[Federal Register Volume 71, Number 141 (Monday, July 24, 2006)]
[Proposed Rules]
[Pages 41910-41973]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-6381]



[[Page 41909]]

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Part III





Federal Deposit Insurance Corporation





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12 CFR Part 327



Deposit Insurance Assessments; Proposed Rule

  Federal Register / Vol. 71, No. 141 / Monday, July 24, 2006 / 
Proposed Rules  

[[Page 41910]]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AD09


Assessments

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking and request for comment.

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SUMMARY: The Federal Deposit Insurance Reform Act of 2005 requires that 
the Federal Deposit Insurance Corporation (the FDIC) prescribe final 
regulations, after notice and opportunity for comment, to provide for 
deposit insurance assessments under section 7(b) of the Federal Deposit 
Insurance Act (the FDI Act). The FDIC is proposing to amend its 
regulations to create different risk differentiation frameworks for 
smaller and larger institutions that are well capitalized and well 
managed; establish a common risk differentiation framework for all 
other insured institutions; and establish a base assessment rate 
schedule.

DATES: Comments must be received on or before September 22, 2006.

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/propose.html. Follow instructions for submitting comments on 
the Agency Web site.
     E-mail: [email protected]. Include the 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.
    Instructions: All submissions received must include the agency name 
and RIN for this rulemaking. All comments received will be posted 
without change to http://www.fdic.gov/regulations/laws/federal/propose.html including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Munsell W. St. Clair, Senior Policy 
Analyst, Division of Insurance and Research, (202) 898-8967; and 
Christopher Bellotto, Counsel, Legal Division, (202) 898-3801.

SUPPLEMENTARY INFORMATION:

I. Background

    On February 8, 2006, the President signed the Federal Deposit 
Insurance Reform Act of 2005 into law; on February 15, 2006, he signed 
the Federal Deposit Insurance Reform Conforming Amendments Act of 2005 
(collectively, the Reform Act).\1\ The Reform Act enacts the bulk of 
the recommendations made by the FDIC in 2001. The Reform Act, among 
other things, gives the FDIC, through its rulemaking authority, the 
opportunity to better price deposit insurance for risk.\2\
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    \1\ Federal Deposit Insurance Reform Act of 2005, Public Law 
109-171, 120 Stat. 9; Federal Deposit Insurance Conforming 
Amendments Act of 2005, Public Law 109-173, 119 Stat. 3601.
    \2\ Pursuant to the Reform Act, current assessment regulations 
remain in effect until the effective date of new regulations. 
Section 2109 of the Reform Act. The Reform Act requires the FDIC, 
within 270 days of enactment, to prescribe final regulations, after 
notice and opportunity for comment, providing for assessments under 
section 7(b) of the Federal Deposit Insurance Act. Section 
2109(a)(5) of the Reform Act. Section 2109 also requires the FDIC to 
prescribe, within 270 days, rules on the designated reserve ratio, 
changes to deposit insurance coverage, the one-time assessment 
credit, and dividends. An interim final rule on deposit insurance 
coverage was published on March 23, 2006. 71 FR 14629. A notice of 
proposed rulemaking on the one-time assessment credit, a notice of 
proposed rulemaking on dividends, and a notice of proposed 
rulemaking on operational changes to part 327 were published on May 
18, 2006. 71 FR 28809, 28804, and 28790. The FDIC is publishing an 
additional rulemaking on the designated reserve ratio simultaneously 
with this notice of proposed rulemaking.
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A. The Risk-Differentiation Framework in Effect Today

    The Federal Deposit Insurance Corporation Improvement Act of 1991 
(FDICIA) required that the FDIC establish a risk-based assessment 
system. To implement this requirement, the FDIC adopted by regulation a 
system that places institutions into risk categories\3\ based on two 
criteria: Capital levels and supervisory ratings. Three capital 
groups--well capitalized, adequately capitalized, and undercapitalized, 
which are numbered 1, 2 and 3, respectively--are based on leverage 
ratios and risk-based capital ratios for regulatory capital purposes. 
Three supervisory subgroups, termed A, B, and C, are based upon the 
FDIC's consideration of evaluations provided by the institution's 
primary federal regulator and other information the FDIC deems 
relevant.\4\ Subgroup A consists of financially sound institutions with 
only a few minor weaknesses; subgroup B consists of institutions that 
demonstrate weaknesses which, if not corrected, could result in 
significant deterioration of the institution and increased risk of loss 
to the insurance fund; and subgroup C consists of institutions that 
pose a substantial probability of loss to the insurance fund unless 
effective corrective action is taken. In practice, the subgroup 
evaluations are generally based on a institution's composite CAMELS 
rating, a rating assigned by the institution's supervisor at the end of 
a bank examination, with 1 being the best rating and 5 being the 
lowest.\5\ Generally speaking, institutions with a CAMELS rating of 1 
or 2 are put in supervisory subgroup A, those with a CAMELS rating of 3 
are put in subgroup B, and those with a CAMELS rating of 4 or 5 are put 
in subgroup C. Thus, in the current assessment system, the highest-
rated (least risky) institutions are assigned to category 1A and 
lowest-rated (riskiest) institutions to category 3C. The three capital 
groups and three supervisory subgroups form a nine-cell matrix for 
risk-based assessments:
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    \3\ The FDIC's regulations refer to these risk categories as 
``assessment risk classifications.''
    \4\ The term ``primary federal regulator'' is synonymous with 
the statutory term ``appropriate federal banking agency.'' 12 U.S.C. 
1813(q).
    \5\ CAMELS is an acronym for component ratings assigned in a 
bank examination: Capital adequacy, Asset quality, Management, 
Earnings, Liquidity, and Sensitivity to market risk. A composite 
CAMELS rating combines these component ratings, which also range 
from 1 (best) to 5 (worst).

------------------------------------------------------------------------
                                           Supervisory  subgroup
          Capital group           --------------------------------------
                                        A            B            C
------------------------------------------------------------------------
1. Well Capitalized..............  1A           1B           1C
2. Adequately Capitalized........  2A           2B           2C
3. Undercapitalized..............  3A           3B           3C
------------------------------------------------------------------------

B. Reform Act Provisions

    The Federal Deposit Insurance Act, as amended by the Reform Act, 
continues to require that the assessment system be risk-based and 
allows the FDIC to define risk broadly. It defines a risk-based system 
as one based on an institution's probability of incurring loss to the 
deposit insurance fund due to the composition and concentration of the 
institution's assets and liabilities, the amount of loss given failure, 
and revenue needs of the Deposit Insurance Fund (the fund).\6\
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    \6\ 12 U.S.C. 1817(b)(1)(A) and (C). The Bank Insurance Fund and 
Savings Association Insurance Fund were merged into the newly 
created Deposit Insurance Fund on March 31, 2006.
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    At the same time, the Reform Act also grants the FDIC's Board of 
Directors the discretion to price deposit insurance according to risk 
for all insured institutions regardless of the level of the fund 
reserve ratio.\7\
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    \7\ The Reform Act eliminates the prohibition against charging 
well-managed and well-capitalized institutions when the deposit 
insurance fund is at or above, and is expected to remain at or 
above, the designated reserve ratio (DRR). However, while the Reform 
Act allows the DRR to be set between 1.15 percent and 1.5 percent, 
it also generally requires dividends of one-half of any amount in 
the fund in excess of the amount required to maintain the reserve 
ratio at 1.35 percent when the insurance fund reserve ratio exceeds 
1.35 percent at the end of any year. The Board can suspend these 
dividends under certain circumstances. 12 U.S.C. 1817(e)(2).

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[[Page 41911]]

    The Reform Act leaves in place the existing statutory provision 
allowing the FDIC to ``establish separate risk-based assessment systems 
for large and small members of the Deposit Insurance Fund.'' \8\ Under 
the Reform Act, however, separate systems are subject to a new 
requirement that ``[n]o insured depository institution shall be barred 
from the lowest-risk category solely because of size.'' \9\
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    \8\ 12 U.S.C. 1817(b)(1)(D).
    \9\ Section 2104(a)(2) of the Reform Act (to be codified at 12 
U.S.C. 1817(b)(2)(D)).
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II. Overview of the Proposal

    The Reform Act provides the FDIC with the authority to make 
substantive improvements to the risk-based assessment system. In this 
notice of proposed rulemaking, the FDIC proposes to improve risk 
differentiation and pricing by drawing upon established measures of 
risk and existing best practices of the industry and federal regulators 
for evaluating risk. The FDIC believes that the proposal will make the 
assessment system more sensitive to risk. The proposal should also make 
the risk-based assessment system fairer, by limiting the subsidization 
of riskier institutions by safer ones.
    The FDIC's proposals are set out in detail in ensuing sections, but 
are briefly summarized here.
    At present, an institution's assessment rate depends upon its risk 
category. Currently, there are nine of these risk categories. The FDIC 
proposes to consolidate the existing nine categories into four and name 
them Risk Categories I, II, III and IV. Risk Category I would replace 
the current 1A risk category.
    Within Risk Category I, the FDIC proposes one method of risk 
differentiation for small institutions, and another for large 
institutions. Both methods share a common feature, namely, the use of 
CAMELS component ratings. However, each method combines these measures 
with different sources of information. For small institutions within 
Risk Category I, the FDIC proposes to combine CAMELS component ratings 
with current financial ratios to determine an institution's assessment 
rate. For large institutions within Risk Category I, the FDIC proposes 
to combine CAMELS component ratings with long-term debt issuer ratings, 
and, for some large institutions, financial ratios to assign 
institutions to initial assessment rate subcategories. These initial 
assignments, however, might be modified upon review of additional 
relevant information pertaining to an institution's risk.
    The FDIC proposes to define a large institution as an institution 
that has $10 billion or more in assets. Also, the FDIC proposes to 
treat all new institutions (established within the last seven years) in 
Risk Category I the same, regardless of size, and assess them at the 
maximum rate applicable to Risk Category I institutions.
    The FDIC proposes to adopt a base schedule of rates. The actual 
rates that the FDIC may put into effect next year and in subsequent 
years could vary from the base schedule. The proposed base schedule of 
rates is as follows:

----------------------------------------------------------------------------------------------------------------
                                                                   Risk category
                                 -------------------------------------------------------------------------------
                                                I *
                                 --------------------------------       II              III             IV
                                      Minimum         Maximum
----------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)..               2               4               7              25             40
----------------------------------------------------------------------------------------------------------------
* Rates for institutions that do not pay the minimum or maximum rate would vary between these rates.

    The FDIC proposes that it continue to be allowed, as it is under 
the present system, to adjust rates uniformly up to a maximum of five 
basis points higher or lower than the base rates without the necessity 
of further notice-and-comment rulemaking, provided that any single 
adjustment from one quarter to the next could not move rates more than 
five basis points.

III. General Framework

    The FDIC proposes to consolidate the number of assessment risk 
categories from nine to four. The four new categories would continue to 
be defined based upon supervisory and capital evaluations, both 
established measures of risk.
    The existing nine categories are not all necessary. Some of the 
categories contain few, if any, institutions at any given time. Table 1 
shows the total number of institutions in each of the nine categories 
of the existing risk matrix as of December 31, 2005:

 Table 1.--Number of Institutions by Assessment Category as of December
                                31, 2005
------------------------------------------------------------------------
                                                Supervisory subgroup
               Capital group               -----------------------------
                                                A         B         C
------------------------------------------------------------------------
1.........................................     8,358       373        50
2.........................................        54         7         1
3.........................................         0         0         2
------------------------------------------------------------------------

    Five of the nine categories contain among them a total of only 10 
institutions. Table 2 shows the average percentage of BIF-member 
institutions that were (or, for the period before the risk-based system 
began, that would have been) in each of the nine categories of the 
existing risk matrix from 1985 to 2005: \10\
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    \10\ Comparable data on SAIF-member (prior to August 1989, 
FSLIC-insured) institutions are not readily available back to 1985.

Table 2.--Percentage of Institutions by Assessment Category, 1985-2005 *
                        [BIF-member institutions]
------------------------------------------------------------------------
                                                Supervisory subgroup
               Capital group               -----------------------------
                                                A         B         C
------------------------------------------------------------------------
1.........................................     83.72      6.08      0.91
2.........................................      1.46      3.17      1.30
3.........................................      0.05      0.21     2.55
------------------------------------------------------------------------
* Approximately 0.56 percent of institutions could not be classified
  because CAMELS data are unavailable.

    Several of the categories contain very small percentages of 
institutions. In fact, for any given year from 1985 to 2005, the number 
of BIF-member institutions rated 3A (or, for the period before the 
risk-based system began, that would have been rated 3A) never exceeded 
10 and the number of BIF-member institutions rated 3B (or, for the 
period before the risk-based system began, that

[[Page 41912]]

would have been rated 3B) never exceeded 81.
    In addition, the failure rates for many of the categories are 
similar. Table 3 shows the average five-year failure rate for BIF-
member institutions for each of the nine categories of the existing 
risk matrix for the five-year periods beginning in 1985 to 2000: \11\
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    \11\ The five-year failure rate is calculated by comparing the 
number of institutions that failed within five years to the number 
of institutions that were (or that would have been) in one of the 9 
categories of the risk matrix at the beginning of the five-year 
period. The average failure rate is an average of rates using the 
years 1985 through 2000 as the initial years. The failure rates for 
the 3A and 3B risk categories are not particularly meaningful, since 
so few institutions have been in these categories.

  Table 3.--Historical Five-Year Failure Rates by Assessment Category,
                               1985-2000 *
                        [BIF-member institutions]
------------------------------------------------------------------------
                                                Supervisory subgroup
               Capital group               -----------------------------
                                                A         B         C
------------------------------------------------------------------------
1.........................................      0.77      2.67      6.78
2.........................................      2.03      5.51     14.43
3.........................................      2.30      7.10    28.84
------------------------------------------------------------------------
* Excludes failures where fraud was determined to be a primary
  contributing factor.\12\

    The failure rates for 2A, 1B and 2B range from 2.03 percent to 5.51 
percent. The failure rates for 1C and 2C are higher: 6.78 percent and 
14.43 percent, respectively. The failure rates for 3A and 3B are based 
upon a very small sample, since the number of institutions that have 
been in these categories is so small. The failure rate for 3C 
institutions is 28.84 percent, which is markedly different from any of 
the other categories.
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    \12\ The validity of an institution's capital ratios depends 
wholly, and the validity of supervisory appraisals depends greatly, 
upon the accuracy of financial data supplied by the institution. 
Where undetected fraud is present, financial data is inaccurate, 
often highly so, and an institution is likely to be placed in the 
wrong risk category for deposit insurance purposes. For this reason, 
failures caused by fraud are excluded.
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    The FDIC proposes consolidating the existing categories based 
primarily on similarity of failure rates. The proposal also would 
combine the sparsely populated 3A and 3B categories with the 1C and 2C 
categories.\13\ The proposed consolidation would create four new Risk 
Categories as shown in Table 4:
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    \13\ While the five-year failure rate for 3A institutions is 
similar to that of 2A and 1B institutions, 3A institutions are 
undercapitalized and, therefore, pose greater risk.

                  Table 4.--Proposed New Risk Categories
------------------------------------------------------------------------
                                               Supervisory subgroup
           Capital  category            --------------------------------
                                             A          B          C
------------------------------------------------------------------------
Well Capitalized.......................      I      .........       III
Adequately Capitalized.................           II                III
Undercapitalized.......................           III                IV
------------------------------------------------------------------------

    The FDIC has analyzed failure rates for each of the proposed risk 
categories over the period 1985 to 2005. They are as follows:

    Table 5.--Historical Five-Year Failure Rates by Proposed New Risk
                          Category, 1985-2000 *
                        [BIF-member institutions]
------------------------------------------------------------------------
                      Risk category                        Failure rate
------------------------------------------------------------------------
I.......................................................            0.77
II......................................................            3.52
III.....................................................           11.05
IV......................................................          28.84
------------------------------------------------------------------------
* Excludes failures where fraud was determined to be a primary
  contributing factor.

    The proposed new categories appear to be well aligned with 
insurance risk, since the risk of failure increases with each 
successive category.
    For clarity, the FDIC proposes to use the phrase ``Supervisory 
Group'' to replace ``Supervisory Subgroup.'' The FDIC also proposes 
calling the capital categories ``Well Capitalized,'' ``Adequately 
Capitalized'' and ``Undercapitalized,'' rather than Capital Groups 1, 2 
and 3. However, the definitions of the Supervisory Groups and Capital 
Groups will not change in substance.
    Risk Category I would contain all well-capitalized institutions in 
Supervisory Group A (generally those with CAMELS composite ratings of 1 
or 2); i.e., those institutions that would be placed in the current 1A 
category. New Risk Category II would contain all institutions in 
Supervisory Groups A and B (generally those with CAMELS composite 
ratings of 1, 2 or 3), except those in Risk Category I and 
undercapitalized institutions.\14\ Category III would contain all 
undercapitalized institutions in Supervisory Groups A and B, and 
institutions in Supervisory Group C (generally those with CAMELS 
composite ratings of 4 or 5) that are not undercapitalized. Category IV 
would contain all undercapitalized institutions in Supervisory Group C; 
i.e., those institutions that would be placed in the current 3C 
category.
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    \14\ Under current regulations, bridge banks and institutions 
for which the FDIC has been appointed or serves as conservator are 
charged the assessment rate applicable to the 2A category. 12 CFR 
327.4(c). The FDIC proposes, instead, to place these institutions in 
Risk Category I and to charge them the minimum rate applicable to 
that category.
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    As of December 31, 2005, the four new categories would have the 
numbers of institutions shown in Table 6:

  Table 6.--Number of Institutions by Proposed New Risk Category as of
                            December 31, 2005
------------------------------------------------------------------------
                                                             Number of
                      Risk category                        institutions
------------------------------------------------------------------------
I.......................................................           8,358
II......................................................             434
III.....................................................              51
IV......................................................               2
------------------------------------------------------------------------

    The FDIC proposes that all institutions in any one risk category, 
other than Risk Category I, be charged the same assessment rate; there 
would be no further differentiation in assessment rates within each 
category. Over the past 11 years, only six to ten percent of 
institutions at any one time have been less than well capitalized or 
have exhibited supervisory weaknesses (that is, have been rated CAMELS 
3, 4 or 5). CAMELS 3, 4 and 5-rated institutions are examined more 
frequently than other institutions; they must be examined at least 
annually and, in practice, are examined more frequently. Institutions 
are examined more frequently as their supervisory ratings deteriorate. 
As a result of these frequent, on-site examinations, supervisory 
evaluations (primarily CAMELS ratings) and capital levels provide a 
good measure of failure risk. In addition, there are few of these 
institutions, and the amount of differentiation that presently exists 
is unnecessary.

IV. Risk Differentiation Within Risk Category I

    Risk Category I, at present, includes 95 percent of all insured 
institutions. The FDIC proposes to further differentiate for risk 
within this category. Within Risk Category I, the FDIC proposes one 
method for small institutions, and another for large institutions. Both 
methods share a common feature, namely, the use of CAMELS component 
ratings. However, each method combines these measures with different 
sources of information on risk.
    For small institutions, the FDIC proposes to combine CAMELS 
component ratings with current

[[Page 41913]]

financial ratios. These ratios can provide updated information on an 
institution's risk profile between bank examinations and allow greater 
differentiation in risk.\15\ For many years, the FDIC and other federal 
regulators have used financial ratios in offsite monitoring systems to 
aid in analyzing the financial condition of institutions. The FDIC has 
used financial ratios in its offsite monitoring system, known as the 
Statistical Camels Offsite Rating system (SCOR), to identify changes in 
risk profiles between bank examinations.\16\
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    \15\ For CAMELS 1 and 2-rated institutions, examinations 
generally occur on a 12 or 18-month cycle. 12 U.S.C. 1820(d).
    \16\ Charles Collier, Sean Forbush, Daniel A. Nuxoll and John 
O'Keefe, ``The SCOR System of Off-Site Monitoring: Its Objectives, 
Functioning, and Performance,'' FDIC Banking Review 15(3) (2003).
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    For large institutions, the FDIC proposes to combine CAMELS 
component ratings with long-term debt issuer ratings, and, for 
institutions with between $10 billion and $30 billion in assets, 
financial ratios, to develop an insurance score and an assessment rate. 
Assessment rates might be adjusted based on considerations of 
additional market, financial performance and condition, and stress 
considerations. This approach is consistent with best practices in the 
banking industry for rating and ranking direct credit and counterparty 
credit risk exposures to include consideration of all relevant risk 
information, the use of standardized risk assessment processes and 
methodologies, the incorporation of judgment, where necessary, and the 
use of quality controls to ensure consistency and reasonableness of the 
ratings and risk rankings.
    The FDIC proposes to define a large institution as an institution 
that has $10 billion or more in assets and a small institution as an 
institution that has less than $10 billion in assets. Also, as 
described below in Section VIII, the FDIC proposes to treat all new 
institutions in Risk Category I the same, regardless of size, and 
assess them at the maximum rate applicable to Risk Category I 
institutions.

V. Risk Differentiation Among Smaller Institutions in Risk Category I

A. Proposal: Rely Upon Supervisory Ratings and Financial Ratios

1. Description of the Proposal
    For smaller institutions, the FDIC proposes to link assessment 
rates to a combination of certain financial ratios and supervisory 
ratings based on a statistical analysis relating these measures to the 
probability that an institution will be downgraded to CAMELS 3, 4 or 5 
within one year.\17\ Few failures have occurred within the past few 
years, but, historically, the failure frequency of insured institutions 
is significantly higher for institutions with CAMELS composite ratings 
of 3 or worse, as Table 7 demonstrates. Thus, in general, the greater 
the risk that a CAMELS 1 or 2-rated institution will be downgraded to 
CAMELS 3, 4 or 5, the greater its risk of failure.
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    \17\ This statistical analysis is described in more detail in 
Appendix 1.

 Table 7.--Historical Five-Year Failure Rates by CAMELS Ratings Groups,
                               1985-2000 *
                        [BIF-member institutions]
------------------------------------------------------------------------
                                                           Percentage of
                    Composite CAMELS                       CAMELS group
                                                              failing
------------------------------------------------------------------------
1.......................................................            0.39
2.......................................................            1.01
3.......................................................            3.84
4.......................................................           14.63
5.......................................................           46.92
------------------------------------------------------------------------
* Excludes failures in which fraud was determined to be a primary
  contributing factor. CAMELS ratings as of each year-end are used for
  failure rate calculations.

    The FDIC used the financial ratios in its offsite monitoring 
system, SCOR, as the starting point for the financial information it 
would use to differentiate risk and selected six financial ratios. 
These financial ratios measure an institution's capital adequacy, asset 
quality, earnings and liquidity (the C, A, E and L of CAMELS). The 
financial ratios are:
     Tier 1 Leverage Ratio;
     Loans past due 30-89 days/gross assets;
     Nonperforming loans/gross assets;
     Net loan charge-offs/gross assets;
     Net income before taxes/risk-weighted assets; and
     Volatile liabilities/gross assets.

The Tier 1 Leverage Ratio has the definition used for regulatory 
capital purposes. Appendix 1 defines each of the ratios and discusses 
the choice of ratios in detail.

    Because supervisory ratings capture important elements of risk that 
financial ratios cannot, the FDIC included in its analysis an 
additional measure of risk based upon an institution's component CAMELS 
ratings. CAMELS component ratings are supervisory evaluations of 
various risks. The component ratings provide a more detailed view of 
supervisory evaluations than composite ratings by themselves and are 
therefore useful for differentiating risk among institutions. Including 
all component ratings accounts for risk management practices, as well 
as for supervisory assessments of capital adequacy, asset quality, 
earnings, liquidity and sensitivity to market risk, that the financial 
ratios by themselves may not fully capture.
    The FDIC created a weighted average of an institution's CAMELS 
components by combining the components as follows:

 
------------------------------------------------------------------------
                                                              Weight
                    CAMELS component                         (percent)
------------------------------------------------------------------------
C.......................................................              25
A.......................................................              20
M.......................................................              25
E.......................................................              10
L.......................................................              10
S.......................................................              10
------------------------------------------------------------------------

    These weights reflect the view of the FDIC regarding the relative 
importance of each of the CAMELS components for differentiating risk 
among institutions in Risk Category I for deposit insurance 
purposes.\18\ The FDIC and other bank supervisors do not use such a 
system to determine CAMELS composite ratings.
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    \18\ Different weights might apply if this measure were being 
used to evaluate risk at all institutions, including those outside 
Risk Category I.

    The FDIC determined how to combine the measures--the financial 
ratios and the weighted average CAMELS component rating--by 
statistically analyzing the relationship between the measures and the 
probability that an institution would be downgraded to CAMELS 3, 4 or 5 
at its next examination.\19\ The FDIC analyzed financial ratios and 
supervisory component ratings over the period 1984 to 2004 to cover 
both periods of stress and strength in the banking industry.\20\ The 
FDIC then converted those probabilities of downgrade to specific 
assessment rates. This analysis and conversion produced the following 
multipliers for each risk measure:
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    \19\ The ``S'' rating was first assigned in 1997. Because the 
statistical analysis relies on data from before 1997, the ``S'' 
rating was excluded from the analysis. Appendix 1 contains a 
detailed description of the statistical analysis.
    \20\ 2005 had to be excluded because the analysis is based upon 
supervisory downgrades within one year and 2006 downgrades have yet 
to be determined.

------------------------------------------------------------------------
                                                             Pricing
                    Risk measures *                       multiplier **
------------------------------------------------------------------------
Tier 1 Leverage Ratio..................................           (0.03)
Loans Past Due 30-89 Days/Gross Assets.................            0.37
Nonperforming Loans/Gross Assets.......................            0.65

[[Page 41914]]

 
Net Loan Charge-Offs/Gross Assets......................            0.71
Net Income before Taxes/Risk-Weighted Assets...........           (0.41)
Volatile Liabilities/Gross Assets......................            0.03
Weight Average CAMELS component rating.................            0.52
------------------------------------------------------------------------
* Ratios are expressed as percentages.
** Multipliers are rounded to two significant decimal places.

    To determine an institution's insurance assessment rate, the FDIC 
proposes multiplying each of these risk measures (that is, each 
institution's financial ratios and weighted average CAMELS component 
rating) by the corresponding pricing multipliers. The sum of these 
products would be added to (or subtracted from) a uniform amount (1.37 
based on an analysis using financial ratios and supervisory component 
ratings from the period 1984 to 2004) to determine an institution's 
assessment rate.\21\ The uniform amount would be derived from the 
statistical analysis and adjusted for assessment rates set by the 
FDIC.\22\
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    \21\ Appendix 1 provides the derivation of the pricing 
multipliers and the uniform amount to be added to compute an 
assessment rate. The rate derived would be an annual rate, but would 
be determined every quarter.
    \22\ The uniform amount would be the same for all smaller 
institutions in Risk Category I (other than insured branches of 
foreign banks and new institutions), but would change when the Board 
changed assessment rates or when the pricing multipliers were 
updated using new data.
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    The FDIC proposes that the rates resulting from this approach be 
subject to a minimum and maximum. A maximum rate would ensure that no 
institution in Risk Category I, all of which are well-capitalized and 
generally have supervisory ratings of 1 or 2, pays as much as an 
institution in a higher risk category. A minimum rate recognizes that 
the possibility of a supervisory rating downgrade to CAMELS 3, 4 or 5 
is low for a significant portion of institutions in Risk Category I.
    This approach would allow incremental pricing for Risk Category I 
institutions whose rates are between the minimum and maximum rates. 
Therefore, small changes in an institution's financial ratios or CAMELS 
component ratings should produce only small changes in assessment 
rates.\23\
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    \23\ Incremental pricing raises questions about how accurately 
small differences in assessment rates between institutions reflect 
differences in the relative risks that they pose to the insurance 
fund. The alternative would be to charge a much larger group of 
institutions the same assessment rate, which could lead to sharper 
differences in rates for institutions poised between one set of 
rates and another. For this reason, the FDIC is proposing 
incremental pricing.
---------------------------------------------------------------------------

    To compute the values of the uniform amount and pricing multipliers 
shown above, the FDIC chose cutoff values for the predicted 
probabilities of downgrade such that, as of December 31, 2005: (1) 45 
percent of smaller institutions (other than new institutions) in Risk 
Category I would have been charged the minimum assessment rate; and (2) 
5 percent of smaller institutions (other than new institutions) in Risk 
Category I would have been charged the maximum assessment rate.\24\ The 
proposal to charge 45 percent of small Risk Category I institutions 
(excluding new institutions) the minimum rate reflects the FDIC's view 
that the current condition of the banking industry is generally 
favorable. The pricing multipliers and the uniform amount shown above 
and in Table 8 assume that the maximum annual assessment rate for 
institutions in Risk Category I would be 2 basis points higher than the 
minimum rate, as the FDIC proposes below.\25\ Appendix 1 discusses the 
analysis in detail.
---------------------------------------------------------------------------

    \24\ The cutoff value for the minimum assessment rate is a 
predicted probability of downgrade of 3 percent. The cutoff value 
for the maximum assessment rate is 16 percent.
    \25\ The uniform amount also depends upon the actual level of 
the minimum assessment rate.
---------------------------------------------------------------------------

    Table 8 gives assessment rates for three institutions with varying 
characteristics, assuming the pricing multipliers given above, and that 
annual assessment rates for institutions in Risk Category I range from 
a minimum of 2 basis points to a maximum of 4 basis points.\26\
---------------------------------------------------------------------------

    \26\ These are the base rates for Risk Category I proposed in 
Section IX; under the proposal, as now, actual rates for any year 
could be as much as 5 basis points higher or lower without the 
necessity of notice-and-comment rulemaking.

                                                   Table 8.--Assessment Rates for Three Institutions *
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Institution 1                   Institution 2                   Institution 3
                                                         -----------------------------------------------------------------------------------------------
                                              Pricing                      Contribution                    Contribution                    Contribution
                                            multiplier     Risk measure    to assessment   Risk measure    to assessment   Risk measure    to assessment
                                                               value           rate            value           rate            value           rate
A                                                     B                C              D                E              F                G              H
--------------------------------------------------------------------------------------------------------------------------------------------------------
Uniform Amount..........................           1.37   ..............           1.37   ..............           1.37   ..............           1.37
Tier 1 Leverage Ratio (%)...............          (0.03)             9.6          (0.27)             8.6          (0.24)             8.4          (0.23)
Loans Past Due 30-89 Days/Gross Assets             0.37              0.4           0.15              0.6           0.22              0.8           0.30
 (%)....................................
Nonperforming Loans/Gross Assets (%)....           0.65              0.2           0.13              0.4           0.26              1.2           0.78
Net Loan Charge-Offs/Gross Assets (%)...           0.71              0.1           0.10              0.1           0.06              0.3           0.21
Net Income before Taxes/Risk-Weighted             (0.41)             2.5          (1.02)             2.0          (0.79)           (0.5)          (0.21)
 Assets (%).............................
Volatile Liabilities/Gross Assets (%)...           0.03             20.1           0.63             22.6           0.70             35.7           1.11
Weighted Average CAMELS Component                  0.52              1.2           0.62              1.5           0.75              2.1           1.08
 Ratings................................
Sum of Contribution.....................  ..............  ..............           1.71   ..............           2.33   ..............           4.41

[[Page 41915]]

 
Assessment Rate.........................  ..............  ..............           2.00   ..............           2.33   ..............           4.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Figures may not multiply or add to totals due to rounding.

    The assessment rate for an institution in the table is calculated 
by multiplying the pricing multipliers (Column B) times the risk 
measure values (Column C, E or G) to derive each measure's contribution 
to the assessment rate. The sum of the products (Column D, F or H) plus 
the uniform amount (first item in Column D, F or H) yields the total 
assessment rate. For Institution 1 in the table, this sum actually 
equals 1.71, but the table reflects the assumed minimum assessment rate 
of 2 basis points. For Institution 3 in the table, the sum actually 
equals 4.41, but the table reflects the assumed maximum assessment rate 
of 4 basis points.
    Chart 1 shows the cumulative distribution of assessment rates based 
on December 31, 2005 data, assuming that annual assessment rates for 
institutions in Risk Category I range from a minimum of 2 basis points 
to a maximum of 4 basis points. The chart excludes new institutions in 
Risk Category I.\27\
---------------------------------------------------------------------------

    \27\ As discussed elsewhere, the FDIC proposes charging new 
institutions in Risk Category I the maximum assessment rate for the 
category. Thus, when new institutions are included, the percentage 
of small insured institutions that are charged the minimum rate in 
Risk Category I is slightly under 40 percent and the percentage of 
institutions that are charged the maximum rate is slightly above 16 
percent.
[GRAPHIC] [TIFF OMITTED] TP24JY06.000

    A more detailed discussion of the analysis underlying this proposal 
is contained in Appendix 1.
    For the final rule, the FDIC proposes to adopt updated cutoff 
values such that, based on data as of June 30, 2006: (1) 45 percent of 
smaller institutions (other than new institutions) in Risk Category I 
would have been charged the minimum assessment rate; and (2) 5 percent 
of smaller institutions (other than new institutions) in Risk Category 
I would have been charged the maximum assessment rate. These updated 
cutoff values could alter the

[[Page 41916]]

pricing multipliers and uniform amount. Using these same cutoff values 
in future periods could lead to different percentages of institutions 
being charged the minimum and maximum rates.
    In addition, the FDIC proposes that it have the flexibility to 
update the pricing multipliers and the uniform amount annually, without 
notice-and-comment rulemaking. In particular, the FDIC intends to add 
data from each new year to its analysis and may, from time to time, 
drop some earlier years from its analysis. For example, some time 
during the next year the FDIC proposes to include data in the 
statistical analysis covering the period 1984 to 2005, rather than 1984 
to 2004. Updating the pricing multipliers in this manner allows use of 
the most recent data, thereby improving the accuracy of the risk-
differentiation method. Because the analysis will continue to use many 
earlier years' data as well, pricing multiplier changes from year to 
year should usually be relatively small.
    On the other hand, as a result of the annual review and analysis, 
the FDIC may conclude that additional or alternative financial 
measures, ratios or other risk factors should be used to determine 
risk-based assessments or that a new method of differentiating for risk 
should be used. In any of these events, changes would be made through 
notice-and-comment rulemaking.
    The FDIC proposes that the financial ratios for any given quarter 
be calculated from the report of condition filed by each institution as 
of the last day of the quarter.\28\ In a separate notice of proposed 
rulemaking, the FDIC has proposed that, for deposit insurance 
assessment purposes, changes to an institution's supervisory rating be 
reflected when the change occurs.\29\ Under this proposal, if an 
examination (or targeted examination) led to a change in an 
institution's CAMELS composite rating that would affect the 
institution's insurance risk category, the institution's risk category 
would change as of the date the examination or targeted examination 
began, if such a date existed.\30\ If there were no examination start 
date, the institution's risk category would change as of the date the 
institution was notified of its rating change by its primary federal 
regulator (or state authority). Both cases assume that the FDIC, after 
taking into account other information that could affect the rating, 
agreed with the primary federal regulator's CAMELS rating.\31\ The FDIC 
proposes that, for small institutions in Risk Category I, a similar 
rule apply for changes in CAMELS component ratings.\32\
---------------------------------------------------------------------------

    \28\ Reports of condition include Reports of Income and 
Condition and Thrift Financial Reports.
    \29\ 71 FR 28790, 28792 (May 18, 2006).
    \30\ Small institutions generally have an examination start 
date; very infrequently, however, a smaller bank's CAMELS rating can 
change without an examination, or there may be no examination start 
date.
    \31\ In the event of a disagreement, the FDIC would determine 
the date that the supervisory change occurred.
    \32\ An examination that begins before the proposed regulatory 
changes would be implemented (for example, before January 1, 2007) 
would be deemed to have begun on the first day of the first 
assessment period for which those changes are effective.
---------------------------------------------------------------------------

2. Implications of the proposal
    By combining both financial data and supervisory evaluations, this 
approach to risk differentiation provides a comprehensive and timely 
depiction of risk based on available data.\33\ The pricing multipliers 
can be periodically updated to incorporate new financial and 
supervisory data. With the publication of pricing multipliers assigned 
to each risk measure, insured institutions could readily compute their 
deposit insurance assessments.
---------------------------------------------------------------------------

    \33\ As discussed in Appendix 1, historical data on costs from 
failures is consistent with the proposed method of risk 
differentiation.
---------------------------------------------------------------------------

    Tables 9 and 10 show the distribution of assessment rates by size 
(for institutions that have less than $10 billion in assets) and by 
CAMELS composite rating over the period 1997 to 2005, assuming the 
application of the proposal over this period and that annual assessment 
rates for institutions in Risk Category I ranged from a minimum of 2 
basis points to a maximum of 4 basis points.\34\ The tables show that 
this approach would not result in significant differences in assessment 
rates based on size and that most CAMELS composite 1-rated institutions 
would pay the minimum rate, while most composite 2-rated institutions 
would not.
---------------------------------------------------------------------------

    \34\ Although the pricing multiplier for the weighted average 
CAMELS component rating is derived from data that excluded the ``S'' 
component, the ``S'' component is included for purposes of 
determining the weighted average CAMELS component ratings used to 
produce these tables. Appendix 2 discusses the derivation of the 
data in Tables 9 and 10 in greater detail.

                          Table 9.--Distribution of Assessment Rates by Size, 1997-2005
----------------------------------------------------------------------------------------------------------------
                                                                            Asset size
                                                 ---------------------------------------------------------------
                                                      <=$0.1B       $0.1-$0.5B       $0.5B-$1B       $1B-$10B
----------------------------------------------------------------------------------------------------------------
25th Percentile.................................             2.0             2.0             2.0             2.0
Median..........................................             2.0             2.1             2.0             2.2
75th Percentile.................................             2.8             2.7             2.6             2.8
95th Percentile.................................             4.0             4.0             4.0             4.0
----------------------------------------------------------------------------------------------------------------


 Table 10.--Distribution of Assessment Rates by CAMELS Composite Rating,
                                1997-2005
------------------------------------------------------------------------
                                                 Composite CAMELS
                                         -------------------------------
                                                 1               2
------------------------------------------------------------------------
25th Percentile.........................             2.0             2.0
Median..................................             2.0             2.5
75th Percentile.........................             2.0             3.2
95th Percentile.........................             3.0             4.0
------------------------------------------------------------------------


[[Page 41917]]

3. Possible Variations on the Proposal
    Variations on the FDIC's proposal are also possible. For example:

     The ratio of net income before taxes to risk-weighted 
assets and the ratio of net loan charge-offs to gross assets could 
be excluded. While higher earnings are statistically associated with 
lower probabilities of downgrades, higher earnings also can be a 
sign of increased risk.\35\ Using risk-weighted assets to adjust 
earnings, as proposed, may not sufficiently capture those higher 
earnings that reflect greater risk taking. A second possible reason 
to eliminate these two ratios is that they are determined using four 
quarters of data and require adjustments to reflect mergers. 
Eliminating them would leave only balance sheet ratios, which are 
easier to calculate.
---------------------------------------------------------------------------

    \35\ If the ratio of net income before taxes to risk-weighted 
assets were not included as a risk measure, the ratio of liquid 
assets to gross assets might be added as a risk measure. This 
additional risk measure becomes statistically significant in 
explaining downgrades when the ratio of net income before taxes to 
risk-weighted assets is excluded, although its pricing multiplier 
would be small.
---------------------------------------------------------------------------

     Time deposits greater than $100,000 could be excluded 
from the definition of volatile liabilities, as some have suggested 
that these deposits can have the same characteristics as core 
deposits.\36\
---------------------------------------------------------------------------

    \36\ However, time deposits greater than $100,000 are more 
likely than smaller deposits to be withdrawn as the financial 
condition of the institution deteriorates (either to be replaced by 
insured deposits or paid off with the proceeds from high-quality 
assets), thus increasing the risk exposure of the insurance fund. 
Removing time deposits greater than $100,000 from the definition of 
volatile liabilities would make volatile liabilities insignificant 
in explaining potential downgrades; therefore, volatile liabilities 
would no longer be used as a ratio.
---------------------------------------------------------------------------

     Ratios might be averaged over some period to limit 
assessment rate changes.
     The weights assigned to each CAMELS component in 
determining the weighted average could be changed.
     A CAMELS composite rating could be used in place of a 
weighted average CAMELS component rating.\37\
---------------------------------------------------------------------------

    \37\ Doing so would mean that far fewer small Risk Category I 
CAMELS 2-rated institutions would pay the same assessment rates as 
(or lower assessment rates than) small Risk Category I CAMELS 1-
rated institutions.

Any changes in the financial ratios used or in the weighted average 
CAMELS component rating could result in changes to the pricing 
multipliers assigned to the risk measures actually used.\38\ The FDIC 
seeks comment on whether any variation on its proposal would be 
preferable.
---------------------------------------------------------------------------

    \38\ New pricing multipliers for the risk measures under these 
variations would be determined in the same manner as the pricing 
multipliers in the proposal. (The derivation of pricing multipliers 
is described in Appendix 1.) The uniform amount to be added to the 
sum of the products of each institution's risk measures and pricing 
multipliers (used to determine the institution's assessment) could 
also change.
---------------------------------------------------------------------------

B. Alternative: Use Financial Ratios Alone To Differentiate for Risk

1. Description of the Alternative
    An alternative to the FDIC's proposal would be to use financial 
ratios alone to determine a small Risk Category I institution's 
assessment rate. The pricing multiplier to be assigned to each 
financial ratio would again be determined by statistically analyzing 
the relationship between these ratios and the probability that an 
institution would be downgraded to CAMELS 3, 4 or 5 at its next 
examination.\39\ Using financial ratios from the period 1984 to 2004 
produced the following multipliers: \40\
---------------------------------------------------------------------------

    \39\ The pricing multipliers for the ratios in the alternative 
would be determined in a manner similar to that used to derive the 
pricing multipliers in the proposal. The derivation of pricing 
multipliers is described in Appendix 1.
    \40\ These pricing multipliers differ from those in the proposal 
because excluding the weighted average CAMELS component rating 
changes the estimated relationships between financial ratios and the 
probability of downgrade.

------------------------------------------------------------------------
                                                             Pricing
                   Financial ratio *                      multiplier * *
------------------------------------------------------------------------
Tier 1 Leverage Ratio..................................           (0.05)
Loans Past due 30-89 Days/Gross Assets.................            0.37
Nonperforming Loans/Gross Assets.......................            0.74
Net Loan Charge-Offs/Gross Assets......................            0.88
Net Income before Taxes/Risk-Weighted Assets...........           (0.42)
Volatile Liabilities/Gross Assets......................           0.03
------------------------------------------------------------------------
* Ratios are expressed as percentages.
* Multipliers are rounded to two significant decimal places.

    Each ratio, as reported by an institution, would be multiplied by 
its pricing multiplier.\41\ The sum of these products would again be 
added to or subtracted from a uniform amount (2.36 based on an analysis 
using financial ratios from the period 1984 to 2004) to determine an 
institution's assessment rate, subject to a minimum and maximum 
rate.\42\
---------------------------------------------------------------------------

    \41\ The financial ratios for any given quarter would be 
calculated from the report of condition filed by each institution as 
of the last day of the quarter.
    \42\ Appendix 1 provides the derivation of the pricing 
multipliers and the uniform amount to be added to compute an 
assessment rate. The rate derived would be an annual rate, but would 
be determined every quarter.
---------------------------------------------------------------------------

    To compute the values of the uniform amount and pricing multipliers 
shown above, the FDIC chose cutoff values for the predicted 
probabilities of downgrade such that, as of December 31, 2005: (1) 43 
percent of smaller institutions (other than new institutions) in Risk 
Category I would have been charged the minimum assessment rate; and (2) 
5 percent of smaller institutions (other than new institutions) in Risk 
Category I would have been charged the maximum assessment rate.\43\ The 
pricing multipliers and uniform amount shown above assume that the 
maximum annual assessment rate for institutions in Risk Category I 
would be 2 basis points higher than the minimum rate, as the FDIC 
proposes below.44, 45, 46
---------------------------------------------------------------------------

    \43\ The cutoff value for the minimum assessment rate would be a 
predicted probability of downgrade of 3 percent. The cutoff value 
for the maximum assessment rate would be 17 percent. The percentage 
of institutions that would have been charged the minimum assessment 
rate (43 percent) is slightly less than the percentage of 
institutions that would have been charged the minimum assessment 
rate under the proposal (45 percent) to ensure that the total 
assessment revenue collected under the proposal and under the 
alternative would be the same.
    \44\ The uniform amount also depends upon the actual level of 
the minimum assessment rate.
    \45\ Appendix 1 discusses the methodology underlying the 
proposed method and the alternative.
    \46\ As discussed elsewhere, the FDIC proposes charging new 
institutions in Risk Category I the maximum assessment rate for the 
category. Thus, when new institutions are included, the percentage 
of small insured institutions that are charged the minimum rate is 
about 38 percent and the percentage of institutions that are charged 
the maximum rate is slightly above 16 percent.
---------------------------------------------------------------------------

    If the alternative were adopted in a final rule, the FDIC would 
adopt updated cutoff values such that, based on data as of June 30, 
2006: (1) 43 percent of smaller institutions (other than new 
institutions) in Risk Category I would have been charged the minimum 
assessment rate; and (2) 5 percent of smaller institutions (other

[[Page 41918]]

than new institutions) in Risk Category I would have been charged the 
maximum assessment rate. These updated cutoff values could alter the 
pricing multipliers and uniform amount. Using these same cutoff values 
in future years could lead to different percentages of institutions 
being charged the minimum and maximum rates.
    Also, as under the proposal, the FDIC would propose to update the 
pricing multipliers assigned to the risk measures being used annually, 
without the necessity of notice-and-comment rulemaking. Again, however, 
if the FDIC's annual review and analysis conclude that additional or 
alternative financial measures, ratios or other risk measures should be 
used to determine risk-based assessments, changes would be made through 
notice-and-comment rulemaking.
2. Comparison With the Proposal
    While this approach to risk differentiation would not include 
supervisory evaluations, it would otherwise provide a comprehensive and 
timely depiction of risk based on available data.\47\ As under the 
proposal, pricing multipliers can be periodically updated to 
incorporate new financial data and with the publication of pricing 
multipliers assigned to each risk measure, insured institutions can 
readily compute their deposit insurance assessments.
---------------------------------------------------------------------------

    \47\ As discussed in Appendix 1, the accuracy of the proposed 
method and the alternative in predicting downgrades is very similar.
---------------------------------------------------------------------------

    Because this approach would also allow incremental pricing for Risk 
Category I institutions whose rates are between the minimum and maximum 
rates, small changes in an institution's financial ratios should 
produce only small changes in assessment rates.
    Table 11 shows the percentage of institutions whose assessment 
rates would change by various amounts under the alternative method 
compared to the proposed method. The assessment rate for over 90 
percent of institutions would change by one-quarter of a basis point or 
less.

                    Table 11.--Comparison of Assessment Rates Under the Alternative and the Proposed Method Using Year-End 2005 Data
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  Higher under the alternative by                                 Lower under the alternative by
                                         ------------------------------------------------    No Change   -----------------------------------------------
                                              >0.5 bp       0.25-0.5 bp      0-0.25 bp                      0-0.25 bp;      0.25-0.5 bp       >0.5 bp
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percent of Institutions.................            0.04            3.91           21.54           45.00           27.34            2.13            0.04
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Tables 12 and 13 show the distribution of assessment rates by size 
and by CAMELS composite rating over the period 1997 to 2005, again 
assuming that annual assessment rates for institutions in Risk Category 
I ranged from a minimum of 2 basis points to a maximum of 4 basis 
points.\48\ Table 12 shows that, like the proposal, using financial 
ratios alone to differentiate for risk and price would not result in 
significant differences in assessment rates based on size. Table 13 
shows that, like the proposal, most CAMELS composite 1-rated 
institutions would pay the minimum rate, while most composite 2-rated 
institutions would not. However, there is a higher likelihood that a 
CAMELS composite 2-rated institution would pay less than a CAMELS 
composite 1-rated institution than under the proposal.
---------------------------------------------------------------------------

    \48\ Appendix 2 discusses the derivation of the data in Tables 
12 and 13 in greater detail.

                         Table 12.--Distribution of Assessment Rates by Size, 1997-2005
----------------------------------------------------------------------------------------------------------------
                                                                            Asset size
                                                 ---------------------------------------------------------------
                                                      <=$0.1B       $0.1-$0.5B       $0.5B-$1B       $1B-$10B
----------------------------------------------------------------------------------------------------------------
25th Percentile.................................             2.0             2.0             2.0             2.0
Median..........................................             2.1             2.1             2.1             2.2
75th Percentile.................................             2.8             2.7             2.6             2.8
95th Percentile.................................             4.0             4.0             4.0             4.0
----------------------------------------------------------------------------------------------------------------


 Table 13.--Distribution of Assessment Rates by CAMELS Composite Rating,
                                1997-2005
------------------------------------------------------------------------
                                                      CAMELS
                                         -------------------------------
                                                 1               2
------------------------------------------------------------------------
25th Percentile.........................             2.0             2.0
Median..................................             2.0             2.5
75th Percentile.........................             2.2             3.2
95th Percentile.........................             3.2             4.0
------------------------------------------------------------------------

3. Possible Variations
    As with the FDIC's proposal, variations on the alternative method 
are also possible, such as excluding the ratio of net income before 
taxes to risk-weighted assets and the ratio of loan charge-offs to 
gross assets. Again, any changes in the financial ratios used could 
result in changes to the pricing multipliers to be used.\49\
---------------------------------------------------------------------------

    \49\ New pricing multipliers for the risk measures under these 
variations would be determined in the same manner as the pricing 
multipliers in the alternative. (Derivation of pricing multipliers 
is described in Appendix 1.) The uniform amount and pricing 
multipliers (used to determine an institution's assessment) could 
also change.

---------------------------------------------------------------------------

[[Page 41919]]

    To incorporate supervisory perspectives that are not captured by 
financial ratios, the alternative method could also be combined with 
CAMELS component ratings, but in a manner different from the proposal. 
Instead of combining a weighted average CAMELS component rating with 
financial ratios through a statistical analysis, part of the assessment 
rate could be determined using solely financial ratios, as in the 
alternative, and the remainder using the weighted average CAMELS 
component rating. For example, the FDIC could determine a rate using 
financial ratios only and a rate using the weighted-average CAMELS 
component rating only and average the two rates to determine the 
institution's actual assessment rate.50 51 This variation 
would more closely resemble the large Risk Category I institution risk 
differentiation method described in Section VI. If adopted, it would 
allow greater integration of the approaches.
---------------------------------------------------------------------------

    \50\ To determine the half of the rate attributable to the 
weighted average CAMELS component rating, the FDIC would charge a 
portion of institutions a minimum rate and a portion a maximum rate. 
The FDIC would assess all other institutions at rates that increase 
as weighted-average CAMELS component ratings increase.
    \51\ To produce the same revenue as the proposal and the 
alternative described above, the percentage of institutions subject 
to the minimum and maximum rates would have to be adjusted.
---------------------------------------------------------------------------

    Another variation could supplement the alternative by incorporating 
CAMELS component ratings in a more limited manner. For example, a small 
Risk Category I institution that had an ``M'' component rating of 3 or 
higher (or any CAMELS component of 3 or higher) might be charged the 
maximum assessment rate.

VI. Risk Differentiation Among Larger Institutions in Risk Category I

A. Proposal: Rely on Supervisory Ratings, Long-Term Debt Issuer 
Ratings, and for Some Institutions, Financial Ratios

1. The Large Institution Risk Differentiation Proposal
    The FDIC proposes to differentiate risk among large institutions 
using a combination of supervisory ratings, long-term debt issuer 
ratings, financial ratios for some institutions, and additional risk 
information. This approach shares two elements in common with the small 
institution approach: CAMELS component ratings, and financial ratios. 
The additional elements in the large institution approach are the 
explicit use of debt rating information and the consideration of 
additional risk information that is typically available for larger 
institutions. The debt rating information element would be gradually 
phased in, and the financial ratio element would be gradually phased 
out, as an institution's assets increased from $10 billion to $30 
billion.
    The FDIC proposes to assign each large Risk Category I institution 
to one of six assessment rate subcategories. This assignment would be 
determined in two steps. In the first step, an insurance score would be 
derived. Cutoff insurance scores would initially be set for the minimum 
and maximum assessment rate subcategories so that similar proportions 
of the number of large and small institutions (excluding new 
institutions) are charged the minimum and maximum rates within Risk 
Category I. At the same time, cutoff insurance scores would be set for 
the four intermediate assessment rate subcategories. Thereafter, an 
institution's insurance score would determine its initial assessment 
rate subcategory assignment. In the second step, the FDIC would 
determine whether to adjust the initial assessment rating subcategory 
assignment based on considerations of additional information.
    The FDIC proposes to derive an insurance score from a combination 
of supervisory and debt rating agency information, and an estimated 
probability of downgrade to a CAMELS composite 3, 4 or 5 as derived in 
the alternative method of risk differentiation for small Risk Category 
I institutions described in Section V(B)(1) (referred to hereafter as 
the financial ratio factor). The financial ratio factor would be 
gradually phased out as institution assets increased and would be fully 
phased out for institutions with $30 billion or more in assets. 
Correspondingly, information from debt rating agencies would increase 
in importance as institution size increased from $10 billion to $30 
billion. For institutions with $30 billion or more in assets, the 
proposed insurance score would be derived solely from supervisory 
ratings and debt rating information.
    The insurance scores would be used to assign institutions to an 
initial assessment rate subcategory. Although these initial subcategory 
assignments should in most cases provide a reasonable rank ordering of 
risk among large Risk Category I institutions, the FDIC would consider 
additional information to determine when adjustments to an 
institution's assessment rate subcategory are appropriate. 
Consideration of this additional information will allow the FDIC to 
develop more reasonable and consistent rank orderings of risk as 
indicated by institutions' Risk Category I assessment rate subcategory 
assignments. Any modification would be limited to changing an 
institution's initial assessment rate subcategory assignment to the 
next higher or lower assessment rate. The risk factors that would be 
considered to determine if assessment rate subcategory adjustments were 
necessary are detailed further below.
    The proposed approach is consistent with best practices in the 
banking industry for rating and ranking large direct credit and 
counterparty credit risk exposures. These practices include considering 
all relevant risk information, using standardized risk assessment 
processes and methodologies, incorporating judgment, where necessary, 
and using quality controls to ensure consistency and reasonableness of 
the ratings and risk rankings.
    International groups, such as the Bank for International 
Settlements' Basel Committee on Banking Supervision, support these 
standards as applied to rating systems for large exposures:

    Credit scoring models and other mechanical rating procedures 
generally use only a subset of available information. Although 
mechanical rating procedures may sometimes avoid some of the 
idiosyncratic errors made by rating systems in which judgment plays 
a large role, mechanical use of limited information also is a source 
of rating errors. Credit scoring models and other mechanical 
procedures are permissible as the primary or partial basis of rating 
assignments, and may play a role in the estimation of loss 
characteristics. Sufficient judgment and oversight is necessary to 
ensure that all relevant and material information, including that 
which is outside the scope of the model, is also taken into 
consideration, and that the model is used appropriately.\52\
---------------------------------------------------------------------------

    \52\ International Convergence of Capital Measurement and 
Capital Standards, June 2004, paragraph 417.

    The insurance score would be a weighted average of three elements: 
(1) A weighted average CAMELS component rating with a value between 1.0 
and 3.0; (2) long-term debt issuer ratings converted to a numerical 
value between 1.0 and 3.0; and (3) for institutions with between $10 
billion and $30 billion in assets, the financial ratio factor converted 
to a value between 1.0 and a 3.0. The result would be an insurance 
score with values ranging from 1.0 to 3.0. The weights applied to the 
supervisory rating element of the proposed approach would be constant 
across all size categories. For institutions with $10 billion to $30 
billion in assets, the weights assigned to the long-term debt issuer 
rating and financial ratio factor would vary. Each

[[Page 41920]]

element of the proposed approach is discussed in detail below.
2. Supervisory Ratings
    As noted in the small Risk Category I institution risk 
differentiation proposal, CAMELS component ratings provide both a more 
detailed description of risk and finer differentiations of risk than do 
composite ratings alone. For large Risk Category I institutions, the 
FDIC proposes to use these component ratings to derive a weighted 
average CAMELS component rating. This weighted average CAMELS component 
rating would be determined by multiplying the component rating value by 
an associated weight and summing the six products. The weights applied 
to individual CAMELS component ratings would be the same as under the 
small Risk Category I institution proposal:

------------------------------------------------------------------------
                                                              Weight
                    CAMELS component                         (percent)
------------------------------------------------------------------------
C.......................................................              25
A.......................................................              20
M.......................................................              25
E.......................................................              10
L.......................................................              10
S.......................................................              10
------------------------------------------------------------------------

    As noted above, these weights reflect the view of the FDIC 
regarding the relative importance of each CAMELS component for 
differentiating risk among Risk Category I institutions for insurance 
purposes.
    The weights proposed above would be appropriate for most large Risk 
Category I institutions. However, alternative weights might be 
appropriate in certain instances. For example, one possible alternative 
would vary these weights depending upon an institution's primary 
business type. To illustrate, some institutions that are engaged in 
securities processing activities retain relatively little credit risk 
compared to other institutions. Risks in these institutions relate more 
to operational practices and controls. For these institutions, it might 
be appropriate to increase the weight for the ``M'' (Management) 
component (which includes operational risk considerations) relative to 
the ``A'' (Asset quality) component. The following table provides an 
example of CAMELS component weights that could be used for selected 
institution types.

----------------------------------------------------------------------------------------------------------------
              Institution type *                    C          A          M          E          L          S
----------------------------------------------------------------------------------------------------------------
Diversified Regional Institutions.............         25         20         25         10         10         10
Processing Institutions and Trust Companies...         20         15         35         10         10         10
Residential Mortgage Lenders..................         20         20         25         10         10         15
Large Diversified Institutions................         20         15         25         10         15         15
Non-diversified Regional Institutions.........         25         25         25         10         10          5
----------------------------------------------------------------------------------------------------------------
* Under this alternative, large institutions might be grouped into institution types using the institution type
  grouping definitions shown in Appendix 3 to this document. This grouping includes institutions with operating
  characteristics or lending concentrations indicative of processing institutions and trust companies,
  residential mortgage lenders, non-diversified regional institutions, large diversified institutions, or
  diversified regional institutions.

    Another possible weighting approach would be for the FDIC to vary 
component weights based on the relative importance of each significant 
business activity in which an institution is engaged. In such a system, 
each institution's unique combination of business activities (such as 
securities processing, fiduciary activities, consumer lending, real 
estate lending, wholesale lending) could lead to unique CAMELS 
component rating weights for each institution. The FDIC is seeking 
comment whether alternative CAMELS component weights should be 
considered.
3. Debt Rating Agency Information
    The proposed approach would be based upon the long-term debt issuer 
ratings of insured institutions assigned by major rating agencies.\53\ 
Debt issuer ratings of insured institutions' holding companies would 
not be used. While there are minor differences in definitions among 
rating agencies, a long-term debt issuer rating generally represents an 
opinion of the ability of an institution to meet its long-term 
financial obligations without respect to the characteristics of a 
firm's underlying obligations (such as the covenants of the obligation 
or whether the obligation is collateralized or guaranteed). There are 
several advantages to using these long-term debt issuer ratings: (1) 
They differentiate risk among large insured institutions by assigning 
an institution to one of a number of risk classifications;\54\ (2) they 
are available for all but a small number of large insured 
institutions;\55\ and (3) they supplement supervisory ratings. 
Moreover, because long-term debt issuer ratings can be viewed as an 
opinion of the likelihood of default, they serve as a useful proxy for 
an institution's relative funding costs. There is an argument for 
aligning the risk rankings used for insurance pricing purposes with the 
relative prices institutions pay on their non-deposit funding sources.
---------------------------------------------------------------------------

    \53\ The major U.S. rating agencies are Moody's, Standard & 
Poor's, and Fitch.
    \54\ Including rating modifiers, there are 10 potential issuer 
ratings possible in the rating agaencies; investment-grade rating 
scales.
    \55\ Most other market measures (equity indicators and most debt 
indicators) are not directly applicable to the insured entity 
because they are based on the equity and debt funding structure of 
the holding company.
---------------------------------------------------------------------------

    To obtain a numerical representation of these ratings, the FDIC 
proposes to convert long-term debt issuer ratings to values between 1 
and 3 in accordance with the conversion table shown in Appendix B. In 
this conversion table, the relative change in converted values 
increases for lower rating grades. This pattern is consistent with 
historical bond default studies that show non-linear increases in 
default risk for lower-graded debt issues.\56\
---------------------------------------------------------------------------

    \56\ See, for example, Standard & Poor's Annual Global Corporate 
Default Study for 2005.
---------------------------------------------------------------------------

    The proposed process for differentiating risk in large institutions 
would only use current agency long-term debt issuer ratings, those that 
have been confirmed or newly assigned within the last 12 months. When 
only one current long-term debt issuer rating exists, that rating would 
be converted directly into a debt issuer score in accordance with 
Appendix B. Where two or more current long-term debt issuer ratings 
exist, the numerical conversion would be calculated as the average of 
the converted value of each current long-term debt issuer rating.
4. The Financial Ratio Factor
    The proposal would use the financial ratio factor as previously 
defined in cases where a large institution has assets of $10 billion to 
$30 billion.\57\ Considering aspects of both the small

[[Page 41921]]

and large institution risk differentiation approaches for institutions 
of this size reduces the potential for abrupt assessment rate changes 
when an institution grows above or shrinks below $10 billion in assets.
---------------------------------------------------------------------------

    \57\ The financial ratios used to derive the financial ratio 
factor are the tier 1 leverage ratio, loans past due 30-89 days to 
gross assets, nonperforming loans to gross assets, net loan charge-
offs to gross assets, net income before taxes to risk-weighted 
assets, and volatility liabilities to gross assets.
---------------------------------------------------------------------------

    The following process would be used to convert the financial ratio 
factor into the same 1.0 to 3.0 scale as the other two insurance score 
elements: (1) Institutions with a financial ratio factor equal to or 
less than the minimum assessment rate cutoff value for small Risk 
Category I institutions under the alternative financial ratio-only risk 
differentiation approach would be assigned a value of 1.0; (2) 
institutions with a financial ratio factor equal to or greater than the 
maximum assessment rate cutoff value for small Risk Category I 
institutions under the alternative financial ratio-only risk 
differentiation approach would be assigned a value of 3.0; and (3) for 
all other institutions, the financial ratio factor would be converted 
by: (a) Calculating the difference between the institution's financial 
ratio factor and the minimum assessment rate cutoff value determined in 
(1) above; (b) dividing the result by the difference between the 
maximum and minimum assessment rate cutoff values determined in (1) and 
(2) above; (c) multiplying this ratio by the difference between the 
maximum and minimum insurance score values (i.e., 3 minus 1); and (d) 
adding the minimum insurance score (i.e., 1) to the result.\58\
---------------------------------------------------------------------------

    \58\ This conversion process is described in detail in Appendix 
B.
---------------------------------------------------------------------------

    As noted in the discussion of the alternative risk differentiation 
method for small Risk Category I institutions, the cutoff values 
applied in the process above will be updated based on data as of June 
30, 2006 by finding the cutoff values that would charge: (1) 43 percent 
of smaller institutions (other than new institutions) in Risk Category 
I the minimum assessment rate; and (2) 5 percent of smaller 
institutions (other than new institutions) in Risk Category I the 
maximum assessment rate.
5. Weights Applied to the Large Risk Category I Insurance Score 
Elements
    Weights would be applied to each of the above elements--the 
weighted average CAMELS component rating, long-term debt issuer ratings 
that have been converted to a numerical value, and the financial ratio 
factor--to derive an insurance score. The weight applied to the 
weighted average CAMELS component rating would be 50 percent for all 
size categories. The weight applied to long-term debt issuer ratings 
would be 50 percent for all institutions with $30 billion or more in 
assets. For institutions with $10 billion to $30 billion in assets, the 
weight applied to long-term debt issuer ratings would increase (and 
correspondingly, the weight applied to the financial ratio factor would 
decrease), as the institution's size increased.\59\ Scaling the long-
term debt issuer rating weights recognizes that, the larger the 
institution, the greater the relative importance of long-term debt 
issuer ratings to both its non-insured funding costs and its ability to 
engage in certain types of business, such as credit derivatives or 
other types of derivatives. While the financial ratio factor weight 
would decline as an institution assets increase, the financial ratios 
used to derive this factor could be among the considerations used to 
potentially adjust the ultimate risk assessment subcategory assignment 
as described further below. Table 14 shows the proposed weights for the 
various size categories of large Risk Category I institutions.
---------------------------------------------------------------------------

    \59\ For any large institution that did not have a long-term 
debt issuer rating, the weighted average CAMELS component rating and 
financial ratio factor would be weighted 50 percent each. Of the 117 
institutions with over $10 billion in assets as of year-end 2005, 17 
did not have any current long-term debt issuer ratings. Most of 
these 17 institutions are insured thrifts and all but two had less 
than $30 billion in year-end 2005 assets.

                                 Table 14.--Weights Under the Proposed Approach
----------------------------------------------------------------------------------------------------------------
                                                                              Weights applied to the:
                                                                 -----------------------------------------------
                                                                     Weighted
                      Asset size category *                       average CAMELS  Converted long-    Financial
                                                                     component       term debt     ratio factor
                                                                      rating      issuer ratings     (percent)
                                                                     (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
>= $30 billion..................................................              50              50               0
>= $25 billion,< $30 billion....................................              50              40              10
>= $20 billion,< $25 billion....................................              50              30              20
>= $15 billion,< $20 billion....................................              50              20              30
>= $10 billion, <$15 billion....................................              50              10              40
No long-term debt issuer rating.................................              50               0              50
----------------------------------------------------------------------------------------------------------------
* Applicable when a current (within last 12 months) long-term debt issuer rating is available for the insured
  institution. If no current rating is available, the last row of the table applies.

6. Insurance Score
    After applying weights to the weighted average CAMELS component 
rating, the numerical representation of the long-term debt issuer 
rating, and financial ratio factor as converted to a 1.0 to 3.0 scale, 
the proposed approach would produce a number between 1.0 and 3.0. (Non-
integer values are possible.) This number would serve as the basis for 
initially assigning an institution to an assessment rate subcategory 
for that assessment period. The relationship between this insurance 
score and the insurance assessment rate subcategories is described 
below.
7. Example of an Insurance Score Calculation
    For illustrative purposes, consider an institution with the 
following characteristics:
     CAMELS component ratings as of the assessment date are 
``222121.''
     The institution has a current long-term debt issuer rating 
of ``A-'' by both Standard and Poor's and Fitch and an ``A3'' rating by 
Moody's.
     The institution's assets as of the assessment date are $18 
billion.
    Given these circumstances, the institution's insurance score would 
be calculated as illustrated in Table 15.

[[Page 41922]]



                               Table 15.--Illustrative Insurance Score Calculation
----------------------------------------------------------------------------------------------------------------
                                                      Weights                     Element weight       Score
    Insurance score elements          Ratings        (percent)      Input value      (percent)     contribution
----------------------------------------------------------------------------------------------------------------
Supervisory Ratings:
    Capital Adequacy............             2.0              25            0.50  ..............  ..............
    Asset Quality...............             2.0              20            0.40  ..............  ..............
    Management..................             2.0              25            0.50  ..............  ..............
    Earnings....................             1.0              10            0.10  ..............  ..............
    Liquidity...................             2.0              10            0.20  ..............  ..............
    Sensitivity to Market Risk..             1.0              10            0.10  ..............  ..............
                                                                 -----------------
        Weighted average CAMELS.  ..............  ..............            1.80              50            0.90
Market Information:
    Long-term debt issuer rating  ..............  ..............            1.50              20            0.30
Financial Ratio Factor:
    (Estimated probability of     ..............  ..............            1.77              30            0.53
     downgrade equals 8.36%)....
                                                                                                 ---------------
    Insurance Score.............  ..............  ..............  ..............  ..............            1.73
----------------------------------------------------------------------------------------------------------------

     The weighted average CAMELS component rating portion of 
the insurance score is calculated as follows: The CAMELS component 
ratings are as assigned through the supervisory process. Multiplying 
the component ratings by their associated weights produces values of 
0.50, 0.40, 0.50, 0.10, 0.20, and 0.10, respectively. The sum of these 
values, the weighted average CAMELS component rating, equals 1.80. The 
overall weight applied to the weighted average CAMELS component rating 
is 50 percent. Multiplying the weighted average CAMELS component rating 
by 50 percent equals 0.90, which is the contribution of the supervisory 
rating element to the insurance score.
     The long-term debt issuer rating portion of the insurance 
score is calculated as follows: The average of three current long-term 
debt issuer ratings converted to numerical values according Appendix B 
is 1.50. With $18 billion in assets, the institution's long-term debt 
issuer rating weight is 20 percent, per Table 14. The product of its 
converted long-term debt issuer rating and weight is 0.30.
     The financial ratio factor of the insurance score is 
calculated as noted above: (a) The difference between the institution's 
estimated probability of downgrade of .0836 percent and the minimum 
assessment rate cutoff value of .03 percent equals .0536; (b) this 
result is divided by the difference between the maximum and minimum 
assessment rate cutoff values of .17 and .03 and equals .3829; (c) this 
ratio is multiplied by the difference between the maximum and minimum 
insurance score values of (3 minus 1) and equals .7657; and (d) this 
result is added to the minimum insurance score of 1 to obtain the 
converted value of 1.77 (rounded). The weight for the financial ratio 
factor, per Table 14, is 30 percent. The product of the converted 
financial ratio factor and its associated weight is 0.53 (rounded).
     The combined insurance score is calculated as follows: The 
sum of the individual elements--the weighted average CAMELS component 
rating, the long-term debt issuer ratings, and the financial ratio 
factor (0.90 + 0.30 + 0.53)--produces an insurance score of 1.73 
(rounded). The relationship between the insurance score and an 
institution's assessment rate is described below.

B. Proposal: Use the Insurance Score, Along With Consideration of Other 
Relevant Risk Information, To Assign an Institution to an Assessment 
Rate Subcategory

1. Establishing Risk Category I Assessment Rate Subcategories for Large 
Institutions
    As indicated earlier, the FDIC proposes using insurance scores to 
set cutoff scores for the minimum and maximum assessment rate 
subcategories. These cutoff scores would be set at levels that 
initially produce similar proportions of the number of large and small 
institutions (excluding new institutions) being charged the minimum and 
maximum rates within Risk Category I. The FDIC would set cutoff scores 
based on the distribution of insurance scores (for large institutions) 
and assessment rates (for small institutions) for the first quarter of 
2007.\60\ Using year-end 2005 information, the FDIC's best estimate is 
that a cutoff insurance score of 1.45 or lower would result in roughly 
46 percent of large institutions (excluding new institutions) being 
charged the minimum assessment rate. Similarly, designating a cutoff 
score of greater than 2.05 would result in roughly 5 percent of large 
institutions (excluding new institutions) being charged the maximum 
assessment rate.
---------------------------------------------------------------------------

    \60\ Thereafter, the proportions of large institutions that are 
charged the minimum and maximum assessment rates could differ from 
the proportions of small institutions that are charged the minimum 
and maximum assessment rates.
---------------------------------------------------------------------------

    For large Risk Category I institutions whose insurance scores fall 
between the cutoff scores for the minimum and maximum assessment rates, 
the FDIC proposes to develop four additional assessment rate 
subcategories, bringing the total number of subcategories (including 
the minimum and maximum subcategories) to six. The cutoff score ranges 
for each of the four intermediate subcategories would be equal. 
Assuming cutoff scores for the minimum and maximum assessment rates of 
1.45 and 2.05, respectively, cutoff scores for the intermediate 
subcategories would be 1.60, 1.75 and 1.90.
    The FDIC proposes to set the base assessment rates for the four 
intermediate subcategories of Risk Category I (those being charged 
between the minimum and maximum base assessment rates) based on 
assessment rates applicable to small Risk Category I institutions 
(excluding insured branches of foreign banks and new institutions). To 
determine these rates, the FDIC would divide the institutions in small 
Risk Category I that are charged assessments between the minimum and 
maximum rates as of June 30, 2006 into four groups. Each of the four 
groups would contain the same proportion of institutions as the 
corresponding intermediate subcategory of large institutions as of June 
30, 2006. Using year-end 2005 information as an estimate, the 
proportion of large institutions within these intermediate

[[Page 41923]]

subcategories (in increasing assessment rate order) would be 38 
percent, 30 percent, 18 percent, and 14 percent, respectively.
    The FDIC would apply the average assessment rate from a small 
institution group to the corresponding large institution intermediate 
subcategory. Again using year-end 2005 information and assuming a 
minimum assessment rate of 2 basis points and a maximum assessment rate 
of 4 basis points, Table 16 provides an estimate of insurance score 
cutoff points and associated assessment rates for each subcategory.

 Table 16.--Assessment Rate Example Using Assessment Rate Subcategories
------------------------------------------------------------------------
               Insurance score                      Assessment rate
------------------------------------------------------------------------
<=1.45.......................................  2 basis points (bp)
                                                (minimum rate).
>1.45 but <=1.60.............................  2.22 bp (average of the
                                                first 38 percent of
                                                small institution
                                                assessment rates in the
                                                incremental range).
>1.60 but <=1.75.............................  2.65 bp (average of the
                                                next 30 percent of small
                                                institution assessment
                                                rates in the incremental
                                                range).
>1.75 but <=1.90.............................  3.09 bp (average of the
                                                next 18 percent of small
                                                institution assessment
                                                rates in the incremental
                                                range).
>1.90 but <=2.05.............................  3.61 bp (average of the
                                                next 14 percent of small
                                                institution assessment
                                                rates in the incremental
                                                range).
>2.05........................................  4 bp (maximum rate).
------------------------------------------------------------------------

    Chart 2 illustrates an estimate of the cumulative distribution of 
assessment rates for large Risk Category I institutions as of year-end 
2005 using the proposed subcategory approach assuming that annual 
assessment rates for these institutions range from 2 basis points to 4 
basis points.
[GRAPHIC] [TIFF OMITTED] TP24JY06.001

    The proposed subcategory approach has the advantage of allowing the 
use of a ``watch list'' whereby institutions could be notified in 
advance when changes in an insurance score input, or consideration of 
other risk information, would result in a change in the institution's 
assessment rate subcategory assignment. Such advance notice would allow 
an institution to take action to improve its risk profile, in the case 
of a potential lowering of a subcategory assignment, before its 
assessment rate increases. The FDIC seeks comment on the 
appropriateness of this possible ``watch list'' feature of the 
proposal.

[[Page 41924]]

2. Adjustments to an Institution's Initial Assessment Rate Subcategory 
Assignment
    Consistent with best practices in the banking industry for rating 
and ranking large direct credit and counterparty credit risk exposures, 
the FDIC proposes to consider additional information and analyses to 
determine whether to adjust an institution's initial assessment rate 
subcategory assignment. Having the ability to make such adjustments, 
combined with quality controls to ensure the adjustments are justified 
and well supported, should promote greater consistency in subcategory 
assignments in terms of the relative levels of risk represented within 
each assessment rate subcategory. Any adjustment to an institution's 
initial assessment rate subcategory assignment (as determined by its 
insurance score) would be limited to the next higher or next lower 
assessment rate subcategory.
    There are three broad categories of information that the FDIC 
proposes to consider in determining whether to make adjustments to an 
institution's initial assessment rate subcategory assignment. The types 
of information included in these categories, as well as the way the 
FDIC proposes to use this information, are discussed below. Appendix D 
contains a more detailed listing of the types of additional risk 
information that would be used to determine whether or not to adjust 
the initial assessment rate subcategory assignment as determined by an 
institution's insurance score.
    Other Market Information: In addition to long-term debt issuer 
ratings, the FDIC proposes to consider other market information, such 
as subordinated debt prices, spreads observed on credit default swaps 
related to an institution's non-deposit obligations, equity price 
volatility observed on an institution's parent company stock, and debt 
rating agency ``watch list'' notices. These additional market 
indicators would be especially beneficial in assessing whether the 
insurance score accurately reflected the relative level of risk posed 
by an institution. For example, instances where an institution has been 
placed on a rating agency ``watch'' list with negative or positive 
implications, or instances when an institution's subordinated debt 
spreads are different from institutions with similar long-term debt 
issuer ratings, may provide evidence that the institution has more or 
less risk than other institutions in the same initial assessment rate 
subcategory.
    Financial Performance and Condition Measures: Regulatory financial 
reports contain a significant amount of information about the 
performance trends and condition of insured institutions. Most large 
institutions also file periodic reports with the Securities and 
Exchange Commission, which contain additional details and disclosures 
concerning operations and performance trends. The FDIC proposes to use 
performance indicators from these reports (e.g., capital levels, 
profitability measures, asset quality measures, liquidity and funding 
measures, interest rate risk measures, and market risk measures), as 
well as other financial performance and condition information and 
analyses developed by or obtained through the institution's primary 
federal regulator, to determine whether these measures were generally 
in line with or different from other institutions assigned to the same 
assessment rate subcategory.\61\
---------------------------------------------------------------------------

    \61\ The FDIC recognizes that institutions engaged in different 
types of banking activities may have different ranges of financial 
performance and condition measures. Therefore, any ``peer 
comparisons'' used to inform assessment rate subcategory adjustment 
decisions would involve institutions engaged in similar types of 
banking activities.
---------------------------------------------------------------------------

    Stress Considerations: Under the proposal, the FDIC would also 
consider two additional kinds of information: how a large institution 
would perform when faced with adverse financial or economic conditions 
(ability to withstand stress), and the potential resolution costs 
implicit in the institution's business activities, asset composition, 
and funding structure (loss severity considerations). To evaluate an 
institution's ability to withstand stress, the FDIC would rely on 
information from internal stress-test models, information pertaining to 
the internal risk and performance characteristics of an institution's 
credit portfolios and other business lines, general balance sheet and 
financial performance measures, and other analyses developed by the 
institution that pertain to its projected performance during periods of 
economic or financial stress.
    The following considerations illustrate how information pertaining 
to the ability to withstand stress would be evaluated: (1) To what 
extent does the institution identify stress conditions that it may be 
vulnerable to, given its credit exposures and banking activities? (2) 
does the institution consider reasonably plausible stress scenarios 
beyond those normally expected? (3) does the institution have the 
technical capability to measure its vulnerability to varying degrees of 
financial stress? (4) what level of protection is provided by the 
institution's current capital, earnings, and liquidity positions 
against varying degrees of unanticipated stress conditions? If, based 
on these considerations, an institution's capital, earnings, and 
liquidity positions can be shown to be sufficient to withstand a 
considerable degree of financial stress, it would be viewed as less 
risky than an institution that can be shown to have only an adequate 
level of protection against moderate levels of financial stress. Such 
evaluations would help determine if there were meaningful differences 
in an institution's ability to withstand financial stress relative to 
other institutions in that assessment rate subcategory.
    In the case of the loss severity considerations, the FDIC proposes 
to evaluate the nature of an institution's primary business activities, 
the expected costs that these activities would impose on the FDIC in 
the event the institution failed, the marketability and potential value 
of the institution's assets, and the implications of an institution's 
funding structure and priority of claims on potential insurance fund 
losses in the event of a failure. To analyze these factors, the FDIC 
would rely on the institution's description of its business lines, 
general balance sheet and funding information, and other analyses 
developed by or in consultation with the institution's primary federal 
regulator. Again, the level of risk indicated by such analyses would be 
compared to those of other institutions in the same assessment rate 
subcategory.
3. Assessment Rating Assignment Evaluation and Review Processes
    In conjunction with its evaluation of assessment rate subcategory 
assignments, the FDIC would establish a variety of controls to ensure 
consistent and well supported insurance pricing decisions. These 
controls would include the following:
     Adjustments to the assessment rate subcategory assignment 
would be fully supported and documented. The justification for the 
adjustment would be internally reviewed to ensure that the ultimate 
assessment rate subcategory assignment was consistent with the risk 
characteristics generally represented within that subcategory 
assignment.
     The overall distribution of large institution assessment 
rate subcategory assignments would be subject to an additional review 
that ensured the risk rankings suggested by these assignments were 
logical.
     The FDIC would consult with institutions' primary federal 
regulators before finalizing assessment rate subcategory assignments.

[[Page 41925]]

     As discussed above, if a ``watch list'' feature were 
included in the proposal, the FDIC would provide prior notice before 
changing an institution's assessment rate subcategory assignment.
4. Timing of Evaluations
    As discussed earlier, in a separate notice of proposed rulemaking, 
the FDIC has proposed that, for deposit insurance purposes, changes to 
an institution's supervisory rating be reflected when the change 
occurs.\62\ Under that proposal, if an examination (or targeted 
examination) led to a change in an institution's CAMELS composite 
rating that would affect the institution's insurance risk category, the 
institution's risk category would change as of the date the examination 
or targeted examination began, if such a date existed. Otherwise, it 
would change as of the date the institution was notified of its rating 
change by its primary federal regulator (or state authority).\63\
---------------------------------------------------------------------------

    \62\ 71 FR 28790, 28792.
    \63\ In either case, the FDIC, after taking into account other 
information that could affect the rating, would have to agree with 
the rating change. Otherwise, for purposes of deposit insurance risk 
classification, the rating change would change as of the date that 
the FDIC determined that the change occurred.
---------------------------------------------------------------------------

    The FDIC proposes that this rule apply to a large institution when 
a supervisory rating change results in the institution being placed in 
a different Risk Category. However, if, during a quarter, a supervisory 
rating change occurs that results in an large institution moving from 
Risk Category I to Risk Category II, III or IV, the institution's 
assessment rate for the portion of the quarter that it was in Risk 
Category I would be based upon its insurance score for the prior 
quarter; no new insurance score would be developed for the quarter in 
which the institution moved to Risk Category II, III or IV.
    When a large institution is moved to Risk Category I during a 
quarter as the result of a supervisory rating change, the FDIC proposes 
to assign an insurance score, associated subcategory (subject to 
adjustment as describe above) and assessment rate for the portion of 
the quarter that the institution was in Risk Category I as it would for 
other large institutions in Risk Category I, except that the assessment 
rate would only apply to the portion of the quarter that the 
institution was in Risk Category I.
    When an institution remains in Risk Category I during a quarter, 
but a CAMELS component or a long-term debt issuer rating changes during 
the quarter that would affect its initial assignment to a subcategory, 
the FDIC proposes to assign separate insurance scores, associated 
subcategories (subject to adjustments as describe above) and associated 
assessment rates for the portion of the quarter before and after the 
change. A long-term debt issuer rating change would be effective as of 
the date the change was announced. If an examination (or targeted 
examination) led to the change in an institution's CAMELS component 
rating, the FDIC proposes that the change would be effective as of the 
date the examination or targeted examination began, if such a date 
existed. Otherwise, the change would be effective as of the date the 
institution was notified of its rating change by its primary federal 
regulator (or state authority).\64\
---------------------------------------------------------------------------

    \64\ In either case, the FDIC, after taking into account other 
information that could affect the rating, would have to agree with 
the rating change. Otherwise, for purposes of deposit insurance risk 
classification, the rating change would change as of the date that 
the FDIC determined that the change occurred.
---------------------------------------------------------------------------

    However, the FDIC is also considering a different rule for large 
institutions that remain in Risk Category I during a quarter, but whose 
CAMELS components or long-term debt issuer ratings change during the 
quarter. Because the FDIC will review each large institution at least 
quarterly for deposit insurance purposes, it will usually be aware of 
changes in an institution's risk profile before they are reflected in 
changed CAMELS component ratings or long-term debt issuer ratings. 
Thus, the FDIC is considering an alternate rule whereby, when a large 
institution remains in Risk Category I during a quarter, the FDIC would 
assign an insurance score, associated subcategory (subject to 
adjustment as describe above) and assessment rate for the entire 
quarter using the supervisory ratings and agency ratings in place as of 
the end of the quarter. However, the FDIC proposes to also take into 
account information received after the end of the quarter if the 
information reflects upon an institution's condition as of the end of 
the quarter.

VII. Definitions of Large and Small Institutions and Exceptions

A. Proposal: Determine Whether an Institution Is Large or Small Based 
Upon Its Assets

    As discussed above, for risk differentiation purposes, the FDIC 
proposes to define a Risk Category I institution as small if it has 
less than $10 billion in assets and large if it has $10 billion or more 
in assets. The selection of the $10 billion asset size threshold stems 
from various considerations. First, institutions in this size category 
tend to have more information available relating to risk. Many of these 
institutions have developed and adopted sophisticated risk measurement 
models and systems. In addition, approximately 85 percent of 
institutions that have over $10 billion in assets have a long-term debt 
issuer rating by one of the three major U.S. rating agencies. Second, 
some types of complex activities engaged in by these larger 
institutions (e.g., securitization, derivatives, and trading) can be 
better evaluated by considering risk measurement and management 
information that is not considered under the proposed and alternative 
methods for small institutions.
    Initially, the FDIC proposes to determine whether an institution is 
small or large based upon its assets as of December 31, 2006. 
Thereafter, a small Risk Category I institution would be reclassified 
as a large institution when it reported assets of $10 billion or more 
for four consecutive quarters. This reclassification would become 
effective for subsequent quarters until it reported assets under $10 
billion for four consecutive quarters. Similarly, a large Risk Category 
I institution would be reclassified as a small institution when it 
reported assets of less than $10 billion for four consecutive quarters. 
This reclassification would become effective for subsequent quarters 
until it reported assets over $10 billion for four consecutive 
quarters.

B. Proposal: Allow Some Small Institutions To Request Treatment as a 
Large Institution

    In addition, the FDIC proposes that any Risk Category I institution 
that has between $5 billion and $10 billion in assets could request 
treatment under the large institution risk differentiation 
approach.\65\ Granting such a request would depend on whether the FDIC 
determines that it has sufficient information to evaluate the 
institution's risk adequately using the large Risk Category I risk 
differentiation method. Once a request had been granted, an institution 
could again request treatment under a different approach after three 
years, subject to the FDIC's approval.\66\ The element weightings for 
institutions with between $5 and $10 billion in assets that request and 
are granted permission to be treated under

[[Page 41926]]

the large institution risk differentiation approach would be the same 
as those shown in Table 14 for institutions with between $10 billion 
and $15 billion in assets.
---------------------------------------------------------------------------

    \65\ As of year-end 2005, there were 74 insured institutions 
with between $5 and $10 billion in assets.
    \66\ If an institution whose request to ``opt-in'' were granted 
and its assets subsequently fell below the $5 billion threshold, the 
FDIC proposes that it would determine within one year whether to use 
the small or large institution risk differentiation approach.
---------------------------------------------------------------------------

C. Proposal: For Risk Differentiation and Pricing Purposes, Treat Small 
Affiliates of Larger Institutions Separately

    In total, large institutions have approximately 200 affiliates that 
have less than $10 billion in assets. The FDIC has considered various 
options for these smaller affiliates of large Risk Category I 
institutions, including whether to consider the large affiliate's 
insurance assessment rate when assigning a rate to the smaller 
affiliate, given statutory cross-guarantees,\67\ and whether to use the 
small or large institution approach to differentiate risk in these 
small affiliates.
---------------------------------------------------------------------------

    \67\ 12 U.S.C. 1815(e).
---------------------------------------------------------------------------

    For a number of reasons, the FDIC proposes to treat these small 
affiliates separately, without regard to the insurance assessment rate 
assigned to the larger affiliate, and to use the small institution 
methodology for purposes of differentiating risk. First, the risk 
profiles of these institutions may be very different than the risk 
profiles of their larger affiliates. Second, the value of a cross-
guarantee in the future is uncertain because the financial condition of 
affiliated institutions may, under certain circumstances, weigh against 
the FDIC's invoking cross-guarantees. Finally, less information is 
generally available for these smaller affiliates and some information, 
such as market information, may not be relevant.

D. Proposal: Differentiate Risk in Insured Foreign Branches Using 
Weighted Supervisory Ratings

1. Overview
    The FDIC proposes to use the supervisory ratings of insured 
branches of foreign banks (referred to hereafter as insured branches) 
in Risk Category I to determine their deposit insurance assessment 
rates.\68\ These branches do not report the information needed to use 
the small institution pricing models.\69\ Hence, the FDIC must rely 
primarily on supervisory information to determine the relative risk of 
insured branches of foreign banks. Similar to the large institution 
risk differentiation approach, the supervisory ratings of insured 
branches would be weighted to determine an insurance score. This 
insurance score would determine the insured branch's initial assessment 
rate subcategory assignment using the same minimum, maximum, and 
intermediate subcategory insurance score cutoff values detailed in the 
large institution differentiation proposal. Adjustments to these 
initial assessment rate subcategory assignments could be made based on 
consideration of additional risk information such as those shown in 
Appendix D (where applicable).
---------------------------------------------------------------------------

    \68\ As of year-end 2005, there were 13 insured branches.
    \69\ For example, insured branches of foreign banks do not 
report earnings and report only limited balance sheet information in 
their regulatory financial submissions (FFIEC form 002).
---------------------------------------------------------------------------

2. Current Treatment of Insured Branches
    The International Banking Act of 1978 (the IBA) \70\ amended the 
FDI Act and allowed U.S. branches of foreign banks to apply for deposit 
insurance. The Federal Deposit Insurance Corporation Improvement Act 
(FDICIA) \71\ amended the IBA and prohibited retail deposit taking by 
U.S. branches of foreign banks. A foreign bank seeking to engage in 
retail deposit-taking activities in the U.S. is now required to 
establish an insured subsidiary bank. A grandfather provision in the 
IBA (as amended by FDICIA) permits insured branches in existence on the 
date of FDICIA's enactment to continue to accept insured deposits of 
less than $100,000. \72\ Of the branches grandfathered in 1991, only 13 
remained as of year-end 2005.
---------------------------------------------------------------------------

    \70\ Public Law 95-369, 92 Stat. 607 (1978).
    \71\ Public Law 102-242, 105 Stat. 2236 (1991).
    \72\ 12 U.S.C. 3104.
---------------------------------------------------------------------------

    The existing risk-based deposit insurance assessment system assigns 
insured branches an assessment risk classification in a manner similar 
to that used for all other insured depository institutions. Like other 
insured depository institutions, each insured branch is assigned an 
assessment risk classification. However, unlike other insured 
depository institutions, whose assessment risk classification is based, 
in part, on risk-based capital ratios, an insured branch's Capital 
category is determined by its asset pledge and asset maintenance ratios 
prescribed by Part 347 of the FDIC's Rules and Regulations. Like other 
insured depository institutions, insured branches are grouped into an 
appropriate supervisory subgroup based on the FDIC's consideration of 
supervisory evaluations provided by the institution's primary federal 
regulator. These supervisory evaluations result in the assignment of 
supervisory ratings referred to as ROCA ratings.\73\
---------------------------------------------------------------------------

    \73\ ROCA stands for Risk Management, Operational Controls, 
Compliance, and Asset Quality. Like CAMELS components, ROCA 
component ratings range from 1 (best rating) to a ``5'' rating 
(worst rating). Risk Category 1 insured branches of foreign banks 
would generally have a ROCA composite rating of 1 or 2 and component 
ratings ranging from 1 to 3.
---------------------------------------------------------------------------

3. Proposed Treatment of Insured Branches of Foreign Banks
    Insured branches that would fall in the revised Risk Category II 
through IV based on their asset pledge and asset maintenance ratios and 
supervisory ratings would be treated in the same manner as other 
insured institutions in these risk categories. For insured branches 
that fall within Risk Category I, the FDIC proposes an approach similar 
to that applied for large Risk Category I institutions.
    As noted above, these insured branches (all of which currently have 
less than $10 billion in assets) do not report the information needed 
to use the proposed small Risk Category I institution risk 
differentiation and pricing method. Moreover, because insured branches 
operate as extensions of a foreign bank's global banking operations, 
they pose unique risks. These branches operate without capital of their 
own, as distinct from capital of their non-U.S. parent, their business 
strategies are typically directed by the foreign bank parent, they rely 
extensively on the foreign bank parent for liquidity and funding, and 
they often have considerable country and transfer risk exposures not 
typically found in other insured institutions of similar size. Insured 
branches also present potentially challenging concerns in the event of 
failure. Consequently, the FDIC proposes to use ROCA component ratings 
for purposes of differentiating risk among Risk Category I insured 
branches, combined with considerations of other relevant risk 
information.
    The ROCA rating system for insured branches of foreign banks is 
analogous to the UFIRS used for commercial banks. Like the UFIRS, the 
ROCA components convey information about the supervisory assessments of 
an insured branch's condition in certain key risk areas. The ROCA 
rating system takes into consideration certain risk management, 
operational, compliance, and asset quality risk factors that are common 
to all branches.
    The FDIC proposes to use ROCA component ratings as the basis for 
determining an insurance score for insured branches. This insurance 
score would be the weighted average of the ROCA component ratings. The 
weights applied to individual ROCA component ratings would be 35 
percent, 25 percent, 25 percent, and 15 percent, respectively. These 
weights reflect the view of the FDIC regarding the relative importance

[[Page 41927]]

of each ROCA component for differentiating risk among foreign branches 
in Risk Category I for insurance purposes.
    The insurance score would determine the insured branch's initial 
assignment to one of six assessment rate subcategories, as these 
categories are defined in the large institution risk differentiation 
proposal. As noted in that section, the cutoff values for the minimum, 
maximum, and interim assessment rate subcategories will be determined 
based on the distribution of insurance scores (for large institutions) 
and assessment rates (for small institutions) for the first quarter of 
2007. Similar to the large institution risk differentiation proposal, 
the FDIC would be allowed to adjust an insured branch's initial 
assessment rate subcategory assignment to the subcategory being charged 
the next higher or lower assessment rate after consideration of 
additional risk information. The types of additional information the 
FDIC would consider in making these determinations are shown in 
Appendix D (where applicable to an insured branch).

VIII. New Institutions in Risk Category I

    The FDIC proposes to exclude an institution in Risk Category I that 
is less than seven years old from evaluation under either the smaller 
or larger institution method of risk differentiation. On average, new 
institutions have a higher failure rate than established institutions. 
Financial information for newer institutions also tends to be harder to 
interpret and less meaningful. A new institution undergoes rapid 
changes in the scale and scope of operations, often causing its 
financial ratios to be fairly volatile. In addition, a new 
institution's loan portfolio is often unseasoned, and therefore it is 
difficult to assess credit risk based solely on current financial 
ratios.\74\
---------------------------------------------------------------------------

    \74\ Empirical studies show that new institutions exhibit a 
``life cycle'' pattern and it takes close to a decade after its 
establishment for a new institution to mature. Despite low 
profitability and rapid growth, institutions that are three years or 
newer have, on average, a very low probability of failure lower than 
established institutions, perhaps owing to large capital cushions 
and close supervisory attention. However, after three years, new 
institutions'' failure probability, on average, surpasses that of 
established institutions. New institutions typically grow more 
rapidly than established institutions and tend to engage in more 
high-risk lending activities funded by large deposits. Studies based 
on data from the 1980s showed that asset quality deteriorated 
rapidly for many new institutions as a result, and failure 
probability (conditional upon survival in prior years) reached a 
peak by the ninth year. Many financial ratios of new institutions 
generally begin to resemble those of established institutions by 
about the seventh or eighth year of their operation. See Chiwon Yom, 
``Recently Chartered Banks'' Vulnerability to Real Estate Crisis,'' 
FDIC Banking Review 17 (2005): 115 and Robert DeYoung, ``For How 
Long Are Newly Chartered Banks Financially Fragile?'' Federal 
Reserve Bank of Chicago Working Paper Series 2000-09.
---------------------------------------------------------------------------

    The FDIC proposes charging all new institutions in Risk Category I 
the same rate, which would be the highest rate charged any other 
institution in this Risk Category. For this purpose, the FDIC proposes 
defining a new institution as one that is not an established 
institution. With two possible exceptions, an established institution 
would be one that has been chartered as a bank or thrift for at least 
seven years as of the last day of any quarter for which it is being 
assessed.
    Where an established institution merges into a new institution, the 
resulting institution would continue to be new. Where an established 
institution consolidates with a new institution, the resulting 
institution would be new. However, under either of these circumstances, 
the FDIC proposes to allow the resulting institution to request that 
the FDIC determine that the institution is an established institution. 
The FDIC proposes to make this determination based upon the following 
factors:
    1. Whether the acquired, established institution was larger than 
the acquiring, new institution, and, if so, how much larger;
    2. Whether management of the acquired, established institution 
continued as management of the resulting institution;
    3. Whether the business lines of the resulting institution were the 
same as the business lines of the acquired, established institution;
    4. To what extent the assets and liabilities of the resulting 
institution were the assets and liabilities of the acquired, 
established institution; and
    5. Any other factors bearing on whether the resulting institution 
remained substantially an established institution.
    Where a new institution merges into an established institution or 
where an established institution acquires a substantial portion of a 
new institution's assets or liabilities, and the merger or acquisition 
agreement is entered into after the date that this notice of proposed 
rulemaking is adopted, the FDIC proposes to conduct a review to 
determine whether the resulting or acquiring institution remains an 
established institution. The FDIC proposes to use the factors described 
above (necessary changes having been made) to make this determination.
    However, where a new institution merges into an established 
institution or where an established institution acquires a substantial 
portion of a new institution's assets or liabilities, and the merger or 
acquisition agreement was entered into before the date that this notice 
of proposed rulemaking is adopted, the FDIC proposes a grandfather rule 
under which the resulting or acquiring institution would be deemed to 
be an established institution.

IX. Assessment Rates Proposal: Adopt a Base Schedule of Rates From 
Which Actual Rates May Be Adjusted Depending Upon the Revenue Needs of 
the Fund

A. Statutory Factors

    In setting assessment rates, the FDIC's Board of Directors is 
required by statute to consider the following factors:
    (i) The estimated operating expenses of the Deposit Insurance Fund.
    (ii) The estimated case resolution expenses and income of the 
Deposit Insurance Fund.
    (iii) The projected effects of the payment of assessments on the 
capital and earnings of insured depository institutions.
    (iv) The risk factors and other factors taken into account pursuant 
to [12 U.S.C Section 1817(b)(1)] under the risk-based assessment 
system, including the requirement under [12 U.S.C Section 
1817(b)(1)(A)] to maintain a risk-based system.
    (v) Any other factors the Board of Directors may determine to be 
appropriate.\75\
---------------------------------------------------------------------------

    \75\ Section 2104 of the Reform Act (to be codified at 12 U.S.C. 
1817(b)(2)(B)). The risk factors referred to in factor (iv) include:
    (i) The probability that the Deposit Insurance Fund will incur a 
loss with respect to the institution, taking into consideration the 
risks attributable to--
    (I) Different categories and concentrations of assets;
    (II) Different categories and concentrations of liabilities, 
both insured and uninsured, contingent and noncontingent; and
    (III) Any other factors the Corporation determines are relevant 
to assessing such probability;
    (ii) The likely amount of any such loss; and
    (iii) The revenue needs of the Deposit Insurance Fund.
    12 U.S.C. 1817(b)(1)(C).
---------------------------------------------------------------------------

B. Description of the proposal

    The FDIC proposes to adopt the following base schedule of rates:

[[Page 41928]]



----------------------------------------------------------------------------------------------------------------
                                                                   Risk category
                                 -------------------------------------------------------------------------------
                                                I *
                                 --------------------------------       II              III             IV
                                      Minimum         Maximum
----------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)..               2               4               7              25             40
----------------------------------------------------------------------------------------------------------------
* Rates for institutions that do not pay the minimum or maximum rate will vary between these rates.

    All institutions in any one risk category, other than Risk Category 
I, would be charged the same assessment rate. For all institutions in 
Risk Category I (other than new institutions), the FDIC proposes base 
annual assessment rates between 2 and 4 basis points.
    Under the present assessment system, the Board has adopted a base 
assessment schedule where it can uniformly adjust rates up to a maximum 
of five basis points higher or lower than the base rate schedule 
without the necessity of further notice-and-comment rulemaking, 
provided that any single adjustment cannot move rates more than five 
basis points.\76\ The FDIC proposes to continue to allow the Board to 
adjust rates uniformly up to a maximum of five basis points higher or 
lower than the base rates without the necessity of further notice-and-
comment rulemaking, provided that any single adjustment from one 
quarter to the next cannot move rates more than five basis points.\77\
---------------------------------------------------------------------------

    \76\ In addition, no assessment rate may be negative. 12 CFR 
327.9.
    \77\ And provided, again, that no assessment rate may be 
negative.
---------------------------------------------------------------------------

    Absent any action by the Board, the FDIC proposes that the base 
rates would be the actual rates once a final rule becomes effective.
    As discussed earlier, the FDIC proposes charging all new 
institutions in Risk Category I, regardless of size, the maximum rate 
for that quarter.

C. Analysis of Statutory Factors

1. Estimated Operating Expenses, Case Resolution Expenses and Income 
and Insured Deposit Growth
    The base schedule of rates, combined with the ability to adjust the 
rates up or down within prescribed limits, provides the Board with 
flexibility to set rates that the FDIC believes are likely under most 
circumstances to keep the reserve ratio between 1.15 percent, the lower 
bound of the range for the designated reserve ratio, and 1.35 percent, 
the reserve ratio at which the FDIC must generally begin paying 
dividends from the fund. However, if insured deposits continue to grow 
at a fast pace, as they have for the past several quarters, the reserve 
ratio is likely to fall from its level of 1.23 percent as of March 31, 
2006, all else being equal.\78\ Most institutions will also have one-
time assessment credits that they can use to offset their assessments 
during 2007, which will reduce assessment income significantly compared 
to what would be collected if credits were not available.
---------------------------------------------------------------------------

    \78\ Insured deposits rose almost 8.5 percent over the four 
quarters ending March 31, 2006.
---------------------------------------------------------------------------

    Thus, absent a significant slowdown in insured deposit growth and 
depending on the Board's decision as to how long it is willing to 
tolerate lower reserve ratios, there is a possibility that the Board 
may adopt rates for 2007 that are higher than the base schedule.\79\ 
For example, suppose that:
---------------------------------------------------------------------------

    \79\ In a separate notice of proposed rulemaking, the FDIC has 
proposed assessing quarterly and in arrears. Under this proposal, 
the FDIC's Board would be required to set rates no later than 30 
days before providing invoices and provide invoices no later than 15 
days before assessments were due. Assessments would be due March 30, 
June 30, September 30 and December 30. Thus, the Board would have to 
set rates for the first quarter of 2007 by May 16, 2007. Of course, 
the Board would etain the flexibility to set rates earlier, for 
example, when it adopts a final rule later this year. 71 FR 28790, 
28791. Rates, once set, would remain in effect until the FDIC's 
Board changed them, since one of the FDIC's primary goals in seeking 
deposit insurance reforms was to distribute assessments more evenly 
over time; that is, to keep assessment rates steady to the extent 
possible and to avoid sharp swings in assessment rates.
---------------------------------------------------------------------------

    1. At the same time or shortly after the Board adopts the proposed 
base rate schedule, the Board also adopts an actual rate schedule for 
2007 that sets rates uniformly 5 basis points above the base rate 
schedule without the need for notice-and-comment rulemaking.
    2. As credits are drawn down, the Board reduces rates for 2008 and 
2009 so that they are uniformly 2 basis points higher than the base 
rate schedule.
    3. In 2010 and 2011, the Board reduces rates to the base rate 
schedule.
    Table 17 illustrates how these rates could affect the insurance 
fund reserve ratio. The projections indicate that, as assessment 
credits are drawn down, these assessment rates would cause the reserve 
ratio to rise in 2008 and again in 2009 from a low point reached either 
in 2006 or 2007. Whether (and how high) the reserve ratio would 
continue to rise would depend upon the rate of insured deposit growth.

               Table 17.--Projected Reserve Ratios Under a Hypothetical Assessment Rate Schedule *
----------------------------------------------------------------------------------------------------------------
                                                                   Insured deposit growth rate
            Period                   Rates      ----------------------------------------------------------------
                                                      4%           5%           6%           7%           8%
----------------------------------------------------------------------------------------------------------------
2007.........................  Base Schedule +          1.22         1.21         1.19         1.18         1.17
                                5 bps.
2008.........................  Base Schedule +          1.26         1.24         1.22         1.20         1.18
                                2 bps.
2009.........................  Base Schedule +          1.32         1.29         1.26         1.23         1.20
                                2 bps.
2010.........................  Base Schedule...         1.35         1.31         1.26         1.22         1.19
2011.........................  Base Schedule...         1.37         1.33         1.27         1.22        1.17
----------------------------------------------------------------------------------------------------------------
* Assumes modest insurance losses and flat operating expenses. The projected reserve ratio at year-end 2006 is
  1.20 percent.

    This example assumes that the Board adopts rates that do not 
require further notice-and-comment rulemaking. On the other hand, 
through additional notice-and-comment rulemaking, the Board could 
choose to adopt actual rates for 2007 where the lowest rate was higher 
than 7 basis points (on an annualized basis) or where rates were not 
uniformly adjusted from the base schedule. The Board may also change 
assessment rates during the course of 2007.

[[Page 41929]]

2. Effects on Capital and Earnings and Factors Under the Risk-Based 
Assessment System
    Appendix 4 contains an analysis of the projected effects of the 
payment of assessments on the capital and earnings of insured 
depository institutions. In sum, the base schedule of rates or even a 
rate schedule that is uniformly 5 basis points higher than the base 
schedule is not expected to impair the capital or earnings of insured 
institutions materially.
    The proposed base rate for Risk Category IV is substantially lower 
than the historical analysis discussed in Appendix 1 would suggest is 
needed to recover costs from failures. The lower rate is intended to 
decrease the chance of assessments being so large that they cause these 
institutions to fail.

X. Request for Comment

    The FDIC seeks comment on every aspect of this proposed rulemaking. 
In particular, the FDIC seeks comment on:
     With respect to the general assessment framework:
    1. Whether the existing 2B category, which has a five-year failure 
rate of 5.51 percent, should be:
    a. Consolidated with the existing 1B and 2A categories, which have 
five-year failure rates of 2.67 percent and 2.03 percent, respectively, 
into new Risk Category II (as proposed);
    b. Placed in its own separate new Risk Category; or
    c. Placed into new Risk Category III, rather than Risk Category II; 
and
    2. Whether the existing 3A category, which has a five-year failure 
rate of 2.3 percent, should be:
    a. Consolidated with the existing 3B, 1C and 2C categories, which 
have five-year failure rates of 7.10 percent, 6.78 percent and 14.43 
percent, respectively, into new Risk Category III (as proposed); or
    b. Consolidated with the existing 1B, 2B and 2A categories, which 
have five-year failure rates of 2.67 percent, 5.51 percent and 2.03 
percent, respectively, into new Risk Category II.
     With respect to risk differentiation among smaller 
institutions in Risk Category I:
    3. Whether the FDIC's proposal or the alternative would be 
preferable or whether there are other approaches that would be more 
appropriate for differentiating risk among small Risk Category I 
institutions.
    4. Whether any variation on its proposal or on the alternative 
would be preferable, such as:
    a. Using a different statistical approach or model;
    b. Excluding any of the proposed risk measures, in particular the 
ratio of net income before taxes to risk-weighted assets and the ratio 
of net loan charge-offs to gross assets;
    c. Adding the ratio of liquid assets to gross assets as a risk 
measure if the ratio of net income before taxes to risk-weighted assets 
is excluded; \80\
---------------------------------------------------------------------------

    \80\ If the ratio of net income before taxes to risk-weighted 
assets were not included as a risk measure, the ratio of liquid 
assets to gross assets becomes significant in explaining downgrades, 
although its pricing multiplier would be small.
---------------------------------------------------------------------------

    d. Excluding time deposits greater than $100,000 from the 
definition of volatile liabilities, and, therefore, excluding volatile 
liabilities as a risk measure; \81\
---------------------------------------------------------------------------

    \81\ As discussed above, removing time deposits greater than 
$100,000 from the definition of volatile liabilities would make 
volatile liabiliies insigniicant in explaining potential downgrades.
---------------------------------------------------------------------------

    e. Including Federal Home Loan Bank advances in the definition of 
volatile liabilities or, alternatively, charging higher assessment 
rates to institutions that have significant amounts of secured 
liabilities;
    f. Averaging ratios over some period;
    g. Changing the pricing multipliers proposed for the measures 
judgmentally;
    h. Changing the weights proposed for the CAMELS component ratings 
used to calculate the weighted average CAMELS component rating, for 
example, weighting each component equally;
    i. Using CAMELS composite ratings instead of weighted average 
CAMELS component ratings; and
    j. Determining a portion of an institution's assessment rate using 
financial ratios and a portion using a weighted average CAMELS 
component rating, but combine financial ratios with CAMELS component 
ratings in a manner different from the proposal in order to have an 
approach that is more integrated with the large institution method.
    5. Whether the FDIC should evaluate institutions with unusual 
business profiles or risk characteristics in a different manner, and, 
if so, which institutions should be so evaluated and on what basis.
    6. Whether the FDIC should use additional relevant information to 
determine whether adjustments to assessment rates are appropriate.
     With respect to risk differentiation among large 
institutions and insured branches of foreign banks in Risk Category I:
    7. Whether there are other approaches that would be more 
appropriate for differentiating risk among large Risk Category I 
institutions.
    8. Whether the weights proposed for the CAMELS component ratings 
used to calculate the weighted average CAMELS are appropriate or 
whether alternative weights should be used, such as:
    a. Weighting each CAMELS component equally;
    b. Varying CAMELS component weightings by the primary business type 
of an institution;
    c. Determining CAMELS component weightings for various business 
activities and then determining the relative importance of these 
activities within each institution (this process would result in 
potentially unique CAMELS weights for each large institution).
    9. Whether it is appropriate to use long-term debt issuer ratings 
to differentiate risk among large Risk Category I institutions.
    10. Whether the proposed numerical conversions of long-term debt 
issuer ratings are reasonable.
    11. Whether using the estimated probability of downgrade to a 
CAMELS composite 3, 4 or 5 as derived in the alternative method of risk 
differentiation for small Risk Category I institutions is appropriate 
for institutions with between $10 billion and $30 billion in assets.
    12. Whether other risk factors or risk measurement approaches 
should be considered in developing deposit insurance pricing 
alternatives.
    13. Whether the proposed weights for the weighted average CAMELS 
component rating, long-term debt issuer ratings, and the financial 
ratio factor used to determine an insurance score are appropriate for 
all size categories or should be modified.
    14. Whether the proposal to assign institutions initially to one of 
six assessment rate subcategories based on an insurance score, and use 
other relevant information to determine whether adjustments to these 
initial assignments are needed, is reasonable.
    15. Whether an alternative to assessment rate subcategories is 
appropriate, such as tying assessment rates directly to the insurance 
score, and to what extent adjustments to the insurance score would be 
appropriate.
    16. Whether the proposed number of six assessment rate 
subcategories (including minimum and maximum assessment rate 
subcategories) is appropriate, and if more or less subcategories are 
appropriate, to what extent should the FDIC have the ability to adjust 
assessment rate subcategory assignments (as determined by the insurance 
score) based on consideration of additional information.

[[Page 41930]]

    17. Whether the proposed approach for converting insurance scores 
to assessment rate subcategories is reasonable. Considerations include: 
the appropriateness of defining insurance score cutoff points for the 
minimum and maximum assessment rates to ensure that initially similar 
proportions of small and large institutions are charged the minimum and 
maximum assessment rates; and the appropriateness of using increments 
of the insurance score between the minimum and maximum assessment rate 
cutoff scores to determine cutoff points for the four intermediate 
assessment rate subcategories.
    18. Whether it would be appropriate to implement a ``watch list'' 
feature to provide advanced notice to large Risk Category I 
institutions when there is a pending change in an institution's 
assessment rate subcategory assignment.
    19. Whether the proposal to develop and assign separate assessment 
rates for Risk Category I institutions whose subcategory assignments 
change during a quarter is appropriate, or whether in these 
circumstances assessment rates for the entire quarter should be based 
on quarter-end supervisory and agency ratings.
     With respect to the definitions of small and large Risk 
Category I institutions:
    20. Whether the proposed definition of a large institution as one 
with at least $10 billion in assets is appropriate.
    21. Whether the FDIC's proposed method for determining whether an 
institution has changed its size class is appropriate.
    22. Whether the proposal to use the small institution approach to 
differentiate risk for small institutions that are affiliates of large 
institutions, independently of the insurance score or assessment rate 
of the large affiliate, is appropriate.
    23. Whether institutions with between $5 and $10 billion in assets 
should be allowed to request to be subject to the risk differentiation 
approach applied to large institutions.
    24. Whether it is appropriate for the FDIC to determine when 
institutions under $10 billion should be treated under the large 
institution risk differentiation approach for Risk Category I 
institutions. Any such determination would be made infrequently and 
would entail considerations of the types of business activities engaged 
in by the institution, the materiality of these activities, and whether 
the financial ratios used in the small institution proposed risk 
differentiation approach are sufficient to accurately reflect the risk 
within these activities.
    25. Whether the proposed approach for differentiating risk in 
insured branches of foreign banks is appropriate.
     With respect to the definitions of a new institution and 
an established institution:
    26. Whether less than seven years old is the appropriate age to 
consider an institution new.
    27. Whether, when an established institution merges into or 
consolidates with a new institution:
    a. The resulting institution should be considered new;
    b. The resulting institution should be allowed to request that the 
FDIC determine that it is established; and
    c. The factors that the FDIC proposes to use to determine whether 
the resulting institution in such a merger or consolidation should be 
considered established are the appropriate factors.
    28. Whether, when a new institution merges into an established 
institution or when an established institution acquires a substantial 
portion of a new institution's assets or liabilities, and:
    a. The merger or acquisition agreement is entered into after the 
date that this notice of proposed rulemaking is adopted, the FDIC 
should conduct a review to determine whether the resulting or acquiring 
institution remains an established institution; and
    b. The merger or acquisition agreement is entered into before the 
date that this notice of proposed rulemaking is adopted, the resulting 
or acquiring institution should be deemed to be an established 
institution.
     With respect to assessment rates:
    29. Whether the FDIC should adopt a permanent base schedule of 
rates and, if so, whether the proposed rates are appropriate.
    30. Whether the difference between the proposed minimum and maximum 
assessment rates for institutions in Risk Category I should be wider 
(e.g., 3 basis points) or narrower (e.g., 1 basis point) than proposed 
in the base schedule.
    31. Whether the FDIC should retain the authority to make changes 
within prescribed limits to assessment rates, as proposed, without the 
necessity of additional notice-and-comment rulemaking.
    32. Whether all new institutions in Risk Category I should be 
charged the maximum rate.

XI. Regulatory Analysis and Procedure

A. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113 
Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The FDIC 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 this material be better organized?
     Are the requirements in the proposed regulation clearly 
stated? If not, how could the regulation be more clearly stated?
     Does the proposed regulation contain language or jargon 
that is not clear? 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? If so, what changes to the format would make the regulation 
easier to understand?
     What else could the FDIC do to make the regulation easier 
to understand?

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that each federal 
agency either certify that a proposed rule would not, if adopted in 
final form, have a significant economic impact on a substantial number 
of small entities or prepare an initial regulatory flexibility analysis 
of the proposal and publish the analysis for comment. See 5 U.S.C. 603, 
604, 605. Certain types of rules, such as rules of particular 
applicability relating to rates or corporate or financial structures, 
or practices relating to such rates or structures, are expressly 
excluded from the definition of ``rule'' for purposes of the RFA. 5 
U.S.C. 601. The proposed rule governs assessments and sets the rates 
imposed on insured depository institutions for deposit insurance. 
Consequently, no regulatory flexibility analysis is required.

C. Paperwork Reduction Act

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

[[Page 41931]]

Supplemental Appropriations Act of 1999 (Pub. L. 105-277, 112 Stat. 
2681).

List of Subjects in 12 CFR Part 327

    Bank deposit insurance, Banks, banking, Savings associations

    For the reasons set forth in the preamble, the FDIC proposes to 
amend chapter III of title 12 of the Code of Federal Regulations as 
follows:

PART 327--ASSESSMENTS

    1. The authority citation for part 327 is revised to read as 
follows:

    Authority: 12 U.S.C. 1441, 1813, 1815, 1817-1819, 1821; Sec. 
2101-2109, Pub. L. 109-171, 120 Stat. 9-21, and Sec. 3, Pub. L. 109-
173, 119 Stat. 3605.

    2. Revise section 327.9 of subpart A to read as follows:


Sec.  327.9  Assessment risk categories and rate schedules; adjustments 
procedures.

    (a) Risk Categories. Each insured depository institution shall be 
assigned to one of the following four Risk Categories based upon the 
institution's capital evaluation and supervisory evaluation as defined 
in this section.
    (1) Risk Category I. All institutions in Supervisory Group A that 
are Well Capitalized;
    (2) Risk Category II. All institutions in Supervisory Group A that 
are Adequately Capitalized, and all institutions in Supervisory Group B 
that are either Well Capitalized or Adequately Capitalized;
    (3) Risk Category III. All institutions in Supervisory Groups A and 
B that are Undercapitalized, and all institutions in Supervisory Group 
C that are Well Capitalized or Adequately Capitalized; and
    (4) Risk Category IV. All institutions in Supervisory Group C that 
are Undercapitalized.
    (b) Capital evaluations. Institutions will receive one of the 
following three capital evaluations on the basis of data reported in 
the institution's Consolidated Reports of Condition and Income, Report 
of Assets and Liabilities of U.S. Branches and Agencies of Foreign 
Banks, or Thrift Financial Report dated as of March 31 for the 
assessment period beginning the preceding January 1; dated as of June 
30 for the assessment period beginning the preceding April 1; dated as 
of September 30 for the assessment period beginning the preceding July 
1; and dated as of December 31 for the assessment period beginning the 
preceding October 1.
    (1) Well Capitalized. (i) Except as provided in paragraph 
(b)(1)(ii) of this section, Well Capitalized institutions satisfy each 
of the following capital ratio standards: Total risk-based ratio, 10.0 
percent or greater; Tier 1 risk-based ratio, 6.0 percent or greater; 
and Tier 1 leverage ratio, 5.0 percent or greater.
    (ii) For purposes of this section, an insured branch of a foreign 
bank will be deemed to be Well Capitalized if the insured branch:
    (A) Maintains the pledge of assets required under Sec.  347.209 of 
this chapter; and
    (B) Maintains the eligible assets prescribed under Sec.  347.210 of 
this chapter at 108 percent or more of the average book value of the 
insured branch's third-party liabilities for the quarter ending on the 
report date specified in paragraph (b) of this section.
    (2) Adequately Capitalized. (i) Except as provided in paragraph 
(b)(2)(ii) of this section, Adequately Capitalized institutions do not 
satisfy the standards of Well Capitalized under this paragraph but 
satisfy each of the following capital ratio standards: Total risk-based 
ratio, 8.0 percent or greater; Tier 1 risk-based ratio, 4.0 percent or 
greater; and Tier 1 leverage ratio, 4.0 percent or greater.
    (ii) For purposes of this section, an insured branch of a foreign 
bank will be deemed to be Adequately Capitalized if the insured branch:
    (A) Maintains the pledge of assets required under Sec.  347.209 of 
this chapter; and
    (B) Maintains the eligible assets prescribed under Sec.  347.210 of 
this chapter at 106 percent or more of the average book value of the 
insured branch's third-party liabilities for the quarter ending on the 
report date specified in paragraph (b) of this section; and
    (C) Does not meet the definition of a Well Capitalized insured 
branch of a foreign bank.
    (3) Undercapitalized. This group consists of institutions that do 
not qualify as either Well Capitalized or Adequately Capitalized under 
paragraphs (b)(1) and (b)(2) of this section.
    (c) Supervisory evaluations. Each institution will be assigned to 
one of three Supervisory Groups based on the Corporation's 
consideration of supervisory evaluations provided by the institution's 
primary federal regulator. The supervisory evaluations include the 
results of examination findings by the primary federal regulator, as 
well as other information that the primary federal regulator determines 
to be relevant. In addition, the Corporation will take into 
consideration such other information (such as state examination 
findings, if appropriate) as it determines to be relevant to the 
institution's financial condition and the risk posed to the Deposit 
Insurance Fund. The three Supervisory Groups are:
    (1) Supervisory Group ``A.'' This Supervisory Group consists of 
financially sound institutions with only a few minor weaknesses;
    (2) Supervisory Group ``B.'' This Supervisory Group consists of 
institutions that demonstrate weaknesses which, if not corrected, could 
result in significant deterioration of the institution and increased 
risk of loss to the Deposit Insurance Fund; and
    (3) Supervisory Group ``C.'' This Supervisory Group consists of 
institutions that pose a substantial probability of loss to the Deposit 
Insurance Fund unless effective corrective action is taken.
    (d) Base Assessment Schedule. The base annual assessment rate for 
an insured depository institution shall be the rate prescribed in the 
following schedule:

                                             Table 1 to Paragraph (d)
----------------------------------------------------------------------------------------------------------------
                                                                   Risk category
                                 -------------------------------------------------------------------------------
                                                I *
                                 --------------------------------       II              III             IV
                                      Minimum         Maximum
----------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)..               2               4               7              25              40
----------------------------------------------------------------------------------------------------------------
* Rates for institutions that do not pay the minimum or maximum rate will vary between these rates.


[[Page 41932]]

    (1) Risk Category I Base Schedule. The base annual assessment rates 
for all institutions in Risk Category I shall range from 2 to 4 basis 
points.
    (2) Small Institutions. An insured depository institution in Risk 
Category I with assets of less than $10 billion as of December 31, 2006 
(other than an insured branch of a foreign bank or a new bank as 
defined in paragraph (d)(7) of this section) shall be classified as a 
small institution. Except as provided in paragraphs (4), (5) and (6) of 
this section, a small institution in Risk Category I shall have its 
assessment rate determined using the Small Institution Pricing Method 
described in paragraph (d)(2)(i) of this section.
    (i) Small Institution Pricing Method. Each of six ratios and a 
weighted average of CAMELS component ratings will be multiplied by a 
corresponding pricing multiplier. The sum of these products will be 
added to a uniform amount. The resulting sum will equal an 
institution's assessment rate; provided, however, that no institution's 
assessment rate will be less than the minimum rate in effect for that 
quarter nor greater than the maximum rate in effect for that quarter. 
The six ratios are: (1) Tier 1 Leverage Ratio; (2) Loans past due 30-89 
days/gross assets; (3) Nonperforming loans/gross assets; (4) Net loan 
charge-offs/gross assets; (5) Net income before taxes/risk-weighted 
assets; and (6) Volatile liabilities/gross assets. The ratios are 
defined in Table A.1 of Appendix A to this subpart. The weighted 
average of CAMELS component ratings is created by multiplying each 
component by the following percentages and adding the products: Capital 
adequacy--25%, Asset quality--20%, Management--25%, Earnings--10%, 
Liquidity--10%, and Sensitivity to market risk--10%. Appendix A to this 
subpart describes the derivation of the pricing multipliers and uniform 
amount and explains how they will be periodically updated.
    (ii) Publication of uniform amount and pricing multipliers. The 
FDIC will publish notice annually in the Federal Register of the 
uniform amount and the pricing multipliers.
    (iii) Changes to supervisory ratings. If, during a quarter, a 
supervisory rating change occurs that results in a small institution 
moving from Risk Category I to Risk Category II, III or IV, the 
institution's base assessment rate for the portion of the quarter that 
it was in Risk Category I shall be determined using the small 
institution pricing method. For the portion of the quarter that the 
institution was not in Risk Category I, the institution's base 
assessment rate shall be determined under the base assessment schedule 
for the appropriate Risk Category. If, during a quarter, a supervisory 
rating change occurs that results in a small institution moving from 
Risk Category II, III or IV to Risk Category I, the institution's base 
assessment rate for the portion of the quarter that it was in Risk 
Category I shall be determined using the small institution pricing 
method. For the portion of the quarter that the institution was not in 
Risk Category I, the institution's base assessment rate shall be 
determined under the base assessment schedule for the appropriate Risk 
Category. Subject to paragraph (d)(2)(iv) of this section, if, during a 
quarter, an institution's CAMELS component ratings change in such a way 
that it would change the assessment rate, the assessment rate for the 
period before that change shall be determined under the small 
institution pricing method using the CAMELS component ratings in effect 
during that period. Beginning on the date of the CAMELS component 
ratings change, the assessment rate for the remainder of the quarter 
shall be determined under the small institution pricing method using 
the CAMELS component ratings in effect after the change.
    (iv) Effective date for changes to CAMELS component ratings. Any 
change to a CAMELS component rating that results in a change to the 
institution's base assessment rate shall take effect as follows.
    (A) If an examination (or targeted examination) leads to the change 
in an institution's CAMELS component rating, the change will be 
effective as of the date the examination or targeted examination 
begins, if such a date exists.
    (B) If an examination (or targeted examination) leads to the change 
in CAMELS component rating and no examination (or targeted examination) 
start date exists, the change will be effective as of the date the 
change to the institution's CAMELS component rating is transmitted to 
the institution.
    (C) Otherwise, the change will be effective as of the date that the 
FDIC determines that the change to the institution's CAMELS component 
rating occurred.
    (3) Large Institution Pricing Method. An insured depository 
institution with assets of $10 billion or more as of December 31, 2006 
(other than an insured branch of a foreign bank or a new bank as 
defined in paragraph (d)(7) of this section) shall be classified as a 
large institution. Large insured depository institutions in Risk 
Category I (subject to paragraph (d)(3) through (d)(6) of this section) 
and insured branches of foreign banks in Risk Category I regardless of 
asset size shall have their assessment rates determined using the 
FDIC's Large Institution Pricing Method. Except for insured branches of 
foreign banks, an institution's assessment rate shall be determined by 
its insurance score, as defined in paragraph (d)(3)(i) or (ii) of this 
section based on the size of the institution, subject to rate 
adjustment under paragraph (d)(3)(ix) of this section. The assessment 
rate applicable to an insured branch of a foreign bank shall be 
determined by its insurance score as defined in paragraph (d)(3)(iii) 
of this section.
    (i) Insurance score for institutions with at least $10 billion and 
less than $30 billion in assets. For institutions that have assets of 
at least $10 billion and less than $30 billion and that are not insured 
branches of foreign banks, the insurance score shall be a weighted 
average, based on the weights specified in paragraph (d)(3)(vii) of 
this section, of a weighted average CAMELS component rating, as 
determined under paragraph (d)(3)(iv) of this section, a long-term debt 
issuer rating converted to a numerical value, determined pursuant to 
paragraph (d)(3)(v) of this section, and the institution's financial 
ratio factor converted to a numerical value, determined pursuant to 
paragraph (d)(3)(vi) of this section.
    (ii) Insurance score for institutions with at least $30 billion in 
assets. For institutions that have assets of at least $30 billion and 
that are not insured branches of foreign banks, the insurance score 
shall be a weighted average, based on the weights specified in 
paragraph (d)(3)(vii) of this section, of a weighted average CAMELS 
component rating, as determined under paragraph (d)(3)(iv) of this 
section, and a long-term debt issuer rating converted to a numerical 
value, determined pursuant to paragraph (d)(3)(iv) of this section.
    (iii) Insurance score for insured branches of foreign banks. For 
insured branches of foreign banks, the insurance score shall be the 
weighted average ROCA component rating, as determined under paragraph 
(d)(3)(iv) of this section.
    (iv) Weighted average CAMELS component rating. For institutions 
that are not insured branches of foreign banks, a weighted average 
CAMELS component rating shall be determined. The weighted average 
CAMELS component rating shall equal the sum of the products that result 
from multiplying CAMELS component ratings by the following percentages: 
Capital adequacy--25%, Asset quality--20%, Management--25%, Earnings--

[[Page 41933]]

10%, Liquidity--10%, and Sensitivity to market risk--10%. For insured 
branches of foreign banks, an institution's ROCA components shall be 
used in place of CAMELS components. The weighted average ROCA component 
rating shall equal the sum of the products that result from multiplying 
ROCA component ratings by the following percentages: Risk Management--
35%, Operational Controls--25%, Compliance--25%, and Asset Quality--
15%.
    (v) Long-term debt issuer rating converted to a numerical value. 
Agency long-term debt issuer ratings shall be converted into numerical 
values between 1 and 3. The ratings must have been confirmed or newly 
assigned within 12 months before the end of the quarter for which an 
assessment rate is being determined. If no ratings for an institution 
have been confirmed or assigned within that 12-month period, that 
institution will be treated as if it had no long-term debt issuer 
rating. The table for converting long-term debt issuer ratings to 
values between 1 and 3 is shown in Appendix B to this subpart.
    (vi) Financial Ratio Factor for Certain Large Institutions. The 
financial ratio factor means the sum of six ratios that have each been 
multiplied by a coefficient, and a constant amount, converted to a 
value between 1 and 3. The six ratios are: Tier 1 Leverage Ratio; Loans 
past due 30-89 days/gross assets; Nonperforming loans/gross assets; Net 
loan charge-offs/gross assets; Net income before taxes/risk-weighted 
assets; and Volatile liabilities/gross assets. The ratios are defined 
in Table C.1 of Appendix C to this subpart. Appendix C to this subpart 
describes the derivation of the coefficients and the constant amount, 
explains how they will be periodically updated and provides a formula 
for converting the financial ratio factor to a value between 1 and 3. 
The FDIC will publish notice annually in the Federal Register of the 
coefficients and constant amount.
    (vii) Weights. (A) For large institutions that have assets of less 
than $30 billion as of the end of a quarter, the following weights will 
be applied to the weighted average CAMELS component rating, the long-
term debt issuer ratings converted to a numerical value, and the 
financial ratio factor converted to a numerical value to derive the 
insurance score under paragraph (d)(3)(i) of this section:

                                        Table 1 to Paragraph (d)(3)(vii)
----------------------------------------------------------------------------------------------------------------
                                                                              Weights applied to the:
                                                                 -----------------------------------------------
                                                                     Weighted
                      Asset size category*                        average CAMELS  Converted long-    Financial
                                                                     component       term debt     ratio factor
                                                                      rating      issuer ratings     (percent)
                                                                     (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
> = $25 billion, < $30 billion..................................              50              40              10
> = $20 billion, < $25 billion..................................              50              30              20
> = $15 billion, < $20 billion..................................              50              20              30
<$15 billion....................................................              50              10              40
No long-term debt issuer rating.................................              50               0              50
----------------------------------------------------------------------------------------------------------------
*Applicable when a current (within last 12 months) long-term debt issuer rating is available for the insured
  institution. If no current rating is available, the last row of the table applies.

    (B) For institutions that have assets of at least $30 billion in 
assets as of the end of a quarter, that are not insured branches of 
foreign banks, the following weights will be applied to the weighted 
average CAMELS component rating and the long-term debt issuer ratings 
converted to a numerical value to derive the insurance score under 
paragraph (d)(3)(ii) of this section.

                                         Table 2 to Paragraph (d)(3)(vii)
----------------------------------------------------------------------------------------------------------------
                                                                Weights applied to the:
                                                   -----------------------------------------------
                                                       Weighted
               Asset size category *                average CAMELS  Converted long-    Financial
                                                       component       term debt     ratio factor
                                                        rating      issuer ratings     (percent)
                                                       (percent)       (percent)
--------------------------------------------------------------------------------------------------
> = $30 billion...................................              50              50               0
No long-term debt issuer rating...................              50               0              50
----------------------------------------------------------------------------------------------------------------
* Applicable when a current (within last 12 months) long-term debt issuer rating is available for the insured
  institution. If no current rating is available, the last row of the table applies.

    (viii) Conversion to Assessment Rate Subcategory. Risk Category I 
for large institutions is subdivided into six assessment rate 
subcategories. The FDIC will determine a cutoff insurance score (the 
minimum cutoff score) such that, if an institution has that score or a 
lower score, it will initially be assigned to the subcategory being 
assessed at the minimum rate. Similarly, the FDIC will determine a 
cutoff insurance score (the maximum cutoff score) such that, if an 
institution has a score higher than the maximum cutoff score, it will 
initially be assigned to the subcategory being assessed at the maximum 
rate. These cutoff scores will be determined such that, for the first 
quarter of 2007, excluding new institutions, as defined in paragraph 
(d)(7) of this section, approximately the same proportion of the number 
of large institutions in Risk Category I will initially be assigned to 
the subcategory being assessed at the minimum rate as the proportion of 
the number of small institutions being charged the minimum rates within 
Risk

[[Page 41934]]

Category I (as determined pursuant to Appendix A to this subpart) and 
approximately the same proportion of the number of large institutions 
in Risk Category I will initially be assigned to the subcategory being 
assessed at the maximum rate as the proportion of the number of small 
institutions being charged the maximum rate within Risk Category I (as 
determined pursuant to Appendix A to this subpart). The insurance score 
ranges for each of the four intermediate subcategories (designated 1, 
2, 3 and 4, for each subcategory with successively higher insurance 
scores) shall be equal.
    (ix) Adjustments to initial assignment of assessment risk 
subcategory. In determining the assessment risk subcategory of a large 
institution or an insured branch of a foreign bank, the FDIC may 
consider other relevant information in addition to the factors used to 
derive the insurance score under paragraph (d)(3)(i) through (iii) of 
this section. Relevant information includes other market information, 
financial performance and condition information, and stress 
considerations, as described in Appendix D to this subpart. The FDIC 
may adjust an institution's initial assignment to an assessment risk 
subcategory based on its insurance score to the subcategory with the 
next lower or higher assessment rate, based on a determination that the 
information used to derive the insurance score combined with the 
additional information considered under this paragraph (d)(3)(ix) of 
this section demonstrate that the institution's overall risk profile 
differs from other institutions initially assigned to the same 
assessment rate subcategory.
    (x) Base Schedule of Rates for intermediate Risk Category I 
subcategories. Base assessment rates for each of the four intermediate 
subcategories of Risk Category I shall be determined using data as of 
June 30, 2006, in the following manner.
    (A) The number of large institutions (excluding new institutions 
and insured branches of foreign banks) in each of the four intermediate 
subcategories labeled 1, 2, 3 and 4 will be divided by the total number 
of all large institutions (excluding new institutions and insured 
branches of foreign banks) in the four intermediate subcategories to 
produce individual percentages to correspond to each subcategory.
    (B) Small institutions in Risk Category I (excluding new 
institutions and insured branches of foreign banks) that are charged 
base assessment rates between the minimum and maximum base assessments 
rates will be grouped into four groups. Each group will contain 
institutions being charged increasingly higher base assessment rates 
and will be numbered 1, 2, 3 and 4. Each group will contain a 
percentage of small institutions in Risk Category I (excluding new 
institutions and insured branches of foreign banks) of those charged 
between the minimum and maximum assessment rates equal to the 
corresponding percentage from the intermediate subcategory, as 
determined in paragraph (3)(x)(A) of this section.
    (C) The base assessment rate applicable to each intermediate 
subcategory of large Risk Category I institutions under paragraph 
(d)(3)(viii) of this section will equal the average base assessment 
rate applicable to the corresponding group of small Risk Category I 
institutions defined in paragraph (d)(3)(x)(B) of this section.
    (xi) Implementation of Supervisory Rating Change. If, during a 
quarter, a supervisory rating change occurs that results in a large 
institution or an insured branch of a foreign bank moving from Risk 
Category I to Risk Category II, III or IV, the institution's assessment 
rate for the portion of the quarter that it was in Risk Category I 
shall be based upon its subcategory for the prior quarter; no new 
insurance score will be developed for the quarter in which the 
institution moved to Risk Category II, III or IV. If, during a quarter, 
a supervisory rating change occurs that results in a large institution 
or an insured branch of a foreign bank moving from Risk Category II, 
III or IV to Risk Category I, the institution's assessment rate for the 
portion of the quarter that it was in Risk Category I shall equal the 
rate applicable to its subcategory as determined under paragraph (d)(3) 
of this section. If, during a quarter, a large institution remains in 
Risk Category I, but a CAMELS component or a long-term debt issuer 
rating changes that would affect the institution's initial assignment 
to a subcategory, separate assessment rates for the portion of the 
quarter before and after the change shall be determined under paragraph 
(d)(3) of this section. A long-term debt issuer rating change will be 
effective as of the date the change was announced.
    (xii) Effective date for changes to CAMELS component ratings. Any 
change to a CAMELS component rating that results in a change to the 
institution's assessment rate shall take effect:
    (A) If an examination (or targeted examination) leads to the change 
in an institution's CAMELS component rating, the change will be 
effective as of the date the examination or targeted examination 
begins, if such a date exists.
    (B) If an examination (or targeted examination) leads to the change 
in CAMELS component rating and no examination (or targeted examination) 
start date exists, the change will be effective as of the date the 
change to the institution's CAMELS component rating is transmitted to 
the institution.
    (C) Otherwise, the change will be effective as of the date that the 
FDIC determines that the change to the institution's CAMELS component 
rating occurred.
    (xiii) Review. All assignments to assessment rate subcategories 
will be subject to review under Sec.  327.4(c) of this part.
    (4) Changes in Institution Size. If, after December 31, 2006, a 
Risk Category I institution classified as small under this section 
reports assets of $10 billion or more in its reports of condition for 
four consecutive quarters, the FDIC will reclassify the institution as 
large beginning the following quarter. If, after December 31, 2006, a 
Risk Category I institution classified as large under this section 
reports assets of less than $10 billion in its reports of condition for 
four consecutive quarters, the FDIC will reclassify the institution as 
small beginning the following quarter.
    (5) Request for Large Institution Treatment. Any institution in 
Risk Category I with assets of between $5 billion and $10 billion may 
request that the FDIC determine its assessment using the FDIC's Large 
Institution Pricing Method. The FDIC will approve such a request only 
if it determines that a sufficient amount of risk information from 
supervisory, market, and financial reporting sources exists to 
adequately evaluate the institution's risk using the requested method. 
Any such request must be made to the FDIC's Division of Insurance and 
Research. Any approved change will become effective within one year 
from the date of the request. If an institution whose request has been 
granted subsequently reports assets of less than $5 billion in its 
report of condition, the FDIC will determine within one year of the 
date of the report whether to use the small or large institution 
pricing method based upon the criteria in this paragraph of this 
section.
    (6) Time Limit on Request for Large Institution Treatment. An 
institution whose request for Large Institution Treatment is granted by 
the FDIC shall not be eligible to request a different method for 
determining its assessment for a period of three years from the first 
quarter in which its approved request becomes effective.
    (7) New and Established Institutions. (i) A new institution is a 
bank or thrift

[[Page 41935]]

that has not been chartered for at least seven years as of the last day 
of any quarter for which it is being assessed. All new institutions 
shall be assessed the Risk Category I maximum rate for that quarter.
    (ii) An established institution is a bank or thrift that has been 
chartered for at least seven years as of the last day of any quarter 
for which it is being assessed.
    (iii) When an established institution merges into or consolidates 
with a new institution, the resulting institution is a new institution. 
The FDIC may determine, upon request by the resulting institution to 
the Director of the Division of Insurance and Research, that the 
institution should be treated as an established institution for deposit 
insurance assessment purposes, based on analysis of the following:
    (A) Whether the acquired, established institution was larger than 
the acquiring, new institution, and, if so, how much larger;
    (B) Whether management of the acquired, established institution 
continued as management of the resulting institution;
    (C) Whether the business lines of the resulting institution were 
the same as the business lines of the acquired, established 
institution;
    (D) To what extent the assets and liabilities of the resulting 
institution were the assets and liabilities of the acquired, 
established institution; and
    (E) Any other factors the FDIC considers relevant in determining 
whether the resulting institution remains substantially an established 
institution.
    (iv) If a new institution merges into an established institution or 
an established institution acquires a substantial portion of a new 
institution's assets or liabilities, and the merger or acquisition 
agreement is entered into after the effective date of this rule, the 
FDIC will conduct the analysis set out in paragraph (d)(7)(iii) of this 
section to determine whether the resulting or acquiring institution 
remains an established institution.
    (v) If a new institution merges into an established institution or 
an established institution acquires a substantial portion of a new 
institution's assets or liabilities, and the merger or acquisition 
agreement was entered into before the effective date of this rule, the 
resulting or acquiring institution shall be deemed to be an established 
institution for purposes of this section.
    (vi) A new institution that has $10 billion or more in assets as of 
the end of the quarter prior to the quarter in which it becomes an 
established institution shall be considered a large institution for the 
quarter in which it becomes an established institution and thereafter, 
provided that it remains in Risk Category I and subject to paragraphs 
(d)(4) through (6) of this section. A new institution that has less 
than $10 billion in assets as of the end of the quarter prior to the 
quarter in which it becomes an established institution shall be 
considered a small institution for the quarter in which it becomes an 
established institution and thereafter, provided that it remains in 
Risk Category I and subject to paragraphs (d)(4) through (6) of this 
section.
    (8) Assessment rates for Bridge Banks and Conservatorships. 
Institutions that are bridge banks under 12 U.S.C. 1821(n) and 
institutions for which the Corporation has been appointed or serves as 
conservator shall, in all cases, be assessed at the Risk Category I 
minimum rate.
    (e) Rate adjustments and procedures--(1) Adjustments. The Board may 
increase or decrease the assessment schedules of this section up to a 
maximum increase of 5 basis points or a fraction thereof or a maximum 
decrease of 5 basis points or a fraction thereof (after aggregating 
increases and decreases), as the Board deems necessary. Any such 
adjustment shall apply uniformly to each rate in the base assessment 
schedule. In no case may such adjustments result in an assessment rate 
that is mathematically less than zero or in a rate schedule that, at 
any time, is more than 5 basis points above or below the base 
assessment schedule for the Deposit Insurance Fund, nor may any one 
such adjustment constitute an increase or decrease of more than 5 basis 
points.
    (2) Amount of revenue. In setting assessment rates, the Board shall 
take into consideration the following:
    (i) Estimated operating expenses of the Deposit Insurance Fund;
    (ii) Case resolution expenditures and income of the Deposit 
Insurance Fund;
    (iii) The projected effects of assessments on the capital and 
earnings of the institutions paying assessments to the Deposit 
Insurance Fund;
    (iv) The risk factors and other factors taken into account pursuant 
to 12 U.S.C. 1817(b)(1); and
    (v) Any other factors the Board may deem appropriate.
    (3) Adjustment procedure. Any adjustment adopted by the Board 
pursuant to this paragraph will be adopted by rulemaking. Nevertheless, 
because the Corporation may set assessment rates as necessary to manage 
the reserve ratio, and because the Corporation must do so in the face 
of constantly changing conditions, and because the purpose of the 
adjustment procedure is to permit the Corporation to act expeditiously 
and frequently to manage the reserve ratio in an environment of 
constant change, but within set parameters not exceeding 5 basis 
points, without the delays associated with full notice-and-comment 
rulemaking, the Corporation has determined that it is ordinarily 
impracticable, unnecessary and not in the public interest to follow the 
procedure for notice and public comment in such a rulemaking, and that 
accordingly notice and public procedure thereon are not required as 
provided in 5 U.S.C. 553(b). For the same reasons, the Corporation has 
determined that the requirement of a 30-day delayed effective date is 
not required under 5 U.S.C. 553(d). Any adjustment adopted by the Board 
pursuant to a rulemaking specified in this paragraph will be reflected 
in an adjusted assessment schedule set forth in paragraph (d) of this 
section, as appropriate.
    (4) Announcement. The Board shall announce the assessment schedule 
and the amount and basis for any adjustment thereto not later than 30 
days before the quarterly certified statement invoice date specified in 
Sec.  327.3(b) of this part for the first assessment period for which 
the adjustment shall be effective.


Sec.  327.10  [Removed]

    3. Remove Sec.  327.10 of Subpart A.
    4. Add Appendices A through D to subpart A to read as follows:

BILLING CODE 6714-01-P

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    By order of the Board of Directors.

    Dated at Washington, DC, this 11th day of July, 2006.

Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
BILLING CODE 6714-01-P

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[FR Doc. 06-6381 Filed 7-21-06; 8:45 am]
BILLING CODE 6714-01-C