[Federal Register Volume 71, Number 199 (Monday, October 16, 2006)]
[Proposed Rules]
[Pages 60674-60678]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-8728]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AD09


Assessments: Initial Regulatory Flexibility Act Analysis

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Notice of proposed rulemaking; supplemental notice.

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SUMMARY: On July 24, 2006, the Federal Deposit Insurance Corporation 
(FDIC) issued a notice of proposed rulemaking with request for comments 
to better price deposit insurance for risk as required by the Federal 
Deposit Insurance Act, as amended by the Federal Deposit Insurance 
Reform Act (''Reform Act'') (see 71 FR 41910 (July 24, 2006)). The FDIC 
is supplementing that notice of proposed rulemaking with an initial 
regulatory flexibility analysis to aid the public in commenting upon 
the small business impact of its proposed rule.

DATES: Comments on the initial regulatory flexibility analysis must be 
received on or before October 26, 2006.

ADDRESSES: You may submit comments, identified by ``Regulatory 
Flexibility Act Analysis'', by any of the following methods:
     Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street, NW., Washington, DC 20429.
     Hand Delivered/Courier: The guard station at the rear of 
the 550 17th Street Building (located on F Street), on business days 
between 7 a.m. and 5 p.m.
     E-mail: [email protected]. Include ``RFA Analysis'' in the 
subject line of the message.
     Public Inspection: Comments may be inspected and 
photocopied in the FDIC Public Information Center, Room E-1002, 3502 
Fairfax Drive, Arlington, Virginia 22226, between 9 a.m. and 5 p.m. on 
business days.
    Instructions: Submissions received must include the agency name and 
RIN for this rulemaking. 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:

Initial Regulatory Flexibility Act Analysis

    The Reform Act \1\ requires that 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). This notice supplements the FDIC's initial 
notice of proposed rulemaking , 71 FR 41910 (July 24, 2006), to amend 
12 CFR 327 to: (1) Create different risk differentiation frameworks for 
smaller and larger institutions that are well capitalized and well 
managed; (2) establish a common risk differentiation framework for all 
other insured institutions; and (3) establish a base assessment rate 
schedule. The proposal would improve risk differentiation and deposit 
insurance pricing by drawing upon established measures of risk and 
existing best practices of the industry and Federal regulators for 
evaluating risk. The proposal would make the assessment system more 
sensitive to risk and fairer, by limiting the subsidization of riskier 
institutions by safer ones. The 60-day period for public comment on the 
proposed rule expired on September 22, 2006.
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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.
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    The FDIC's notice of proposed rulemaking did not include an initial 
regulatory flexibility analysis pursuant to the Regulatory Flexibility 
Act (RFA) (5 U.S.C. 603) based on an exception for rules of particular 
applicability relating to rates or practices relating to such rates, 
which are expressly excluded from the definition of ``rule'' for 
purposes of the RFA (5 U.S.C. 601). The FDIC continues to believe that 
the rate exception applies to this rulemaking. Nonetheless, the FDIC is 
voluntarily undertaking an initial regulatory flexibility analysis of 
the proposal and seeking comment on it.
    The Reform Act requires that 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).\2\ The Reform Act enacted the bulk of the 
recommendations made by the FDIC in 2001; it defines a risk-based 
system generally 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 likely 
amount of loss, and the revenue needs of the Deposit Insurance Fund 
(DIF).\3\
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    \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.
    \3\ 12 U.S.C. 1817(b)(1)(A) and (C).
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    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; it 
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.'' \4\ These 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.'' 
\5\ In short, Congress directed the FDIC to differentiate for risk 
among all depository institutions and gave it the tools to do so.
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    \4\ 12 U.S.C. 1817(b)(1)(D).
    \5\ Section 2104(a)(2) of the Reform Act (to be codified at 12 
U.S.C. 1817(b)(2)(D)).
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    The FDIC's proposal would 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 would make the assessment system 
more sensitive to risk, and also make the risk-based assessment system 
fairer, by limiting the subsidization of riskier institutions by safer 
ones. The proposed system for risk differentiation would 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 (see 71 FR 41910).
    Within Risk Category I, the FDIC proposed one method of risk 
differentiation for small institutions

[[Page 60675]]

(institutions with less than $10 billion in assets), and another for 
large institutions (institutions with $10 billion or more in 
assets).\6\ For small institutions within Risk Category I, the FDIC 
proposed to combine CAMELS component ratings with current financial 
ratios to determine an institution's assessment rate.\7\ Within Risk 
Category I, the FDIC proposed to link assessment rates for small 
institutions 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. An alternative was proposed that 
would use financial ratios alone to determine a small Risk Category I 
institution's assessment rate.
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    \6\ Both methods share a common feature, namely, the use of 
CAMELS component ratings. However, each method combines these 
measures with additional, different information.
    \7\ For large institutions within Risk Category I, the FDIC 
proposed 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.
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    The FDIC also proposed to assess all new (established within seven 
years of a particular assessment period) well-capitalized, well-managed 
institutions, regardless of size, at the maximum rate applicable to 
well-managed, well-capitalized institutions. The proposal included a 
base schedule of rates, setting a minimum of 2 and a maximum of 4 basis 
points in Risk Category I, and 7, 25, and 40 basis points respectively 
in Risk Categories II, III, and IV. Finally, the proposal included 
retention of the FDIC Board's ability 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.
    As of December 31, 2005, of the 8,832 insured depository 
institutions, there were 5,362 small insured depository institutions as 
that term is defined for purposes of the RFA (i.e., those with $165 
million or less in assets).
    For purposes of this analysis, whether the FDIC were to collect 
needed assessments under the existing rule or under the proposed rule, 
the total amount of assessments collected would be the same. The FDIC's 
total assessment needs are driven by its aggregate insurance losses, 
expenses, investment income, and insured deposit growth, among other 
factors. The proposed rule (or the alternative, if employed) would 
merely alter the distribution of assessments among banks. Using the 
data as of December 31, 2005, the FDIC calculated the total assessments 
that would be collected under the base rate schedule in the proposed 
rule.
    The economic impact of the proposal on each small institution for 
RFA purposes (i.e., institutions with assets of $165 million or less) 
was then calculated as the difference in annual assessments under the 
proposed rule compared to the existing rule as a percentage of the 
institution's annual revenue \8\ and annual profits,\9\ assuming the 
same total assessments collected by the FDIC from the banking industry.
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    \8\ An institution's total revenue is defined as the sum of its 
annual net interest income and non-interest income.
    \9\ An institution's profit is defined as income before taxes 
and extraordinary items, gross of loan loss provisions.
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    Based on the December 2005 data, under the proposal, for more than 
99 percent of small institutions (as defined by the RFA), the change in 
the assessment system would result in assessment changes (up or down) 
totaling one percent or less of annual revenue.\10\ Table 1 below sets 
forth the results of the analysis in more detail.
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    \10\ For about half of the small institutions analyzed, the 
change reflected an assessment decrease and a revenue increase.

  Table 1.--Change in Assessments Under the Proposal as a Percentage of
                              Total Revenue
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Change in assessments as a percentage of     Number of      Percent of
              total revenue                institutions    institutions
------------------------------------------------------------------------
0.5 percent or less.....................           5,236            97.7
0.5 to 1.0 percent......................              94             1.8
1.0 to 1.5 percent......................              15             0.3
1.5 to 2.0 percent......................               7             0.1
2.0 to 2.5 percent......................               4             0.1
2.5 to 3.0 percent......................               2             0.0
3.0 to 3.5 percent......................               0             0.0
3.5 to 4.0 percent......................               2             0.0
4.0 to 4.5 percent......................               0             0.0
4.5 to 5.0 percent......................               0             0.0
Greater than 5.0 percent................               2             0.0
                                         -------------------------------
    Total...............................           5,362           100.0
------------------------------------------------------------------------
Note: Three institutions with no reported revenue were excluded. The
  change in assessment under the alternative was less than $2,500 for
  all three institutions.

    As indicated, of the total of 5,362 small institutions for RFA 
purposes, just 10 would have experienced an increase or decrease equal 
to 2 percent or greater of their total revenue. These figures do not 
reflect a significant economic impact on revenues for a substantial 
number of small insured institutions from the proposed small bank 
pricing method.
    The FDIC performed a similar analysis to determine the impact on 
profits for small (again, as defined by the RFA) institutions. Based on 
December 2005 data, under the proposal, 85 percent of the small 
institutions (as defined by RFA) with reported profits would have 
experienced an increase or decrease in their annual profits of one 
percent or less.\11\ Table 2 sets forth the results of the analysis in 
more detail.
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    \11\ For about half of the small institutions analyzed, the 
change reflected an assessment decrease and a profit increase.

[[Page 60676]]



  Table 2.--Change in Assessments Under the Proposal as a Percentage of
                                 Profit
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Change in assessments as a percentage of     Number of      Percent of
                 profit                    institutions    institutions
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0.5 percent or less.....................           3,470            69.9
0.5 to 1.0 percent......................             728            14.7
1.0 to 1.5 percent......................             324             6.5
1.5 to 2.0 percent......................             132             2.7
2.0 to 2.5 percent......................              84             1.7
2.5 to 3.0 percent......................              43             0.9
3.0 to 3.5 percent......................              37             0.7
3.5 to 4.0 percent......................              19             0.4
4.0 to 4.5 percent......................              13             0.3
4.5 to 5.0 percent......................              12             0.2
Greater than 5.0 percent................             104             2.1
                                         -------------------------------
    Total...............................           4,966           100.0
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Note:Institutions with negative or no profit were excluded. These
  institutions are shown separately in Table 3.

    The data indicate that, out of those small institutions, as defined 
by the RFA, with reported profits, just 4 percent would have 
experienced an increase or decrease in their total profits of 3 percent 
or greater. Again, these figures do not reflect a significant economic 
impact on profits for a substantial number of small (as defined by the 
RFA) insured institutions from the proposed small bank pricing method.
    Table 2 excludes small institutions (as defined by the RFA) that 
either show no profit or show a loss, because a percentage cannot be 
calculated. The FDIC analyzed the effect of the proposal on these 
institutions by determining the annual assessment change (either an 
increase or a decrease) that would result. Table 3 below shows that 56 
percent (224) of the 399 small insured institutions in this category 
would have experienced a change (increase or decrease) in annual 
assessments of $5,000 or less. Of the remainder, 3 percent (12) would 
have experienced assessment changes (increases or decreases) of $20,000 
or more.

Table 3.--Change in Assessments Under the Proposal for Institutions With
                     Negative or No Reported Profit
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                                             Number of      Percent of
          Change in assessments            institutions    institutions
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$2,500 or Less..........................             136            34.1
$2,500-$5,000...........................              88            22.1
$5,000-$7,500...........................              57            14.3
$7,500-$10,000..........................              37             9.3
$10,000-$20,000.........................              69            17.3
Greater than $20,000....................              12             3.0
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    Total...............................             399           100.0
------------------------------------------------------------------------

    By way of comparison, the FDIC performed the same analyses on the 
alternative to the small banking method set forth in the proposed rule. 
As set forth in Tables 4, 5, and 6 below, the results are similar to 
the results obtained analyzing the proposed method. For example, based 
on December 2005 data, under the alternative method, more than 99 
percent of small institutions (as defined by RFA) would have 
experienced an increase or decrease in their annual assessments 
amounting to one percent or less of annual revenue, as shown in Table 
4.\12\
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    \12\ For about half of the small institutions analyzed, the 
change reflected an assessment decrease and a revenue increase.

     Table 4.--Change in the Assessments Under the Alternative as a
                       Percentage of Total Revenue
------------------------------------------------------------------------
Change in assessments as a percentage of     Number of      Percent of
              total revenue                institutions    institutions
------------------------------------------------------------------------
0.5 percent or less.....................           5,236            97.7
0.5 to 1.0 percent......................              93             1.7
1.0 to 1.5 percent......................              16             0.3
1.5 to 2.0 percent......................               7             0.1
2.0 to 2.5 percent......................               4             0.1
2.5 to 3.0 percent......................               2             0.0
3.0 to 3.5 percent......................               0             0.0
3.5 to 4.0 percent......................               2             0.0
4.0 to 4.5 percent......................               0             0.0

[[Page 60677]]

 
4.5 to 5.0 percent......................               0             0.0
Greater than 5.0 percent................               2             0.0
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    Total...............................           5,362           100.0
------------------------------------------------------------------------
Note: Three institutions with no reported revenue were excluded. The
  change in assessments under the alternative was less than $2,500 for
  all three institutions.

    Similarly, based on December 2005 data, under the alternative, 85 
percent of the small institutions (as defined by RFA) with reported 
profits would have experienced an increase or decrease of one percent 
or less of annual profits as shown in Table 5.\13\
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    \13\ For about half of the small institutions analyzed, the 
change reflected an assessment decrease and a profit increase.

Table 5.--Change in Assessments Under the Alternative as a Percentage of
                                 Profit
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Change in assessments as a percentage of     Number of      Percent of
                 profit                    institutions    institutions
------------------------------------------------------------------------
0.5 percent or less.....................           3,489            70.3
0.5 to 1.0 percent......................             728            14.7
1.0 to 1.5 percent......................             307             6.2
1.5 to 2.0 percent......................             138             2.8
2.0 to 2.5 percent......................              79             1.6
2.5 to 3.0 percent......................              43             0.9
3.0 to 3.5 percent......................              34             0.7
3.5 to 4.0 percent......................              18             0.4
4.0 to 4.5 percent......................              16             0.3
4.5 to 5.0 percent......................              12             0.2
Greater than 5.0 percent................             102             2.1
                                         -------------------------------
    Total...............................           4,966          100.0
------------------------------------------------------------------------
Note: Institutions with negative or no profit were excluded. These
  institutions are shown separately in Table 6.

    Table 6 below shows that 56 percent of the 399 small insured 
institutions that showed no profit or a negative profit category would 
have experienced a change (increase or decrease) in annual assessments 
of $5,000 or less. Of the remainder, three percent (12) would have 
experienced assessment changes (increases or decreases) of $20,000 or 
more.

 Table 6.--Change in Assessments Under the Alternative for Institutions
                   With Negative or No Reported Profit
------------------------------------------------------------------------
                                             Number of      Percent of
          Change in assessment             institutions    institutions
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$2,500 or Less..........................             138            34.6
$2,500-$5,000...........................              87            21.8
$5,000-$7,500...........................              57            14.3
$7,500-$10,000..........................              36             9.0
$10,000-$20,000.........................              69            17.3
Greater than $20,000....................              12             3.0
                                         -------------------------------
    Total...............................             399           100.0
------------------------------------------------------------------------

    The proposed rule does not directly impose any ``reporting'' or 
``recordkeeping'' requirements within the meaning of the Paperwork 
Reduction Act. The compliance requirements for the proposed rule would 
not exceed existing compliance requirements for the present system of 
FDIC deposit insurance assessments, which, in any event, are governed 
by separate regulations.
    The FDIC is unaware of any duplicative, overlapping or conflicting 
Federal rules.
    The initial regulatory flexibility analysis set forth above 
demonstrates that, if adopted in final form, the proposed rule would 
not have a significant economic impact on a substantial number of small 
institutions within the meaning of those terms as used in the RFA (5 
U.S.C. 605).
    Commenters are invited to provide the FDIC with any information 
they may have about the likely quantitative effects of the proposal on 
small insured ($165

[[Page 60678]]

million or less in assets) depository institutions.

    By order of the Board of Directors.

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

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 06-8728 Filed 10-13-06; 8:45 am]
BILLING CODE 6714-01-P