Assessments, 70427-70438 [2014-27941]
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70427
Rules and Regulations
Federal Register
Vol. 79, No. 228
Wednesday, November 26, 2014
This section of the FEDERAL REGISTER
contains regulatory documents having general
applicability and legal effect, most of which
are keyed to and codified in the Code of
Federal Regulations, which is published under
50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by
the Superintendent of Documents. Prices of
new books are listed in the first FEDERAL
REGISTER issue of each week.
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 327
RIN 3064–AE16
Assessments
Federal Deposit Insurance
Corporation (FDIC).
ACTION: Final rule.
AGENCY:
The FDIC is amending its
regulations to revise the ratios and ratio
thresholds for capital evaluations used
in its risk-based deposit insurance
assessment system to conform to the
prompt corrective action capital (PCA)
ratios and ratio thresholds adopted by
the FDIC, the Board of Governors of the
Federal Reserve System (Federal
Reserve) and the Office of the
Comptroller of the Currency (OCC)
(collectively, the Federal banking
agencies); revise the assessment base
calculation for custodial banks to
conform to the asset risk weights
adopted by the Federal banking
agencies; and require all highly complex
institutions to measure counterparty
exposure for deposit insurance
assessment purposes using the Basel III
standardized approach credit equivalent
amount for derivatives (with
modifications for certain cash collateral)
and the Basel III standardized approach
exposure amount for securities
financing transactions—such as repostyle transactions, margin loans and
similar transactions—as adopted by the
Federal banking agencies.
DATES: Effective date: January 1, 2015,
except for the amendment to § 327.9
(amendatory instruction 5), which is
effective January 1, 2018.
Applicability date: The incorporation
of the supplementary leverage ratio and
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SUMMARY:
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corresponding ratio thresholds into the
definition of capital evaluations is
applicable January 1, 2018.
FOR FURTHER INFORMATION CONTACT:
Munsell St. Clair, Chief, Banking and
Regulatory Policy Section, Division of
Insurance and Research, (202) 898–
8967; Ashley Mihalik, Senior Financial
Economist, Banking and Regulatory
Policy Section, Division of Insurance
and Research, (202) 898–3793; Nefretete
Smith, Senior Attorney, Legal Division,
(202) 898–6851; Tanya Otsuka, Senior
Attorney, Legal Division, (202) 898–
6816.
SUPPLEMENTARY INFORMATION:
I. Notice of Proposed Rulemaking and
Comments
On July 15, 2014, the FDIC’s Board of
Directors authorized publication of a
notice of proposed rulemaking (NPR)
proposing to: (1) Revise the ratios and
ratio thresholds for capital evaluations
used in its risk-based deposit insurance
assessment system to conform to the
PCA capital ratios and ratio thresholds
adopted by the Federal banking
agencies; (2) revise the assessment base
calculation for custodial banks to
conform to the asset risk weights
adopted by the Federal banking
agencies; and (3) require all highly
complex institutions to measure
counterparty exposure for deposit
insurance assessment purposes using
the Basel III standardized approach
credit equivalent amount for derivatives
and the Basel III standardized approach
exposure amount for securities
financing transactions, such as repostyle transactions, margin loans and
similar transactions, as adopted by the
Federal banking agencies. These
changes were proposed in part to
accommodate recent changes to the
Federal banking agencies’ capital rules
that are referenced in portions of the
FDIC’s assessments regulation.
The NPR was published in the
Federal Register on July 23, 2014.1 The
FDIC sought comment on every aspect
of the proposed rule and on alternatives.
The FDIC received a total of 4 comment
letters. The FDIC also met with one
commenter to improve understanding of
1 79
PO 00000
FR 42698 (July 23, 2014).
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the issues raised in the commenter’s
written comment letter. A summary of
the meeting is posted on the FDIC’s Web
site. Comments are discussed in the
relevant sections that follow.
II. Ratios and Ratio Thresholds
Relating to Capital Evaluations
A. Background
The Federal Deposit Insurance
Corporation Improvement Act of 1991
(FDICIA) 2 required that the FDIC
establish a risk-based deposit insurance
assessment system. To implement this
requirement, the FDIC adopted by
regulation a system that placed all
insured depository institutions (IDIs or
banks) into nine risk classifications
based on two criteria: Capital
evaluations and supervisory ratings.3
Each bank was assigned one of three
capital evaluations based on data
reported in its Consolidated Report of
Condition and Income (Call Report):
Well capitalized, adequately capitalized,
or undercapitalized. The capital ratios
and ratio thresholds used to determine
each capital evaluation were based on
the capital ratios and ratio thresholds
adopted for PCA purposes by the FDIC,
the OCC, the Federal Reserve, and the
Office of Thrift Supervision (OTS)—the
Federal banking agencies at that time.4
In 1993, the ratios and ratio thresholds
used to determine each capital
evaluation for assessment purposes
were as shown in Table 1.
2 12 U.S.C. 1817(b), Pub. L. 102–242, 105 Stat.
2236 (1991).
3 The FDIC first published a transitional rule that
provided the industry guidance during the period
of transition from a uniform rate to a risk-based
assessment system. 57 FR 45263 (Oct. 1, 1992). The
FDIC established the new risk-based assessment
system, which became effective on January 1, 1994,
to replace the transitional rule. 58 FR 34357 (June
25, 1993); 12 CFR 327.3 (1993).
4 This final rule, issued by the FDIC, OCC,
Federal Reserve, and OTS, in part, established
capital ratios and ratio thresholds for the five
capital categories for purposes of the PCA rules:
Well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized,
and critically undercapitalized. 57 FR 44866 (Sept.
29, 1992). The risk-based assessment system does
not use the two lowest capital categories
(significantly undercapitalized and critically
undercapitalized) under the PCA rules. For
assessment purposes, banks that would be in one
of these capital categories are treated as
undercapitalized.
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Federal Register / Vol. 79, No. 228 / Wednesday, November 26, 2014 / Rules and Regulations
TABLE 1—CAPITAL RATIOS USED TO DETERMINE CAPITAL EVALUATIONS FOR ASSESSMENT PURPOSES
Total riskbased ratio
(%)
Capital evaluations
≥10
≥8
Well Capitalized ...........................................................................................................................
Adequately Capitalized * ..............................................................................................................
Undercapitalized ..........................................................................................................................
Tier 1 riskbased ratio
(%)
≥6
≥4
Tier 1 leverage ratio
(%)
≥5
≥4
Does not qualify as either Well Capitalized or
Adequately Capitalized
* An institution is Adequately Capitalized if it is not Well Capitalized, but satisfies each of the listed capital ratio standards for Adequately
Capitalized.
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In 2007, the nine risk classifications
were consolidated into four risk
categories, which continued to be based
on capital evaluations and supervisory
ratings; 5 the capital ratios and the
thresholds used to determine capital
evaluations remained unchanged.6
In 2011, the FDIC adopted a revised
assessment system for large banks—
generally, those with at least $10 billion
in total assets (Assessments final rule).7
This system eliminated risk categories
for these banks, but PCA capital
evaluations continue to be used to
determine whether an assessment rate is
subject to adjustment for significant
amounts of brokered deposits.8
The assessment system for small
banks, generally those with less than
$10 billion in total assets, continues to
use risk categories based on capital
evaluations and supervisory ratings; the
capital ratios and the thresholds used to
determine capital evaluations have
remained unchanged.
On September 7, 2013, the FDIC
adopted an interim final rule 9 and on
April 14, 2014, published a final rule
that, in part, revises the definition of
regulatory capital.10 The OCC and the
Federal Reserve adopted a final rule in
5 The four risk categories are I, II, III, and IV.
Banks posing the least risk are assigned to risk
category I. 71 FR 69282 (Nov. 30, 2006).
6 To the extent that the definitions of components
of the ratios—such as tier 1 capital, total capital,
and risk-weighted assets—have changed over time
for PCA purposes, the assessment system has
reflected these changes.
7 76 FR 10672 (Feb. 25, 2011). The FDIC amended
Part 327 in a subsequent final rule by revising some
of the definitions used to determine assessment
rates for large and highly complex IDIs. 77 FR
66000 (Oct. 31, 2012). The term ‘‘Assessments final
rule’’ includes the October 2012 final rule.
8 In 2009, the FDIC added adjustments to its riskbased pricing methods to improve the way the
assessment system differentiates risk among insured
institutions. The brokered deposit adjustment (one
of the adjustments added in 2009) is applicable
only to small institutions in risk categories II, III,
and IV, and large institutions that are either less
than well capitalized or have a composite CAMELS
rating of 3, 4 or 5 (under the Uniform Financial
Institution Rating System). The adjustment
increases assessment rates for significant amounts
of brokered deposits. 74 FR 9525 (Mar. 4, 2009).
9 78 FR 55340 (Sept. 10, 2013).
10 79 FR 20754 (Apr. 14, 2014).
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October 2013 that is substantially
identical to the FDIC’s interim final rule
and final rule.11 (The FDIC’s interim
final rule and final rule and the OCC
and Federal Reserve’s final rule are
referred to collectively hereafter as the
Basel III capital rules.) The Basel III
capital rules revise the thresholds for
the tier 1 risk-based capital ratio used to
determine a bank’s capital category
under the PCA rules (that is, whether
the bank is well capitalized, adequately
capitalized, undercapitalized,
significantly undercapitalized, or
critically undercapitalized). The Basel
III capital rules also add a new ratio, the
common equity tier 1 capital ratio, and
new thresholds for that ratio to
determine a bank’s capital category
under the PCA rules.12 The new ratio
and ratio thresholds will take effect on
January 1, 2015.
The Basel III capital rules also adopt
changes to the regulatory capital
requirements for banking organizations
consistent with section 171 of the DoddFrank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act), often
referred to as the ‘‘Collins
Amendment.’’ 13 Under section 171 of
the Dodd-Frank Act, the generally
applicable risk-based capital
requirements serve as a risk-based
capital floor for banking organizations
subject to the advanced approaches riskbased capital rules 14 (advanced
approaches banks 15). Under the Basel III
11 78
FR 62018 (Oct. 11, 2013).
FR at 55592 (FDIC) and 78 FR at 62277 and
62283 (OCC and Federal Reserve), codified, in part,
at 12 CFR part 324, subpart H (FDIC); 12 CFR part
6 (OCC); and 12 CFR part 208 (Regulation H),
subpart D (Federal Reserve).
13 Pub. L. 111–203, sec. 171, 124 Stat. 1376, 1435
(2010) (codified at 12 U.S.C. 5371).
14 The FDIC’s advanced approaches rule is at 12
CFR part 324, subpart E. The advanced approaches
rule is also supplemented by the FDIC’s risk-based
capital requirements for banks subject to significant
exposure to market risk (market risk rule) in 12 CFR
part 324, subpart F.
15 As used herein, an advanced approaches bank
means an IDI that is an advanced approaches
national bank or Federal savings association under
12 CFR 3.100(b)(1), an advanced approaches Boardregulated institution under 12 CFR 217.100(b)(1), or
an advanced approaches FDIC-supervised
12 78
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capital rules effective January 1, 2015,
the minimum capital requirements as
determined by the regulatory capital
ratios based on the standardized
approach 16 become the ‘‘generally
applicable’’ capital requirements under
section 171 of the Dodd-Frank Act.
All banks, including advanced
approaches banks, must calculate riskweighted assets under the standardized
approach and report these risk-weighted
assets, for capital purposes, in Schedule
RC–R of the Call Report effective
January 1, 2015. Advanced approaches
banks also must calculate risk weights
using the advanced approaches and
report risk-weighted assets in the RiskBased Capital Reporting for Institutions
Subject to the Advanced Capital
Adequacy Framework (FFIEC 101).
Revisions to the advanced approaches
risk-weight calculations became
effective January 1, 2014. An advanced
approaches bank that has successfully
completed the parallel run process 17
must determine whether it meets its
minimum risk-based capital
requirements by calculating the three
risk-based capital ratios using total riskweighted assets under the general riskbased capital rules and, separately, total
risk-weighted assets under the advanced
institution under 12 CFR 324.100(b)(1). In general,
an IDI is an advanced approaches bank if it has total
consolidated assets of $250 billion or more, has
total consolidated on-balance sheet foreign
exposures of $10 billion or more, or elects to use
or is a subsidiary of an IDI, bank holding company,
or savings and loan holding company that uses the
advanced approaches to calculate risk-weighted
assets.
16 The FDIC’s standardized approach risk-based
capital rule is at 12 CFR part 324, subpart D. The
standardized-approach risk-based capital rule is
supplemented by the FDIC’s market risk rule in 12
CFR part 324, subpart F.
17 Before determining its risk-weighted assets
under advanced approaches, a bank must conduct
a satisfactory parallel run. A satisfactory parallel
run is a period of no less than four consecutive
calendar quarters during which the bank complies
with the qualification requirements to the
satisfaction of its primary Federal regulator.
Following completion of a satisfactory parallel run,
a bank must receive approval from its primary
Federal regulator to calculate risk-based capital
requirements under the advanced approaches. See
12 CFR 324.121 (FDIC); 12 CFR 3.121 (OCC); and
12 CFR 217.121 (Federal Reserve).
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approaches.18 The lower ratio for each
risk-based capital requirement is the
ratio that will be used to determine an
advanced approaches bank’s
compliance with the minimum capital
requirements 19 and, beginning on
January 1, 2015, for purposes of
determining compliance with the new
PCA requirements.20
For advanced approaches banks, the
Basel III capital rules also introduce the
supplementary leverage ratio and a
threshold for that ratio that advanced
approaches banks must meet to be
deemed adequately capitalized.21 (The
supplementary leverage ratio as adopted
in the Basel III capital rules does not,
however, establish a ratio that advanced
approaches banks must meet to be
deemed well capitalized.) While all
advanced approaches banks must
calculate and begin reporting the
supplementary leverage ratio beginning
in the first quarter of 2015, the
supplementary leverage ratio does not
become effective for PCA purposes until
January 1, 2018.22
On May 1, 2014, the Federal banking
agencies published a final rule (the
Enhanced Supplementary Leverage
Ratio final rule) that strengthens the
supplementary leverage ratio standards
for the largest advanced approaches
banks.23 The Enhanced Supplementary
Leverage Ratio final rule provides that
an IDI that is a subsidiary of a covered
bank holding company (BHC) must
maintain a supplementary leverage ratio
of at least 6 percent to be well
capitalized under the Federal banking
agencies’ PCA framework.24 On
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18 Currently, the general risk-based capital rules
are found at 12 CFR part 325, appendix A (as
supplemented by the risk-based capital
requirements for banks subject to the market risk
rule in appendix C). Effective January 1, 2015, the
general risk-based capital rules will be based on the
standardized approach for calculating risk-weighted
assets under the Basel III capital rules, 12 CFR part
324, subpart D (as supplemented by the risk-based
capital requirements for banks subject to the market
risk rule in subpart F).
19 See 12 CFR 324.10(c) (FDIC); 12 CFR 3.10(c)
(OCC); and 12 CFR 217.10(c) (Federal Reserve).
20 See 12 CFR part 324, subpart H.
21 The supplementary leverage ratio includes
many off-balance sheet exposures in its
denominator, while the generally applicable
leverage ratio does not.
22 78 FR at 55592 (FDIC); 78 FR at 62277 (OCC
and Federal Reserve).
23 79 FR 24528 (May 1, 2014).
24 79 FR at 24530. IDI subsidiaries of a ‘‘covered
BHC’’ are a subset of IDIs subject to advanced
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September 26, 2014, the Federal
banking agencies published a second
final rule that revises the definition of
the denominator of the supplementary
leverage ratio (total leverage
exposure).25 Again, all advanced
approaches banks must calculate and
begin reporting the supplementary
leverage ratio beginning in the first
quarter of 2015, but the supplementary
leverage ratio does not become effective
for PCA purposes until January 1, 2018.
B. The Final Rule: Capital Evaluations
As proposed, the final rule revises the
ratios and ratio thresholds relating to
capital evaluations for deposit insurance
assessment purposes to conform to the
new PCA capital rules. This revision
maintains the consistency between
capital evaluations for deposit insurance
assessment purposes and capital ratios
and ratio thresholds for PCA purposes
that has existed since the creation of the
risk-based assessment system over 20
years ago.
Specifically, the final rule revises the
definitions of well capitalized and
adequately capitalized for deposit
insurance assessment purposes to reflect
the threshold changes for the tier 1 riskbased capital ratio, to incorporate the
common equity tier 1 capital ratio and
its thresholds and, for those banks
subject to the supplementary leverage
ratio for PCA purposes, to incorporate
the supplementary leverage ratio and its
thresholds.26 The definition of
undercapitalized remains unchanged.
The final rule revises the definitions of
well capitalized and adequately
capitalized for deposit insurance
assessment purposes effective when the
approaches requirements. A covered BHC is any
top-tier U.S. BHC with more than $700 billion in
total consolidated assets or more than $10 trillion
in assets under custody. 79 FR at 24538. The list
of ‘‘covered BHCs’’ is consistent with the list of
banking organizations that meet the Basel
Committee on Banking Supervision (Basel
Committee or BCBS) definition of a Global
Systemically Important Bank (G–SIB), based on
year-end 2011 data, and consistent with the revised
list, based on year-end 2012 data. The revised list
is available at http://www.financialstabilityboard.
org/publications/r_131111.pdf).
25 79 FR 57725 (Sept. 26, 2014).
26 To the extent that the definitions of
components of the ratios—such as tier 1 capital,
total capital, and risk-weighted assets—change in
the future for PCA purposes, the assessment system
will automatically incorporate these changes as
implemented under the Basel III capital rules.
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70429
new PCA capital rules become effective.
Therefore, some of the revisions for
deposit insurance assessment purposes
will become effective January 1, 2015
and the remaining revisions will
become effective January 1, 2018.
Effective January 1, 2015, for deposit
insurance assessment purposes:
1. An institution is well capitalized if
it satisfies each of the following capital
ratio standards: Total risk-based capital
ratio, 10.0 percent or greater; tier 1 riskbased capital ratio, 8.0 percent or greater
(as opposed to the current 6.0 percent or
greater); leverage ratio, 5.0 percent or
greater; and common equity tier 1
capital ratio, 6.5 percent or greater.
2. An institution is adequately
capitalized if it is not well capitalized
but satisfies each of the following
capital ratio standards: Total risk-based
capital ratio, 8.0 percent or greater; tier
1 risk-based capital ratio, 6.0 percent or
greater (as opposed to the current 4.0
percent or greater); leverage ratio, 4.0
percent or greater; and common equity
tier 1 capital ratio, 4.5 percent or
greater.
The definition of an undercapitalized
institution remains the same: An
institution is undercapitalized if it does
not qualify as either well capitalized or
adequately capitalized.
The final rule makes a technical
amendment to Part 327 to replace the
terms ‘‘Total risk-based ratio,’’ ‘‘Tier 1
risk-based ratio,’’ and ‘‘Tier 1 leverage
ratio,’’ with ‘‘total risk-based capital
ratio,’’ ‘‘tier 1 risk-based capital ratio,’’
and ‘‘leverage ratio,’’ respectively,
wherever such terms appear.27
Table 2 summarizes the ratios and
ratio thresholds for determining capital
evaluations for deposit insurance
assessment purposes, effective January
1, 2015.
27 The FDIC has identified a slight inconsistency
in terminology between the PCA capital rules of
parts 324 and 325 and the deposit insurance
assessment system of part 327. Currently, the riskbased assessment system under part 327 uses the
terms ‘‘Total risk-based ratio,’’ ‘‘Tier 1 risk-based
ratio,’’ and ‘‘Tier 1 leverage ratio.’’ The PCA capital
rules use the terms ‘‘total risk-based capital ratio,’’
‘‘tier 1 risk-based capital ratio,’’ and ‘‘leverage
ratio’’ (emphasis added). Despite this minor
difference in nomenclature, the underlying
calculations for each of these three ratios are the
same under parts 324, 325 and 327 of the FDIC
regulations.
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TABLE 2—CAPITAL RATIOS USED TO DETERMINE CAPITAL EVALUATIONS FOR ASSESSMENT PURPOSES, EFFECTIVE
JANUARY 1, 2015
Total riskbased capital
ratio
(%)
Capital evaluations
Tier 1 riskbased capital
ratio
(%)
≥10
≥8
Well Capitalized ...............................................................................................
Adequately Capitalized * ..................................................................................
Undercapitalized ..............................................................................................
Common
equity tier 1
capital ratio
(%)
≥8
≥6
Leverage ratio
(%)
≥6.5
≥4.5
≥5
≥4
Does not qualify as either Well Capitalized or Adequately
Capitalized.
* An institution is Adequately Capitalized if it is not Well Capitalized, but satisfies each of the listed capital ratio standards for Adequately
Capitalized.
Effective January 1, 2018, the final
rule adds the supplementary leverage
ratio to its capital evaluations for
deposit insurance assessment purposes
to conform to the PCA capital rules. For
assessment purposes, an advanced
approaches bank, including an IDI
subsidiary of a covered BHC, must have
at least a 3.0 percent supplementary
leverage ratio to be adequately
capitalized, and an IDI subsidiary of a
covered BHC must have at least a 6.0
percent supplementary leverage ratio to
be well capitalized.
Table 3 summarizes the ratios and
ratio thresholds for determining capital
evaluations for deposit insurance
assessment purposes, effective January
1, 2018.
TABLE 3—CAPITAL RATIOS USED TO DETERMINE CAPITAL EVALUATIONS FOR ASSESSMENT PURPOSES, EFFECTIVE
JANUARY 1, 2018
Total riskbased capital
ratio
(%)
Capital evaluations
Tier 1 riskbased capital
ratio
(%)
≥10
≥8
Well Capitalized .......................................
Adequately Capitalized * ..........................
Undercapitalized ......................................
Common
equity tier 1
capital ratio
(%)
≥8
≥6
Leverage ratio
(%)
Supplementary
leverage ratio
(advanced
approaches
banking
organizations)
(%)
Supplementary
leverage ratio
(subsidiary
IDIs of
covered
BHCs)
(%)
≥5
≥4
Not applicable
≥3
≥6
≥3
≥6.5
≥4.5
Does not qualify as either Well Capitalized or Adequately Capitalized.
* An institution is Adequately Capitalized if it is not Well Capitalized, but satisfies each of the listed capital ratio standards for Adequately
Capitalized.
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C. Comments Received
The FDIC sought comments on the
proposed ratios and ratio thresholds
relating to capital evaluations for
deposit insurance assessment purposes.
The FDIC received one written comment
that supported the proposal to revise the
ratios and ratio thresholds for capital
evaluations used in the risk-based
deposit insurance assessment system to
conform to the new PCA capital ratios
and ratio thresholds.
In the NPR, the FDIC discussed an
alternative that would leave in place the
current terminology and capital
evaluations for deposit insurance
assessment purposes, but the FDIC did
not receive any comments on the
alternative. In any event, the FDIC
believes that the alternative would lead
to unnecessary complexity and
inconsistency, which could lead to
confusion and increase regulatory
burden on banks. Therefore, the FDIC
will finalize the amendments to Part 327
as proposed.
III. Assessment Base Calculation for
Custodial Banks
A. Background
The FDIC charges IDIs an amount for
deposit insurance equal to the IDI’s
deposit insurance assessment base
multiplied by its risk-based assessment
rate. The Dodd-Frank Act directed the
FDIC to amend its regulatory definition
of ‘‘assessment base’’ for purposes of
setting assessments for IDIs.
Specifically, the Dodd-Frank Act
required the FDIC to define the term
‘‘assessment base’’ with respect to a
depository institution:
As an amount equal to—
• The average consolidated total
assets of the insured depository
institution during the assessment
period; minus
• The sum of—
Æ The average tangible equity of the
insured depository institution during
the assessment period, and
Æ In the case of an insured depository
institution that is a custodial bank (as
defined by the Corporation, based on
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factors including the percentage of total
revenues generated by custodial
businesses and the level of assets under
custody) . . . , an amount that the
Corporation determines is necessary to
establish assessments consistent with
the definition under section 7(b)(1) of
the Federal Deposit Insurance Act (12
U.S.C. 1817(b)(1)) for a custodial
bank . . .28
In February 2011, the FDIC
implemented this requirement in the
Assessments final rule.29 The
Assessments final rule defines a
custodial bank and specifies the
additional amount to be deducted from
a custodial bank’s average consolidated
total assets for purposes of determining
its assessment base. The assessment
base deduction for custodial banks is
defined as the daily or weekly average
(depending upon the way the bank
reports its average consolidated total
assets) of a specified amount of certain
28 Pub. L. 111–203, sec. 331(b), 124 Stat. 1538
(codified as amended at 12 U.S.C. 1817(nt)).
29 76 FR at 10706.
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low-risk, liquid assets, subject to the
limitation that the daily or weekly
average value of such assets not exceed
the average value of deposits that are
classified as transaction accounts and
are identified by the bank as being
directly linked to a fiduciary or
custodial and safekeeping account.
Under the Assessments final rule, a
custodial bank may deduct all asset
types described in the instructions to
lines 34, 35, 36, and 37 of Schedule RC–
R of the Call Report as of December 31,
2010 with a risk weight of 0 percent,
regardless of maturity, and 50 percent of
those asset types described in the
instructions to those same lines with a
risk weight of 20 percent, again
regardless of maturity.30 These assets
include cash and balances due from
depository institutions, securities,
federal funds sold, and securities
purchased under agreements to resell.
Under the Basel III capital rules, the
standardized approach introduces 2
percent and 4 percent risk weights for
cleared transactions with Qualified
Central Counterparties (QCCPs), as
defined in the Basel III capital rules,
subject to certain collateral
requirements.31 The lower risk weights
reflect the Federal banking agencies’
support for ‘‘incentives designed to
encourage clearing of derivative and
repo-style transactions through a CCP
[central counterparty] wherever possible
in order to promote transparency,
multilateral netting, and robust riskmanagement practices.’’ 32 Nonetheless,
the new 2 percent and 4 percent risk
weights (being greater than 0) recognize
that, while clearing transactions through
a CCP significantly reduces
counterparty credit risk, the clearing
process does not eliminate risk
altogether and that some degree of
residual risk is retained.
Section 939A of the Dodd-Frank Act
requires the removal of any regulatory
reference to or requirement of reliance
on credit ratings for assessing the creditworthiness of a security or money
market instrument and the substitution
of new standards of credit-worthiness.33
Consequently, the Basel III capital rules
remove references to credit ratings for
purposes of determining risk weights for
risk-based capital calculations, and the
30 Risk-weighted assets are generally determined
by assigning assets to broad risk-weight categories.
The amount of an asset is multiplied by its risk
weight (for example, 0 percent or 20 percent) to
calculate the risk-weighted asset amount.
31 See 78 FR at 55502 (FDIC); 78 FR at 62184–85
(OCC and Federal Reserve).
32 See 78 FR at 55414 (FDIC); 78 FR at 62096
(OCC and Federal Reserve).
33 See Pub. L. 111–203, sec. 939A, 124 Stat 1887
(codified as amended at 15 U.S.C. 78o–7(nt)).
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standardized approach introduces a
formula-based methodology for
calculating risk-weighted assets for
many securitization exposures.34 Risk
weights under the standardized
approach for certain other assets,
including but not limited to exposures
to foreign sovereigns, foreign banks, and
foreign public sector entities, have also
changed.35
B. The Final Rule: Assessment Base
Calculation
As proposed in the NPR, the final rule
conforms the assessment base deduction
for custodial banks to the new
standardized approach for risk-weighted
assets adopted in the Basel III capital
rules. For purposes of the assessment
base deduction for custodial banks, the
final rule continues to use the generally
applicable risk weights (as revised
under the standardized approach,
effective January 1, 2015), even for
advanced approaches banks.
The assessment base deduction for
custodial banks will continue to be
defined as the daily or weekly average
of a certain amount of specified lowrisk, liquid assets, subject to the
limitation that the daily or weekly
average value of these assets cannot
exceed the daily or weekly average
value of deposits that are classified as
transaction accounts and are identified
by the bank as being directly linked to
a fiduciary or custodial and safekeeping
account asset. Subject to this limitation,
effective January 1, 2015, the assessment
base deduction will be the daily or
weekly average of:
1. 100 percent of those asset types
described in the instructions to lines 1,
2, and 3 of Schedule RC of the Call
Report with a standardized approach
risk weight of 0 percent, regardless of
maturity; plus
2. 50 percent of those asset types
described in the instructions to lines 1,
2, and 3 of Schedule RC of the Call
Report, including assets that qualify as
securitization exposures, with a
standardized approach risk weight
greater than 0 and up to and including
20 percent, regardless of maturity.
In general, the assets described in
lines 1, 2, and 3 of Schedule RC of the
Call Report include cash and balances
due from depository institutions,
securities (both held-to-maturity and
available-for-sale), federal funds sold,
and securities purchased under
agreements to resell. The inclusion of
these asset types in the assessment base
34 78 FR at 55430 (FDIC); 78 FR at 62111 (OCC
and Federal Reserve).
35 See, e.g., 78 FR at 55400–04 (FDIC); 78 FR at
62083–87 (OCC and Federal Reserve).
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deduction for custodial banks is
consistent with the asset types included
in the current adjustment.
In response to comments, the final
rule differs from the NPR in that it
includes in the assessment base
deduction for custodial banks those
asset types described in lines 1, 2, and
3 of Schedule RC of the Call Report that
qualify as securitization exposures (as
defined in the Basel III capital rules)
and have a standardized risk weight of
20 percent.36 Under current assessment
rules, securitizations with a risk weight
of 20 percent are included in the
assessment base deduction for custodial
banks. After further consideration, the
FDIC has concluded that assets of this
type appear to be sufficiently low risk
(as reflected in the 20 percent risk
weight) and sufficiently liquid to allow
them to continue to be included in the
assessment base deduction. This
difference from the NPR conforms the
final rule more closely with the current
assessment rule.
As proposed, 50 percent of assets
described in line 3 of Schedule RC of
the Call Report that are assigned a 2 or
4 percent risk weight may be included
in the assessment base deduction for
custodial banks. In the NPR, the FDIC
discussed, as an alternative, including
100 percent of these asset types in the
adjustment. The FDIC, however,
believes that these assets are not riskfree and thus do not merit a 100 percent
inclusion in the assessment base
deduction for custodial banks.
Last, the final rule makes a technical
amendment to the definition of
‘‘custodial bank’’ by removing any
reference to the Call Report date of
December 31, 2010, to ensure
conformity with the Basel III capital
rules.
C. Comments Received
The FDIC received two written
comments on the NPR’s proposal
regarding the assessment base deduction
36 Under the Basel III capital rules, a
securitization exposure generally includes a credit
exposure with more than one underlying exposure
where the credit risk associated with the underlying
exposures has been separated into at least two
tranches reflecting different levels of seniority.
Specifically, a securitization exposure is defined as
an on- or off-balance sheet credit exposure
(including credit-enhancing representations and
warranties) that arises from a traditional
securitization or a synthetic securitization
(including a re-securitization), or an exposure that
directly or indirectly references a securitization
exposure. See 78 FR at 55482 (FDIC); 78 FR at
62168 (OCC and Federal Reserve). Under the Basel
III capital rules’ standardized approach, securitized
assets of the type described in lines 1, 2, and 3 of
Schedule RC of the Call Report cannot have a riskweight lower than 20 percent. 78 FR at 55515
(FDIC); 78 FR at 62196 (OCC and Federal Reserve).
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for custodial banks.37 Both commenters
suggested that the FDIC continue to
include low-risk securitization
exposures in the assessment base
deduction.38 As discussed above, the
FDIC agrees and the change is reflected
in the final rule.
In addressing the alternative
discussed in the NPR of including 100
percent of cleared transactions with
QCCPs in the adjustment, two
commenters suggested a different
weighting method under which the
FDIC would allow custodial banks to
deduct 100 percent of a ‘‘qualifying
asset’’ 39 minus 21⁄2 times the asset’s
Basel III standardized approach risk
weight. Under this approach, for
example, a custodial bank could deduct
95 percent of a 2 percent risk-weighted
qualifying asset from its assessment base
and 25 percent of a 30 percent riskweighted qualifying asset. Commenters
argued that this approach would take
into account the increased granularity of
risk weights under the Basel III
standardized approach, where, for
example, a securitization could receive
a risk weight of 20.5 percent.
In the FDIC’s view, however, this
proposal ignores the greater risk
reflected in higher risk-weighted assets
because it would allow the deduction of
assets with risk weights of up to 40
percent. The FDIC has never allowed a
deduction from custodial banks’
assessment bases for assets with risk
weights greater than 20 percent because
the deduction is only intended for lowrisk assets.
37 The comments did not address another
alternative discussed in the NPR that would
maintain the current assessment base deduction. In
any event, the alternative would create unnecessary
complexity and inconsistency between the asset
risk weights used for capital purposes and for
deposit insurance assessment purposes, which
would lead to confusion and increase burden.
38 One commenter also suggested an alternative if
the FDIC determined that it is appropriate to fully
exclude securitization exposures from the
assessment base deduction. Under this alternative,
the assessment base deduction for assets with a
standardized approach risk weight of 20 percent
would increase from 50 percent to 85 percent. The
commenter reasoned that assets assigned this risk
weight and that are not securitization exposures are
characterized by strong credit risk profiles and
robust structural liquidity that warrant more
favorable treatment.
The FDIC disagrees that assets assigned a 20
percent risk weight are sufficiently low risk and
liquid to warrant an 85 percent deduction from the
assessment base.
39 Only one of the commenters used the term
‘‘qualifying asset,’’ but the substance of the other
commenter’s suggestion was substantially the same.
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IV. Calculation of Counterparty
Exposures in the Highly Complex
Institution Scorecard
A. Background
Section 7 of the Federal Deposit
Insurance Act (FDI Act) requires the
FDIC Board of Directors to adopt a riskbased assessment system based on the
probability that the DIF will incur a loss
with respect to an institution, the likely
amount of any loss to the DIF, and the
revenue needs of the DIF.40 Further,
under the FDI Act the FDIC may
establish a separate risk-based
assessment system for large members of
the Deposit Insurance Fund (DIF).41
In the Assessments final rule, the
FDIC adopted a revised assessment
system for large banks—generally, those
with at least $10 billion in total assets.
This system, which went into effect in
the second quarter of 2011, uses
scorecards that combine CAMELS
ratings and certain financial measures to
assess the risk a large institution poses
to the DIF. One scorecard applies to
most large institutions and another
applies to highly complex institutions,
those that are structurally and
operationally complex or that pose
unique challenges and risks to the DIF
in the event of failure.42
The scorecards for both large and
highly complex institutions use
quantitative measures that are useful in
predicting a large institution’s long-term
performance. Most of the measures used
in the highly complex institution
scorecard are similar to the measures
used in the large bank scorecard. The
scorecard for highly complex
institutions, however, includes
additional measures, such as the ratio of
top 20 counterparty exposures to Tier 1
capital and reserves and the ratio of the
largest counterparty exposure to Tier 1
capital and reserves (collectively, the
counterparty exposure measures). Both
ratios are defined in the Assessments
final rule.43
The Assessments final rule defines
counterparty exposure as the sum of
exposure at default (EAD) associated
40 12
U.S.C. 1817(b)(1)(C).
U.S.C. 1817(b)(1)(D).
42 A ‘‘highly complex institution’’ is defined as:
(1) An IDI (excluding a credit card bank) that has
had $50 billion or more in total assets for at least
four consecutive quarters 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; or (2) a processing bank or
trust company. 12 CFR 327.8(g).
43 76 FR at 10721; 12 CFR part 327, subpart A,
App. A.
41 12
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with derivatives trading 44 and
securities financing transactions
(SFTs) 45 and the gross lending exposure
(including all unfunded commitments)
for each counterparty or borrower at the
consolidated entity level.46 Generally,
since June 30, 2011, when highly
complex institutions began reporting for
scorecard purposes, they have
determined and reported their
counterparty exposures for assessment
purposes using certain methods
permitted under the Assessments final
rule.47 The Assessments final rule
allows use of an approach based on
internal models (the Internal Models
Method, or IMM) to calculate
counterparty exposures subject to
approval by an institution’s primary
federal regulator, but until recently no
highly complex institution was
permitted to use the IMM.
The IMM is one component of the
advanced approaches risk-based capital
framework. Banking organizations that
have received approval to use the
advanced approaches do not
automatically have approval to use the
IMM, which requires a separate
approval. Seven of the nine highly
complex institutions received approval
from their primary federal regulators to
use the advanced approaches for
regulatory capital beginning in the first
quarter of 2014. Of these seven banks,
some, but not all, received approval
from their primary federal regulators to
use the IMM for calculating EAD for
counterparty credit risk for derivatives
beginning in the second quarter of 2014.
Thus, some of the nine banks using the
highly complex institution scorecard
began calculating their counterparty
exposure in the second quarter of 2014
using the IMM, while the others still use
non-IMM methods.
Based on assessments data, the
adoption of the IMM by itself has
caused a significant reduction in
measured counterparty exposure
amounts and changed the scorecard
44 Derivatives trading exposures include both
over-the-counter (OTC) derivatives and derivative
contracts that an IDI has entered into with a CCP.
45 SFTs include repurchase agreements, reverse
repurchase agreements, security lending and
borrowing, and margin lending transactions, where
the value of the transactions depends on market
valuations and the transactions are often subject to
margin agreements.
46 76 FR at 10721. Counterparty exposure
excludes all counterparty exposure to the U.S.
government and departments or agencies of the U.S.
government that is unconditionally guaranteed by
the full faith and credit of the United States.
47 For example, permitted methods for derivatives
exposures have included the credit equivalent
amount as calculated under the Federal banking
agencies’ general risk-based capital rules and the
current exposure method (CEM) under the BCBS
Basel II framework.
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results in a way that significantly
reduces deposit insurance assessments
for the banks using the IMM. This
significant reduction in assessments
does not appear to be driven primarily
by a change in risk exposure, but rather
by a change in measurement
methodology. Moreover, since the
second quarter of 2014, the nine banks
currently subject to the highly complex
institution scorecard have been
measuring counterparty risk in different
ways.
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B. The Final Rule: Calculation of
Counterparty Exposure
Under the final rule, starting in the
first quarter of 2015, exposure to a
counterparty is equal to the sum of:
Gross loans (including all unfunded
commitments); the amount of
derivatives exposures reduced by the
amount of qualifying cash collateral;
and the amount of SFT exposure.
Derivatives exposures and SFT
exposures are described in more detail
below.
Specifically, the counterparty
exposure amount associated with
derivatives, including OTC derivatives,
a cleared transaction that is a derivative
contract, or a netting set of derivative
contracts,48 is to be calculated as the
credit equivalent amount under the
standardized approach without
deduction for collateral other than
qualifying cash collateral. The credit
equivalent amount under the
standardized approach is the sum of
current credit exposure and potential
future exposure; that is, the exposure
amount set forth in 12 CFR 324.34(a)
(but with no reduction for collateral
under 12 CFR 324.34(b)).49
The NPR proposed allowing no
deduction for collateral from a highly
complex institution’s counterparty
exposure amount associated with
derivatives. Two trade groups
recommended that the FDIC permit
recognition of financial collateral to
reduce the counterparty exposure
amount associated with derivatives, as
permitted under the Basel III
standardized approach. The final rule
addresses the concerns of these
commenters to an extent by allowing
48 A ‘‘netting set’’ is a group of transactions with
a single counterparty that are subject to a qualifying
master netting agreement or a qualifying crossproduct master netting agreement. 12 CFR 324.2.
49 For multiple OTC derivative contracts subject
to a qualifying master netting agreement, however,
the exposure amount equals the sum of the net
current credit exposure and the adjusted sum of
potential future exposure amounts for all OTC
derivative contracts subject to the qualifying master
netting agreement; that is, the exposure amount set
forth in 12 CFR 324.34(a)(2) (but with no reduction
for collateral under 12 CFR 324.34(b)).
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qualifying cash collateral (but not other
collateral) to reduce a highly complex
institution’s derivative exposures in the
counterparty exposure measures. To
qualify, the cash collateral must be all
or part of variation margin and satisfy
the conditions that would allow the
cash collateral to be excluded from the
institution’s total leverage exposure for
purposes of the supplementary leverage
ratio.50 These conditions are designed to
ensure that the cash collateral is in
effect a pre-settlement payment on the
derivatives contracts.
The counterparty exposure amount
associated with SFTs, including SFTs
that are cleared transactions, is to be
calculated using either the simple
approach or the collateral haircut
approach contained in 12 CFR 324.37(b)
and (c), respectively.
For both derivative and SFT
exposures, the amount of counterparty
exposure to CCPs must also include the
default fund contribution, which is the
funds contributed or commitments
50 In
general, the conditions are that:
(1) For derivative contracts that are not cleared
through a QCCP, the cash collateral received by the
recipient counterparty is not segregated (by law,
regulation or an agreement with the counterparty);
(2) Variation margin is calculated and transferred
on a daily basis based on the mark-to-fair value of
the derivative contract;
(3) The variation margin transferred under the
derivative contract or the governing rules for a
cleared transaction is the full amount that is
necessary to fully extinguish the net current credit
exposure to the counterparty of the derivative
contracts, subject to the threshold and minimum
transfer amounts applicable to the counterparty
under the terms of the derivative contract or the
governing rules for a cleared transaction;
(4) The variation margin is in the form of cash
in the same currency as the currency of settlement
set forth in the derivative contract, provided that for
the purposes of this paragraph, currency of
settlement means any currency for settlement
specified in the governing qualifying master netting
agreement and the credit support annex to the
qualifying master netting agreement, or in the
governing rules for a cleared transaction;
(5) The derivative contract and the variation
margin are governed by a qualifying master netting
agreement between the legal entities that are the
counterparties to the derivative contract or by the
governing rules for a cleared transaction, and the
qualifying master netting agreement or the
governing rules for a cleared transaction must
explicitly stipulate that the counterparties agree to
settle any payment obligations on a net basis, taking
into account any variation margin received or
provided under the contract if a credit event
involving either counterparty occurs;
(6) The variation margin is used to reduce the
current credit exposure of the derivative contract
and not the PFE; and
(7) For the purpose of the calculation of the netto-gross ratio (NGR), variation margin may not
reduce the net current credit exposure or the gross
current credit exposure.
The requirements are specified at 12 CFR
324.10(c)(4)(ii)(C)(1)–(7) (FDIC); 12 CFR
3.10(c)(4)(ii)(C)(1)–(7) (OCC); and 12 CFR
217.10(c)(4)(ii)(C)(1)–(7) (Federal Reserve).
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70433
made by a clearing member to a CCP’s
mutualized loss sharing arrangement.51
Counterparty exposure continues to
exclude all counterparty exposure to the
U.S. government and departments or
agencies of the U.S. government that is
unconditionally guaranteed by the full
faith and credit of the United States.
C. Comments Received
The FDIC sought comments on the
proposed calculation of counterparty
exposure measures. The FDIC received
a total of three written comments, two
from trade groups and one from a bank.
In general, the two trade groups
contended that the change proposed in
the NPR to the counterparty exposure
measures is inconsistent with the FDIC’s
statutory mandate 52 because the
proposal does not recognize the riskmitigating benefits of financial collateral
and the minimal risk posed by exposure
to CCPs.
As discussed above, in establishing a
risk-based assessment system the FDIC
is statutorily required to consider a
number of factors, including the
probability that the DIF will incur a loss
with respect to an institution. The FDIC
also takes into consideration the likely
amount of any such loss and the
revenue needs of the DIF. In
determining the probability that the DIF
will incur a loss, the FDIC takes into
consideration the risks attributable to
different categories and concentrations
of assets and liabilities, both insured
and uninsured, contingent and
noncontingent, and any other factors the
FDIC determines are relevant to
assessing such probability.53 In the case
of the counterparty exposure measures,
such other factors include the need for
a common measurement framework for
counterparty exposure and the need to
ensure that methodological differences
do not determine a bank’s exposure
relative to its peers.
In this context, the FDIC has taken
into account the relative risk-mitigating
factors associated with certain financial
collateral and the use of CCPs. The FDIC
has concluded that it is appropriate to
allow qualifying cash collateral to
reduce a bank’s measured derivatives
exposure for purposes of the
assessments scorecard, but as discussed
in more detail below, does not agree
with commenters that other forms of
collateral warrant the same recognition.
51 12 CFR 324.2 (FDIC); 12 CFR 3.2 (OCC); 12 CFR
217.2 (Federal Reserve).
52 The two trade groups argued that the FDIC’s
statutory mandate is ‘‘that assessments be based on
actual risk to the DIF,’’ and that ‘‘assessments [be]
based on risk.’’
53 12 U.S.C. 1817(b)(1)(C).
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As stated above, two trade groups
recommended that financial collateral
reduce OTC derivative exposures as
permitted when calculating riskweighted assets under the Basel III
standardized approach.54 The final rule
adopts another, more limited, approach,
allowing—under certain
circumstances—cash variation margin to
reduce OTC derivative exposures. The
regular and timely exchange of cash
variation margin helps to protect both
counterparties from the effects of a
counterparty default. The conditions
under which cash collateral may be
used to offset the amount of a derivative
contract in the supplementary leverage
ratio are intended to ensure that such
cash collateral ‘‘is, in substance, a form
of pre-settlement payment on a
derivative contract,’’ 55 such that that
portion of the exposure has essentially
been paid. The conditions also ensure
that the counterparties calculate their
exposures arising from derivative
contracts on a daily basis and transfer
the net amounts owed, as appropriate,
in a timely manner. The approach in the
final rule is consistent with the design
of the supplementary leverage ratio and
with U.S. generally accepted accounting
principles (GAAP).56
In the FDIC’s view, however, it would
be inappropriate to reduce OTC
derivatives exposures in the
counterparty exposure measures for all
types of financial collateral and the final
rule allows no reduction for collateral
other than qualifying cash collateral. As
54 The NPR discussed allowing the deduction of
collateral in this manner as a possible alternative
to the proposal in the NPR.
55 79 FR 57725, 57730 (Sept. 26, 2014). The
supplementary leverage ratio rule ‘‘generally does
not permit banking organizations to use collateral
to reduce exposures for purposes of calculating total
leverage exposure,’’ but does allow reduction under
the circumstances permitted under this final rule.
In the NPR, the FDIC also requested comment on
an alternative approach that would require highly
complex institutions to use total leverage exposure,
as defined in the supplementary leverage ratio,
when calculating counterparty exposure measures.
The FDIC received two brief comments, one in favor
of the alternative approach and one opposed to it.
While the FDIC may consider using total leverage
exposure, as defined in the supplementary leverage
ratio, as a general measure of counterparty exposure
in the future, the FDIC is not persuaded that this
alternative approach should be adopted wholesale
now in lieu of the standardized approach.
56 As the federal banking regulators noted
recently in amending the rules governing the
supplementary leverage ratio, ‘‘For the purpose of
determining the carrying value of derivative
contracts, U.S. generally accepted accounting
principles (GAAP) provide a banking organization
the option to reduce any positive mark-to-fair value
of a derivative contract by the amount of any cash
collateral received from the counterparty, provided
the relevant GAAP criteria for offsetting are met (the
GAAP offset option).’’ 79 FR at 57729.
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the Basel Committee noted in adopting
the Basel III leverage framework,
‘‘Collateral received in connection with
derivative contracts does not necessarily
reduce the leverage inherent in a bank’s
derivatives position, which is generally
the case if the settlement exposure
arising from the underlying derivative
contract is not reduced.’’ 57
Qualifying Central Counterparties
(QCCPs)
Two trade groups argued that
exposures to QCCPs should be excluded
from the counterparty exposure
measures. They argued that the capital
and prudential requirements applicable
to QCCPs ensure that they pose no risk
to banks and that, because Congress has
encouraged the use of QCCPs, exposures
to QCCPs will likely increase and come
to dominate the 20 largest total exposure
amounts to counterparties while
actually reducing risk. One trade group
argued that exposures to QCCPs should
be excluded from the measures until the
full effect of the central clearing
requirements are known and the
strength of QCCPs is more fully
understood.
Counterparty exposures to QCCPs,
however, are not risk-free. For example,
the Basel Committee notes that despite
the benefits that CCPs can bring to OTC
derivatives markets, they can
concentrate counterparty and
operational risks, with a potential for
systemic risk.58 As mentioned above,
the counterparty exposure measures are
concentration measures intended to
assess a highly complex institution’s
ability to withstand asset-related
stress.59 Also, as one of the comments
implies, QCCPs’ performance in times of
stress has not been tested. For these
reasons, the final rule continues to
include exposures to QCCPs in the
counterparty exposure measures. To the
extent that derivatives exposures to
QCCPs are secured by qualifying cash
collateral, however, the amount of
exposure for purposes of the
counterparty exposure measures will be
reduced.
Affiliates
Two trade groups also argued that
exposures to affiliates should be
excluded from the counterparty
exposure measures on the grounds that
57 Basel Committee on Banking Supervision.
(January 2014). ‘‘Basel III leverage ratio framework
and disclosure requirements’’, available online at
http://www.bis.org/publ/bcbs270.pdf.
58 Basel Committee on Banking Supervision.
(November 2011). ‘‘Capitalisation of bank exposures
to central counterparties’’, available online at
http://www.bis.org/publ/bcbs206.pdf.
59 76 FR at 10696.
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Section 23A of the Federal Reserve Act
and the Federal Reserve’s Regulation W
effectively limit a bank’s exposure to an
affiliate and impose collateral
requirements.60
The FDIC disagrees. Limiting
exposure to an affiliate, as required by
Section 23A and Regulation W, does not
eliminate risk, particularly during
periods of stress. For this reason, the
final rule continues to include
exposures to affiliates in the
counterparty exposure measures. To the
extent that derivatives exposures to
affiliates are secured by qualifying cash
collateral, however, the amount of
exposure for purposes of the
counterparty exposure measures will be
reduced.
Non-U.S. Sovereigns
Two trade groups also argued that
exposures to non-U.S. sovereigns with
high credit quality should be excluded
from the counterparty exposure
measures. They suggested excluding
foreign sovereign exposures where the
Basel III capital rules assign a zero risk
weight based on either the Organization
for Economic Cooperation and
Development’s (OECD’s) Country Risk
Classification (CRC) or the sovereign’s
OECD membership status if no CRC
exists, or where the foreign sovereign
meets the criteria for obligations that
qualify as Level 1 high quality liquid
assets under the Liquidity Coverage
Ratio rule.
The FDIC again disagrees. Exposures
to non-U.S. sovereigns pose risk,
particularly during periods of stress.
Consequently, the final rule treats these
exposures as it does other derivatives
exposures. Again, to the extent that
derivatives exposures to non-U.S.
sovereigns are secured by qualifying
cash collateral, the amount of exposure
for purposes of the counterparty
exposure measures will be reduced.
IMM
In the NPR, the FDIC requested
comment on whether highly complex
institutions should be allowed to
measure counterparty exposure for
assessment purposes using the IMM.
Two trade groups made arguments in
favor of allowing the use of the IMM.
The trade groups argued that the IMM
is a better measure of counterparty
exposure than is the standardized
approach and that the shortcomings of
the standardized approach ‘‘are well
known and have been widely
recognized,’’ citing a Basel Committee
paper. Because, in their view, the IMM
60 12 U.S.C. 371c; 12 CFR 223.11; 223.12; and
223.14.
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is a better risk measure than the
standardized approach, the commenters
argued that the NPR fails to meet the
statutory requirement that the FDIC
adopt a risk-based assessment system
and that, in conflict with the
requirements of the Administrative
Procedure Act, the FDIC has failed to
justify elimination of the IMM.
The FDIC has considered the issues
the commenters raised and does not
agree with the commenters. Specifically,
the FDIC does not agree that, for
assessment purposes, the IMM measures
counterparty exposure better than the
standardized approach does. In arguing
that the IMM is a better measure of
counterparty exposure than is the
standardized approach, commenters
ignore the Basel Committee’s
observation (noted in the NPR) that the
use of internal models has resulted in a
material amount of variability between
banks, a significant amount of which
may be driven by banks’ individual
modeling choices rather than by
distinctions in portfolio risk or risk
management practices.61 Under the
IMM, banks may use different
assumptions and measurement
approaches, resulting in inconsistency.
This variability was one of the chief
reasons that the NPR rejected the use of
the IMM in measuring counterparty
exposure for assessment purposes.
Partly for this reason, it would
impractical for the FDIC to calibrate and
adjust counterparty measures in a way
that produces accurate and equitable
assessments outcomes.62
The commenters also ignore the
FDIC’s statutory authority to take
consistency of risk measurement into
account in the risk-based assessment
system. As stated above, the FDIC Board
of Directors must consider certain
enumerated factors when setting a riskbased assessment system, including the
probability that the DIF will incur a loss
with respect to an institution. In
determining the probability that the DIF
61 79 FR 42698, 42705 (July 23, 2014). See Basel
Committee on Banking Supervision. (January 2013).
‘‘Regulatory consistency assessment programme
(RCAP)—Analysis of risk-weighted assets for
market risk’’, available online at http://www.bis.org/
publ/bcbs240.htm; Basel Committee on Banking
Supervision. (July 2013). ‘‘Regulatory consistency
assessment programme (RCAP)—Analysis of riskweighted assets for credit risk in the banking book,’’
available online at http://www.bis.org/publ/
bcbs256.htm; and Basel Committee on Banking
Supervision. (July 2013). ‘‘The regulatory
framework: balancing risk sensitivity, simplicity
and comparability—discussion paper,’’ available
online at http://www.bis.org/publ/bcbs258.htm.
62 In the NPR, the FDIC also discussed but argued
against an alternative in which it would recalibrate
the conversion of counterparty exposure measures
into scores using exposures calculated using the
IMM approach.
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will incur a loss with respect to an
institution, the FDIC may take into
account ‘‘any other factors the
Corporation determines are relevant to
assessing such probability.’’ 63 In
proposing to use the standardized
approach to measure counterparty
exposure, the FDIC has taken into
account ‘‘other factors;’’ namely, the
need for a common measurement
framework for counterparty exposure
and the need to ensure that
methodological differences do not
determine a bank’s exposure relative to
its peers. Consistency in the manner in
which highly complex IDIs calculate
counterparty exposure is an appropriate
and necessary factor in establishing a
risk-based assessment system.
More broadly, existing law and
regulation do not generally allow the
unconstrained use of banks’ internal
models for regulatory capital purposes,
instead providing for the use of a
standardized capital floor. Current law
recognizes the standardized approach as
a valid measure of risk for risk-based
capital purposes. Thus, the approach
taken in the final rule is consistent in
spirit with this aspect of the capital
rules.
Two trade groups also argued that
adopting the standardized approach for
measuring counterparty exposure is
premature and that the FDIC should not
eliminate the IMM until Federal
banking agencies determine whether to
adopt the Basel Committee’s
standardized approach for measuring
exposure at default for counterparty
credit risk (SA–CCR) for risk-based
capital purposes. As the commenters
acknowledged, no decision has been
made regarding when or how (or
whether) the SA–CCR will be adopted
in the U.S. for capital purposes. If the
Federal banking agencies adopt the SA–
CCR for risk-based capital purposes, the
FDIC will consider whether changes to
the counterparty exposure measures are
appropriate. The trade groups’
argument, however, amounts to
indefinitely allowing the use of vastly
different measurement methodologies
for calculating counterparty exposure
for assessment purposes, with the
concomitant inequities in assessment
rates, which the FDIC finds
unreasonable.
Converting Counterparty Exposure
Measures to Scores
In the Assessments final rule, the
FDIC reserved the right to update the
minimum and maximum cutoff values
used in each scorecard annually without
further rulemaking as long as the
63 12
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method of selecting cut-off values
remained unchanged. Under this
reservation, the FDIC can add new data
for later years to its analysis and can,
from time to time, exclude some earlier
years from its analysis.64
In the NPR, the FDIC proposed to
continue to reserve the right to revise
the conversion of the counterparty
exposures measures to scores (that is,
recalibrate the conversion by updating
the minimum and maximum cutoff
values) after reviewing data reported for
some or all of 2015 without further
notice-and-comment rulemaking. Two
trade groups objected to this proposal,
arguing that the specific recalibration of
the counterparty exposure measures
proposed in the NPR should be
accomplished through notice-andcomment rulemaking. After further
consideration, the FDIC has decided
that, for the conversion of the
counterparty exposure measures to
scores only, any revisions will be done
through notice-and-comment
rulemaking.65
Cost-Benefit Analysis
One trade group argued that the NPR
should not be finalized until the FDIC
has conducted a cost-benefit analysis
subject to public comment, and that the
FDIC would not be able to conduct such
a cost-benefit analysis without
additional data that will only become
available after the first quarter of 2015.
For this reason, the commenter
suggested foregoing any immediate
changes to the counterparty exposure
measures until additional data becomes
available and can be evaluated.
In developing and reviewing
regulations, the FDIC is committed to
continually improving the quality of its
regulations and policies, minimizing
regulatory burdens on the public and
the banking industry, and generally to
ensuring that its regulations and
policies achieve legislative goals
effectively and efficiently. The FDIC
evaluates benefits and costs of
regulations based on available
information and the consideration of
reasonable and possible alternatives. As
part of the notice-and-comment process,
the FDIC actively seeks comment on
64 76 FR at 10700; see also 77 FR at 66016. 12 CFR
part 327, subpart A, App. A.
65 As currently provided in the FDIC’s
assessments rules and regulations, the FDIC
continues to reserve the general right to update the
minimum and maximum cutoff values for all
measures in the scorecards without additional
notice-and-comment rulemaking. See 12 CFR part
327, subpart A, App. A.
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Federal Register / Vol. 79, No. 228 / Wednesday, November 26, 2014 / Rules and Regulations
cost, benefits, and burdens, and
carefully considers these comments.66
The FDIC has, in fact, evaluated the
costs and benefits of requiring that
highly complex institutions measure
counterparty exposure using the
standardized approach in the Basel III
capital rules rather than the IMM. For
those few banks that are already (or
would be) using the IMM to measure
counterparty exposure, the final rule is
likely to increase these banks’
assessment rates compared to rates
calculated using the IMM, all else equal.
As one trade group noted in its
comment letter, albeit in another
context, ‘‘The credit equivalent amount
in the U.S. Basel I-based capital rules,
the credit equivalent amount under the
Standardized Approach, and the Basel
Committee’s Basel II current exposure
method are all broadly similar.’’
Consequently, in the NPR, the FDIC was
able to rely on its data on assessment
rates before adoption of the IMM.
Moreover, the FDIC is required by
statute to ensure that the DIF reserve
ratio reaches at least 1.35 percent of
estimated insured deposits by
September 30, 2020.67 The FDIC has
already adopted a schedule of lower
overall assessment rates that will go into
effect automatically when the DIF
reserve ratio reaches 1.15 percent.68
While a few banks will have increased
assessment rates under the final rule,
these higher rates will reduce the risk
that an assessment rate increase for all
banks will be needed for the DIF reserve
ratio to reach 1.35 percent by the
statutory deadline; it will also increase
the possibility that the reserve ratio will
reach 1.15 percent sooner than
otherwise, at which time overall
assessment rates will fall.
The FDIC has also tailored its
approach to minimize additional
reporting burden. Under the final rule,
highly complex institutions will
calculate their counterparty exposure
for deposit insurance assessment
purposes using the standardized
approach under the Basel III capital
rules (modified for cash collateral for
derivatives exposures). These banks
must determine counterparty exposure
using the generally applicable riskbased capital requirements, that is, the
standardized approach under the Basel
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66 See
FDIC Statement of Policy on the
Development and Review of Regulations and
Policies, 78 FR 22771, 22772 (Apr. 17, 2013).
67 See Pub. L. 111–203, sec. 334(d), 124 Stat. 1539
(codified as amended at 12 U.S.C. 1817(nt)). The
FDIC is also required to charge banks with $10
billion or more in assets for the cost of increasing
the reserve ratio from 1.15 percent to 1.35 percent.
Id. at sec. 334(e).
68 See 12 CFR 327.10.
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III capital rules, as required by the
Collins Amendment. They must also
calculate qualifying cash collateral for
derivatives exposures for purposes of
the supplementary leverage ratio. Thus,
the final rule imposes little, if any,
additional reporting burden.
Rather than indefinitely allowing the
use of methodologies that would result
in inequitable assessments, the final
rule takes into account potential
burdens, benefits, alternative
approaches, and cumulative costs of
regulations to make assessments
appropriately reflect relative risk.
V. Effective Date
A. Ratios and Thresholds Relating to
Capital Evaluations
Two effective dates apply to the ratios
and ratio thresholds relating to the
capital evaluations used in its deposit
insurance system: January 1, 2015, for
all ratios and ratio thresholds except the
supplementary leverage ratio, and
January 1, 2018, for the supplementary
leverage ratio and ratio threshold. These
are the effective dates of the changes to
the PCA capital rules.
B. Assessment Base Calculation for
Custodial Banks
The effective date for the assessment
base calculation for custodial banks is
January 1, 2015.
C. Calculation of Counterparty
Exposures in the Highly Complex
Institution Scorecard
The effective date for the calculation
of counterparty exposures in the highly
complex institution scorecard is January
1, 2015.
VI. Regulatory Analysis and Procedure
A. Solicitation of Comments on Use of
Plain Language
Section 722 of the Gramm-LeachBliley Act, Public Law 106–102, 113
Stat. 1338, 1471 (Nov. 12, 1999),
requires the Federal banking agencies to
use plain language in all proposed final
rules published after January 1, 2000.
The FDIC invited comments on how to
make this proposal easier to understand.
No comments addressing this issue were
received.
B. Regulatory Flexibility Act
The FDIC has carefully considered the
potential impacts on all banking
organizations, including community
banking organizations, and has sought
to minimize the potential burden of
these changes where consistent with
applicable law and the agencies’ goals.
The Regulatory Flexibility Act (RFA)
requires that each Federal agency either
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certify that the final rule will not have
a significant economic impact on a
substantial number of small entities.69
Certain types of rules, such as rules of
particular applicability relating to rates
or corporate or financial structures, or
practices relating to such rates or
structures, are expressly excluded from
the definition of ‘‘rule’’ for purposes of
the RFA.70 Nonetheless, the FDIC is
voluntarily undertaking a regulatory
flexibility analysis.
As of December 31, 2013, of the 6,812
IDIs, there were 5,655 small IDIs as that
term is defined for the purposes of the
RFA (i.e., institutions with $550 million
or less in total assets). Under the
revisions to the ratios and ratio
thresholds for capital evaluations in the
final rule, five small IDIs (0.09 percent
of small IDIs) would have had higher
deposit insurance assessments as of the
end of December 2013 (assuming that
they had not increased their capital in
response to the new PCA capital rules).
None would have had lower
assessments. In the aggregate, these five
small IDIs would have been assessed
approximately $1 million more in
annual assessments under the final rule.
In aggregate, the final rule would have
increased small IDIs’ assessments by
0.01 percent of all small IDIs’ income
before taxes.
Four additional IDIs that meet the
RFA definition of a small IDI were
identified as subsidiaries of custodial
banks subject to assessments
adjustments. The FDIC estimates that
under the final rule, the assessments for
these additional small IDIs would not be
affected.
The final rule regarding the
calculation of counterparty exposures in
the highly complex institution scorecard
does not affect any small IDIs.
Thus, the final rule does not have a
significant economic impact on a
substantial number of small entities.
C. Paperwork Reduction Act
No collections of information
pursuant to the Paperwork Reductions
Act (44 U.S.C. 3501 et seq.) are
contained in the final rule.
D. The Treasury and General
Government Appropriations Act, 1999—
Assessment of Federal Regulations and
Policies on Families
The FDIC has determined that the
final rule does not affect family wellbeing within the meaning of section 654
of the Treasury and General
Government Appropriations Act,
enacted as part of the Omnibus
69 See
70 See
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5 U.S.C. 603 and 605.
5 U.S.C. 601(2).
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Federal Register / Vol. 79, No. 228 / Wednesday, November 26, 2014 / Rules and Regulations
Consolidated and Emergency
Supplemental Appropriations Act of
1999 (Public Law 105–277, 112 Stat.
2681).
List of Subjects in 12 CFR Part 327
Bank deposit insurance, Banks,
Savings associations.
For the reasons set forth above, the
FDIC amends part 327 as follows:
PART 327—ASSESSMENTS
1. The authority citation for part 327
continues to read as follows:
■
Authority: 12 U.S.C. 1441, 1813, 1815,
1817–19, 1821.
Subpart A—[Amended]
2. In subpart A, remove the term ‘‘Tier
1 leverage ratio’’ and add in its place
‘‘Leverage ratio’’ wherever it appears.
■ 3. In § 327.5, revise paragraphs (c)(1)
and (2) to read as follows:
■
§ 327.5
Assessment base.
*
*
*
*
(c) * * *
(1) Custodial bank defined. A
custodial bank for purposes of
calculating deposit insurance
assessments shall be an insured
depository institution with previous
calendar-year trust assets (fiduciary and
custody and safekeeping assets, as
described in the instructions to
Schedule RC–T of the Consolidated
Report of Condition and Income) of at
least $50 billion or an insured
depository institution that derived more
than 50 percent of its total revenue
(interest income plus non-interest
income) from trust activity over the
previous calendar year.
(2) Assessment base calculation for
custodial banks. A custodial bank shall
pay deposit insurance assessments on
its assessment base as calculated in
paragraph (a) of this section, but the
FDIC will exclude from that assessment
base the daily or weekly average
(depending on how the bank reports its
average consolidated total assets) of all
asset types described in the instructions
to lines 1, 2, and 3 of Schedule RC of
the Consolidated Report of Condition
and Income with a standardized
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*
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approach risk weight of 0 percent,
regardless of maturity, plus 50 percent
of those asset types described in the
instructions to lines 1, 2, and 3 of
Schedule RC of the Consolidated Report
of Condition and Income, with a
standardized approach risk-weight
greater than 0 and up to and including
20 percent, regardless of maturity,
subject to the limitation that the daily or
weekly average (depending on how the
bank reports its average consolidated
total assets) value of all assets that serve
as the basis for a deduction under this
section cannot exceed the daily or
weekly average value of those deposits
that are classified as transaction
accounts in the instructions to Schedule
RC–E of the Consolidated Report of
Condition and Income and that are
identified by the institution as being
directly linked to a fiduciary or
custodial and safekeeping account asset.
*
*
*
*
*
■ 4. In § 327.9, revise paragraphs
(a)(2)(i) and (ii) to read as follows:
§ 327.9
Assessment pricing methods.
(a) * * *
(2) * * *
(i) Well Capitalized. A Well
Capitalized institution is one that
satisfies each of the following capital
ratio standards: Total risk-based capital
ratio, 10.0 percent or greater; tier 1 riskbased capital ratio, 8.0 percent or
greater; leverage ratio, 5.0 percent or
greater; and common equity tier 1
capital ratio, 6.5 percent or greater.
(ii) Adequately Capitalized. An
Adequately Capitalized institution is
one that does not satisfy the standards
of Well Capitalized in paragraph (a)(2)(i)
of this section but satisfies each of the
following capital ratio standards: Total
risk-based capital ratio, 8.0 percent or
greater; tier 1 risk-based capital ratio,
6.0 percent or greater; leverage ratio, 4.0
percent or greater; and common equity
tier 1 capital ratio, 4.5 percent or
greater.
*
*
*
*
*
■ 5. In § 327.9, effective January 1, 2018,
revise paragraphs (a)(2)(i) and (ii) to
read as follows:
§ 327.9
Assessment pricing methods.
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Frm 00011
(2) * * *
(i) Well Capitalized. A Well
Capitalized institution is one that
satisfies each of the following capital
ratio standards: Total risk-based capital
ratio, 10.0 percent or greater; tier 1 riskbased capital ratio, 8.0 percent or
greater; leverage ratio, 5.0 percent or
greater; common equity tier 1 capital
ratio, 6.5 percent or greater; and, if the
institution is an insured depository
institution subject to the enhanced
supplementary leverage ratio standards
under 12 CFR 6.4(c)(1)(iv)(B), 12 CFR
208.43(c)(2)(iv)(B), or 12 CFR
324.403(b)(1)(v), as each may be
amended from time to time, a
supplementary leverage ratio of 6.0
percent or greater.
(ii) Adequately Capitalized. An
Adequately Capitalized institution is
one that does not satisfy the standards
of Well Capitalized in paragraph (a)(2)(i)
of this section but satisfies each of the
following capital ratio standards: Total
risk-based capital ratio, 8.0 percent or
greater; tier 1 risk-based capital ratio,
6.0 percent or greater; leverage ratio, 4.0
percent or greater; common equity tier
1 capital ratio, 4.5 percent or greater;
and, if the institution is subject to the
advanced approaches risk-based capital
rules under 12 CFR 6.4(c)(2)(iv)(B), 12
CFR 208.43(c)(2)(iv)(B), or 12 CFR
324.403(b)(2)(vi), as each may be
amended from time to time, a
supplementary leverage ratio of 3.0
percent or greater.
*
*
*
*
*
■ 6. In Appendix A to Subpart A, in the
table under the section heading, ‘‘VI.
Description of Scorecard Measures,’’
revise the descriptions of ‘‘(2) Top 20
Counterparty Exposure/Tier 1 Capital
and Reserves’’ and ‘‘(3) Largest
Counterparty Exposure/Tier 1 Capital
and Reserves’’ under the subheading
‘‘Concentration Measure for Highly
Complex Institutions’’ to read as
follows:
Appendix A to Subpart A of Part 327—
Method To Derive Pricing Multipliers
and Uniform Amount
*
(a) * * *
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*
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Federal Register / Vol. 79, No. 228 / Wednesday, November 26, 2014 / Rules and Regulations
VI—DESCRIPTION OF SCORECARD MEASURES
Scorecard measures 1
Description
*
*
(2) Top 20 Counterparty Exposure/
Tier 1 Capital and Reserves.
*
*
*
*
*
Sum of the 20 largest total exposure amounts to counterparties divided by Tier 1 capital and reserves. The
total exposure amount is equal to the sum of the institution’s exposure amounts to one counterparty (or
borrower) for derivatives, securities financing transactions (SFTs), and cleared transactions, and its
gross lending exposure (including all unfunded commitments) to that counterparty (or borrower). A
counterparty includes an entity’s own affiliates. Exposures to entities that are affiliates of each other are
treated as exposures to one counterparty (or borrower). Counterparty exposure excludes all counterparty
exposure to the U.S. government and departments or agencies of the U.S. government that is unconditionally guaranteed by the full faith and credit of the United States. The exposure amount for derivatives,
including OTC derivatives, cleared transactions that are derivative contracts, and netting sets of derivative contracts, must be calculated using the methodology set forth in 12 CFR 324.34(a), but without any
reduction for collateral other than cash collateral that is all or part of variation margin and that satisfies
the requirements of 12 CFR 324.10(c)(4)(ii)(C)(1)–(7). The exposure amount associated with SFTs, including cleared transactions that are SFTs, must be calculated using the standardized approach set
forth in 12 CFR 324.37(b) or (c). For both derivatives and SFT exposures, the exposure amount to central counterparties must also include the default fund contribution.2
The largest total exposure amount to one counterparty divided by Tier 1 capital and reserves. The total exposure amount is equal to the sum of the institution’s exposure amounts to one counterparty (or borrower) for derivatives, SFTs, and cleared transactions, and its gross lending exposure (including all unfunded commitments) to that counterparty (or borrower). A counterparty includes an entity’s own affiliates. Exposures to entities that are affiliates of each other are treated as exposures to one counterparty
(or borrower). Counterparty exposure excludes all counterparty exposure to the U.S. government and
departments or agencies of the U.S. government that is unconditionally guaranteed by the full faith and
credit of the United States. The exposure amount for derivatives, including OTC derivatives, cleared
transactions that are derivative contracts, and netting sets of derivative contracts, must be calculated
using the methodology set forth in 12 CFR 324.34(a), but without any reduction for collateral other than
cash collateral that is all or part of variation margin and that satisfies the requirements of 12 CFR
324.10(c)(4)(ii)(C)(1)–(7). The exposure amount associated with SFTs, including cleared transactions
that are SFTs, must be calculated using the standardized approach set forth in 12 CFR 324.37(b) or (c).
For both derivatives and SFT exposures, the exposure amount to central counterparties must also include the default fund contribution.2
(3) Largest Counterparty Exposure/
Tier 1 Capital and Reserves.
*
*
*
*
*
*
*
1 The
FDIC retains the flexibility, as part of the risk-based assessment system, without the necessity of additional notice-and-comment rulemaking, to update the minimum and maximum cutoff values for all measures used in the scorecard (except for the Top 20 counterparty exposure
to Tier 1 capital and reserves ratio and the largest counterparty exposure to Tier 1 capital and reserves ratio). The FDIC may update the minimum and maximum cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio in order to maintain an approximately similar distribution of higher-risk assets to Tier 1 capital and reserves ratio scores as reported prior to April 1, 2013, or to avoid changing the overall
amount of assessment revenue collected. 76 FR 10672, 10700 (February 25, 2011). The FDIC will review changes in the distribution of the higher-risk assets to Tier 1 capital and reserves ratio scores and the resulting effect on total assessments and risk differentiation between banks
when determining changes to the cutoffs. The FDIC may update the cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio
more frequently than annually. The FDIC will provide banks with a minimum one quarter advance notice of changes in the cutoff values for the
higher-risk assets to Tier 1 capital and reserves ratio with their quarterly deposit insurance invoice.
2 SFTs include repurchase agreements, reverse repurchase agreements, security lending and borrowing, and margin lending transactions,
where the value of the transactions depends on market valuations and the transactions are often subject to margin agreements. The default fund
contribution is the funds contributed or commitments made by a clearing member to a central counterparty’s mutualized loss sharing arrangement. The other terms used in this description are as defined in 12 CFR part 324, subparts A and D, unless defined otherwise in 12 CFR part
327.
*
*
*
*
*
DEPARTMENT OF TRANSPORTATION
By order of the Board of Directors.
Dated at Washington, DC, this 18th day of
November, 2014.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2014–27941 Filed 11–25–14; 8:45 am]
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2014–0191; Directorate
Identifier 2013–NM–256–AD; Amendment
39–18030; AD 2014–23–14]
BILLING CODE 6714–01–P
mstockstill on DSK4VPTVN1PROD with RULES
RIN 2120–AA64
Airworthiness Directives; Bombardier,
Inc. Airplanes
Federal Aviation
Administration (FAA), Department of
Transportation (DOT).
ACTION: Final rule.
AGENCY:
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We are adopting a new
airworthiness directive (AD) for certain
Bombardier, Inc. Model DHC–8–400
series airplanes. This AD was prompted
by reports of swing arm assemblies of
engine fuel feed ejector pumps
detaching from the outlet port of the
engine fuel feed ejector pump and
partially blocking the engine fuel feed
line. This AD requires installing a
restrictor into the engine fuel feed line.
We are issuing this AD to prevent
blocked engine fuel flow and possible
engine flameout.
SUMMARY:
This AD becomes effective
December 31, 2014.
The Director of the Federal Register
approved the incorporation by reference
DATES:
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]]>Agencies
[Federal Register Volume 79, Number 228 (Wednesday, November 26, 2014)]
[Rules and Regulations]
[Pages 70427-70438]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-27941]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
week.
========================================================================
Federal Register / Vol. 79, No. 228 / Wednesday, November 26, 2014 /
Rules and Regulations
[[Page 70427]]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
RIN 3064-AE16
Assessments
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The FDIC is amending its regulations to revise the ratios and
ratio thresholds for capital evaluations used in its risk-based deposit
insurance assessment system to conform to the prompt corrective action
capital (PCA) ratios and ratio thresholds adopted by the FDIC, the
Board of Governors of the Federal Reserve System (Federal Reserve) and
the Office of the Comptroller of the Currency (OCC) (collectively, the
Federal banking agencies); revise the assessment base calculation for
custodial banks to conform to the asset risk weights adopted by the
Federal banking agencies; and require all highly complex institutions
to measure counterparty exposure for deposit insurance assessment
purposes using the Basel III standardized approach credit equivalent
amount for derivatives (with modifications for certain cash collateral)
and the Basel III standardized approach exposure amount for securities
financing transactions--such as repo-style transactions, margin loans
and similar transactions--as adopted by the Federal banking agencies.
DATES: Effective date: January 1, 2015, except for the amendment to
Sec. 327.9 (amendatory instruction 5), which is effective January 1,
2018.
Applicability date: The incorporation of the supplementary leverage
ratio and corresponding ratio thresholds into the definition of capital
evaluations is applicable January 1, 2018.
FOR FURTHER INFORMATION CONTACT: Munsell St. Clair, Chief, Banking and
Regulatory Policy Section, Division of Insurance and Research, (202)
898-8967; Ashley Mihalik, Senior Financial Economist, Banking and
Regulatory Policy Section, Division of Insurance and Research, (202)
898-3793; Nefretete Smith, Senior Attorney, Legal Division, (202) 898-
6851; Tanya Otsuka, Senior Attorney, Legal Division, (202) 898-6816.
SUPPLEMENTARY INFORMATION:
I. Notice of Proposed Rulemaking and Comments
On July 15, 2014, the FDIC's Board of Directors authorized
publication of a notice of proposed rulemaking (NPR) proposing to: (1)
Revise the ratios and ratio thresholds for capital evaluations used in
its risk-based deposit insurance assessment system to conform to the
PCA capital ratios and ratio thresholds adopted by the Federal banking
agencies; (2) revise the assessment base calculation for custodial
banks to conform to the asset risk weights adopted by the Federal
banking agencies; and (3) require all highly complex institutions to
measure counterparty exposure for deposit insurance assessment purposes
using the Basel III standardized approach credit equivalent amount for
derivatives and the Basel III standardized approach exposure amount for
securities financing transactions, such as repo-style transactions,
margin loans and similar transactions, as adopted by the Federal
banking agencies. These changes were proposed in part to accommodate
recent changes to the Federal banking agencies' capital rules that are
referenced in portions of the FDIC's assessments regulation.
The NPR was published in the Federal Register on July 23, 2014.\1\
The FDIC sought comment on every aspect of the proposed rule and on
alternatives. The FDIC received a total of 4 comment letters. The FDIC
also met with one commenter to improve understanding of the issues
raised in the commenter's written comment letter. A summary of the
meeting is posted on the FDIC's Web site. Comments are discussed in the
relevant sections that follow.
---------------------------------------------------------------------------
\1\ 79 FR 42698 (July 23, 2014).
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II. Ratios and Ratio Thresholds Relating to Capital Evaluations
A. Background
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) \2\ required that the FDIC establish a risk-based deposit
insurance assessment system. To implement this requirement, the FDIC
adopted by regulation a system that placed all insured depository
institutions (IDIs or banks) into nine risk classifications based on
two criteria: Capital evaluations and supervisory ratings.\3\ Each bank
was assigned one of three capital evaluations based on data reported in
its Consolidated Report of Condition and Income (Call Report): Well
capitalized, adequately capitalized, or undercapitalized. The capital
ratios and ratio thresholds used to determine each capital evaluation
were based on the capital ratios and ratio thresholds adopted for PCA
purposes by the FDIC, the OCC, the Federal Reserve, and the Office of
Thrift Supervision (OTS)--the Federal banking agencies at that time.\4\
In 1993, the ratios and ratio thresholds used to determine each capital
evaluation for assessment purposes were as shown in Table 1.
---------------------------------------------------------------------------
\2\ 12 U.S.C. 1817(b), Pub. L. 102-242, 105 Stat. 2236 (1991).
\3\ The FDIC first published a transitional rule that provided
the industry guidance during the period of transition from a uniform
rate to a risk-based assessment system. 57 FR 45263 (Oct. 1, 1992).
The FDIC established the new risk-based assessment system, which
became effective on January 1, 1994, to replace the transitional
rule. 58 FR 34357 (June 25, 1993); 12 CFR 327.3 (1993).
\4\ This final rule, issued by the FDIC, OCC, Federal Reserve,
and OTS, in part, established capital ratios and ratio thresholds
for the five capital categories for purposes of the PCA rules: Well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. 57 FR 44866
(Sept. 29, 1992). The risk-based assessment system does not use the
two lowest capital categories (significantly undercapitalized and
critically undercapitalized) under the PCA rules. For assessment
purposes, banks that would be in one of these capital categories are
treated as undercapitalized.
[[Page 70428]]
Table 1--Capital Ratios Used To Determine Capital Evaluations for Assessment Purposes
----------------------------------------------------------------------------------------------------------------
Total risk- Tier 1 risk- Tier 1
Capital evaluations based ratio based ratio leverage ratio
(%) (%) (%)
----------------------------------------------------------------------------------------------------------------
Well Capitalized................................................ >=10 >=6 >=5
Adequately Capitalized *........................................ >=8 >=4 >=4
-----------------------------------------------
Undercapitalized................................................ Does not qualify as either Well Capitalized or
Adequately Capitalized
----------------------------------------------------------------------------------------------------------------
* An institution is Adequately Capitalized if it is not Well Capitalized, but satisfies each of the listed
capital ratio standards for Adequately Capitalized.
In 2007, the nine risk classifications were consolidated into four
risk categories, which continued to be based on capital evaluations and
supervisory ratings; \5\ the capital ratios and the thresholds used to
determine capital evaluations remained unchanged.\6\
---------------------------------------------------------------------------
\5\ The four risk categories are I, II, III, and IV. Banks
posing the least risk are assigned to risk category I. 71 FR 69282
(Nov. 30, 2006).
\6\ To the extent that the definitions of components of the
ratios--such as tier 1 capital, total capital, and risk-weighted
assets--have changed over time for PCA purposes, the assessment
system has reflected these changes.
---------------------------------------------------------------------------
In 2011, the FDIC adopted a revised assessment system for large
banks--generally, those with at least $10 billion in total assets
(Assessments final rule).\7\ This system eliminated risk categories for
these banks, but PCA capital evaluations continue to be used to
determine whether an assessment rate is subject to adjustment for
significant amounts of brokered deposits.\8\
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\7\ 76 FR 10672 (Feb. 25, 2011). The FDIC amended Part 327 in a
subsequent final rule by revising some of the definitions used to
determine assessment rates for large and highly complex IDIs. 77 FR
66000 (Oct. 31, 2012). The term ``Assessments final rule'' includes
the October 2012 final rule.
\8\ In 2009, the FDIC added adjustments to its risk-based
pricing methods to improve the way the assessment system
differentiates risk among insured institutions. The brokered deposit
adjustment (one of the adjustments added in 2009) is applicable only
to small institutions in risk categories II, III, and IV, and large
institutions that are either less than well capitalized or have a
composite CAMELS rating of 3, 4 or 5 (under the Uniform Financial
Institution Rating System). The adjustment increases assessment
rates for significant amounts of brokered deposits. 74 FR 9525 (Mar.
4, 2009).
---------------------------------------------------------------------------
The assessment system for small banks, generally those with less
than $10 billion in total assets, continues to use risk categories
based on capital evaluations and supervisory ratings; the capital
ratios and the thresholds used to determine capital evaluations have
remained unchanged.
On September 7, 2013, the FDIC adopted an interim final rule \9\
and on April 14, 2014, published a final rule that, in part, revises
the definition of regulatory capital.\10\ The OCC and the Federal
Reserve adopted a final rule in October 2013 that is substantially
identical to the FDIC's interim final rule and final rule.\11\ (The
FDIC's interim final rule and final rule and the OCC and Federal
Reserve's final rule are referred to collectively hereafter as the
Basel III capital rules.) The Basel III capital rules revise the
thresholds for the tier 1 risk-based capital ratio used to determine a
bank's capital category under the PCA rules (that is, whether the bank
is well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, or critically undercapitalized). The
Basel III capital rules also add a new ratio, the common equity tier 1
capital ratio, and new thresholds for that ratio to determine a bank's
capital category under the PCA rules.\12\ The new ratio and ratio
thresholds will take effect on January 1, 2015.
---------------------------------------------------------------------------
\9\ 78 FR 55340 (Sept. 10, 2013).
\10\ 79 FR 20754 (Apr. 14, 2014).
\11\ 78 FR 62018 (Oct. 11, 2013).
\12\ 78 FR at 55592 (FDIC) and 78 FR at 62277 and 62283 (OCC and
Federal Reserve), codified, in part, at 12 CFR part 324, subpart H
(FDIC); 12 CFR part 6 (OCC); and 12 CFR part 208 (Regulation H),
subpart D (Federal Reserve).
---------------------------------------------------------------------------
The Basel III capital rules also adopt changes to the regulatory
capital requirements for banking organizations consistent with section
171 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act), often referred to as the ``Collins Amendment.'' \13\
Under section 171 of the Dodd-Frank Act, the generally applicable risk-
based capital requirements serve as a risk-based capital floor for
banking organizations subject to the advanced approaches risk-based
capital rules \14\ (advanced approaches banks \15\). Under the Basel
III capital rules effective January 1, 2015, the minimum capital
requirements as determined by the regulatory capital ratios based on
the standardized approach \16\ become the ``generally applicable''
capital requirements under section 171 of the Dodd-Frank Act.
---------------------------------------------------------------------------
\13\ Pub. L. 111-203, sec. 171, 124 Stat. 1376, 1435 (2010)
(codified at 12 U.S.C. 5371).
\14\ The FDIC's advanced approaches rule is at 12 CFR part 324,
subpart E. The advanced approaches rule is also supplemented by the
FDIC's risk-based capital requirements for banks subject to
significant exposure to market risk (market risk rule) in 12 CFR
part 324, subpart F.
\15\ As used herein, an advanced approaches bank means an IDI
that is an advanced approaches national bank or Federal savings
association under 12 CFR 3.100(b)(1), an advanced approaches Board-
regulated institution under 12 CFR 217.100(b)(1), or an advanced
approaches FDIC-supervised institution under 12 CFR 324.100(b)(1).
In general, an IDI is an advanced approaches bank if it has total
consolidated assets of $250 billion or more, has total consolidated
on-balance sheet foreign exposures of $10 billion or more, or elects
to use or is a subsidiary of an IDI, bank holding company, or
savings and loan holding company that uses the advanced approaches
to calculate risk-weighted assets.
\16\ The FDIC's standardized approach risk-based capital rule is
at 12 CFR part 324, subpart D. The standardized-approach risk-based
capital rule is supplemented by the FDIC's market risk rule in 12
CFR part 324, subpart F.
---------------------------------------------------------------------------
All banks, including advanced approaches banks, must calculate
risk-weighted assets under the standardized approach and report these
risk-weighted assets, for capital purposes, in Schedule RC-R of the
Call Report effective January 1, 2015. Advanced approaches banks also
must calculate risk weights using the advanced approaches and report
risk-weighted assets in the Risk-Based Capital Reporting for
Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC
101). Revisions to the advanced approaches risk-weight calculations
became effective January 1, 2014. An advanced approaches bank that has
successfully completed the parallel run process \17\ must determine
whether it meets its minimum risk-based capital requirements by
calculating the three risk-based capital ratios using total risk-
weighted assets under the general risk-based capital rules and,
separately, total risk-weighted assets under the advanced
[[Page 70429]]
approaches.\18\ The lower ratio for each risk-based capital requirement
is the ratio that will be used to determine an advanced approaches
bank's compliance with the minimum capital requirements \19\ and,
beginning on January 1, 2015, for purposes of determining compliance
with the new PCA requirements.\20\
---------------------------------------------------------------------------
\17\ Before determining its risk-weighted assets under advanced
approaches, a bank must conduct a satisfactory parallel run. A
satisfactory parallel run is a period of no less than four
consecutive calendar quarters during which the bank complies with
the qualification requirements to the satisfaction of its primary
Federal regulator. Following completion of a satisfactory parallel
run, a bank must receive approval from its primary Federal regulator
to calculate risk-based capital requirements under the advanced
approaches. See 12 CFR 324.121 (FDIC); 12 CFR 3.121 (OCC); and 12
CFR 217.121 (Federal Reserve).
\18\ Currently, the general risk-based capital rules are found
at 12 CFR part 325, appendix A (as supplemented by the risk-based
capital requirements for banks subject to the market risk rule in
appendix C). Effective January 1, 2015, the general risk-based
capital rules will be based on the standardized approach for
calculating risk-weighted assets under the Basel III capital rules,
12 CFR part 324, subpart D (as supplemented by the risk-based
capital requirements for banks subject to the market risk rule in
subpart F).
\19\ See 12 CFR 324.10(c) (FDIC); 12 CFR 3.10(c) (OCC); and 12
CFR 217.10(c) (Federal Reserve).
\20\ See 12 CFR part 324, subpart H.
---------------------------------------------------------------------------
For advanced approaches banks, the Basel III capital rules also
introduce the supplementary leverage ratio and a threshold for that
ratio that advanced approaches banks must meet to be deemed adequately
capitalized.\21\ (The supplementary leverage ratio as adopted in the
Basel III capital rules does not, however, establish a ratio that
advanced approaches banks must meet to be deemed well capitalized.)
While all advanced approaches banks must calculate and begin reporting
the supplementary leverage ratio beginning in the first quarter of
2015, the supplementary leverage ratio does not become effective for
PCA purposes until January 1, 2018.\22\
---------------------------------------------------------------------------
\21\ The supplementary leverage ratio includes many off-balance
sheet exposures in its denominator, while the generally applicable
leverage ratio does not.
\22\ 78 FR at 55592 (FDIC); 78 FR at 62277 (OCC and Federal
Reserve).
---------------------------------------------------------------------------
On May 1, 2014, the Federal banking agencies published a final rule
(the Enhanced Supplementary Leverage Ratio final rule) that strengthens
the supplementary leverage ratio standards for the largest advanced
approaches banks.\23\ The Enhanced Supplementary Leverage Ratio final
rule provides that an IDI that is a subsidiary of a covered bank
holding company (BHC) must maintain a supplementary leverage ratio of
at least 6 percent to be well capitalized under the Federal banking
agencies' PCA framework.\24\ On September 26, 2014, the Federal banking
agencies published a second final rule that revises the definition of
the denominator of the supplementary leverage ratio (total leverage
exposure).\25\ Again, all advanced approaches banks must calculate and
begin reporting the supplementary leverage ratio beginning in the first
quarter of 2015, but the supplementary leverage ratio does not become
effective for PCA purposes until January 1, 2018.
---------------------------------------------------------------------------
\23\ 79 FR 24528 (May 1, 2014).
\24\ 79 FR at 24530. IDI subsidiaries of a ``covered BHC'' are a
subset of IDIs subject to advanced approaches requirements. A
covered BHC is any top-tier U.S. BHC with more than $700 billion in
total consolidated assets or more than $10 trillion in assets under
custody. 79 FR at 24538. The list of ``covered BHCs'' is consistent
with the list of banking organizations that meet the Basel Committee
on Banking Supervision (Basel Committee or BCBS) definition of a
Global Systemically Important Bank (G-SIB), based on year-end 2011
data, and consistent with the revised list, based on year-end 2012
data. The revised list is available at http://www.financialstabilityboard.org/publications/r_131111.pdf).
\25\ 79 FR 57725 (Sept. 26, 2014).
---------------------------------------------------------------------------
B. The Final Rule: Capital Evaluations
As proposed, the final rule revises the ratios and ratio thresholds
relating to capital evaluations for deposit insurance assessment
purposes to conform to the new PCA capital rules. This revision
maintains the consistency between capital evaluations for deposit
insurance assessment purposes and capital ratios and ratio thresholds
for PCA purposes that has existed since the creation of the risk-based
assessment system over 20 years ago.
Specifically, the final rule revises the definitions of well
capitalized and adequately capitalized for deposit insurance assessment
purposes to reflect the threshold changes for the tier 1 risk-based
capital ratio, to incorporate the common equity tier 1 capital ratio
and its thresholds and, for those banks subject to the supplementary
leverage ratio for PCA purposes, to incorporate the supplementary
leverage ratio and its thresholds.\26\ The definition of
undercapitalized remains unchanged. The final rule revises the
definitions of well capitalized and adequately capitalized for deposit
insurance assessment purposes effective when the new PCA capital rules
become effective. Therefore, some of the revisions for deposit
insurance assessment purposes will become effective January 1, 2015 and
the remaining revisions will become effective January 1, 2018.
---------------------------------------------------------------------------
\26\ To the extent that the definitions of components of the
ratios--such as tier 1 capital, total capital, and risk-weighted
assets--change in the future for PCA purposes, the assessment system
will automatically incorporate these changes as implemented under
the Basel III capital rules.
---------------------------------------------------------------------------
Effective January 1, 2015, for deposit insurance assessment
purposes:
1. An institution is well capitalized if it satisfies each of the
following capital ratio standards: Total risk-based capital ratio, 10.0
percent or greater; tier 1 risk-based capital ratio, 8.0 percent or
greater (as opposed to the current 6.0 percent or greater); leverage
ratio, 5.0 percent or greater; and common equity tier 1 capital ratio,
6.5 percent or greater.
2. An institution is adequately capitalized if it is not well
capitalized but satisfies each of the following capital ratio
standards: Total risk-based capital ratio, 8.0 percent or greater; tier
1 risk-based capital ratio, 6.0 percent or greater (as opposed to the
current 4.0 percent or greater); leverage ratio, 4.0 percent or
greater; and common equity tier 1 capital ratio, 4.5 percent or
greater.
The definition of an undercapitalized institution remains the same:
An institution is undercapitalized if it does not qualify as either
well capitalized or adequately capitalized.
The final rule makes a technical amendment to Part 327 to replace
the terms ``Total risk-based ratio,'' ``Tier 1 risk-based ratio,'' and
``Tier 1 leverage ratio,'' with ``total risk-based capital ratio,''
``tier 1 risk-based capital ratio,'' and ``leverage ratio,''
respectively, wherever such terms appear.\27\
---------------------------------------------------------------------------
\27\ The FDIC has identified a slight inconsistency in
terminology between the PCA capital rules of parts 324 and 325 and
the deposit insurance assessment system of part 327. Currently, the
risk-based assessment system under part 327 uses the terms ``Total
risk-based ratio,'' ``Tier 1 risk-based ratio,'' and ``Tier 1
leverage ratio.'' The PCA capital rules use the terms ``total risk-
based capital ratio,'' ``tier 1 risk-based capital ratio,'' and
``leverage ratio'' (emphasis added). Despite this minor difference
in nomenclature, the underlying calculations for each of these three
ratios are the same under parts 324, 325 and 327 of the FDIC
regulations.
---------------------------------------------------------------------------
Table 2 summarizes the ratios and ratio thresholds for determining
capital evaluations for deposit insurance assessment purposes,
effective January 1, 2015.
[[Page 70430]]
Table 2--Capital Ratios Used To Determine Capital Evaluations for Assessment Purposes, Effective January 1, 2015
----------------------------------------------------------------------------------------------------------------
Total risk- Tier 1 risk- Common equity
Capital evaluations based capital based capital tier 1 capital Leverage ratio
ratio (%) ratio (%) ratio (%) (%)
----------------------------------------------------------------------------------------------------------------
Well Capitalized................................ >=10 >=8 >=6.5 >=5
Adequately Capitalized *........................ >=8 >=6 >=4.5 >=4
---------------------------------------------------------------
Undercapitalized................................ Does not qualify as either Well Capitalized or Adequately
Capitalized.
----------------------------------------------------------------------------------------------------------------
* An institution is Adequately Capitalized if it is not Well Capitalized, but satisfies each of the listed
capital ratio standards for Adequately Capitalized.
Effective January 1, 2018, the final rule adds the supplementary
leverage ratio to its capital evaluations for deposit insurance
assessment purposes to conform to the PCA capital rules. For assessment
purposes, an advanced approaches bank, including an IDI subsidiary of a
covered BHC, must have at least a 3.0 percent supplementary leverage
ratio to be adequately capitalized, and an IDI subsidiary of a covered
BHC must have at least a 6.0 percent supplementary leverage ratio to be
well capitalized.
Table 3 summarizes the ratios and ratio thresholds for determining
capital evaluations for deposit insurance assessment purposes,
effective January 1, 2018.
Table 3--Capital Ratios Used To Determine Capital Evaluations for Assessment Purposes, Effective January 1, 2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
Supplementary
leverage ratio Supplementary
Total risk- Tier 1 risk- Common equity (advanced leverage ratio
Capital evaluations based capital based capital tier 1 capital Leverage ratio approaches (subsidiary
ratio (%) ratio (%) ratio (%) (%) banking IDIs of
organizations) covered BHCs)
(%) (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Well Capitalized........................................ >=10 >=8 >=6.5 >=5 Not applicable >=6
Adequately Capitalized *................................ >=8 >=6 >=4.5 >=4 >=3 >=3
-----------------------------------------------------------------------------------------------
Undercapitalized........................................ Does not qualify as either Well Capitalized or Adequately Capitalized.
--------------------------------------------------------------------------------------------------------------------------------------------------------
* An institution is Adequately Capitalized if it is not Well Capitalized, but satisfies each of the listed capital ratio standards for Adequately
Capitalized.
C. Comments Received
The FDIC sought comments on the proposed ratios and ratio
thresholds relating to capital evaluations for deposit insurance
assessment purposes. The FDIC received one written comment that
supported the proposal to revise the ratios and ratio thresholds for
capital evaluations used in the risk-based deposit insurance assessment
system to conform to the new PCA capital ratios and ratio thresholds.
In the NPR, the FDIC discussed an alternative that would leave in
place the current terminology and capital evaluations for deposit
insurance assessment purposes, but the FDIC did not receive any
comments on the alternative. In any event, the FDIC believes that the
alternative would lead to unnecessary complexity and inconsistency,
which could lead to confusion and increase regulatory burden on banks.
Therefore, the FDIC will finalize the amendments to Part 327 as
proposed.
III. Assessment Base Calculation for Custodial Banks
A. Background
The FDIC charges IDIs an amount for deposit insurance equal to the
IDI's deposit insurance assessment base multiplied by its risk-based
assessment rate. The Dodd-Frank Act directed the FDIC to amend its
regulatory definition of ``assessment base'' for purposes of setting
assessments for IDIs. Specifically, the Dodd-Frank Act required the
FDIC to define the term ``assessment base'' with respect to a
depository institution:
As an amount equal to--
The average consolidated total assets of the insured
depository institution during the assessment period; minus
The sum of--
[cir] The average tangible equity of the insured depository
institution during the assessment period, and
[cir] In the case of an insured depository institution that is a
custodial bank (as defined by the Corporation, based on factors
including the percentage of total revenues generated by custodial
businesses and the level of assets under custody) . . . , an amount
that the Corporation determines is necessary to establish assessments
consistent with the definition under section 7(b)(1) of the Federal
Deposit Insurance Act (12 U.S.C. 1817(b)(1)) for a custodial bank . .
.\28\
---------------------------------------------------------------------------
\28\ Pub. L. 111-203, sec. 331(b), 124 Stat. 1538 (codified as
amended at 12 U.S.C. 1817(nt)).
---------------------------------------------------------------------------
In February 2011, the FDIC implemented this requirement in the
Assessments final rule.\29\ The Assessments final rule defines a
custodial bank and specifies the additional amount to be deducted from
a custodial bank's average consolidated total assets for purposes of
determining its assessment base. The assessment base deduction for
custodial banks is defined as the daily or weekly average (depending
upon the way the bank reports its average consolidated total assets) of
a specified amount of certain
[[Page 70431]]
low-risk, liquid assets, subject to the limitation that the daily or
weekly average value of such assets not exceed the average value of
deposits that are classified as transaction accounts and are identified
by the bank as being directly linked to a fiduciary or custodial and
safekeeping account.
---------------------------------------------------------------------------
\29\ 76 FR at 10706.
---------------------------------------------------------------------------
Under the Assessments final rule, a custodial bank may deduct all
asset types described in the instructions to lines 34, 35, 36, and 37
of Schedule RC-R of the Call Report as of December 31, 2010 with a risk
weight of 0 percent, regardless of maturity, and 50 percent of those
asset types described in the instructions to those same lines with a
risk weight of 20 percent, again regardless of maturity.\30\ These
assets include cash and balances due from depository institutions,
securities, federal funds sold, and securities purchased under
agreements to resell.
---------------------------------------------------------------------------
\30\ Risk-weighted assets are generally determined by assigning
assets to broad risk-weight categories. The amount of an asset is
multiplied by its risk weight (for example, 0 percent or 20 percent)
to calculate the risk-weighted asset amount.
---------------------------------------------------------------------------
Under the Basel III capital rules, the standardized approach
introduces 2 percent and 4 percent risk weights for cleared
transactions with Qualified Central Counterparties (QCCPs), as defined
in the Basel III capital rules, subject to certain collateral
requirements.\31\ The lower risk weights reflect the Federal banking
agencies' support for ``incentives designed to encourage clearing of
derivative and repo-style transactions through a CCP [central
counterparty] wherever possible in order to promote transparency,
multilateral netting, and robust risk-management practices.'' \32\
Nonetheless, the new 2 percent and 4 percent risk weights (being
greater than 0) recognize that, while clearing transactions through a
CCP significantly reduces counterparty credit risk, the clearing
process does not eliminate risk altogether and that some degree of
residual risk is retained.
---------------------------------------------------------------------------
\31\ See 78 FR at 55502 (FDIC); 78 FR at 62184-85 (OCC and
Federal Reserve).
\32\ See 78 FR at 55414 (FDIC); 78 FR at 62096 (OCC and Federal
Reserve).
---------------------------------------------------------------------------
Section 939A of the Dodd-Frank Act requires the removal of any
regulatory reference to or requirement of reliance on credit ratings
for assessing the credit-worthiness of a security or money market
instrument and the substitution of new standards of credit-
worthiness.\33\ Consequently, the Basel III capital rules remove
references to credit ratings for purposes of determining risk weights
for risk-based capital calculations, and the standardized approach
introduces a formula-based methodology for calculating risk-weighted
assets for many securitization exposures.\34\ Risk weights under the
standardized approach for certain other assets, including but not
limited to exposures to foreign sovereigns, foreign banks, and foreign
public sector entities, have also changed.\35\
---------------------------------------------------------------------------
\33\ See Pub. L. 111-203, sec. 939A, 124 Stat 1887 (codified as
amended at 15 U.S.C. 78o-7(nt)).
\34\ 78 FR at 55430 (FDIC); 78 FR at 62111 (OCC and Federal
Reserve).
\35\ See, e.g., 78 FR at 55400-04 (FDIC); 78 FR at 62083-87 (OCC
and Federal Reserve).
---------------------------------------------------------------------------
B. The Final Rule: Assessment Base Calculation
As proposed in the NPR, the final rule conforms the assessment base
deduction for custodial banks to the new standardized approach for
risk-weighted assets adopted in the Basel III capital rules. For
purposes of the assessment base deduction for custodial banks, the
final rule continues to use the generally applicable risk weights (as
revised under the standardized approach, effective January 1, 2015),
even for advanced approaches banks.
The assessment base deduction for custodial banks will continue to
be defined as the daily or weekly average of a certain amount of
specified low-risk, liquid assets, subject to the limitation that the
daily or weekly average value of these assets cannot exceed the daily
or weekly average value of deposits that are classified as transaction
accounts and are identified by the bank as being directly linked to a
fiduciary or custodial and safekeeping account asset. Subject to this
limitation, effective January 1, 2015, the assessment base deduction
will be the daily or weekly average of:
1. 100 percent of those asset types described in the instructions
to lines 1, 2, and 3 of Schedule RC of the Call Report with a
standardized approach risk weight of 0 percent, regardless of maturity;
plus
2. 50 percent of those asset types described in the instructions to
lines 1, 2, and 3 of Schedule RC of the Call Report, including assets
that qualify as securitization exposures, with a standardized approach
risk weight greater than 0 and up to and including 20 percent,
regardless of maturity.
In general, the assets described in lines 1, 2, and 3 of Schedule
RC of the Call Report include cash and balances due from depository
institutions, securities (both held-to-maturity and available-for-
sale), federal funds sold, and securities purchased under agreements to
resell. The inclusion of these asset types in the assessment base
deduction for custodial banks is consistent with the asset types
included in the current adjustment.
In response to comments, the final rule differs from the NPR in
that it includes in the assessment base deduction for custodial banks
those asset types described in lines 1, 2, and 3 of Schedule RC of the
Call Report that qualify as securitization exposures (as defined in the
Basel III capital rules) and have a standardized risk weight of 20
percent.\36\ Under current assessment rules, securitizations with a
risk weight of 20 percent are included in the assessment base deduction
for custodial banks. After further consideration, the FDIC has
concluded that assets of this type appear to be sufficiently low risk
(as reflected in the 20 percent risk weight) and sufficiently liquid to
allow them to continue to be included in the assessment base deduction.
This difference from the NPR conforms the final rule more closely with
the current assessment rule.
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\36\ Under the Basel III capital rules, a securitization
exposure generally includes a credit exposure with more than one
underlying exposure where the credit risk associated with the
underlying exposures has been separated into at least two tranches
reflecting different levels of seniority. Specifically, a
securitization exposure is defined as an on- or off-balance sheet
credit exposure (including credit-enhancing representations and
warranties) that arises from a traditional securitization or a
synthetic securitization (including a re-securitization), or an
exposure that directly or indirectly references a securitization
exposure. See 78 FR at 55482 (FDIC); 78 FR at 62168 (OCC and Federal
Reserve). Under the Basel III capital rules' standardized approach,
securitized assets of the type described in lines 1, 2, and 3 of
Schedule RC of the Call Report cannot have a risk-weight lower than
20 percent. 78 FR at 55515 (FDIC); 78 FR at 62196 (OCC and Federal
Reserve).
---------------------------------------------------------------------------
As proposed, 50 percent of assets described in line 3 of Schedule
RC of the Call Report that are assigned a 2 or 4 percent risk weight
may be included in the assessment base deduction for custodial banks.
In the NPR, the FDIC discussed, as an alternative, including 100
percent of these asset types in the adjustment. The FDIC, however,
believes that these assets are not risk-free and thus do not merit a
100 percent inclusion in the assessment base deduction for custodial
banks.
Last, the final rule makes a technical amendment to the definition
of ``custodial bank'' by removing any reference to the Call Report date
of December 31, 2010, to ensure conformity with the Basel III capital
rules.
C. Comments Received
The FDIC received two written comments on the NPR's proposal
regarding the assessment base deduction
[[Page 70432]]
for custodial banks.\37\ Both commenters suggested that the FDIC
continue to include low-risk securitization exposures in the assessment
base deduction.\38\ As discussed above, the FDIC agrees and the change
is reflected in the final rule.
---------------------------------------------------------------------------
\37\ The comments did not address another alternative discussed
in the NPR that would maintain the current assessment base
deduction. In any event, the alternative would create unnecessary
complexity and inconsistency between the asset risk weights used for
capital purposes and for deposit insurance assessment purposes,
which would lead to confusion and increase burden.
\38\ One commenter also suggested an alternative if the FDIC
determined that it is appropriate to fully exclude securitization
exposures from the assessment base deduction. Under this
alternative, the assessment base deduction for assets with a
standardized approach risk weight of 20 percent would increase from
50 percent to 85 percent. The commenter reasoned that assets
assigned this risk weight and that are not securitization exposures
are characterized by strong credit risk profiles and robust
structural liquidity that warrant more favorable treatment.
The FDIC disagrees that assets assigned a 20 percent risk weight
are sufficiently low risk and liquid to warrant an 85 percent
deduction from the assessment base.
---------------------------------------------------------------------------
In addressing the alternative discussed in the NPR of including 100
percent of cleared transactions with QCCPs in the adjustment, two
commenters suggested a different weighting method under which the FDIC
would allow custodial banks to deduct 100 percent of a ``qualifying
asset'' \39\ minus 2\1/2\ times the asset's Basel III standardized
approach risk weight. Under this approach, for example, a custodial
bank could deduct 95 percent of a 2 percent risk-weighted qualifying
asset from its assessment base and 25 percent of a 30 percent risk-
weighted qualifying asset. Commenters argued that this approach would
take into account the increased granularity of risk weights under the
Basel III standardized approach, where, for example, a securitization
could receive a risk weight of 20.5 percent.
---------------------------------------------------------------------------
\39\ Only one of the commenters used the term ``qualifying
asset,'' but the substance of the other commenter's suggestion was
substantially the same.
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In the FDIC's view, however, this proposal ignores the greater risk
reflected in higher risk-weighted assets because it would allow the
deduction of assets with risk weights of up to 40 percent. The FDIC has
never allowed a deduction from custodial banks' assessment bases for
assets with risk weights greater than 20 percent because the deduction
is only intended for low-risk assets.
IV. Calculation of Counterparty Exposures in the Highly Complex
Institution Scorecard
A. Background
Section 7 of the Federal Deposit Insurance Act (FDI Act) requires
the FDIC Board of Directors to adopt a risk-based assessment system
based on the probability that the DIF will incur a loss with respect to
an institution, the likely amount of any loss to the DIF, and the
revenue needs of the DIF.\40\ Further, under the FDI Act the FDIC may
establish a separate risk-based assessment system for large members of
the Deposit Insurance Fund (DIF).\41\
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\40\ 12 U.S.C. 1817(b)(1)(C).
\41\ 12 U.S.C. 1817(b)(1)(D).
---------------------------------------------------------------------------
In the Assessments final rule, the FDIC adopted a revised
assessment system for large banks--generally, those with at least $10
billion in total assets. This system, which went into effect in the
second quarter of 2011, uses scorecards that combine CAMELS ratings and
certain financial measures to assess the risk a large institution poses
to the DIF. One scorecard applies to most large institutions and
another applies to highly complex institutions, those that are
structurally and operationally complex or that pose unique challenges
and risks to the DIF in the event of failure.\42\
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\42\ A ``highly complex institution'' is defined as: (1) An IDI
(excluding a credit card bank) that has had $50 billion or more in
total assets for at least four consecutive quarters 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; or (2) a
processing bank or trust company. 12 CFR 327.8(g).
---------------------------------------------------------------------------
The scorecards for both large and highly complex institutions use
quantitative measures that are useful in predicting a large
institution's long-term performance. Most of the measures used in the
highly complex institution scorecard are similar to the measures used
in the large bank scorecard. The scorecard for highly complex
institutions, however, includes additional measures, such as the ratio
of top 20 counterparty exposures to Tier 1 capital and reserves and the
ratio of the largest counterparty exposure to Tier 1 capital and
reserves (collectively, the counterparty exposure measures). Both
ratios are defined in the Assessments final rule.\43\
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\43\ 76 FR at 10721; 12 CFR part 327, subpart A, App. A.
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The Assessments final rule defines counterparty exposure as the sum
of exposure at default (EAD) associated with derivatives trading \44\
and securities financing transactions (SFTs) \45\ and the gross lending
exposure (including all unfunded commitments) for each counterparty or
borrower at the consolidated entity level.\46\ Generally, since June
30, 2011, when highly complex institutions began reporting for
scorecard purposes, they have determined and reported their
counterparty exposures for assessment purposes using certain methods
permitted under the Assessments final rule.\47\ The Assessments final
rule allows use of an approach based on internal models (the Internal
Models Method, or IMM) to calculate counterparty exposures subject to
approval by an institution's primary federal regulator, but until
recently no highly complex institution was permitted to use the IMM.
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\44\ Derivatives trading exposures include both over-the-counter
(OTC) derivatives and derivative contracts that an IDI has entered
into with a CCP.
\45\ SFTs include repurchase agreements, reverse repurchase
agreements, security lending and borrowing, and margin lending
transactions, where the value of the transactions depends on market
valuations and the transactions are often subject to margin
agreements.
\46\ 76 FR at 10721. Counterparty exposure excludes all
counterparty exposure to the U.S. government and departments or
agencies of the U.S. government that is unconditionally guaranteed
by the full faith and credit of the United States.
\47\ For example, permitted methods for derivatives exposures
have included the credit equivalent amount as calculated under the
Federal banking agencies' general risk-based capital rules and the
current exposure method (CEM) under the BCBS Basel II framework.
---------------------------------------------------------------------------
The IMM is one component of the advanced approaches risk-based
capital framework. Banking organizations that have received approval to
use the advanced approaches do not automatically have approval to use
the IMM, which requires a separate approval. Seven of the nine highly
complex institutions received approval from their primary federal
regulators to use the advanced approaches for regulatory capital
beginning in the first quarter of 2014. Of these seven banks, some, but
not all, received approval from their primary federal regulators to use
the IMM for calculating EAD for counterparty credit risk for
derivatives beginning in the second quarter of 2014. Thus, some of the
nine banks using the highly complex institution scorecard began
calculating their counterparty exposure in the second quarter of 2014
using the IMM, while the others still use non-IMM methods.
Based on assessments data, the adoption of the IMM by itself has
caused a significant reduction in measured counterparty exposure
amounts and changed the scorecard
[[Page 70433]]
results in a way that significantly reduces deposit insurance
assessments for the banks using the IMM. This significant reduction in
assessments does not appear to be driven primarily by a change in risk
exposure, but rather by a change in measurement methodology. Moreover,
since the second quarter of 2014, the nine banks currently subject to
the highly complex institution scorecard have been measuring
counterparty risk in different ways.
B. The Final Rule: Calculation of Counterparty Exposure
Under the final rule, starting in the first quarter of 2015,
exposure to a counterparty is equal to the sum of: Gross loans
(including all unfunded commitments); the amount of derivatives
exposures reduced by the amount of qualifying cash collateral; and the
amount of SFT exposure. Derivatives exposures and SFT exposures are
described in more detail below.
Specifically, the counterparty exposure amount associated with
derivatives, including OTC derivatives, a cleared transaction that is a
derivative contract, or a netting set of derivative contracts,\48\ is
to be calculated as the credit equivalent amount under the standardized
approach without deduction for collateral other than qualifying cash
collateral. The credit equivalent amount under the standardized
approach is the sum of current credit exposure and potential future
exposure; that is, the exposure amount set forth in 12 CFR 324.34(a)
(but with no reduction for collateral under 12 CFR 324.34(b)).\49\
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\48\ A ``netting set'' is a group of transactions with a single
counterparty that are subject to a qualifying master netting
agreement or a qualifying cross-product master netting agreement. 12
CFR 324.2.
\49\ For multiple OTC derivative contracts subject to a
qualifying master netting agreement, however, the exposure amount
equals the sum of the net current credit exposure and the adjusted
sum of potential future exposure amounts for all OTC derivative
contracts subject to the qualifying master netting agreement; that
is, the exposure amount set forth in 12 CFR 324.34(a)(2) (but with
no reduction for collateral under 12 CFR 324.34(b)).
---------------------------------------------------------------------------
The NPR proposed allowing no deduction for collateral from a highly
complex institution's counterparty exposure amount associated with
derivatives. Two trade groups recommended that the FDIC permit
recognition of financial collateral to reduce the counterparty exposure
amount associated with derivatives, as permitted under the Basel III
standardized approach. The final rule addresses the concerns of these
commenters to an extent by allowing qualifying cash collateral (but not
other collateral) to reduce a highly complex institution's derivative
exposures in the counterparty exposure measures. To qualify, the cash
collateral must be all or part of variation margin and satisfy the
conditions that would allow the cash collateral to be excluded from the
institution's total leverage exposure for purposes of the supplementary
leverage ratio.\50\ These conditions are designed to ensure that the
cash collateral is in effect a pre-settlement payment on the
derivatives contracts.
---------------------------------------------------------------------------
\50\ In general, the conditions are that:
(1) For derivative contracts that are not cleared through a
QCCP, the cash collateral received by the recipient counterparty is
not segregated (by law, regulation or an agreement with the
counterparty);
(2) Variation margin is calculated and transferred on a daily
basis based on the mark-to-fair value of the derivative contract;
(3) The variation margin transferred under the derivative
contract or the governing rules for a cleared transaction is the
full amount that is necessary to fully extinguish the net current
credit exposure to the counterparty of the derivative contracts,
subject to the threshold and minimum transfer amounts applicable to
the counterparty under the terms of the derivative contract or the
governing rules for a cleared transaction;
(4) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract, provided that for the purposes of this paragraph, currency
of settlement means any currency for settlement specified in the
governing qualifying master netting agreement and the credit support
annex to the qualifying master netting agreement, or in the
governing rules for a cleared transaction;
(5) The derivative contract and the variation margin are
governed by a qualifying master netting agreement between the legal
entities that are the counterparties to the derivative contract or
by the governing rules for a cleared transaction, and the qualifying
master netting agreement or the governing rules for a cleared
transaction must explicitly stipulate that the counterparties agree
to settle any payment obligations on a net basis, taking into
account any variation margin received or provided under the contract
if a credit event involving either counterparty occurs;
(6) The variation margin is used to reduce the current credit
exposure of the derivative contract and not the PFE; and
(7) For the purpose of the calculation of the net-to-gross ratio
(NGR), variation margin may not reduce the net current credit
exposure or the gross current credit exposure.
The requirements are specified at 12 CFR 324.10(c)(4)(ii)(C)(1)-
(7) (FDIC); 12 CFR 3.10(c)(4)(ii)(C)(1)-(7) (OCC); and 12 CFR
217.10(c)(4)(ii)(C)(1)-(7) (Federal Reserve).
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The counterparty exposure amount associated with SFTs, including
SFTs that are cleared transactions, is to be calculated using either
the simple approach or the collateral haircut approach contained in 12
CFR 324.37(b) and (c), respectively.
For both derivative and SFT exposures, the amount of counterparty
exposure to CCPs must also include the default fund contribution, which
is the funds contributed or commitments made by a clearing member to a
CCP's mutualized loss sharing arrangement.\51\
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\51\ 12 CFR 324.2 (FDIC); 12 CFR 3.2 (OCC); 12 CFR 217.2
(Federal Reserve).
---------------------------------------------------------------------------
Counterparty exposure continues to exclude all counterparty
exposure to the U.S. government and departments or agencies of the U.S.
government that is unconditionally guaranteed by the full faith and
credit of the United States.
C. Comments Received
The FDIC sought comments on the proposed calculation of
counterparty exposure measures. The FDIC received a total of three
written comments, two from trade groups and one from a bank. In
general, the two trade groups contended that the change proposed in the
NPR to the counterparty exposure measures is inconsistent with the
FDIC's statutory mandate \52\ because the proposal does not recognize
the risk-mitigating benefits of financial collateral and the minimal
risk posed by exposure to CCPs.
---------------------------------------------------------------------------
\52\ The two trade groups argued that the FDIC's statutory
mandate is ``that assessments be based on actual risk to the DIF,''
and that ``assessments [be] based on risk.''
---------------------------------------------------------------------------
As discussed above, in establishing a risk-based assessment system
the FDIC is statutorily required to consider a number of factors,
including the probability that the DIF will incur a loss with respect
to an institution. The FDIC also takes into consideration the likely
amount of any such loss and the revenue needs of the DIF. In
determining the probability that the DIF will incur a loss, the FDIC
takes into consideration the risks attributable to different categories
and concentrations of assets and liabilities, both insured and
uninsured, contingent and noncontingent, and any other factors the FDIC
determines are relevant to assessing such probability.\53\ In the case
of the counterparty exposure measures, such other factors include the
need for a common measurement framework for counterparty exposure and
the need to ensure that methodological differences do not determine a
bank's exposure relative to its peers.
---------------------------------------------------------------------------
\53\ 12 U.S.C. 1817(b)(1)(C).
---------------------------------------------------------------------------
In this context, the FDIC has taken into account the relative risk-
mitigating factors associated with certain financial collateral and the
use of CCPs. The FDIC has concluded that it is appropriate to allow
qualifying cash collateral to reduce a bank's measured derivatives
exposure for purposes of the assessments scorecard, but as discussed in
more detail below, does not agree with commenters that other forms of
collateral warrant the same recognition.
[[Page 70434]]
Financial Collateral
As stated above, two trade groups recommended that financial
collateral reduce OTC derivative exposures as permitted when
calculating risk-weighted assets under the Basel III standardized
approach.\54\ The final rule adopts another, more limited, approach,
allowing--under certain circumstances--cash variation margin to reduce
OTC derivative exposures. The regular and timely exchange of cash
variation margin helps to protect both counterparties from the effects
of a counterparty default. The conditions under which cash collateral
may be used to offset the amount of a derivative contract in the
supplementary leverage ratio are intended to ensure that such cash
collateral ``is, in substance, a form of pre-settlement payment on a
derivative contract,'' \55\ such that that portion of the exposure has
essentially been paid. The conditions also ensure that the
counterparties calculate their exposures arising from derivative
contracts on a daily basis and transfer the net amounts owed, as
appropriate, in a timely manner. The approach in the final rule is
consistent with the design of the supplementary leverage ratio and with
U.S. generally accepted accounting principles (GAAP).\56\
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\54\ The NPR discussed allowing the deduction of collateral in
this manner as a possible alternative to the proposal in the NPR.
\55\ 79 FR 57725, 57730 (Sept. 26, 2014). The supplementary
leverage ratio rule ``generally does not permit banking
organizations to use collateral to reduce exposures for purposes of
calculating total leverage exposure,'' but does allow reduction
under the circumstances permitted under this final rule.
In the NPR, the FDIC also requested comment on an alternative
approach that would require highly complex institutions to use total
leverage exposure, as defined in the supplementary leverage ratio,
when calculating counterparty exposure measures. The FDIC received
two brief comments, one in favor of the alternative approach and one
opposed to it. While the FDIC may consider using total leverage
exposure, as defined in the supplementary leverage ratio, as a
general measure of counterparty exposure in the future, the FDIC is
not persuaded that this alternative approach should be adopted
wholesale now in lieu of the standardized approach.
\56\ As the federal banking regulators noted recently in
amending the rules governing the supplementary leverage ratio, ``For
the purpose of determining the carrying value of derivative
contracts, U.S. generally accepted accounting principles (GAAP)
provide a banking organization the option to reduce any positive
mark-to-fair value of a derivative contract by the amount of any
cash collateral received from the counterparty, provided the
relevant GAAP criteria for offsetting are met (the GAAP offset
option).'' 79 FR at 57729.
---------------------------------------------------------------------------
In the FDIC's view, however, it would be inappropriate to reduce
OTC derivatives exposures in the counterparty exposure measures for all
types of financial collateral and the final rule allows no reduction
for collateral other than qualifying cash collateral. As the Basel
Committee noted in adopting the Basel III leverage framework,
``Collateral received in connection with derivative contracts does not
necessarily reduce the leverage inherent in a bank's derivatives
position, which is generally the case if the settlement exposure
arising from the underlying derivative contract is not reduced.'' \57\
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\57\ Basel Committee on Banking Supervision. (January 2014).
``Basel III leverage ratio framework and disclosure requirements'',
available online at http://www.bis.org/publ/bcbs270.pdf.
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Qualifying Central Counterparties (QCCPs)
Two trade groups argued that exposures to QCCPs should be excluded
from the counterparty exposure measures. They argued that the capital
and prudential requirements applicable to QCCPs ensure that they pose
no risk to banks and that, because Congress has encouraged the use of
QCCPs, exposures to QCCPs will likely increase and come to dominate the
20 largest total exposure amounts to counterparties while actually
reducing risk. One trade group argued that exposures to QCCPs should be
excluded from the measures until the full effect of the central
clearing requirements are known and the strength of QCCPs is more fully
understood.
Counterparty exposures to QCCPs, however, are not risk-free. For
example, the Basel Committee notes that despite the benefits that CCPs
can bring to OTC derivatives markets, they can concentrate counterparty
and operational risks, with a potential for systemic risk.\58\ As
mentioned above, the counterparty exposure measures are concentration
measures intended to assess a highly complex institution's ability to
withstand asset-related stress.\59\ Also, as one of the comments
implies, QCCPs' performance in times of stress has not been tested. For
these reasons, the final rule continues to include exposures to QCCPs
in the counterparty exposure measures. To the extent that derivatives
exposures to QCCPs are secured by qualifying cash collateral, however,
the amount of exposure for purposes of the counterparty exposure
measures will be reduced.
---------------------------------------------------------------------------
\58\ Basel Committee on Banking Supervision. (November 2011).
``Capitalisation of bank exposures to central counterparties'',
available online at http://www.bis.org/publ/bcbs206.pdf.
\59\ 76 FR at 10696.
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Affiliates
Two trade groups also argued that exposures to affiliates should be
excluded from the counterparty exposure measures on the grounds that
Section 23A of the Federal Reserve Act and the Federal Reserve's
Regulation W effectively limit a bank's exposure to an affiliate and
impose collateral requirements.\60\
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\60\ 12 U.S.C. 371c; 12 CFR 223.11; 223.12; and 223.14.
---------------------------------------------------------------------------
The FDIC disagrees. Limiting exposure to an affiliate, as required
by Section 23A and Regulation W, does not eliminate risk, particularly
during periods of stress. For this reason, the final rule continues to
include exposures to affiliates in the counterparty exposure measures.
To the extent that derivatives exposures to affiliates are secured by
qualifying cash collateral, however, the amount of exposure for
purposes of the counterparty exposure measures will be reduced.
Non-U.S. Sovereigns
Two trade groups also argued that exposures to non-U.S. sovereigns
with high credit quality should be excluded from the counterparty
exposure measures. They suggested excluding foreign sovereign exposures
where the Basel III capital rules assign a zero risk weight based on
either the Organization for Economic Cooperation and Development's
(OECD's) Country Risk Classification (CRC) or the sovereign's OECD
membership status if no CRC exists, or where the foreign sovereign
meets the criteria for obligations that qualify as Level 1 high quality
liquid assets under the Liquidity Coverage Ratio rule.
The FDIC again disagrees. Exposures to non-U.S. sovereigns pose
risk, particularly during periods of stress. Consequently, the final
rule treats these exposures as it does other derivatives exposures.
Again, to the extent that derivatives exposures to non-U.S. sovereigns
are secured by qualifying cash collateral, the amount of exposure for
purposes of the counterparty exposure measures will be reduced.
IMM
In the NPR, the FDIC requested comment on whether highly complex
institutions should be allowed to measure counterparty exposure for
assessment purposes using the IMM. Two trade groups made arguments in
favor of allowing the use of the IMM. The trade groups argued that the
IMM is a better measure of counterparty exposure than is the
standardized approach and that the shortcomings of the standardized
approach ``are well known and have been widely recognized,'' citing a
Basel Committee paper. Because, in their view, the IMM
[[Page 70435]]
is a better risk measure than the standardized approach, the commenters
argued that the NPR fails to meet the statutory requirement that the
FDIC adopt a risk-based assessment system and that, in conflict with
the requirements of the Administrative Procedure Act, the FDIC has
failed to justify elimination of the IMM.
The FDIC has considered the issues the commenters raised and does
not agree with the commenters. Specifically, the FDIC does not agree
that, for assessment purposes, the IMM measures counterparty exposure
better than the standardized approach does. In arguing that the IMM is
a better measure of counterparty exposure than is the standardized
approach, commenters ignore the Basel Committee's observation (noted in
the NPR) that the use of internal models has resulted in a material
amount of variability between banks, a significant amount of which may
be driven by banks' individual modeling choices rather than by
distinctions in portfolio risk or risk management practices.\61\ Under
the IMM, banks may use different assumptions and measurement
approaches, resulting in inconsistency. This variability was one of the
chief reasons that the NPR rejected the use of the IMM in measuring
counterparty exposure for assessment purposes. Partly for this reason,
it would impractical for the FDIC to calibrate and adjust counterparty
measures in a way that produces accurate and equitable assessments
outcomes.\62\
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\61\ 79 FR 42698, 42705 (July 23, 2014). See Basel Committee on
Banking Supervision. (January 2013). ``Regulatory consistency
assessment programme (RCAP)--Analysis of risk-weighted assets for
market risk'', available online at http://www.bis.org/publ/bcbs240.htm; Basel Committee on Banking Supervision. (July 2013).
``Regulatory consistency assessment programme (RCAP)--Analysis of
risk-weighted assets for credit risk in the banking book,''
available online at http://www.bis.org/publ/bcbs256.htm; and Basel
Committee on Banking Supervision. (July 2013). ``The regulatory
framework: balancing risk sensitivity, simplicity and
comparability--discussion paper,'' available online at http://www.bis.org/publ/bcbs258.htm.
\62\ In the NPR, the FDIC also discussed but argued against an
alternative in which it would recalibrate the conversion of
counterparty exposure measures into scores using exposures
calculated using the IMM approach.
---------------------------------------------------------------------------
The commenters also ignore the FDIC's statutory authority to take
consistency of risk measurement into account in the risk-based
assessment system. As stated above, the FDIC Board of Directors must
consider certain enumerated factors when setting a risk-based
assessment system, including the probability that the DIF will incur a
loss with respect to an institution. In determining the probability
that the DIF will incur a loss with respect to an institution, the FDIC
may take into account ``any other factors the Corporation determines
are relevant to assessing such probability.'' \63\ In proposing to use
the standardized approach to measure counterparty exposure, the FDIC
has taken into account ``other factors;'' namely, the need for a common
measurement framework for counterparty exposure and the need to ensure
that methodological differences do not determine a bank's exposure
relative to its peers. Consistency in the manner in which highly
complex IDIs calculate counterparty exposure is an appropriate and
necessary factor in establishing a risk-based assessment system.
---------------------------------------------------------------------------
\63\ 12 U.S.C. 1817(b)(1)(C)(i)(III).
---------------------------------------------------------------------------
More broadly, existing law and regulation do not generally allow
the unconstrained use of banks' internal models for regulatory capital
purposes, instead providing for the use of a standardized capital
floor. Current law recognizes the standardized approach as a valid
measure of risk for risk-based capital purposes. Thus, the approach
taken in the final rule is consistent in spirit with this aspect of the
capital rules.
Two trade groups also argued that adopting the standardized
approach for measuring counterparty exposure is premature and that the
FDIC should not eliminate the IMM until Federal banking agencies
determine whether to adopt the Basel Committee's standardized approach
for measuring exposure at default for counterparty credit risk (SA-CCR)
for risk-based capital purposes. As the commenters acknowledged, no
decision has been made regarding when or how (or whether) the SA-CCR
will be adopted in the U.S. for capital purposes. If the Federal
banking agencies adopt the SA-CCR for risk-based capital purposes, the
FDIC will consider whether changes to the counterparty exposure
measures are appropriate. The trade groups' argument, however, amounts
to indefinitely allowing the use of vastly different measurement
methodologies for calculating counterparty exposure for assessment
purposes, with the concomitant inequities in assessment rates, which
the FDIC finds unreasonable.
Converting Counterparty Exposure Measures to Scores
In the Assessments final rule, the FDIC reserved the right to
update the minimum and maximum cutoff values used in each scorecard
annually without further rulemaking as long as the method of selecting
cut-off values remained unchanged. Under this reservation, the FDIC can
add new data for later years to its analysis and can, from time to
time, exclude some earlier years from its analysis.\64\
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\64\ 76 FR at 10700; see also 77 FR at 66016. 12 CFR part 327,
subpart A, App. A.
---------------------------------------------------------------------------
In the NPR, the FDIC proposed to continue to reserve the right to
revise the conversion of the counterparty exposures measures to scores
(that is, recalibrate the conversion by updating the minimum and
maximum cutoff values) after reviewing data reported for some or all of
2015 without further notice-and-comment rulemaking. Two trade groups
objected to this proposal, arguing that the specific recalibration of
the counterparty exposure measures proposed in the NPR should be
accomplished through notice-and-comment rulemaking. After further
consideration, the FDIC has decided that, for the conversion of the
counterparty exposure measures to scores only, any revisions will be
done through notice-and-comment rulemaking.\65\
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\65\ As currently provided in the FDIC's assessments rules and
regulations, the FDIC continues to reserve the general right to
update the minimum and maximum cutoff values for all measures in the
scorecards without additional notice-and-comment rulemaking. See 12
CFR part 327, subpart A, App. A.
---------------------------------------------------------------------------
Cost-Benefit Analysis
One trade group argued that the NPR should not be finalized until
the FDIC has conducted a cost-benefit analysis subject to public
comment, and that the FDIC would not be able to conduct such a cost-
benefit analysis without additional data that will only become
available after the first quarter of 2015. For this reason, the
commenter suggested foregoing any immediate changes to the counterparty
exposure measures until additional data becomes available and can be
evaluated.
In developing and reviewing regulations, the FDIC is committed to
continually improving the quality of its regulations and policies,
minimizing regulatory burdens on the public and the banking industry,
and generally to ensuring that its regulations and policies achieve
legislative goals effectively and efficiently. The FDIC evaluates
benefits and costs of regulations based on available information and
the consideration of reasonable and possible alternatives. As part of
the notice-and-comment process, the FDIC actively seeks comment on
[[Page 70436]]
cost, benefits, and burdens, and carefully considers these
comments.\66\
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\66\ See FDIC Statement of Policy on the Development and Review
of Regulations and Policies, 78 FR 22771, 22772 (Apr. 17, 2013).
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The FDIC has, in fact, evaluated the costs and benefits of
requiring that highly complex institutions measure counterparty
exposure using the standardized approach in the Basel III capital rules
rather than the IMM. For those few banks that are already (or would be)
using the IMM to measure counterparty exposure, the final rule is
likely to increase these banks' assessment rates compared to rates
calculated using the IMM, all else equal. As one trade group noted in
its comment letter, albeit in another context, ``The credit equivalent
amount in the U.S. Basel I-based capital rules, the credit equivalent
amount under the Standardized Approach, and the Basel Committee's Basel
II current exposure method are all broadly similar.'' Consequently, in
the NPR, the FDIC was able to rely on its data on assessment rates
before adoption of the IMM.
Moreover, the FDIC is required by statute to ensure that the DIF
reserve ratio reaches at least 1.35 percent of estimated insured
deposits by September 30, 2020.\67\ The FDIC has already adopted a
schedule of lower overall assessment rates that will go into effect
automatically when the DIF reserve ratio reaches 1.15 percent.\68\
While a few banks will have increased assessment rates under the final
rule, these higher rates will reduce the risk that an assessment rate
increase for all banks will be needed for the DIF reserve ratio to
reach 1.35 percent by the statutory deadline; it will also increase the
possibility that the reserve ratio will reach 1.15 percent sooner than
otherwise, at which time overall assessment rates will fall.
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\67\ See Pub. L. 111-203, sec. 334(d), 124 Stat. 1539 (codified
as amended at 12 U.S.C. 1817(nt)). The FDIC is also required to
charge banks with $10 billion or more in assets for the cost of
increasing the reserve ratio from 1.15 percent to 1.35 percent. Id.
at sec. 334(e).
\68\ See 12 CFR 327.10.
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The FDIC has also tailored its approach to minimize additional
reporting burden. Under the final rule, highly complex institutions
will calculate their counterparty exposure for deposit insurance
assessment purposes using the standardized approach under the Basel III
capital rules (modified for cash collateral for derivatives exposures).
These banks must determine counterparty exposure using the generally
applicable risk-based capital requirements, that is, the standardized
approach under the Basel III capital rules, as required by the Collins
Amendment. They must also calculate qualifying cash collateral for
derivatives exposures for purposes of the supplementary leverage ratio.
Thus, the final rule imposes little, if any, additional reporting
burden.
Rather than indefinitely allowing the use of methodologies that
would result in inequitable assessments, the final rule takes into
account potential burdens, benefits, alternative approaches, and
cumulative costs of regulations to make assessments appropriately
reflect relative risk.
V. Effective Date
A. Ratios and Thresholds Relating to Capital Evaluations
Two effective dates apply to the ratios and ratio thresholds
relating to the capital evaluations used in its deposit insurance
system: January 1, 2015, for all ratios and ratio thresholds except the
supplementary leverage ratio, and January 1, 2018, for the
supplementary leverage ratio and ratio threshold. These are the
effective dates of the changes to the PCA capital rules.
B. Assessment Base Calculation for Custodial Banks
The effective date for the assessment base calculation for
custodial banks is January 1, 2015.
C. Calculation of Counterparty Exposures in the Highly Complex
Institution Scorecard
The effective date for the calculation of counterparty exposures in
the highly complex institution scorecard is January 1, 2015.
VI. Regulatory Analysis and Procedure
A. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113
Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking agencies
to use plain language in all proposed final rules published after
January 1, 2000. The FDIC invited comments on how to make this proposal
easier to understand. No comments addressing this issue were received.
B. Regulatory Flexibility Act
The FDIC has carefully considered the potential impacts on all
banking organizations, including community banking organizations, and
has sought to minimize the potential burden of these changes where
consistent with applicable law and the agencies' goals.
The Regulatory Flexibility Act (RFA) requires that each Federal
agency either certify that the final rule will not have a significant
economic impact on a substantial number of small entities.\69\ Certain
types of rules, such as rules of particular applicability relating to
rates or corporate or financial structures, or practices relating to
such rates or structures, are expressly excluded from the definition of
``rule'' for purposes of the RFA.\70\ Nonetheless, the FDIC is
voluntarily undertaking a regulatory flexibility analysis.
---------------------------------------------------------------------------
\69\ See 5 U.S.C. 603 and 605.
\70\ See 5 U.S.C. 601(2).
---------------------------------------------------------------------------
As of December 31, 2013, of the 6,812 IDIs, there were 5,655 small
IDIs as that term is defined for the purposes of the RFA (i.e.,
institutions with $550 million or less in total assets). Under the
revisions to the ratios and ratio thresholds for capital evaluations in
the final rule, five small IDIs (0.09 percent of small IDIs) would have
had higher deposit insurance assessments as of the end of December 2013
(assuming that they had not increased their capital in response to the
new PCA capital rules). None would have had lower assessments. In the
aggregate, these five small IDIs would have been assessed approximately
$1 million more in annual assessments under the final rule. In
aggregate, the final rule would have increased small IDIs' assessments
by 0.01 percent of all small IDIs' income before taxes.
Four additional IDIs that meet the RFA definition of a small IDI
were identified as subsidiaries of custodial banks subject to
assessments adjustments. The FDIC estimates that under the final rule,
the assessments for these additional small IDIs would not be affected.
The final rule regarding the calculation of counterparty exposures
in the highly complex institution scorecard does not affect any small
IDIs.
Thus, the final rule does not have a significant economic impact on
a substantial number of small entities.
C. Paperwork Reduction Act
No collections of information pursuant to the Paperwork Reductions
Act (44 U.S.C. 3501 et seq.) are contained in the final rule.
D. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The FDIC has determined that the final rule does not affect family
well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, enacted as part of the Omnibus
[[Page 70437]]
Consolidated and Emergency Supplemental Appropriations Act of 1999
(Public Law 105-277, 112 Stat. 2681).
List of Subjects in 12 CFR Part 327
Bank deposit insurance, Banks, Savings associations.
For the reasons set forth above, the FDIC amends part 327 as
follows:
PART 327--ASSESSMENTS
0
1. The authority citation for part 327 continues to read as follows:
Authority: 12 U.S.C. 1441, 1813, 1815, 1817-19, 1821.
Subpart A--[Amended]
0
2. In subpart A, remove the term ``Tier 1 leverage ratio'' and add in
its place ``Leverage ratio'' wherever it appears.
0
3. In Sec. 327.5, revise paragraphs (c)(1) and (2) to read as follows:
Sec. 327.5 Assessment base.
* * * * *
(c) * * *
(1) Custodial bank defined. A custodial bank for purposes of
calculating deposit insurance assessments shall be an insured
depository institution with previous calendar-year trust assets
(fiduciary and custody and safekeeping assets, as described in the
instructions to Schedule RC-T of the Consolidated Report of Condition
and Income) of at least $50 billion or an insured depository
institution that derived more than 50 percent of its total revenue
(interest income plus non-interest income) from trust activity over the
previous calendar year.
(2) Assessment base calculation for custodial banks. A custodial
bank shall pay deposit insurance assessments on its assessment base as
calculated in paragraph (a) of this section, but the FDIC will exclude
from that assessment base the daily or weekly average (depending on how
the bank reports its average consolidated total assets) of all asset
types described in the instructions to lines 1, 2, and 3 of Schedule RC
of the Consolidated Report of Condition and Income with a standardized
approach risk weight of 0 percent, regardless of maturity, plus 50
percent of those asset types described in the instructions to lines 1,
2, and 3 of Schedule RC of the Consolidated Report of Condition and
Income, with a standardized approach risk-weight greater than 0 and up
to and including 20 percent, regardless of maturity, subject to the
limitation that the daily or weekly average (depending on how the bank
reports its average consolidated total assets) value of all assets that
serve as the basis for a deduction under this section cannot exceed the
daily or weekly average value of those deposits that are classified as
transaction accounts in the instructions to Schedule RC-E of the
Consolidated Report of Condition and Income and that are identified by
the institution as being directly linked to a fiduciary or custodial
and safekeeping account asset.
* * * * *
0
4. In Sec. 327.9, revise paragraphs (a)(2)(i) and (ii) to read as
follows:
Sec. 327.9 Assessment pricing methods.
(a) * * *
(2) * * *
(i) Well Capitalized. A Well Capitalized institution is one that
satisfies each of the following capital ratio standards: Total risk-
based capital ratio, 10.0 percent or greater; tier 1 risk-based capital
ratio, 8.0 percent or greater; leverage ratio, 5.0 percent or greater;
and common equity tier 1 capital ratio, 6.5 percent or greater.
(ii) Adequately Capitalized. An Adequately Capitalized institution
is one that does not satisfy the standards of Well Capitalized in
paragraph (a)(2)(i) of this section but satisfies each of the following
capital ratio standards: Total risk-based capital ratio, 8.0 percent or
greater; tier 1 risk-based capital ratio, 6.0 percent or greater;
leverage ratio, 4.0 percent or greater; and common equity tier 1
capital ratio, 4.5 percent or greater.
* * * * *
0
5. In Sec. 327.9, effective January 1, 2018, revise paragraphs
(a)(2)(i) and (ii) to read as follows:
Sec. 327.9 Assessment pricing methods.
(a) * * *
(2) * * *
(i) Well Capitalized. A Well Capitalized institution is one that
satisfies each of the following capital ratio standards: Total risk-
based capital ratio, 10.0 percent or greater; tier 1 risk-based capital
ratio, 8.0 percent or greater; leverage ratio, 5.0 percent or greater;
common equity tier 1 capital ratio, 6.5 percent or greater; and, if the
institution is an insured depository institution subject to the
enhanced supplementary leverage ratio standards under 12 CFR
6.4(c)(1)(iv)(B), 12 CFR 208.43(c)(2)(iv)(B), or 12 CFR
324.403(b)(1)(v), as each may be amended from time to time, a
supplementary leverage ratio of 6.0 percent or greater.
(ii) Adequately Capitalized. An Adequately Capitalized institution
is one that does not satisfy the standards of Well Capitalized in
paragraph (a)(2)(i) of this section but satisfies each of the following
capital ratio standards: Total risk-based capital ratio, 8.0 percent or
greater; tier 1 risk-based capital ratio, 6.0 percent or greater;
leverage ratio, 4.0 percent or greater; common equity tier 1 capital
ratio, 4.5 percent or greater; and, if the institution is subject to
the advanced approaches risk-based capital rules under 12 CFR
6.4(c)(2)(iv)(B), 12 CFR 208.43(c)(2)(iv)(B), or 12 CFR
324.403(b)(2)(vi), as each may be amended from time to time, a
supplementary leverage ratio of 3.0 percent or greater.
* * * * *
0
6. In Appendix A to Subpart A, in the table under the section heading,
``VI. Description of Scorecard Measures,'' revise the descriptions of
``(2) Top 20 Counterparty Exposure/Tier 1 Capital and Reserves'' and
``(3) Largest Counterparty Exposure/Tier 1 Capital and Reserves'' under
the subheading ``Concentration Measure for Highly Complex
Institutions'' to read as follows:
Appendix A to Subpart A of Part 327--Method To Derive Pricing
Multipliers and Uniform Amount
* * * * *
[[Page 70438]]
VI--Description of Scorecard Measures
------------------------------------------------------------------------
Scorecard measures \1\ Description
------------------------------------------------------------------------
* * * * * * *
(2) Top 20 Counterparty Exposure/ Sum of the 20 largest total exposure
Tier 1 Capital and Reserves. amounts to counterparties divided
by Tier 1 capital and reserves. The
total exposure amount is equal to
the sum of the institution's
exposure amounts to one
counterparty (or borrower) for
derivatives, securities financing
transactions (SFTs), and cleared
transactions, and its gross lending
exposure (including all unfunded
commitments) to that counterparty
(or borrower). A counterparty
includes an entity's own
affiliates. Exposures to entities
that are affiliates of each other
are treated as exposures to one
counterparty (or borrower).
Counterparty exposure excludes all
counterparty exposure to the U.S.
government and departments or
agencies of the U.S. government
that is unconditionally guaranteed
by the full faith and credit of the
United States. The exposure amount
for derivatives, including OTC
derivatives, cleared transactions
that are derivative contracts, and
netting sets of derivative
contracts, must be calculated using
the methodology set forth in 12 CFR
324.34(a), but without any
reduction for collateral other than
cash collateral that is all or part
of variation margin and that
satisfies the requirements of 12
CFR 324.10(c)(4)(ii)(C)(1)-(7). The
exposure amount associated with
SFTs, including cleared
transactions that are SFTs, must be
calculated using the standardized
approach set forth in 12 CFR
324.37(b) or (c). For both
derivatives and SFT exposures, the
exposure amount to central
counterparties must also include
the default fund contribution.\2\
(3) Largest Counterparty Exposure/ The largest total exposure amount to
Tier 1 Capital and Reserves. one counterparty divided by Tier 1
capital and reserves. The total
exposure amount is equal to the sum
of the institution's exposure
amounts to one counterparty (or
borrower) for derivatives, SFTs,
and cleared transactions, and its
gross lending exposure (including
all unfunded commitments) to that
counterparty (or borrower). A
counterparty includes an entity's
own affiliates. Exposures to
entities that are affiliates of
each other are treated as exposures
to one counterparty (or borrower).
Counterparty exposure excludes all
counterparty exposure to the U.S.
government and departments or
agencies of the U.S. government
that is unconditionally guaranteed
by the full faith and credit of the
United States. The exposure amount
for derivatives, including OTC
derivatives, cleared transactions
that are derivative contracts, and
netting sets of derivative
contracts, must be calculated using
the methodology set forth in 12 CFR
324.34(a), but without any
reduction for collateral other than
cash collateral that is all or part
of variation margin and that
satisfies the requirements of 12
CFR 324.10(c)(4)(ii)(C)(1)-(7). The
exposure amount associated with
SFTs, including cleared
transactions that are SFTs, must be
calculated using the standardized
approach set forth in 12 CFR
324.37(b) or (c). For both
derivatives and SFT exposures, the
exposure amount to central
counterparties must also include
the default fund contribution.\2\
* * * * * * *
------------------------------------------------------------------------
\1\ The FDIC retains the flexibility, as part of the risk-based
assessment system, without the necessity of additional notice-and-
comment rulemaking, to update the minimum and maximum cutoff values
for all measures used in the scorecard (except for the Top 20
counterparty exposure to Tier 1 capital and reserves ratio and the
largest counterparty exposure to Tier 1 capital and reserves ratio).
The FDIC may update the minimum and maximum cutoff values for the
higher-risk assets to Tier 1 capital and reserves ratio in order to
maintain an approximately similar distribution of higher-risk assets
to Tier 1 capital and reserves ratio scores as reported prior to April
1, 2013, or to avoid changing the overall amount of assessment revenue
collected. 76 FR 10672, 10700 (February 25, 2011). The FDIC will
review changes in the distribution of the higher-risk assets to Tier 1
capital and reserves ratio scores and the resulting effect on total
assessments and risk differentiation between banks when determining
changes to the cutoffs. The FDIC may update the cutoff values for the
higher-risk assets to Tier 1 capital and reserves ratio more
frequently than annually. The FDIC will provide banks with a minimum
one quarter advance notice of changes in the cutoff values for the
higher-risk assets to Tier 1 capital and reserves ratio with their
quarterly deposit insurance invoice.
\2\ SFTs include repurchase agreements, reverse repurchase agreements,
security lending and borrowing, and margin lending transactions, where
the value of the transactions depends on market valuations and the
transactions are often subject to margin agreements. The default fund
contribution is the funds contributed or commitments made by a
clearing member to a central counterparty's mutualized loss sharing
arrangement. The other terms used in this description are as defined
in 12 CFR part 324, subparts A and D, unless defined otherwise in 12
CFR part 327.
* * * * *
By order of the Board of Directors.
Dated at Washington, DC, this 18th day of November, 2014.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2014-27941 Filed 11-25-14; 8:45 am]
BILLING CODE 6714-01-P
