[Federal Register Volume 79, Number 141 (Wednesday, July 23, 2014)]
[Proposed Rules]
[Pages 42698-42707]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-16963]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 79, No. 141 / Wednesday, July 23, 2014 / 
Proposed Rules

[[Page 42698]]



FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AE16


Assessments

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking and request for comment.

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SUMMARY: The FDIC is proposing: To revise the ratios and ratio 
thresholds for capital evaluations used in its risk-based deposit 
insurance assessment system to conform to the prompt corrective action 
capital ratios and ratio thresholds adopted by the FDIC, the Board of 
Governors of the Federal Reserve System and the Office of the 
Comptroller of the Currency; to revise the assessment base calculation 
for custodial banks to conform to the asset risk weights adopted by the 
FDIC, the Board of Governors of the Federal Reserve System and the 
Office of the Comptroller of the Currency; and to require all highly 
complex institutions to measure counterparty exposure for deposit 
insurance assessment purposes using the Basel III standardized approach 
credit equivalent amount for derivatives and the Basel III standardized 
approach exposure amount for other securities financing transactions, 
such as repo-style transactions, margin loans and similar transactions, 
as adopted by the Federal banking agencies. These changes are intended 
to accommodate recent changes to the Federal banking agencies' capital 
rules that are referenced in portions of the assessments regulation.

DATES: Comments must be received on or before September 22, 2014.

ADDRESSES: You may submit comments, identified by RIN number, by any of 
the following methods:
     Agency Web site: http://www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments on the Agency 
Web site.
     Email: Comments@FDIC.gov. Include RIN number in the 
subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW., 
Washington, DC 20429.
     Hand Delivery/Courier: 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. (EDT).
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Public Inspection: All comments received will be posted 
without change to http://www.fdic.gov/regulations/laws/federal 
including any personal information provided. Additionally, you may send 
a copy of your comments to: By mail to the U.S. OMB, 725 17th Street 
NW., 10235, Washington, DC 20503 or by facsimile to 
202.395.6974, Attention: Federal Banking Agency Desk Officer.

FOR FURTHER INFORMATION CONTACT: Munsell St. Clair, Chief, Banking and 
Regulatory Policy Section, Division of Insurance and Research, (202) 
898-8967; Ashley Mihalik, Senior Financial Economist, Banking and 
Regulatory Policy Section, Division of Insurance and Research, (202) 
898-3793; Nefretete Smith, Senior Attorney, Legal Division, (202) 898-
6851; Tanya Otsuka, Attorney, Legal Division, (202) 898-6816.

SUPPLEMENTARY INFORMATION:

I. Ratios and Ratio Thresholds Relating to Capital Evaluations

A. Background

    The Federal Deposit Insurance Corporation Improvement Act of 1991 
(FDICIA) \1\ required that the FDIC establish a risk-based deposit 
insurance assessment system. To implement this requirement, the FDIC 
adopted by regulation a system that placed all insured depository 
institutions (IDIs or banks) into nine risk classifications based on 
two criteria: Capital evaluations and supervisory ratings.\2\ Each bank 
was assigned one of three capital evaluations based on data reported in 
its Consolidated Report of Condition and Income (Call Report): Well 
capitalized, adequately capitalized, or undercapitalized. The capital 
ratios and ratio thresholds used to determine each capital evaluation 
were based on the capital ratios and ratio thresholds adopted by the 
FDIC, the Office of the Comptroller of the Currency (OCC), the Board of 
Governors of the Federal Reserve System (Federal Reserve), and the 
Office of Thrift Supervision (OTS)--the Federal banking agencies at 
that time--for prompt corrective action (PCA) purposes.\3\ In 1993, the 
ratios and ratio thresholds used to determine each capital evaluation 
for assessment purposes were as shown in Table 1.
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    \1\ 12 U.S.C. 1817(b), Public Law 102-242, 105 Stat. 2236 
(1991).
    \2\ The FDIC first published a transitional rule that provided 
the industry guidance during the period of transition from a uniform 
rate to a risk-based assessment system. 57 FR 45263 (Oct. 1, 1992). 
The FDIC established the new risk-based assessment system, which 
became effective on January 1, 1994, to replace the transitional 
rule. 58 FR 34357 (June 25, 1993). 12 CFR 327.3 (1993).
    \3\ This final rule, issued by the FDIC, OCC, Federal Reserve, 
and OTS, in part, established capital ratios and ratio thresholds 
for the five capital categories for purposes of the PCA rules: Well 
capitalized, adequately capitalized, undercapitalized, significantly 
undercapitalized, and critically undercapitalized. 57 FR 44866 
(Sept. 29, 1992). The risk-based assessment system does not use the 
two lowest capital categories (significantly undercapitalized and 
critically undercapitalized) under the PCA rules. For assessment 
purposes, banks that would be in one of these capital categories are 
treated as undercapitalized.

[[Page 42699]]



              Table 1--Capital Ratios Used To Determine Capital Evaluations for Assessment Purposes
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                                                          Total risk-based  Tier 1 risk-based   Tier 1 leverage
                  Capital evaluations                     ratio (percent)    ratio (percent)    ratio (percent)
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Well Capitalized.......................................               >=10                >=6                >=5
Adequately Capitalized *...............................                >=8                >=4                >=4
                                                        --------------------------------------------------------
Undercapitalized.......................................       Does not qualify as either Well Capitalized or
                                                                         Adequately Capitalized.
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* An institution is Adequately Capitalized if it is not Well Capitalized, but satisfies each of the listed
  capital ratio standards for Adequaltely Capitalized.

    In 2007, the nine risk classifications were consolidated into four 
risk categories, which continued to be based on capital evaluations and 
supervisory ratings; \4\ the capital ratios and the thresholds used to 
determine capital evaluations remained unchanged.\5\
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    \4\ The four risk categories are I, II, III, and IV. Banks 
posing the least risk are assigned to risk category I. 71 FR 69282 
(Nov. 30, 2006).
    \5\ To the extent that the definitions of components of the 
ratios--such as tier 1 capital, total capital, and risk-weighted 
assets--have changed over time for PCA purposes, the assessment 
system has reflected these changes.
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    In 2011, the FDIC adopted a revised assessment system for large 
banks--generally, those with at least $10 billion in total assets 
(Assessments final rule).\6\ This system eliminated risk categories for 
these banks, but the capital evaluations continue to be used to 
determine whether an assessment rate is subject to adjustment for 
significant amounts of brokered deposits.\7\
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    \6\ 76 FR 10672 (Feb. 25, 2011). The FDIC amended part 327 in a 
subsequent final rule by revising some of the definitions used to 
determine assessment rates for large and highly complex IDIs. 77 FR 
66000 (Oct. 31, 2012). The term ``Assessments final rule'' includes 
the October 2012 final rule.
    \7\ In 2009, the FDIC added adjustments to its risk-based 
pricing methods to improve the way the assessment system 
differentiates risk among insured institutions. The brokered deposit 
adjustment (one of the adjustments added in 2009) is applicable only 
to small institutions in risk categories II, III, and IV, and large 
institutions that are either less than well capitalized or have a 
composite CAMELS rating of 3, 4 or 5 (under the Uniform Financial 
Institution Rating System). The adjustment increases assessment 
rates for significant amounts of brokered deposits. 75 FR 9525 (Mar. 
4, 2009).
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    The assessment system for small banks, generally those with less 
than $10 billion in total assets, continues to use risk categories 
based on capital evaluations and supervisory ratings; the capital 
ratios and the thresholds used to determine capital evaluations have 
remained unchanged.
    On September 7, 2013, the FDIC adopted an interim final rule.\8\ On 
April 14, 2014, the FDIC published a final rule that, in part, revises 
the definition of regulatory capital.\9\ The OCC and the Federal 
Reserve adopted a final rule in October 2013 that is substantially 
identical to the FDIC's interim final rule and final rule.\10\ (The 
FDIC's interim final rule and final rule and the OCC and Federal 
Reserve's final rule are referred to collectively hereafter as the 
Basel III capital rules.) The Basel III capital rules revise the 
thresholds for the tier 1 risk-based capital ratio used to determine a 
bank's capital category under the PCA rules (that is, whether the bank 
is well capitalized, adequately capitalized, undercapitalized, 
significantly undercapitalized or critically undercapitalized). The 
Basel III capital rules also add a new ratio, the common equity tier 1 
capital ratio, and new thresholds for that ratio to determine a bank's 
capital category under the PCA rules.\11\ The new ratio and ratio 
thresholds will take effect on January 1, 2015.
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    \8\ 78 FR 55340 (Sept. 10, 2013).
    \9\ 79 FR 20754 (Apr. 14, 2014).
    \10\ 78 FR 62018 (Oct. 11, 2013).
    \11\ 78 FR at 62027 and 62283 (OCC and Federal Reserve) and 78 
FR 55592 (FDIC), codified, in part, at 12 CFR part 6 (OCC); 12 CFR 
part 208 (Regulation H), subpart D (Federal Reserve); and 12 CFR 
part 324, subpart H (FDIC).
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    The Basel III capital rules also adopt changes to the regulatory 
capital requirements for banking organizations consistent with section 
171 of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act), often referred to as the ``Collins Amendment.'' Under 
section 171 of the Dodd-Frank Act, the generally applicable capital 
requirements serve as a risk-based capital floor for banking 
organizations subject to the advanced approaches risk-based capital 
rules \12\ (advanced approaches banks \13\). Under the Basel III 
capital rules effective January 1, 2015, the minimum capital 
requirements as determined by the regulatory capital ratios based on 
the standardized approach \14\ become the ``generally applicable'' 
capital requirements under section 171 of the Dodd-Frank Act.
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    \12\ The FDIC's advanced approaches rule is at 12 CFR part 324, 
subpart E. The advanced approaches rule is also supplemented by the 
FDIC's risk-based capital requirements for banks subject to 
significant exposure to market risk (market risk rule) in 12 CFR 
part 324, subpart F.
    \13\ As used herein, an advanced approaches bank means an IDI 
that is an advanced approaches national bank or Federal savings 
association under 12 CFR 3.100(b)(1), an advanced approaches Board-
regulated institution under 12 CFR 217.100(b)(1), or an advanced 
approaches FDIC-supervised institution under 12 CFR 324.100(b)(1). 
In general, an IDI is an advanced approaches bank if it has total 
consolidated assets of $250 billion or more, has total consolidated 
on-balance sheet foreign exposures of $10 billion or more, or elects 
to use or is a subsidiary of an IDI, bank holding company, or 
savings and loan holding company that uses the advanced approaches 
to calculate risk-weighted assets.
    \14\ The FDIC's standardized approach risk-based capital rule is 
at 12 CFR part 324, subpart D. The standardized-approach risk-based 
capital rule is supplemented by the FDIC's market risk rule in 12 
CFR part 324, subpart F.
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    All banks, including advanced approaches banks, must calculate 
risk-weighted assets under the standardized approach and report these 
risk-weighted assets, for capital purposes, in Schedule RC-R of the 
Call Report effective January 1, 2015. Advanced approaches banks also 
must calculate risk weights using the advanced approaches and report 
risk-weighted assets in the Risk-Based Capital Reporting for 
Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 
101). Revisions to the advanced approaches risk-weight calculations 
became effective January 1, 2014. An advanced approaches bank that has 
successfully completed the parallel run process \15\ must determine 
whether it meets its minimum risk-based capital requirements by 
calculating the three risk-based capital ratios using total risk-
weighted assets under the generally applicable risk-based capital rules 
and, separately, total risk-weighted assets under the advanced 
approaches.\16\ The

[[Page 42700]]

lower ratio for each risk-based capital requirement is the ratio that 
will be used to determine an advanced approaches bank's compliance with 
the minimum capital requirements \17\ and, beginning on January 1, 
2015, for purposes of determining compliance with the new PCA 
requirements.\18\
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    \15\ Before determining its risk-weighted assets under advanced 
approaches, a bank must conduct a satisfactory parallel run. A 
satisfactory parallel run is a period of no less than four 
consecutive calendar quarters during which the bank complies with 
the qualification requirements to the satisfaction of its primary 
Federal regulator. Following completion of a satisfactory parallel 
run, a bank must receive approval from its primary Federal regulator 
to calculate risk-based capital requirements under the advanced 
approaches. See 12 CFR 324.121 (FDIC); 12 CFR 3.121 (OCC); and 12 
CFR 217.121 (Federal Reserve).
    \16\ Currently, the generally applicable risk-based capital 
rules are found at 12 CFR part 325, appendix A (as supplemented by 
the risk-based capital requirements for banks subject to the market 
risk rule in appendix C). Effective January 1, 2015, the generally 
applicable risk-based capital rules will be based on the 
standardized approach for calculating risk-weighted assets under the 
Basel III capital rules, 12 CFR part 324, subpart D (as supplemented 
by the risk-based capital requirements for banks subject to the 
market risk rule in subpart F).
    \17\ See 12 CFR 324.10(c) (FDIC); 12 CFR 3.10(c) (OCC); and 12 
CFR 217.10(c) (Federal Reserve).
    \18\ See 12 CFR part 324, subpart H.
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    For advanced approaches banks, the Basel III capital rules also 
introduce the supplementary leverage ratio and a threshold for that 
ratio that advanced approaches banks must meet to be deemed adequately 
capitalized.\19\ (The supplementary leverage ratio as adopted in the 
Basel III capital rules does not, however, establish a ratio that 
advanced approaches banks must meet to be deemed well capitalized.) 
While all advanced approaches banks must calculate and begin reporting 
the supplementary leverage ratio beginning in the first quarter of 
2015, the supplementary leverage ratio does not become effective for 
PCA purposes until January 1, 2018.\20\
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    \19\ The supplementary leverage ratio includes many off-balance 
sheet exposures in its denominator, while the generally applicable 
leverage ratio does not.
    \20\ 78 FR at 62277 (OCC and Federal Reserve); 78 FR at 55592 
(FDIC).
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    On May 1, 2014, the Federal Reserve, FDIC, and OCC (the Federal 
banking agencies) published a final rule (the Enhanced Supplementary 
Leverage Ratio final rule) that strengthens the supplementary leverage 
ratio standards for the largest advanced approaches banks.\21\ The 
Enhanced Supplementary Leverage Ratio final rule provides that an IDI 
that is a subsidiary of a covered bank holding company (BHC) must 
maintain a supplementary leverage ratio of at least 6 percent to be 
well capitalized under the Federal banking agencies' PCA framework.\22\ 
Again, the supplementary leverage ratio does not become effective for 
PCA purposes until January 1, 2018.
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    \21\ 79 FR 24528 (May 1, 2014).
    \22\ 79 FR at 24530. IDI subsidiaries of a ``covered BHC'' are a 
subset of IDIs subject to advanced approaches requirements. A 
covered BHC is any U.S. top-tier U.S. BHC with more than $700 
billion in total consolidated assets or more than $10 trillion in 
assets under custody. 79 FR at 24530. The list of ``covered BHCs'' 
is consistent with the list of banking organizations that meet the 
Basel Committee on Banking Supervision (BCBS) definition of a Global 
Systemically Important Bank (G-SIB), based on year-end 2011 data, 
and consistent with the revised list, based on year-end 2012 data. 
The revised list is available at http://www.financialstabilityboard.org/publications/r_131111.pdf).
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B. Proposed Capital Evaluations

    The FDIC proposes to revise the ratios and ratio thresholds 
relating to capital evaluations for deposit insurance assessment 
purposes to conform to the new PCA capital rules. This proposed 
revision would maintain the consistency between capital evaluations for 
deposit insurance assessment purposes and capital ratios and ratio 
thresholds for PCA purposes that has existed since the creation of the 
risk-based assessment system over 20 years ago. Ensuring that the same 
ratios, ratio thresholds, and terminology used for PCA purposes also 
are used for deposit insurance assessment purposes will avoid differing 
capital definitions and potential confusion, and will decrease 
regulatory burden for banks because they will be subject to only a 
single set of capital category definitions.
    Specifically, the FDIC proposes to revise the definitions of well 
capitalized and adequately capitalized for deposit insurance assessment 
purposes to reflect the threshold changes for the tier 1 risk-based 
capital ratio, to incorporate the common equity tier 1 capital ratio 
and its thresholds and, for those banks subject to the supplementary 
leverage ratio for PCA purposes, to incorporate the supplementary 
leverage ratio and its thresholds.\23\ The definition of 
undercapitalized will remain unchanged. The FDIC proposes to make the 
revisions to the definitions of well capitalized and adequately 
capitalized for deposit insurance assessment purposes effective when 
the new PCA capital rules become effective. Therefore, some of the 
revisions for deposit insurance assessment purposes would become 
effective January 1, 2015 and the remaining revisions would become 
effective January 1, 2018.
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    \23\ To the extent that the definitions of components of the 
ratios--such as tier 1 capital, total capital, and risk-weighted 
assets--change in the future for PCA purposes, the assessment system 
will automatically incorporate these changes as implemented under 
the Basel III capital rules. Thus, for example, if the Federal 
banking agencies adopt a final rule redefining the denominator of 
the supplementary leverage ratio, as they have proposed, 79 FR 24596 
(May 1, 2014), the new definition will automatically become 
applicable to the assessment system.
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    Effective January 1, 2015, the FDIC proposes that for deposit 
insurance assessment purposes:
    1. An institution will be well capitalized if it satisfies each of 
the following capital ratio standards: Total risk-based capital ratio, 
10.0 percent or greater; tier 1 risk-based capital ratio, 8.0 percent 
or greater (as opposed to the current 6.0 percent or greater); leverage 
ratio, 5.0 percent or greater; and common equity tier 1 capital ratio, 
6.5 percent or greater.
    2. An institution will be adequately capitalized if it is not well 
capitalized but satisfies each of the following capital ratio 
standards: Total risk-based capital ratio, 8.0 percent or greater; tier 
1 risk-based capital ratio, 6.0 percent or greater (as opposed to the 
current 4.0 percent or greater); leverage ratio, 4.0 percent or 
greater; and common equity tier 1 capital ratio, 4.5 percent or 
greater.

The definition of an undercapitalized institution remains the same: An 
institution will be undercapitalized if it does not qualify as either 
well capitalized or adequately capitalized.

    The FDIC also proposes a technical amendment to Part 327 to replace 
the terms ``Total risk-based ratio,'' ``Tier 1 risk-based ratio,'' and 
``Tier 1 leverage ratio,'' with ``total risk-based capital ratio,'' 
``tier 1 risk-based capital ratio,'' and ``leverage ratio,'' 
respectively, wherever such terms appear.\24\
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    \24\ The FDIC has identified a slight inconsistency in 
terminology between the PCA capital rules of parts 324 and 325 and 
the deposit insurance assessment system of part 327. Currently, the 
risk-based assessment system under part 327 uses the terms ``Total 
risk-based ratio,'' ``Tier 1 risk-based ratio,'' and ``Tier 1 
leverage ratio.'' The PCA capital rules use the terms ``total risk-
based capital ratio,'' ``tier 1 risk-based capital ratio,'' and 
``leverage ratio'' (emphasis added). Despite this minor difference 
in nomenclature, the underlying calculations for each of these three 
ratios are the same under parts 324, 325 and 327 of the FDIC 
regulations.
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    Table 2 summarizes the proposed ratios and ratio thresholds for 
determining capital evaluations for deposit insurance assessment 
purposes, to be effective January 1, 2015.

[[Page 42701]]



    Table 2--Proposed Capital Ratios Used To Determine Capital Evaluations for Assessment Purposes, Effective
                                                 January 1, 2015
----------------------------------------------------------------------------------------------------------------
                                                    Total risk-    Tier 1 risk-    Common equity
                                                   based capital   based capital  tier 1 capital  Leverage ratio
               Capital evaluations                     ratio           ratio           ratio         (percent)
                                                     (percent)       (percent)       (percent)
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Well Capitalized................................            >=10             >=8           >=6.5             >=5
Adequately Capitalized *........................             >=8             >=6           >=4.5             >=4
�������������������������������������������������
Undercapitalized................................     Does not qualify as either Well Capitalized or Adequately
                                                                           Capitalized.
----------------------------------------------------------------------------------------------------------------
* An institution is Adequately Capitalized if it is not Well Capitalized, but satisfies each of the listed
  capital ratio standards for Adequately Capitalized.

    Effective January 1, 2018, the FDIC proposes to add the 
supplementary leverage ratio to its capital evaluations for deposit 
insurance assessment purposes to conform to the PCA capital rules. For 
assessment purposes, an advanced approaches bank, including an IDI 
subsidiary of a covered BHC, must have at least a 3.0 percent 
supplementary leverage ratio to be adequately capitalized, and an IDI 
subsidiary of a covered BHC must have at least a 6.0 percent 
supplementary leverage ratio to be well capitalized.
    Table 3 summarizes the proposed ratios and ratio thresholds for 
determining capital evaluations for deposit insurance assessment 
purposes, to be effective January 1, 2018.

                Table 3--Proposed Capital Ratios Used To Determine Capital Evaluations for Assessment Purposes, Effective January 1, 2018
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                                                                                                                                           Supplementary
                                              Total risk-    Tier 1 risk-    Common equity                                                leverage ratio
                                             based capital   based capital  tier 1 capital  Leverage ratio  Supplementary leverage ratio    (subsidiary
            Capital evaluations                  ratio           ratio           ratio         (percent)    (advanced approaches banking      IDIs of
                                               (percent)       (percent)       (percent)                           organizations)          covered BHCs)
                                                                                                                                             (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Well Capitalized..........................            >=10             >=8           >=6.5             >=5  Not applicable..............             >=6
Adequately Capitalized *..................             >=8             >=6           >=4.5             >=4  >=3.........................             >=3
                                           -------------------------------------------------------------------------------------------------------------
Undercapitalized..........................                     Does not qualify as either Well Capitalized or Adequately Capitalized.
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* An institution is Adequately Capitalized if it is not Well Capitalized, but satisfies each of the listed capital ratio standards for Adequately
  Capitalized.

C. Alternatives

    Given the information available, the FDIC has considered whether 
there are reasonable alternatives. The only alternative the FDIC has 
identified would be to leave in place the current terminology and 
capital evaluations for deposit insurance assessment purposes. This 
would create unnecessary complexity and inconsistency between the 
ratios and ratio thresholds used to determine whether a bank is well 
capitalized, adequately capitalized or undercapitalized for deposit 
insurance assessment purposes and for PCA purposes. This complexity and 
inconsistency could lead to confusion and increase regulatory burden on 
banks.

II. Assessment Base Calculation for Custodial Banks

A. Background

    The FDIC charges IDIs an amount for deposit insurance equal to the 
IDI's deposit insurance assessment base multiplied by its risk-based 
assessment rate. The Dodd-Frank Act directed the FDIC to amend its 
regulatory definition of ``assessment base'' for purposes of setting 
assessments for IDIs. Specifically, the Dodd-Frank Act required the 
FDIC to define the term ``assessment base'' with respect to a 
depository institution as an amount equal to:
 The average consolidated total assets of the insured 
depository institution during the assessment period; minus
 The sum of:
    [cir] The average tangible equity of the insured depository 
institution during the assessment period, and
    [cir] In the case of an insured depository institution that is a 
custodial bank (as defined by the Corporation, based on factors 
including the percentage of total revenues generated by custodial 
businesses and the level of assets under custody) . . ., an amount that 
the Corporation determines is necessary to establish assessments 
consistent with the definition under section 7(b)(1) of the Federal 
Deposit Insurance Act (12 U.S.C. 1817(b)(1)) for a custodial bank.\25\
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    \25\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203 (Dodd-Frank Act), 331(b), 124 Stat. 1376, 1538 
(codified at 12 U.S.C. 1817(nt)).
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    In February 2011, the FDIC implemented this requirement in the 
Assessments final rule.\26\ The Assessments final rule defines a 
custodial bank and specifies the additional amount to be deducted from 
a custodial bank's average consolidated total assets for purposes of 
determining its assessment base. The assessment base deduction for 
custodial banks is defined as the daily or weekly average (depending 
upon the way the bank reports its average consolidated total assets) of 
a specified amount of certain low-risk, liquid assets, subject to the 
limitation that the daily or weekly

[[Page 42702]]

average value of such assets not exceed the average value of deposits 
that are classified as transaction accounts and are identified by the 
bank as being directly linked to a fiduciary or custodial and 
safekeeping account.
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    \26\ 76 FR at 10706.
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    Under the Assessments final rule, a custodial bank may deduct all 
asset types described in the instructions to lines 34, 35, 36, and 37 
of Schedule RC-R of the Call Report as of December 31, 2010 with a 
Basel risk weight of 0 percent, regardless of maturity, and 50 percent 
of those asset types described in the instructions to those same lines 
with a Basel risk weight of 20 percent, again regardless of 
maturity.\27\ These assets include cash and balances due from 
depository institutions, securities, federal funds sold, and securities 
purchased under agreements to resell.
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    \27\ Risk-weighted assets are generally determined by assigning 
assets to broad risk-weight categories. The amount of an asset is 
multiplied by its risk weight (for example, 0 percent or 20 percent) 
to calculate the risk-weighted asset amount.
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    Under the Basel III capital rules, the standardized approach 
introduces 2 percent and 4 percent risk weights for cleared 
transactions with Qualified Central Counterparties (QCCPs), as defined 
in the regulatory capital rules, subject to certain collateral 
requirements.\28\ The lower risk weights reflect the Federal banking 
agencies' support for ``incentives designed to encourage clearing of 
derivative and repo-style transactions through a CCP [central 
counterparty] wherever possible in order to promote transparency, 
multilateral netting, and robust risk-management practices.'' \29\ 
Nonetheless, the new 2 percent and 4 percent risk weights (being 
greater than 0) recognize that, while clearing transactions through a 
CPP significantly reduces counterparty credit risk, the clearing 
process does not eliminate risk altogether and that some degree of 
residual risk is retained.
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    \28\ See 78 FR 62184-85 (OCC and Federal Reserve); 78 FR at 
55502 (FDIC).
    \29\ See 78 FR at 62096 (OCC and Federal Reserve); 78 FR at 
55414 (FDIC).
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    Section 939A of the Dodd-Frank Act requires the removal of any 
regulatory reference to or requirement of reliance on credit ratings 
for assessing the credit-worthiness of a security or money market 
instrument and the substitution of new standards of credit-
worthiness.\30\ Consequently, the Basel III capital rules remove 
references to credit ratings for purposes of determining risk weights 
for risk-based capital calculations, and the standardized approach 
introduces a formula-based methodology for calculating risk-weighted 
assets for many securitization exposures. Risk weights under the 
standardized approach for certain other assets, including but not 
limited to exposures to foreign sovereigns, foreign banks, and foreign 
public sector entities, have also changed.
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    \30\ See 15 U.S.C. 78o-7 note.
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B. Proposed Assessment Base Calculation

    The FDIC proposes to revise the assessment base deduction for 
custodial banks to conform to the new standardized approach for risk-
weighted assets adopted in the Basel III capital rules. For deposit 
insurance assessment purposes, the FDIC proposes to continue using the 
generally applicable risk weights (as revised under the standardized 
approach, effective January 1, 2015), even for advanced approaches 
banks. Using a single set of risk weights assures that all custodial 
banks will be treated consistently for purposes of determining the 
assessment base deduction, whether or not they are advanced approaches 
banks. In addition, as described above, all banks, including advanced 
approaches banks, must calculate standardized approach risk weights to 
determine compliance with minimum capital requirements and the PCA 
standards. Thus, the FDIC's proposal should not increase reporting 
burden for advanced approaches banks.
    The FDIC proposes to continue to define the assessment base 
deduction for custodial banks as the daily or weekly average of a 
certain amount of specified low-risk, liquid assets, subject to the 
limitation that the daily or weekly average value of these assets 
cannot exceed the daily or weekly average value of deposits that are 
classified as transaction accounts and are identified by the bank as 
being directly linked to a fiduciary or custodial and safekeeping 
account asset. Subject to this limitation, effective January 1, 2015, 
the FDIC proposes that the assessment base deduction be the daily or 
weekly average of:
    1. 100 percent of those asset types described in the instructions 
to lines 1, 2, and 3 of Schedule RC of the Consolidated Report of 
Condition and Income with a standardized approach risk weight of 0 
percent, regardless of maturity, excluding any asset that qualifies as 
a securitization exposure; plus
    2. 50 percent of those asset types described in the instructions to 
lines 1, 2, and 3 of Schedule RC of the Consolidated Report of 
Condition and Income with a standardized approach risk weight greater 
than 0 and up to and including 20 percent, regardless of maturity, 
excluding any asset that qualifies as a securitization exposure.
    In general, the assets described in lines 1, 2, and 3 of Schedule 
RC of the Call Report include cash and balances due from depository 
institutions, securities (both held-to-maturity and available-for-
sale), federal funds sold, and securities under agreements to resell. 
The inclusion of these asset types in the assessment base deduction for 
custodial banks is consistent with the asset types included in the 
current adjustment.
    The assessment base of a custodial bank is adjusted because of the 
custodial bank's need to hold low-risk, liquid assets to facilitate the 
payments and processing function associated with its custody and 
safekeeping accounts. For this reason, the FDIC is proposing to exclude 
from the assessment base deduction those asset types described in lines 
1, 2, and 3 of Schedule RC of the Call Report that qualify as a 
securitization exposure as defined in the regulatory capital rules,\31\ 
since these assets are often not liquid. Under the Basel III capital 
rules, a securitization exposure generally includes credit exposures 
with more than one underlying exposure where the credit risk associated 
with the underlying exposures has been separated into at least two 
tranches reflecting different levels of seniority.\32\ Traditional 
collateralized mortgage obligations issued or guaranteed by the Federal 
National Mortgage Association, Federal Home Loan Mortgage Corporation, 
or Government National Mortgage Association that do not have credit 
tranches generally do not meet this definition of a securitization 
exposure, and thus will generally continue to be included in the 
assessment base deduction for custodial banks.
---------------------------------------------------------------------------

    \31\ 78 FR at 55482.
    \32\ Securitization exposure is defined as an on- or off-balance 
sheet credit exposure (including credit-enhancing representations 
and warranties) that arises from a traditional securitization or a 
synthetic securitization (including a re-securitization), or an 
exposure that directly or indirectly references a securitization 
exposure. See 78 FR at 62168 (OCC and Federal Reserve); 78 FR at 
55482 (FDIC).
---------------------------------------------------------------------------

    In addition, 50 percent of assets described in line 3 of Schedule 
RC of the Call Report that are assigned a 2 or 4 percent risk weight 
may be included in the assessment base deduction for custodial banks. 
While these assets are generally liquid and low-risk, they are not 
risk-free and consequently do not merit a 100 percent inclusion in the 
assessment base deduction for custodial banks.
    The FDIC also proposes a technical amendment to the definition of 
``custodial bank.'' This amendment removes any reference to the Call 
Report

[[Page 42703]]

date of December 31, 2010 and ensures conformity with the Basel III 
capital rules.

C. Alternatives

    Given the information available, the FDIC has considered whether 
there are reasonable alternatives to this proposal. One possible 
alternative would be to maintain the current assessment base 
calculation applicable to custodial banks. This alternative would 
create unnecessary complexity and inconsistency between the asset risk 
weights used for regulatory capital purposes and for deposit insurance 
assessment purposes. This complexity and inconsistency could lead to 
confusion and increase regulatory burden on banks.
    As previously noted, the Basel III capital rules revise asset risk 
weights for capital purposes. The FDIC is proposing to adjust the 
assessment base deduction for custodial banks to conform to the revised 
risk weights under the Basel III capital rules. The Basel III capital 
rules introduce new 2 and 4 percent risk weights for cleared 
transactions with QCCPs. The FDIC is proposing to include in the 
assessment base deduction for custodial banks the daily or weekly 
average of 50 percent of certain low-risk assets assigned the new 2 or 
4 percent risk weight. Alternatively, the FDIC has considered including 
100 percent of these asset types in the adjustment. As previously 
stated, however, while these assets are generally liquid and low-risk, 
they are not risk-free and consequently the FDIC believes that they do 
not merit a 100 percent inclusion in the assessment base deduction for 
custodial banks.

III. Calculation of Counterparty Exposures in the Highly Complex 
Institution Scorecard

A. Background

    Under section 7 of the Federal Deposit Insurance Act, the FDIC may 
establish a separate risk-based assessment system for large members of 
the Deposit Insurance Fund (DIF). In setting assessments for IDIs, the 
FDIC must consider certain enumerated factors, including the 
probability that the DIF will incur a loss with respect to an 
institution, taking into consideration the risks attributable to 
different categories and concentrations of assets and liabilities.\33\ 
In the Assessments final rule, the FDIC adopted a revised assessment 
system for large banks--generally, those with at least $10 billion in 
total assets. This system, which went into effect in the second quarter 
of 2011, uses scorecards that combine CAMELS ratings and certain 
financial measures to assess the risk a large institution poses to the 
DIF. One scorecard applies to most large institutions and another 
applies to highly complex institutions, those that are structurally and 
operationally complex or that pose unique challenges and risks to the 
DIF in the event of failure.\34\
---------------------------------------------------------------------------

    \33\ 12 U.S.C. 1817(b).
    \34\ A ``highly complex institution'' is defined as: (1) An IDI 
(excluding a credit card bank) that has had $50 billion or more in 
total assets for at least four consecutive quarters that either is 
controlled by a U.S. parent holding company that has had $500 
billion or more in total assets for four consecutive quarters, or is 
controlled by one or more intermediate U.S. parent holding companies 
that are controlled by a U.S. holding company that has had $500 
billion or more in assets for four consecutive quarters; or (2) a 
processing bank or trust company. 12 CFR 327.8(g).
---------------------------------------------------------------------------

    The scorecards for both large and highly complex institutions use 
quantitative measures that are useful in predicting a large 
institution's long-term performance. Most of the measures used in the 
highly complex institution scorecard are similar to the measures used 
in the large bank scorecard. The scorecard for highly complex 
institutions, however, includes additional measures, such as the ratio 
of top 20 counterparty exposures to Tier 1 capital and reserves and the 
ratio of the largest counterparty exposure to Tier 1 capital and 
reserves (collectively, the counterparty exposure measures). Both 
ratios are defined in the Assessments final rule.
    The Assessments final rule defines counterparty exposure as the sum 
of exposure at default (EAD) associated with derivatives trading \35\ 
and securities financing transactions (SFTs) and the gross lending 
exposure for each counterparty or borrower.\36\ Generally, since June 
30, 2011, when highly complex institutions began reporting for 
scorecard purposes, they have determined and reported their 
counterparty exposures for assessment purposes using certain methods 
permitted under the Assessments final rule.\37\ The Assessments final 
rule allows use of an approach based on internal models (the Internal 
Models Method, or IMM) to calculate counterparty exposures subject to 
approval by primary federal regulators, but until recently no highly 
complex institution has been permitted to use the IMM.
---------------------------------------------------------------------------

    \35\ Derivatives trading exposures include both over-the-counter 
(OTC) derivatives and derivative contracts that an IDI has entered 
into with a central counterparty.
    \36\ Counterparty exposure excludes all counterparty exposure to 
the U.S. government and departments or agencies of the U.S. 
government that is unconditionally guaranteed by the full faith and 
credit of the United States.
    \37\ For example, permitted methods for derivatives exposures 
have included the credit equivalent amount as calculated under the 
Federal banking agencies' general risk based capital rules and the 
current exposure method (CEM) under the BCBS Basel II framework.
---------------------------------------------------------------------------

    The IMM is one component of the advanced approaches risk-based 
capital framework. Banking organizations that have received approval to 
use the advanced approaches do not automatically have approval to use 
the IMM, which requires a separate approval. Seven of the nine highly 
complex institutions recently received approval from their primary 
regulators to use the advanced approaches for regulatory capital 
beginning in the first quarter of 2014. Of these seven banks, some, but 
not all, have received approval from their primary regulator to use the 
IMM for calculating part of their counterparty credit risk beginning in 
the second quarter of 2014. Thus, some of the nine banks using the 
highly complex institution scorecard began calculating their 
counterparty exposure in the second quarter of 2014 using the IMM, 
while the others will use non-IMM methods.
    Based on preliminary assessments data, the adoption of the IMM by 
itself will cause a significant reduction in counterparty exposure 
amounts and change the scorecard results in a way that significantly 
reduces deposit insurance assessments for the banks using the IMM. This 
significant reduction in assessments does not appear to be driven 
primarily by a change in risk exposure, but rather by a change in 
measurement methodology. Moreover, since the second quarter of 2014, 
the nine banks currently subject to the highly complex institution 
scorecard have been measuring counterparty risk in different ways, and 
the differences in assessments are driven primarily by the different 
methodologies these banks are using.

B. General Description and Rationale for Proposed Counterparty Exposure 
Calculation

    Consequently, the FDIC is proposing that all banks using the highly 
complex institution scorecard calculate their counterparty exposure 
using standardized approach measures from the Basel III capital rules 
starting in the first quarter of 2015. Using the standardized approach 
has four primary advantages. First, all banks employing the highly 
complex institution scorecard would calculate their counterparty 
exposure using a common measurement framework. Using a common, 
consistent methodology for measuring counterparty exposure would ensure

[[Page 42704]]

that methodological differences do not determine a bank's exposure 
relative to its peers. This advantage is an important consideration in 
a risk-based assessment system that in part functions by comparing 
banks according to specified risk metrics. Second, this approach would 
ensure a consistent measurement of counterparty exposure even among 
advanced approaches banks approved for the use of IMM. Third, as 
compared to allowing the IMM to determine the counterparty exposure 
measure for the scorecard, the FDIC's proposal is generally more 
consistent with the approach taken in the Federal banking agencies' 
regulatory capital framework, because most advanced approaches banks 
will be bound by the floor set by the standardized approach risk-based 
capital rules. Finally, all nine institutions currently using the 
highly complex institution scorecard would be using counterparty 
exposure measures they will compute for the standardized approach, so 
that the FDIC's proposal would not impose additional reporting burdens.
    The FDIC's proposal to use the standardized approach is intended to 
be broadly consistent with the way banks have measured their 
counterparty exposure under the Assessments final rule (before adopting 
IMM). Under this NPR, exposure to a counterparty would be the sum of 
gross loans, the credit equivalent amount of all derivatives exposures 
as reported in the revised Basel III regulatory reporting instructions 
for the standardized approach, and the amount of SFTs subject to risk 
weighting. The proposal is described in more detail directly below.

C. Specifics of the Proposed Counterparty Exposure Calculation

    For deposit insurance assessment purposes, the FDIC proposes that, 
effective January 1, 2015, all highly complex institutions calculate 
counterparty exposure amounts for the counterparty exposure measures 
based upon the standardized approach implemented under the Basel III 
capital rules. Counterparty exposure amounts would continue to include 
derivatives, SFTs and gross lending exposures (including all unfunded 
commitments). SFTs would include repurchase agreements, reverse 
repurchase agreements, security lending and borrowing, and margin 
lending transactions, where the value of the transactions depends on 
market valuations and the transactions are often subject to margin 
agreements. A cleared transaction, which is an exposure associated with 
an outstanding derivative contract or repo-style transaction that an 
IDI has entered into with a central counterparty, would be included in 
the counterparty exposure measures. Counterparty exposure would 
continue to exclude all counterparty exposure to the U.S. government 
and departments or agencies of the U.S. government that is 
unconditionally guaranteed by the full faith and credit of the United 
States.
    Specifically, the FDIC proposes that, for deposit insurance 
assessment purposes, the counterparty exposure amount associated with 
derivatives, including OTC derivatives, a cleared transaction that is a 
derivative contract, or a netting set of derivative contracts,\38\ 
would be calculated as the credit equivalent amount under the 
standardized approach. The credit equivalent amount under the 
standardized approach is the exposure amount set forth in 12 CFR 
324.34(a) and is the sum of current credit exposure and potential 
future exposure without reduction for collateral.\39\ This approach is 
generally consistent with the manner in which highly complex 
institutions have been measuring derivatives exposure for the 
counterparty exposure measures before their approval to use IMM.
---------------------------------------------------------------------------

    \38\ A ``netting set'' is a group of transactions with a single 
counterparty that are subject to a qualifying master netting 
agreement or a qualifying cross-product master netting agreement. 12 
CFR 324.2.
    \39\ For multiple OTC derivative contracts subject to a 
qualifying master netting agreement, however, the exposure amount 
equals the sum of the net current credit exposure and the adjusted 
sum of potential future exposure OTC derivative contracts subject to 
the qualifying master netting agreement, also without reduction for 
collateral.
---------------------------------------------------------------------------

    The FDIC proposes that, for deposit insurance assessment purposes, 
the counterparty exposure amount associated with SFTs, including SFTs 
that are cleared transactions, would be calculated using either the 
simple approach or the collateral haircut approach contained in 12 CFR 
324.37(b) and (c), respectively. This treatment is generally consistent 
with the manner in which highly complex institutions have been 
measuring counterparty exposure under the Assessments final rule.
    For both derivative and SFT exposures, the amount of counterparty 
exposure to central counterparties must also include the default fund 
contribution, which is the funds contributed or commitments made by a 
clearing member to a central counterparty's mutualized loss sharing 
arrangement.
    These proposals are likely to change the amounts that highly 
complex institutions report in their counterparty exposure measures. 
For banks that have begun reporting counterparty exposure using the 
IMM, the amounts reported under the proposals are likely to increase 
total scores and assessment rates compared to amounts reported under 
the IMM; however, the FDIC lacks sufficient data to determine the 
magnitude of the increases at this time. The proposals also may change 
the counterparty exposure amounts reported by banks that do not use the 
IMM because the standardized approach in the Basel III capital rules 
changes the generally applicable risk-based capital rules. Because 
banks will not begin reporting under the Basel III standardized 
approach until March 2015, the FDIC lacks sufficient data at this time 
to determine whether the proposals would increase or decrease total 
scores and assessment rates for these banks.
    To ensure that scores for the counterparty exposure measures 
appropriately differentiate for risk, the FDIC may need to revise the 
conversion of the counterparty exposures measures to scores (that is, 
recalibrate the conversion) after reviewing data reported for some or 
all of 2015. The FDIC's Board would continue to reserve the right to 
make such a revision without further notice-and-comment rulemaking.\40\ 
From time to time, the FDIC could add new data for subsequent reporting 
periods to its analysis and exclude some earlier reporting periods from 
its analysis. Updating the conversion of the counterparty exposure 
measures to scores would allow the FDIC to use the most recent data, 
thereby improving the accuracy of the scorecard method. The NPR also 
proposes that FDIC give banks at least one quarter notice before any 
revision takes effect.
---------------------------------------------------------------------------

    \40\ See 76 FR at 10700; 77 FR at 66016.
---------------------------------------------------------------------------

D. Alternatives

    Given the information available, the FDIC has considered reasonable 
alternatives to this proposal. One possible alternative would be to 
recalibrate the conversion of counterparty exposure measures into 
scores using exposures calculated using the IMM approach with the 
additional counterparty credit components included in the Basel III 
capital rules (that is, credit valuation adjustment \41\ and default 
fund contribution charges). As described above, however, at the time of 
this rulemaking only some of the nine banks employing the highly 
complex institution scorecard are using

[[Page 42705]]

the IMM. Also, there may be differences in assumptions and measurement 
approaches among the banks using the IMM. Recent publications by the 
Basel Committee on Banking Supervision indicate that the use of 
internal models has resulted in a material amount of variability 
between banks, a significant amount of which may be driven by banks' 
individual modeling choices rather than distinctions in portfolio risk 
or risk management practices.\42\ For these reasons, the FDIC believes 
it would be difficult to calibrate and adjust counterparty exposure 
measures in a way that appropriately reflects relative risk.
---------------------------------------------------------------------------

    \41\ Credit valuation adjustment means the fair value adjustment 
to reflect counterparty credit risk in valuation of OTC derivative 
contracts.
    \42\ See, Basel Committee on Banking Supervision. (January 
2013). ``Regulatory consistency assessment programme (RCAP)--
Analysis of risk-weighted assets for market risk'', available online 
at http://www.bis.org/publ/bcbs240.htm; Basel Committee on Banking 
Supervision. (July 2013). ``Regulatory consistency assessment 
programme (RCAP)--Analysis of risk-weighted assets for credit risk 
in the banking book,'' available online at http://www.bis.org/publ/bcbs256.htm; and Basel Committee on Banking Supervision. (July 
2013). ``The regulatory framework: Balancing risk sensitivity, 
simplicity and comparability--discussion paper,'' available online 
at http://www.bis.org/publ/bcbs258.htm.
---------------------------------------------------------------------------

    Another approach would be to provide full recognition for 
collateral posted in derivatives transactions; that is, to reduce the 
credit equivalent amount of derivatives using the collateral haircut 
approach. This approach recognizes benefits of collateral for 
derivatives in the same manner as the proposal recognizes them for 
repo-style transactions, margin loans and other secured transactions. 
In the context of a rulemaking that is designed to accommodate the 
transition to Basel III, the FDIC views this alternative as a material 
departure from past practice with deposit insurance assessments and one 
that could unduly underprice the risks associated with large volumes of 
derivatives activity.
    Another approach would be to measure counterparty exposure using 
``total leverage exposure,'' the exposure measure in the denominator of 
the supplementary leverage ratio as defined in the Basel III capital 
rules. Both in the existing Basel III capital rules and under the 
proposed denominator changes in a recent notice of proposed 
rulemaking,\43\ the total leverage exposure measure is a more 
comprehensive measure of exposure. The definition of total leverage 
exposure, however, is the subject of an open interagency rulemaking, 
and while advanced approaches institutions are expected to begin 
reporting total leverage exposure in 2015, some of the associated 
reporting elements are new and some are unknown pending the outcome of 
the leverage rulemaking. The FDIC is seeking comment on the 
desirability and feasibility of implementing this approach for 
assessment purposes in the first quarter of 2015.
---------------------------------------------------------------------------

    \43\ 79 FR 24596 (May 1, 2014).
---------------------------------------------------------------------------

    Whether the FDIC adopts the proposed approach or an alternative, 
the FDIC believes that it should take some action to ensure that 
counterparty exposures are meaningfully captured in the highly complex 
institution scorecard and converted to scores in a way that 
appropriately and consistently reflects risk. If the FDIC does not 
adopt the proposal set forth above, it would have to take other action, 
such as adopting one of the foregoing alternatives and ensuring that 
counterparty exposures are converted to scores in a way that 
appropriately and consistently reflects risk.

E. Request for Comments on Questions Related to Counterparty Exposures

    The FDIC seeks comment on the following questions related to the 
counterparty exposure measures:
    1. Should the FDIC consider methods other than the proposed 
approach to measure counterparty exposures consistently across 
institutions?
    2. Would reduction of the credit equivalent amount for derivatives 
to reflect collateral better reflect relative risk across institutions; 
and, if so, would this benefit be outweighed by an understatement or 
underpricing of the potential risk associated with large volumes of 
derivatives activities with large counterparties?
    3. Should the FDIC measure counterparty exposures using ``total 
leverage exposure'' as defined in the Basel III capital rules or the 
recent notice of proposed rulemaking proposing changes to the 
denominator of the supplementary leverage ratio?
    4. Should exposure to particular counterparties (e.g., central 
counterparties, affiliates) be excluded from the counterparty exposure 
measure?

IV. Request for Comments

    In addition to its request for comment on specific questions, the 
FDIC seeks comment on all aspects of this proposed rulemaking, 
including comments on possible alternatives and comments on potential 
benefits and costs of its proposals and any alternatives.

V. Effective Date

A. Ratios and Thresholds Relating to Capital Evaluations

    As discussed above, the FDIC proposes two effective dates for the 
ratios and ratio thresholds relating to the capital evaluations used in 
its deposit insurance system: January 1, 2015, and January 1, 2018, the 
effective dates of the changes to the PCA capital rules.

B. Assessment Base Calculation for Custodial Banks

    As discussed above, the FDIC proposes an effective date for the 
assessment base calculation for custodial banks of January 1, 2015.

C. Calculation of Counterparty Exposures in the Highly Complex 
Institution Scorecard

    As discussed above, the FDIC proposes an effective date for the 
calculation of counterparty exposures in the highly complex institution 
scorecard of January 1, 2015.

VI. Regulatory Analysis and Procedure

A. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113 
Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking agencies 
to use plain language in all proposed final rules published after 
January 1, 2000. The FDIC invites your comments on how to make this 
proposal easier to understand. For example:
     Has the FDIC organized the material to suit your needs? If 
not, how could the material be better organized?
     Are the requirements in the proposed regulation clearly 
stated? If not, how could the regulation be stated more clearly?
     Does the proposed regulation contain language or jargon 
that is unclear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand?

B. Regulatory Flexibility Act

    The FDIC has carefully considered the potential impacts on all 
banking organizations, including community banking organizations, and 
has sought to minimize the potential burden of these changes where 
consistent with applicable law and the agencies' goals.
    The Regulatory Flexibility Act (RFA) requires that each Federal 
agency either certify that 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

[[Page 42706]]

analysis for comment.\44\ 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.\45\ Nonetheless, the FDIC is voluntarily undertaking a regulatory 
flexibility analysis to aid the public in commenting on the effect of 
the proposed rule on small institutions.
---------------------------------------------------------------------------

    \44\ See 5 U.S.C. 603 and 605.
    \45\ See 5 U.S.C. 601.
---------------------------------------------------------------------------

    As of December 31, 2013, of the 6,812 IDIs, there were 5,655 small 
IDIs as that term is defined for the purposes of the RFA (i.e., 
institutions with $550 million or less in total assets). Under the 
revisions to the ratios and ratio thresholds for capital evaluations in 
the proposed rule, five small IDIs (0.09 percent of small IDIs) would 
have had higher deposit insurance assessments as of the end of December 
2013 (assuming that they had not increased their capital in response to 
the new PCA capital rules). None would have had lower assessments. In 
the aggregate, these five small IDIs would have been assessed 
approximately $1 million more in annual assessments under the proposed 
rule. In aggregate, the proposed rule would have increased small IDIs' 
assessments by 0.01 percent of all small IDIs' income before taxes.
    Four additional IDIs that meet the RFA definition of a small IDI 
were identified as subsidiaries of custodial banks subject to 
assessments adjustments. The FDIC estimates that under the proposed 
rule, the assessments for these additional small IDIs would not be 
affected.
    The proposed rule regarding the calculation of counterparty 
exposures in the highly complex institution scorecard, if adopted in 
final form, would not affect any small IDIs.
    Thus, the proposed rule, if adopted in final form, would not have a 
significant economic impact on a substantial number of small entities.

C. Paperwork Reduction Act

    No collections of information pursuant to the Paperwork Reductions 
Act (44 U.S.C. 3501 et seq.) are contained in the proposed rule.

D. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The FDIC has determined that the proposed 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 
(Pub. L. 105-277, 112 Stat. 2681).

List of Subjects in 12 CFR Part 327

    Bank deposit insurance, Banks, Savings Associations.

    For the reasons set forth above, the FDIC proposes to amend 12 CFR 
part 327 as follows:

PART 327--ASSESSMENTS

0
1. The authority for 12 CFR Part 327 continues to read as follows:

    Authority:  12 U.S.C. 1441, 1813, 1815, 1817-19, 1821.

0
2. In part 327, subpart A, remove the term ``Tier 1 leverage ratio'' 
and add in its place ``Leverage ratio'' wherever it appears.
0
3. In Sec.  327.5, revise paragraphs (c)(1) and (2) to read as follows:


Sec.  327.5  Assessment base.

* * * * *
    (c) * * *
    (1) Custodial bank defined. A custodial bank for purposes of 
calculating deposit insurance assessments shall be an insured 
depository institution with previous calendar-year trust assets 
(fiduciary and custody and safekeeping assets, as described in the 
instructions to Schedule RC-T of the Consolidated Report of Condition 
and Income) of at least $50 billion or an insured depository 
institution that derived more than 50 percent of its total revenue 
(interest income plus non-interest income) from trust activity over the 
previous calendar year.
    (2) Assessment base calculation for custodial banks. A custodial 
bank shall pay deposit insurance assessments on its assessment base as 
calculated in paragraph (a) of this section, but the FDIC will exclude 
from that assessment base the daily or weekly average (depending on how 
the bank reports its average consolidated total assets) of all asset 
types described in the instructions to lines 1, 2, and 3 of Schedule RC 
of the Consolidated Report of Condition and Income with a standardized 
approach risk weighting of 0 percent, regardless of maturity, except 
those assets that qualify as securitization exposures (as defined in 
Sec.  324.2), plus 50 percent of those asset types described in the 
instructions to lines 1, 2, and 3 of Schedule RC of the Consolidated 
Report of Condition and Income, with a standardized approach risk-
weighting greater than 0 and up to and including 20 percent, regardless 
of maturity, except those assets that qualify as securitization 
exposures (as defined in Sec.  324.2), subject to the limitation that 
the daily or weekly average (depending on how the bank reports its 
average consolidated total assets) value of all assets deducted under 
this section cannot exceed the daily or weekly average value of those 
deposits that are classified as transaction accounts in the 
instructions to Schedule RC-E of the Consolidated Report of Condition 
and Income and that are identified by the institution as being directly 
linked to a fiduciary or custodial and safekeeping account asset.
* * * * *
0
4. In Sec.  327.9, revise paragraphs (a)(2)(i) and (ii) to read as 
follows:
[January 1, 2015 Revision]


Sec.  327.9  Assessment pricing methods.

    (a) * * *
    (2) * * *
    (i) Well Capitalized. A Well Capitalized institution is one that 
satisfies each of the following capital ratio standards: Total risk-
based capital ratio, 10.0 percent or greater; tier 1 risk-based capital 
ratio, 8.0 percent or greater; leverage ratio, 5.0 percent or greater; 
and common equity tier 1 capital ratio, 6.5 percent or greater.
    (ii) Adequately Capitalized. An Adequately Capitalized institution 
is one that does not satisfy the standards of Well Capitalized in 
paragraph (a)(2)(i) of this section but satisfies each of the following 
capital ratio standards: Total risk-based capital ratio, 8.0 percent or 
greater; tier 1 risk-based capital ratio, 6.0 percent or greater; 
leverage ratio, 4.0 percent or greater; and common equity tier 1 
capital ratio, 4.5 percent or greater.
* * * * *
[January 1, 2018 Revision]


Sec.  327.9  Assessment pricing methods.

    (a) * * *
    (2) * * *
    (i) Well Capitalized. A Well Capitalized institution is one that 
satisfies each of the following capital ratio standards: Total risk-
based capital ratio, 10.0 percent or greater; tier 1 risk-based capital 
ratio, 8.0 percent or greater; leverage ratio, 5.0 percent or greater; 
common equity tier 1 capital ratio, 6.5 percent or greater; and, if the 
institution is an insured depository institution subject to the 
enhanced supplementary leverage ratio standards under 12 CFR 
6.4(c)(1)(iv)(B), 12 CFR 208.43(c)(iv)(B), or 12 CFR 324.403(b)(1)(v), 
as each may be amended from time to time, a

[[Page 42707]]

supplementary leverage ratio of 6.0 percent or greater.
    (ii) Adequately Capitalized. An Adequately Capitalized institution 
is one that does not satisfy the standards of Well Capitalized in 
paragraph (a)(2)(i) of this section but satisfies each of the following 
capital ratio standards: Total risk-based capital ratio, 8.0 percent or 
greater; tier 1 risk-based capital ratio, 6.0 percent or greater; 
leverage ratio, 4.0 percent or greater; common equity tier 1 capital 
ratio, 4.5 percent or greater; and, if the institution is subject to 
the advanced approaches risk-based capital rules under 12 CFR 
6.4(c)(2)(iv)(B), 12 CFR 208.43(c)(2)(iv)(B), or 12 CFR 
324.403(b)(2)(vi), as each may be amended from time to time, a 
supplementary leverage ratio of 3.0 percent or greater.
* * * * *
0
5. In Appendix A to Subpart A, in the table under the section heading 
``VI. Description of Scorecard Measures,'' revise the descriptions of 
``(2) Top 20 Counterparty Exposure/Tier 1 Capital and Reserves'' and 
``(3) Largest Counterparty Exposure/Tier 1 Capital and Reserves'' under 
the subheading ``Concentration Measure for Highly Complex 
Institutions'' to read as follows:

Appendix A to Subpart A of Part 327--Method to Derive Pricing 
Multipliers and Uniform Amount

* * * * *

                  VI. Description of Scorecard Measures
------------------------------------------------------------------------
              Scorecard measures \1\                     Description
------------------------------------------------------------------------
 
                              * * * * * * *
Concentration Measure for Highly Complex            Concentration score
 Institutions.                                       for highly complex
                                                     institutions is the
                                                     highest of the
                                                     following three
                                                     scores:
 
                              * * * * * * *
(2) Top 20 Counterparty Exposure/Tier 1 Capital     Sum of the 20
 and Reserves.                                       largest total
                                                     exposure amounts to
                                                     counterparties
                                                     divided by Tier 1
                                                     capital and
                                                     reserves. The total
                                                     exposure amount is
                                                     equal to the sum of
                                                     the institution's
                                                     exposure amounts to
                                                     one counterparty
                                                     (or borrower) for
                                                     derivatives,
                                                     securities
                                                     financing
                                                     transactions
                                                     (SFTs), and cleared
                                                     transactions, and
                                                     its gross lending
                                                     exposure (including
                                                     all unfunded
                                                     commitments) to
                                                     that counterparty
                                                     (or borrower).
                                                     Exposures to
                                                     entities that are
                                                     affiliates of each
                                                     other are treated
                                                     as exposures to one
                                                     counterparty (or
                                                     borrower).
                                                     Counterparty
                                                     exposure excludes
                                                     all counterparty
                                                     exposure to the
                                                     U.S. government and
                                                     departments or
                                                     agencies of the
                                                     U.S. government
                                                     that is
                                                     unconditionally
                                                     guaranteed by the
                                                     full faith and
                                                     credit of the
                                                     United States. The
                                                     exposure amount for
                                                     derivatives,
                                                     including OTC
                                                     derivatives,
                                                     cleared
                                                     transactions that
                                                     are derivative
                                                     contracts, and
                                                     netting sets of
                                                     derivative
                                                     contracts, must be
                                                     calculated using
                                                     the methodology set
                                                     forth in 12 CFR
                                                     324.34(a), without
                                                     any reduction for
                                                     collateral. The
                                                     exposure amount
                                                     associated with
                                                     SFTs, including
                                                     cleared
                                                     transactions that
                                                     are SFTs, must be
                                                     calculated using
                                                     the standardized
                                                     approach set forth
                                                     in 12 CFR 324.37(b)
                                                     or (c). For both
                                                     derivatives and SFT
                                                     exposures, the
                                                     exposure amount to
                                                     central
                                                     counterparties must
                                                     also include the
                                                     default fund
                                                     contribution.\2\
(3) Largest Counterparty Exposure/Tier 1 Capital    The largest total
 and Reserves.                                       exposure amount to
                                                     one counterparty
                                                     divided by Tier 1
                                                     capital and
                                                     reserves. The total
                                                     exposure amount is
                                                     equal to the sum of
                                                     the institution's
                                                     exposure amounts to
                                                     one counterparty
                                                     (or borrower) for
                                                     derivatives, SFTs,
                                                     and cleared
                                                     transactions, and
                                                     its gross lending
                                                     exposure (including
                                                     all unfunded
                                                     commitments) to
                                                     that counterparty
                                                     (or borrower).
                                                     Exposures to
                                                     entities that are
                                                     affiliates of each
                                                     other are treated
                                                     as exposures to one
                                                     counterparty (or
                                                     borrower).
                                                     Counterparty
                                                     exposure excludes
                                                     all counterparty
                                                     exposure to the
                                                     U.S. government and
                                                     departments or
                                                     agencies of the
                                                     U.S. government
                                                     that is
                                                     unconditionally
                                                     guaranteed by the
                                                     full faith and
                                                     credit of the
                                                     United States. The
                                                     exposure amount for
                                                     derivatives,
                                                     including OTC
                                                     derivatives,
                                                     cleared
                                                     transactions that
                                                     are derivative
                                                     contracts, and
                                                     netting sets of
                                                     derivative
                                                     contracts, must be
                                                     calculated using
                                                     the methodology set
                                                     forth in 12 CFR
                                                     324.34(a), without
                                                     any reduction for
                                                     collateral. The
                                                     exposure amount
                                                     associated with
                                                     SFTs, including
                                                     cleared
                                                     transactions that
                                                     are SFTs, must be
                                                     calculated using
                                                     the standardized
                                                     approach set forth
                                                     in 12 CFR 324.37(b)
                                                     or (c). For both
                                                     derivatives and SFT
                                                     exposures, the
                                                     exposure amount to
                                                     central
                                                     counterparties must
                                                     also include the
                                                     default fund
                                                     contribution.\2\
 
                              * * * * * * *
------------------------------------------------------------------------
\1\ The FDIC retains the flexibility, as part of the risk-based
  assessment system, without the necessity of additional notice-and-
  comment rulemaking, to update the minimum and maximum cutoff values
  for all measures used in the scorecard. The FDIC may update the
  minimum and maximum cutoff values for the higher-risk assets to Tier 1
  capital and reserves ratio in order to maintain an approximately
  similar distribution of higher-risk assets to Tier 1 capital and
  reserves ratio scores as reported prior to April 1, 2013, or to avoid
  changing the overall amount of assessment revenue collected. 76 FR
  10672, 10700 (February 25, 2011). The FDIC will review changes in the
  distribution of the higher-risk assets to Tier 1 capital and reserves
  ratio scores and the resulting effect on total assessments and risk
  differentiation between banks when determining changes to the cutoffs.
  The FDIC may update the cutoff values for the higher-risk assets to
  Tier 1 capital and reserves ratio more frequently than annually. The
  FDIC will provide banks with a minimum one quarter advance notice of
  changes in the cutoff values for the higher-risk assets to Tier 1
  capital and reserves ratio with their quarterly deposit insurance
  invoice.
\2\ SFTs include repurchase agreements, reverse repurchase agreements,
  security lending and borrowing, and margin lending transactions, where
  the value of the transactions depends on market valuations and the
  transactions are often subject to margin agreements. The default fund
  contribution is the funds contributed or commitments made by a
  clearing member to a central counterparty's mutualized loss sharing
  arrangement. The other terms used in this description are as defined
  in 12 CFR Part 324, Subparts A and D, unless defined otherwise in 12
  CFR Part 327.

* * * * *

    Dated at Washington, DC, this 15th day of July, 2014.

    By order of the Board of Directors. Federal Deposit Insurance 
Corporation.
Robert E. Feldman,
Executive Secretary.

[FR Doc. 2014-16963 Filed 7-22-14; 8:45 am]
BILLING CODE 6714-01-P