[Federal Register: November 30, 2006 (Volume 71, Number 230)]
[Rules and Regulations]
[Page 69282-69323]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30no06-9]
-----------------------------------------------------------------------
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
RIN 3064-AD09
Assessments
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Federal Deposit Insurance Reform Act of 2005 requires that
the Federal Deposit Insurance Corporation (the FDIC) prescribe final
regulations, after notice and opportunity for comment, to provide for
deposit insurance assessments under section 7(b) of the Federal Deposit
Insurance Act (the FDI Act). In this rulemaking, the FDIC is amending
its regulations to create a new risk differentiation system, to
establish a new base assessment rate schedule, and to set assessment
rates effective January 1, 2007.
DATES: Effective Date: January 1, 2007.
FOR FURTHER INFORMATION CONTACT: Munsell W. St. Clair, Senior Policy
Analyst, Division of Insurance and Research, (202) 898-8967; or
Christopher Bellotto, Counsel, Legal Division, (202) 898-3801.
SUPPLEMENTARY INFORMATION:
I. Background
On February 8, 2006, the President signed the Federal Deposit
Insurance Reform Act of 2005 into law; on February 15, 2006, he signed
the Federal Deposit Insurance Reform Conforming Amendments Act of 2005
(collectively, the Reform Act).\1\ The Reform Act enacts the bulk of
the recommendations made by the FDIC in 2001. The Reform Act, among
other things, requires that the FDIC, within 270 days, ``prescribe
final regulations, after notice and opportunity for comment * * *
providing for assessments under section 7(b) of the Federal Deposit
Insurance Act, as amended * * * ,'' thus giving the FDIC, through its
rulemaking authority, the opportunity to better price deposit insurance
for risk.\2\
---------------------------------------------------------------------------
\1\ Federal Deposit Insurance Reform Act of 2005, Public Law
109-171, 120 Stat. 9; Federal Deposit Insurance Conforming
Amendments Act of 2005, Public Law 109-173, 119 Stat. 3601.
\2\ Section 2109(a)(5) of the Reform Act. Pursuant to the
Section 2109 of the Reform Act, current assessment regulations
remain in effect until the effective date of new regulations.
Section 2109(a)(5) of the Reform Act requires the FDIC, within 270
days of enactment, to prescribe final regulations, after notice and
opportunity for comment, providing for assessments under section
7(b) of the Federal Deposit Insurance Act. Section 2109 also
requires the FDIC to prescribe, within 270 days, rules on the
designated reserve ratio, changes to deposit insurance coverage, the
one-time assessment credit, and dividends. A final rule on deposit
insurance coverage was published on September 12, 2006. 71 FR 53547.
Final rules on the one-time assessment credit and dividends were
published on October 18, 2006. 71 FR 61374; 71 FR 61385. The FDIC is
publishing final rulemakings on the designated reserve ratio and on
operational changes to part 327 elsewhere in this issue of the
Federal Register.
---------------------------------------------------------------------------
On July 24, 2006, the FDIC published in the Federal Register, for a
60-day comment period, a notice of proposed rulemaking providing for
deposit insurance assessments (the NPR). 71 FR 41910. The FDIC sought
public comment on its proposal and received 707 comment letters,
including numerous comments from trade organizations.3 4 The
comments and the final rule providing for assessments are discussed in
later sections.
---------------------------------------------------------------------------
\3\ The comment period expired on September 22, 2006. The FDIC
also received many comments relevant to this rulemaking in response
to the other rulemakings discussed in footnote 2. All comments have
been considered and are available on the FDIC's Web site, http://www.fdic.gov/regulations/laws/federal/propose.html
.
\4\ The trade associations included the American Bankers
Association, the Independent Community Bankers of America, America's
Community Bankers, the Clearing House, the Financial Services
Roundtable, the New York Bankers Association, the New Jersey League
of Community Bankers, the Massachusetts Bankers Association, the
Kansas Bankers Association, and the Association for Financial
Professionals.
---------------------------------------------------------------------------
A. The Current Risk-Differentiation Framework
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) required that the FDIC establish a risk-based assessment
system. To implement this requirement, the FDIC adopted by regulation a
system that places institutions into risk categories \5\ based on two
criteria: capital levels and supervisory ratings. Three capital
groups--well capitalized, adequately capitalized, and undercapitalized,
which are numbered 1, 2 and 3, respectively--are based on leverage
ratios and risk-based capital ratios for regulatory capital purposes.
Three supervisory subgroups, termed A, B, and C, are based upon the
FDIC's consideration of evaluations provided by the institution's
primary federal regulator and other information the FDIC deems
relevant.\6\ Subgroup A
[[Page 69283]]
consists of financially sound institutions with only a few minor
weaknesses; subgroup 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
insurance fund; and subgroup C consists of institutions that pose a
substantial probability of loss to the insurance fund unless effective
corrective action is taken. In practice, the subgroup evaluations are
generally based on an institution's composite CAMELS rating, a rating
assigned by the institution's supervisor at the end of a bank
examination, with 1 being the best rating and 5 being the lowest.\7\
Generally speaking, institutions with a CAMELS rating of 1 or 2 are put
in supervisory subgroup A, those with a CAMELS rating of 3 are put in
subgroup B, and those with a CAMELS rating of 4 or 5 are put in
subgroup C. Thus, in the current assessment system, the highest-rated
(least risky) institutions are assigned to category 1A and the lowest-
rated (riskiest) institutions to category 3C. The three capital groups
and three supervisory subgroups form a nine-cell matrix for risk-based
assessments:
---------------------------------------------------------------------------
\5\ The FDIC's regulations refer to these risk categories as
``assessment risk classifications.''
\6\ The term ``primary federal regulator'' is synonymous with
the statutory term ``appropriate federal banking agency.'' 12 U.S.C.
1813(q).
\7\ CAMELS is an acronym for component ratings assigned in a
bank examination: Capital adequacy, Asset quality, Management,
Earnings, Liquidity, and Sensitivity to market risk. A composite
CAMELS rating combines these component ratings, which also range
from 1 (best) to 5 (worst).
[GRAPHIC] [TIFF OMITTED] TR30NO06.002
B. Reform Act Provisions
The Federal Deposit Insurance Act, as amended by the Reform Act,
continues to require that the assessment system be risk-based and
allows the FDIC to define risk broadly. It defines a risk-based system
as one based on an institution's probability of causing a loss to the
deposit insurance fund due to the composition and concentration of the
institution's assets and liabilities, the amount of loss given failure,
and revenue needs of the Deposit Insurance Fund (the fund).\8\
---------------------------------------------------------------------------
\8\ 12 U.S.C. 1817(b)(1)(A) and (C). The Bank Insurance Fund and
Savings Association Insurance Fund were merged into the newly
created Deposit Insurance Fund on March 31, 2006.
---------------------------------------------------------------------------
At the same time, the Reform Act also restores to the FDIC's Board
of Directors the discretion to price deposit insurance according to
risk for all insured institutions regardless of the level of the fund
reserve ratio.\9\
---------------------------------------------------------------------------
\9\ The Reform Act eliminates the prohibition against charging
well-managed and well-capitalized institutions when the deposit
insurnace fund is at or above, and is expected to remain at or
above, the designated reserve ratio (DRR). This prohibition was
inclulded as part of the Deposit Insurance Funds Act of 1996. Public
Law 104-208, 110 Stat. 3009, 3009-479. However, while the Reform Act
allows the DRR to be set between 1.15 percent and 1.50 percent, it
also generally requires dividends of one-half of any amount in the
fund in excess of the amount required to maintain the reserve ratio
at 1.35 percent when the insurance fund reserve ratio exceeds 1.35
percent at the end of any year. The Board can suspend these
dividends under certain circumstances. 12 U.S.C. 1817(e)(2).
---------------------------------------------------------------------------
The Reform Act leaves in place the existing statutory provision
allowing the FDIC to ``establish separate risk-based assessment systems
for large and small members of the Deposit Insurance Fund.'' \10\ Under
the Reform Act, however, separate systems are subject to a new
requirement that ``[n]o insured depository institution shall be barred
from the lowest-risk category solely because of size.'' \11\
---------------------------------------------------------------------------
\10\ 12 U.S.C. 1817(b)(1)(D).
\11\ Section 2104(a)(2) of the Reform Act (to be codified at 12
U.S.C. 1817(b)(2)(D)).
---------------------------------------------------------------------------
II. Summary of the Final Rule
The final rule is set out in detail in ensuing sections, but is
briefly summarized here.
The final rule consolidates the existing nine risk categories into
four and names them Risk Categories I, II, III and IV. Risk Category I
replaces the 1A risk category.
Within Risk Category I, the final rule combines supervisory ratings
with other risk measures to differentiate risk. For most institutions,
the final rule combines CAMELS component ratings with financial ratios
to determine an institution's assessment rate. For large institutions
that have long-term debt issuer ratings, the final rule differentiates
risk by combining CAMELS component ratings with these ratings. For
large institutions within Risk Category I, initial assessment rate
determinations may be modified within limits upon review of additional
relevant information.
The final rule defines a large institution as an institution that
has $10 billion or more in assets. With certain exceptions, beginning
in 2010, the final rule treats new institutions (those established for
less than five years) in Risk Category I the same, regardless of size,
and assesses them at the maximum rate applicable to Risk Category I
institutions.
The final rule sets actual rates beginning January 1, 2007, as
follows:
------------------------------------------------------------------------
Risk Category
-------------------------------------------
I *
---------------------- II III IV
Minimum Maximum
------------------------------------------------------------------------
Annual Rates (in basis 5 7 10 28 43
points)....................
------------------------------------------------------------------------
\*\ Rates for institutions that do not pay the minimum or maximum rate
vary between these rates.
[[Page 69284]]
These rates are three basis points above the base rate schedule
adopted in the final rule:
------------------------------------------------------------------------
Risk Category
-------------------------------------------
I *
---------------------- II III IV
Minimum Maximum
------------------------------------------------------------------------
Annual Rates (in basis 2 4 7 25 40
points)....................
------------------------------------------------------------------------
\*\ Rates for institutions that do not pay the minimum or maximum rate
vary between these rates.
The final rule continues to allow the FDIC Board to adjust rates
uniformly from one quarter to the next, except that no single
adjustment can exceed three basis points. In addition, cumulative
adjustments cannot exceed a maximum of three basis points higher or
lower than the base rates without further notice-and-comment
rulemaking.
III. General Risk Differentiation Framework
The final rule consolidates the number of assessment risk
categories from nine to four. The four new categories will continue to
be defined based upon supervisory and capital evaluations, which are
both established measures of risk. The consolidation creates four new
Risk Categories as shown in Table 1:
[GRAPHIC] [TIFF OMITTED] TR30NO06.003
Risk Category I contains all well-capitalized institutions in
Supervisory Group A (generally those with CAMELS composite ratings of 1
or 2); i.e., those institutions that would be placed in the former 1A
category. Risk Category II contains all institutions in Supervisory
Groups A and B (generally those with CAMELS composite ratings of 1, 2
or 3), except those in Risk Category I and undercapitalized
institutions.\12\ Risk Category III contains all undercapitalized
institutions in Supervisory Groups A and B, and institutions in
Supervisory Group C (generally those with CAMELS composite ratings of 4
or 5) that are not undercapitalized. Risk Category IV contains all
undercapitalized institutions in Supervisory Group C; i.e., those
institutions that would be placed in the former 3C category.\13\
---------------------------------------------------------------------------
\12\ Under current regulations, bridge banks and institutions
for which the FDIC has been appointed or serves as conservator are
charged the assessment rate applicable to the 2A category. 12 CFR
327.4(c). The final rule places these institutions in Risk Categoryd
I and charges them the minimum rate applicable to that category.
\13\ For clarity, the final rule uses the phrase ``Supervisory
Group'' to replace ``Supervisory Subground.'' The final rule also
designates the capital categories as ``Well Capitalized,''
``Adequately Capitalized'' and ``Undercapitalilzed,'' rather than
Capital Groups 1, 2 and 3. However, the definitions of the
Supervisory Groups and Capital Group have not changed in substance.
---------------------------------------------------------------------------
Comments
No comments disagreed with the proposed reduction in the number of
risk categories from nine to four. However, one comment recommended
adding subcategories to Risk Category I to provide a warning to
institutions that are moving toward Risk Category II if corrective
action is not taken and giving an institution that slips from Risk
Category I to Risk Category II an opportunity to show quick
improvement. The FDIC does not believe that these subcategories are
necessary. For an institution in Risk Category I, its assessment rate
will provide the same information. The FDIC also does not believe that
special treatment should be accorded an institution that slips from
Risk Category I, as opposed to other institutions already in Risk
Category II.
Some comments argued that, for CAMELS 3, 4 and 5-rated institutions
in Risk Categories II and III, some provision for lower premiums should
be made for institutions that augment and maintain strong capital,
maintain adequate reserves for loan losses and have a plan for recovery
approved by the FDIC. The FDIC does not see a need for special
provisions for these institutions, as they have other incentives to
improve capital and business operations.
IV. Risk Differentiation Within Risk Category I
A. Overview
Risk Category I, as of June 30, 2006, would include approximately
95 percent of all insured institutions. The final rule will further
differentiate risk within this category using one of two methods. Both
methods share a common feature, namely, the use of CAMELS component
ratings. However, each method combines these measures with different
sources of information on risk. For small institutions within Risk
Category I and for large institutions within Risk Category I that do
not have long-term debt issuer ratings, the final rule combines CAMELS
component ratings with current financial ratios to determine an
institution's assessment rate. For large institutions within Risk
Category I that have long-term debt
[[Page 69285]]
issuer ratings, the final rule combines CAMELS component ratings with
these debt ratings. For all large institutions, initial assessment
rates may be modified within limits upon review of additional relevant
information.
The risk differentiation methods for institutions in Risk Category
I measure levels of risk and result in rank orderings of risk within
the category. Within Risk Category I, the final rule assesses those
institutions that pose the least risk a minimum assessment rate and
those that pose the greatest risk a maximum assessment rate that is two
basis points higher than the minimum rate. An institution that poses an
intermediate risk within Risk Category I will be charged a rate between
the minimum and maximum that will vary by institution. Under the final
rule, small changes in an institution's financial ratios, long-term
debt issuer ratings or CAMELS component ratings should produce only
small changes in assessment rates.
The final rule defines a large institution as an institution that
has $10 billion or more in assets and a small institution as an
institution that has less than $10 billion in assets. Also, as
described below in Section VII, beginning in 2010, with certain
exceptions, the final rule treats new institutions in Risk Category I
the same, regardless of size, and assesses them at the maximum rate
applicable to Risk Category I institutions.
B. Distribution of Assessment Rates
As stated above, within Risk Category I, the final rule results in
assessing those institutions that pose the least risk a minimum
assessment rate and those that pose the greatest risk a maximum
assessment rate that is two basis points higher. An institution that
poses an intermediate risk within Risk Category I will be charged a
rate between the minimum and maximum that will vary incrementally by
institution.
In this regard, the final rule differs from the NPR in its
application to large institutions. The NPR had proposed assessing large
institutions that posed an intermediate risk within Risk Category I one
of four rates between the minimum and maximum based on subcategory
assignments. A number of comments expressed concern over the proposed
use of assessment rate subcategories and the possibility that large
increases (and decreases) in assessment rates could result from
relatively small changes in risk. Some of these comments recommended
using as few as three assessment rate subcategories, and some comments
recommended using incremental pricing, as proposed in the NPR for small
institutions. The FDIC has decided to adopt an incremental pricing
framework for all institutions so that a small change in risk will
produce a small change in assessment rates.
Under the final rule, as of June 30, 2006: (1) Approximately 45
percent of all institutions that would have been in Risk Category I
(other than institutions less than 5 years old) would have been charged
the minimum assessment rate; and (2) approximately 5 percent of all
institutions that would have been in Risk Category I (other than
institutions less than 5 years old) would have been charged the maximum
assessment rate. In future periods, different percentages of
institutions may be charged the minimum and maximum rates.
Chart 1 shows the cumulative distribution of assessment rates based
on June 30, 2006 data, using base assessment rates for institutions in
Risk Category I. The chart excludes Risk Category I institutions less
than 5 years old.
[GRAPHIC] [TIFF OMITTED] TR30NO06.004
[[Page 69286]]
Comments
Percentages of institutions paying the minimum rate. A comment
agreed that charging 45 percent of institutions the minimum rate makes
sense given the current health of the banking industry. Several
comments (including comments from some trade groups), however,
suggested that initially charging 45 percent of institutions the
minimum rate was arbitrary or inappropriate. These comments suggested
initially charging a larger percentage of institutions the minimum
rate, at least in part, because risk in the banking industry is very
low at present.
Two comments expressed the view that the decision to place roughly
45 percent of large institutions in the minimum assessment rate
subcategory and 5 percent in the maximum assessment rate subcategory
was subjective and arbitrary. In one of these comments, it was
suggested that large institutions might be restricted from the lowest
premium rate by this decision. Several other comments also urged the
FDIC to expand the availability of the minimum assessment rate to a
larger proportion of large institutions. Some comments argued for the
elimination of premiums altogether for the highest-rated large
institutions.
The FDIC has found that small institutions with a probability of
downgrade to a CAMELS 3 or worse that is equal to or less than the
probability of downgrade for the 40th to 50th percentile as of June 30,
2006, had minimal risk of a CAMELS downgrade over time. The remainder
of small institutions in the industry had increasing and
distinguishable risk of CAMELS downgrades. The FDIC believes it is
appropriate to initially assign roughly similar proportions of large
and small institutions to the minimum assessment rate to achieve
parity. While the initial proportions of large and small institutions
being charged the minimum and maximum rates will be similar, the final
rule does not fix the proportions for the future. Thus, in future
periods, more or less than 45 percent of large (or small) institutions
may pay the minimum rate and more or less than 5 percent may pay the
maximum rate.
Risk Category I assessment rate spread. Several comments (including
comments from trade groups) recommended that the FDIC eliminate or
narrow the spread between the minimum and maximum base rates for Risk
Category I. Arguments in favor of eliminating or narrowing the spread
included:
The new risk differentiation system is untested and could
lead to unintended consequences.
Improvements in bank risk-management systems, improvements
in supervisory evaluations and off-site monitoring, and enhanced
supervisory powers enjoyed by the regulators have reduced risk.
A narrower spread would reduce the adverse effect of
changes in subcategories on large banks and the adverse effect of
paying the maximum rate on new banks.
Other comments (including comments from some trade groups)
recommended increasing the spread between minimum and maximum
assessment rates for Risk Category I to 3 basis points. According to
these comments, a wider spread would improve risk differentiation and
could subject more institutions to incremental rates between the
minimum and maximum rates.
The final rule strikes a balance between the arguments for a
narrower spread and those for a wider spread. The two basis point
spread adopted in the final rule is narrower than the historical loss
data would suggest.\14\ However, as the comments have noted, the new
system is, as yet, untested.
---------------------------------------------------------------------------
\14\ See Table 1.6 in Appendix 1 to the NPR, 71 FR 41910.
---------------------------------------------------------------------------
C. CAMELS Ratings
For all institutions in Risk Category I, supervisory ratings will
be taken into account in setting assessment rates using a weighted
average of an institution's CAMELS components. This weighted average
will be created by combining the components as follows: \15\
---------------------------------------------------------------------------
\15\ The FDIC and other bank supervisors do not use a weighting
system to determine CAMELS composite ratings. The weights in the
table reflect the view of the FDIC regarding the relative importance
of each of the CAMELS components for differentiating risk among
institutions in Risk Category I for deposit insurance purposes.
Different weights might apply if this measure were being used to
evaluate risk for deposit insurance purposes for all institutions,
including those outside Risk Category I.
[GRAPHIC] [TIFF OMITTED] TR30NO06.005
Comments
Almost every comment that discussed the use of CAMELS ratings to
differentiate risk within Risk Category I supported their use. One
comment questioned their use and a few comments opposed any
differentiation within Risk Category I.
One trade group asserted that the FDIC should use a simple, rather
than weighted, average of CAMELS components on the grounds that using
financial ratios related to these components effectively weights the
components. The trade group noted that capital, for example, is already
reflected in an institution's risk category and as a CAMELS component.
The trade group also asserted that asset quality is given extra
emphasis in the proposed weighting scheme by including several asset
quality financial ratios as well as the A rating in the CAMELS
component average. With regards to the M component, the trade group
asserted that:
Management--the most subjective of all the CAMELS components--
must by necessity be involved in all the financial ratios and other
examination components. In practice,
[[Page 69287]]
therefore, it is unlikely that examiners would rate management
higher than the other components. Thus, there is always a bias
against a high management rating.
Several comments proposed different weighting schemes for large
institutions, such as heavier weights for Liquidity, Capital, and Asset
quality.
The final rule retains the weights proposed in the NPR to determine
the weighted average CAMELS component rating. These weights reflect the
view of the FDIC on the relative importance of each of the CAMELS
components in differentiating risk among institutions in Risk Category
I for deposit insurance purposes.
D. Financial Ratios
For small institutions and for large institutions without a long-
term debt issuer rating, the final rule uses certain financial ratios,
in addition to supervisory ratings, to differentiate risk. The final
rule differs slightly from the proposal in the NPR with respect to the
financial ratios being used and their definitions.
The financial ratios that will be used are:
The Tier 1 Leverage Ratio;
Loans past due 30-89 days/gross assets;
Nonperforming assets/gross assets; \16\
---------------------------------------------------------------------------
\16\ The NPR used the phrase ``nonperforming loans'' rather than
``nonperforming assets.'' Because this ratio includes repossessed
real estate in the numerator, the FDIC has concluded that the phrase
``nonperforming assets'' would be more accurate. No change in the
definition of the ratio is intended by this name change (although,
as discussed later, a slight revision to the definition is being
made for other reasons).
---------------------------------------------------------------------------
Net loan charge-offs/gross assets; and
Net income before taxes/risk-weighted assets.
The Tier 1 Leverage Ratio has the definition used for regulatory
capital purposes. Appendix A defines each of the ratios.
Many comments (including comments from several industry trade
groups) opposed including time deposits greater than $100,000 in the
definition of volatile liabilities for a variety of reasons, including:
(1) These deposits are core deposits or should be so considered; and
(2) including them would have an effect on attracting municipal
deposits. One comment opposed including brokered deposits in the
definition of volatile liabilities on the grounds that they are less
volatile than many core deposits. One trade group argued that deposits
in excess of $100,000 that are insured by excess deposit insurance
should not be included in the definition of volatile liabilities.
The final rule eliminates the basis for these concerns by excluding
one of the financial ratios proposed in the NPR, the ratio of volatile
liabilities to gross assets. The financial data used to compute
volatile liabilities reported by thrifts in the Thrift Financial
Reports (TFRs) and reported by banks in their Reports of Condition and
Income (Call Reports) were not compatible and could not be made
compatible without changes in reporting requirements.\17\
---------------------------------------------------------------------------
\17\ The largest item in volatile liabilities for the great
majority of institutions is time-and-savings deposits greater than
$100,000. Institutions that file Call Reports report this figure,
but institutions that file TFRs do not report this item separately.
Instead, they report all deposits greater than $100,000, including
demand deposits. Time-and-savings deposits greater than $100,000
cannot be determined from TFRs.
---------------------------------------------------------------------------
The final rule also excludes the portion of loans and leases that
is guaranteed by the U.S. Government, including government agencies and
government-sponsored agencies, from the computation of loans past due
30-89 days and from the computation of non-performing assets. These
types of guaranteed loans are treated as less risky than other loans
for risk-based capital purposes. Moreover, the use of past due and
nonaccrual loan measures that do not adjust for these guaranteed loans
might overstate credit risk and result in assessment rates that are too
high for some institutions.
Comments
Almost all comments (including comments from a trade group) on
using financial ratios (in addition to CAMELS ratings) to determine
assessment rates supported their use. However, some suggested that
different financial ratios be used.
In the NPR, the definition of volatile liabilities did not include
Federal Home Loan Bank advances, but the FDIC asked for comment on
whether it should. The FDIC received 569 comments on this issue. All
but one argued that the definition of volatile liabilities should not
include Federal Home Loan Bank advances; one argued that the definition
should include these advances. The final rule does not include the
volatile liability ratio.
A trade group suggested excluding the loans past due 30-89 days to
gross assets ratio on the grounds that loan delinquencies are already
considered in two CAMELS components, A (Assets) and M (Management). The
final rule retains the loans past due 30-89 days to gross assets ratio.
Independent of the CAMELS components, this ratio is statistically
significant and highly predictive of CAMELS downgrades and institution
failures even when it is considered together with the nonperforming
ratio.\18\
---------------------------------------------------------------------------
\18\ One comment suggested excluding total loans and lease
financing receivables past due 30 to 59 days in the ratio. Call
Reports and TFRs currently do not collect separate data on loans and
lease financing receivables past due 30 to 59 days; thus, it is not
feasible to exclude these past due receivables from the ratio.
---------------------------------------------------------------------------
A trade group commented that the risk weighting formula used to
establish risk weighted assets is biased against residential mortgage
lenders. It argued that, since they are secured by property liens, all
1-4 family, owner occupied residential mortgage loans with a loan-to-
value ratio under 80 percent should be given a risk weighting of zero.
In the final rule, pre-tax earnings are divided by risk-weighted
assets rather than by gross assets to avoid penalizing certain types of
institutions, including those that hold low-risk and low-yielding
assets. The FDIC's analysis shows that institutions specializing in
mortgage lending are not charged a higher average assessment rate than
other institutions under the final rule. Moreover, Call Reports and
TFRs currently do not collect separate data on the loan-to-value ratio
for 1-4 family, owner occupied residential mortgage loans; thus, it is
not feasible to treat loans with a low loan-to-value ratio differently.
This trade group also requested that the FDIC study how mutual
institutions are affected by including earnings in the financial
ratios. The FDIC found that, while mutual institutions typically have a
lower ratio of pre-tax earnings to risk-weighted assets, they typically
have a higher Tier 1 leverage ratio and lower non-performing loan and
charge-off ratios than other small institutions in Risk Category I. As
a result, mutual institutions are not charged a higher average
assessment rate than other institutions under the final rule.
Another trade group advocated averaging financial ratios over a
period not less than four quarters, arguing that taking ``a one-quarter
snap shot'' can be a misleading indicator of risk, since many financial
institutions can experience seasonal variations. By averaging, these
seasonalities would be removed.
The final rule uses a four-quarter sum for two of the five
financial ratios--the pre-tax earnings and net charge-offs ratios--to
reduce volatility related to seasonality. The final rule uses the
values of the three other financial ratios as of each quarter-end for
several reasons. First, the seasonality of these
[[Page 69288]]
financial ratios is more modest. Second, with a quarterly computation
of assessment rates, the average assessment rate an institution would
be charged throughout the year would roughly equate to the assessment
rate calculated with average ratios. Third, averaging financial ratios
over time has the disadvantage of blunting the effect of changes in an
institution's financial condition that are not related to seasonality;
thus, averaging ratios would prevent assessments from fully adjusting
to changes in risk.
One trade group supported the FDIC's use of a Tier 1 leverage ratio
and suggested that it should be weighted heaviest among the financial
ratios considered. However, several comments (including comments from
other trade groups) stated that capital should be measured by a risk-
adjusted capital ratio rather than the Tier 1 leverage ratio because a
risk-adjusted capital ratio is a better measure of capital adequacy.
Several comments stated that the FDIC should not use a Tier 1
leverage ratio to determine assessment rates for large institutions, in
particular. One of these comments argued that this ratio is not an
accurate measure of risk, effectively penalizes institutions that
invest in high quality short-term assets, such as U.S. government
securities, and places U.S. banks at a competitive disadvantage with
foreign banks. Another comment suggested that larger institutions might
tend to be penalized by inclusion of a leverage ratio.
The final rule uses the Tier 1 leverage ratio. The Tier 1 leverage
ratio is highly significant in predicting CAMELS downgrades and
failures. Using a risk-based capital measure in place of the Tier 1
leverage ratio does not improve predictive accuracy. For the relatively
few large Risk Category I institutions that do not have long-term debt
issuer ratings, the FDIC's ability to adjust assessment rates based on
consideration of other risk information, as discussed below, should
ensure that these institutions are treated equitably.
Several comments (including comments from several trade groups)
stated that the capital measure should include subordinated debt and
stated or implied that subordinated debt should reduce assessment rates
because it would reduce loss given failure. Several comments (including
comments from some trade groups) argued that the statutes governing the
risk-based pricing system require that the FDIC take loss given failure
into account when determining assessments and that the proposed system
does not do so. Because it does not do so, they argue, the assessment
system is actuarially unfair. These issues are discussed in a
subsequent section (Section IX).
One commenter explicitly argued that, for large institutions in
Risk Category I, only CAMELS components should be used to differentiate
risk. However, the comment also implied that only CAMELS components
should be used for all Risk Category I institutions, including small
institutions. The method adopted in the final rule, which combines
financial ratios and supervisory ratings, predicts downgrades better
than one without financial ratios. For this reason, the final rule does
not adopt the method suggested in the comment.
E. Long-Term Debt Issuer Ratings
For large institutions with long-term debt issuer ratings, the
final rule uses these ratings, in addition to supervisory ratings, to
differentiate risk. The final rule uses the current long-term debt
issuer rating or ratings assigned by the major U.S. rating
agencies.\19\ Debt issuer ratings of holding companies and other third
party debt ratings will not be used in the calculation of an assessment
rate, but may be considered along with other information in determining
whether adjustments to the resulting assessment rate are appropriate.
Possible adjustments to assessment rates are discussed in a subsequent
section.
---------------------------------------------------------------------------
\19\ That is, Moody's, Standard & Poor's, and Fitch.
---------------------------------------------------------------------------
Comments
A number of comments (including comments from some trade groups)
supported the use of debt issuer ratings as an objective measure of
risk in large institutions and as complementary to supervisory ratings.
One trade group urged the FDIC to use ratings issued by any nationally
recognized credit rating agency; a rating agency requested that its
ratings be used. The rating agency also urged the FDIC to consider
agency ratings for both small and large institutions when available.
While there is merit in considering ratings provided by other
rating agencies, long-term debt issuer ratings issued by the three
major U.S. rating agencies are widely accepted and used by market
participants to gauge the relative risk of large financial institutions
for many purposes, including the determination of required rates of
return on institution-issued debt. They provide market-based views of
risk that are complementary to supervisory views.\20\ The final rule
does not incorporate debt issuer rating information into the pricing
methodology used for smaller institutions; however, as described in a
subsequent section, institutions with assets between $5 billion and $10
billion may request to be treated as a large institution for pricing
purposes.
---------------------------------------------------------------------------
\20\ The FDIC is aware of the enactment of the Credit Rating
Agency Reform Act of 2006, Public Law 109-291. However, this
legislation has not yet been implemented. The Act requires the
Securities and Exchange Commission to issue final implementing
regulations within 270 days of enactment. The FDIC expects to
revisit how best to incorporate the ratings of other agencies in the
future. Any future revisions would involve notice-and-comment
rulemaking.
---------------------------------------------------------------------------
Other comments (including comments from other trade groups) either
urged caution in the use of agency ratings on the grounds of bias in
favor of large institutions or argued they should not be used. The
FDIC's ability to adjust assessment rates for large institutions,
discussed below, should alleviate these concerns.
Several comments urged the FDIC to use holding company debt issuer
ratings to determine assessment rates. These comments noted that debt
is often issued at the parent level, that holding companies are
required to serve as a source of strength to their subsidiary
institutions, and that holding company considerations apply to insured
subsidiaries due to the cross guarantee liabilities of affiliated
institutions.
The long-term debt issuer rating of an insured entity relates
directly to the risk in that particular entity. As noted in the NPR,
the risk profiles of affiliated institutions within a holding company
can differ. Additionally, the value of a cross-guarantee in the future
is uncertain because the financial condition of affiliated institutions
may, in certain circumstances, weigh against the FDIC's invoking such
cross-guarantee provisions.
Nevertheless, it is prudent to consider all available risk
information in setting assessment rates. As discussed below, the FDIC
will consider additional information, including any holding company
debt issuer ratings, in determining whether the assessment rate for any
large institution is appropriate.\21\
---------------------------------------------------------------------------
\21\ There are, at present, only a few cases where holding
company debt issuer ratings are available and insured entity debt
issuer ratings are not. Of these, two cases involve entities owned
by non-bank parents. Where both holding company ratings and insured
entity debt issuer ratings exist, most insured entity ratings are
better (indicating lower risk) than those of the parent company.
---------------------------------------------------------------------------
F. Combining Supervisory Ratings and Financial Ratios
For small institutions within Risk Category I and for large
institutions within Risk Category I that do not have long-term debt
issuer ratings, the final rule combines supervisory ratings and
[[Page 69289]]
financial ratios to determine assessment rates. The financial ratios
and the weighted average CAMELS component rating are used to estimate
the probability that an institution will be downgraded to CAMELS 3, 4
or 5 at its next examination using data from the end of the years 1984
to 2004.\22\ This period covers both periods of stress and strength in
the banking industry.\23\ The final rule converts the probabilities of
downgrade to specific base assessment rates. The analysis and
conversion produced the following multipliers for each risk measure:
---------------------------------------------------------------------------
\22\ The ``S'' component rating was first assigned in 1997.
Because the statistical analysis relies on data from before 1997,
the ``S'' component rating was excluded from the analysis. Appendix
A describes the statistical analysis.
\23\ 2005 data had to be excluded because the analysis is based
upon supervisory downgrades within one year and 2006 downgrades have
yet to be determined.
------------------------------------------------------------------------
Pricing
Risk measures * multipliers * *
------------------------------------------------------------------------
Tier 1 Leverage Ratio................................. (0.042)
Loans Past Due 30-89 Days/Gross Assets................ 0.372
Nonperforming Assets/Gross Assets..................... 0.719
Net Loan Charge-Offs/Gross Assets..................... 0.841
Net Income before Taxes/Risk-Weighted Assets.......... (0.420)
Weighted Average CAMELS Component Rating.............. 0.534
------------------------------------------------------------------------
* Ratios are expressed as percentages.
* * Multipliers are rounded to three decimal places.
To determine an institution's insurance assessment rate under the
base assessment rate schedule, each of these risk measures (that is,
each institution's financial ratios and weighted average CAMELS
component rating) will be multiplied by the corresponding pricing
multipliers. The sum of these products will be added to (or subtracted
from) a uniform amount, 1.954.\24\ The uniform amount is derived from a
statistical analysis.\25\ However, no rate within Risk Category I will
be less than the minimum assessment rate applicable to the category or
higher than the maximum assessment rate applicable to the category. The
final rule sets the minimum base assessment rate for Risk Category I at
two basis points and the maximum base assessment rate for Risk Category
I two basis points higher.
---------------------------------------------------------------------------
\24\ Appendix A provides the derivation of the pricing
multipliers and the uniform amount to be added to compute an
assessment rate. The rate derived will be an annual rate, but will
be determined every quarter.
\25\ The uniform amount will be the same for all institutions in
Risk Category I (other than large institutions that have long-term
debt issuer ratings, insured branches of foreign banks and,
beginning in 2010, new institutions). In the NPR, the FDIC had
proposed that the uniform amount would be adjusted for assessment
rates set by the FDIC. The final rule is mathematically equivalent.
Rather than adjusting the uniform amount, the final rule simply
calculates rates for Risk Category I institutions with respect to
the base assessment rates, and adjusts all rates by the same amount
to conform to actual rates.
---------------------------------------------------------------------------
To compute the values of the uniform amount and pricing multipliers
shown above, the FDIC chose cutoff values for the predicted
probabilities of downgrade such that, as of June 30, 2006: (1) 45
percent of smaller institutions that would have been in Risk Category I
(other than institutions less than 5 years old) would have been charged
the minimum assessment rate; and (2) 5 percent of smaller institutions
that would have been in Risk Category I (other than institutions less
than 5 years old) would have been charged the maximum assessment
rate.\26\ These cutoff values will be used in future periods, which
could lead to different percentages of institutions being charged the
minimum and maximum rates.
---------------------------------------------------------------------------
\26\ The cutoff value for the minimum assessment rate is a
predicted probability of downgrade of approximately 2 percent. The
cutoff value for the maximum assessment rate is approximately 14
percent.
---------------------------------------------------------------------------
Table 2 gives assessment rates for three institutions with varying
characteristics, assuming the pricing multipliers given above, using
the base assessment rates for institutions in Risk Category I (which
range between a minimum of 2 basis points to a maximum of 4 basis
points).\27\
---------------------------------------------------------------------------
\27\ These are the base rates for Risk Category I adopted in
Section VIII. Under the final rule, actual rates for any year could
be as much as 3 basis points higher or lower than the base rates
without the necessity of notice-and-comment rulemaking. Beginning in
2007, actual rates will be 3 basis points higher than the base
rates.
---------------------------------------------------------------------------
[[Page 69290]]
[GRAPHIC] [TIFF OMITTED] TR30NO06.006
The assessment rate for an institution in the table is calculated
by multiplying the pricing multipliers (Column B) by the risk measure
values (Column C, E or G) to produce each measure's contribution to the
assessment rate. The sum of the products (Column D, F or H) plus the
uniform amount (the first item in Column D, F and H) yields the total
assessment rate. For Institution 1 in the table, this sum actually
equals 1.56, but the table reflects the assumed minimum assessment rate
of 2 basis points. For Institution 3 in the table, the sum actually
equals 4.25, but the table reflects the assumed maximum assessment rate
of 4 basis points.
---------------------------------------------------------------------------
\28\ The final rule provides that pricing multipliers, the
uniform amount, and financial ratios will be rounded to three digits
after the decimal point. Resulting assessment rates will be rounded
to the nearest one-hundredth (1/100th) of a basis point.
---------------------------------------------------------------------------
Under the final rule, the FDIC will have the flexibility to update
the pricing multipliers and the uniform amount annually, without
further notice-and-comment rulemaking. In particular, the FDIC will be
able to add data from each new year to its analysis and may, from time
to time, exclude some earlier years from its analysis. For example,
some time during 2007 the FDIC may include data in the statistical
analysis covering the period 1984 to 2005, rather than 1984 to 2004.
Because the analysis will continue to use many earlier years' data as
well, pricing multiplier changes from year to year should usually be
relatively small.
On the other hand, as a result of the annual review and analysis,
the FDIC may conclude that additional or alternative financial
measures, ratios or other risk factors should be used to determine
risk-based assessments or that a new method of differentiating for risk
should be used. In any of these events, changes would be made through
notice-and-comment rulemaking.
Under the final rule, the financial ratios for any given quarter
will be calculated from the report of condition filed by each
institution as of the last day of the quarter.\29\ In a separate rule,
the FDIC has determined that, for purposes of assigning an institution
to one of the four risk categories, changes to an institution's
supervisory rating will be reflected as of the date that the rating
change is transmitted to the institution.\30\ This final rule adopts
the same rule with respect to CAMELS component rating changes for
purposes of determining assessment rates for all institutions in Risk
Category I.31 32
---------------------------------------------------------------------------
\29\ Reports of condition include Reports of Condition and
Income and Thrift Financial Reports.
\30\ See final rule on Operational Changes to Assessments,
published elsewhere in this issue of the Federal Register. However,
if the FDIC disagrees with the CAMELS composite rating assigned by
an institution's primary federal regulator, and assigns a different
composite rating, the supervisory change will be effective for
assessment purposes as of the date that the FDIC assigned the new
rating. Disagreements of this type have been rare.
\31\ Pursuant to existing supervisory practice, the FDIC does
not assign a different component rating from that assigned by an
institution's primary federal regulator, even if the FDIC disagrees
with a CAMELS component rating assigned by an institution's primary
federal regulator, unless: (1) the disagreement over the component
rating also involves a disagreement over a CAMELS composite rating;
and (2) the disagreement over the CAMELS composite rating is not a
disagreement over whether the CAMELS composite rating should be a 1
or a 2. The FDIC has no plans to alter this practice.
\32\ A rating change that is transmitted before this final rule
becomes effective (i.e., before January 1, 2007) will be deemed to
have been transmitted prior to January 1, 2007.
---------------------------------------------------------------------------
Using the transmittal date of a ratings change for assessment
purposes represents a change from the method proposed in the NPR. Under
the NPR, transmittal dates would only have been used in the absence of
an examination start date (for example, for a large institution with
continuous on-site supervision). Otherwise, in almost all instances,
the examination start date would have been used.
The final rule adopts a suggestion contained in a banking trade
group comment and alters the proposed rule for several reasons
discussed in more detail in the final rule on operational changes to
the assessment system.\33\
---------------------------------------------------------------------------
\33\ See final rule on Operational Changes to Assessments,
published elsewhere in this issue of the Federal Register.
---------------------------------------------------------------------------
The final rule also differs from the NPR for large institutions
without long-term debt issuer ratings. The NPR proposed determining
assessment rates for these institutions from insurance scores using a
weighted average CAMELS rating and a financial ratio factor, with each
weighted 50 percent. While the supervisory ratings and financial ratios
in the final rule are
[[Page 69291]]
nearly the same as those proposed in the NPR, they are combined
differently.\34\
---------------------------------------------------------------------------
\34\ The ratio of volatile liabilities to gross assets was
included in the proposed rule, but is not included in the final
rule. Other minor changes to the ratios have been made. The changes
are discussed earlier in the text.
---------------------------------------------------------------------------
The approach in the final rule is simpler because it uses one
consistent method for all institutions other than those with at least
$10 billion in assets that have long-term debt issuer ratings.
Comments
Supervisory ratings. Several comments supported the use of
supervisory ratings. One comment asserted that supervisory ratings are
the only reliable method to differentiate risk among financial
institutions. One trade group supported using supervisory ratings as
one of the variables used to determine assessment rates as proposed in
the NPR and opposed either allowing supervisory ratings to ``be greater
than 50 percent of the overall risk score'' or automatically giving
supervisory ratings a 50 percent weight for small institutions, which
was suggested in the NPR as an alternative method of determining
assessment rates. Another trade group urged that ``supervisory ratings
should never be weighted more than half of the total weight of both the
supervisory ratings and financial ratios.'' Both trade groups urged
these limitations because of the perceived subjectivity of supervisory
ratings.
The FDIC has decided not to impose a cap on the contribution that
supervisory ratings can make to an institution's assessment rate for
two reasons. First, the final rule combining supervisory ratings and
financial ratios does not use a weighting scheme or a risk score. The
final rule uses pricing multipliers, which can be either positive or
negative, based on a statistical model that relates financial ratios
and component ratings to CAMELS downgrades. The pricing multipliers--
including the multiplier for the weighted average CAMELS component
rating--are based on the actual historical experience of how well
financial ratios and weighted average CAMELS component ratings predict
whether an institution will be downgraded to a CAMELS composite rating
of 3 or worse at its next examination. Second, a cap on the
contribution that supervisory ratings can make to an institution's
assessment rate would affect only a small percentage of institutions
and the effect would be very small.\35\
---------------------------------------------------------------------------
\35\ As of June 30, 2006: (1) the contribution of CAMELS
component ratings would have exceeded 50 percent of the assessment
rate; and (2) assessment rates would have exceeded the minimum rate
for less than 1.3 percent of small institutions in Risk Category I
(other than institutions less than 5 years old). Most of these
institutions, however, would have been charged a rate only slightly
above the minimum rate. For a Risk Category I institution being
charged the minimum rate, the contribution of the weighted average
CAMELS component rating does not increase the institution's
assessment rate.
---------------------------------------------------------------------------
Updating pricing multipliers. One trade group agreed that the FDIC
should have the flexibility to update the pricing multipliers and the
uniform amount annually, without further notice-and-comment rulemaking
and that adding additional or alternative financial measures, ratios or
other risk factors to determine risk-based assessments or adopting a
new method of differentiating for risk should be done through notice-
and-comment rulemaking. The final rule is consistent with this comment.
No comments disagreed.
Additional comments. One trade group urged that the FDIC avoid
having low-risk multi-family loans lead to higher assessment rates to
avoid chilling this type of lending. The final rule does not target
this kind of lending.
G. Combining Supervisory Ratings With Long-Term Debt Issuer Ratings
For large institutions that have long-term debt issuer ratings, a
combination of these ratings and supervisory ratings will determine
assessment rates, using equal weighting for each. The base assessment
rate will be derived as follows: (1) CAMELS component ratings will be
weighted to derive a weighted average CAMELS rating; \36\ (2) long-term
debt issuer ratings will be converted to numerical values between 1 and
3 using the conversion values in Appendix B; \37\ (3) the weighted
average CAMELS rating and converted long-term debt issuer rating will
be multiplied by a pricing multiplier and the products will be summed;
and (4) a uniform amount, which will always be negative, will be added
to the result. The resulting base assessment rate will be subject to a
minimum and a maximum assessment rate. The pricing multiplier for both
the weighted average CAMELS ratings and converted long-term debt issuer
rating will be 1.176, and the uniform amount will be -1.882.
---------------------------------------------------------------------------
\36\ Each component rating will typically, if not always, range
from ``1'' to ``3'' for institutions in Risk Category I.
\37\ Where more than one long-term debt issuer rating is
available, the converted values will be averaged.
---------------------------------------------------------------------------
The conversion of long-term debt issuer ratings into numerical
values in the final rule differs slightly from the conversion proposed
in the NPR. Specifically, the final rule assigns the lowest conversion
value of ``1'' to the best possible long-term debt issuer rating rather
than to double A ratings or better (Aa2 or better for Moody's ratings),
and the highest conversion value of ``3'' to triple B or worse ratings
(Baa2 or worse for Moody's ratings), rather than to double B plus or
worse ratings (Ba1 or worse for Moody's ratings). This revised
conversion methodology takes better advantage of the possible range of
ratings for large Risk Category I institutions, which are concentrated
primarily in the triple B rating range and higher.
Pricing multipliers and the uniform amount for large institutions
with debt ratings were derived using cutoff values of the combination
of weighted average CAMELS ratings and converted long-term debt issuer
ratings (weighted 50 percent each) such that, as of June 30, 2006: (1)
Approximately 44 percent of large institutions with long-term debt
issuer ratings that would have been in Risk Category I (other than
institutions less than 5 years old) would have been charged the minimum
assessment rate; and (2) approximately 6 percent of the large
institutions with long-term debt issuer ratings that would have been in
Risk Category I (other than institutions less than 5 years old) would
have been charged the maximum assessment rate.\38\ The derivation of
pricing multipliers and the uniform amount is described in Appendix 1.
---------------------------------------------------------------------------
\38\ As of June 30, 2006, approximately 46 percent of all large
institutions that would have been in Risk Category I (other than
institutions less than 5 years old) would have been charged the
minimum assessment rate and approximately 5 percent of all large
institutions that would have been in Risk Category I (other than
institutions less than 5 years old) would have been charged the
maximum assessment rate.
---------------------------------------------------------------------------
Under the final rule, the base assessment rate for an institution
with CAMELS component ratings of ``222111,'' a Moody's long-term debt
issuer rating of ``A1,'' and a Standard and Poor's long-term debt
issuer rating of ``A'' would be 2.06 basis points. This rate is
calculated as follows:
The weighted average CAMELS rating is computed by
multiplying each component rating by its associated weight to produce
values of 0.50, 0.40, 0.50, 0.10, 0.10, and 0.10, respectively. The sum
of these values, the weighted average CAMELS rating, is 1.70.
The Moody's and Standard and Poor's long-term debt issuer
ratings are converted to numerical values and averaged. The average of
the two long-term debt issuer ratings, converted to numerical values of
1.50 and 1.80, respectively, is 1.65.
The weighted average CAMELS rating and converted long-term
debt
[[Page 69292]]
issuer ratings are multiplied by the pricing multiplier and summed
(1.700*1.176 + 1.650*1.176) \39\ to produce a value of 3.940. A uniform
amount of 1.882 is subtracted from this result to produce a base
assessment rate of 2.06 basis points.\40\
---------------------------------------------------------------------------
\39\ Under the final rule, the pricing multipliers will be
rounded to three digits after the decimal point.
\40\ Under the final rule, the assessment rates resulting from
these calculations will be rounded to the nearest one-hundredth (1/
100th) of a basis point.
---------------------------------------------------------------------------
The final rule also differs from the NPR in that it does not use
financial ratios to determine assessment rates for any large
institution that has long-term debt issuer ratings, and does not use
varying weights for long-term debt issuer ratings for institutions with
between $10 billion and $30 billion in assets. The final rule
simplifies the derivation of assessment rates by applying the same
weight to weighted average CAMELS component ratings and long-term debt
issuer ratings (when they exist) regardless of an institution's size.
Several trade groups commented that the proposed risk
differentiation methodology for large banks was too complex, in part
because of the varying weights given risk factors for institutions
between $10 billion and $30 billion in assets. These comments noted
that an institution's assessment rate could change simply because of an
increase or decrease in assets even when the institution's risk profile
remained unchanged. After considering comments, the FDIC concluded that
this simpler approach for all large institutions with debt issuer
ratings achieves the objective of differentiating risk in these large
institutions without the need to introduce further complexity in the
form of varying weights for large institutions in different size
categories.
Additional Comments
One trade group expressed concern that dissimilar methods for
differentiating risk in large and small institutions could lead to
possible inequity among institutions due solely to size. This comment
expressed the view that agency and supervisory ratings tend to favor
larger institutions, possibly because of diversification
considerations.
The FDIC notes that the distribution of current supervisory ratings
for large and small institutions does not support this view. Agency
debt issuer ratings do take diversification into account, and the FDIC
believes that it is appropriate to reflect these considerations in
assessment rates. The final rule ensures, as required by statute, that
no institution is precluded from the lowest assessment rate solely
because of size. This statutory requirement underlies, in part, the
FDIC's decision to initially include roughly similar proportions of
large and small institutions in Risk Category I that would be charged
minimum and maximum assessment rates. As discussed later, the FDIC will
have the ability to adjust an institution's assessment rate when this
rate is inconsistent with assessment rates of other large institutions
with similar risk profiles.
This comment further noted that financial ratios also could be
applied to all large institutions. Another trade group argued that the
financial ratios should not be phased out in importance as institutions
increase in size and should be used for all large institutions. This
comment argued that measurements other than the financial ratios that
are combined with supervisory ratings might be necessary to assess the
off-balance sheet, securitization, trading, and securities processing
activities engaged in by large institutions and to serve as a quality
control check on long-term debt issuer ratings.
The FDIC believes that consideration of additional risk information
(including financial performance and condition measures), discussed
below, will be sufficient to ensure that the range of activities
engaged in by banking organizations are fully considered and that debt
issuer ratings are appropriately considered in assessment rates.
One comment suggested that business diversification should be more
explicitly taken into account in determining deposit insurance
premiums. This comment also recommended that the FDIC consider lowering
or even eliminating premium rates for institutions that adopt the
advanced approaches under the Basel II framework or whose actual
capital sufficiently exceeds their Basel II required capital, since
these institutions will have demonstrated capital levels and risk
management practices that virtually eliminate risk to the deposit
insurance fund. The FDIC believes that, in most cases, diversification,
capital adequacy, and risk management considerations are reflected in
supervisory or agency ratings or in financial ratios and the
consideration of additional factors (in Appendix C) ensures that they
are taken into account in all cases.
One comment argued that the large institution methodology proposed
in the NPR was overly subjective because cutoff values to determine the
percentage of institutions that would be charged the minimum and
maximum rates would be set quarterly by the FDIC. In fact, under the
final rule, minimum and maximum assessment rate cutoff values will be
established using data as of June 30, 2006. No change will be made to
these cutoff values without further notice and opportunity for comment.
H. Additional Provisions Relating to Large Institutions' Assessment
Rates in Risk Category I
1. Adjustments to a Large Institution's Assessment Rate
To ensure consistency, fairness, and consideration of all available
information, the FDIC will determine, in consultation with the primary
federal regulator, whether or not to adjust the assessment rates for
large institutions derived from either a combination of long-term debt
issuer ratings and supervisory ratings or financial ratios and
supervisory ratings (when no long-term debt issuer rating is
available). The FDIC will make these determinations by evaluating
additional risk information including current financial performance and
condition information and trends, current market information,
information pertaining to an institution's ability to withstand
financial adversity, and information pertaining to severity of losses
in the event of failure.
Any adjustments to assessment rates will be limited to 0.50 basis
points (higher or lower). Upward adjustments will not take effect
without notification to and consideration of responses from both the
primary federal regulator and the institution. Downward adjustments
will not take effect without notification to and consideration of
responses from the primary federal regulator. No rate will be adjusted
below the minimum rate for Risk Category I institutions in effect for
an assessment period or above the maximum rate for Risk Category I
institutions in effect for the period. Rate adjustments in Risk
Category I are not meant to (and will not) override supervisory
evaluations.\41\
---------------------------------------------------------------------------
\41\ This rule addresses only adjustments to assessment rates.
It does not address the FDIC's role as back-up supervisor involving
possible disagreements between the FDIC and the primary federal
regulator over CAMELS ratings. Notification and resolution of such
disagreements are covered by existing supervisory processes. See
also footnote 34.
---------------------------------------------------------------------------
Examples of additional risk factors that will be considered are
enumerated in Appendix C. Evaluating this additional risk information
on an ongoing basis will help the FDIC ensure that relative levels of
risk posed by large
[[Page 69293]]
Risk Category I institutions are consistently represented by resulting
assessment rates. Additional information will be evaluated in the
following way:
Current financial performance indicators such as capital
levels, profitability measures, and asset quality measures of each
large institution will be compared to those of institutions that are
ranked similarly in terms of their assessment rates.
Current market indicators such as subordinated debt
spreads and holding company market indicators of each institution will
be compared to market indicators of institutions that are ranked
similarly in terms of their assessment rates.
Recent information pertaining to an institution's ability
to withstand financial stress will be evaluated by comparing this
information to that of institutions ranked similarly in terms of their
assessment rates. This information includes the internal risk
characteristics of an institution's credit portfolios and other
business lines as well as information from internal stress-test models.
Current loss severity indicators of institutions will be
evaluated by comparing this information to that of institutions ranked
similarly in terms of their assessment rates. This information includes
funding structure considerations such as the extent of priority and
subordinated claims, as well as the availability of sufficient
information (e.g., information pertaining to the level of insured
deposits and qualified financial contracts) to resolve an institution
in an orderly and cost-efficient manner.
Evaluations of financial performance, market information,
information pertaining to an institution's ability to withstand
financial stress, and loss severity indicators will focus on: first,
identifying those institutions that exhibit significantly different
risk profiles, as indicated by risk indicators such as those enumerated
above, than institutions with similar assessment rates; and second,
where inconsistencies between assessment rates and these risk
indicators are identified, determining the assessment rate adjustment
that would be necessary to bring an institution's assessment rate into
better alignment with those of other institutions that pose similar
levels or risk.
Some comments (including comments from trade groups) indicated that
the FDIC should consider certain information pertaining to losses that
might be sustained by the insurance fund in the event of failure. For
example, some comments indicated the FDIC should explicitly incorporate
information about the relative level of subordinated claims into the
determination of assessment rates for large institutions. The FDIC
believes the final rule does consider loss given failure by explicitly
incorporating consideration of this information into decisions of
whether or not to adjust an institution's assessment rate.
In addition to ongoing consultations with the primary federal
regulator on whether or not to make assessment rate adjustments, the
FDIC will formally notify an institution's primary federal regulator
when it decides to recommend an adjustment in assessment rates and will
consider the primary federal regulator's response to this notification.
The FDIC will also notify an institution in advance when the FDIC
intends to increase its assessment rate because of the FDIC's
consideration of additional risk information. This notice will include
the reasons for the adjustment and when the adjustment will take
effect, and provide the institution an opportunity to respond. An
institution will, of course, have the right to request a review of any
assessment rate that is adjusted in this manner.
After considering an institution's response to the notice, the FDIC
will determine whether an adjustment to an institution's assessment
rate is warranted, taking into account any revisions to weighted
average CAMELS component ratings, long-term debt issuer ratings, and
financial ratios, as well as any actions taken by the institution to
respond to the FDIC's concerns described in the notice. The FDIC will
evaluate the need for the adjustment each subsequent assessment period,
until it determines that an adjustment is no longer warranted. The
amount of adjustment will in no event be larger than that contained in
the initial notice without further notice to, and consideration of
responses from, both the primary federal regulator and the institution.
Any downward adjustment in assessment rates will remain in effect
for subsequent assessment periods until the FDIC determines that an
adjustment is no longer warranted. However, the FDIC will provide
advance notice to an institution and its primary federal regulator and
give them an opportunity to respond before removing a downward
adjustment. Of course, the FDIC may raise an institution's assessment
rate without notice if the institution's supervisory or agency ratings
or financial ratios (for an institution without long-term debt issuer
ratings) deteriorate.
The FDIC acknowledges the need to clarify its processes for making
any adjustments to ensure fair treatment and accountability and plans
to propose and seek comment on additional guidelines for evaluating
whether assessment rate adjustments are warranted and the size of the
adjustments. The FDIC will not adjust assessment rates until the
guidelines are approved by the FDIC's Board.
2. Timing of Evaluations
Under the final rule, a large institution's risk category will
change as of the date the institution is notified of its rating change
by its primary federal regulator (or state authority). If the
supervisory rating change results in a large institution moving from
Risk Category I to Risk Category II, III, or IV, the institution's
assessment rate for the portion of the quarter it was in Risk Category
I will be based on its assessment rate for the prior quarter. The
assessment rate for that portion of the quarter it was in Risk Category
II, III, or IV will be based on the assessment rate for these risk
categories.
When a large institution is moved from Risk Category II, III, or IV
to Risk Category I during a quarter because of a supervisory rating
change, the FDIC will determine the associated assessment rate (subject
to adjustment as described above) for that portion of the quarter that
the institution was in Risk Category I. The assessment rate for that
portion of the quarter it was in Risk Category II, III, or IV will be
based on the assessment rate for these risk categories.
When an institution remains in Risk Category I during a quarter,
but a CAMELS component or long-term debt issuer rating change during
the quarter would affect its assessment rate, the FDIC will determine
an assessment rate for each portion of the quarter before and after the
change. A long-term debt issuer rating change will be effective as of
the date the change is announced by the rating agency. Changes in
supervisory ratings will be effective as of the date the institution is
notified by its primary federal regulator (or state authority).
The timing of changes in assessment rates due to changes in
supervisory or long-term debt issuer ratings described above differs
only slightly from the proposal in that it uses, in all cases, the date
of transmittal of a supervisory rating change by the primary federal
regulator to the institution. The reasons
[[Page 69294]]
for this change are discussed in a separate rule.\42\
---------------------------------------------------------------------------
\42\ See final rule on Operational Changes to Assessments,
published elsewhere in this issue of the Federal Register. If the
FDIC disagrees with the CAMELS composite rating assigned by an
institution's primary federal regulator, and assigns a different
composite rating, the supervisory change will be effective for
assessment purposes as of the date that the FDIC assigned the new
rating. Disagreements of this type have been rare. See also footnote
34.
---------------------------------------------------------------------------
One trade group expressed concern about the possibility of
retroactive changes in assessment rates and the prospects for
accounting restatements. This comment pointed out that CAMELS rating
changes often occur one and even two quarters after the start date of
an examination. The use of the transmittal date of examination findings
rather than start date of an examination to effect changes in
assessment rates should alleviate this concern about retroactive
accounting adjustments.
Another comment expressed a similar concern that institutions would
not be able to plan for the financial impact of assessment rate changes
if they were applied retroactively, either because of a change in
supervisory or long-term debt issuer ratings, or because of a decision
by the FDIC to adjust an institution's assessment rate. The FDIC
believes that the final rule sufficiently addresses this concern since:
(1) the transmittal of revised CAMELS ratings or the announcement of
revised long-term debt issuer ratings will provide sufficient notice to
the institution that a change in assessment rates will occur; and (2)
assessment rate changes caused by a decision by the FDIC to adjust an
institution's assessment rate will not become effective before the
institution is duly notified and has had an opportunity to respond to
the proposed change.
Additional Comments
Adjustments to an institution's assessment rates. A number of
comments (including several comments from trade groups) questioned the
need for the FDIC to incorporate additional information into its
pricing decisions for large institutions. Some of the main objections
were that:
Adjustments would override the evaluations of the primary
federal regulator;
The FDIC should not be allowed to unilaterally override
CAMELS ratings assigned by the primary federal regulator since they are
viewed to have better information than the FDIC about the risks posed
by these institutions;
The need for more timely information is not necessary
since many large institutions are supervised on a continuous basis;
Supervisory ratings incorporate all relevant risk
information and therefore consideration of additional information is
not necessary;
The application of the FDIC's discretion over pricing
decisions has not been sufficiently described; and
Many of the additional risk indicators identified in
Appendix C of the proposal are vaguely defined and not necessarily
aligned with risk.
Several comments specifically criticized the proposal's use of
additional stress consideration factors. For example, some comments
stated that these factors were not well developed and expressed concern
about the possibly conflicting role such information would play in
evaluations by the primary federal regulators and the FDIC.
One trade group supported the FDIC's consideration of additional
risk information to ensure that assessment rates were consistently
assigned, that risk information was incorporated into the assessment
rate in a timely manner, and that assessment rates reflected
consideration of all relevant risk information.
For the reasons described earlier, the FDIC has decided to retain
its ability to adjust assessment rates based upon consideration of
additional risk factors.
A number of comments supported providing institutions with prior
notification relating to any possible increase in assessment rates.
However, many of these comments were made in the context of the
proposed risk ``bucket'' or subcategory pricing approach. Given the
adoption of an incremental pricing approach for institutions in the
incremental pricing range, the FDIC believes advance notice is only
needed in two cases based on consideration of additional risk
information: (1) Where the FDIC intends to make an upward adjustment to
a large institution's assessment rate above that derived from
supervisory and long-term debt issuer ratings (or from supervisory
ratings and financial ratios); and (2) where it intends to remove a
previously made downward adjustment to an institution's assessment
rate.
V. Definitions of Large and Small Institutions and Exceptions
Under a companion final rule making operational changes to the
FDIC's assessment regulations, a Risk Category I institution will be
defined as large if it has $10 billion or more in assets and small if
it has assets of less than $10 billion. This determination will
initially be made as of December 31, 2006. Thereafter, a small Risk
Category I institution will be reclassified as a large institution when
it reports assets of $10 billion or more for four consecutive quarters.
Similarly, a large Risk Category I institution will be reclassified as
a small institution when it reports assets under $10 billion for four
consecutive quarters. Any reclassification will remain effective for
subsequent quarters, unless an institution reports assets that would
change its size category (from large to small or vice versa) for four
consecutive quarters.
The definition of large and small institutions for Risk Category I
institutions in the final rule is the same as that contained in the
proposal. One trade group commented that the $10 billion cutoff point
for categorizing institutions as either large or small was appropriate
given the tendency of larger institutions to have more available risk
information. This same comment indicated that large institutions should
be evaluated using more information than current financial ratios and
CAMELS component ratings given the types of complex activities engaged
in by the largest institutions, such as securitization, derivatives,
and trading.
As described in the NPR, the final rule makes an exception to the
$10 billion size threshold for Risk Category I institutions with
between $5 billion and $10 billion in assets that request treatment as
a large institution. The FDIC will grant such requests if it determines
that it has sufficient information to evaluate the institution's risk
profile adequately under the risk differentiation methods used for
large institutions. The absence of long-term debt issuer ratings alone
will not preclude the FDIC from granting a request. The assessment rate
for an institution without a long-term debt issuer rating would still
be derived from supervisory ratings and financial ratios, but would be
subject to adjustment. Once a request has been granted, an institution
could again request treatment under a different approach after three
years, subject to FDIC approval.\43\
---------------------------------------------------------------------------
\43\ In the event that the FDIC grants an institution's request
to be treated as a large institution and the institution
subsequently reports assets of less than $5 billion for four
consecutive quarters, the institution will be assessed as a small
institution thereafter.
---------------------------------------------------------------------------
As discussed in the NPR, small institutions that are affiliated
with large institutions will be evaluated separately under the final
rule. Specifically, assessment rates for small institutions will be
determined using supervisory ratings and financial ratios, whether or
[[Page 69295]]
not these institutions are affiliated with large institutions.
An institution that disagrees with the FDIC's determination that it
is small or large may request review of the determination pursuant to
12 CFR 327.4(c).
Comments
One comment supported the proposal to allow institutions with
between $5 billion and $10 billion in assets to request treatment as a
large institution. This comment noted that the proposal will allow
flexibility for small institutions that are transitioning to large
institutions and want to be evaluated using long-term debt issuer
ratings.
Some comments supported: (1) Assigning the same assessment rate to
all affiliated institutions, possibly by strengthening cross
guarantees; (2) assigning the assessment rate of the largest
institution in a holding company to all institutions in the holding
company; or (3) applying the same method of calculating assessment
rates to all institutions in a holding company regardless of size to
avoid different assessment rate approaches for institutions within the
same holding company. The FDIC acknowledges that often each institution
in a holding company derives managerial, operational, and financial
support from the parent holding company. However, financial condition
and operating performance can and does vary among banks within a
holding company. Consequently, the FDIC believes it is necessary to
evaluate risk at each insured institution individually. Any
modifications to current cross guarantee provisions are outside the
scope of this proposal.
VI. Risk Differentiation Among Insured Foreign Branches
The final rule for insured foreign branches (insured branches) is
substantially similar to the proposed rule. The main difference is the
use of incremental pricing for insured branches whose assigned
assessment rates fall between the minimum and maximum assessment rates.
Insured branches that are assigned to Risk Category II, III or IV,
based on their asset pledge and asset maintenance ratios and
supervisory ratings, will be treated in the same manner as other
insured institutions in these risk categories. For insured branches
that are assigned to Risk Category I, assessment rates will be
determined from the supervisory ROCA component ratings assigned to the
insured branch.\44\ Each of these component ratings will be weighted to
produce a weighted average ROCA rating. The weights applied to
individual ROCA component ratings will be the same as those contained
in the NPR: 35 percent, 25 percent, 25 percent, and 15 percent,
respectively. An assessment rate for insured branches will be
determined by multiplying the average ROCA rating by a pricing
multiplier of 2.353 and adding a uniform amount of -1.882 from this
product.\45\ The derivation of the pricing multipliers and uniform
amount for insured branches is described in Appendix 2.
---------------------------------------------------------------------------
\44\ ROCA stands for Risk Management, Operational Controls,
Compliance, and Asset Quality.
\45\ The pricing multiplier and uniform amount for insured
branches are computed in the same manner as those used for large
Risk Category I institutions with long-term debt issuer ratings. The
uniform amount is the same as described under that approach, and the
pricing multiplier for weighted average ROCA ratings is simply two
times the pricing multiplier used for either weighted average CAMELS
ratings or converted long-term debt issuer ratings (i.e., the
weighted average ROCA rating is weighted 100 percent).
---------------------------------------------------------------------------
As with the large institution risk differentiation approach, the
FDIC may adjust these assessment rates up or down by 0.50 basis points
after consideration of the additional risk factors described in
Appendix C. The same process for making adjustments described to large
institution rates, including advance notification and consultation with
the primary federal regulator, will apply to insured foreign branches.
The FDIC received no comments on the proposed treatment of insured
foreign branches.
VII. New Institutions in Risk Category I
Under the final rule, beginning in 2010, new institutions in Risk
Category I generally will be assessed at the same rate, which will be
the highest rate charged any other institution in this Risk Category.
For this purpose, the final rule on operational changes defines a new
institution as one that is not an established institution.\46\ With
three exceptions, beginning in 2010, an established institution, as
defined in the final rule on operational changes, will be one that has
been chartered as a bank or thrift for at least five years as of the
last day of any quarter for which it is being assessed. Before 2010,
all Risk Category I institutions will be assessed using either the
supervisory ratings and financial ratios method or the supervisory and
debt ratings method.
---------------------------------------------------------------------------
\46\ Empirical studies show that new institutions exhibit a
``life cycle'' pattern and it takes close to a decade after its
establishment for a new institution to mature. Despite low
profitability and rapid growth, institutions that are three years or
newer have, on average, a very low probability of failure--lower
than established institutions, perhaps owing to large capital
cushions and close supervisory attention. However, after three
years, new institutions' failure probability, on average, surpasses
that of established institutions. New institutions typically grow
more rapidly than established institutions and tend to engage in
more high-risk lending activities funded by large deposits. Studies
based on data from the 1980s showed that asset quality deteriorated
rapidly for many new institutions as a result, and failure
probability (conditional upon survival in prior years) reached a
peak by the ninth year. Many financial ratios of new institutions
generally begin to resemble those of established institutions by
about the seventh or eighth year of their operation. See Chiwon Yom,
``Recently Chartered Banks'' Vulnerability to Real Estate Crisis,''
FDIC Banking Review 17 (2005): 1-15 and Robert DeYoung, ``For How
Long Are Newly Chartered Banks Financially Fragile?'' Federal
Reserve Bank of Chicago Working Paper Series 2000-09.
---------------------------------------------------------------------------
Where an established institution merges or consolidates with a new
institution, the surviving or resulting institution will be new unless:
1. The assets of the established institution, as reported in its
report of condition for the quarter ending immediately before the
merger, exceeded the assets of the new institution, as reported in its
report of condition for the quarter ending immediately before the
merger; and
2. Substantially all of the management of the established
institution continued as management of the resulting or surviving
institution.\47\ \48\
---------------------------------------------------------------------------
\47\ A surviving or resulting Risk Category I institution that
qualifies as an established institution under this exception will
have its assessment rate determined using the CAMELS component
ratings of the established institution involved in the merger or
consolidation until the surviving or resulting institution receives
a new supervisory rating.
\48\ The resulting institution in a consolidation (as well as
the surviving institution in a merger) involving only established
institutions will, of course, be deemed to be an established
institution.
---------------------------------------------------------------------------
However, where a new institution merges into an established
institution and the merger agreement was entered into on or before July
11, 2006, the final rule contains a grandfather clause under which the
surviving institution will be deemed to be an established institution.
This exception to the definition of a new institution represents a
change from the proposed rule. The NPR proposed that, when an
established institution merged into or consolidated with a new
institution, the surviving or resulting institution would be new, but
would be allowed to request that the FDIC determine that it was
established. The NPR also proposed that, when a new institution merged
into an established institution or when an established institution
acquired a
[[Page 69296]]
substantial portion of a new institution's assets or liabilities, and
the merger or acquisition agreement was entered into after July 11,
2006 (the date that the FDIC's Board approved the NPR), the FDIC would
conduct a review to determine whether the surviving or acquiring
institution remained an established institution. The NPR proposed that
the FDIC would make determinations based upon factors that included
factors similar to the two listed above.
The final rule differs from the NPR in this regard. By specifying
the particular circumstances that will allow an institution to be
considered established, the final rule will give institutions greater
certainty regarding the effects of mergers and consolidations and
should reduce the necessity of filing requests for review. The final
rule should not result in denying an exception to any institution that
would have been considered established under the proposed rule, while
still achieving the purpose of the proposed rule.
The second exception was raised in comment letters in response to
the FDIC's specific request for comment on its proposed definition of a
new institution.\49\ This exception will apply to a new institution
that is a subsidiary of a holding company with an established
institution or that is a subsidiary of an established institution,
provided certain criteria are met. Under these circumstances, the
institution will be considered established for assessment purposes.\50\
Specifically, an institution that would otherwise be new will be
considered established if it is a wholly owned subsidiary of:
---------------------------------------------------------------------------
\49\ 71 FR 41910.
\50\ A Risk Category I institution that has no CAMELS component
ratings shall be assessed at one basis point above the minimum rate
applicable to Risk Category I institutions until it receives CAMELS
component ratings. If an institution has less than $10 billion in
assets or has at least $10 billion in assets and no long-term debt
issuer rating, once it receives CAMELS component ratings, its
assessment rate will be determined under the supervisory ratings and
financial ratios method. The assessment rate will be determined by
annualizing, where appropriate, financial ratios obtained from the
reports of condition that have been filed, until the earlier of the
following two events occurs: (1) the institution files four reports
of condition; or (2) if it has at least $10 billion in assets, it
receives a long-term debt issuer rating.
---------------------------------------------------------------------------
1. A company that is a ``bank holding company'' under the Bank
Holding Company Act of 1956 or a ``savings and loan holding company''
under the Home Owners'' Loan Act, and:
a. At least one ``eligible'' depository institution (as defined in
12 CFR 303.2(r)) that is owned by the holding company has been
chartered as a bank or thrift for at least five years as of the date
that the otherwise new institution was established; and
b. The holding company has a composite rating of at least ``2'' for
bank holding companies or an above average or ``A'' rating for thrift
holding companies and at least 75 percent of its depository institution
assets are assets of ``eligible'' depository institutions, as defined
in 12 CFR 303.2(r);\51\ \52\ or
---------------------------------------------------------------------------
\51\ 12 CFR. 303.2(r) defines an eligible depository institution
as one that:
(1) Received an FDIC-assigned composite rating of 1 or 2 under
the Uniform Financial Institutions Rating System (UFIRS) as a result
of its most recent federal or state examination;
(2) Received a satisfactory or better Community Reinvestment Act
(CRA) rating from its primary federal regulator at its most recent
examination, if the depository institution is subject to examination
under part 345 of this chapter;
(3) Received a compliance rating of 1 or 2 from its primary
federal regulator at its most recent examination;
(4) Is well-capitalized as defined in the appropriate capital
regulation and guidance of the institution's primary federal
regulator; and
(5) Is not subject to a cease and desist order, consent order,
prompt corrective action directive, written agreement, memorandum of
understanding, or other administrative agreement with its primary
federal regulator or chartering authority.
\52\ For bank holding companies, RFI ratings replaced BOPEC
ratings as of December 2004. For a bank holding company that does
not yet have an RFI composite rating, BOPEC ratings will be used.
---------------------------------------------------------------------------
2. An ``eligible'' insured depository institution, as defined in 12
CFR 303.2(r), that has been chartered as a bank or thrift for at least
five years as of the date that the otherwise new institution was
established.
Several comments (including comments from trade groups) argued
that, at a minimum, new institutions in a bank holding company should
be charged at the same rate as other institutions in the holding
company. Arguments for this position included:
Assessing new institutions at a higher rate will affect a
holding company's decision to charter a new institution or to branch;
in the context of mergers and acquisitions, the deal structure could be
influenced to retain the seasoned banks post-consolidation solely for
the purpose of avoiding high assessments, even though a different
structure would otherwise be more appropriate.
The articles referenced by the FDIC in support of
assessing all ``new'' institutions at a higher rate did not take into
account holding company support or enhancements in supervision.
Holding companies often have considerable banking
experience, so that the institution is not really new. Institutions in
a holding company typically share management.
The FDIC is persuaded that a new institution within an established
holding company structure does not necessarily pose a higher risk than
established institutions, in part because of the banking experience
within the holding company, and has created an exception from the new
bank definition for these institutions. However, the assessment rate
for a new institution subsidiary of an insured depository institution
or holding company that qualifies for the exception will not
necessarily be the same rate charged an affiliate. As with any
established institution in Risk Category I, its assessment rate will be
determined based upon the risk it poses.
The third exception was also raised in comment letters in response
to the FDIC's specific request for comment on its proposed definition
of a new bank.\53\ For a credit union that converts to a bank or thrift
charter, some comments (including comments from trade groups) urged the
FDIC to take into account the period that a credit union has had
federal deposit insurance in determining whether it is new or
established. As one trade group pointed out:
---------------------------------------------------------------------------
\53\ 71 FR 41910.
These institutions have a seasoned loan portfolio, experienced
leaders, and an established business history. They have been
---------------------------------------------------------------------------
carefully screened by their new banking regulator.
The final rule takes into account the period that a credit union
has been federally insured as a credit union in determining whether it
is new or established.\54\
---------------------------------------------------------------------------
\54\ Again, a Risk Category I institution that has no CAMELS
component ratings shall be assessed at one basis point above the
minimum rate applicable to Risk Category I institutions until it
receives CAMELS component ratings. If an institution has less than
$10 billion in assets or has at least $10 billion in assets and no
long-term debt issuer rating, once it receives CAMELS component
ratings, its assessment rate will be determined under the
supervisory ratings and financial ratios method. The assessment rate
will be determined by annualizing, where appropriate, financial
ratios obtained from the reports of condition that have been filed,
until the earlier of the following two events occurs: (1) The
institution files four reports of condition; or (2) if it has at
least $10 billion in assets, it receives a long-term debt issuer
rating.
---------------------------------------------------------------------------
The final rule also differs from the NPR in its definition of a new
institution. Under the NPR, a new institution would have been defined
as an institution that had not been chartered as a bank or thrift for
at least seven years as of the last day of any quarter for which it was
being assessed (subject to the exceptions above).
Several comments (including comments from trade groups) suggested
that charging the maximum Risk Category I assessment rate to new
institutions for 7 years was too long and
[[Page 69297]]
favored a shorter period, such as 3 or 5 years (assuming new
institutions were assessed separately). One trade group argued that,
after three years, an institution's loan portfolio and its operations
should be seasoned enough so that the FDIC can assess the risks of the
institution based on financial ratios and CAMELS ratings as it does for
other institutions. Other arguments for shortening the period that an
institution is considered new included:
Higher failure rates for new institutions occurred in
earlier periods, but not in recent periods, partly because supervision
has been enhanced.
The banking industry uses three years as an estimate of
banking maturity; banking supervisors use the same period when
reviewing new bank applications.
The FDIC's decision to assess new institutions separately from
established institutions is based on the difficulty of assessing new
institutions' risk with the same risk measures used to assess the risk
of established institutions. New institutions undergo rapid changes in
the scale and scope of operations for a period of time after being
chartered and these changes can make new institutions' financial
condition and performance measures volatile. Moreover, new
institutions' loan portfolios are unseasoned, and their management is
often untested, making it difficult to assess loan quality through
standard financial performance measures.
These differences between new and established institutions'
financial characteristics could lead to mis-measurement of risk when
new institutions are evaluated by the same financial risk measurement
model used to evaluate established institutions' risk. More
specifically, the FDIC finds that new institution risk is, in general,
underestimated by the manner in which supervisory ratings are combined
with financial ratios; however, the degree of underestimation of risk
declines with bank age.
Under the final rule, all new institutions in Risk Category I will
be assessed at the same rate and this rate will be the highest rate
charged any other institution in Risk Category I. The FDIC finds that
the failure rates of institutions that have been in existence for less
than 5 years are greater than those of established institutions that
would have historically paid the highest assessment rate in Risk
Category I (the riskiest Risk Category I established institutions).
Historical failure rates among institutions that have been in existence
between 5 and 7 years, however, are somewhat lower than those of the
riskiest Risk Category I established institutions. For this reason, for
purposes of setting assessment rates, the final rule defines new
institutions as those institutions that have been in existence less
than 5 years.
Some comments expressed concern that a combination of factors could
result in inequitable treatment for new institutions. These factors
included the need to initially charge more than the base rates, the
lack of credits for most new institutions, and charging the maximum
rate to these institutions. The FDIC recognizes that during the
transition from the existing system to the new system, this combination
of factors could significantly increase assessment rates for new
institutions. Consequently, the final rule delays the effective date of
the provisions subjecting new Risk Category I institutions to the
maximum Risk Category I rate until January 1, 2010.
Before 2010, a Risk Category I institution that has no CAMELS
component ratings shall be assessed at one basis point above the
minimum rate applicable to Risk Category I institutions until it
receives CAMELS component ratings. If an institution has less than $10
billion in assets or has at least $10 billion in assets and no long-
term debt issuer rating, once it receives CAMELS component ratings, its
assessment rate will be determined under the supervisory ratings and
financial ratios method. The assessment rate will be determined by
annualizing, where appropriate, financial ratios obtained from the
reports of condition that have been filed, until the earlier of the
following two events occurs: (1) The institution files four reports of
condition; or (2) if it has at least $10 billion in assets, it receives
a long-term debt issuer rating.
Additional Comments
No rule for new institutions. Several comments (including comments
from trade groups) argued that the FDIC should assess new institutions
as other institutions are assessed. Arguments for assessing new
institutions as other institutions are assessed included:
New institutions are scrutinized by examiners more
intently and more frequently.
There is an inherent bias against new institutions in
CAMELS ratings.
Capital is usually higher in new institutions.
Many new institutions are started by experienced bankers
or are spin-offs of established institutions.
A separate rule for new institutions will undermine public
confidence in these institutions.
A single rate for new institutions does not adequately
differentiate risk.
A new institution has no incentive to reduce its risk
because it will not reduce its assessment rate.
The final rule changes the new institution period from seven to
five years, but assesses new institutions separately for the reasons
described. However, the final rule does delay the effective date of the
provisions governing new institutions for three years.
An institution that disagrees with the FDIC's determination that it
is new or established may request review of the determination pursuant
to 12 CFR 327.4(c).
Mergers. One trade group opposed treating established institutions
that merge into or consolidate with new institutions as new on the
grounds that such treatment is unreasonable and prejudicial to
shareholders. Other comments also took issue, at least implicitly, with
the proposed rule regarding mergers and consolidations. A comment from
a trade group, however, stated that the FDIC should judge an individual
institution based on the specific risk profile that it presents to the
deposit insurance fund:
Generally, a new institution that merges with, acquires or is
acquired by an existing depository institution will immediately
exhibit certain risk characteristics, such as market penetration,
strength of management, amount of capital and experience of the
officers and employees of the resulting institution, that will allow
the primary federal supervisor of the resulting institution to make
a determination whether it most appropriately should be
characterized in accordance with the risk profile of the new
institution or the established one.
The FDIC has simplified the final rule in response to comments. The
final rule allows the FDIC to review the surviving or resulting
institution in a merger or consolidation involving both a new and an
established institution to determine whether the surviving or resulting
institution is new or established based on the criteria previously
discussed without, in general, requiring that the institution file a
request for review.
VIII. Assessment Rates
A. Rate Schedules
Beginning on January 1, 2007, assessment rates will be as shown in
the following table:
[[Page 69298]]
------------------------------------------------------------------------
Risk Category
-------------------------------------------
I *
---------------------- II III IV
Minimum Maximum
------------------------------------------------------------------------
Annual Rates (in basis 5 7 10 28 43
points)....................
------------------------------------------------------------------------
* Rates for institutions that do not pay the minimum or maximum rate
will vary between these rates.
All institutions in any one risk category, other than Risk Category
I, will be charged the same assessment rate. For all institutions in
Risk Category I, annual assessment rates will range between 5 and 7
basis points.
The final rule also adopts the base schedule of rates proposed in
the NPR: \55\
---------------------------------------------------------------------------
\55\ With respect to the base schedule of rates, the NPR
contains the FDIC's analysis of the statutory factors that must be
considered whenever the FDIC's Board of Directors sets rates. These
factors include: (1) estimated fund operating expenses; (2)
estimated fund case resolution expenses and income; (3) the
projected effects of assessments on institution capital and
earnings; (4) the risk factors and other factors taken into account
pursuant to 12 U.S.C Sec. 1817(b)(1) under the risk-based
assessment system, including the requirement under 12 U.S.C Sec.
1817(b)(1)(A) to maintain a risk-based system; and (5) any other
factors the Board of Directors may determine to be appropriate. 12
U.S.C. 1817(b)(1)(C).
------------------------------------------------------------------------
Risk Category
-------------------------------------------
I *
---------------------- II III IV
Minimum Maximum
------------------------------------------------------------------------
Annual Rates (in basis 2 4 7 25 40
points)....................
------------------------------------------------------------------------
* Rates for institutions that do not pay the minimum or maximum rate
will vary between these rates.
The assessment rates that take effect January 1, 2007, will be
uniformly 3 basis points higher than the base rate schedule. Under the
present assessment system, the Board has adopted a base assessment
schedule where it can uniformly adjust rates up to a maximum of five
basis points higher or lower than the base rate schedule without the
necessity of further notice-and-comment rulemaking, provided that any
single adjustment cannot move rates more than five basis points.\56\ In
the NPR, the Board indicated its intention to retain the ability to
adjust rates up to five basis points without seeking further public
comment. Upon considering the comments received on this issue
(discussed below), the Board has decided to retain this feature, but
limit its ability to adjust rates without seeking further public
comment to three basis points. Hence, the final rule allows the Board
to adjust rates uniformly up to a maximum of three basis points higher
or lower than the base rates without the necessity of further notice-
and-comment rulemaking, provided that any single adjustment from one
quarter to the next cannot move rates more than three basis points.\57\
In the event that the Board uniformly adjusts rates, rates calculated
for institutions in Risk Category I in reference to the base assessment
rates will be uniformly adjusted by the same amount. Once set by the
Board, assessment rates will remain in effect until changed.
---------------------------------------------------------------------------
\56\ In addition, no assessment rate may be negative. See 12 CFR
327.9.
\57\ And provided, again, that no assessment rate may be
negative.
---------------------------------------------------------------------------
Table 3 shows projected reserve ratios assuming different average
annual growth rates for insured deposits if the actual rate schedule
(as opposed to base rate schedule) adopted in this rule remains in
effect through the year in which the reserve ratio first reaches or
exceeds the designated reserve ratio (DRR) of 1.25 percent.\58\
---------------------------------------------------------------------------
\58\ The FDIC is contemporaneously adopting a DRR of 1.25
percent. See final rule on the Designated Reserve Ratio, to be
published elsewhere in this issue of the Federal Register.
---------------------------------------------------------------------------
[[Page 69299]]
[GRAPHIC] [TIFF OMITTED] TR30NO06.007
In summary, the Board bases its decision to adopt this rate
schedule on the following:
The Reform Act gives the Board flexibility to achieve the
DRR within a time frame that it believes appropriate, rather than treat
the DRR as a ``hard'' annual target. In the Board's view, reaching the
DRR within the third year of the new assessment system would be a
reasonable goal, which this rate schedule would facilitate, given the
FDIC's assumptions regarding insured deposit growth.
An objective of the Reform Act is to allow the fund to
increase under favorable conditions so that it can decline under
adverse conditions without sharp increases in assessments. The outlook
for economic conditions affecting banks remains generally favorable,
industry conditions remain strong, and projected reserve ratios under
the rate schedule assume very low insurance losses.
During the next few years, the rate schedule is likely to
prevent the reserve ratio from declining below the 1.15 percent
statutory lower bound for the DRR and unlikely to raise the reserve
ratio above the 1.35 percent threshold that could trigger the payment
of dividends.
It is reasonable to plan for future annual insured deposit
growth in the 4-to-6 percent range, down from higher rates observed
last year and estimated for this year. Reaching the DRR within three
years under this rate schedule assumes that insured deposit growth will
be in this range.
Assessment credits authorized under the Reform Act will
limit assessment revenue in the near term.
Implementation of the rate schedule is unlikely to have a
materially adverse effect on the earnings and capital of insured
institutions.
B. Factors Supporting the Rate Schedule
As required by statute, the FDIC's Board of Directors considered
the following factors in setting rates:
(i) The estimated operating expenses of the Deposit Insurance Fund.
(ii) The estimated case resolution expenses and income of the
Deposit Insurance Fund.
(iii) The projected effects of the payment of assessments on the
capital and earnings of insured depository institutions.
(iv) The risk factors and other factors taken into account pursuant
to 12 U.S.C section 1817(b)(1) under the risk-based assessment system,
including the requirement under 12 U.S.C section 1817(b)(1)(A) to
maintain a risk-based system.
(v) Other factors that the Board of Directors determined to be
appropriate.\59\
---------------------------------------------------------------------------
\59\ Section 2104 of the Reform Act (to be codified at 12 U.S.C.
1817(b)(2)(B)). The risk factors referred to in factor (iv) include:
(i) the probability that the Deposit Insurance Fund will incur a
loss with respect to the institution, taking into consideration the
risks attributable to--
(I) different categories and concentrations of assets;
(II) different categories and concentrations of liabilities,
both insured and uninsured, contingent and noncontingent; and
(III) any other factors the Corporation determines are relevant
to assessing such probability;
(ii) the likely amount of any such loss; and
(iii) the revenue needs of the Deposit Insurance Fund. 12 U.S.C.
1817(b)(1)(C).
---------------------------------------------------------------------------
These factors, including those determined by the Board to be
appropriate, are discussed in more detail below.
1. Projected Changes to the Fund Balance From Case Resolution Expenses,
Operating Expenses, Investment Contributions, and Risk-Based
Assessments
Table 4 shows projected changes to the fund balance over the next
two years under the rate schedule adopted in this rule. Future changes
to the fund balance depend, in turn, on projections and assumptions for
insurance losses (case resolution expenses), operating expenses,
assessment revenue, and investment contributions. These components of
fund balance changes are discussed below.
[[Page 69300]]
[GRAPHIC] [TIFF OMITTED] TR30NO06.008
a. Insurance losses and operating expenses. The rate schedule
adopted assumes a continuing trend of very few bank failures and very
low insurance losses. Reserve ratio projections based on the rate
schedule assume that annual insurance loss provisions beginning in 2007
equal one thousandth of one percent of industry aggregate domestic
deposits. This is less than one quarter of the average annual rate over
the last 10 years--also a time of few failures and modest insurance
losses. Loss provisions in 2007 are projected at $71 million, and rise
slightly in proportion to domestic deposit growth.\60\
---------------------------------------------------------------------------
\60\ The projection for 2007 is very close to the result
obtained from the statistical method that has been used to develop
estimates of losses to support past semiannual assessment rate
schedules. This method estimates likely ranges of insurance losses
based on projected changes in the estimated liability for
anticipated failures (contingent loss reserve) through December 31,
2007.
---------------------------------------------------------------------------
Banks in general appear to be well positioned to withstand
considerable financial stress from unlikely economic shocks.\61\
Nonetheless, the possibility remains that insurance losses may be
higher than anticipated. Higher losses, in turn, would reduce the
likelihood of raising the reserve ratio to the DRR within three years
under the rate schedule adopted in this rule. Future assessment rate
setting under such conditions would have to weigh several factors,
including the desirability of avoiding sharp increases in assessments
at a time of industry stress and the need to maintain the fund within
the range authorized by the Reform Act.
---------------------------------------------------------------------------
\61\ Two-year stress event simulations were run based on data
through June 30, 2006, affecting institutions specializing in
residential mortgages, subprime loans, commercial real estate
mortgages, commercial and industrial loans, and consumer loans. The
results of each simulation, which were derived from historical
stress events, demonstrate that banks are well positioned to
withstand a significant degree of financial adversity. In no case
did the stress simulation results raise significant concerns for the
insurance fund. However, the effects were not evaluated beyond a
two-year horizon. Also, the historical experiences underlying the
stress scenarios may be less applicable in the future, so
conclusions drawn from the stress analyses should be treated with
some degree of caution.
---------------------------------------------------------------------------
In Table 3, the reserve ratio projections based on the rate
schedule adopted also assume that annual operating expenses remain flat
over the next few years, at approximately $1 billion.\62\
---------------------------------------------------------------------------
\62\ Alternatively, if operating expenses increased by 5 percent
per year after 2007, the reserve ratio would still be projected to
reach the 1.25 percent DRR during, or by year-end, 2009, assuming
that insured deposit growth averages between 4 and 6 percent
annually.
---------------------------------------------------------------------------
b. Investment contributions. As shown in Table 4 above, projections
of fund balances assume that annual investment contributions beginning
in 2007 amount to slightly over 4.5 percent of the fund balance.
Investment contributions equal interest income plus (minus) unrealized
gains (losses) on available-for-sale securities. The investment yield
used in the projections assumes a continuation of recent investment
return experience.
The use of expert forecasts for interest rates next year, as
detailed in the Blue Chip Financial Forecasts, would yield similar
projections for 2007 investment contributions. Since May of this year,
short-term Treasury yields have increased slightly as the Federal
Reserve raised the target for the federal funds rate to 5.25 percent.
Long-term Treasury yields declined by over 35 basis points over the
same period, resulting in a modestly inverted yield curve since late
July. Low longer-term interest rates reflect historically low and
stable long-term inflationary expectations, heightened global demand
for low-risk, long-term assets and, potentially, expectations of slower
economic growth ahead. The economy is forecast to grow below its long-
run average level for the remainder of 2006, and the futures market
places little chance of any further federal funds rate increases. Many
economic forecasters expect long-term interest rates and the yield
curve to remain steady through 2007.
c. Risk-based assessment revenue and assessment credits. Table 5
below shows projected gross assessment revenue, assessment credit use,
and net assessment revenue for 2007-2008 under the rate schedule
adopted in this rule.
[[Page 69301]]
[GRAPHIC] [TIFF OMITTED] TR30NO06.009
Projected gross assessment revenue is derived by assigning each
insured institution to a Risk Category, and assigning each institution
in Risk Category I to the minimum rate, maximum rate, or rate in
between, using the most recently available supervisory and debt issuer
ratings, and June 30, 2006, financial data. Table 6 shows the
distribution of institutions and assessment bases among the Risk
Categories using the most recently available data.\63\ For purposes of
assessment revenue projections, the distribution of assessable deposits
among Risk Categories (and within Risk Category I) is assumed to remain
constant.
---------------------------------------------------------------------------
\63\ The table actually reflects domestic deposits rather than
assessment bases. However, pursuant to a final rule adopted
simultaneously with this final rule, beginning in 2007 the
assessment base will equal domestic deposits with minor adjustments.
The final rule eliminates the standard amounts deducted from
domestic deposits for float. See Final Rule on Operational Changes
to Assessments, to be published elsewhere in this issue of the
Federal Register.
[GRAPHIC] [TIFF OMITTED] TR30NO06.010
Assessment revenue projections reflect the use of assessment
credits authorized under the Reform Act and distributed in accordance
with the recent final rule adopted for assessment credits.\64\ In 2007,
most institutions that have credits will apply them to offset either
their entire assessment or an amount equal to their total credit,
whichever is less. Therefore, as indicated in Table 5 above, the
effective rate applicable to the industry next year under this rate
schedule is projected to be only 0.9 basis points. The effective rate
is projected to rise to 3.4 basis points in 2008 as some institutions
exhaust their credits.\65\
---------------------------------------------------------------------------
\64\ 71 FR 61374 (October 18, 2006).
\65\ In 2008, 2009 and 2010, credit use will be capped at 90
percent of an institution's assessment, as required by the Reform
Act and implementing regulations.
---------------------------------------------------------------------------
2. Projected Insured Deposits
Chart 2 shows levels of insured deposits and corresponding four-
quarter growth rates since 1990, including forecasts through 2007. Over
the 1990-2005 period, annual growth rates in insured deposits ranged
between -2.8 percent and 7.4 percent. After three consecutive annual
declines in insured
[[Page 69302]]
deposits--from year-end 1991 to year-end 1994--annual growth in insured
deposits picked up in the mid-1990s and reached 6.5 percent in 2000.
Improved stock market conditions and historically low short-term
interest rates helped reduce growth to 2.0 percent in 2003. However,
insured deposit growth then climbed to 4.9 percent in 2004 and 7.4
percent in 2005. The high growth in insured deposits may have resulted
partly from an increase in short-term interest rates, triggered by a
tightening in monetary policy by the Federal Reserve. An increase in
short-term interest rates relative to long-term rates makes short-term
investment instruments, such as bank deposits, more attractive to
investors.
[GRAPHIC] [TIFF OMITTED] TR30NO06.011
[[Page 69303]]
Based on the results of a statistical forecast model, insured
deposits are predicted to increase by 6.6 percent in 2006 and 5.0
percent in 2007.\66\ The projected growth rate in 2007 is approximately
the same as the average annual growth rate for the five years ending in
2005.\67\
---------------------------------------------------------------------------
\66\ Specifically, the statistical forecast model explains
growth in insured deposits as dependent on current and last quarter
growth in domestic deposits (both insured and uninsured) as well as
on last quarter's growth in insured deposits. The 95 percent
confidence interval for the 2006 growth rate is +/-2.6 percent. The
range of uncertainty grows beyond 2006 as the forecast horizon
lengthens. An alternative forecasting model, which also uses lagged
growth in the federal funds rate to explain domestic deposits,
resulted in a slightly lower 2007 insured deposit growth rate (4.7
percent).
\67\ The forecast does not explicitly account for the effect of
the Reform Act provision raising the insurance coverage limit on
retirement accounts from $100,000 to $250,000. The increase in
coverage became effective on April 1, 2006. There is considerable
uncertainty about the provision's effect on aggregate estimated
insured deposits and the reserve ratio. Regulatory reporting changes
that will help capture the magnitude of any increase in estimated
insured deposits took effect in the second quarter of 2006 for Call
Report filers and are scheduled to take effect in the fourth quarter
of 2006 for TFR filers. Based on the very limited information
currently available, staff anticipates that the retirement account
coverage limit increase may reduce the reserve ratio by between one-
half and one basis point.
---------------------------------------------------------------------------
Beyond 2007, while not relying on a statistical forecast model, the
FDIC believes that it is reasonable to plan for average annual insured
deposit growth in the 4 percent-to-6 percent range. Table 3 shows that,
with an average annual growth rate between 4 percent and 6 percent
beginning next year, implementation of a rate schedule 3 basis points
above the base rate schedule has a reasonable chance of raising the
reserve ratio to the 1.25 percent DRR in the third year (2009) of the
new assessment system. That table also indicates that average annual
growth of 7 percent or higher would make it unlikely to achieve a
reserve ratio of 1.25 percent within three years. Yet, while insured
deposits rose by more than 7 percent in 2005, the historical data
suggest that it is very unlikely that insured deposits will increase at
an average annual rate as high as 7 percent for three consecutive
years.\68\
---------------------------------------------------------------------------
\68\ Rolling 12-quarter growth rates in insured deposits were
calculated beginning with the March 1995 to March 1998 period and
ending with the June 2003 to June 2006 period. The mean 12-quarter
growth rate over this period was 3.8 percent (annualized), and the
largest reported 12-quarter growth rate was 5.7 percent.
---------------------------------------------------------------------------
3. Projected Reserve Ratios
Assuming insured deposit growth of 5 percent per year beginning in
2007, projections for year-end 2006 and the first three years under the
new rate schedule are as follows: \69\
---------------------------------------------------------------------------
\69\ These projections also assume that domestic deposits (the
assessment base) increase by 5.6 percent in 2007, 5.3 percent in
2008, and 5.2 percent in 2009.
[GRAPHIC] [TIFF OMITTED] TR30NO06.012
The table indicates that the reserve ratio is expected to decline
slightly next year as the use of assessment credits prevents the fund
balance from rising in pace with insured deposits. However, with two-
thirds of credits drawn down by the end of 2007, assessment revenue
should accelerate in 2008 and help the fund meet the DRR during 2009.
4. Effect of the Rate Schedule on Capital and Earnings of Insured
Institutions
Appendix 3 contains an analysis of the projected effects of the
payment of assessments under the actual (as opposed to base) rate
schedule adopted in this rule on the capital and earnings of insured
depository institutions. In sum, the actual rate schedule is not
expected to impair the capital or earnings of insured institutions
materially.
5. Other Factors Supporting the Rate Schedule
As permitted by law, the FDIC Board considered other factors in
establishing the rate schedule adopted in this rule:
a. Flexibility to manage the reserve ratio within a range. While
the Reform Act requires the FDIC Board to set a DRR annually, there is
no longer a requirement for the reserve ratio to meet the DRR within a
particular time frame. The DRR is no longer a statutory ``hard''
target. The Board may choose a time period that it believes appropriate
to bring the reserve ratio in line with the DRR and, subject to the
range established in the Reform Act, decide how much variation from the
DRR would be acceptable.\70\
---------------------------------------------------------------------------
\70\ The Reform Act requires the FDIC to establish the DRR
within a range of 1.15 percent to 1.50 percent of estimated insured
deposits. The Board must establish a restoration plan when the
reserve ratio falls below 1.15 percent. The FDIC must also pay
dividends when the reserve ratio exceeds 1.35 percent, unless the
Board elects to suspend them.
---------------------------------------------------------------------------
As of June 30, 2006, the reserve ratio stood at 1.23 percent, and
is expected to decline to 1.21 percent by year-end. Returning the fund
to the DRR within a 12-month period, as had been required when the DRR
was treated as a ``hard'' target, would require charging a minimum rate
of 10.5 basis points (assuming insured deposit growth of 5 percent next
year, as well as low losses and flat operating expenses). The FDIC does
not believe that this steep an increase is advisable or consistent with
the Reform Act's objective of providing for greater premium stability.
Therefore,
[[Page 69304]]
the FDIC is using the flexibility provided in the Reform Act to raise
the reserve ratio more gradually and permit a less steep increase in
assessment rates.
b. Increasing the fund when conditions are favorable. An objective
of the Reform Act is to allow the fund to increase under favorable
conditions so that it can decline under adverse conditions without
sharp increases in assessments. The outlook for economic conditions
affecting banks remains favorable. There have been no failures in over
two years. Banking industry profits have continued to set records and
capital remains strong. Loan performance has been solid and charge-offs
are at, or near, 15-year lows. There is little evidence of material
adverse conditions currently impairing industry performance.
Nonetheless, it is difficult to predict how long such favorable
conditions will last. Areas of concern already visible include the
compression in net interest margins, weakening housing markets, and the
uncertainty over energy prices, among other risks. In the FDIC's view,
it would be prudent not to stretch out too long the time to raise the
fund to the 1.25 percent DRR and risk encountering a worsening of
industry conditions before the fund is at the desired level.
c. Ensuring that the fund stays within the range established by
Congress. As Table 3 shows, the rate schedule adopted in this rule is
unlikely to cause the reserve ratio to decline below the 1.15 percent
lower bound for the range, even in the unlikely event that insured
deposit growth averages as much as 8 percent over the next few years.
Furthermore, the FDIC Board can act to adjust rates when the reserve
ratio achieves the DRR to prevent the fund from growing too large and
triggering the requirement to pay dividends.
On the other hand, if the FDIC Board sets rates equal to the base
rate schedule, Table 8 below shows that it would be highly unlikely for
the fund to reach the 1.25 percent DRR within five years. Furthermore,
there would be a significantly greater chance that insured deposit
growth would push the fund below the 1.15 percent lower bound.
[GRAPHIC] [TIFF OMITTED] TR30NO06.013
Comments
Overall base rates: Some comments (including a comment from a trade
group) noted that the base rates for Risk Categories II, III and IV
were not sufficiently high multiples of the average Risk Category I
base rate, given the historical costs to the FDIC from failures of
institutions in these categories. Thus, ``under the Proposal, a
substantial subsidization will remain of the riskier institutions by
the safer ones.''
The NPR itself notes that, at least with respect to Risk Category
IV, the base rate is substantially lower than the historical analysis
would suggest is needed to recover costs from failures. The lower rate
is intended to decrease the chance of assessments being so large that
they cause these institutions to fail.
When losses due to fraud are taken into account by prorating among
all risk categories, the base rates for Categories II and III and for
the riskier institutions in Risk Category I are slightly lower than the
historical analysis would suggest and the base rates for the less risky
institutions in Risk Category I are slightly higher than the historical
analysis would suggest.\71\ However, the historical analysis can only
be a guide to rates. The base rates also take into account the FDIC's
estimate of its long-term revenue needs, including the requirement to
manage the reserve ratio within a range. In addition, the base rates
for institutions in Risk Category I are equal to or lower than the base
rate being replaced (four basis points) and the base rates for Risk
Categories II, III and IV are, with a single exception, higher than the
base rates being replaced.\72\ Thus, the new base rates substantially
reduce the subsidization of non-Risk Category I institutions by Risk
Category I institutions and also substantially reduce the subsidization
of higher risk institutions in Risk Category I by lower risk
institutions in that category. For these reasons, the FDIC is adopting
the proposed base rate schedule unchanged.
---------------------------------------------------------------------------
\71\ See Table 1.6 in Appendix 1 to the NPR. 71 FR 41910.
\72\ The base rate for institutions in the 2B risk
classification was 14 basis points, compared with a base rate for
institutions in Risk Category II of 7 basis points.
---------------------------------------------------------------------------
Minimum rate. Several comments argued in favor of a lower minimum
base rate for institutions in Risk Category I. Suggestions for the
minimum base rate included 0, 1 basis point or less, 1 basis point, and
1.25 basis points. Arguments in favor of a lower minimum base rate
included:
The FDIC is not likely to set actual rates below the base
rates.
Institutions in Risk Category I do not present much, if
any, risk.
The FDIC's data does not support charging the least risky
institutions 2 basis points.
[[Page 69305]]
Over certain periods in the past, average rates for Risk
Category I required to maintain a given reserve ratio have been lower
than 2 basis points.
2 basis points would unfairly penalize those institutions
that could qualify for an assessment of less than 2 basis points under
the proposed small institution method.
The base rates do not take into account loss given
default.
As discussed earlier, the historical analysis of costs attributable
to each risk category can only be a guide to rates. The base rates take
into account the FDIC's estimate of its long-term revenue needs.
Moreover, the base rates do not in any sense represent a floor below
which rates cannot be set. If these rates prove to generate too much
revenue over time, the FDIC's Board can reduce actual rates.
That some institutions appear to qualify for an assessment of less
than 2 basis points using the method that combines supervisory ratings
with financial ratios is largely an artifact of the statistical method
used to estimate an institution's probability of downgrade. Had the
FDIC employed the more commonly used logit model rather than an
ordinary least squares (OLS) model, this artifact would have nearly
disappeared.\73\
---------------------------------------------------------------------------
\73\ The FDIC chose to use an OLS model for two primary reasons.
The two models, logit and OLS, produced very similar risk rankings
and the OLS model allowed institutions to easily calculate their
potential base assessment rate for given changes in their financial
ratios and CAMELS component ratings.
---------------------------------------------------------------------------
The issue of loss given default is discussed in a subsequent
section (XI(C)).
Rate adjustments. Several comments (including comments from trade
groups) opposed allowing the FDIC to adjust rates from the base rate
schedule without further notice-and-comment rulemaking; one suggested
that the FDIC be allowed to increase rates above the base rate schedule
a maximum of 2 basis points without further notice-and-comment
rulemaking. Arguments in support of requiring further notice-and-
comment rulemaking included:
The FDIC is no longer required to raise rates when the
reserve ratio falls below the designated reserve ratio; therefore, the
FDIC no longer needs to be able to raise rates quickly and drastically.
If the FDIC must raise rates quickly, it can do so on an
expedited basis or on an emergency basis, subject to subsequent notice
and comment.
Notice-and-comment rulemaking will allow banks time to
plan for higher rates.
Arguments in support of allowing the FDIC to increase rates above
the base rate schedule a maximum of 2 basis points without further
notice-and-comment rulemaking included:
Given historical longer-term insured deposit growth rates,
an increase above the base rates of more than 2 basis points is
unnecessary.
An increase above the base rates of more than 2 basis
points would affect institutions' earnings and their ability to lend in
ways that cannot be justified given the present size of the DIF.
Limiting the increase in this way should make assessment
rates more stable from quarter to quarter.
Congress has granted the FDIC broad authority to establish a risk-
based assessment system. 12 U.S.C. 1817(b)(1). Maintaining the ability
to adjust rates within limits without notice and comment rulemaking is
consistent with our well established practice and will allow the FDIC
to act expeditiously to adjust rates in the face of constantly changing
conditions, subject to the statutory factors we are required to
consider. The NPR gave institutions notice that rates may be
significantly higher than the base rates temporarily, partly because of
the ongoing trend of high insured deposit growth and partly because the
use of one-time credits will limit assessment revenue. For this reason,
the final rule continues to allow the FDIC to adjust rates within
limits without further notice-and-comment rulemaking. However, in light
of the comments, the FDIC has decided to limit its ability to adjust
rates without further notice-and-comment rulemaking to three basis
points, as discussed above.
One comment opposed making uniform increases from the base rate
schedule in determining actual rates and argued that any increase above
the base rate schedule that was uniform would not reflect actual risk:
Any basis point ``surcharge'' should be risk-weighted, so that
an institution with a lower risk profile would be charged a lower
``surcharge'' (e.g., 1 basis point or lower), and an institution
with a higher risk profile would be charged a higher ``surcharge''
(e.g., 5 basis points).
The FDIC believes that this comment contains a valid point. In the
event that revenue needs increase or decrease greatly and variations in
risk among institutions suggest non-uniform rate changes, the FDIC will
consider whether to increase or decrease the range of assessment rates
between risk categories and within Risk Category I. Any such change
would only be made pursuant to further rulemaking.
Fraud costs. Two comments argued that the FDIC had failed to take
fraud costs into account in the NPR. This is incorrect. Fraud was not
excluded from the data used to develop the risk differentiation
methods. The risk differentiation methodology was applied to analyze
historical costs attributable to the risk categories (and to subsets of
Risk Category I). The FDIC conducted this analysis in two steps. In the
first step, the FDIC excluded fraud costs because, until fraud is
uncovered, an institution engaged in fraud is usually not assigned to
the correct risk category. After this step was concluded, the FDIC then
distributed these fraud costs pro rata among all risk categories to
determine historical costs attributable to the risk categories (and to
subsets of Risk Category I). The FDIC used these historical costs to
determine and validate base assessment rates.
Currently, fraud cannot be predicted. When it does appear, it can
cause the failure of very large institutions. Keystone Bank, which was
a relatively large bank, failed as the result of massive fraud. The
Bank of Credit and Commerce International and Barings Brothers, Inc.,
were both very large banks that failed as a result of fraud. Outside of
the banking industry, many failures have resulted as the result of
fraud.
Actual rates. Many comments dealt with the actual assessment rates
to be charged, either explicitly or by implication. Many comments
(including comments from trade groups) suggested or implied that the
FDIC keep assessment rates low, particularly for institutions in Risk
Category I, and build the reserve ratio gradually over a period of
years. The reasons cited for keeping assessment rates low included many
of the reasons for lowering the base rate schedule for Risk Category I.
In addition, other arguments included:
The Reform Act eliminates the requirement that the reserve
ratio reach any particular level within any particular time period.
There should be a period of transition to allow banks to
gradually use up their one-time assessment credits and adjust to paying
premiums again under the new risk-based assessment system.
High rates would be a burden on all institutions and would
particularly and unnecessarily burden institutions without one-time
credits, harming their competitive position and discouraging the
formation of new banks.
Insured deposit growth rates are not likely to be high
over the long term; in
[[Page 69306]]
the past 15 years, there has been no 5-year period where annual growth
rates much exceeded 5 percent. Given realistic growth rates of 4 to 5
percent, charging high rates will quickly increase the reserve ratio to
unnecessarily high levels.
The banking industry is extremely healthy because of
improved risk management policies and procedures in the banking
industry, and legislation that has equipped the federal bank regulatory
agencies with additional supervisory and enforcement tools and the
increased sophistication of the supervisory process.
The risk of failure for Category I institutions is
extremely low, and the risk of loss to the FDIC is even lower.
Bank customers, particularly corporate customers, actually
bear the burden of assessments.
The FDIC has decided on actual rates based upon the analysis
described earlier. In sum, the FDIC is using the flexibility afforded
under the Reform Act to raise the reserve ratio more gradually than if
the 1.25 percent DRR remained a ``hard'' annual target. Nonetheless,
consistent with the legislation's objectives, the FDIC believes that
rates should currently be set to build up the fund while economic
conditions are generally favorable and the industry remains strong.
Absent persistent high insured deposit growth, the FDIC expects that
future assessment rates should be able to decline toward the base rate
schedule once the reserve ratio reaches the DRR. Rates could be set
below the base rate schedule if insured deposit growth slows
considerably. Finally, the rates adopted in this rule (including rates
charged new institutions when the provisions regarding new institutions
become effective) remain well below rates that were charged during
periods of both economic and industry stress and are not expected to
have material adverse effects on established or new institutions.
IX. Comments on Additional Issues
Rapid Growth Premium
Some trade groups proposed imposing an additional premium for
institutions (or new institutions) that have rapid deposit growth to
offset dilution of the reserve ratio. Other trade groups proposed such
a premium for large institutions that have rapid deposit growth.
The FDIC has decided against imposing a specific growth premium,
primarily for two reasons. First, Congress has already considered and
resolved the issue of rapid growth during the past 10 years, when most
institutions have paid nothing for deposit insurance, by awarding a
one-time credit to those institutions that helped build the deposit
insurance funds before 1996. Second, assessments under the final rule
take future growth into account. An institution's assessment equals the
product of its assessment rate times its assessment base (which, under
a final rule adopted simultaneously with this final rule, will be
identical or nearly identical with its domestic deposits). Thus, any
growth in domestic deposits will proportionally increase an
institution's assessment.\74\
---------------------------------------------------------------------------
\74\ Of course, only growth in insured deposits can dilute the
reserve ratio.
---------------------------------------------------------------------------
In addition, in the FDIC's view, it is not practicable to define or
impose such a premium. One difficult issue with defining an appropriate
level of growth as a trigger is that a relatively small dollar increase
in deposits at a small institution could represent a significant
percentage of growth while a very large increase in deposits at a large
institution might result in a small increase in the institution's
percentage of growth. Additionally, rapid growth alone may or may not
warrant an additional premium. Finally, it would be very difficult--and
probably impossible--to specify a rule for triggering a specific growth
premium that could not be circumvented by some institutions.
Risk Differentiation
Several comments (including comments from trade groups) asserted
that the FDIC cannot accurately differentiate risk amongst Category I
institutions (or at least accurately enough for incremental pricing in
small banks and/or six sub-categories for large banks) and, therefore,
all institutions in Risk Category I should be charged the same
assessment rate. These comments argued that subcategories and
incremental pricing introduce unnecessary complexities. These comments
claim that this additional complexity creates confusion and undermines
confidence in the assessment system. One comment added that looking
beyond three years when analyzing Category I institutions' risk is
unnecessary, since failing institutions would still be placed in a
higher risk category well before failure.
The FDIC has found significant differences in risk among
institutions in Risk Category I. To illustrate these differences in
risk, consider differences in failure rates between CAMELS 1-rated and
CAMELS 2-rated institutions that make up Risk Category I. The
historical failure rate for CAMELS 2-rated institutions is 2.5 times
that of CAMELS 1-rated institutions for both three-and five-year
horizons. Moreover, for a two-year horizon, CAMELS 2-rated institutions
fail three times more often than do CAMELS 1-rated institutions.
In the FDIC's view, while the analysis that produced the risk
differentiation and pricing methodology underlying the final rule is
complex, its application is not. Moreover, in general, the simpler a
system is, the less able it is to capture differences in risk. The
statistical analysis used may be complex, but it produces meaningful
distinctions in risk.
One commenter also stated that the proposal makes assessment rates
most risk sensitive for those banks that are least likely to fail. The
FDIC recognizes that institutions in Risk Category I are less likely to
fail than institutions in Risk Categories II, III and IV. These
differences are reflected in assessment rates. Base assessment rates
for Category IV institutions are 10 to 20 times higher than rates for
the riskiest Category I institutions.
Calibration
One trade group argued that the FDIC's model is not well calibrated
to economic cycles because ``the percentage of institutions that would
qualify for the floor rate is greater than the 45 percent for every
year since 1992, except one.'' The inference apparently intended to be
drawn from this argument is that, because the industry is healthier now
than it has been for almost all years since 1992, the percentage of
institutions that would qualify for the floor rate should be greater
now than in the past. However, this argument overlooks two important
points. First, the profitability of the banking industry in this decade
compared to the 1990s has resulted, in part, from increased risk. From
the mid-1990s to the present, earnings did not grow as fast as risk-
weighted assets. As shown in Chart 3 below, the median ratio of
earnings before taxes to risk-weighted assets has declined steadily
since the early 1990s. The risk differentiation methods adopted in the
final rule are designed to capture this increased risk. Second, not all
institutions are prospering as much as they were in the past. In 2005,
the pre-tax return on assets for institutions with under $100 million
in assets was 1.29 percent, which was less than in any year between
1992 and 1999.
[[Page 69307]]
[GRAPHIC] [TIFF OMITTED] TR30NO06.014
Loss Given Failure
Several comments (including comments from trade groups) stated that
the capital measure should include subordinated debt and stated or
implied that subordinated debt should reduce assessment rates. For
example, one comment recommended that institutions with subordinated
liabilities and equity in excess of 25 percent of assets be placed in
the minimum assessment rate subcategory. Several comments (including
comments from trade groups) argued that the statutes governing the
risk-based pricing system require that the FDIC take loss given default
into account when determining assessments and that the proposed system
fails to do so. This failure, they argue, makes the system actuarially
unfair.
The FDIC recognizes that the Federal Deposit Insurance Act requires
that the FDIC take the likely amount of any loss from failure into
account in the assessment system. The final rule takes loss given
failure (and expected loss pricing in general) into account in several
ways. For a large institution, the FDIC will consider loss given
failure (through the loss severity indicators enumerated in Appendix C)
in determining whether to make an adjustment to an institution's
assessment rate. The final rule also takes loss given failure into
account in the historical analysis that informed the base rate schedule
and in each institution's assessment base. However, the FDIC's ability
to take loss given failure into account in determining the assessment
rate for some institutions, particularly small institutions, is
somewhat limited for several reasons.\75\ First, Call Reports and TFRs
do not provide complete disclosure of several important determinants of
loss given failure, such as secured liabilities, loan collateral
requirements and the maturity structure of assets and liabilities.
Second, as the FDIC explained in the NPR, at present it is not always
clear which assumptions regarding loss given failure are most
appropriate.\76\
---------------------------------------------------------------------------
\75\ Another comment illustrated the loss given failure problem
by noting that the FDIC would suffer lower losses, all else equal,
at an institution that relied more on non-deposit borrowing relative
to one that relied on deposits. However, the FDIC would collect
lower assessment revenue from an institution that used non-deposit
borrowing, because only deposits are included in the assessment
base. In addition, the comment assumes that, between the time the
FDIC assesses an institution and the time it fails, the
institution's liability structure will not change. As discussed
later in the text, this is usually not the case. As an institution
approaches failure, insured deposit liabilities and secured
liabilities tend to become a larger percentage of an institution's
liabilities.
\76\ Rosalind L. Bennett, ``Evaluating the Adequacy of the
Deposit Insurance Fund: A Credit-Risk Modeling Approach,'' FDIC
Working Paper Series 2001-02.
---------------------------------------------------------------------------
Thus, as the NPR noted, the FDIC is using an alternative to
expected loss pricing to differentiate risk and set assessment rates.
The FDIC hopes to refine its treatment of loss given failure (and
expected loss pricing) in the future. As part of any refinement, the
FDIC plans to consider whether, for example, to factor the composition
of liabilities into loss given failure.
One comment also argued that the proposed risk differentiation and
pricing system is unfair because institutions are assessed on deposits
that are not insured, which ``results in institutions with larger-than-
average uninsured deposits (as a fraction of total deposits)
subsidizing other institutions.'' This argument is inconsistent with
studies that show that, as an institution approaches failure, uninsured
deposits tend to be replaced by insured deposits and secured
liabilities, which increases the FDIC's
[[Page 69308]]
loss given failure.\77\ Restricting the assessment base in this manner
would reduce the assessment system's ability to take into account loss
given failure.
---------------------------------------------------------------------------
\77\ See, e.g., Lawrence G. Goldberg and Sylvia Hudgins,
``Response of Uninsured Depositors to Impending S&L Failures:
Evidence of Depositor Discipline,'' Quarterly Review of Economics
and Finance 36, no. 3 (1996), 311-325; Andrew Davenport and Kathleen
McDill, ``The Depositor behind the Discipline: A Micro-Level Case
Study of Hamilton Bank,'' Journal of Financial Services Research 30:
93-109 (2006).
---------------------------------------------------------------------------
Guidance on Disclosure
Some comments expressed concern over potential disclosure of an
institution's assessment rate or amount, and changes to that rate or
amount, through which third parties could determine an institution's
confidential CAMELS component ratings. Concern also was expressed that
disclosure of an institution's assessment rate or amount could create
funding problems for an institution. Finally, the question was raised
whether an institution can disclose its assessment rate because an
element of that rate is examination ratings.
Assessment rates remain confidential and cannot be disclosed
directly, except to the extent required by law. However, the proposed
assessment system, similar to the current system, is based in part on
publicly available information. Even under the current system, it is
possible to estimate an institution's composite CAMELS rating using
publicly available information. Under the proposed system it may be
possible to estimate component or composite ratings or assessment
rates. The additional information that could be determined under the
new assessment system should not materially affect an institution's
funding costs compared to the current system.
X. 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 and final rules published after
January 1, 2000. The FDIC invited comments on how to make this proposal
easier to understand, but received none.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that each federal
agency either certify that a proposed rule would not, if adopted in
final form, have a significant economic impact on a substantial number
of small entities or prepare an initial regulatory flexibility analysis
of the proposal and publish the analysis for comment. See 5 U.S.C. 603,
604, 605. 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. 5
U.S.C. 601. The final rule governs assessments and sets the rates
imposed on insured depository institutions for deposit insurance.
Consequently, no regulatory flexibility analysis is required.
Nonetheless, the FDIC voluntarily undertook a regulatory flexibility
analysis to aid the public in commenting upon the small business impact
of its proposed rule. The initial regulatory flexibility analysis was
published in the Federal Register (71 FR 60674) on October 16, 2006.
Public comment was invited and the comment period closed on October 26,
2006. The FDIC received no comments on the Initial Regulatory
Flexibility Act analysis.
In its analysis, the FDIC used data as of December 31, 2005, and
calculated the total assessments that would be collected under the base
rate schedule in the final rule. The economic impact on each small
institution for RFA purposes (i.e., institutions with assets of $165
million or less) was then calculated as the difference in annual
assessments under the base rate schedule compared to the prior rule as
a percentage of the institution's annual revenue and annual profits,
assuming the same total assessments collected by the FDIC from the
banking industry.
Based on the December 2005 data, under the final base rate
schedule, for more than 99 percent of small institutions (as defined
for RFA purposes), the change in the assessment system would result in
assessment changes (up or down) totaling one percent or less of annual
revenue.\78\ Of the total of 5,362 small institutions for RFA purposes,
just 10 would have experienced an increase or decrease equal to 2
percent or greater of their total revenue. These figures do not reflect
a significant economic impact on revenues for a substantial number of
small insured institutions.
---------------------------------------------------------------------------
\78\ For about half of the small institutions analyzed, the
change reflected an assessment decrease and a revenue increase.
---------------------------------------------------------------------------
The FDIC performed a similar analysis to determine the impact on
profits for small (again, as defined for RFA purposes) institutions.
Based on December 2005 data, under the final base rate schedule, 85
percent of the small institutions (as defined for RFA purposes) with
reported profits would have experienced an increase or decrease in
their annual profits of one percent or less.79-81 The data
indicate that, out of those small institutions, as defined for RFA
purposes, with reported profits, just 4 percent would have experienced
an increase or decrease in their total profits of 3 percent or greater.
Again, these figures do not reflect a significant economic impact on
profits for a substantial number of small (as defined for RFA purposes)
insured institutions.
---------------------------------------------------------------------------
\79-81\ For about half of the small institutions analyzed, the
change reflected an assessment decrease and a profit increase.
---------------------------------------------------------------------------
The FDIC analyzed the effect of the proposal on these institutions
that showed no profit or loss by determining the annual assessment
change (either an increase or a decrease) that would result. The
analysis showed that 56 percent (224) of the 399 small insured
institutions in this category would have experienced a change (increase
or decrease) in annual assessments of $5,000 or less. Of the remainder,
3 percent (12) would have experienced assessment changes (increases or
decreases) of $20,000 or more.
The final rule makes only minor modifications to the way assessment
rates are calculated for small institutions (although the final rule
does set assessment rates higher than the base rates). Again assuming
that the same assessment revenue would be collected under the old
system as under the final rule, these modifications have a minimal
effect on almost all small institutions. The effect of the final rule
on a small institution's annualized profit and revenue as of June 30,
2006 is nearly identical to the effect shown under the proposal.
The final rule does not directly impose any ``reporting'' or
``recordkeeping'' requirements within the meaning of the Paperwork
Reduction Act. The compliance requirements for the final rule do not
exceed existing compliance requirements for the present system of FDIC
deposit insurance assessments, which, in any event, are governed by
separate regulations. The FDIC is unaware of any duplicative,
overlapping or conflicting Federal rules. Accordingly, the FDIC
certifies that the final rule will not have a significant economic
impact on a substantial number of small institutions for purposes of
the RFA.
[[Page 69309]]
C. Paperwork Reduction Act
No collections of information pursuant to the Paperwork Reduction
Act (44 U.S.C. 3501 et seq.) are contained in the 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 will 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
Consolidated and Emergency Supplemental Appropriations Act of 1999
(Public Law 105-277, 112 Stat. 2681).
E. Small Business Regulatory Enforcement Fairness Act
The Office of Management and Budget has determined that the final
rule is not a ``major rule'' within the meaning of the relevant
sections of the Small Business Regulatory Enforcement Fairness Act of
1996 (SBREFA) (5 U.S.C. 801 et seq.). As required by SBREFA, the FDIC
will file the appropriate reports with Congress and the Government
Accountability Office so that the final rule may be reviewed.
List of Subjects in 12 CFR Part 327
Bank deposit insurance, Banks, banking, Savings associations.
0
For the reasons set forth in the preamble, the FDIC hereby amends
chapter III of title 12 of the Code of Federal Regulations 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, 1817-1819, 1821; Sec.
2101-2109, Pub. L. 109-171, 120 Stat. 9-21, and Sec. 3, Pub. L. 109-
173, 119 Stat. 3605.
0
2. Revise Sec. Sec. 327.9 and 327.10 of Subpart A to read as follows:
Sec. 327.9 Assessment risk categories and pricing methods.
(a) Risk Categories. Each insured depository institution shall be
assigned to one of the following four Risk Categories based upon the
institution's capital evaluation and supervisory evaluation as defined
in this section.
(1) Risk Category I. All institutions in Supervisory Group A that
are Well Capitalized;
(2) Risk Category II. All institutions in Supervisory Group A that
are Adequately Capitalized, and all institutions in Supervisory Group B
that are either Well Capitalized or Adequately Capitalized;
(3) Risk Category III. All institutions in Supervisory Groups A and
B that are Undercapitalized, and all institutions in Supervisory Group
C that are Well Capitalized or Adequately Capitalized; and
(4) Risk Category IV. All institutions in Supervisory Group C that
are Undercapitalized.
(b) Capital evaluations. An institution will receive one of the
following three capital evaluations on the basis of data reported in
the institution's Consolidated Reports of Condition and Income, Report
of Assets and Liabilities of U.S. Branches and Agencies of Foreign
Banks, or Thrift Financial Report dated as of March 31 for the
assessment period beginning the preceding January 1; dated as of June
30 for the assessment period beginning the preceding April 1; dated as
of September 30 for the assessment period beginning the preceding July
1; and dated as of December 31 for the assessment period beginning the
preceding October 1.
(1) Well Capitalized. (i) Except as provided in paragraph
(b)(1)(ii) of this section, a Well Capitalized institution is one that
satisfies each of the following capital ratio standards: Total risk-
based ratio, 10.0 percent or greater; Tier 1 risk-based ratio, 6.0
percent or greater; and Tier 1 leverage ratio, 5.0 percent or greater.
(ii) For purposes of this section, an insured branch of a foreign
bank will be deemed to be Well Capitalized if the insured branch:
(A) Maintains the pledge of assets required under Sec. 347.209 of
this chapter; and
(B) Maintains the eligible assets prescribed under Sec. 347.210 of
this chapter at 108 percent or more of the average book value of the
insured branch's third-party liabilities for the quarter ending on the
report date specified in paragraph (b) of this section.
(2) Adequately Capitalized. (i) Except as provided in paragraph
(b)(2)(ii) of this section, an Adequately Capitalized institution is
one that does not satisfy the standards of Well Capitalized under this
paragraph but satisfies each of the following capital ratio standards:
Total risk-based ratio, 8.0 percent or greater; Tier 1 risk-based
ratio, 4.0 percent or greater; and Tier 1 leverage ratio, 4.0 percent
or greater.
(ii) For purposes of this section, an insured branch of a foreign
bank will be deemed to be Adequately Capitalized if the insured branch:
(A) Maintains the pledge of assets required under Sec. 347.209 of
this chapter; and
(B) Maintains the eligible assets prescribed under Sec. 347.210 of
this chapter at 106 percent or more of the average book value of the
insured branch's third-party liabilities for the quarter ending on the
report date specified in paragraph (b) of this section; and
(C) Does not meet the definition of a Well Capitalized insured
branch of a foreign bank.
(3) Undercapitalized. An undercapitalized institution is one that
does not qualify as either Well Capitalized or Adequately Capitalized
under paragraphs (b)(1) and (b)(2) of this section.
(c) Supervisory evaluations. Each institution will be assigned to
one of three Supervisory Groups based on the Corporation's
consideration of supervisory evaluations provided by the institution's
primary federal regulator. The supervisory evaluations include the
results of examination findings by the primary federal regulator, as
well as other information that the primary federal regulator determines
to be relevant. In addition, the Corporation will take into
consideration such other information (such as state examination
findings, if appropriate) as it determines to be relevant to the
institution's financial condition and the risk posed to the Deposit
Insurance Fund. The three Supervisory Groups are:
(1) Supervisory Group ``A.'' This Supervisory Group consists of
financially sound institutions with only a few minor weaknesses;
(2) Supervisory Group ``B.'' This Supervisory Group consists of
institutions that demonstrate weaknesses which, if not corrected, could
result in significant deterioration of the institution and increased
risk of loss to the Deposit Insurance Fund; and
(3) Supervisory Group ``C.'' This Supervisory Group consists of
institutions that pose a substantial probability of loss to the Deposit
Insurance Fund unless effective corrective action is taken.
(d) Determining Assessment Rates for Risk Category I Institutions.
Subject to paragraphs (d)(4), (6), (7) and (8) of this section, an
insured depository institution in Risk Category I, except for a large
institution that has at least one long-term debt issuer rating, as
defined in Sec. 327.8(i), shall have its assessment rate determined
using the supervisory ratings and financial ratios method set forth in
paragraph (d)(1) of this section. A large insured depository
institution in Risk Category I that has at least one
[[Page 69310]]
long-term debt issuer rating shall have its assessment rate determined
using the supervisory and debt ratings method set forth in paragraph
(d)(2) of this section (subject to paragraphs (d)(4), (6), (7) and (8)
of this section). The assessment rate for a large institution whose
assessment rate in the prior quarter was determined using the
supervisory and debt ratings method, but which no longer has a long-
term debt issuer rating, shall be determined using the supervisory
ratings and financial ratios method.
(1) Supervisory ratings and financial ratios method. Under the
supervisory ratings and financial ratios method for Risk Category I
institutions, each of five financial ratios and a weighted average of
CAMELS component ratings will be multiplied by a corresponding pricing
multiplier. The sum of these products will be added to or subtracted
from a uniform amount. The resulting sum, subject to adjustment
pursuant to paragraph (d)(4) of this section, if appropriate, and
adjusted for the actual assessment rates set by the Board under Sec.
327.10, will equal an institution's assessment rate; provided, however,
that no institution's assessment rate will be less than the minimum
rate in effect for Risk Category I institutions for that quarter nor
greater than the maximum rate in effect for Risk Category I
institutions for that quarter. The five financial ratios are: Tier 1
Leverage Ratio; Loans past due 30-89 days/gross assets; Nonperforming
assets/gross assets; Net loan charge-offs/gross assets; and Net income
before taxes/risk-weighted assets. The ratios are defined in Table A.1
of Appendix A to this subpart. The ratios will be determined for an
assessment period based upon information contained in an institution's
report of condition filed as of the last day of the assessment period
as set out in Sec. 327.9(b). The weighted average of CAMELS component
ratings is created by multiplying each component by the following
percentages and adding the products: Capital adequacy--25%, Asset
quality--20%, Management--25%, Earnings--10%, Liquidity--10%, and
Sensitivity to market risk--10%. Appendix A to this subpart contains
the initial values of the pricing multipliers and uniform amount,
describes their derivation, and explains how they will be periodically
updated.
(i) Publication of uniform amount and pricing multipliers. The FDIC
will publish notice in the Federal Register whenever a change is made
to the uniform amount or the pricing multipliers for the supervisory
ratings and financial ratios method.
(ii) Implementation of CAMELS rating changes--(A) Changes between
risk categories. If, during a quarter, a CAMELS rating change occurs
that results in an institution whose Risk Category I assessment rate is
determined using the supervisory ratings and financial ratios method
moving from Risk Category I to Risk Category II, III or IV, the
institution's assessment rate for the portion of the quarter that it
was in Risk Category I shall be determined using the CAMELS rating in
effect before the change, subject to adjustment pursuant to paragraph
(d)(4) of this section, if appropriate, and adjusted for the actual
assessment rates set by the Board under Sec. 327.10. For the portion
of the quarter that the institution was not in Risk Category I, the
institution's assessment rate shall be determined under the assessment
schedule for the appropriate Risk Category. If, during a quarter, a
CAMELS rating change occurs that results in an institution (other than
a large institution that has at least one long-term debt issuer rating)
moving from Risk Category II, III or IV to Risk Category I, the
institution's assessment rate for the portion of the quarter that it
was in Risk Category I shall be determined using the supervisory
ratings and financial ratios method, subject to adjustment pursuant to
paragraph (d)(4) of this section, if appropriate, and adjusted for the
actual assessment rates set by the Board under Sec. 327.10. For the
portion of the quarter that the institution was not in Risk Category I,
the institution's assessment rate shall be determined under the
assessment schedule for the appropriate Risk Category.
(B) Changes within Risk Category I. If, during a quarter, an
institution's CAMELS component ratings change in a way that would
change the institution's assessment rate within Risk Category I, the
assessment rate for the period before the change shall be determined
under the supervisory ratings and financial ratios method using the
CAMELS component ratings in effect before the change. Beginning on the
date of the CAMELS component ratings change, the assessment rate for
the remainder of the quarter shall be determined using the CAMELS
component ratings in effect after the change.
(2) Supervisory and debt ratings method. A large insured depository
institution in Risk Category I that has at least one long-term debt
issuer rating shall have its assessment rate determined using the
supervisory and debt ratings method (subject to paragraphs (d)(4)
through (8) of this section). Its CAMELS component ratings will be
weighted to derive a weighted average CAMELS rating using the same
weights applied in the supervisory ratings and financial ratios method
as set forth under paragraph (d)(1) of this section. Long-term debt
issuer ratings will be converted to numerical values between 1 and 3 as
provided in Appendix B to this subpart and the converted values will be
averaged. The weighted average CAMELS rating and the average of
converted long-term debt issuer ratings each will be multiplied by
1.176 (which shall be the pricing multiplier), and the products will be
summed. To this result will be added -1.882 (which shall be a uniform
amount for all institutions subject to the supervisory and debt ratings
method). The resulting sum, subject to adjustment pursuant to paragraph
(d)(4) of this section, if appropriate, and adjusted for the actual
assessment rates set by the Board pursuant to Sec. 327.10, will equal
an institution's assessment rate; provided, however, that no
institution's assessment rate will be less than the minimum rate in
effect for Risk Category I institutions for that quarter nor greater
than the maximum rate in effect for Risk Category I institutions for
that quarter.
(3) Assessment rate for insured branches of foreign banks--(i)
Insured branches of foreign banks in Risk Category I. Insured branches
of foreign banks in Risk Category I shall be assessed using the
weighted average ROCA component rating, as determined under paragraph
(d)(3)(ii) of this section.
(ii) Weighted average ROCA component rating. The weighted average
ROCA component rating shall equal the sum of the products that result
from multiplying ROCA component ratings by the following percentages:
Risk Management--35%, Operational Controls--25%, Compliance--25%, and
Asset Quality--15%. The weighted average ROCA rating will be multiplied
by 2.353 (which shall be the pricing multiplier). To this result will
be added -1.882 (which shall be a uniform amount for all insured
branches of foreign banks). The resulting sum, subject to adjustment
pursuant to paragraph (d)(4) of this section and adjusted for
assessment rates set by the FDIC pursuant to Sec. 327.10(b), will
equal an institution's assessment rate; provided, however, that no
institution's assessment rate will be less than the minimum rate in
effect for Risk Category I institutions for that quarter nor greater
than the maximum rate in effect for Risk Category I institutions for
that quarter.
(4) Adjustments to the initial risk assignment for large banks or
insured branches of foreign banks--(i) Basis for and size of
adjustment. Within Risk
[[Page 69311]]
Category I, large institutions and insured branches of foreign banks
are subject to risk assignment adjustment. In determining whether to
make an adjustment for a large institution or an insured branch of a
foreign bank, the FDIC may consider other relevant information in
addition to the factors used to derive the risk assignment under
paragraphs (d)(1), (2), or (3) of this section. Relevant information
includes financial performance and condition information, other market
information, and stress considerations, as described in Appendix C to
this subpart. Any such adjustment shall be limited to a change in
assessment rate of up to 0.5 basis points higher or lower than the rate
determined using the supervisory ratings and financial ratios method,
the supervisory and debt ratings method, or the weighted average ROCA
component rating method, whichever is applicable.
(ii) Adjustment subject to maximum and minimum rates. No rate will
be adjusted below the minimum rate or above the maximum rate for Risk
Category I institutions in effect for the quarter.
(iii) Prior notice of adjustments--(A) Prior notice of upward
adjustment. Prior to making any upward adjustment to an institution's
rate because of considerations of additional risk information, the FDIC
will formally notify the institution and its primary federal regulator
and provide an opportunity to respond. This notification will include
the reasons for the adjustment and when the adjustment will take
effect.
(B) Prior notice of downward adjustment. Prior to making any
downward adjustment to an institution's rate because of considerations
of additional risk information, the FDIC will formally notify the
institution's primary federal regulator and provide an opportunity to
respond.
(iv) Determination whether to adjust upward; effective period of
adjustment. After considering an institution's and the primary federal
regulator's responses to the notice, the FDIC will determine whether
the adjustment to an institution's assessment rate is warranted, taking
into account any revisions to weighted average CAMELS component
ratings, long-term debt issuer ratings, and financial ratios, as well
as any actions taken by the institution to address the FDIC's concerns
described in the notice. The FDIC will evaluate the need for the
adjustment each subsequent assessment period, until it determines that
an adjustment is no longer warranted. The amount of adjustment will in
no event be larger than that contained in the initial notice without
further notice to, and consideration of, responses from the primary
federal regulator and the institution.
(v) Determination whether to adjust downward; effective period of
adjustment. After considering the primary federal regulator's responses
to the notice, the FDIC will determine whether the adjustment to an
institution's assessment rate is warranted, taking into account any
revisions to weighted average CAMELS component ratings, long-term debt
issuer ratings, and financial ratios, as well as any actions taken by
the institution to address the FDIC's concerns described in the notice.
Any downward adjustment in an institution's assessment rate will remain
in effect for subsequent assessment periods until the FDIC determines
that an adjustment is no longer warranted. Downward adjustments will be
made without notification to the institution. However, the FDIC will
provide advance notice to an institution and its primary federal
regulator and give them an opportunity to respond before removing a
downward adjustment.
(vi) Adjustment without notice. Notwithstanding the notice
provisions set forth above, the FDIC may change an institution's
assessment rate without advance notice under this paragraph, if the
institution's supervisory or agency ratings or the financial ratios set
forth in Appendix A to this subpart (for an institution without long-
term debt issuer ratings) deteriorate.
(5) Implementation of Supervisory and Long-Term Debt Issuer Rating
Changes--(i) Changes between risk categories. If, during a quarter, a
CAMELS rating change occurs that results in an institution whose Risk
Category I assessment rate is determined using the supervisory and debt
ratings method or an insured branch of a foreign bank moving from Risk
Category I to Risk Category II, III or IV, the institution's assessment
rate for the portion of the quarter that it was in Risk Category I
shall be based upon its assessment rate for the prior quarter; no new
Risk Category I assessment rate will be developed for the quarter in
which the institution moved to Risk Category II, III or IV. If, during
a quarter, a CAMELS rating change occurs that results in a large
institution with a long-term debt issuer rating or an insured branch of
a foreign bank moving from Risk Category II, III or IV to Risk Category
I, the institution's assessment rate for the portion of the quarter
that it was in Risk Category I shall equal the rate determined under
paragraphs (d)(2) and (4) or (d)(3) and (4) of this section, as
appropriate.
(ii) Changes within Risk Category I. If, during a quarter, an
institution whose Risk Category I assessment rate is determined using
the supervisory and debt ratings method remains in Risk Category I, but
a CAMELS component or a long-term debt issuer rating changes that would
affect the institution's assessment rate, or if, during a quarter, an
insured branch of a foreign bank remains in Risk Category I, but a ROCA
component rating changes that would affect the institution's assessment
rate, separate assessment rates for the portion(s) of the quarter
before and after the change(s) shall be determined under paragraphs
(d)(2) and (4) or (d)(3) and (4) of this section, as appropriate.
(6) Request to be treated as a large institution--(i) Procedure.
Any institution in Risk Category I with assets of between $5 billion
and $10 billion may request that the FDIC determine its assessment rate
as a large institution. The FDIC will grant such a request if it
determines that it has sufficient information to do so. The absence of
long-term debt issuer ratings alone will not preclude the FDIC from
granting a request. The assessment rate for an institution without a
long-term debt issuer rating will be derived using the supervisory
ratings and financial ratios method, but will be subject to adjustment.
Any such request must be made to the FDIC's Division of Insurance and
Research. Any approved change will become effective within one year
from the date of the request. If an institution whose request has been
granted subsequently reports assets of less than $5 billion in its
report of condition for four consecutive quarters, the FDIC will
consider such institution to be a small institution subject to the
supervisory ratings and financial ratios method. An institution that
disagrees with the FDIC's determination that it is a large or small
institution may request review of that determination pursuant to Sec.
327.4(c).
(ii) Time limit on subsequent request for alternate method. An
institution whose request to be assessed as a large institution is
granted by the FDIC shall not be eligible to request that it be
assessed as a small institution for a period of three years from the
first quarter in which its approved request to be assessed as a large
bank became effective. Any request to be assessed as a small
institution must be made to the FDIC's Division of Insurance and
Research.
(7) New and established institutions and exceptions--(i) New Risk
Category I institutions--(A) Rule as of January 1,
[[Page 69312]]
2010. Effective for assessment periods beginning on or after January 1,
2010, a new institution shall be assessed the Risk Category I maximum
rate for the relevant assessment period, except as provided in
paragraphs (d)(7)(ii)-(viii) of this section.
(B) Rule prior to January 1, 2010. Prior to January 1, 2010, a new
institution's risk assignment shall be determined under paragraph
(d)(1) or (2) of this section, as appropriate. Prior to January 1,
2010, a Risk Category I institution that has no CAMELS component
ratings shall be assessed at one basis point above the minimum rate
applicable to Risk Category I institutions until it receives CAMELS
component ratings. If an institution has less than $10 billion in
assets or has at least $10 billion in assets and no long-term debt
issuer rating, its assessment rate will be determined under the
supervisory ratings and financial ratios method once it receives CAMELS
component ratings. The assessment rate will be determined by
annualizing, where appropriate, financial ratios obtained from the
reports of condition that have been filed, until the earlier of the
following two events occurs: the institution files four reports of
condition, or, if it has at least $10 billion in assets, it receives a
long-term debt issuer rating.
(ii) Merger or consolidation involving new and established
institution(s). Subject to paragraphs (d)(7)(iii)-(viii) of this
section, when an established institution merges into or consolidates
with a new institution, the resulting institution is a new institution
unless:
(A) The assets of the established institution, as reported in its
report of condition for the quarter ending immediately before the
merger, exceeded the assets of the new institution, as reported in its
report of condition for the quarter ending immediately before the
merger; and
(B) Substantially all of the management of the established
institution continued as management of the resulting or surviving
institution.
(iii) Consolidation involving established institutions. When
established institutions consolidate into a new institution, the
resulting institution is an established institution.
(iv) Grandfather exception. If a new institution merges into an
established institution, and the merger agreement was entered into on
or before July 11, 2006, the resulting institution shall be deemed to
be an established institution for purposes of this section.
(v) Subsidiary exception. Subject to paragraph (d)(7)(vi) of this
section, a new institution will be considered established if it is a
wholly owned subsidiary of:
(A) A company that is a bank holding company under the Bank Holding
Company Act of 1956 or a savings and loan holding company under the
Home Owners' Loan Act, and:
(1) At least one eligible depository institution (as defined in 12
CFR 303.2(r)) that is owned by the holding company has been chartered
as a bank or savings association for at least five years as of the date
that the otherwise new institution was established; and
(2) The holding company has a composite rating of at least ``2''
for bank holding companies or an above average or ``A'' rating for
savings association holding companies and at least 75 percent of its
insured depository institution assets are assets of eligible depository
institutions, as defined in 12 CFR 303.2(r); or
(B) An eligible depository institution, as defined in 12 CFR
303.2(r), that has been chartered as a bank or savings association for
at least five years as of the date that the otherwise new institution
was established.
(vi) Effect of credit union conversion. In determining whether an
insured depository institution is new or established, as those terms
are defined in Sec. 327.8, the FDIC will include any period of time
that the institution was a federally insured credit union.
(vii) CAMELS ratings for the surviving institution in a merger or
consolidation. When an established institution merges with or
consolidates into a new institution, if the FDIC determines the
resulting institution to be an established institution under paragraph
(d)(ii) of this section, its CAMELS ratings will be based upon the
established institution's ratings prior to the merger or consolidation
until new ratings become available.
(viii) Rate applicable to institutions subject to subsidiary or
credit union exception. On or after January 1, 2010, if an institution
is considered established under paragraph (d)(7)(v) or (vi) of this
section, but does not have CAMELS component ratings, it shall be
assessed at one basis point above the minimum rate applicable to Risk
Category I institutions until it receives CAMELS component ratings. If
an institution has less than $10 billion in assets or has at least $10
billion in assets and no long-term debt issuer rating, its assessment
rate will be determined under the supervisory ratings and financial
ratios method once it receives CAMELS component ratings. The assessment
rate will be determined by annualizing, where appropriate, financial
ratios obtained from all reports of condition that have been filed,
until the earlier of the following two events occurs: the institution
files four reports of condition, or, if it has at least $10 billion in
assets, it receives a long-term debt issuer rating.
(ix) Request for review. An institution that disagrees with the
FDIC's determination that it is a new institution may request review of
that determination pursuant to Sec. 327.4(c).
(8) Assessment rates for bridge banks and conservatorships.
Institutions that are bridge banks under 12 U.S.C. 1821(n) and
institutions for which the Corporation has been appointed or serves as
conservator shall, in all cases, be assessed at the Risk Category I
minimum rate.
Sec. 327.10 Assessment rate schedules.
(a) Base Assessment Schedule. The base annual assessment rate for
an insured depository institution shall be the rate prescribed in the
following schedule:
Table 1 to Paragraph (a)
------------------------------------------------------------------------
Risk Category
-------------------------------------------
I*
---------------------- II III IV
Minimum Maximum
------------------------------------------------------------------------
Annual Rates (in basis 2 4 7 25 40
points)....................
------------------------------------------------------------------------
* Rates for institutions that do not pay the minimum or maximum rate
vary between these rates.
(1) Risk Category I Base Rate Schedule. The base annual assessment
rates for all institutions in Risk Category I shall range from 2 to 4
basis points.
(2) Risk Category II, III, and IV Base Rate Schedule. The base
annual
[[Page 69313]]
assessment rates for Risk Categories II, III, and IV shall be 7, 25,
and 40 basis points respectively.
(3) All institutions in any one risk category, other than Risk
Category I, will be charged the same assessment rate.
(b) Adjusted Rate Schedule. Beginning on January 1, 2007, the
adjusted annual assessment rate for an insured depository institution
shall be the rate prescribed in the following schedule:
Table 1 to Paragraph (b)
------------------------------------------------------------------------
Risk Category
-------------------------------------------
I*
---------------------- II III IV
Minimum Maximum
------------------------------------------------------------------------
Annual Rates (in basis 5 7 10 28 43
points)....................
------------------------------------------------------------------------
*Rates for institutions that do not pay the minimum or maximum rate vary
between these rates.
(1) Risk Category I Adjusted Rate Schedule. The adjusted annual
assessment rates for all institutions in Risk Category I shall range
from 5 to 7 basis points.
(2) Risk Category II, III, and IV Adjusted Rate Schedule. The
adjusted annual assessment rates for Risk Categories II, III, and IV
shall be 10, 28, and 43 basis points respectively.
(3) All institutions in any one risk category, other than Risk
Category I, will be charged the same assessment rate.
(c) Rate schedule adjustments and procedures--(1) Adjustments. The
Board may increase or decrease the base assessment schedule up to a
maximum increase of 3 basis points or a fraction thereof or a maximum
decrease of 3 basis points or a fraction thereof (after aggregating
increases and decreases), as the Board deems necessary. Any such
adjustment shall apply uniformly to each rate in the base assessment
schedule. In no case may such adjustments result in an assessment rate
that is mathematically less than zero or in a rate schedule that, at
any time, is more than 3 basis points above or below the base
assessment schedule for the Deposit Insurance Fund, nor may any one
such adjustment constitute an increase or decrease of more than 3 basis
points.
(2) Amount of revenue. In setting assessment rates, the Board shall
take into consideration the following:
(i) Estimated operating expenses of the Deposit Insurance Fund;
(ii) Case resolution expenditures and income of the Deposit
Insurance Fund;
(iii) The projected effects of assessments on the capital and
earnings of the institutions paying assessments to the Deposit
Insurance Fund;
(iv) The risk factors and other factors taken into account pursuant
to 12 U.S.C. 1817(b)(1); and
(v) Any other factors the Board may deem appropriate.
(3) Adjustment procedure. Any adjustment adopted by the Board
pursuant to this paragraph will be adopted by rulemaking, except that
the Corporation may set assessment rates as necessary to manage the
reserve ratio, within set parameters not exceeding cumulatively 3 basis
points, pursuant to paragraph (c)(1) of this section, without further
rulemaking.
(4) Announcement. The Board shall announce the assessment schedule
and the amount and basis for any adjustment thereto not later than 30
days before the quarterly certified statement invoice date specified in
Sec. 327.3(b) of this part for the first assessment period for which
the adjustment shall be effective. Once set, rates will remain in
effect until changed by the Board.
0
3-4. Add Appendices A through C to subpart A to read as follows:
Appendix A to Subpart A
Method to Derive Pricing Multipliers and Uniform Amount
I. Introduction
The uniform amount and pricing multipliers are derived from:
A model (the Statistical Model) that estimates the
probability that a Risk Category I institution will be downgraded to
a composite CAMELS rating of 3 or worse within one year;
Minimum and maximum downgrade probability cutoff
values, based on data from June 2006, that will determine which
small institutions will be charged the minimum and maximum
assessment rates in Risk Category I;
The minimum base assessment rate for Risk Category I,
equal to two basis points, and
The maximum base assessment rate for Risk Category I,
which is two basis points higher than the minimum rate.
II. The Statistical Model
The Statistical Model is defined in equation 1a below.
[GRAPHIC] [TIFF OMITTED] TR30NO06.022
where Downgrade(0,1)i,t (the dependent variable--the
event being explained) is the incidence of downgrade from a
composite rating of 1 or 2 to a rating of 3 or worse during an on-
site examination for an institution i between 3 and 12 months after
time t. Time t is the end of a year within the multi-year period
over which the model was estimated (as explained below). The
[[Page 69314]]
dependent variable takes a value of 1 if a downgrade occurs and 0 if
it does not.
The explanatory variables (regressors) in the model are five
financial ratios and a weighted average of the ``C,'' ``A,'' ``M,''
``E'' and ``L'' component ratings. The five financial ratios
included in the model are:
Tier 1 leverage ratio
Loans past due 30-89 days/Gross assets
Nonperforming assets/Gross assets
Net loan charge-offs/Gross assets
Net income before taxes/Risk-weighted assets.
The financial ratios and the weighted average of the ``C,''
``A,'' ``M,'' ``E'' and ``L'' component ratings (collectively, the
regressors) are defined in Table A.1. The component rating for
sensitivity to market risk (the ``S'' rating) is not available for
years prior to 1997. As a result, and as described in Table A.1, the
Statistical Model is estimated using a weighted average of five
component ratings excluding the ``S'' component. In addition,
delinquency and non-accrual data on government guaranteed loans are
not available before 1993 for Call Report filers and before the
third quarter of 2005 for TFR filers. As a result, and as also
described in Table A.1, the Statistical Model is estimated without
deducting delinquent or past-due government guaranteed loans from
either the loans past due 30-89 days to gross assets ratio or the
nonperforming assets to gross assets ratio.
Table A.1.--Definitions of Regressors
----------------------------------------------------------------------------------------------------------------
Regressor Description
----------------------------------------------------------------------------------------------------------------
Tier 1 Leverage Ratio (%) Tier 1 capital for Prompt Corrective Action (PCA) divided
by adjusted average assets based on the definition for
prompt corrective action
----------------------------------------------------------------------------------------------------------------
Loans Past Due 30-89 Days/Gross Assets (%) Total loans and lease financing receivables past due 30
through 89 days and still accruing interest divided by
gross assets (gross assets equal total assets plus
allowance for loan and lease financing receivable losses
and allocated transfer risk)
----------------------------------------------------------------------------------------------------------------
Nonperforming Assets/Gross Assets (%) Sum of total loans and lease financing receivables past
due 90 or more days and still accruing interest, total
nonaccrual loans and lease financing receivables, and
other real estate owned divided by gross assets
----------------------------------------------------------------------------------------------------------------
Net Loan Charge-Offs/Gross Assets (%) Total charged-off loans and lease financing receivables
debited to the allowance for loan and lease losses less
total recoveries credited to the allowance to loan and
lease losses for the most recent twelve months divided by
gross assets
----------------------------------------------------------------------------------------------------------------
Net Income before Taxes/Risk-Weighted Assets (%) Income before income taxes and extraordinary items and
other adjustments for the most recent twelve months
divided by risk-weighted assets
----------------------------------------------------------------------------------------------------------------
Weighted Average of C, A, M, E and L Component The weighted sum of the ``C,'' ``A,'' ``M,'' ``E'' and
Ratings ``L'' CAMELS components, with weights of 28 percent each
for the ``C'' and ``M'' components, 22 percent for the
``A'' component, and 11 percent each for the ``E'' and
``L'' components. (For the regression, the ``S''
component is omitted.)
----------------------------------------------------------------------------------------------------------------
The financial ratio regressors used to estimate the downgrade
probabilities are obtained from quarterly reports of condition
(Reports of Condition and Income and Thrift Financial Reports). The
weighted average of the ``C,'' ``A,'' ``M,'' ``E'' and ``L''
component ratings regressor is based on component ratings obtained
from the most recent bank examination conducted within 24 months
before the date of the report of condition.
The Statistical Model uses ordinary least squares (OLS)
regression to estimate downgrade probabilities. The model is
estimated with data from a multi-year period (as explained below)
for all institutions in Risk Category I, except for institutions
established within five years before the date of the report of
condition.
The OLS regression estimates coefficients, [beta]j,
for a given regressor j and a constant amount, [beta]0,
as specified in equation 1a. As shown in equation 1b below, these
coefficients are multiplied by values of risk measures at time T,
which is the date of the report of condition corresponding to the
end of the quarter for which the assessment rate is computed. The
sum of the products is then added to the constant amount to produce
an estimated probability, di,T, that an institution will
be downgraded to 3 or worse within 3 to 12 months from time T.
The risk measures are financial ratios as defined in Table A.1,
except that the loans past due 30 to 89 days ratio and the
nonperforming asset ratio are adjusted to exclude the maximum amount
recoverable from the U.S. Government, its agencies or government-
sponsored agencies, under guarantee or insurance provisions. Also,
the weighted sum of six CAMELS component ratings is used, with
weights of 25 percent each for the ``C'' and ``M'' components, 20
percent for the ``A'' component, and 10 percent each for the ``E,''
``L,'' and ``S'' components.
[GRAPHIC] [TIFF OMITTED] TR30NO06.023
[[Page 69315]]
III. Minimum and maximum downgrade probability cutoff values
The pricing multipliers are also determined by minimum and
maximum downgrade probability cutoff values, which will be computed
as follows:
The minimum downgrade probability cutoff value will be
the maximum downgrade probability among the forty-five percent of
all small insured institutions in Risk Category I (excluding new
institutions) with the lowest estimated downgrade probabilities,
computed using values of the risk measures as of June 30, 2006.\1\
The minimum downgrade probability cutoff value is approximately 2
percent.
---------------------------------------------------------------------------
\1\ As used in this context, a ``new institution'' means an
institution that has been chartered as a bank or thrift for less
than five years.
---------------------------------------------------------------------------
The maximum downgrade probability cutoff value will be
the minimum downgrade probability among the five percent of all
small insured institutions in Risk Category I (excluding new
institutions) with the highest estimated downgrade probabilities,
computed using values of the risk measures as of June 30, 2006.\2\
The maximum downgrade probability cutoff value is approximately 14
percent.
---------------------------------------------------------------------------
\2\ As used in this context, a ``new institution'' means an
institution that has been chartered as a bank or thrift for less
than five years.
---------------------------------------------------------------------------
IV. Derivation of uniform amount and pricing multipliers
The uniform amount and pricing multipliers used to compute the
annual base assessment rate in basis points, PiT, for any
such institution i at a given time T will be determined from the
Statistical Model, the minimum and maximum downgrade probability
cutoff values, and minimum and maximum base assessment rates in Risk
Category I as follows:
[GRAPHIC] [TIFF OMITTED] TR30NO06.026
where [alpha]0 and [alpha]1 are a constant
term and a scale factor used to convert diT (the
estimated downgrade probability for institution i at a given time T
from the Statistical Model) to an assessment rate, respectively. The
numbers 2 and 4 in the restriction to equation 2 are the minimum
base assessment rate and maximum base assessment rate, respectively,
and they are expressed in basis points.
[GRAPHIC] [TIFF OMITTED] TR30NO06.027
Solving equation 2 for minimum and maximum base assessment rates
simultaneously, (2 = [alpha]0 + [alpha]1 *
0.02 and 4 = [alpha]0 + [alpha]1 * 0.14),
where 0.02 is the minimum downgrade probability cutoff value and
0.14 is the maximum downgrade probability cutoff value, results in
values for the constant amount, [alpha]0, and the scale
factor, [alpha]1:
[GRAPHIC] [TIFF OMITTED] TR30NO06.028
[GRAPHIC] [TIFF OMITTED] TR30NO06.024
Substituting equations 1b, 3 and 4 into equation 2 produces an
annual base assessment rate for institution i at time T,
PiT, in terms of the uniform amount, the pricing
multipliers and the ratios and weighted average CAMELS component
rating referred to in 12 CFR 327.9(d)(2)(i):
[GRAPHIC] [TIFF OMITTED] TR30NO06.025
where 1.67+16.67*[beta]0 equals the uniform amount,
16.67*[beta]j is a pricing multiplier for the associated
risk measure j, and T is the date of the report of condition
corresponding to the end of the quarter for which the assessment
rate is computed.
V. Updating the Statistical Model, uniform amount, and pricing
multipliers
The initial Statistical Model is estimated using year-end
financial ratios and the weighted average of the ``C,'' ``A,''
``M,'' ``E'' and ``L'' component ratings over the 1984 to 2004
period and downgrade data from the 1985 to 2005 period. The FDIC
may, from time to time, but no more frequently than annually, re-
estimate the Statistical Model with updated data and publish a new
formula for determining assessment rates--equation 5--based on
updated uniform amounts and pricing multipliers. However, the
minimum and maximum downgrade probability cutoff values will not
change without additional notice-and-comment rulemaking. The period
covered by the analysis will be lengthened by one year each year;
however, from time to time, the FDIC may drop some earlier years
from its analysis.
Appendix B to Subpart A
Numerical Conversion of Long-term Debt Issuer Ratings
------------------------------------------------------------------------
Converted
Current long-term debt issuer rating * value
------------------------------------------------------------------------
Standard & Poor's
[[Page 69316]]
AAA....................................................... 1.00
AA+....................................................... 1.05
AA........................................................ 1.15
AA-....................................................... 1.30
A+........................................................ 1.50
A......................................................... 1.80
A-........................................................ 2.20
BBB+...................................................... 2.70
BBB or worse.............................................. 3.00
Moody's
Aaa....................................................... 1.00
Aa1....................................................... 1.05
Aa2....................................................... 1.15
Aa3....................................................... 1.30
A1........................................................ 1.50
A2........................................................ 1.80
A3........................................................ 2.20
Baa1...................................................... 2.70
Baa2 or worse............................................. 3.00
Fitch's
AAA....................................................... 1.00
AA+....................................................... 1.05
AA........................................................ 1.15
AA-....................................................... 1.30
A+........................................................ 1.50
A......................................................... 1.80
A-........................................................ 2.20
BBB+...................................................... 2.70
BBB or worse.............................................. 3.00
------------------------------------------------------------------------
* A current rating is defined as one that has been assigned or reviewed
in the last 12 months. Stale ratings are not considered.
Appendix C to Subpart A
[[Page 69317]]
Additional Risk Considerations for Large Risk Category I Institutions
------------------------------------------------------------------------
Examples of Associated Risk Indicators or
Information source Information
------------------------------------------------------------------------
Financial Performance Capital Measures (Level and Trend)
and Condition
Information
Regulatory capital ratios
Capital composition
Dividend payout ratios
Internal capital growth rates
relative to asset growth
Profitability Measures (Level and Trend)
Return on assets and return on risk-
adjusted assets
Net interest margins, funding costs
and volumes, earning asset yields and
volumes
Noninterest revenue sources
Operating expenses
Loan loss provisions relative to
problem loans
Historical volatility of various
earnings sources
Asset Quality Measures (Level and Trend)
Loan and securities portfolio
composition and volume of higher risk lending
activities (e.g., sub-prime lending)
Loan performance measures (past
due, nonaccrual, classified and criticized,
and renegotiated loans) and portfolio
characteristics such as internal loan
rating and credit score distributions,
internal estimates of default, internal
estimates of loss given default, and
internal estimates of exposures in the
event of default
Loan loss reserve trends
Loan growth and underwriting trends
Off-balance sheet credit exposure
measures (unfunded loan commitments,
securitization activities, counterparty
derivatives exposures) and hedging
activities
Liquidity and Funding Measures (Level and
Trend)
Composition of deposit and non-
deposit funding sources
Liquid resources relative to short-
term obligations, undisbursed credit lines,
and contingent liabilities
Interest Rate Risk and Market Risk (Level and
Trend)
Maturity and repricing information
on assets and liabilities, interest rate
risk analyses
Trading book composition and Value-
at-Risk information
------------------------------------------------------------------------
Market Information Subordinated debt spreads
Credit default swap spreads
Parent's debt issuer ratings and
equity price volatility
Market-based measures of default
probabilities
Rating agency watch lists
Market analyst reports
------------------------------------------------------------------------
Stress Considerations Ability to Withstand Stress Conditions
Internal analyses of portfolio
composition and risk concentrations, and
vulnerabilities to changing economic and
financial conditions
Stress scenario development and
analyses
Results of stress tests or scenario
analyses that show the degree of
vulnerability to adverse economic,
industry, market, and liquidity events.
Examples include:
i. an evaluation of credit portfolio
performance under varying stress
scenarios
ii. an evaluation of non-credit business
performance under varying stress
scenarios.
iii. an analysis of the ability of
earnings and capital to absorb losses
stemming from unanticipated adverse
events
Contingency or emergency funding
strategies and analyses
Capital adequacy assessments
Loss Severity Indicators
Nature of and breadth of an
institution's primary business lines and the
degree of variability in valuations for firms
with similar business lines or similar
portfolios
Ability to identify and describe
discrete business units within the banking
legal entity
Funding structure considerations
relating to the order of claims in the
event of liquidation (including the extent
of subordinated claims and priority claims)
Extent of insured institutions
assets held in foreign units
Degree of reliance on affiliates
and outsourcing for material mission-
critical services, such as management
information systems or loan servicing, and
products
Availability of sufficient
information, such as information on insured
deposits and qualified financial contracts,
to resolve an institution in an orderly and
cost-efficient manner
------------------------------------------------------------------------
By order of the Board of Directors.
Dated at Washington, D.C., this 2nd day of November, 2006.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
BILLING CODE 6714-01-P
[[Page 69318]]
[GRAPHIC] [TIFF OMITTED] TR30NO06.015
[[Page 69319]]
[GRAPHIC] [TIFF OMITTED] TR30NO06.016
[[Page 69320]]
[GRAPHIC] [TIFF OMITTED] TR30NO06.017
[[Page 69321]]
[GRAPHIC] [TIFF OMITTED] TR30NO06.018
[[Page 69322]]
[GRAPHIC] [TIFF OMITTED] TR30NO06.019
[[Page 69323]]
[GRAPHIC] [TIFF OMITTED] TR30NO06.020
[FR Doc. 06-9204 Filed 11-29-06; 8:45 am]
BILLING CODE 6714-01-C