Assessments, 6107-6155 [2016-01448]
Agencies
[Federal Register Volume 81, Number 23 (Thursday, February 4, 2016)] [Proposed Rules] [Pages 6107-6155] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 2016-01448] [[Page 6107]] Vol. 81 Thursday, No. 23 February 4, 2016 Part II Federal Deposit Insurance Corporation ----------------------------------------------------------------------- 12 CFR Part 327 Assessments; Proposed Rule Federal Register / Vol. 81 , No. 23 / Thursday, February 4, 2016 / Proposed Rules [[Page 6108]] ----------------------------------------------------------------------- FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 327 RIN 3064-AE37 Assessments AGENCY: Federal Deposit Insurance Corporation (FDIC). ACTION: Notice of proposed rulemaking and request for comment. ----------------------------------------------------------------------- SUMMARY: On July 13, 2015, the FDIC published a notice of proposed rulemaking in the Federal Register proposing to amend 12 CFR part 327 to refine the deposit insurance assessment system for small insured depository institutions that have been federally insured for at least 5 years (established small banks). In response to comments received regarding the notice, the FDIC is issuing this revised notice of proposed rulemaking (revised NPR or revised proposal) that would: Use a brokered deposit ratio (that treats reciprocal deposits the same as under current regulations) as a measure in the financial ratios method for calculating assessment rates for established small banks instead of the previously proposed core deposit ratio; remove the existing brokered deposit adjustment for established small banks; and revise the previously proposed one-year asset growth measure. The FDIC proposes that a final rule would take effect the quarter after the Deposit Insurance Fund (DIF) reserve ratio has reached 1.15 percent (or the first quarter after a final rule is adopted that the rule can take effect, whichever is later). DATES: Comments must be received by the FDIC no later than March 7, 2016. ADDRESSES: You may submit comments on the notice of proposed rulemaking using any of the following methods:Agency Web site: https://www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments on the agency Web site. Email: comments@fdic.gov. Include RIN 3064-AE37 on the subject line of the message. Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429. Hand Delivery: Comments may be hand delivered to the guard station at the rear of the 550 17th Street Building (located on F Street) on business days between 7 a.m. and 5 p.m. Public Inspection: All comments received, including any personal information provided, will be posted generally without change to https://www.fdic.gov/regulations/laws/federal. FOR FURTHER INFORMATION CONTACT: Munsell St. Clair, Chief, Banking and Regulatory Policy, Division of Insurance and Research, 202-898-8967; Ashley Mihalik, Senior Financial Economist, Division of Insurance and Research, 202-898-3793; Nefretete Smith, Senior Attorney, Legal Division, 202-898-6851; Thomas Hearn, Counsel, Legal Division, 202-898- 6967. SUPPLEMENTARY INFORMATION: I. Background The 2015 Notice of Proposed Rulemaking On June 16, 2015, the FDIC's Board of Directors (Board) authorized publication of a notice of proposed rulemaking (the 2015 NPR) to refine the deposit insurance assessment system for established small banks (that is, small banks other than new small banks and insured branches of foreign banks).\1\ The 2015 NPR was published in the Federal Register on July 13, 2015.\2\ In the 2015 NPR, the FDIC proposed to improve the assessment system by: (1) Revising the financial ratios method so that it would be based on a statistical model estimating the probability of failure over three years; (2) updating the financial measures used in the financial ratios method consistent with the statistical model; and (3) eliminating risk categories for all established small banks and using the financial ratios method to determine assessment rates for all such banks. CAMELS composite ratings,\3\ however, would be used to place a maximum on the assessment rates that CAMELS composite 1- and 2-rated banks can be charged and minimums on the assessment rates that CAMELS composite 3-, 4- and 5- rated banks can be charged. --------------------------------------------------------------------------- \1\ Subject to exceptions, an established insured depository institution is one that has been federally insured for at least five years as of the last day of any quarter for which it is being assessed. 12 CFR 327.8(k). \2\ See 80 FR 40838 (July 13, 2015). \3\ A financial institution is assigned a CAMELS composite rating based on an evaluation and rating of six essential components of an institution's financial condition and operations. These component factors address the adequacy of capital (C), the quality of assets (A), the capability of management (M), the quality and level of earnings (E), the adequacy of liquidity (L), and the sensitivity to market risk (S). --------------------------------------------------------------------------- The FDIC received a total of 484 comment letters in response to the 2015 NPR. Of these, 45 were from trade groups and 439 were from individuals or banks. The majority of commenters expressed concern regarding the proposed treatment of reciprocal deposits in the 2015 NPR. The FDIC is issuing this revised NPR in response to comments received regarding the 2015 NPR. The broad outline of this revised NPR remains the same as the 2015 NPR, but this revised NPR revises the proposal by: (1) Using a brokered deposit ratio (that treats reciprocal deposits the same as under current regulations) as a measure in the financial ratios method for calculating assessment rates for established small banks instead of the previously proposed core deposit ratio; (2) removing the existing brokered deposit adjustment for established small banks; (3) revising the previously proposed one-year asset growth measure; (4) re-estimating the statistical model underlying the established small bank deposit insurance assessment system; (5) revising the uniform amount and pricing multipliers used in the financial ratios method; and (6) providing that any future changes to the statistical model underlying the established small bank deposit insurance assessment system would go through notice-and-comment rulemaking. The FDIC also received comments on parts of the proposal in the 2015 NPR that have not changed in this revised NPR. These comments included suggestions to more heavily weight CAMELS supervisory ratings over various financial ratios and to tailor the loan mix index to individual banks, and assertions that the proposed minimum and maximum assessment rates are inappropriate. The FDIC will consider all comments submitted in response to the 2015 NPR, as well as comments submitted in response to this revised NPR, in developing a final rule. Thus, to reduce burden, those who submitted a comment on the 2015 NPR need not resubmit the comment for it to be considered by the FDIC in developing the final rule. Comments on any aspect of this revised NPR, however, are welcome. Policy Objectives The primary purpose of the proposed rule, like the 2015 NPR, is to improve the risk-based deposit insurance assessment system applicable to small banks to more accurately reflect risk.\4\ Additional discussion of the policy objectives of the proposed rule can be found in the 2015 NPR.\5\ --------------------------------------------------------------------------- \4\ 12 U.S.C. 1817(b). A ``risk-based assessment system'' means a system for calculating an insured depository institution's assessment based on the institution's probability of causing a loss to the DIF due to the composition and concentration of the institution's assets and liabilities, the likely amount of any such loss, and the revenue needs of the DIF. See 12 U.S.C. 1817(b)(1)(C). \5\ See 80 FR at 40838 and 40842. --------------------------------------------------------------------------- [[Page 6109]] Risk-Based Deposit Insurance Assessments for Established Small Banks Since 2007, assessment rates for established small banks have been determined by placing each bank into one of four risk categories, Risk Categories I, II, III, and IV.\6\ These four risk categories are based on two criteria: Capital levels and supervisory ratings. The three capital groups--well capitalized, adequately capitalized, and undercapitalized--are based on the leverage ratio and three risk-based capital ratios used for regulatory capital purposes.\7\ The three supervisory groups, termed A, B, and C, are based upon supervisory evaluations by the small bank's primary federal regulator, state regulator or the FDIC.\8\ Group A consists of financially sound institutions with only a few minor weaknesses (generally, banks with CAMELS composite ratings of 1 or 2); Group B consists of institutions that demonstrate weaknesses that, if not corrected, could result in significant deterioration of the institution and increased risk of loss to the DIF (generally, banks with CAMELS composite ratings of 3); and Group C consists of institutions that pose a substantial probability of loss to the DIF unless effective corrective action is taken (generally, banks with CAMELS composite ratings of 4 or 5). An institution's capital group and supervisory group determine its risk category as set out in Table 1 below. --------------------------------------------------------------------------- \6\ On January 1, 2007, the FDIC instituted separate assessment systems for small and large banks. 71 FR 69282 (Nov. 30, 2006). See 12 U.S.C. 1817(b)(1)(D) (granting the Board the authority to establish separate risk-based assessment systems for large and small insured depository institutions). As used in this revised proposal, the term ``bank'' is synonymous with the term ``insured depository institution'' as it is used in section 3(c)(2) of the FDI Act, 12 U.S.C 1813(c)(2). As used in this revised proposal, the term ``small bank'' is synonymous with the term ``small institution'' as it is used in 12 CFR 327.8. In general, a ``small bank'' is one with less than $10 billion in total assets. \7\ The common equity tier 1 capital ratio, a new risk-based capital ratio, was incorporated into the deposit insurance assessment system effective January 1, 2015. 79 FR 70427 (November 26, 2014). Beginning January 1, 2018, a supplementary leverage ratio will also be used to determine whether an advanced approaches bank is: (a) Well capitalized, if the bank is subject to the enhanced supplementary leverage ratio standards under 12 CFR 6.4(c)(1)(iv)(B), 12 CFR 208.43(c)(1)(iv)(B), or 12 CFR 324.403(b)(1)(vi), as each may be amended from time to time; and (b) adequately capitalized, if the bank 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. 79 FR 70427, 70437 (November 26, 2014). The supplementary leverage ratio is expected to affect the capital group assignment of few, if any, small banks. \8\ The term ``primary federal regulator'' is synonymous with the term ``appropriate federal banking agency'' as it is used in section 3(q) of the FDI Act, 12 U.S.C. 1813(q). Table 1--Determination of Risk Category ---------------------------------------------------------------------------------------------------------------- Supervisory group Capital group -------------------------------------------------------------------------- A CAMELS 1 or 2 B CAMELS 3 C CAMELS 4 or 5 ---------------------------------------------------------------------------------------------------------------- Well Capitalized..................... Risk Category I........ ------------------------- Adequately Capitalized............... Risk Category II Risk Category III. ---------------------------------------------------------------------------------------------------------------- Under Capitalized.................... Risk Category III Risk Category IV. ---------------------------------------------------------------------------------------------------------------- To further differentiate risk within Risk Category I (which includes most small banks), the FDIC uses the financial ratios method, which combines a weighted average of supervisory CAMELS component ratings \9\ with current financial ratios to determine a small Risk Category I bank's initial assessment rate.\10\ --------------------------------------------------------------------------- \9\ The weights applied to CAMELS components are as follows: 25 percent each for Capital and Management; 20 percent for Asset quality; and 10 percent each for Earnings, Liquidity, and Sensitivity to market risk. These weights reflect the view of the FDIC regarding the relative importance of each of the CAMELS components for differentiating risk among institutions for deposit insurance purposes. The FDIC and other bank supervisors do not use such a system to determine CAMELS composite ratings. \10\ New small banks in Risk Category I, however, are charged the highest initial assessment rate in effect for that risk category. Subject to exceptions, a new bank is one that has been federally insured for less than five years as of the last day of any quarter for which it is being assessed. 12 CFR 327.8(j). --------------------------------------------------------------------------- Within Risk Category I, those institutions that pose the least risk are charged a minimum initial assessment rate and those that pose the greatest risk are charged an initial assessment rate that is four basis points higher than the minimum. All other banks within Risk Category I are charged a rate that varies between these rates. In contrast, all banks in Risk Category II are charged the same initial assessment rate, which is higher than the maximum initial rate for Risk Category I. A single, higher, initial assessment rate applies to each bank in Risk Category III and another, higher, rate to each bank in Risk Category IV.\11\ --------------------------------------------------------------------------- \11\ In 2011, the Board revised and approved regular assessment rate schedules. See 76 FR 10672 (Feb. 25, 2011); 12 CFR 327.10. --------------------------------------------------------------------------- To determine a Risk Category I bank's initial assessment rate, the weighted CAMELS components and financial ratios are multiplied by statistically derived pricing multipliers, the products are summed, and the sum is added to a uniform amount that applies to all Risk Category I banks. If, however, the rate is below the minimum initial assessment rate for Risk Category I, the bank will pay the minimum initial assessment rate; if the rate derived is above the maximum initial assessment rate for Risk Category I, then the bank will pay the maximum initial rate for the risk category. The financial ratios used to determine rates come from a statistical model that predicts the probability that a Risk Category I institution will be downgraded from a composite CAMELS rating of 1 or 2 to a rating of 3 or worse within one year. The probability of a CAMELS downgrade is intended as a proxy for the bank's probability of failure. When the model was developed in 2006, the FDIC decided not to attempt to determine a bank's probability of failure because of the lack of bank failures in the years between the end of the bank and thrift crisis in the early 1990s and 2006.\12\ --------------------------------------------------------------------------- \12\ See 71 FR 41910, 41913 (July 24, 2006). --------------------------------------------------------------------------- The financial ratios method does not apply to new small banks or to insured branches of foreign banks (insured branches).\13\ --------------------------------------------------------------------------- \13\ Insured branches are deemed small banks for purposes of the deposit insurance assessment system. --------------------------------------------------------------------------- Assessment Rates Under Current Rules In 2011, the FDIC adopted a schedule of assessment rates designed to ensure that the reserve ratio reaches 1.15 [[Page 6110]] percent by September 30, 2020.\14\ On October 22, 2015, the FDIC authorized publication of a notice of proposed rulemaking to implement the Dodd-Frank Act requirements that the fund reserve ratio reach 1.35 percent by September 30, 2020 and that the effect of the higher minimum reserve ratio on small banks be offset.\15\ --------------------------------------------------------------------------- \14\ See 76 FR 10672. Among other things, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), enacted in July 2010: (1) Raised the minimum designated reserve ratio (DRR), which the FDIC must set each year, to 1.35 percent (from the former minimum of 1.15 percent) and removed the upper limit on the DRR (which was formerly capped at 1.5 percent), 12 U.S.C. 1817(b)(3)(B); (2) required that the fund reserve ratio reach 1.35 percent by September 30, 2020 (rather than 1.15 percent by the end of 2016, as formerly required), Public Law 111-203, 334(d), 124 Stat. 1376, 1539 (12 U.S.C. 1817(note)); and (3) required that, in setting assessments, the FDIC ``offset the effect of [requiring that the reserve ratio reach 1.35 percent by September 30, 2020 rather than 1.15 percent by the end of 2016] on insured depository institutions with total consolidated assets of less than $10,000,000,000'', Public Law 111-203, 334(e), 124 Stat. 1376, 1539 (12 U.S.C. 1817(note)). The Dodd-Frank Act also: (1) Eliminated the requirement that the FDIC provide dividends from the fund when the reserve ratio is between 1.35 percent and 1.5 percent, 12 U.S.C. 1817(e), and (2) continued the FDIC's authority to declare dividends when the reserve ratio at the end of a calendar year is at least 1.5 percent, but granted the FDIC sole discretion in determining whether to suspend or limit the declaration of payment or dividends, 12 U.S.C. 1817(e)(2)(A)-(B). \15\ See 80 FR 68780. --------------------------------------------------------------------------- The initial assessment rates currently in effect for small and large banks are set forth in Table 2 below.\16\ --------------------------------------------------------------------------- \16\ Before adopting the assessment rate schedules currently in effect, the FDIC undertook a historical analysis to determine how high the reserve ratio would have to have been to have maintained both a positive balance and stable assessment rates from 1950 through 2010. The historical analysis and long-term fund management plan are described at 76 FR at 10675 and 75 FR 66272, 66272-281 (Oct. 27, 2010). The analysis shows that the fund reserve ratio would have needed to be approximately 2 percent or more before the onset of the 1980s and 2008 crises to maintain both a positive fund balance and stable assessment rates, assuming, in lieu of dividends, that the long-term industry average nominal assessment rate would have been reduced by 25 percent when the reserve ratio reached 2 percent, and by 50 percent when the reserve ratio reached 2.5 percent. Table 2--Initial Base Assessment Rates [In basis points per annum] -------------------------------------------------------------------------------------------------------------------------------------------------------- Risk Category ----------------------------------------------------------------------------------------------------- I* Large & highly ---------------------------------- II III IV complex Minimum Maximum institutions ** -------------------------------------------------------------------------------------------------------------------------------------------------------- Annual Rates (in basis points).................... 5 9 14 23 35 5-35 -------------------------------------------------------------------------------------------------------------------------------------------------------- * Initial base rates that are not the minimum or maximum will vary between these rates. ** See 12 CFR 327.8(f) and 12 CFR 327.8(g) for the definition of large and highly complex institutions. An institution's total assessment rate may vary from the initial assessment rate as the result of possible adjustments.\17\ After applying all possible adjustments, minimum and maximum total assessment rates for each risk category are set forth in Table 3 below. --------------------------------------------------------------------------- \17\ A bank's total base assessment rate can vary from its initial base assessment rate as the result of three possible adjustments. Two of these adjustments--the unsecured debt adjustment and the depository institution debt adjustment (DIDA)--apply to all banks (except that the unsecured debt adjustment does not apply to new banks or insured branches). The unsecured debt adjustment lowers a bank's assessment rate based on the bank's ratio of long-term unsecured debt to the bank's assessment base. The DIDA increases a bank's assessment rate when it holds long-term, unsecured debt issued by another insured depository institution. The third possible adjustment--the brokered deposit adjustment--applies only to small banks in Risk Category II, III and IV (and to large and highly complex institutions that are not well capitalized or that are not CAMELS composite 1 or 2-rated). It does not apply to insured branches. The brokered deposit adjustment increases a bank's assessment when it holds significant amounts of brokered deposits. 12 CFR 327.9(d). Table 3--Total Base Assessment Rates * [In basis points per annum] -------------------------------------------------------------------------------------------------------------------------------------------------------- Large & highly Risk Category I Risk Category II Risk Category III Risk Category IV complex institutions ** -------------------------------------------------------------------------------------------------------------------------------------------------------- Initial Assessment Rate............ 5-9................... 14.................... 23................... 35................... 5-35. Unsecured Debt Adjustment ***...... -4.5 to 0............. -5 to 0............... -5 to 0.............. -5 to 0.............. -5 to 0. Brokered Deposit Adjustment........ N/A................... 0 to 10............... 0 to 10.............. 0 to 10.............. 0 to 10. Total Assessment Rate.............. 2.5 to 9.............. 9 to 24............... 18 to 33............. 30 to 45............. 2.5 to 45. -------------------------------------------------------------------------------------------------------------------------------------------------------- * Total base assessment rates do not include the DIDA. ** See 12 CFR 327.8(f) and (g) for the definition of large and highly complex institutions. *** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured depository institution's initial base assessment rate. The unsecured debt adjustment does not apply to new banks or insured branches. In 2011, consistent with the FDIC's long-term fund management plan, the Board adopted lower, moderate assessment rates that will go into effect when the DIF reserve ratio reaches 1.15 percent.\18\ Pursuant to the FDIC's authority to set assessments, regulations currently in effect provide that the initial base and total base assessment rates set forth in Table 4 below will take effect beginning the assessment period after the fund reserve ratio first meets or exceeds 1.15 percent, without the necessity of further action by the Board. The rates are to remain in effect unless and until the reserve ratio meets or exceeds 2 percent.\19\ --------------------------------------------------------------------------- \18\ See 76 FR at 10717-720. \19\ For new banks, however, the rates will remain in effect even if the reserve ratio equals or exceeds 2 percent (or 2.5 percent). [[Page 6111]] Table 4--Initial and Total Base Assessment Rates * [In basis points per annum] [Once the reserve ratio reaches 1.15 percent \20\] -------------------------------------------------------------------------------------------------------------------------------------------------------- Large & highly Risk Category I Risk Category II Risk Category III Risk Category IV complex institutions ** -------------------------------------------------------------------------------------------------------------------------------------------------------- Initial Base Assessment Rate....... 3-7................... 12.................... 19................... 30................... 3-30. Unsecured Debt Adjustment ***...... -3.5 to 0............. -5 to 0............... -5 to 0.............. -5 to 0.............. -5 to 0. Brokered Deposit Adjustment........ N/A................... 0 to 10............... 0 to 10.............. 0 to 10.............. 0 to 10. Total Base Assessment Rate......... 1.5 to 7.............. 7 to 22............... 14 to 29............. 25 to 40............. 1.5 to 40. -------------------------------------------------------------------------------------------------------------------------------------------------------- * Total base assessment rates do not include the DIDA. ** See 12 CFR 327.8(f) and (g) for the definition of large and highly complex institutions. *** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured depository institution's initial base assessment rate; thus, for example, an insured depository institution with an initial base assessment rate of 3 basis points will have a maximum unsecured debt adjustment of 1.5 basis points and cannot have a total base assessment rate lower than 1.5 basis points. The unsecured debt adjustment does not apply to new banks or insured branches. In lieu of dividends, and pursuant to the FDIC's authority to set assessments and consistent with the FDIC's long-term fund management plan, the Board also adopted a lower schedule of assessment rates that will come into effect without further action by the Board when the fund reserve ratio at the end of the prior assessment period meets or exceeds 2 percent, but is less than 2.5 percent, and another, still lower, schedule of assessment rates that will come into effect, again, without further action by the Board when the fund reserve ratio at the end of the prior assessment period meets or exceeds 2.5 percent.\21\ --------------------------------------------------------------------------- \20\ The reserve ratio for the immediately prior assessment period must also be less than 2 percent. \21\ New small banks will remain subject to the assessment schedule in Table 4 when the reserve ratio reaches 2 percent and 2.5 percent. --------------------------------------------------------------------------- The Board has the authority to adopt rates without further notice and comment rulemaking that are higher or lower than the total assessment rates (also known as the total base assessment rates), provided that: (1) The Board cannot increase or decrease rates from one quarter to the next by more than two basis points; and (2) cumulative increases and decreases cannot be more than two basis points higher or lower than the total base assessment rates.\22\ --------------------------------------------------------------------------- \22\ See 12 CFR 327.10(f); 76 FR at 10684. --------------------------------------------------------------------------- II. The Proposed Rule Description of the Proposed Rule The financial ratios method as revised would use the measures described in the right-hand column of Table 5 below. For comparison's sake, the measures currently used in the financial ratios method are set out on the left-hand column of the table. To avoid unnecessary burden, the proposal will not require established small banks to report any new data in their Reports of Condition and Income (Call Reports). Table 5--Comparison of Current and Proposed Measures in the Financial Ratios Method ------------------------------------------------------------------------ Current risk category I financial Proposed financial ratios ratios method method ------------------------------------------------------------------------ Weighted Average CAMELS Weighted Average Component Rating. CAMELS Component Rating. Tier 1 Leverage Ratio......... Tier 1 Leverage Ratio. Net Income before Taxes/Risk- Net Income before Weighted Assets. Taxes/Total Assets. Nonperforming Assets/Gross Nonperforming Loans Assets. and Leases/Gross Assets. Other Real Estate Owned/Gross Assets. Adjusted Brokered Deposit Brokered Deposit Ratio. Ratio. One Year Asset Growth. Net Loan Charge-Offs/Gross Assets. Loans Past Due 30-89 Days/ Gross Assets. Loan Mix Index. ------------------------------------------------------------------------ All of the measures proposed in this revised NPR are derived from a statistical analysis that estimates a bank's probability of failure within three years. Each of the measures is statistically significant in predicting a bank's probability of failure over that period. The statistical analysis used bank financial data and CAMELS ratings from 1985 through 2011, failure data from 1986 through 2014, and loan charge-off data from 2001 through 2014.\23\ Appendix 1 to the Supplementary Information section of the 2015 NPR, and Appendix 1 to the Supplementary Information Section and Appendix E of this proposed rule describe the statistical analysis and the derivation of these measures in detail. --------------------------------------------------------------------------- \23\ For certain lagged variables, such as one-year asset growth rates, the statistical analysis also used bank financial data from 1984. --------------------------------------------------------------------------- Two of the measures proposed in this revised NPR--the weighted average CAMELS component rating and the tier 1 leverage ratio--are identical to the measures currently used in the financial ratios method and are as proposed in the 2015 NPR. The net income before taxes/total assets measure in this revised NPR is virtually identical to the measure proposed in the 2015 NPR and is also almost identical to the current measure. The denominator in the net income before taxes/total assets measure in the revised proposal is total assets rather than risk-weighted assets as under current rules. The definition of the measure in the revised proposal also differs from the definitions in both the 2015 NPR and current rules in that it no longer refers to extraordinary items.\24\ [[Page 6112]] The current nonperforming assets/gross assets measure includes other real estate owned. In this revised NPR and in the 2015 NPR, other real estate owned/gross assets is a separate measure from nonperforming loans and leases/gross assets. --------------------------------------------------------------------------- \24\ The numerator of the proposed net income measure definition is income before applicable income taxes and discontinued operations for the most recent twelve months, rather than income before income taxes and extraordinary items and other adjustments for the most recent twelve months as in the 2015 NPR and current rules. In the current Call Report, extraordinary items and discontinued operations are combined for reporting purposes. Income for the net income ratio is currently determined before both extraordinary items and discontinued operations. In January 2015, the Financial Accounting Standards Board (FASB) eliminated from U.S. generally accepted accounting principles (GAAP) the concept of extraordinary items, effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. In September 2015, the Federal banking agencies published a joint Paperwork Reduction Act (PRA) notice and request for comment on proposed changes to the Call Report, including the elimination of the concept of extraordinary items and revision of affected data items. See 80 FR 56539 (Sept. 18, 2015). That PRA process is still in progress and the FDIC expects that, at some future time, references to extraordinary items will be removed from the Call Report. Nevertheless, items that would have met the criteria for classification as extraordinary before the effective date of the FASB's accounting change will no longer be reported as such in the Call Report income statement after the effective date of the change. Discontinued operations, however, will continue to be reported in the Call Report income statement as a separate item in the future and, under the revised proposal, income for the net income ratio would be determined before discontinued operations. See, e.g., 80 FR at 56547. Therefore, the FDIC is proposing to define the net income measure to reflect the anticipated Call Report changes. The FDIC recognizes that this revised proposal may be finalized and become effective before the Federal banking agencies finalize the proposed Call Report changes. Because the numerator of the proposed net income measure is defined to include income for the most recent twelve months, there may be a transition period in which income for the most recent twelve months may include income from periods before the elimination from GAAP of the concept of extraordinary items has taken effect. For those portions of the most recent twelve months before this elimination has taken effect, income will be determined as income before income taxes and extraordinary items and other adjustments. --------------------------------------------------------------------------- The remaining three proposed financial measures, described in detail below, differ from the measures in the current established small bank deposit assessment system.\25\ The FDIC proposes to replace the adjusted brokered deposit ratio currently used in the financial ratios method with two separate measures: A brokered deposit ratio (rather than a core deposit ratio as proposed in the 2015 NPR) and a one-year asset growth measure. As stated above, these two financial measures-- the brokered deposit ratio and the one year asset growth measure-- differ from the measures proposed in the 2015 NPR. The third proposed new measure, the loan mix index, remains as proposed in the 2015 NPR. --------------------------------------------------------------------------- \25\ Two measures in the current financial ratios method--net loan charge-offs/gross assets and loans past due 30-89 days/gross assets--are not used in the statistical analysis and are not among the measures in the 2015 NPR or this revised proposal. --------------------------------------------------------------------------- Brokered Deposit Ratio Under current assessment rules, brokered deposits affect a small bank's assessment rate based on its Risk Category. For established small banks that are assigned to Risk Category I (those that are well capitalized and have a CAMELS composite rating of 1 or 2), the adjusted brokered deposit ratio is one of the financial ratios used to determine a bank's initial assessment rate. The adjusted brokered deposit ratio increases a bank's initial assessment rate when a bank has brokered deposits that exceed 10 percent of its domestic deposits, combined with a high asset growth rate.\26\ Reciprocal deposits are not included with other brokered deposits in the adjusted brokered deposit ratio. --------------------------------------------------------------------------- \26\ The adjusted brokered deposit ratio can affect assessment rates only if a bank's brokered deposits (excluding reciprocal deposits) exceed 10 percent of its non-reciprocal brokered deposits and its assets have grown more than 40 percent in the previous 4 years. 12 CFR 327 Appendix A to Subpart A. Few Risk Category I banks have both high levels of non- reciprocal brokered deposits and high asset growth, so the adjusted brokered deposit ratio affects relatively few banks. As of September 30, 2015, the adjusted brokered deposit ratio affected the assessment rate of 95 banks. --------------------------------------------------------------------------- Established small banks in Risk Categories II, III, and IV (those that are less than well capitalized or that have a CAMELS composite rating of 3, 4, or 5) are subject to the brokered deposit adjustment, one of three possible adjustments that can increase or decrease a bank's initial assessment rate. The brokered deposit adjustment increases a bank's assessment rate if it has brokered deposits in excess of 10 percent of its domestic deposits.\27\ Unlike the adjusted brokered deposit ratio, the brokered deposit adjustment includes all brokered deposits, including reciprocal deposits, and is not affected by asset growth rates. As the FDIC noted when it adopted the brokered deposit adjustment and included reciprocal deposits with other brokered deposits in the adjustment, ``The statutory restrictions on accepting, renewing or rolling over brokered deposits when an institution becomes less than well capitalized apply to all brokered deposits, including reciprocal deposits. Market restrictions may also apply to these reciprocal deposits when an institution's condition declines.'' \28\ --------------------------------------------------------------------------- \27\ 12 CFR 327.9(d)(3); 12 U.S.C. 1831f. \28\ 74 FR 9525, 9541 (Mar. 9, 2009). --------------------------------------------------------------------------- The FDIC proposes to replace the adjusted brokered deposit ratio currently used in the financial ratios method with a brokered deposit ratio, measured as the ratio of brokered deposits to total assets. As discussed below, the FDIC also proposes to eliminate the existing brokered deposit adjustment for established small banks. Under the proposed brokered deposit ratio, brokered deposits would increase an assessment rate only for an established small bank that holds brokered deposits in excess of 10 percent of total assets. For a bank that is well capitalized and has a CAMELS composite rating of 1 or 2, reciprocal deposits would be deducted from brokered deposits. For a bank that is less than well capitalized or has a CAMELS composite rating of 3, 4 or 5, however, reciprocal deposits would be included with other brokered deposits. This treatment of reciprocal deposits is generally consistent with the 442 comment letters on the 2015 NPR arguing that reciprocal deposits should not be treated as brokered deposits for assessment purposes.\29\ Some commenters encouraged the FDIC to revise the proposal in the 2015 NPR so that it reflects the current treatment of reciprocal deposits, which this revised proposal does. As described above, in the current system, the adjusted brokered deposit, which applies to well-capitalized established small banks that have CAMELS composite ratings of 1 or 2, excludes reciprocal deposits.\30\ The brokered deposit adjustment, however, which applies to all established small banks that are less than well capitalized or have CAMELS composite ratings of 3, 4 or 5, includes reciprocal deposits.\31\ The proposed brokered deposit ratio makes the same distinction with respect to reciprocal deposits. --------------------------------------------------------------------------- \29\ On the other hand, four commenters asserted that the FDIC should not charge higher assessment rates to banks that hold brokered deposits, but should instead consider how banks used brokered deposits and whether they remain profitable and well- capitalized. The FDIC's statistical analyses have consistently found, however, that brokered deposits are correlated with a higher probability of failure. See FDIC Study on Core Deposits and Brokered Deposits (2011), 46-47 and 66-68 (Appendix A: Excerpts from Material Loss Reviews And Summaries of OIG Semiannual Reports to Congress). \30\ 12 CFR part 327 Appendix A to Subpart A. \31\ 12 CFR 327.9(d)(3); 12 U.S.C. 1831f. --------------------------------------------------------------------------- The FDIC also received 40 comment letters on the 2015 NPR arguing that reciprocal deposits should be treated as core deposits or are the functional equivalent of core deposits. The FDIC analyzed the characteristics of reciprocal deposits in its Study on Core Deposits and Brokered Deposits and concluded that, ``While the FDIC agrees that reciprocal deposits do not present [[Page 6113]] all of the problems that traditional brokered deposits present, they pose sufficient potential problems--particularly their dependence on a network and the network's continued willingness to allow a bank to participate, and the potential of supporting rapid growth if not based upon a relationship--that they should not be considered core . . .'' \32\ (Emphasis added.) The proposed brokered deposit ratio, which deducts reciprocal deposits for well capitalized, well rated banks, is consistent with the Study on Core Deposits and Brokered Deposits and with the majority of comments received. --------------------------------------------------------------------------- \32\ FDIC Study on Core Deposits and Brokered Deposits (2011), 54. --------------------------------------------------------------------------- Sixteen commenters, including banking trade associations, cautioned against penalizing the use of Federal Home Loan Bank advances in determining assessment rates. Some commenters also argued that lowering assessments for core deposits, as proposed in the 2015 NPR, would make Federal Home Loan Bank advances relatively more expensive. Replacing the previously proposed core deposit ratio with a brokered deposit ratio would not change the current treatment of Federal Home Loan Bank advances in the small bank deposit insurance assessment system. In contrast, treating reciprocal deposits as core deposits in the core deposit ratio would create an incentive for established small banks to switch Federal Home Loan Bank advances and other funding sources (other than core deposits) to reciprocal deposit funding, with unpredictable effects on banks' probability of failure. One-Year Asset Growth Measure The FDIC received 18 comments on the proposed one-year asset growth measure in the 2015 NPR. Some commenters argued that the one-year asset growth rate should not penalize normal growth. One commenter suggested that asset growth should not affect assessments until it exceeds an industry-based norm, while other commenters suggested using the ``A'' (``Asset quality'') CAMELS component instead of a one-year asset growth rate or taking mitigating factors into account in the growth rate. In response to comments, the FDIC is proposing that the one-year asset growth measure increase the assessment rate only for an established small bank that has had one-year asset growth greater than 10 percent. With this modification, the measure will raise assessment rates for established small banks that grow rapidly (other than through merger or by acquiring failed banks), but will not increase assessments for normal asset growth.\33\ --------------------------------------------------------------------------- \33\ From 1985 through 2014, one-year asset growth rates greater than 10 percent represented approximately the 70th percentile of small banks. A 10 percent one-year asset growth rate measure is generally consistent with the adjusted brokered deposit ratio in the current Risk Category I financial ratios method, which raises assessment rates only when small banks have both four-year asset growth rates in excess of 40 percent and high levels of brokered deposits. --------------------------------------------------------------------------- Loan Mix Index The proposed loan mix index is unchanged from the 2015 NPR. As described in the 2015 NPR, the loan mix index is a measure of the extent to which a bank's total assets include higher-risk categories of loans. The index uses historical charge-off rates to identify loan types with higher risk. Each category of loan in a bank's loan portfolio is divided by the bank's total assets to determine the percentage of the bank's assets represented by that category of loan. Each percentage is then multiplied by that category of loan's historical weighted average industry-wide charge-off rate. The products are then summed to determine the loan mix index value for that bank. The loan categories in the loan mix index were selected based on the availability of category-specific charge-off rates over a sufficiently lengthy period (2001 through 2014) to be representative. The loan categories exclude credit card loans.\34\ For each loan category, the weighted-average charge-off rate weights each industry- wide charge-off rate for each year by the number of bank failures in that year. Thus, charge-off rates from 2008 through 2014, during the recent banking crisis, have a much greater influence on the weighted- average charge-off rate than do charge-off rates from the years before the crisis, when few failures occurred. The weighted averages assure that types of loans that have high charge-off rates during downturns (i.e., periods marked by significant insurance fund losses) have an appropriate influence on assessment rates. --------------------------------------------------------------------------- \34\ Credit card loans were excluded from the loan mix index because they produced anomalously high assessment rates for banks with significant credit card loans. Credit card loans have very high charge-off rates, but they also tend to have very high interest rates to compensate. In addition, few small banks have significant concentrations of credit card loans. Consequently, credit card loans are omitted from the index. --------------------------------------------------------------------------- Table 6 below illustrates how the loan mix index is calculated for a hypothetical bank. --------------------------------------------------------------------------- \35\ As discussed above, the loan mix index uses loan charge-off data from 2001 through 2014. The table shows industry-wide weighted charge-off percentage rates, the loan category as a percentage of total assets, and the products to two decimal places. In fact, the FDIC proposes to use seven decimal places for industry-wide weighted charge-off percentage rates, and as many decimal places as permitted by the FDIC's computer systems for the loan category as a percentage of total assets and the products. The total (the loan mix index itself) would use three decimal places. Table 6--Loan Mix Index for a Hypothetical Bank \35\ ---------------------------------------------------------------------------------------------------------------- Loan category as a percent Weighted of Product of two charge-off hypothetical columns to the rate percent bank's total left assets ---------------------------------------------------------------------------------------------------------------- Construction & Development...................................... 4.50 1.40 6.29 Commercial & Industrial......................................... 1.60 24.24 38.75 Leases.......................................................... 1.50 0.64 0.96 Other Consumer.................................................. 1.46 14.93 21.74 Loans to Foreign Government..................................... 1.34 0.24 0.32 Real Estate Loans Residual...................................... 1.02 0.11 0.11 Multifamily Residential......................................... 0.88 2.42 2.14 Nonfarm Nonresidential.......................................... 0.73 13.71 9.99 1-4 Family Residential.......................................... 0.70 2.27 1.58 Loans to Depository banks....................................... 0.58 1.15 0.66 Agricultural Real Estate........................................ 0.24 3.43 0.82 Agriculture..................................................... 0.24 5.91 1.44 ----------------------------------------------- [[Page 6114]] SUM (Loan Mix Index)........................................ .............. 70.45 84.79 ---------------------------------------------------------------------------------------------------------------- The weighted charge-off rates in the table are the same for all established small banks. The remaining two columns vary from bank to bank, depending on the bank's loan portfolio. For each loan type, the value in the rightmost column is calculated by multiplying the weighted charge-off rate by the bank's loans of that type as a percent of its total assets. In this illustration, the sum of the right-hand column (84.79) is the loan mix index for this bank. Calculating the Initial Assessment Rate As in the current methodology for Risk Category I small banks, and as proposed in the 2015 NPR, under the revised proposal the weighted CAMELS components and financial ratios would be multiplied by statistically derived pricing multipliers, the products would be summed, and the sum would be added to a uniform amount that would be: (a) Derived from the statistical analysis, (b) adjusted for assessment rates set by the FDIC, and (c) applied to all established small banks.\36\ The total would equal the bank's initial assessment rate. If, however, the resulting rate were below the minimum initial assessment rate for established small banks, the bank's initial assessment rate would be the minimum initial assessment rate; if the rate were above the maximum, then the bank's initial assessment rate would be the maximum initial rate for established small banks. In addition, if the resulting rate for an established small bank were below the minimum or above the maximum initial assessment rate applicable to banks with the bank's CAMELS composite rating, the bank's initial assessment rate would be the respective minimum or maximum assessment rate for an established small bank with its CAMELS composite rating. This approach would allow rates to vary incrementally across a wide range of rates for all established small banks. The conversion of the statistical model to pricing multipliers and the uniform amount is discussed further below and in detail in the proposed Appendix E. Appendix E also discusses the derivation of the pricing multipliers and the uniform amount. --------------------------------------------------------------------------- \36\ Current rules provide that: (1) Under specified conditions, certain subsidiary small banks will be considered established rather than new, 12 CFR 327.8(k)(4); and (2) the time that a bank has spent as a federally insured credit union is included in determining whether a bank is established, 12 CFR 327.8(k)(5). If a Risk Category I small bank is considered established under these rules, but has no CAMELS component ratings, its initial assessment rate is 2 basis points above the minimum initial assessment rate applicable to Risk Category I (which is equivalent to 2 basis points above the minimum initial assessment rate for established small banks) until it receives CAMELS component ratings. Thereafter, the assessment rate is determined by annualizing, where appropriate, financial ratios obtained from all quarterly Call Reports that have been filed, until the bank files four quarterly Call Reports. As proposed in the 2015 NPR, for small banks that are considered established under these rules, but do not have CAMELS component ratings, the FDIC proposes the following: 1. If the bank has no CAMELS composite rating, its initial assessment rate would be 2 basis points above the minimum initial assessment rate for established small banks until it receives a CAMELS composite rating; and 2. If the bank has a CAMELS composite rating but no CAMELS component ratings, its initial assessment rate would be determined using the financial ratios method by substituting its CAMELS composite rating for its weighted average CAMELS component rating and, if the bank has not yet filed four quarterly Call Reports, by annualizing, where appropriate, financial ratios obtained from all quarterly Call Reports that have been filed. --------------------------------------------------------------------------- Adjustments to Initial Base Assessment Rates As discussed above, the FDIC proposes to eliminate the brokered deposit adjustment for established small banks.\37\ Under current rules, the brokered deposit adjustment only applies to small banks if they are in Risk Category II, III, and IV. The brokered deposit adjustment increases a bank's assessment when it holds significant amounts of brokered deposits. To avoid assessing banks twice for holding brokered deposits (because the brokered deposit ratio would apply to all established small banks), the FDIC proposes eliminating the brokered deposit adjustment. --------------------------------------------------------------------------- \37\ As under rules currently in effect, the brokered deposit adjustment would continue to apply to all new small institutions in Risk Categories II, III, and IV, and all large and highly complex institutions, except large and highly complex institutions that are well capitalized and have a CAMELS composite rating of 1 or 2. As under rules currently in effect, the brokered deposit adjustment would not apply to insured branches. --------------------------------------------------------------------------- As under current rules, the DIDA would continue to apply to all banks, and the unsecured debt adjustment would continue to apply to all banks except new banks and insured branches.\38\ --------------------------------------------------------------------------- \38\ As under rules currently in effect, however, no adjustments would apply to bridge banks or conservatorships. These banks would continue to be charged the minimum assessment rate applicable to small banks. --------------------------------------------------------------------------- Proposed Assessment Rates Like the 2015 NPR, this revised proposal preserves the lower range of initial base assessment rates previously adopted by the Board. Under current regulations, once the reserve ratio reaches 1.15 percent, initial base assessment rates will fall automatically from the current 5 basis point to 35 basis point range to a 3 basis point to 30 basis point range, as reflected in Table 4. The FDIC adopted the range of initial assessment rates in this rate schedule pursuant to its long- term fund management plan as the FDIC's best estimate of the assessment rates that would have been needed from 1950 to 2010 to maintain a positive fund balance during the past two banking crises. This assessment rate schedule remains the FDIC's best estimate of the long- term rates needed. Consequently, and as discussed in greater detail further below and in detail in Appendix E, the FDIC proposes to convert its statistical model to assessment rates within this 3 basis point to 30 basis point assessment range in a revenue neutral way; that is, in a manner that does not materially change the aggregate assessment revenue collected from established small banks. As set out in the rate schedule in Table 7 below, for established small banks, the FDIC proposes to eliminate risk categories but maintain the range of initial assessment rates that the Board has previously determined will go into effect starting the quarter after the reserve ratio reaches 1.15 percent.\39\ Unless revised by the Board, these rates would remain in effect as long as the reserve ratio is less than 2 percent. Table 7 also includes a maximum assessment rate that would apply to [[Page 6115]] CAMELS composite 1- and 2-rated banks and minimum assessment rates that would apply to CAMELS composite 3-rated banks and CAMELS composite 4- and 5-rated banks. --------------------------------------------------------------------------- \39\ See 12 CFR 327.10(b); 76 FR at 10718. Table 7--Initial and Total Base Assessment Rates * [In basis points per annum] [Once the reserve ratio reaches 1.15 percent \40\] ---------------------------------------------------------------------------------------------------------------- Established small banks --------------------------------------------------------------- Large & highly CAMELS composite complex --------------------------------------------------------------- institutions ** 1 or 2 3 4 or 5 ---------------------------------------------------------------------------------------------------------------- Initial Base Assessment Rate. 3 to 16............ 6 to 30............ 16 to 30........... 3 to 30. Unsecured Debt Adjustment *** -5 to 0............ -5 to 0............ -5 to 0............ -5 to 0. Brokered Deposit Adjustment.. N/A................ N/A................ N/A................ 0 to 10. Total Base Assessment Rate... 1.5 to 16.......... 3 to 30............ 11 to 30........... 1.5 to 40. ---------------------------------------------------------------------------------------------------------------- * Total base assessment rates in the table do not include the DIDA. ** See 12 CFR 327.8(f) and (g) for the definition of large and highly complex institutions. *** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured depository institution's initial base assessment rate; thus, for example, an insured depository institution with an initial base assessment rate of 3 basis points will have a maximum unsecured debt adjustment of 1.5 basis points and cannot have a total base assessment rate lower than 1.5 basis points. The FDIC proposes to maintain the range of initial assessment rates, set out in the rate schedule in Table 8 below, that the Board previously determined will go into effect starting the quarter after the reserve ratio reaches or exceeds 2 percent and is less than 2.5 percent. Unless revised by the Board, these rates would remain in effect as long as the reserve ratio is in this range. Table 8 also includes the maximum assessment rates that would apply to CAMELS composite 1- and 2-rated banks and the minimum assessment rates that would apply to CAMELS composite 3-rated banks and CAMELS composite 4- and 5-rated banks. --------------------------------------------------------------------------- \40\ The reserve ratio for the immediately prior assessment period must also be less than 2 percent. Table 8--Initial and Total Base Assessment Rates * [In basis points per annum] [If the reserve ratio for the prior assessment period is equal to or greater than 2 percent and less than 2.5 percent] ---------------------------------------------------------------------------------------------------------------- Established small banks --------------------------------------------------------------- Large & highly CAMELS composite complex --------------------------------------------------------------- institutions ** 1 or 2 3 4 or 5 ---------------------------------------------------------------------------------------------------------------- Initial Base Assessment Rate. 2 to 14............ 5 to 28............ 14 to 28........... 2 to 28. Unsecured Debt Adjustment *** -5 to 0............ -5 to 0............ -5 to 0............ -5 to 0. Brokered Deposit Adjustment.. N/A................ N/A................ N/A................ 0 to 10. Total Base Assess
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