Assessments, 70427-70438 [2014-27941]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[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]



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Rules and Regulations
                                                Federal Register
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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.

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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.
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    \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.
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    \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
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                                                                    Total risk-    Tier 1 risk-       Tier 1
                       Capital evaluations                          based ratio     based ratio   leverage ratio
                                                                        (%)             (%)             (%)
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Well Capitalized................................................            >=10             >=6             >=5
Adequately Capitalized *........................................             >=8             >=4             >=4
                                                                 -----------------------------------------------
Undercapitalized................................................  Does not qualify as either Well Capitalized or
                                                                              Adequately Capitalized
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* 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\
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    \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.
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    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).
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    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.
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    \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).
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    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.
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    \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.
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    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\
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    \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.
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    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\
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    \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).
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    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.
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    \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 https://www.financialstabilityboard.org/publications/r_131111.pdf).
    \25\ 79 FR 57725 (Sept. 26, 2014).
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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.
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    \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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    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\
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    \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.
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    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
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                                                    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.
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* 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
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                                                                                                                           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.
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* 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\
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    \28\ Pub. L. 111-203, sec. 331(b), 124 Stat. 1538 (codified as 
amended at 12 U.S.C. 1817(nt)).
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    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.
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    \29\ 76 FR at 10706.
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    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.
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    \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.
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    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.
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    \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).
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    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\
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    \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).
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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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \43\ 76 FR at 10721; 12 CFR part 327, subpart A, App. A.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \57\ Basel Committee on Banking Supervision. (January 2014). 
``Basel III leverage ratio framework and disclosure requirements'', 
available online at https://www.bis.org/publ/bcbs270.pdf.
---------------------------------------------------------------------------

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 https://www.bis.org/publ/bcbs206.pdf.
    \59\ 76 FR at 10696.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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 https://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 https://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 https://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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \66\ See FDIC Statement of Policy on the Development and Review 
of Regulations and Policies, 78 FR 22771, 22772 (Apr. 17, 2013).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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