
a large bank adjustment. One commenter suggested that the FDIC provide
the number of challenges to deposit insurance assessment adjustments
and rulings for or against such challenges in its quarterly publication
of statistics. Another commenter recommended that the FDIC provide a
prompt response for any downward adjustment request. Finally, one
commenter requested clarification about whether the national or
regional office of the FDIC would recommend an adjustment to a large
institution's total score, stating that the national office is better
suited to consider the entire banking industry when determining
outliers for pricing purposes.
As noted in the Amended Assessment Regulations, the FDIC will
publish aggregate statistics on adjustments each quarter. The FDIC's
Assessment Appeals Committee publishes all appeals and the results of
such appeals. In addition, the FDIC will respond promptly to all well-
supported requests for a downward large bank adjustment. As noted
previously, a well-supported request (the requests must also be
material, as defined above) should be received by the FDIC within 35
days after the end of the quarter for which the adjustment is being
requested. Finally, the FDIC will ensure that appropriate staff is
involved in the decision-making process relevant to large bank
adjustments.
C. Determining the Adjustment Amount
Once the FDIC determines that an adjustment may be warranted, the
FDIC will determine the adjustment necessary to bring an institution's
total score into better alignment with those of other institutions that
pose similar levels of risk. The FDIC will initiate an adjustment or
consider an institution-initiated request for adjustment only when a
combination of risk measures and other information suggest either
materially higher or lower risk than an institution's total score
indicates. The FDIC expects that the adjustment process will be needed
for only a relatively small number of institutions. If the size of the
adjustment required to align an institution's total score with
institutions of similar risk is not material, no adjustment will be
made. The FDIC will only initiate adjustments either upward or downward
that warrant an adjustment of 5 points or more and adjustments will
generally only be made in 5, 10, or 15 point increments.
One commenter stated that the proper size of an adjustment would be
subject to differences of opinion. The FDIC agrees that there is
subjectivity involved in the large bank adjustment process; however,
the FDIC expects that differences of opinion on the appropriate size of
the adjustment should be limited. The FDIC will only initiate
adjustments or consider reviews for adjustment if the comprehensive
analysis of the institution's risk and the institution's relative risk
ranking warrant a material adjustment of the institution's total score.
To reduce the potential subjectivity regarding the precision of the
size of an adjustment, the FDIC has determined that any adjustment will
be limited to a minimum of 5 points and generally limited to 5, 10, or
15 point increments. The FDIC believes a minimum 5 point adjustment
provides a threshold that clarifies how the FDIC will determine whether
an adjustment is material. In addition, the discrete adjustment levels
should reduce potential disagreements regarding the appropriate size of
any adjustment applied.
D. Further Analysis and Consultation With Primary Federal Regulator
As under the 2007 Guidelines, the FDIC will consult with an
institution's primary federal regulator and appropriate state banking
supervisor before making any decision to adjust an institution's total
score (and before removing a previously implemented adjustment).
One commenter recommended that any adjustment to an institution's
total score should require concurrence by an institution's primary
federal regulator, rather than simply consultation. The FDIC disagrees.
Large bank adjustments are made only after consideration of the
institution's relative risk ranking among the entire large bank
universe. Such consideration requires knowledge and data of the total
scores for every institution in the large bank universe, which is
information that other primary federal regulators do not have.
Furthermore, only the FDIC has the legal authority to assess
institutions for deposit insurance. Therefore, the FDIC will continue
to consult with an institution's primary federal regulator and consider
the primary federal regulator's comments prior to making a large bank
adjustment, but, ultimately, the decision concerning any adjustment
will be made by the FDIC. This process is consistent with the procedure
used in the 2007 Guidelines.
E. Advance Notice
To give an institution an opportunity to respond, the FDIC will
give advance notice to an institution when proposing to make an upward
adjustment to the institution's total score.\10\ Consistent with the
2007 Guidelines, the timing of the notice will correspond approximately
to the invoice date for an assessment period. For example, an
institution will be notified of a proposed upward adjustment to its
assessment rates for the period April 1 through June 30 by
approximately June 15, which is the invoice date for the January 1
through March 31 assessment period.\11\
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\10\ The institution will also be given advance notice when the
FDIC determines to eliminate any downward adjustment to an
institution's total score.
\11\ The invoice covering the assessment period January 1
through March 31 in this example would not reflect the upward
adjustment.
---------------------------------------------------------------------------
Decisions to lower an institution's total score will not be
communicated to institutions in advance. Rather, as under the 2007
Guidelines, downward adjustments will be reflected in the invoices for
a given assessment period along with the reasons for the adjustment.
[[Page 57997]]
F. Institution's Opportunity To Respond
An institution that has been notified of the FDIC's intent to apply
an upward adjustment will have 60 days to respond to the notice. Before
implementing an upward adjustment, the FDIC will review the
institution's response, along with any subsequent changes to
supervisory ratings, scorecard measures, or other relevant risk
factors. Similar to the 2007 Guidelines, the FDIC will notify the
institution of its decision to proceed or not to proceed with the
upward adjustment along with the invoice for the quarter in which the
adjustment will become effective.
Extending the example above, if the FDIC notified an institution of
a proposed upward adjustment on June 15, the institution would have 60
days from that date to respond to the notification. If, after
evaluating the institution's response and updated information for the
quarterly assessment period ending June 30, the FDIC decided to proceed
with the adjustment, the FDIC would communicate this decision to the
institution by approximately September 15, which is the invoice date
for the April 1 through June 30 assessment period. In this case, the
adjusted assessment rate would be reflected in the September 15
invoice.
The time frames and example above also apply to a decision by the
FDIC to remove a previously implemented downward adjustment as well as
a decision to increase a previously implemented upward adjustment.
G. Duration of the Adjustment
Consistent with the 2007 Guidelines, the large bank adjustment will
remain in effect for subsequent assessment periods until the FDIC
determines either that the adjustment is no longer warranted or that
the magnitude of the adjustment needs to be reduced or increased
(subject to the 15 point limitation and the requirement for further
advance notification).\12\
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\12\ As noted in the Amended Assessments Regulation, an
institution's assessment rate may increase without notice if the
institution's supervisory, agency ratings, or financial ratios
deteriorate.
---------------------------------------------------------------------------
H. Requests for Review and Appeals
In making a decision regarding an adjustment, the FDIC will
consider all material information available to it, including any
information provided by an institution, but ultimately, all decisions
concerning adjustments will be made by the FDIC. An institution may
request review of or appeal an upward adjustment, the magnitude of an
upward adjustment, removal of a previously implemented downward
adjustment or an increase in a previously implemented upward adjustment
pursuant to 12 CFR 327.4(c). An institution may similarly request
review of or appeal a decision not to apply an adjustment following an
institution-initiated request for an adjustment.
V. Additional Information on the Adjustment Process, Including Examples
As discussed previously, the FDIC will primarily consider two types
of information in determining whether to make a large bank adjustment:
scorecard measure outliers and information not directly captured in the
scorecard, including complementary quantitative risk measures and
qualitative risk considerations.
A. Scorecard Measure Outliers
In order to convert each scorecard ratio into a score that ranges
between 0 and 100, the Amended Assessment Regulations use minimum and
maximum cutoff values that generally correspond to the 10th and 90th
percentile values for each ratio based on data for the 2000 to 2009
period. All values less than the 10th percentile or all values greater
than the 90th percentile are assigned the same score. This process
enables the FDIC to compare different ratios in a standardized way and
assign statistically-based weights; however, the process may mask
significant differences in risk among institutions with the minimum or
maximum score. The FDIC believes that an institution with one or more
scorecard ratios well in excess of the maximum cutoffs or well below
the minimum cutoffs may pose significantly greater or lower risk to the
deposit insurance fund than its score suggests.
The example below illustrates the analytical process the FDIC will
follow in determining to propose a downward adjustment based on
scorecard measure outliers. The example is merely illustrative. As
shown in Chart 1, Bank A has a total score of 45 and two scorecard
measures with a score of 0 (indicating lower risk).
BILLING CODE 6714-01-P
[[Page 57998]]
[GRAPHIC] [TIFF OMITTED] TN19SE11.000
Since at least one of the scorecard measures has a score of 0, the
FDIC would further review whether the ratios underlying these measures
materially differ from the cutoff value associated with a score of 0.
Materiality will generally be determined by the amount that the
underlying ratio differs from the relevant cutoff as a percentage of
the overall scoring range (the maximum cutoff minus the minimum
cutoff). Table 3 shows that Bank A's Tier 1 Leverage ratio (17 percent)
far exceeds the cutoff value associated with a score of 0 (13 percent),
with the difference representing 57 percent of the associated scoring
range. Based on this additional information and assuming no other
mitigating factors, the FDIC may conclude that Bank A's loss absorbing
capacity is not fully recognized, particularly when compared with other
institutions receiving the same overall score. By contrast, Bank A's
Core Return on Assets (ROA) ratio is much closer to its cutoff values,
suggesting that an adjustment based on consideration of this factor may
not be justified.
Table 3--Outlier Analysis for Bank A
----------------------------------------------------------------------------------------------------------------
Cutoffs (%) Outlier amount
------------------------ (value minus
Value cutoff) as
Scorecard measure Score (%) percentage of
Minimum Maximum the scoring
range
----------------------------------------------------------------------------------------------------------------
Core ROA.......................................... 0 0 2 2.08 4
Tier 1 Capital Ratio.............................. 0 6 13 17 57
----------------------------------------------------------------------------------------------------------------
Before initiating an adjustment, however, the FDIC would consider
whether Bank A had significant risks that were not captured in the
scorecard. If no information on such risks existed, the FDIC would
initiate a downward adjustment to Bank A's total score to the extent
that the FDIC determined that such a downward adjustment warranted at
least a 5 point adjustment.
The amount of the adjustment will be the amount needed to make the
total score consistent with those of banks of comparable overall risk,
with particular emphasis on institutions of the same peer group (e.g.,
diversified regional institutions), as described above. Typically,
however, adjustments supported by only one extreme outlier value will
be less than the FDIC's potential adjustment authority of 15 points. In
the case of multiple outlier values, inconsistent outlier values, or
outlier values that are exceptionally beyond the scoring range, an
overall analysis of each measure's relative importance could result in
varying adjustment amounts depending on each institution's unique set
of circumstances. For Bank A, a 5-point adjustment may be most
appropriate.
The next example illustrates the analytical process the FDIC will
follow in determining to propose an upward adjustment based on
scorecard measure outliers. As in the example above, the example is
merely illustrative; an institution with less extreme values may also
receive an upward adjustment. As shown in Chart 2, Bank B has a total
score of 72 and three scorecard
[[Page 57999]]
measures with a score of 100 (indicating higher risk).
[GRAPHIC] [TIFF OMITTED] TN19SE11.001
Since at least one of the scorecard measures has a score of 100,
the FDIC would further review whether the ratios underlying these
measures materially exceed the cutoff value associated with a score of
100. Table 4 shows that Bank B's Criticized and Classified Items to
Tier 1 Capital and Reserves ratio (198 percent) far exceeds the cutoff
value associated with a score of 100 (100 percent), with the difference
representing 105 percent of the associated scoring range. Based on this
additional information and assuming no other mitigating factors, the
FDIC may determine that the risk associated with Bank B's ability to
withstand asset-related stress and, therefore, its overall risk, is
materially greater than its score suggests, particularly when compared
with other institutions receiving the same overall score. By contrast,
the Core ROA and Underperforming Assets to Tier 1 Capital and Reserves
values are much closer to their respective cutoff values, suggesting
that an adjustment based on these factors may not be justified.
Table 4--Outlier Analysis for Bank B
----------------------------------------------------------------------------------------------------------------
Cutoffs (%) Outlier amount
------------------------ (value minus
Value cutoff) as
Scorecard measure Score (%) percentage of
Minimum Maximum the scoring
range
----------------------------------------------------------------------------------------------------------------
Core ROA.......................................... 100 0 2 -0.05 -3
Criticized and Classified to Tier 1 Capital & 100 7 100 198 105
Reserves.........................................
Underperforming Assets to Tier 1 Capital & 100 2 35 36 3
Reserves.........................................
----------------------------------------------------------------------------------------------------------------
[[Page 58000]]
After considering any risk-mitigating factors, the FDIC will
determine the amount of adjustment needed to make the total score
consistent with those of banks of comparable overall risk. For Bank B,
a 5-point adjustment may be most appropriate.
B. Information Not Directly Captured by the Scorecard
1. Complementary Risk Measures
Complementary risk measures are measures that are not included in
the scorecard, but that can inform the appropriateness of a given
scorecard measure for a particular institution. These measures are
readily available for all institutions and include quantitative metrics
and market indicators that provide further insight into an
institution's ability to withstand financial adversity, and the
severity of losses in the event of failure.
Analyzing complementary risk measures will help the FDIC determine
whether the assumptions applied to a scorecard measure are appropriate
for a particular institution. For example, as detailed in the Amended
Assessments Regulation, the scorecard includes a loss severity measure
based on the FDIC's loss severity model. The measure applies a standard
set of assumptions to all large banks to estimate potential losses to
the insurance fund. These assumptions, including liability runoffs and
asset recovery rates, are derived from actual bank failures; however,
the FDIC recognizes that a large bank may have unique attributes that
could have a bearing on the appropriateness of those assumptions. When
data or quantitative metrics exist that support materially different
runoff assumptions or asset recovery rates for a particular
institution, the FDIC may consider an adjustment to the total score,
particularly if the information is further supported by qualitative
loss severity considerations as discussed below.
Two commenters suggested that the FDIC provide an exhaustive list
of complementary benchmarks or qualitative factors that may be
considered during the large bank adjustment process. A few commenters
stated that the FDIC has not provided sufficient detail regarding the
factors that may trigger a large bank adjustment.
The FDIC agrees that providing an exhaustive list of factors that
may be considered in the large bank adjustment process would be ideal,
but has concluded that this is not reasonable or practical. The FDIC
will consider all factors that may affect an institution's risk
profile, including idiosyncratic risks and the dynamic nature of the
industry.
The example below illustrates the analytical process the FDIC will
follow when determining whether to propose an upward adjustment based
on complementary risk measures. Again, the example is merely
illustrative. Chart 3 shows that Bank C has a total score of 66. Some
of Bank C's risk measure scores are significantly higher than the total
score, while others, including the Tier 1 leverage ratio score (42),
are significantly lower.
[GRAPHIC] [TIFF OMITTED] TN19SE11.002
In this hypothetical, following a review of complementary measures
for all financial ratios in the scorecard, the complementary measures
for Tier 1 leverage ratio shows that the level and quality of capital
protection may not be correctly reflected in the Tier 1 leverage ratio
score. Chart 4 shows that two other complementary capital measures for
[[Page 58001]]
Bank C--the total equity ratio and the ratio of other comprehensive
income (OCI) to Tier 1 capital--suggest higher risk than the Tier 1
leverage ratio score suggests. Additional review reveals that sizeable
unrealized losses in the securities portfolio account for these
differences and that Bank C's loss absorbing capacity is potentially
overstated by the Tier 1 leverage ratio.
[GRAPHIC] [TIFF OMITTED] TN19SE11.003
An upward adjustment to Bank C's total score may be appropriate,
again assuming that no significant risk mitigants are evident. An
adjustment of 5 points would be likely since the underlying level of
unrealized losses is extremely high (greater than 25% of Tier 1
capital). While the adjustment in this case would likely be limited to
5 points because the bank's concentration measure and credit quality
measure already receive the maximum possible score, in other cases
modest unrealized losses could lead to a higher overall adjustment
amount, if the concentration and credit quality measures were
understated as well.\13\
---------------------------------------------------------------------------
\13\ The concentration measure and the credit quality measure
are expressed as a percent of Tier 1 capital plus the allowance for
loan loss reserves.
---------------------------------------------------------------------------
2. Qualitative Risk Considerations
The FDIC believes that it is important to consider all relevant
qualitative risk considerations in determining whether to apply a large
bank adjustment. Qualitative information often provides significant
insights into institution-specific or idiosyncratic risk factors that
are impossible to capture in the scorecard. Similar to scorecard
outliers and complementary risk measures, the FDIC will use the
qualitative information to consider whether potential discrepancies
exist between the risk ranking of institutions based on their total
score and the relative risk ranking suggested by a combination of risk
measures and qualitative risk considerations. Such information
includes, but is not limited to, analysis based on information obtained
through the supervisory process, including information gained through
the FDIC's special examination authority, such as underwriting
practices, interest rate risk exposure and other information obtained
through public filings.\14\
---------------------------------------------------------------------------
\14\ 12 U.S.C. 1820(b)(3); see Interagency Memorandum of
Understanding on Special Examinations dated July 12, 2010. https://www.fdic.gov/news/news/press/2010/pr10153.html.
---------------------------------------------------------------------------
Another example of qualitative information that the FDIC will
consider is available information pertaining to an institution's
ability to withstand adverse events. Sources of this information are
varied but may include analyses produced by the institution or
supervisory authorities, such as stress test results, capital adequacy
assessments, or information detailing the risk characteristics of the
institution's lending portfolios and other businesses. Information
pertaining to internal stress test results and internal capital
adequacy assessment will be used qualitatively to help inform the
relative importance of other risk measures, especially concentrations
of credit exposures and other material non-lending business activities.
As an example, in cases where an institution has a significant
concentration of credit risk, results of internal stress tests and
[[Page 58002]]
internal capital adequacy assessments could alleviate FDIC concerns
about this risk and therefore provide support for a downward
adjustment, or alternatively, provide additional mitigating information
to forestall a pending upward adjustment. In some cases, stress testing
results may suggest greater risk than is normally evident through the
scorecard methodology alone.
Qualitative risk considerations will also include information that
could have a bearing on potential loss severity, and could include, for
example, the ease with which the FDIC can make quick deposit insurance
determinations and depositor payments, or the availability of
sufficient information on qualified financial contracts to allow the
FDIC to accurately analyze these contracts in a timely manner in the
event of the institution's failure.
In general, qualitative factors will become more important in
determining whether to apply an adjustment when an institution has high
performance risk or if the institution has high asset, earnings, or
funding concentrations. For example, if a bank is near failure,
qualitative loss severity information becomes more important in the
adjustment process.
Further, if a bank has material concentrations in some asset
classes, the quality of underwriting becomes more important in the
adjustment process.
Additionally, engaging in certain business lines may warrant
further consideration of qualitative factors. For instance, supervisory
assessments of operational risk and controls at processing banks are
likely to be important regardless of the institution's performance.
The specific example below illustrates the analytical process the
FDIC will follow to determine whether to make an adjustment based on
qualitative information. Chart 5 shows that Bank D has a high score of
82 that is largely driven by a high score for the ability to withstand
asset-related stress component, which is, in turn, largely driven by
the higher-risk asset concentration score and the underperforming asset
score. The ability to withstand asset-related stress component is
heavily weighted in the scorecard (50 percent weight), and, as a
result, significant qualitative information that is not considered in
the scorecard could lead to an adjustment to the institution's total
score.
[GRAPHIC] [TIFF OMITTED] TN19SE11.004
The FDIC would review qualitative information pertaining to the
higher-risk asset concentration measure and the underperforming asset
measure for Bank D to determine whether there are one or more important
risk mitigants that are not factored into the scorecard. The example
assumes that FDIC's review revealed that, while Bank D has
concentrations in non-traditional mortgages, its mortgage portfolio has
the following characteristics that suggest lower risk:
a. Most of the loan portfolio is composed of bank-originated
residential real estate loans on owner-occupied properties;
b. The portfolio has strong collateral protection (e.g., few or no
loans with a high loan-to-value ratio) compared to the rest of the
industry;
c. Debt service coverage ratios are favorable (e.g., few or no
loans with a high debt-to-income ratio) compared to the institution's
peers;
d. The primary federal regulator notes in its examination report
that the institution has strong collection practices and reports no
identified risk management deficiencies.
Additionally, these qualitative factors surrounding the bank's real
estate portfolio suggest that the loss rate assumptions applied to Bank
D's residential mortgage portfolio may be too severe, resulting in a
loss severity score that is too high relative to its risk.
Based on the information above, the bank would be a strong
candidate for a 10 to 15 point reduction in total score, primarily
since the ability to withstand
[[Page 58003]]
asset-related stress score and loss severity score do not reflect a
number of significant qualitative risk mitigants that suggest lower
risk.
VI. Additional Comments
The FDIC received two comments stating that including Troubled Debt
Restructurings (TDR) in the Criticized and Classified items and/or
underperforming assets ratios and/or the higher-risk concentration
measure is inconsistent with the FDIC's public remarks encouraging
institutions to enter into loan modifications. In particular, the
commenter cited remarks made in ``Supervisory Insights: Regulatory
Actions Related to Foreclosure Activities by Large Servicers and
Practical Implications for Community Banks.'' One commenter suggested
that the FDIC include in the guidelines a method to adjust
institutions' scores that actively demonstrates support for the FDIC's
guidance on mortgage loan modifications.
Many loan modifications, such as those to reduce the interest rate
for competitive reasons, are not TDRs. However, a loan modification
results in a TDR when a creditor for economic or legal reasons related
to the borrower's financial difficulties grants a concession to the
borrower that the creditor would not otherwise have considered if it
were not for the borrower's financial difficulties. Restructured
workout loans typically present an elevated level of credit risk as the
borrowers are not able to perform according to the original contractual
terms. The FDIC is interested in pricing for risk; therefore, TDRs
(which display higher risk) are included in certain scorecard ratios.
The FDIC does not believe the definitions and the application of
those definitions in the pricing rule for these higher risk assets is
inconsistent with the FDIC's guidance to ``avoid unnecessary
foreclosures and consider mortgage loan modifications or other workouts
that are affordable and sustainable.'' To the extent that TDRs have
risk mitigants that materially lower an institution's risk profile
relative to that institution's total score, the FDIC would consider
those specific mitigants in the adjustment process.
VII. Effective Date: September 13, 2011
VIII. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3501 et seq.), an agency may not conduct or sponsor, and a person is
not required to respond to, a collection of information unless it
displays a currently valid OMB control number. This Notice of
Assessment Rate Adjustment Guidelines for Large and Highly Complex
Institutions includes a provision allowing large and highly complex
institutions to make a written request to the FDIC for an adjustment to
an institution's total score. An institution's request for adjustment
is considered only if it is supported by evidence of a material risk or
risk-mitigating factor that is not adequately accounted for in the
scorecard.
In conjunction with publication of the Proposed Assessment Rate
Adjustment Guidelines for Large and Highly Complex Institutions, the
FDIC submitted to OMB a request for clearance of the paperwork burden
associated with the request for adjustment. That request is still
pending. The proposal requested comment on the estimated paperwork
burden. One comment addressing the estimated paperwork burden was
received; the commenter stated that the number of hours required to
prepare an institution-initiated request for adjustment was
underestimated. The FDIC agrees that there can be significant
variations in the amount of time required to provide a written request
for an adjustment and has altered its initial burden estimates
accordingly. The revised estimated burden for the application
requirement is as follows:
Title: ``Assessment Rate Adjustment Guidelines for Large and Highly
Complex Institutions--Request for Adjustment.''
OMB Number: 3064-0179.
Respondents: Large and Highly Complex insured depository
institutions.
Number of Responses: 0-11 per year.
Frequency of Response: Occasional.
Average number of hours to prepare a response: 8-80.
Total Annual Burden: 0-880 hours.
Comment Request: The FDIC has an ongoing interest in public
comments on its collections of information, including comments on: (1)
Whether this collection of information is necessary for the proper
performance of the FDIC's functions, including whether the information
has practical utility; (2) the accuracy of the estimates of the burden
of the information collection, including the validity of the
methodologies and assumptions used; (3) ways to enhance the quality,
utility, and clarity of the information to be collected; and (4) ways
to minimize the burden of the information collection on respondents,
including through the use of automated collection techniques or other
forms of information technology. Comments may be submitted to the FDIC
by any of the following methods:
https://www.FDIC.gov/regulations/laws/federal/propose.html.
E-mail: comments@fdic.gov: Include the name and number of
the collection in the subject line of the message.
Mail: Gary Kuiper (202-898-3877), Counsel, Federal Deposit
Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.
Hand Delivery: Comments may be hand-delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street), on business days between 7 a.m. and 5 p.m. A copy of the
comment may also be submitted to the OMB Desk Officer for the FDIC,
Office of Information and Regulatory Affairs, Office of Management and
Budget, New Executive Office Building, Room 3208, Washington, DC 20503.
All comments should refer to the ``Assessment Rate Adjustment
Guidelines for Large and Highly Complex Institutions--Request for
Adjustment.'' (OMB No. 3064-0179).
By order of the Board of Directors.
Dated at Washington, DC, this 13th day of September, 2011.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2011-23835 Filed 9-16-11; 8:45 am]
BILLING CODE 6714-01-P
