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