[Federal Register Volume 71, Number 230 (Thursday, November 30, 2006)]
[Rules and Regulations]
[Pages 69282-69323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-9204]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AD09


Assessments

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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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). In this rulemaking, the FDIC is amending 
its regulations to create a new risk differentiation system, to 
establish a new base assessment rate schedule, and to set assessment 
rates effective January 1, 2007.

DATES: Effective Date: January 1, 2007.

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

SUPPLEMENTARY INFORMATION:

I. Background

    On February 8, 2006, the President signed the Federal Deposit 
Insurance Reform Act of 2005 into law; on February 15, 2006, he signed 
the Federal Deposit Insurance Reform Conforming Amendments Act of 2005 
(collectively, the Reform Act).\1\ The Reform Act enacts the bulk of 
the recommendations made by the FDIC in 2001. The Reform Act, among 
other things, requires that the FDIC, within 270 days, ``prescribe 
final regulations, after notice and opportunity for comment * * * 
providing for assessments under section 7(b) of the Federal Deposit 
Insurance Act, as amended * * * ,'' thus giving the FDIC, through its 
rulemaking authority, the opportunity to better price deposit insurance 
for risk.\2\
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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\ Section 2109(a)(5) of the Reform Act. Pursuant to the 
Section 2109 of the Reform Act, current assessment regulations 
remain in effect until the effective date of new regulations. 
Section 2109(a)(5) of the Reform Act requires the FDIC, within 270 
days of enactment, to prescribe final regulations, after notice and 
opportunity for comment, providing for assessments under section 
7(b) of the Federal Deposit Insurance Act. Section 2109 also 
requires the FDIC to prescribe, within 270 days, rules on the 
designated reserve ratio, changes to deposit insurance coverage, the 
one-time assessment credit, and dividends. A final rule on deposit 
insurance coverage was published on September 12, 2006. 71 FR 53547. 
Final rules on the one-time assessment credit and dividends were 
published on October 18, 2006. 71 FR 61374; 71 FR 61385. The FDIC is 
publishing final rulemakings on the designated reserve ratio and on 
operational changes to part 327 elsewhere in this issue of the 
Federal Register.
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    On July 24, 2006, the FDIC published in the Federal Register, for a 
60-day comment period, a notice of proposed rulemaking providing for 
deposit insurance assessments (the NPR). 71 FR 41910. The FDIC sought 
public comment on its proposal and received 707 comment letters, 
including numerous comments from trade organizations.3 4 The 
comments and the final rule providing for assessments are discussed in 
later sections.
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    \3\ The comment period expired on September 22, 2006. The FDIC 
also received many comments relevant to this rulemaking in response 
to the other rulemakings discussed in footnote 2. All comments have 
been considered and are available on the FDIC's Web site, http://www.fdic.gov/regulations/laws/federal/propose.html.
    \4\ The trade associations included the American Bankers 
Association, the Independent Community Bankers of America, America's 
Community Bankers, the Clearing House, the Financial Services 
Roundtable, the New York Bankers Association, the New Jersey League 
of Community Bankers, the Massachusetts Bankers Association, the 
Kansas Bankers Association, and the Association for Financial 
Professionals.
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A. The Current Risk-Differentiation Framework

    The Federal Deposit Insurance Corporation Improvement Act of 1991 
(FDICIA) required that the FDIC establish a risk-based assessment 
system. To implement this requirement, the FDIC adopted by regulation a 
system that places institutions into risk categories \5\ based on two 
criteria: capital levels and supervisory ratings. Three capital 
groups--well capitalized, adequately capitalized, and undercapitalized, 
which are numbered 1, 2 and 3, respectively--are based on leverage 
ratios and risk-based capital ratios for regulatory capital purposes. 
Three supervisory subgroups, termed A, B, and C, are based upon the 
FDIC's consideration of evaluations provided by the institution's 
primary federal regulator and other information the FDIC deems 
relevant.\6\ Subgroup A

[[Page 69283]]

consists of financially sound institutions with only a few minor 
weaknesses; subgroup B consists of institutions that demonstrate 
weaknesses that, if not corrected, could result in significant 
deterioration of the institution and increased risk of loss to the 
insurance fund; and subgroup C consists of institutions that pose a 
substantial probability of loss to the insurance fund unless effective 
corrective action is taken. In practice, the subgroup evaluations are 
generally based on an institution's composite CAMELS rating, a rating 
assigned by the institution's supervisor at the end of a bank 
examination, with 1 being the best rating and 5 being the lowest.\7\ 
Generally speaking, institutions with a CAMELS rating of 1 or 2 are put 
in supervisory subgroup A, those with a CAMELS rating of 3 are put in 
subgroup B, and those with a CAMELS rating of 4 or 5 are put in 
subgroup C. Thus, in the current assessment system, the highest-rated 
(least risky) institutions are assigned to category 1A and the lowest-
rated (riskiest) institutions to category 3C. The three capital groups 
and three supervisory subgroups form a nine-cell matrix for risk-based 
assessments:
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    \5\ The FDIC's regulations refer to these risk categories as 
``assessment risk classifications.''
    \6\ The term ``primary federal regulator'' is synonymous with 
the statutory term ``appropriate federal banking agency.'' 12 U.S.C. 
1813(q).
    \7\ CAMELS is an acronym for component ratings assigned in a 
bank examination: Capital adequacy, Asset quality, Management, 
Earnings, Liquidity, and Sensitivity to market risk. A composite 
CAMELS rating combines these component ratings, which also range 
from 1 (best) to 5 (worst).
[GRAPHIC] [TIFF OMITTED] TR30NO06.002

B. Reform Act Provisions

    The Federal Deposit Insurance Act, as amended by the Reform Act, 
continues to require that the assessment system be risk-based and 
allows the FDIC to define risk broadly. It defines a risk-based system 
as one based on an institution's probability of causing a loss to the 
deposit insurance fund due to the composition and concentration of the 
institution's assets and liabilities, the amount of loss given failure, 
and revenue needs of the Deposit Insurance Fund (the fund).\8\
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    \8\ 12 U.S.C. 1817(b)(1)(A) and (C). The Bank Insurance Fund and 
Savings Association Insurance Fund were merged into the newly 
created Deposit Insurance Fund on March 31, 2006.
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    At the same time, the Reform Act also restores to the FDIC's Board 
of Directors the discretion to price deposit insurance according to 
risk for all insured institutions regardless of the level of the fund 
reserve ratio.\9\
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    \9\ The Reform Act eliminates the prohibition against charging 
well-managed and well-capitalized institutions when the deposit 
insurnace fund is at or above, and is expected to remain at or 
above, the designated reserve ratio (DRR). This prohibition was 
inclulded as part of the Deposit Insurance Funds Act of 1996. Public 
Law 104-208, 110 Stat. 3009, 3009-479. However, while the Reform Act 
allows the DRR to be set between 1.15 percent and 1.50 percent, it 
also generally requires dividends of one-half of any amount in the 
fund in excess of the amount required to maintain the reserve ratio 
at 1.35 percent when the insurance fund reserve ratio exceeds 1.35 
percent at the end of any year. The Board can suspend these 
dividends under certain circumstances. 12 U.S.C. 1817(e)(2).
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    The Reform Act leaves in place the existing statutory provision 
allowing the FDIC to ``establish separate risk-based assessment systems 
for large and small members of the Deposit Insurance Fund.'' \10\ Under 
the Reform Act, however, separate systems are subject to a new 
requirement that ``[n]o insured depository institution shall be barred 
from the lowest-risk category solely because of size.'' \11\
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    \10\ 12 U.S.C. 1817(b)(1)(D).
    \11\ Section 2104(a)(2) of the Reform Act (to be codified at 12 
U.S.C. 1817(b)(2)(D)).
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II. Summary of the Final Rule

    The final rule is set out in detail in ensuing sections, but is 
briefly summarized here.
    The final rule consolidates the existing nine risk categories into 
four and names them Risk Categories I, II, III and IV. Risk Category I 
replaces the 1A risk category.
    Within Risk Category I, the final rule combines supervisory ratings 
with other risk measures to differentiate risk. For most institutions, 
the final rule combines CAMELS component ratings with financial ratios 
to determine an institution's assessment rate. For large institutions 
that have long-term debt issuer ratings, the final rule differentiates 
risk by combining CAMELS component ratings with these ratings. For 
large institutions within Risk Category I, initial assessment rate 
determinations may be modified within limits upon review of additional 
relevant information.
    The final rule defines a large institution as an institution that 
has $10 billion or more in assets. With certain exceptions, beginning 
in 2010, the final rule treats new institutions (those established for 
less than five years) in Risk Category I the same, regardless of size, 
and assesses them at the maximum rate applicable to Risk Category I 
institutions.
    The final rule sets actual rates beginning January 1, 2007, as 
follows:

------------------------------------------------------------------------
                                             Risk Category
                             -------------------------------------------
                                       I *
                             ----------------------   II     III     IV
                               Minimum    Maximum
------------------------------------------------------------------------
Annual Rates (in basis                5          7     10      28     43
 points)....................
------------------------------------------------------------------------
\*\ Rates for institutions that do not pay the minimum or maximum rate
  vary between these rates.


[[Page 69284]]

    These rates are three basis points above the base rate schedule 
adopted in the final rule:

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

    The final rule continues to allow the FDIC Board to adjust rates 
uniformly from one quarter to the next, except that no single 
adjustment can exceed three basis points. In addition, cumulative 
adjustments cannot exceed a maximum of three basis points higher or 
lower than the base rates without further notice-and-comment 
rulemaking.

III. General Risk Differentiation Framework

    The final rule consolidates the number of assessment risk 
categories from nine to four. The four new categories will continue to 
be defined based upon supervisory and capital evaluations, which are 
both established measures of risk. The consolidation creates four new 
Risk Categories as shown in Table 1:
[GRAPHIC] [TIFF OMITTED] TR30NO06.003

    Risk Category I contains all well-capitalized institutions in 
Supervisory Group A (generally those with CAMELS composite ratings of 1 
or 2); i.e., those institutions that would be placed in the former 1A 
category. Risk Category II contains all institutions in Supervisory 
Groups A and B (generally those with CAMELS composite ratings of 1, 2 
or 3), except those in Risk Category I and undercapitalized 
institutions.\12\ Risk Category III contains all undercapitalized 
institutions in Supervisory Groups A and B, and institutions in 
Supervisory Group C (generally those with CAMELS composite ratings of 4 
or 5) that are not undercapitalized. Risk Category IV contains all 
undercapitalized institutions in Supervisory Group C; i.e., those 
institutions that would be placed in the former 3C category.\13\
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    \12\ Under current regulations, bridge banks and institutions 
for which the FDIC has been appointed or serves as conservator are 
charged the assessment rate applicable to the 2A category. 12 CFR 
327.4(c). The final rule places these institutions in Risk Categoryd 
I and charges them the minimum rate applicable to that category.
    \13\ For clarity, the final rule uses the phrase ``Supervisory 
Group'' to replace ``Supervisory Subground.'' The final rule also 
designates the capital categories as ``Well Capitalized,'' 
``Adequately Capitalized'' and ``Undercapitalilzed,'' rather than 
Capital Groups 1, 2 and 3. However, the definitions of the 
Supervisory Groups and Capital Group have not changed in substance.
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Comments

    No comments disagreed with the proposed reduction in the number of 
risk categories from nine to four. However, one comment recommended 
adding subcategories to Risk Category I to provide a warning to 
institutions that are moving toward Risk Category II if corrective 
action is not taken and giving an institution that slips from Risk 
Category I to Risk Category II an opportunity to show quick 
improvement. The FDIC does not believe that these subcategories are 
necessary. For an institution in Risk Category I, its assessment rate 
will provide the same information. The FDIC also does not believe that 
special treatment should be accorded an institution that slips from 
Risk Category I, as opposed to other institutions already in Risk 
Category II.
    Some comments argued that, for CAMELS 3, 4 and 5-rated institutions 
in Risk Categories II and III, some provision for lower premiums should 
be made for institutions that augment and maintain strong capital, 
maintain adequate reserves for loan losses and have a plan for recovery 
approved by the FDIC. The FDIC does not see a need for special 
provisions for these institutions, as they have other incentives to 
improve capital and business operations.

IV. Risk Differentiation Within Risk Category I

A. Overview

    Risk Category I, as of June 30, 2006, would include approximately 
95 percent of all insured institutions. The final rule will further 
differentiate risk within this category using one of two methods. Both 
methods share a common feature, namely, the use of CAMELS component 
ratings. However, each method combines these measures with different 
sources of information on risk. For small institutions within Risk 
Category I and for large institutions within Risk Category I that do 
not have long-term debt issuer ratings, the final rule combines CAMELS 
component ratings with current financial ratios to determine an 
institution's assessment rate. For large institutions within Risk 
Category I that have long-term debt

[[Page 69285]]

issuer ratings, the final rule combines CAMELS component ratings with 
these debt ratings. For all large institutions, initial assessment 
rates may be modified within limits upon review of additional relevant 
information.
    The risk differentiation methods for institutions in Risk Category 
I measure levels of risk and result in rank orderings of risk within 
the category. Within Risk Category I, the final rule assesses those 
institutions that pose the least risk a minimum assessment rate and 
those that pose the greatest risk a maximum assessment rate that is two 
basis points higher than the minimum rate. An institution that poses an 
intermediate risk within Risk Category I will be charged a rate between 
the minimum and maximum that will vary by institution. Under the final 
rule, small changes in an institution's financial ratios, long-term 
debt issuer ratings or CAMELS component ratings should produce only 
small changes in assessment rates.
    The final rule defines a large institution as an institution that 
has $10 billion or more in assets and a small institution as an 
institution that has less than $10 billion in assets. Also, as 
described below in Section VII, beginning in 2010, with certain 
exceptions, the final rule treats new institutions in Risk Category I 
the same, regardless of size, and assesses them at the maximum rate 
applicable to Risk Category I institutions.

B. Distribution of Assessment Rates

    As stated above, within Risk Category I, the final rule results in 
assessing those institutions that pose the least risk a minimum 
assessment rate and those that pose the greatest risk a maximum 
assessment rate that is two basis points higher. An institution that 
poses an intermediate risk within Risk Category I will be charged a 
rate between the minimum and maximum that will vary incrementally by 
institution.
    In this regard, the final rule differs from the NPR in its 
application to large institutions. The NPR had proposed assessing large 
institutions that posed an intermediate risk within Risk Category I one 
of four rates between the minimum and maximum based on subcategory 
assignments. A number of comments expressed concern over the proposed 
use of assessment rate subcategories and the possibility that large 
increases (and decreases) in assessment rates could result from 
relatively small changes in risk. Some of these comments recommended 
using as few as three assessment rate subcategories, and some comments 
recommended using incremental pricing, as proposed in the NPR for small 
institutions. The FDIC has decided to adopt an incremental pricing 
framework for all institutions so that a small change in risk will 
produce a small change in assessment rates.
    Under the final rule, as of June 30, 2006: (1) Approximately 45 
percent of all institutions that would have been in Risk Category I 
(other than institutions less than 5 years old) would have been charged 
the minimum assessment rate; and (2) approximately 5 percent of all 
institutions that would have been in Risk Category I (other than 
institutions less than 5 years old) would have been charged the maximum 
assessment rate. In future periods, different percentages of 
institutions may be charged the minimum and maximum rates.
    Chart 1 shows the cumulative distribution of assessment rates based 
on June 30, 2006 data, using base assessment rates for institutions in 
Risk Category I. The chart excludes Risk Category I institutions less 
than 5 years old.
[GRAPHIC] [TIFF OMITTED] TR30NO06.004


[[Page 69286]]


Comments
    Percentages of institutions paying the minimum rate. A comment 
agreed that charging 45 percent of institutions the minimum rate makes 
sense given the current health of the banking industry. Several 
comments (including comments from some trade groups), however, 
suggested that initially charging 45 percent of institutions the 
minimum rate was arbitrary or inappropriate. These comments suggested 
initially charging a larger percentage of institutions the minimum 
rate, at least in part, because risk in the banking industry is very 
low at present.
    Two comments expressed the view that the decision to place roughly 
45 percent of large institutions in the minimum assessment rate 
subcategory and 5 percent in the maximum assessment rate subcategory 
was subjective and arbitrary. In one of these comments, it was 
suggested that large institutions might be restricted from the lowest 
premium rate by this decision. Several other comments also urged the 
FDIC to expand the availability of the minimum assessment rate to a 
larger proportion of large institutions. Some comments argued for the 
elimination of premiums altogether for the highest-rated large 
institutions.
    The FDIC has found that small institutions with a probability of 
downgrade to a CAMELS 3 or worse that is equal to or less than the 
probability of downgrade for the 40th to 50th percentile as of June 30, 
2006, had minimal risk of a CAMELS downgrade over time. The remainder 
of small institutions in the industry had increasing and 
distinguishable risk of CAMELS downgrades. The FDIC believes it is 
appropriate to initially assign roughly similar proportions of large 
and small institutions to the minimum assessment rate to achieve 
parity. While the initial proportions of large and small institutions 
being charged the minimum and maximum rates will be similar, the final 
rule does not fix the proportions for the future. Thus, in future 
periods, more or less than 45 percent of large (or small) institutions 
may pay the minimum rate and more or less than 5 percent may pay the 
maximum rate.
    Risk Category I assessment rate spread. Several comments (including 
comments from trade groups) recommended that the FDIC eliminate or 
narrow the spread between the minimum and maximum base rates for Risk 
Category I. Arguments in favor of eliminating or narrowing the spread 
included:
     The new risk differentiation system is untested and could 
lead to unintended consequences.
     Improvements in bank risk-management systems, improvements 
in supervisory evaluations and off-site monitoring, and enhanced 
supervisory powers enjoyed by the regulators have reduced risk.
     A narrower spread would reduce the adverse effect of 
changes in subcategories on large banks and the adverse effect of 
paying the maximum rate on new banks.
    Other comments (including comments from some trade groups) 
recommended increasing the spread between minimum and maximum 
assessment rates for Risk Category I to 3 basis points. According to 
these comments, a wider spread would improve risk differentiation and 
could subject more institutions to incremental rates between the 
minimum and maximum rates.
    The final rule strikes a balance between the arguments for a 
narrower spread and those for a wider spread. The two basis point 
spread adopted in the final rule is narrower than the historical loss 
data would suggest.\14\ However, as the comments have noted, the new 
system is, as yet, untested.
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    \14\ See Table 1.6 in Appendix 1 to the NPR, 71 FR 41910.
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C. CAMELS Ratings

    For all institutions in Risk Category I, supervisory ratings will 
be taken into account in setting assessment rates using a weighted 
average of an institution's CAMELS components. This weighted average 
will be created by combining the components as follows: \15\
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    \15\ The FDIC and other bank supervisors do not use a weighting 
system to determine CAMELS composite ratings. The weights in the 
table reflect the view of the FDIC regarding the relative importance 
of each of the CAMELS components for differentiating risk among 
institutions in Risk Category I for deposit insurance purposes. 
Different weights might apply if this measure were being used to 
evaluate risk for deposit insurance purposes for all institutions, 
including those outside Risk Category I.
[GRAPHIC] [TIFF OMITTED] TR30NO06.005

Comments
    Almost every comment that discussed the use of CAMELS ratings to 
differentiate risk within Risk Category I supported their use. One 
comment questioned their use and a few comments opposed any 
differentiation within Risk Category I.
    One trade group asserted that the FDIC should use a simple, rather 
than weighted, average of CAMELS components on the grounds that using 
financial ratios related to these components effectively weights the 
components. The trade group noted that capital, for example, is already 
reflected in an institution's risk category and as a CAMELS component. 
The trade group also asserted that asset quality is given extra 
emphasis in the proposed weighting scheme by including several asset 
quality financial ratios as well as the A rating in the CAMELS 
component average. With regards to the M component, the trade group 
asserted that:

    Management--the most subjective of all the CAMELS components--
must by necessity be involved in all the financial ratios and other 
examination components. In practice,

[[Page 69287]]

therefore, it is unlikely that examiners would rate management 
higher than the other components. Thus, there is always a bias 
against a high management rating.

    Several comments proposed different weighting schemes for large 
institutions, such as heavier weights for Liquidity, Capital, and Asset 
quality.
    The final rule retains the weights proposed in the NPR to determine 
the weighted average CAMELS component rating. These weights reflect the 
view of the FDIC on the relative importance of each of the CAMELS 
components in differentiating risk among institutions in Risk Category 
I for deposit insurance purposes.

D. Financial Ratios

    For small institutions and for large institutions without a long-
term debt issuer rating, the final rule uses certain financial ratios, 
in addition to supervisory ratings, to differentiate risk. The final 
rule differs slightly from the proposal in the NPR with respect to the 
financial ratios being used and their definitions.
    The financial ratios that will be used are:
     The Tier 1 Leverage Ratio;
     Loans past due 30-89 days/gross assets;
     Nonperforming assets/gross assets; \16\
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    \16\ The NPR used the phrase ``nonperforming loans'' rather than 
``nonperforming assets.'' Because this ratio includes repossessed 
real estate in the numerator, the FDIC has concluded that the phrase 
``nonperforming assets'' would be more accurate. No change in the 
definition of the ratio is intended by this name change (although, 
as discussed later, a slight revision to the definition is being 
made for other reasons).
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     Net loan charge-offs/gross assets; and
     Net income before taxes/risk-weighted assets.
    The Tier 1 Leverage Ratio has the definition used for regulatory 
capital purposes. Appendix A defines each of the ratios.
    Many comments (including comments from several industry trade 
groups) opposed including time deposits greater than $100,000 in the 
definition of volatile liabilities for a variety of reasons, including: 
(1) These deposits are core deposits or should be so considered; and 
(2) including them would have an effect on attracting municipal 
deposits. One comment opposed including brokered deposits in the 
definition of volatile liabilities on the grounds that they are less 
volatile than many core deposits. One trade group argued that deposits 
in excess of $100,000 that are insured by excess deposit insurance 
should not be included in the definition of volatile liabilities.
    The final rule eliminates the basis for these concerns by excluding 
one of the financial ratios proposed in the NPR, the ratio of volatile 
liabilities to gross assets. The financial data used to compute 
volatile liabilities reported by thrifts in the Thrift Financial 
Reports (TFRs) and reported by banks in their Reports of Condition and 
Income (Call Reports) were not compatible and could not be made 
compatible without changes in reporting requirements.\17\
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    \17\ The largest item in volatile liabilities for the great 
majority of institutions is time-and-savings deposits greater than 
$100,000. Institutions that file Call Reports report this figure, 
but institutions that file TFRs do not report this item separately. 
Instead, they report all deposits greater than $100,000, including 
demand deposits. Time-and-savings deposits greater than $100,000 
cannot be determined from TFRs.
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    The final rule also excludes the portion of loans and leases that 
is guaranteed by the U.S. Government, including government agencies and 
government-sponsored agencies, from the computation of loans past due 
30-89 days and from the computation of non-performing assets. These 
types of guaranteed loans are treated as less risky than other loans 
for risk-based capital purposes. Moreover, the use of past due and 
nonaccrual loan measures that do not adjust for these guaranteed loans 
might overstate credit risk and result in assessment rates that are too 
high for some institutions.
Comments
    Almost all comments (including comments from a trade group) on 
using financial ratios (in addition to CAMELS ratings) to determine 
assessment rates supported their use. However, some suggested that 
different financial ratios be used.
    In the NPR, the definition of volatile liabilities did not include 
Federal Home Loan Bank advances, but the FDIC asked for comment on 
whether it should. The FDIC received 569 comments on this issue. All 
but one argued that the definition of volatile liabilities should not 
include Federal Home Loan Bank advances; one argued that the definition 
should include these advances. The final rule does not include the 
volatile liability ratio.
    A trade group suggested excluding the loans past due 30-89 days to 
gross assets ratio on the grounds that loan delinquencies are already 
considered in two CAMELS components, A (Assets) and M (Management). The 
final rule retains the loans past due 30-89 days to gross assets ratio. 
Independent of the CAMELS components, this ratio is statistically 
significant and highly predictive of CAMELS downgrades and institution 
failures even when it is considered together with the nonperforming 
ratio.\18\
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    \18\ One comment suggested excluding total loans and lease 
financing receivables past due 30 to 59 days in the ratio. Call 
Reports and TFRs currently do not collect separate data on loans and 
lease financing receivables past due 30 to 59 days; thus, it is not 
feasible to exclude these past due receivables from the ratio.
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    A trade group commented that the risk weighting formula used to 
establish risk weighted assets is biased against residential mortgage 
lenders. It argued that, since they are secured by property liens, all 
1-4 family, owner occupied residential mortgage loans with a loan-to-
value ratio under 80 percent should be given a risk weighting of zero.
    In the final rule, pre-tax earnings are divided by risk-weighted 
assets rather than by gross assets to avoid penalizing certain types of 
institutions, including those that hold low-risk and low-yielding 
assets. The FDIC's analysis shows that institutions specializing in 
mortgage lending are not charged a higher average assessment rate than 
other institutions under the final rule. Moreover, Call Reports and 
TFRs currently do not collect separate data on the loan-to-value ratio 
for 1-4 family, owner occupied residential mortgage loans; thus, it is 
not feasible to treat loans with a low loan-to-value ratio differently.
    This trade group also requested that the FDIC study how mutual 
institutions are affected by including earnings in the financial 
ratios. The FDIC found that, while mutual institutions typically have a 
lower ratio of pre-tax earnings to risk-weighted assets, they typically 
have a higher Tier 1 leverage ratio and lower non-performing loan and 
charge-off ratios than other small institutions in Risk Category I. As 
a result, mutual institutions are not charged a higher average 
assessment rate than other institutions under the final rule.
    Another trade group advocated averaging financial ratios over a 
period not less than four quarters, arguing that taking ``a one-quarter 
snap shot'' can be a misleading indicator of risk, since many financial 
institutions can experience seasonal variations. By averaging, these 
seasonalities would be removed.
    The final rule uses a four-quarter sum for two of the five 
financial ratios--the pre-tax earnings and net charge-offs ratios--to 
reduce volatility related to seasonality. The final rule uses the 
values of the three other financial ratios as of each quarter-end for 
several reasons. First, the seasonality of these

[[Page 69288]]

financial ratios is more modest. Second, with a quarterly computation 
of assessment rates, the average assessment rate an institution would 
be charged throughout the year would roughly equate to the assessment 
rate calculated with average ratios. Third, averaging financial ratios 
over time has the disadvantage of blunting the effect of changes in an 
institution's financial condition that are not related to seasonality; 
thus, averaging ratios would prevent assessments from fully adjusting 
to changes in risk.
    One trade group supported the FDIC's use of a Tier 1 leverage ratio 
and suggested that it should be weighted heaviest among the financial 
ratios considered. However, several comments (including comments from 
other trade groups) stated that capital should be measured by a risk-
adjusted capital ratio rather than the Tier 1 leverage ratio because a 
risk-adjusted capital ratio is a better measure of capital adequacy.
    Several comments stated that the FDIC should not use a Tier 1 
leverage ratio to determine assessment rates for large institutions, in 
particular. One of these comments argued that this ratio is not an 
accurate measure of risk, effectively penalizes institutions that 
invest in high quality short-term assets, such as U.S. government 
securities, and places U.S. banks at a competitive disadvantage with 
foreign banks. Another comment suggested that larger institutions might 
tend to be penalized by inclusion of a leverage ratio.
    The final rule uses the Tier 1 leverage ratio. The Tier 1 leverage 
ratio is highly significant in predicting CAMELS downgrades and 
failures. Using a risk-based capital measure in place of the Tier 1 
leverage ratio does not improve predictive accuracy. For the relatively 
few large Risk Category I institutions that do not have long-term debt 
issuer ratings, the FDIC's ability to adjust assessment rates based on 
consideration of other risk information, as discussed below, should 
ensure that these institutions are treated equitably.
    Several comments (including comments from several trade groups) 
stated that the capital measure should include subordinated debt and 
stated or implied that subordinated debt should reduce assessment rates 
because it would reduce loss given failure. Several comments (including 
comments from some trade groups) argued that the statutes governing the 
risk-based pricing system require that the FDIC take loss given failure 
into account when determining assessments and that the proposed system 
does not do so. Because it does not do so, they argue, the assessment 
system is actuarially unfair. These issues are discussed in a 
subsequent section (Section IX).
    One commenter explicitly argued that, for large institutions in 
Risk Category I, only CAMELS components should be used to differentiate 
risk. However, the comment also implied that only CAMELS components 
should be used for all Risk Category I institutions, including small 
institutions. The method adopted in the final rule, which combines 
financial ratios and supervisory ratings, predicts downgrades better 
than one without financial ratios. For this reason, the final rule does 
not adopt the method suggested in the comment.

E. Long-Term Debt Issuer Ratings

    For large institutions with long-term debt issuer ratings, the 
final rule uses these ratings, in addition to supervisory ratings, to 
differentiate risk. The final rule uses the current long-term debt 
issuer rating or ratings assigned by the major U.S. rating 
agencies.\19\ Debt issuer ratings of holding companies and other third 
party debt ratings will not be used in the calculation of an assessment 
rate, but may be considered along with other information in determining 
whether adjustments to the resulting assessment rate are appropriate. 
Possible adjustments to assessment rates are discussed in a subsequent 
section.
---------------------------------------------------------------------------

    \19\ That is, Moody's, Standard & Poor's, and Fitch.
---------------------------------------------------------------------------

Comments
    A number of comments (including comments from some trade groups) 
supported the use of debt issuer ratings as an objective measure of 
risk in large institutions and as complementary to supervisory ratings. 
One trade group urged the FDIC to use ratings issued by any nationally 
recognized credit rating agency; a rating agency requested that its 
ratings be used. The rating agency also urged the FDIC to consider 
agency ratings for both small and large institutions when available.
    While there is merit in considering ratings provided by other 
rating agencies, long-term debt issuer ratings issued by the three 
major U.S. rating agencies are widely accepted and used by market 
participants to gauge the relative risk of large financial institutions 
for many purposes, including the determination of required rates of 
return on institution-issued debt. They provide market-based views of 
risk that are complementary to supervisory views.\20\ The final rule 
does not incorporate debt issuer rating information into the pricing 
methodology used for smaller institutions; however, as described in a 
subsequent section, institutions with assets between $5 billion and $10 
billion may request to be treated as a large institution for pricing 
purposes.
---------------------------------------------------------------------------

    \20\ The FDIC is aware of the enactment of the Credit Rating 
Agency Reform Act of 2006, Public Law 109-291. However, this 
legislation has not yet been implemented. The Act requires the 
Securities and Exchange Commission to issue final implementing 
regulations within 270 days of enactment. The FDIC expects to 
revisit how best to incorporate the ratings of other agencies in the 
future. Any future revisions would involve notice-and-comment 
rulemaking.
---------------------------------------------------------------------------

    Other comments (including comments from other trade groups) either 
urged caution in the use of agency ratings on the grounds of bias in 
favor of large institutions or argued they should not be used. The 
FDIC's ability to adjust assessment rates for large institutions, 
discussed below, should alleviate these concerns.
    Several comments urged the FDIC to use holding company debt issuer 
ratings to determine assessment rates. These comments noted that debt 
is often issued at the parent level, that holding companies are 
required to serve as a source of strength to their subsidiary 
institutions, and that holding company considerations apply to insured 
subsidiaries due to the cross guarantee liabilities of affiliated 
institutions.
    The long-term debt issuer rating of an insured entity relates 
directly to the risk in that particular entity. As noted in the NPR, 
the risk profiles of affiliated institutions within a holding company 
can differ. Additionally, the value of a cross-guarantee in the future 
is uncertain because the financial condition of affiliated institutions 
may, in certain circumstances, weigh against the FDIC's invoking such 
cross-guarantee provisions.
    Nevertheless, it is prudent to consider all available risk 
information in setting assessment rates. As discussed below, the FDIC 
will consider additional information, including any holding company 
debt issuer ratings, in determining whether the assessment rate for any 
large institution is appropriate.\21\
---------------------------------------------------------------------------

    \21\ There are, at present, only a few cases where holding 
company debt issuer ratings are available and insured entity debt 
issuer ratings are not. Of these, two cases involve entities owned 
by non-bank parents. Where both holding company ratings and insured 
entity debt issuer ratings exist, most insured entity ratings are 
better (indicating lower risk) than those of the parent company.
---------------------------------------------------------------------------

F. Combining Supervisory Ratings and Financial Ratios

    For small institutions within Risk Category I and for large 
institutions within Risk Category I that do not have long-term debt 
issuer ratings, the final rule combines supervisory ratings and

[[Page 69289]]

financial ratios to determine assessment rates. The financial ratios 
and the weighted average CAMELS component rating are used to estimate 
the probability that an institution will be downgraded to CAMELS 3, 4 
or 5 at its next examination using data from the end of the years 1984 
to 2004.\22\ This period covers both periods of stress and strength in 
the banking industry.\23\ The final rule converts the probabilities of 
downgrade to specific base assessment rates. The analysis and 
conversion produced the following multipliers for each risk measure:
---------------------------------------------------------------------------

    \22\ The ``S'' component rating was first assigned in 1997. 
Because the statistical analysis relies on data from before 1997, 
the ``S'' component rating was excluded from the analysis. Appendix 
A describes the statistical analysis.
    \23\ 2005 data had to be excluded because the analysis is based 
upon supervisory downgrades within one year and 2006 downgrades have 
yet to be determined.

------------------------------------------------------------------------
                                                             Pricing
                    Risk measures *                      multipliers * *
------------------------------------------------------------------------
Tier 1 Leverage Ratio.................................           (0.042)
Loans Past Due 30-89 Days/Gross Assets................             0.372
Nonperforming Assets/Gross Assets.....................             0.719
Net Loan Charge-Offs/Gross Assets.....................             0.841
Net Income before Taxes/Risk-Weighted Assets..........           (0.420)
Weighted Average CAMELS Component Rating..............             0.534
------------------------------------------------------------------------
* Ratios are expressed as percentages.
* * Multipliers are rounded to three decimal places.

    To determine an institution's insurance assessment rate under the 
base assessment rate schedule, each of these risk measures (that is, 
each institution's financial ratios and weighted average CAMELS 
component rating) will be multiplied by the corresponding pricing 
multipliers. The sum of these products will be added to (or subtracted 
from) a uniform amount, 1.954.\24\ The uniform amount is derived from a 
statistical analysis.\25\ However, no rate within Risk Category I will 
be less than the minimum assessment rate applicable to the category or 
higher than the maximum assessment rate applicable to the category. The 
final rule sets the minimum base assessment rate for Risk Category I at 
two basis points and the maximum base assessment rate for Risk Category 
I two basis points higher.
---------------------------------------------------------------------------

    \24\ Appendix A provides the derivation of the pricing 
multipliers and the uniform amount to be added to compute an 
assessment rate. The rate derived will be an annual rate, but will 
be determined every quarter.
    \25\ The uniform amount will be the same for all institutions in 
Risk Category I (other than large institutions that have long-term 
debt issuer ratings, insured branches of foreign banks and, 
beginning in 2010, new institutions). In the NPR, the FDIC had 
proposed that the uniform amount would be adjusted for assessment 
rates set by the FDIC. The final rule is mathematically equivalent. 
Rather than adjusting the uniform amount, the final rule simply 
calculates rates for Risk Category I institutions with respect to 
the base assessment rates, and adjusts all rates by the same amount 
to conform to actual rates.
---------------------------------------------------------------------------

    To compute the values of the uniform amount and pricing multipliers 
shown above, the FDIC chose cutoff values for the predicted 
probabilities of downgrade such that, as of June 30, 2006: (1) 45 
percent of smaller institutions that would have been in Risk Category I 
(other than institutions less than 5 years old) would have been charged 
the minimum assessment rate; and (2) 5 percent of smaller institutions 
that would have been in Risk Category I (other than institutions less 
than 5 years old) would have been charged the maximum assessment 
rate.\26\ These cutoff values will be used in future periods, which 
could lead to different percentages of institutions being charged the 
minimum and maximum rates.
---------------------------------------------------------------------------

    \26\ The cutoff value for the minimum assessment rate is a 
predicted probability of downgrade of approximately 2 percent. The 
cutoff value for the maximum assessment rate is approximately 14 
percent.
---------------------------------------------------------------------------

    Table 2 gives assessment rates for three institutions with varying 
characteristics, assuming the pricing multipliers given above, using 
the base assessment rates for institutions in Risk Category I (which 
range between a minimum of 2 basis points to a maximum of 4 basis 
points).\27\
---------------------------------------------------------------------------

    \27\ These are the base rates for Risk Category I adopted in 
Section VIII. Under the final rule, actual rates for any year could 
be as much as 3 basis points higher or lower than the base rates 
without the necessity of notice-and-comment rulemaking. Beginning in 
2007, actual rates will be 3 basis points higher than the base 
rates.

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[[Page 69290]]

[GRAPHIC] [TIFF OMITTED] TR30NO06.006

    The assessment rate for an institution in the table is calculated 
by multiplying the pricing multipliers (Column B) by the risk measure 
values (Column C, E or G) to produce each measure's contribution to the 
assessment rate. The sum of the products (Column D, F or H) plus the 
uniform amount (the first item in Column D, F and H) yields the total 
assessment rate. For Institution 1 in the table, this sum actually 
equals 1.56, but the table reflects the assumed minimum assessment rate 
of 2 basis points. For Institution 3 in the table, the sum actually 
equals 4.25, but the table reflects the assumed maximum assessment rate 
of 4 basis points.
---------------------------------------------------------------------------

    \28\ The final rule provides that pricing multipliers, the 
uniform amount, and financial ratios will be rounded to three digits 
after the decimal point. Resulting assessment rates will be rounded 
to the nearest one-hundredth (1/100th) of a basis point.
---------------------------------------------------------------------------

    Under the final rule, the FDIC will have the flexibility to update 
the pricing multipliers and the uniform amount annually, without 
further notice-and-comment rulemaking. In particular, the FDIC will be 
able to add data from each new year to its analysis and may, from time 
to time, exclude some earlier years from its analysis. For example, 
some time during 2007 the FDIC may include data in the statistical 
analysis covering the period 1984 to 2005, rather than 1984 to 2004. 
Because the analysis will continue to use many earlier years' data as 
well, pricing multiplier changes from year to year should usually be 
relatively small.
    On the other hand, as a result of the annual review and analysis, 
the FDIC may conclude that additional or alternative financial 
measures, ratios or other risk factors should be used to determine 
risk-based assessments or that a new method of differentiating for risk 
should be used. In any of these events, changes would be made through 
notice-and-comment rulemaking.
    Under the final rule, the financial ratios for any given quarter 
will be calculated from the report of condition filed by each 
institution as of the last day of the quarter.\29\ In a separate rule, 
the FDIC has determined that, for purposes of assigning an institution 
to one of the four risk categories, changes to an institution's 
supervisory rating will be reflected as of the date that the rating 
change is transmitted to the institution.\30\ This final rule adopts 
the same rule with respect to CAMELS component rating changes for 
purposes of determining assessment rates for all institutions in Risk 
Category I.31 32
---------------------------------------------------------------------------

    \29\ Reports of condition include Reports of Condition and 
Income and Thrift Financial Reports.
    \30\ See final rule on Operational Changes to Assessments, 
published elsewhere in this issue of the Federal Register. However, 
if the FDIC disagrees with the CAMELS composite rating assigned by 
an institution's primary federal regulator, and assigns a different 
composite rating, the supervisory change will be effective for 
assessment purposes as of the date that the FDIC assigned the new 
rating. Disagreements of this type have been rare.
    \31\ Pursuant to existing supervisory practice, the FDIC does 
not assign a different component rating from that assigned by an 
institution's primary federal regulator, even if the FDIC disagrees 
with a CAMELS component rating assigned by an institution's primary 
federal regulator, unless: (1) the disagreement over the component 
rating also involves a disagreement over a CAMELS composite rating; 
and (2) the disagreement over the CAMELS composite rating is not a 
disagreement over whether the CAMELS composite rating should be a 1 
or a 2. The FDIC has no plans to alter this practice.
    \32\ A rating change that is transmitted before this final rule 
becomes effective (i.e., before January 1, 2007) will be deemed to 
have been transmitted prior to January 1, 2007.
---------------------------------------------------------------------------

    Using the transmittal date of a ratings change for assessment 
purposes represents a change from the method proposed in the NPR. Under 
the NPR, transmittal dates would only have been used in the absence of 
an examination start date (for example, for a large institution with 
continuous on-site supervision). Otherwise, in almost all instances, 
the examination start date would have been used.
    The final rule adopts a suggestion contained in a banking trade 
group comment and alters the proposed rule for several reasons 
discussed in more detail in the final rule on operational changes to 
the assessment system.\33\
---------------------------------------------------------------------------

    \33\ See final rule on Operational Changes to Assessments, 
published elsewhere in this issue of the Federal Register.
---------------------------------------------------------------------------

    The final rule also differs from the NPR for large institutions 
without long-term debt issuer ratings. The NPR proposed determining 
assessment rates for these institutions from insurance scores using a 
weighted average CAMELS rating and a financial ratio factor, with each 
weighted 50 percent. While the supervisory ratings and financial ratios 
in the final rule are

[[Page 69291]]

nearly the same as those proposed in the NPR, they are combined 
differently.\34\
---------------------------------------------------------------------------

    \34\ The ratio of volatile liabilities to gross assets was 
included in the proposed rule, but is not included in the final 
rule. Other minor changes to the ratios have been made. The changes 
are discussed earlier in the text.
---------------------------------------------------------------------------

    The approach in the final rule is simpler because it uses one 
consistent method for all institutions other than those with at least 
$10 billion in assets that have long-term debt issuer ratings.
Comments
    Supervisory ratings. Several comments supported the use of 
supervisory ratings. One comment asserted that supervisory ratings are 
the only reliable method to differentiate risk among financial 
institutions. One trade group supported using supervisory ratings as 
one of the variables used to determine assessment rates as proposed in 
the NPR and opposed either allowing supervisory ratings to ``be greater 
than 50 percent of the overall risk score'' or automatically giving 
supervisory ratings a 50 percent weight for small institutions, which 
was suggested in the NPR as an alternative method of determining 
assessment rates. Another trade group urged that ``supervisory ratings 
should never be weighted more than half of the total weight of both the 
supervisory ratings and financial ratios.'' Both trade groups urged 
these limitations because of the perceived subjectivity of supervisory 
ratings.
    The FDIC has decided not to impose a cap on the contribution that 
supervisory ratings can make to an institution's assessment rate for 
two reasons. First, the final rule combining supervisory ratings and 
financial ratios does not use a weighting scheme or a risk score. The 
final rule uses pricing multipliers, which can be either positive or 
negative, based on a statistical model that relates financial ratios 
and component ratings to CAMELS downgrades. The pricing multipliers--
including the multiplier for the weighted average CAMELS component 
rating--are based on the actual historical experience of how well 
financial ratios and weighted average CAMELS component ratings predict 
whether an institution will be downgraded to a CAMELS composite rating 
of 3 or worse at its next examination. Second, a cap on the 
contribution that supervisory ratings can make to an institution's 
assessment rate would affect only a small percentage of institutions 
and the effect would be very small.\35\
---------------------------------------------------------------------------

    \35\ As of June 30, 2006: (1) the contribution of CAMELS 
component ratings would have exceeded 50 percent of the assessment 
rate; and (2) assessment rates would have exceeded the minimum rate 
for less than 1.3 percent of small institutions in Risk Category I 
(other than institutions less than 5 years old). Most of these 
institutions, however, would have been charged a rate only slightly 
above the minimum rate. For a Risk Category I institution being 
charged the minimum rate, the contribution of the weighted average 
CAMELS component rating does not increase the institution's 
assessment rate.
---------------------------------------------------------------------------

    Updating pricing multipliers. One trade group agreed that the FDIC 
should have the flexibility to update the pricing multipliers and the 
uniform amount annually, without further notice-and-comment rulemaking 
and that adding additional or alternative financial measures, ratios or 
other risk factors to determine risk-based assessments or adopting a 
new method of differentiating for risk should be done through notice-
and-comment rulemaking. The final rule is consistent with this comment. 
No comments disagreed.
    Additional comments. One trade group urged that the FDIC avoid 
having low-risk multi-family loans lead to higher assessment rates to 
avoid chilling this type of lending. The final rule does not target 
this kind of lending.

G. Combining Supervisory Ratings With Long-Term Debt Issuer Ratings

    For large institutions that have long-term debt issuer ratings, a 
combination of these ratings and supervisory ratings will determine 
assessment rates, using equal weighting for each. The base assessment 
rate will be derived as follows: (1) CAMELS component ratings will be 
weighted to derive a weighted average CAMELS rating; \36\ (2) long-term 
debt issuer ratings will be converted to numerical values between 1 and 
3 using the conversion values in Appendix B; \37\ (3) the weighted 
average CAMELS rating and converted long-term debt issuer rating will 
be multiplied by a pricing multiplier and the products will be summed; 
and (4) a uniform amount, which will always be negative, will be added 
to the result. The resulting base assessment rate will be subject to a 
minimum and a maximum assessment rate. The pricing multiplier for both 
the weighted average CAMELS ratings and converted long-term debt issuer 
rating will be 1.176, and the uniform amount will be -1.882.
---------------------------------------------------------------------------

    \36\ Each component rating will typically, if not always, range 
from ``1'' to ``3'' for institutions in Risk Category I.
    \37\ Where more than one long-term debt issuer rating is 
available, the converted values will be averaged.
---------------------------------------------------------------------------

    The conversion of long-term debt issuer ratings into numerical 
values in the final rule differs slightly from the conversion proposed 
in the NPR. Specifically, the final rule assigns the lowest conversion 
value of ``1'' to the best possible long-term debt issuer rating rather 
than to double A ratings or better (Aa2 or better for Moody's ratings), 
and the highest conversion value of ``3'' to triple B or worse ratings 
(Baa2 or worse for Moody's ratings), rather than to double B plus or 
worse ratings (Ba1 or worse for Moody's ratings). This revised 
conversion methodology takes better advantage of the possible range of 
ratings for large Risk Category I institutions, which are concentrated 
primarily in the triple B rating range and higher.
    Pricing multipliers and the uniform amount for large institutions 
with debt ratings were derived using cutoff values of the combination 
of weighted average CAMELS ratings and converted long-term debt issuer 
ratings (weighted 50 percent each) such that, as of June 30, 2006: (1) 
Approximately 44 percent of large institutions with long-term debt 
issuer ratings that would have been in Risk Category I (other than 
institutions less than 5 years old) would have been charged the minimum 
assessment rate; and (2) approximately 6 percent of the large 
institutions with long-term debt issuer ratings that would have been in 
Risk Category I (other than institutions less than 5 years old) would 
have been charged the maximum assessment rate.\38\ The derivation of 
pricing multipliers and the uniform amount is described in Appendix 1.
---------------------------------------------------------------------------

    \38\ As of June 30, 2006, approximately 46 percent of all large 
institutions that would have been in Risk Category I (other than 
institutions less than 5 years old) would have been charged the 
minimum assessment rate and approximately 5 percent of all large 
institutions that would have been in Risk Category I (other than 
institutions less than 5 years old) would have been charged the 
maximum assessment rate.
---------------------------------------------------------------------------

    Under the final rule, the base assessment rate for an institution 
with CAMELS component ratings of ``222111,'' a Moody's long-term debt 
issuer rating of ``A1,'' and a Standard and Poor's long-term debt 
issuer rating of ``A'' would be 2.06 basis points. This rate is 
calculated as follows:
     The weighted average CAMELS rating is computed by 
multiplying each component rating by its associated weight to produce 
values of 0.50, 0.40, 0.50, 0.10, 0.10, and 0.10, respectively. The sum 
of these values, the weighted average CAMELS rating, is 1.70.
     The Moody's and Standard and Poor's long-term debt issuer 
ratings are converted to numerical values and averaged. The average of 
the two long-term debt issuer ratings, converted to numerical values of 
1.50 and 1.80, respectively, is 1.65.
     The weighted average CAMELS rating and converted long-term 
debt

[[Page 69292]]

issuer ratings are multiplied by the pricing multiplier and summed 
(1.700*1.176 + 1.650*1.176) \39\ to produce a value of 3.940. A uniform 
amount of 1.882 is subtracted from this result to produce a base 
assessment rate of 2.06 basis points.\40\
---------------------------------------------------------------------------

    \39\ Under the final rule, the pricing multipliers will be 
rounded to three digits after the decimal point.
    \40\ Under the final rule, the assessment rates resulting from 
these calculations will be rounded to the nearest one-hundredth (1/
100th) of a basis point.
---------------------------------------------------------------------------

    The final rule also differs from the NPR in that it does not use 
financial ratios to determine assessment rates for any large 
institution that has long-term debt issuer ratings, and does not use 
varying weights for long-term debt issuer ratings for institutions with 
between $10 billion and $30 billion in assets. The final rule 
simplifies the derivation of assessment rates by applying the same 
weight to weighted average CAMELS component ratings and long-term debt 
issuer ratings (when they exist) regardless of an institution's size.
    Several trade groups commented that the proposed risk 
differentiation methodology for large banks was too complex, in part 
because of the varying weights given risk factors for institutions 
between $10 billion and $30 billion in assets. These comments noted 
that an institution's assessment rate could change simply because of an 
increase or decrease in assets even when the institution's risk profile 
remained unchanged. After considering comments, the FDIC concluded that 
this simpler approach for all large institutions with debt issuer 
ratings achieves the objective of differentiating risk in these large 
institutions without the need to introduce further complexity in the 
form of varying weights for large institutions in different size 
categories.
Additional Comments
    One trade group expressed concern that dissimilar methods for 
differentiating risk in large and small institutions could lead to 
possible inequity among institutions due solely to size. This comment 
expressed the view that agency and supervisory ratings tend to favor 
larger institutions, possibly because of diversification 
considerations.
    The FDIC notes that the distribution of current supervisory ratings 
for large and small institutions does not support this view. Agency 
debt issuer ratings do take diversification into account, and the FDIC 
believes that it is appropriate to reflect these considerations in 
assessment rates. The final rule ensures, as required by statute, that 
no institution is precluded from the lowest assessment rate solely 
because of size. This statutory requirement underlies, in part, the 
FDIC's decision to initially include roughly similar proportions of 
large and small institutions in Risk Category I that would be charged 
minimum and maximum assessment rates. As discussed later, the FDIC will 
have the ability to adjust an institution's assessment rate when this 
rate is inconsistent with assessment rates of other large institutions 
with similar risk profiles.
    This comment further noted that financial ratios also could be 
applied to all large institutions. Another trade group argued that the 
financial ratios should not be phased out in importance as institutions 
increase in size and should be used for all large institutions. This 
comment argued that measurements other than the financial ratios that 
are combined with supervisory ratings might be necessary to assess the 
off-balance sheet, securitization, trading, and securities processing 
activities engaged in by large institutions and to serve as a quality 
control check on long-term debt issuer ratings.
    The FDIC believes that consideration of additional risk information 
(including financial performance and condition measures), discussed 
below, will be sufficient to ensure that the range of activities 
engaged in by banking organizations are fully considered and that debt 
issuer ratings are appropriately considered in assessment rates.
    One comment suggested that business diversification should be more 
explicitly taken into account in determining deposit insurance 
premiums. This comment also recommended that the FDIC consider lowering 
or even eliminating premium rates for institutions that adopt the 
advanced approaches under the Basel II framework or whose actual 
capital sufficiently exceeds their Basel II required capital, since 
these institutions will have demonstrated capital levels and risk 
management practices that virtually eliminate risk to the deposit 
insurance fund. The FDIC believes that, in most cases, diversification, 
capital adequacy, and risk management considerations are reflected in 
supervisory or agency ratings or in financial ratios and the 
consideration of additional factors (in Appendix C) ensures that they 
are taken into account in all cases.
    One comment argued that the large institution methodology proposed 
in the NPR was overly subjective because cutoff values to determine the 
percentage of institutions that would be charged the minimum and 
maximum rates would be set quarterly by the FDIC. In fact, under the 
final rule, minimum and maximum assessment rate cutoff values will be 
established using data as of June 30, 2006. No change will be made to 
these cutoff values without further notice and opportunity for comment.

H. Additional Provisions Relating to Large Institutions' Assessment 
Rates in Risk Category I

1. Adjustments to a Large Institution's Assessment Rate
    To ensure consistency, fairness, and consideration of all available 
information, the FDIC will determine, in consultation with the primary 
federal regulator, whether or not to adjust the assessment rates for 
large institutions derived from either a combination of long-term debt 
issuer ratings and supervisory ratings or financial ratios and 
supervisory ratings (when no long-term debt issuer rating is 
available). The FDIC will make these determinations by evaluating 
additional risk information including current financial performance and 
condition information and trends, current market information, 
information pertaining to an institution's ability to withstand 
financial adversity, and information pertaining to severity of losses 
in the event of failure.
    Any adjustments to assessment rates will be limited to 0.50 basis 
points (higher or lower). Upward adjustments will not take effect 
without notification to and consideration of responses from both the 
primary federal regulator and the institution. Downward adjustments 
will not take effect without notification to and consideration of 
responses from the primary federal regulator. No rate will be adjusted 
below the minimum rate for Risk Category I institutions in effect for 
an assessment period or above the maximum rate for Risk Category I 
institutions in effect for the period. Rate adjustments in Risk 
Category I are not meant to (and will not) override supervisory 
evaluations.\41\
---------------------------------------------------------------------------

    \41\ This rule addresses only adjustments to assessment rates. 
It does not address the FDIC's role as back-up supervisor involving 
possible disagreements between the FDIC and the primary federal 
regulator over CAMELS ratings. Notification and resolution of such 
disagreements are covered by existing supervisory processes. See 
also footnote 34.
---------------------------------------------------------------------------

    Examples of additional risk factors that will be considered are 
enumerated in Appendix C. Evaluating this additional risk information 
on an ongoing basis will help the FDIC ensure that relative levels of 
risk posed by large

[[Page 69293]]

Risk Category I institutions are consistently represented by resulting 
assessment rates. Additional information will be evaluated in the 
following way:
     Current financial performance indicators such as capital 
levels, profitability measures, and asset quality measures of each 
large institution will be compared to those of institutions that are 
ranked similarly in terms of their assessment rates.
     Current market indicators such as subordinated debt 
spreads and holding company market indicators of each institution will 
be compared to market indicators of institutions that are ranked 
similarly in terms of their assessment rates.
     Recent information pertaining to an institution's ability 
to withstand financial stress will be evaluated by comparing this 
information to that of institutions ranked similarly in terms of their 
assessment rates. This information includes the internal risk 
characteristics of an institution's credit portfolios and other 
business lines as well as information from internal stress-test models.
     Current loss severity indicators of institutions will be 
evaluated by comparing this information to that of institutions ranked 
similarly in terms of their assessment rates. This information includes 
funding structure considerations such as the extent of priority and 
subordinated claims, as well as the availability of sufficient 
information (e.g., information pertaining to the level of insured 
deposits and qualified financial contracts) to resolve an institution 
in an orderly and cost-efficient manner.
     Evaluations of financial performance, market information, 
information pertaining to an institution's ability to withstand 
financial stress, and loss severity indicators will focus on: first, 
identifying those institutions that exhibit significantly different 
risk profiles, as indicated by risk indicators such as those enumerated 
above, than institutions with similar assessment rates; and second, 
where inconsistencies between assessment rates and these risk 
indicators are identified, determining the assessment rate adjustment 
that would be necessary to bring an institution's assessment rate into 
better alignment with those of other institutions that pose similar 
levels or risk.
    Some comments (including comments from trade groups) indicated that 
the FDIC should consider certain information pertaining to losses that 
might be sustained by the insurance fund in the event of failure. For 
example, some comments indicated the FDIC should explicitly incorporate 
information about the relative level of subordinated claims into the 
determination of assessment rates for large institutions. The FDIC 
believes the final rule does consider loss given failure by explicitly 
incorporating consideration of this information into decisions of 
whether or not to adjust an institution's assessment rate.
    In addition to ongoing consultations with the primary federal 
regulator on whether or not to make assessment rate adjustments, the 
FDIC will formally notify an institution's primary federal regulator 
when it decides to recommend an adjustment in assessment rates and will 
consider the primary federal regulator's response to this notification. 
The FDIC will also notify an institution in advance when the FDIC 
intends to increase its assessment rate because of the FDIC's 
consideration of additional risk information. This notice will include 
the reasons for the adjustment and when the adjustment will take 
effect, and provide the institution an opportunity to respond. An 
institution will, of course, have the right to request a review of any 
assessment rate that is adjusted in this manner.
    After considering an institution's response to the notice, the FDIC 
will determine whether an adjustment to an institution's assessment 
rate is warranted, taking into account any revisions to weighted 
average CAMELS component ratings, long-term debt issuer ratings, and 
financial ratios, as well as any actions taken by the institution to 
respond to the FDIC's concerns described in the notice. The FDIC will 
evaluate the need for the adjustment each subsequent assessment period, 
until it determines that an adjustment is no longer warranted. The 
amount of adjustment will in no event be larger than that contained in 
the initial notice without further notice to, and consideration of 
responses from, both the primary federal regulator and the institution.
    Any downward adjustment in assessment rates will remain in effect 
for subsequent assessment periods until the FDIC determines that an 
adjustment is no longer warranted. However, the FDIC will provide 
advance notice to an institution and its primary federal regulator and 
give them an opportunity to respond before removing a downward 
adjustment. Of course, the FDIC may raise an institution's assessment 
rate without notice if the institution's supervisory or agency ratings 
or financial ratios (for an institution without long-term debt issuer 
ratings) deteriorate.
    The FDIC acknowledges the need to clarify its processes for making 
any adjustments to ensure fair treatment and accountability and plans 
to propose and seek comment on additional guidelines for evaluating 
whether assessment rate adjustments are warranted and the size of the 
adjustments. The FDIC will not adjust assessment rates until the 
guidelines are approved by the FDIC's Board.
2. Timing of Evaluations
    Under the final rule, a large institution's risk category will 
change as of the date the institution is notified of its rating change 
by its primary federal regulator (or state authority). If the 
supervisory rating change results in a large institution moving from 
Risk Category I to Risk Category II, III, or IV, the institution's 
assessment rate for the portion of the quarter it was in Risk Category 
I will be based on its assessment rate for the prior quarter. The 
assessment rate for that portion of the quarter it was in Risk Category 
II, III, or IV will be based on the assessment rate for these risk 
categories.
    When a large institution is moved from Risk Category II, III, or IV 
to Risk Category I during a quarter because of a supervisory rating 
change, the FDIC will determine the associated assessment rate (subject 
to adjustment as described above) for that portion of the quarter that 
the institution was in Risk Category I. The assessment rate for that 
portion of the quarter it was in Risk Category II, III, or IV will be 
based on the assessment rate for these risk categories.
    When an institution remains in Risk Category I during a quarter, 
but a CAMELS component or long-term debt issuer rating change during 
the quarter would affect its assessment rate, the FDIC will determine 
an assessment rate for each portion of the quarter before and after the 
change. A long-term debt issuer rating change will be effective as of 
the date the change is announced by the rating agency. Changes in 
supervisory ratings will be effective as of the date the institution is 
notified by its primary federal regulator (or state authority).
    The timing of changes in assessment rates due to changes in 
supervisory or long-term debt issuer ratings described above differs 
only slightly from the proposal in that it uses, in all cases, the date 
of transmittal of a supervisory rating change by the primary federal 
regulator to the institution. The reasons

[[Page 69294]]

for this change are discussed in a separate rule.\42\
---------------------------------------------------------------------------

    \42\ See final rule on Operational Changes to Assessments, 
published elsewhere in this issue of the Federal Register. If the 
FDIC disagrees with the CAMELS composite rating assigned by an 
institution's primary federal regulator, and assigns a different 
composite rating, the supervisory change will be effective for 
assessment purposes as of the date that the FDIC assigned the new 
rating. Disagreements of this type have been rare. See also footnote 
34.
---------------------------------------------------------------------------

    One trade group expressed concern about the possibility of 
retroactive changes in assessment rates and the prospects for 
accounting restatements. This comment pointed out that CAMELS rating 
changes often occur one and even two quarters after the start date of 
an examination. The use of the transmittal date of examination findings 
rather than start date of an examination to effect changes in 
assessment rates should alleviate this concern about retroactive 
accounting adjustments.
    Another comment expressed a similar concern that institutions would 
not be able to plan for the financial impact of assessment rate changes 
if they were applied retroactively, either because of a change in 
supervisory or long-term debt issuer ratings, or because of a decision 
by the FDIC to adjust an institution's assessment rate. The FDIC 
believes that the final rule sufficiently addresses this concern since: 
(1) the transmittal of revised CAMELS ratings or the announcement of 
revised long-term debt issuer ratings will provide sufficient notice to 
the institution that a change in assessment rates will occur; and (2) 
assessment rate changes caused by a decision by the FDIC to adjust an 
institution's assessment rate will not become effective before the 
institution is duly notified and has had an opportunity to respond to 
the proposed change.
Additional Comments
    Adjustments to an institution's assessment rates. A number of 
comments (including several comments from trade groups) questioned the 
need for the FDIC to incorporate additional information into its 
pricing decisions for large institutions. Some of the main objections 
were that:
     Adjustments would override the evaluations of the primary 
federal regulator;
     The FDIC should not be allowed to unilaterally override 
CAMELS ratings assigned by the primary federal regulator since they are 
viewed to have better information than the FDIC about the risks posed 
by these institutions;
     The need for more timely information is not necessary 
since many large institutions are supervised on a continuous basis;
     Supervisory ratings incorporate all relevant risk 
information and therefore consideration of additional information is 
not necessary;
     The application of the FDIC's discretion over pricing 
decisions has not been sufficiently described; and
     Many of the additional risk indicators identified in 
Appendix C of the proposal are vaguely defined and not necessarily 
aligned with risk.
    Several comments specifically criticized the proposal's use of 
additional stress consideration factors. For example, some comments 
stated that these factors were not well developed and expressed concern 
about the possibly conflicting role such information would play in 
evaluations by the primary federal regulators and the FDIC.
    One trade group supported the FDIC's consideration of additional 
risk information to ensure that assessment rates were consistently 
assigned, that risk information was incorporated into the assessment 
rate in a timely manner, and that assessment rates reflected 
consideration of all relevant risk information.
    For the reasons described earlier, the FDIC has decided to retain 
its ability to adjust assessment rates based upon consideration of 
additional risk factors.
    A number of comments supported providing institutions with prior 
notification relating to any possible increase in assessment rates. 
However, many of these comments were made in the context of the 
proposed risk ``bucket'' or subcategory pricing approach. Given the 
adoption of an incremental pricing approach for institutions in the 
incremental pricing range, the FDIC believes advance notice is only 
needed in two cases based on consideration of additional risk 
information: (1) Where the FDIC intends to make an upward adjustment to 
a large institution's assessment rate above that derived from 
supervisory and long-term debt issuer ratings (or from supervisory 
ratings and financial ratios); and (2) where it intends to remove a 
previously made downward adjustment to an institution's assessment 
rate.

V. Definitions of Large and Small Institutions and Exceptions

    Under a companion final rule making operational changes to the 
FDIC's assessment regulations, a Risk Category I institution will be 
defined as large if it has $10 billion or more in assets and small if 
it has assets of less than $10 billion. This determination will 
initially be made as of December 31, 2006. Thereafter, a small Risk 
Category I institution will be reclassified as a large institution when 
it reports assets of $10 billion or more for four consecutive quarters. 
Similarly, a large Risk Category I institution will be reclassified as 
a small institution when it reports assets under $10 billion for four 
consecutive quarters. Any reclassification will remain effective for 
subsequent quarters, unless an institution reports assets that would 
change its size category (from large to small or vice versa) for four 
consecutive quarters.
    The definition of large and small institutions for Risk Category I 
institutions in the final rule is the same as that contained in the 
proposal. One trade group commented that the $10 billion cutoff point 
for categorizing institutions as either large or small was appropriate 
given the tendency of larger institutions to have more available risk 
information. This same comment indicated that large institutions should 
be evaluated using more information than current financial ratios and 
CAMELS component ratings given the types of complex activities engaged 
in by the largest institutions, such as securitization, derivatives, 
and trading.
    As described in the NPR, the final rule makes an exception to the 
$10 billion size threshold for Risk Category I institutions with 
between $5 billion and $10 billion in assets that request treatment as 
a large institution. The FDIC will grant such requests if it determines 
that it has sufficient information to evaluate the institution's risk 
profile adequately under the risk differentiation methods used for 
large institutions. The absence of long-term debt issuer ratings alone 
will not preclude the FDIC from granting a request. The assessment rate 
for an institution without a long-term debt issuer rating would still 
be derived from supervisory ratings and financial ratios, but would be 
subject to adjustment. Once a request has been granted, an institution 
could again request treatment under a different approach after three 
years, subject to FDIC approval.\43\
---------------------------------------------------------------------------

    \43\ In the event that the FDIC grants an institution's request 
to be treated as a large institution and the institution 
subsequently reports assets of less than $5 billion for four 
consecutive quarters, the institution will be assessed as a small 
institution thereafter.
---------------------------------------------------------------------------

    As discussed in the NPR, small institutions that are affiliated 
with large institutions will be evaluated separately under the final 
rule. Specifically, assessment rates for small institutions will be 
determined using supervisory ratings and financial ratios, whether or

[[Page 69295]]

not these institutions are affiliated with large institutions.
    An institution that disagrees with the FDIC's determination that it 
is small or large may request review of the determination pursuant to 
12 CFR 327.4(c).
Comments
    One comment supported the proposal to allow institutions with 
between $5 billion and $10 billion in assets to request treatment as a 
large institution. This comment noted that the proposal will allow 
flexibility for small institutions that are transitioning to large 
institutions and want to be evaluated using long-term debt issuer 
ratings.
    Some comments supported: (1) Assigning the same assessment rate to 
all affiliated institutions, possibly by strengthening cross 
guarantees; (2) assigning the assessment rate of the largest 
institution in a holding company to all institutions in the holding 
company; or (3) applying the same method of calculating assessment 
rates to all institutions in a holding company regardless of size to 
avoid different assessment rate approaches for institutions within the 
same holding company. The FDIC acknowledges that often each institution 
in a holding company derives managerial, operational, and financial 
support from the parent holding company. However, financial condition 
and operating performance can and does vary among banks within a 
holding company. Consequently, the FDIC believes it is necessary to 
evaluate risk at each insured institution individually. Any 
modifications to current cross guarantee provisions are outside the 
scope of this proposal.

VI. Risk Differentiation Among Insured Foreign Branches

    The final rule for insured foreign branches (insured branches) is 
substantially similar to the proposed rule. The main difference is the 
use of incremental pricing for insured branches whose assigned 
assessment rates fall between the minimum and maximum assessment rates.
    Insured branches that are assigned to Risk Category II, III or IV, 
based on their asset pledge and asset maintenance ratios and 
supervisory ratings, will be treated in the same manner as other 
insured institutions in these risk categories. For insured branches 
that are assigned to Risk Category I, assessment rates will be 
determined from the supervisory ROCA component ratings assigned to the 
insured branch.\44\ Each of these component ratings will be weighted to 
produce a weighted average ROCA rating. The weights applied to 
individual ROCA component ratings will be the same as those contained 
in the NPR: 35 percent, 25 percent, 25 percent, and 15 percent, 
respectively. An assessment rate for insured branches will be 
determined by multiplying the average ROCA rating by a pricing 
multiplier of 2.353 and adding a uniform amount of -1.882 from this 
product.\45\ The derivation of the pricing multipliers and uniform 
amount for insured branches is described in Appendix 2.
---------------------------------------------------------------------------

    \44\ ROCA stands for Risk Management, Operational Controls, 
Compliance, and Asset Quality.
    \45\ The pricing multiplier and uniform amount for insured 
branches are computed in the same manner as those used for large 
Risk Category I institutions with long-term debt issuer ratings. The 
uniform amount is the same as described under that approach, and the 
pricing multiplier for weighted average ROCA ratings is simply two 
times the pricing multiplier used for either weighted average CAMELS 
ratings or converted long-term debt issuer ratings (i.e., the 
weighted average ROCA rating is weighted 100 percent).
---------------------------------------------------------------------------

    As with the large institution risk differentiation approach, the 
FDIC may adjust these assessment rates up or down by 0.50 basis points 
after consideration of the additional risk factors described in 
Appendix C. The same process for making adjustments described to large 
institution rates, including advance notification and consultation with 
the primary federal regulator, will apply to insured foreign branches.
    The FDIC received no comments on the proposed treatment of insured 
foreign branches.

VII. New Institutions in Risk Category I

    Under the final rule, beginning in 2010, new institutions in Risk 
Category I generally will be assessed at the same rate, which will be 
the highest rate charged any other institution in this Risk Category. 
For this purpose, the final rule on operational changes defines a new 
institution as one that is not an established institution.\46\ With 
three exceptions, beginning in 2010, an established institution, as 
defined in the final rule on operational changes, will be one that has 
been chartered as a bank or thrift for at least five years as of the 
last day of any quarter for which it is being assessed. Before 2010, 
all Risk Category I institutions will be assessed using either the 
supervisory ratings and financial ratios method or the supervisory and 
debt ratings method.
---------------------------------------------------------------------------

    \46\ Empirical studies show that new institutions exhibit a 
``life cycle'' pattern and it takes close to a decade after its 
establishment for a new institution to mature. Despite low 
profitability and rapid growth, institutions that are three years or 
newer have, on average, a very low probability of failure--lower 
than established institutions, perhaps owing to large capital 
cushions and close supervisory attention. However, after three 
years, new institutions' failure probability, on average, surpasses 
that of established institutions. New institutions typically grow 
more rapidly than established institutions and tend to engage in 
more high-risk lending activities funded by large deposits. Studies 
based on data from the 1980s showed that asset quality deteriorated 
rapidly for many new institutions as a result, and failure 
probability (conditional upon survival in prior years) reached a 
peak by the ninth year. Many financial ratios of new institutions 
generally begin to resemble those of established institutions by 
about the seventh or eighth year of their operation. See Chiwon Yom, 
``Recently Chartered Banks'' Vulnerability to Real Estate Crisis,'' 
FDIC Banking Review 17 (2005): 1-15 and Robert DeYoung, ``For How 
Long Are Newly Chartered Banks Financially Fragile?'' Federal 
Reserve Bank of Chicago Working Paper Series 2000-09.
---------------------------------------------------------------------------

    Where an established institution merges or consolidates with a new 
institution, the surviving or resulting institution will be new unless:
    1. The assets of the established institution, as reported in its 
report of condition for the quarter ending immediately before the 
merger, exceeded the assets of the new institution, as reported in its 
report of condition for the quarter ending immediately before the 
merger; and
    2. Substantially all of the management of the established 
institution continued as management of the resulting or surviving 
institution.\47\ \48\
---------------------------------------------------------------------------

    \47\ A surviving or resulting Risk Category I institution that 
qualifies as an established institution under this exception will 
have its assessment rate determined using the CAMELS component 
ratings of the established institution involved in the merger or 
consolidation until the surviving or resulting institution receives 
a new supervisory rating.
    \48\ The resulting institution in a consolidation (as well as 
the surviving institution in a merger) involving only established 
institutions will, of course, be deemed to be an established 
institution.
---------------------------------------------------------------------------

    However, where a new institution merges into an established 
institution and the merger agreement was entered into on or before July 
11, 2006, the final rule contains a grandfather clause under which the 
surviving institution will be deemed to be an established institution.
    This exception to the definition of a new institution represents a 
change from the proposed rule. The NPR proposed that, when an 
established institution merged into or consolidated with a new 
institution, the surviving or resulting institution would be new, but 
would be allowed to request that the FDIC determine that it was 
established. The NPR also proposed that, when a new institution merged 
into an established institution or when an established institution 
acquired a

[[Page 69296]]

substantial portion of a new institution's assets or liabilities, and 
the merger or acquisition agreement was entered into after July 11, 
2006 (the date that the FDIC's Board approved the NPR), the FDIC would 
conduct a review to determine whether the surviving or acquiring 
institution remained an established institution. The NPR proposed that 
the FDIC would make determinations based upon factors that included 
factors similar to the two listed above.
    The final rule differs from the NPR in this regard. By specifying 
the particular circumstances that will allow an institution to be 
considered established, the final rule will give institutions greater 
certainty regarding the effects of mergers and consolidations and 
should reduce the necessity of filing requests for review. The final 
rule should not result in denying an exception to any institution that 
would have been considered established under the proposed rule, while 
still achieving the purpose of the proposed rule.
    The second exception was raised in comment letters in response to 
the FDIC's specific request for comment on its proposed definition of a 
new institution.\49\ This exception will apply to a new institution 
that is a subsidiary of a holding company with an established 
institution or that is a subsidiary of an established institution, 
provided certain criteria are met. Under these circumstances, the 
institution will be considered established for assessment purposes.\50\ 
Specifically, an institution that would otherwise be new will be 
considered established if it is a wholly owned subsidiary of:
---------------------------------------------------------------------------

    \49\ 71 FR 41910.
    \50\ A Risk Category I institution that has no CAMELS component 
ratings shall be assessed at one basis point above the minimum rate 
applicable to Risk Category I institutions until it receives CAMELS 
component ratings. If an institution has less than $10 billion in 
assets or has at least $10 billion in assets and no long-term debt 
issuer rating, once it receives CAMELS component ratings, its 
assessment rate will be determined under the supervisory ratings and 
financial ratios method. The assessment rate will be determined by 
annualizing, where appropriate, financial ratios obtained from the 
reports of condition that have been filed, until the earlier of the 
following two events occurs: (1) the institution files four reports 
of condition; or (2) if it has at least $10 billion in assets, it 
receives a long-term debt issuer rating.
---------------------------------------------------------------------------

    1. A company that is a ``bank holding company'' under the Bank 
Holding Company Act of 1956 or a ``savings and loan holding company'' 
under the Home Owners'' Loan Act, and:
    a. At least one ``eligible'' depository institution (as defined in 
12 CFR 303.2(r)) that is owned by the holding company has been 
chartered as a bank or thrift for at least five years as of the date 
that the otherwise new institution was established; and
    b. The holding company has a composite rating of at least ``2'' for 
bank holding companies or an above average or ``A'' rating for thrift 
holding companies and at least 75 percent of its depository institution 
assets are assets of ``eligible'' depository institutions, as defined 
in 12 CFR 303.2(r);\51\ \52\ or
---------------------------------------------------------------------------

    \51\ 12 CFR. 303.2(r) defines an eligible depository institution 
as one that:
    (1) Received an FDIC-assigned composite rating of 1 or 2 under 
the Uniform Financial Institutions Rating System (UFIRS) as a result 
of its most recent federal or state examination;
    (2) Received a satisfactory or better Community Reinvestment Act 
(CRA) rating from its primary federal regulator at its most recent 
examination, if the depository institution is subject to examination 
under part 345 of this chapter;
    (3) Received a compliance rating of 1 or 2 from its primary 
federal regulator at its most recent examination;
    (4) Is well-capitalized as defined in the appropriate capital 
regulation and guidance of the institution's primary federal 
regulator; and
    (5) Is not subject to a cease and desist order, consent order, 
prompt corrective action directive, written agreement, memorandum of 
understanding, or other administrative agreement with its primary 
federal regulator or chartering authority.
    \52\ For bank holding companies, RFI ratings replaced BOPEC 
ratings as of December 2004. For a bank holding company that does 
not yet have an RFI composite rating, BOPEC ratings will be used.
---------------------------------------------------------------------------

    2. An ``eligible'' insured depository institution, as defined in 12 
CFR 303.2(r), that has been chartered as a bank or thrift for at least 
five years as of the date that the otherwise new institution was 
established.
    Several comments (including comments from trade groups) argued 
that, at a minimum, new institutions in a bank holding company should 
be charged at the same rate as other institutions in the holding 
company. Arguments for this position included:
     Assessing new institutions at a higher rate will affect a 
holding company's decision to charter a new institution or to branch; 
in the context of mergers and acquisitions, the deal structure could be 
influenced to retain the seasoned banks post-consolidation solely for 
the purpose of avoiding high assessments, even though a different 
structure would otherwise be more appropriate.
     The articles referenced by the FDIC in support of 
assessing all ``new'' institutions at a higher rate did not take into 
account holding company support or enhancements in supervision.
     Holding companies often have considerable banking 
experience, so that the institution is not really new. Institutions in 
a holding company typically share management.
    The FDIC is persuaded that a new institution within an established 
holding company structure does not necessarily pose a higher risk than 
established institutions, in part because of the banking experience 
within the holding company, and has created an exception from the new 
bank definition for these institutions. However, the assessment rate 
for a new institution subsidiary of an insured depository institution 
or holding company that qualifies for the exception will not 
necessarily be the same rate charged an affiliate. As with any 
established institution in Risk Category I, its assessment rate will be 
determined based upon the risk it poses.
    The third exception was also raised in comment letters in response 
to the FDIC's specific request for comment on its proposed definition 
of a new bank.\53\ For a credit union that converts to a bank or thrift 
charter, some comments (including comments from trade groups) urged the 
FDIC to take into account the period that a credit union has had 
federal deposit insurance in determining whether it is new or 
established. As one trade group pointed out:
---------------------------------------------------------------------------

    \53\ 71 FR 41910.

    These institutions have a seasoned loan portfolio, experienced 
leaders, and an established business history. They have been 
---------------------------------------------------------------------------
carefully screened by their new banking regulator.

    The final rule takes into account the period that a credit union 
has been federally insured as a credit union in determining whether it 
is new or established.\54\
---------------------------------------------------------------------------

    \54\ Again, a Risk Category I institution that has no CAMELS 
component ratings shall be assessed at one basis point above the 
minimum rate applicable to Risk Category I institutions until it 
receives CAMELS component ratings. If an institution has less than 
$10 billion in assets or has at least $10 billion in assets and no 
long-term debt issuer rating, once it receives CAMELS component 
ratings, its assessment rate will be determined under the 
supervisory ratings and financial ratios method. The assessment rate 
will be determined by annualizing, where appropriate, financial 
ratios obtained from the reports of condition that have been filed, 
until the earlier of the following two events occurs: (1) The 
institution files four reports of condition; or (2) if it has at 
least $10 billion in assets, it receives a long-term debt issuer 
rating.
---------------------------------------------------------------------------

    The final rule also differs from the NPR in its definition of a new 
institution. Under the NPR, a new institution would have been defined 
as an institution that had not been chartered as a bank or thrift for 
at least seven years as of the last day of any quarter for which it was 
being assessed (subject to the exceptions above).
    Several comments (including comments from trade groups) suggested 
that charging the maximum Risk Category I assessment rate to new 
institutions for 7 years was too long and

[[Page 69297]]

favored a shorter period, such as 3 or 5 years (assuming new 
institutions were assessed separately). One trade group argued that, 
after three years, an institution's loan portfolio and its operations 
should be seasoned enough so that the FDIC can assess the risks of the 
institution based on financial ratios and CAMELS ratings as it does for 
other institutions. Other arguments for shortening the period that an 
institution is considered new included:
     Higher failure rates for new institutions occurred in 
earlier periods, but not in recent periods, partly because supervision 
has been enhanced.
     The banking industry uses three years as an estimate of 
banking maturity; banking supervisors use the same period when 
reviewing new bank applications.
    The FDIC's decision to assess new institutions separately from 
established institutions is based on the difficulty of assessing new 
institutions' risk with the same risk measures used to assess the risk 
of established institutions. New institutions undergo rapid changes in 
the scale and scope of operations for a period of time after being 
chartered and these changes can make new institutions' financial 
condition and performance measures volatile. Moreover, new 
institutions' loan portfolios are unseasoned, and their management is 
often untested, making it difficult to assess loan quality through 
standard financial performance measures.
    These differences between new and established institutions' 
financial characteristics could lead to mis-measurement of risk when 
new institutions are evaluated by the same financial risk measurement 
model used to evaluate established institutions' risk. More 
specifically, the FDIC finds that new institution risk is, in general, 
underestimated by the manner in which supervisory ratings are combined 
with financial ratios; however, the degree of underestimation of risk 
declines with bank age.
    Under the final rule, all new institutions in Risk Category I will 
be assessed at the same rate and this rate will be the highest rate 
charged any other institution in Risk Category I. The FDIC finds that 
the failure rates of institutions that have been in existence for less 
than 5 years are greater than those of established institutions that 
would have historically paid the highest assessment rate in Risk 
Category I (the riskiest Risk Category I established institutions). 
Historical failure rates among institutions that have been in existence 
between 5 and 7 years, however, are somewhat lower than those of the 
riskiest Risk Category I established institutions. For this reason, for 
purposes of setting assessment rates, the final rule defines new 
institutions as those institutions that have been in existence less 
than 5 years.
    Some comments expressed concern that a combination of factors could 
result in inequitable treatment for new institutions. These factors 
included the need to initially charge more than the base rates, the 
lack of credits for most new institutions, and charging the maximum 
rate to these institutions. The FDIC recognizes that during the 
transition from the existing system to the new system, this combination 
of factors could significantly increase assessment rates for new 
institutions. Consequently, the final rule delays the effective date of 
the provisions subjecting new Risk Category I institutions to the 
maximum Risk Category I rate until January 1, 2010.
    Before 2010, a Risk Category I institution that has no CAMELS 
component ratings shall be assessed at one basis point above the 
minimum rate applicable to Risk Category I institutions until it 
receives CAMELS component ratings. If an institution has less than $10 
billion in assets or has at least $10 billion in assets and no long-
term debt issuer rating, once it receives CAMELS component ratings, its 
assessment rate will be determined under the supervisory ratings and 
financial ratios method. The assessment rate will be determined by 
annualizing, where appropriate, financial ratios obtained from the 
reports of condition that have been filed, until the earlier of the 
following two events occurs: (1) The institution files four reports of 
condition; or (2) if it has at least $10 billion in assets, it receives 
a long-term debt issuer rating.
Additional Comments
    No rule for new institutions. Several comments (including comments 
from trade groups) argued that the FDIC should assess new institutions 
as other institutions are assessed. Arguments for assessing new 
institutions as other institutions are assessed included:
     New institutions are scrutinized by examiners more 
intently and more frequently.
     There is an inherent bias against new institutions in 
CAMELS ratings.
     Capital is usually higher in new institutions.
     Many new institutions are started by experienced bankers 
or are spin-offs of established institutions.
     A separate rule for new institutions will undermine public 
confidence in these institutions.
     A single rate for new institutions does not adequately 
differentiate risk.
     A new institution has no incentive to reduce its risk 
because it will not reduce its assessment rate.
    The final rule changes the new institution period from seven to 
five years, but assesses new institutions separately for the reasons 
described. However, the final rule does delay the effective date of the 
provisions governing new institutions for three years.
    An institution that disagrees with the FDIC's determination that it 
is new or established may request review of the determination pursuant 
to 12 CFR 327.4(c).
    Mergers. One trade group opposed treating established institutions 
that merge into or consolidate with new institutions as new on the 
grounds that such treatment is unreasonable and prejudicial to 
shareholders. Other comments also took issue, at least implicitly, with 
the proposed rule regarding mergers and consolidations. A comment from 
a trade group, however, stated that the FDIC should judge an individual 
institution based on the specific risk profile that it presents to the 
deposit insurance fund:

Generally, a new institution that merges with, acquires or is 
acquired by an existing depository institution will immediately 
exhibit certain risk characteristics, such as market penetration, 
strength of management, amount of capital and experience of the 
officers and employees of the resulting institution, that will allow 
the primary federal supervisor of the resulting institution to make 
a determination whether it most appropriately should be 
characterized in accordance with the risk profile of the new 
institution or the established one.

    The FDIC has simplified the final rule in response to comments. The 
final rule allows the FDIC to review the surviving or resulting 
institution in a merger or consolidation involving both a new and an 
established institution to determine whether the surviving or resulting 
institution is new or established based on the criteria previously 
discussed without, in general, requiring that the institution file a 
request for review.

VIII. Assessment Rates

A. Rate Schedules

    Beginning on January 1, 2007, assessment rates will be as shown in 
the following table:

[[Page 69298]]



------------------------------------------------------------------------
                                             Risk Category
                             -------------------------------------------
                                       I *
                             ----------------------   II     III     IV
                               Minimum    Maximum
------------------------------------------------------------------------
Annual Rates (in basis                5          7     10      28     43
 points)....................
------------------------------------------------------------------------
* Rates for institutions that do not pay the minimum or maximum rate
  will vary between these rates.

    All institutions in any one risk category, other than Risk Category 
I, will be charged the same assessment rate. For all institutions in 
Risk Category I, annual assessment rates will range between 5 and 7 
basis points.
    The final rule also adopts the base schedule of rates proposed in 
the NPR: \55\
---------------------------------------------------------------------------

    \55\ With respect to the base schedule of rates, the NPR 
contains the FDIC's analysis of the statutory factors that must be 
considered whenever the FDIC's Board of Directors sets rates. These 
factors include: (1) estimated fund operating expenses; (2) 
estimated fund case resolution expenses and income; (3) the 
projected effects of assessments on institution capital and 
earnings; (4) the risk factors and other factors taken into account 
pursuant to 12 U.S.C Sec.  1817(b)(1) under the risk-based 
assessment system, including the requirement under 12 U.S.C Sec.  
1817(b)(1)(A) to maintain a risk-based system; and (5) any other 
factors the Board of Directors may determine to be appropriate. 12 
U.S.C. 1817(b)(1)(C).

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

    The assessment rates that take effect January 1, 2007, will be 
uniformly 3 basis points higher than the base rate schedule. Under the 
present assessment system, the Board has adopted a base assessment 
schedule where it can uniformly adjust rates up to a maximum of five 
basis points higher or lower than the base rate schedule without the 
necessity of further notice-and-comment rulemaking, provided that any 
single adjustment cannot move rates more than five basis points.\56\ In 
the NPR, the Board indicated its intention to retain the ability to 
adjust rates up to five basis points without seeking further public 
comment. Upon considering the comments received on this issue 
(discussed below), the Board has decided to retain this feature, but 
limit its ability to adjust rates without seeking further public 
comment to three basis points. Hence, the final rule allows the Board 
to adjust rates uniformly up to a maximum of three basis points higher 
or lower than the base rates without the necessity of further notice-
and-comment rulemaking, provided that any single adjustment from one 
quarter to the next cannot move rates more than three basis points.\57\ 
In the event that the Board uniformly adjusts rates, rates calculated 
for institutions in Risk Category I in reference to the base assessment 
rates will be uniformly adjusted by the same amount. Once set by the 
Board, assessment rates will remain in effect until changed.
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    \56\ In addition, no assessment rate may be negative. See 12 CFR 
327.9.
    \57\ And provided, again, that no assessment rate may be 
negative.
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    Table 3 shows projected reserve ratios assuming different average 
annual growth rates for insured deposits if the actual rate schedule 
(as opposed to base rate schedule) adopted in this rule remains in 
effect through the year in which the reserve ratio first reaches or 
exceeds the designated reserve ratio (DRR) of 1.25 percent.\58\
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    \58\ The FDIC is contemporaneously adopting a DRR of 1.25 
percent. See final rule on the Designated Reserve Ratio, to be 
published elsewhere in this issue of the Federal Register.

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[[Page 69299]]

[GRAPHIC] [TIFF OMITTED] TR30NO06.007

    In summary, the Board bases its decision to adopt this rate 
schedule on the following:
     The Reform Act gives the Board flexibility to achieve the 
DRR within a time frame that it believes appropriate, rather than treat 
the DRR as a ``hard'' annual target. In the Board's view, reaching the 
DRR within the third year of the new assessment system would be a 
reasonable goal, which this rate schedule would facilitate, given the 
FDIC's assumptions regarding insured deposit growth.
     An objective of the Reform Act is to allow the fund to 
increase under favorable conditions so that it can decline under 
adverse conditions without sharp increases in assessments. The outlook 
for economic conditions affecting banks remains generally favorable, 
industry conditions remain strong, and projected reserve ratios under 
the rate schedule assume very low insurance losses.
     During the next few years, the rate schedule is likely to 
prevent the reserve ratio from declining below the 1.15 percent 
statutory lower bound for the DRR and unlikely to raise the reserve 
ratio above the 1.35 percent threshold that could trigger the payment 
of dividends.
     It is reasonable to plan for future annual insured deposit 
growth in the 4-to-6 percent range, down from higher rates observed 
last year and estimated for this year. Reaching the DRR within three 
years under this rate schedule assumes that insured deposit growth will 
be in this range.
     Assessment credits authorized under the Reform Act will 
limit assessment revenue in the near term.
     Implementation of the rate schedule is unlikely to have a 
materially adverse effect on the earnings and capital of insured 
institutions.

B. Factors Supporting the Rate Schedule

    As required by statute, the FDIC's Board of Directors considered 
the following factors in setting rates:
    (i) The estimated operating expenses of the Deposit Insurance Fund.
    (ii) The estimated case resolution expenses and income of the 
Deposit Insurance Fund.
    (iii) The projected effects of the payment of assessments on the 
capital and earnings of insured depository institutions.
    (iv) The risk factors and other factors taken into account pursuant 
to 12 U.S.C section 1817(b)(1) under the risk-based assessment system, 
including the requirement under 12 U.S.C section 1817(b)(1)(A) to 
maintain a risk-based system.
    (v) Other factors that the Board of Directors determined to be 
appropriate.\59\
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    \59\ Section 2104 of the Reform Act (to be codified at 12 U.S.C. 
1817(b)(2)(B)). The risk factors referred to in factor (iv) include:
    (i) the probability that the Deposit Insurance Fund will incur a 
loss with respect to the institution, taking into consideration the 
risks attributable to--
    (I) different categories and concentrations of assets;
    (II) different categories and concentrations of liabilities, 
both insured and uninsured, contingent and noncontingent; and
    (III) any other factors the Corporation determines are relevant 
to assessing such probability;
    (ii) the likely amount of any such loss; and
    (iii) the revenue needs of the Deposit Insurance Fund. 12 U.S.C. 
1817(b)(1)(C).
---------------------------------------------------------------------------

    These factors, including those determined by the Board to be 
appropriate, are discussed in more detail below.
1. Projected Changes to the Fund Balance From Case Resolution Expenses, 
Operating Expenses, Investment Contributions, and Risk-Based 
Assessments
    Table 4 shows projected changes to the fund balance over the next 
two years under the rate schedule adopted in this rule. Future changes 
to the fund balance depend, in turn, on projections and assumptions for 
insurance losses (case resolution expenses), operating expenses, 
assessment revenue, and investment contributions. These components of 
fund balance changes are discussed below.

[[Page 69300]]

[GRAPHIC] [TIFF OMITTED] TR30NO06.008

    a. Insurance losses and operating expenses. The rate schedule 
adopted assumes a continuing trend of very few bank failures and very 
low insurance losses. Reserve ratio projections based on the rate 
schedule assume that annual insurance loss provisions beginning in 2007 
equal one thousandth of one percent of industry aggregate domestic 
deposits. This is less than one quarter of the average annual rate over 
the last 10 years--also a time of few failures and modest insurance 
losses. Loss provisions in 2007 are projected at $71 million, and rise 
slightly in proportion to domestic deposit growth.\60\
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    \60\ The projection for 2007 is very close to the result 
obtained from the statistical method that has been used to develop 
estimates of losses to support past semiannual assessment rate 
schedules. This method estimates likely ranges of insurance losses 
based on projected changes in the estimated liability for 
anticipated failures (contingent loss reserve) through December 31, 
2007.
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    Banks in general appear to be well positioned to withstand 
considerable financial stress from unlikely economic shocks.\61\ 
Nonetheless, the possibility remains that insurance losses may be 
higher than anticipated. Higher losses, in turn, would reduce the 
likelihood of raising the reserve ratio to the DRR within three years 
under the rate schedule adopted in this rule. Future assessment rate 
setting under such conditions would have to weigh several factors, 
including the desirability of avoiding sharp increases in assessments 
at a time of industry stress and the need to maintain the fund within 
the range authorized by the Reform Act.
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    \61\ Two-year stress event simulations were run based on data 
through June 30, 2006, affecting institutions specializing in 
residential mortgages, subprime loans, commercial real estate 
mortgages, commercial and industrial loans, and consumer loans. The 
results of each simulation, which were derived from historical 
stress events, demonstrate that banks are well positioned to 
withstand a significant degree of financial adversity. In no case 
did the stress simulation results raise significant concerns for the 
insurance fund. However, the effects were not evaluated beyond a 
two-year horizon. Also, the historical experiences underlying the 
stress scenarios may be less applicable in the future, so 
conclusions drawn from the stress analyses should be treated with 
some degree of caution.
---------------------------------------------------------------------------

    In Table 3, the reserve ratio projections based on the rate 
schedule adopted also assume that annual operating expenses remain flat 
over the next few years, at approximately $1 billion.\62\
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    \62\ Alternatively, if operating expenses increased by 5 percent 
per year after 2007, the reserve ratio would still be projected to 
reach the 1.25 percent DRR during, or by year-end, 2009, assuming 
that insured deposit growth averages between 4 and 6 percent 
annually.
---------------------------------------------------------------------------

    b. Investment contributions. As shown in Table 4 above, projections 
of fund balances assume that annual investment contributions beginning 
in 2007 amount to slightly over 4.5 percent of the fund balance. 
Investment contributions equal interest income plus (minus) unrealized 
gains (losses) on available-for-sale securities. The investment yield 
used in the projections assumes a continuation of recent investment 
return experience.
    The use of expert forecasts for interest rates next year, as 
detailed in the Blue Chip Financial Forecasts, would yield similar 
projections for 2007 investment contributions. Since May of this year, 
short-term Treasury yields have increased slightly as the Federal 
Reserve raised the target for the federal funds rate to 5.25 percent. 
Long-term Treasury yields declined by over 35 basis points over the 
same period, resulting in a modestly inverted yield curve since late 
July. Low longer-term interest rates reflect historically low and 
stable long-term inflationary expectations, heightened global demand 
for low-risk, long-term assets and, potentially, expectations of slower 
economic growth ahead. The economy is forecast to grow below its long-
run average level for the remainder of 2006, and the futures market 
places little chance of any further federal funds rate increases. Many 
economic forecasters expect long-term interest rates and the yield 
curve to remain steady through 2007.
    c. Risk-based assessment revenue and assessment credits. Table 5 
below shows projected gross assessment revenue, assessment credit use, 
and net assessment revenue for 2007-2008 under the rate schedule 
adopted in this rule.

[[Page 69301]]

[GRAPHIC] [TIFF OMITTED] TR30NO06.009

    Projected gross assessment revenue is derived by assigning each 
insured institution to a Risk Category, and assigning each institution 
in Risk Category I to the minimum rate, maximum rate, or rate in 
between, using the most recently available supervisory and debt issuer 
ratings, and June 30, 2006, financial data. Table 6 shows the 
distribution of institutions and assessment bases among the Risk 
Categories using the most recently available data.\63\ For purposes of 
assessment revenue projections, the distribution of assessable deposits 
among Risk Categories (and within Risk Category I) is assumed to remain 
constant.
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    \63\ The table actually reflects domestic deposits rather than 
assessment bases. However, pursuant to a final rule adopted 
simultaneously with this final rule, beginning in 2007 the 
assessment base will equal domestic deposits with minor adjustments. 
The final rule eliminates the standard amounts deducted from 
domestic deposits for float. See Final Rule on Operational Changes 
to Assessments, to be published elsewhere in this issue of the 
Federal Register.
[GRAPHIC] [TIFF OMITTED] TR30NO06.010

    Assessment revenue projections reflect the use of assessment 
credits authorized under the Reform Act and distributed in accordance 
with the recent final rule adopted for assessment credits.\64\ In 2007, 
most institutions that have credits will apply them to offset either 
their entire assessment or an amount equal to their total credit, 
whichever is less. Therefore, as indicated in Table 5 above, the 
effective rate applicable to the industry next year under this rate 
schedule is projected to be only 0.9 basis points. The effective rate 
is projected to rise to 3.4 basis points in 2008 as some institutions 
exhaust their credits.\65\
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    \64\ 71 FR 61374 (October 18, 2006).
    \65\ In 2008, 2009 and 2010, credit use will be capped at 90 
percent of an institution's assessment, as required by the Reform 
Act and implementing regulations.
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2. Projected Insured Deposits
    Chart 2 shows levels of insured deposits and corresponding four-
quarter growth rates since 1990, including forecasts through 2007. Over 
the 1990-2005 period, annual growth rates in insured deposits ranged 
between -2.8 percent and 7.4 percent. After three consecutive annual 
declines in insured

[[Page 69302]]

deposits--from year-end 1991 to year-end 1994--annual growth in insured 
deposits picked up in the mid-1990s and reached 6.5 percent in 2000. 
Improved stock market conditions and historically low short-term 
interest rates helped reduce growth to 2.0 percent in 2003. However, 
insured deposit growth then climbed to 4.9 percent in 2004 and 7.4 
percent in 2005. The high growth in insured deposits may have resulted 
partly from an increase in short-term interest rates, triggered by a 
tightening in monetary policy by the Federal Reserve. An increase in 
short-term interest rates relative to long-term rates makes short-term 
investment instruments, such as bank deposits, more attractive to 
investors.
[GRAPHIC] [TIFF OMITTED] TR30NO06.011


[[Page 69303]]


    Based on the results of a statistical forecast model, insured 
deposits are predicted to increase by 6.6 percent in 2006 and 5.0 
percent in 2007.\66\ The projected growth rate in 2007 is approximately 
the same as the average annual growth rate for the five years ending in 
2005.\67\
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    \66\ Specifically, the statistical forecast model explains 
growth in insured deposits as dependent on current and last quarter 
growth in domestic deposits (both insured and uninsured) as well as 
on last quarter's growth in insured deposits. The 95 percent 
confidence interval for the 2006 growth rate is +/-2.6 percent. The 
range of uncertainty grows beyond 2006 as the forecast horizon 
lengthens. An alternative forecasting model, which also uses lagged 
growth in the federal funds rate to explain domestic deposits, 
resulted in a slightly lower 2007 insured deposit growth rate (4.7 
percent).
    \67\ The forecast does not explicitly account for the effect of 
the Reform Act provision raising the insurance coverage limit on 
retirement accounts from $100,000 to $250,000. The increase in 
coverage became effective on April 1, 2006. There is considerable 
uncertainty about the provision's effect on aggregate estimated 
insured deposits and the reserve ratio. Regulatory reporting changes 
that will help capture the magnitude of any increase in estimated 
insured deposits took effect in the second quarter of 2006 for Call 
Report filers and are scheduled to take effect in the fourth quarter 
of 2006 for TFR filers. Based on the very limited information 
currently available, staff anticipates that the retirement account 
coverage limit increase may reduce the reserve ratio by between one-
half and one basis point.
---------------------------------------------------------------------------

    Beyond 2007, while not relying on a statistical forecast model, the 
FDIC believes that it is reasonable to plan for average annual insured 
deposit growth in the 4 percent-to-6 percent range. Table 3 shows that, 
with an average annual growth rate between 4 percent and 6 percent 
beginning next year, implementation of a rate schedule 3 basis points 
above the base rate schedule has a reasonable chance of raising the 
reserve ratio to the 1.25 percent DRR in the third year (2009) of the 
new assessment system. That table also indicates that average annual 
growth of 7 percent or higher would make it unlikely to achieve a 
reserve ratio of 1.25 percent within three years. Yet, while insured 
deposits rose by more than 7 percent in 2005, the historical data 
suggest that it is very unlikely that insured deposits will increase at 
an average annual rate as high as 7 percent for three consecutive 
years.\68\
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    \68\ Rolling 12-quarter growth rates in insured deposits were 
calculated beginning with the March 1995 to March 1998 period and 
ending with the June 2003 to June 2006 period. The mean 12-quarter 
growth rate over this period was 3.8 percent (annualized), and the 
largest reported 12-quarter growth rate was 5.7 percent.
---------------------------------------------------------------------------

3. Projected Reserve Ratios
    Assuming insured deposit growth of 5 percent per year beginning in 
2007, projections for year-end 2006 and the first three years under the 
new rate schedule are as follows: \69\
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    \69\ These projections also assume that domestic deposits (the 
assessment base) increase by 5.6 percent in 2007, 5.3 percent in 
2008, and 5.2 percent in 2009.
[GRAPHIC] [TIFF OMITTED] TR30NO06.012

    The table indicates that the reserve ratio is expected to decline 
slightly next year as the use of assessment credits prevents the fund 
balance from rising in pace with insured deposits. However, with two-
thirds of credits drawn down by the end of 2007, assessment revenue 
should accelerate in 2008 and help the fund meet the DRR during 2009.
4. Effect of the Rate Schedule on Capital and Earnings of Insured 
Institutions
    Appendix 3 contains an analysis of the projected effects of the 
payment of assessments under the actual (as opposed to base) rate 
schedule adopted in this rule on the capital and earnings of insured 
depository institutions. In sum, the actual rate schedule is not 
expected to impair the capital or earnings of insured institutions 
materially.
5. Other Factors Supporting the Rate Schedule
    As permitted by law, the FDIC Board considered other factors in 
establishing the rate schedule adopted in this rule:
    a. Flexibility to manage the reserve ratio within a range. While 
the Reform Act requires the FDIC Board to set a DRR annually, there is 
no longer a requirement for the reserve ratio to meet the DRR within a 
particular time frame. The DRR is no longer a statutory ``hard'' 
target. The Board may choose a time period that it believes appropriate 
to bring the reserve ratio in line with the DRR and, subject to the 
range established in the Reform Act, decide how much variation from the 
DRR would be acceptable.\70\
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    \70\ The Reform Act requires the FDIC to establish the DRR 
within a range of 1.15 percent to 1.50 percent of estimated insured 
deposits. The Board must establish a restoration plan when the 
reserve ratio falls below 1.15 percent. The FDIC must also pay 
dividends when the reserve ratio exceeds 1.35 percent, unless the 
Board elects to suspend them.
---------------------------------------------------------------------------

    As of June 30, 2006, the reserve ratio stood at 1.23 percent, and 
is expected to decline to 1.21 percent by year-end. Returning the fund 
to the DRR within a 12-month period, as had been required when the DRR 
was treated as a ``hard'' target, would require charging a minimum rate 
of 10.5 basis points (assuming insured deposit growth of 5 percent next 
year, as well as low losses and flat operating expenses). The FDIC does 
not believe that this steep an increase is advisable or consistent with 
the Reform Act's objective of providing for greater premium stability. 
Therefore,

[[Page 69304]]

the FDIC is using the flexibility provided in the Reform Act to raise 
the reserve ratio more gradually and permit a less steep increase in 
assessment rates.
    b. Increasing the fund when conditions are favorable. An objective 
of the Reform Act is to allow the fund to increase under favorable 
conditions so that it can decline under adverse conditions without 
sharp increases in assessments. The outlook for economic conditions 
affecting banks remains favorable. There have been no failures in over 
two years. Banking industry profits have continued to set records and 
capital remains strong. Loan performance has been solid and charge-offs 
are at, or near, 15-year lows. There is little evidence of material 
adverse conditions currently impairing industry performance.
    Nonetheless, it is difficult to predict how long such favorable 
conditions will last. Areas of concern already visible include the 
compression in net interest margins, weakening housing markets, and the 
uncertainty over energy prices, among other risks. In the FDIC's view, 
it would be prudent not to stretch out too long the time to raise the 
fund to the 1.25 percent DRR and risk encountering a worsening of 
industry conditions before the fund is at the desired level.
    c. Ensuring that the fund stays within the range established by 
Congress. As Table 3 shows, the rate schedule adopted in this rule is 
unlikely to cause the reserve ratio to decline below the 1.15 percent 
lower bound for the range, even in the unlikely event that insured 
deposit growth averages as much as 8 percent over the next few years. 
Furthermore, the FDIC Board can act to adjust rates when the reserve 
ratio achieves the DRR to prevent the fund from growing too large and 
triggering the requirement to pay dividends.
    On the other hand, if the FDIC Board sets rates equal to the base 
rate schedule, Table 8 below shows that it would be highly unlikely for 
the fund to reach the 1.25 percent DRR within five years. Furthermore, 
there would be a significantly greater chance that insured deposit 
growth would push the fund below the 1.15 percent lower bound.
[GRAPHIC] [TIFF OMITTED] TR30NO06.013

Comments
    Overall base rates: Some comments (including a comment from a trade 
group) noted that the base rates for Risk Categories II, III and IV 
were not sufficiently high multiples of the average Risk Category I 
base rate, given the historical costs to the FDIC from failures of 
institutions in these categories. Thus, ``under the Proposal, a 
substantial subsidization will remain of the riskier institutions by 
the safer ones.''
    The NPR itself notes that, at least with respect to Risk Category 
IV, the base rate is substantially lower than the historical analysis 
would suggest is needed to recover costs from failures. The lower rate 
is intended to decrease the chance of assessments being so large that 
they cause these institutions to fail.
    When losses due to fraud are taken into account by prorating among 
all risk categories, the base rates for Categories II and III and for 
the riskier institutions in Risk Category I are slightly lower than the 
historical analysis would suggest and the base rates for the less risky 
institutions in Risk Category I are slightly higher than the historical 
analysis would suggest.\71\ However, the historical analysis can only 
be a guide to rates. The base rates also take into account the FDIC's 
estimate of its long-term revenue needs, including the requirement to 
manage the reserve ratio within a range. In addition, the base rates 
for institutions in Risk Category I are equal to or lower than the base 
rate being replaced (four basis points) and the base rates for Risk 
Categories II, III and IV are, with a single exception, higher than the 
base rates being replaced.\72\ Thus, the new base rates substantially 
reduce the subsidization of non-Risk Category I institutions by Risk 
Category I institutions and also substantially reduce the subsidization 
of higher risk institutions in Risk Category I by lower risk 
institutions in that category. For these reasons, the FDIC is adopting 
the proposed base rate schedule unchanged.
---------------------------------------------------------------------------

    \71\ See Table 1.6 in Appendix 1 to the NPR. 71 FR 41910.
    \72\ The base rate for institutions in the 2B risk 
classification was 14 basis points, compared with a base rate for 
institutions in Risk Category II of 7 basis points.
---------------------------------------------------------------------------

    Minimum rate. Several comments argued in favor of a lower minimum 
base rate for institutions in Risk Category I. Suggestions for the 
minimum base rate included 0, 1 basis point or less, 1 basis point, and 
1.25 basis points. Arguments in favor of a lower minimum base rate 
included:
     The FDIC is not likely to set actual rates below the base 
rates.
     Institutions in Risk Category I do not present much, if 
any, risk.
     The FDIC's data does not support charging the least risky 
institutions 2 basis points.

[[Page 69305]]

     Over certain periods in the past, average rates for Risk 
Category I required to maintain a given reserve ratio have been lower 
than 2 basis points.
     2 basis points would unfairly penalize those institutions 
that could qualify for an assessment of less than 2 basis points under 
the proposed small institution method.
     The base rates do not take into account loss given 
default.
    As discussed earlier, the historical analysis of costs attributable 
to each risk category can only be a guide to rates. The base rates take 
into account the FDIC's estimate of its long-term revenue needs. 
Moreover, the base rates do not in any sense represent a floor below 
which rates cannot be set. If these rates prove to generate too much 
revenue over time, the FDIC's Board can reduce actual rates.
    That some institutions appear to qualify for an assessment of less 
than 2 basis points using the method that combines supervisory ratings 
with financial ratios is largely an artifact of the statistical method 
used to estimate an institution's probability of downgrade. Had the 
FDIC employed the more commonly used logit model rather than an 
ordinary least squares (OLS) model, this artifact would have nearly 
disappeared.\73\
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    \73\ The FDIC chose to use an OLS model for two primary reasons. 
The two models, logit and OLS, produced very similar risk rankings 
and the OLS model allowed institutions to easily calculate their 
potential base assessment rate for given changes in their financial 
ratios and CAMELS component ratings.
---------------------------------------------------------------------------

    The issue of loss given default is discussed in a subsequent 
section (XI(C)).
    Rate adjustments. Several comments (including comments from trade 
groups) opposed allowing the FDIC to adjust rates from the base rate 
schedule without further notice-and-comment rulemaking; one suggested 
that the FDIC be allowed to increase rates above the base rate schedule 
a maximum of 2 basis points without further notice-and-comment 
rulemaking. Arguments in support of requiring further notice-and-
comment rulemaking included:
     The FDIC is no longer required to raise rates when the 
reserve ratio falls below the designated reserve ratio; therefore, the 
FDIC no longer needs to be able to raise rates quickly and drastically.
     If the FDIC must raise rates quickly, it can do so on an 
expedited basis or on an emergency basis, subject to subsequent notice 
and comment.
     Notice-and-comment rulemaking will allow banks time to 
plan for higher rates.
    Arguments in support of allowing the FDIC to increase rates above 
the base rate schedule a maximum of 2 basis points without further 
notice-and-comment rulemaking included:
     Given historical longer-term insured deposit growth rates, 
an increase above the base rates of more than 2 basis points is 
unnecessary.
     An increase above the base rates of more than 2 basis 
points would affect institutions' earnings and their ability to lend in 
ways that cannot be justified given the present size of the DIF.
     Limiting the increase in this way should make assessment 
rates more stable from quarter to quarter.
    Congress has granted the FDIC broad authority to establish a risk-
based assessment system. 12 U.S.C. 1817(b)(1). Maintaining the ability 
to adjust rates within limits without notice and comment rulemaking is 
consistent with our well established practice and will allow the FDIC 
to act expeditiously to adjust rates in the face of constantly changing 
conditions, subject to the statutory factors we are required to 
consider. The NPR gave institutions notice that rates may be 
significantly higher than the base rates temporarily, partly because of 
the ongoing trend of high insured deposit growth and partly because the 
use of one-time credits will limit assessment revenue. For this reason, 
the final rule continues to allow the FDIC to adjust rates within 
limits without further notice-and-comment rulemaking. However, in light 
of the comments, the FDIC has decided to limit its ability to adjust 
rates without further notice-and-comment rulemaking to three basis 
points, as discussed above.
    One comment opposed making uniform increases from the base rate 
schedule in determining actual rates and argued that any increase above 
the base rate schedule that was uniform would not reflect actual risk:

    Any basis point ``surcharge'' should be risk-weighted, so that 
an institution with a lower risk profile would be charged a lower 
``surcharge'' (e.g., 1 basis point or lower), and an institution 
with a higher risk profile would be charged a higher ``surcharge'' 
(e.g., 5 basis points).

    The FDIC believes that this comment contains a valid point. In the 
event that revenue needs increase or decrease greatly and variations in 
risk among institutions suggest non-uniform rate changes, the FDIC will 
consider whether to increase or decrease the range of assessment rates 
between risk categories and within Risk Category I. Any such change 
would only be made pursuant to further rulemaking.
    Fraud costs. Two comments argued that the FDIC had failed to take 
fraud costs into account in the NPR. This is incorrect. Fraud was not 
excluded from the data used to develop the risk differentiation 
methods. The risk differentiation methodology was applied to analyze 
historical costs attributable to the risk categories (and to subsets of 
Risk Category I). The FDIC conducted this analysis in two steps. In the 
first step, the FDIC excluded fraud costs because, until fraud is 
uncovered, an institution engaged in fraud is usually not assigned to 
the correct risk category. After this step was concluded, the FDIC then 
distributed these fraud costs pro rata among all risk categories to 
determine historical costs attributable to the risk categories (and to 
subsets of Risk Category I). The FDIC used these historical costs to 
determine and validate base assessment rates.
    Currently, fraud cannot be predicted. When it does appear, it can 
cause the failure of very large institutions. Keystone Bank, which was 
a relatively large bank, failed as the result of massive fraud. The 
Bank of Credit and Commerce International and Barings Brothers, Inc., 
were both very large banks that failed as a result of fraud. Outside of 
the banking industry, many failures have resulted as the result of 
fraud.
    Actual rates. Many comments dealt with the actual assessment rates 
to be charged, either explicitly or by implication. Many comments 
(including comments from trade groups) suggested or implied that the 
FDIC keep assessment rates low, particularly for institutions in Risk 
Category I, and build the reserve ratio gradually over a period of 
years. The reasons cited for keeping assessment rates low included many 
of the reasons for lowering the base rate schedule for Risk Category I. 
In addition, other arguments included:
     The Reform Act eliminates the requirement that the reserve 
ratio reach any particular level within any particular time period.
     There should be a period of transition to allow banks to 
gradually use up their one-time assessment credits and adjust to paying 
premiums again under the new risk-based assessment system.
     High rates would be a burden on all institutions and would 
particularly and unnecessarily burden institutions without one-time 
credits, harming their competitive position and discouraging the 
formation of new banks.
     Insured deposit growth rates are not likely to be high 
over the long term; in

[[Page 69306]]

the past 15 years, there has been no 5-year period where annual growth 
rates much exceeded 5 percent. Given realistic growth rates of 4 to 5 
percent, charging high rates will quickly increase the reserve ratio to 
unnecessarily high levels.
     The banking industry is extremely healthy because of 
improved risk management policies and procedures in the banking 
industry, and legislation that has equipped the federal bank regulatory 
agencies with additional supervisory and enforcement tools and the 
increased sophistication of the supervisory process.
     The risk of failure for Category I institutions is 
extremely low, and the risk of loss to the FDIC is even lower.
     Bank customers, particularly corporate customers, actually 
bear the burden of assessments.
    The FDIC has decided on actual rates based upon the analysis 
described earlier. In sum, the FDIC is using the flexibility afforded 
under the Reform Act to raise the reserve ratio more gradually than if 
the 1.25 percent DRR remained a ``hard'' annual target. Nonetheless, 
consistent with the legislation's objectives, the FDIC believes that 
rates should currently be set to build up the fund while economic 
conditions are generally favorable and the industry remains strong. 
Absent persistent high insured deposit growth, the FDIC expects that 
future assessment rates should be able to decline toward the base rate 
schedule once the reserve ratio reaches the DRR. Rates could be set 
below the base rate schedule if insured deposit growth slows 
considerably. Finally, the rates adopted in this rule (including rates 
charged new institutions when the provisions regarding new institutions 
become effective) remain well below rates that were charged during 
periods of both economic and industry stress and are not expected to 
have material adverse effects on established or new institutions.

IX. Comments on Additional Issues

Rapid Growth Premium

    Some trade groups proposed imposing an additional premium for 
institutions (or new institutions) that have rapid deposit growth to 
offset dilution of the reserve ratio. Other trade groups proposed such 
a premium for large institutions that have rapid deposit growth.
    The FDIC has decided against imposing a specific growth premium, 
primarily for two reasons. First, Congress has already considered and 
resolved the issue of rapid growth during the past 10 years, when most 
institutions have paid nothing for deposit insurance, by awarding a 
one-time credit to those institutions that helped build the deposit 
insurance funds before 1996. Second, assessments under the final rule 
take future growth into account. An institution's assessment equals the 
product of its assessment rate times its assessment base (which, under 
a final rule adopted simultaneously with this final rule, will be 
identical or nearly identical with its domestic deposits). Thus, any 
growth in domestic deposits will proportionally increase an 
institution's assessment.\74\
---------------------------------------------------------------------------

    \74\ Of course, only growth in insured deposits can dilute the 
reserve ratio.
---------------------------------------------------------------------------

    In addition, in the FDIC's view, it is not practicable to define or 
impose such a premium. One difficult issue with defining an appropriate 
level of growth as a trigger is that a relatively small dollar increase 
in deposits at a small institution could represent a significant 
percentage of growth while a very large increase in deposits at a large 
institution might result in a small increase in the institution's 
percentage of growth. Additionally, rapid growth alone may or may not 
warrant an additional premium. Finally, it would be very difficult--and 
probably impossible--to specify a rule for triggering a specific growth 
premium that could not be circumvented by some institutions.

Risk Differentiation

    Several comments (including comments from trade groups) asserted 
that the FDIC cannot accurately differentiate risk amongst Category I 
institutions (or at least accurately enough for incremental pricing in 
small banks and/or six sub-categories for large banks) and, therefore, 
all institutions in Risk Category I should be charged the same 
assessment rate. These comments argued that subcategories and 
incremental pricing introduce unnecessary complexities. These comments 
claim that this additional complexity creates confusion and undermines 
confidence in the assessment system. One comment added that looking 
beyond three years when analyzing Category I institutions' risk is 
unnecessary, since failing institutions would still be placed in a 
higher risk category well before failure.
    The FDIC has found significant differences in risk among 
institutions in Risk Category I. To illustrate these differences in 
risk, consider differences in failure rates between CAMELS 1-rated and 
CAMELS 2-rated institutions that make up Risk Category I. The 
historical failure rate for CAMELS 2-rated institutions is 2.5 times 
that of CAMELS 1-rated institutions for both three-and five-year 
horizons. Moreover, for a two-year horizon, CAMELS 2-rated institutions 
fail three times more often than do CAMELS 1-rated institutions.
    In the FDIC's view, while the analysis that produced the risk 
differentiation and pricing methodology underlying the final rule is 
complex, its application is not. Moreover, in general, the simpler a 
system is, the less able it is to capture differences in risk. The 
statistical analysis used may be complex, but it produces meaningful 
distinctions in risk.
    One commenter also stated that the proposal makes assessment rates 
most risk sensitive for those banks that are least likely to fail. The 
FDIC recognizes that institutions in Risk Category I are less likely to 
fail than institutions in Risk Categories II, III and IV. These 
differences are reflected in assessment rates. Base assessment rates 
for Category IV institutions are 10 to 20 times higher than rates for 
the riskiest Category I institutions.

Calibration

    One trade group argued that the FDIC's model is not well calibrated 
to economic cycles because ``the percentage of institutions that would 
qualify for the floor rate is greater than the 45 percent for every 
year since 1992, except one.'' The inference apparently intended to be 
drawn from this argument is that, because the industry is healthier now 
than it has been for almost all years since 1992, the percentage of 
institutions that would qualify for the floor rate should be greater 
now than in the past. However, this argument overlooks two important 
points. First, the profitability of the banking industry in this decade 
compared to the 1990s has resulted, in part, from increased risk. From 
the mid-1990s to the present, earnings did not grow as fast as risk-
weighted assets. As shown in Chart 3 below, the median ratio of 
earnings before taxes to risk-weighted assets has declined steadily 
since the early 1990s. The risk differentiation methods adopted in the 
final rule are designed to capture this increased risk. Second, not all 
institutions are prospering as much as they were in the past. In 2005, 
the pre-tax return on assets for institutions with under $100 million 
in assets was 1.29 percent, which was less than in any year between 
1992 and 1999.

[[Page 69307]]

[GRAPHIC] [TIFF OMITTED] TR30NO06.014

Loss Given Failure

    Several comments (including comments from trade groups) stated that 
the capital measure should include subordinated debt and stated or 
implied that subordinated debt should reduce assessment rates. For 
example, one comment recommended that institutions with subordinated 
liabilities and equity in excess of 25 percent of assets be placed in 
the minimum assessment rate subcategory. Several comments (including 
comments from trade groups) argued that the statutes governing the 
risk-based pricing system require that the FDIC take loss given default 
into account when determining assessments and that the proposed system 
fails to do so. This failure, they argue, makes the system actuarially 
unfair.
    The FDIC recognizes that the Federal Deposit Insurance Act requires 
that the FDIC take the likely amount of any loss from failure into 
account in the assessment system. The final rule takes loss given 
failure (and expected loss pricing in general) into account in several 
ways. For a large institution, the FDIC will consider loss given 
failure (through the loss severity indicators enumerated in Appendix C) 
in determining whether to make an adjustment to an institution's 
assessment rate. The final rule also takes loss given failure into 
account in the historical analysis that informed the base rate schedule 
and in each institution's assessment base. However, the FDIC's ability 
to take loss given failure into account in determining the assessment 
rate for some institutions, particularly small institutions, is 
somewhat limited for several reasons.\75\ First, Call Reports and TFRs 
do not provide complete disclosure of several important determinants of 
loss given failure, such as secured liabilities, loan collateral 
requirements and the maturity structure of assets and liabilities. 
Second, as the FDIC explained in the NPR, at present it is not always 
clear which assumptions regarding loss given failure are most 
appropriate.\76\
---------------------------------------------------------------------------

    \75\ Another comment illustrated the loss given failure problem 
by noting that the FDIC would suffer lower losses, all else equal, 
at an institution that relied more on non-deposit borrowing relative 
to one that relied on deposits. However, the FDIC would collect 
lower assessment revenue from an institution that used non-deposit 
borrowing, because only deposits are included in the assessment 
base. In addition, the comment assumes that, between the time the 
FDIC assesses an institution and the time it fails, the 
institution's liability structure will not change. As discussed 
later in the text, this is usually not the case. As an institution 
approaches failure, insured deposit liabilities and secured 
liabilities tend to become a larger percentage of an institution's 
liabilities.
    \76\ Rosalind L. Bennett, ``Evaluating the Adequacy of the 
Deposit Insurance Fund: A Credit-Risk Modeling Approach,'' FDIC 
Working Paper Series 2001-02.
---------------------------------------------------------------------------

    Thus, as the NPR noted, the FDIC is using an alternative to 
expected loss pricing to differentiate risk and set assessment rates. 
The FDIC hopes to refine its treatment of loss given failure (and 
expected loss pricing) in the future. As part of any refinement, the 
FDIC plans to consider whether, for example, to factor the composition 
of liabilities into loss given failure.
    One comment also argued that the proposed risk differentiation and 
pricing system is unfair because institutions are assessed on deposits 
that are not insured, which ``results in institutions with larger-than-
average uninsured deposits (as a fraction of total deposits) 
subsidizing other institutions.'' This argument is inconsistent with 
studies that show that, as an institution approaches failure, uninsured 
deposits tend to be replaced by insured deposits and secured 
liabilities, which increases the FDIC's

[[Page 69308]]

loss given failure.\77\ Restricting the assessment base in this manner 
would reduce the assessment system's ability to take into account loss 
given failure.
---------------------------------------------------------------------------

    \77\ See, e.g., Lawrence G. Goldberg and Sylvia Hudgins, 
``Response of Uninsured Depositors to Impending S&L Failures: 
Evidence of Depositor Discipline,'' Quarterly Review of Economics 
and Finance 36, no. 3 (1996), 311-325; Andrew Davenport and Kathleen 
McDill, ``The Depositor behind the Discipline: A Micro-Level Case 
Study of Hamilton Bank,'' Journal of Financial Services Research 30: 
93-109 (2006).
---------------------------------------------------------------------------

Guidance on Disclosure

    Some comments expressed concern over potential disclosure of an 
institution's assessment rate or amount, and changes to that rate or 
amount, through which third parties could determine an institution's 
confidential CAMELS component ratings. Concern also was expressed that 
disclosure of an institution's assessment rate or amount could create 
funding problems for an institution. Finally, the question was raised 
whether an institution can disclose its assessment rate because an 
element of that rate is examination ratings.
    Assessment rates remain confidential and cannot be disclosed 
directly, except to the extent required by law. However, the proposed 
assessment system, similar to the current system, is based in part on 
publicly available information. Even under the current system, it is 
possible to estimate an institution's composite CAMELS rating using 
publicly available information. Under the proposed system it may be 
possible to estimate component or composite ratings or assessment 
rates. The additional information that could be determined under the 
new assessment system should not materially affect an institution's 
funding costs compared to the current system.

X. Regulatory Analysis and Procedure

A. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113 
Stat. 1338, 1471 (Nov. 12, 1999), requires the federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The FDIC invited comments on how to make this proposal 
easier to understand, but received none.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that each federal 
agency either certify that a proposed rule would not, if adopted in 
final form, have a significant economic impact on a substantial number 
of small entities or prepare an initial regulatory flexibility analysis 
of the proposal and publish the analysis for comment. See 5 U.S.C. 603, 
604, 605. Certain types of rules, such as rules of particular 
applicability relating to rates or corporate or financial structures, 
or practices relating to such rates or structures, are expressly 
excluded from the definition of ``rule'' for purposes of the RFA. 5 
U.S.C. 601. The final rule governs assessments and sets the rates 
imposed on insured depository institutions for deposit insurance. 
Consequently, no regulatory flexibility analysis is required. 
Nonetheless, the FDIC voluntarily undertook a regulatory flexibility 
analysis to aid the public in commenting upon the small business impact 
of its proposed rule. The initial regulatory flexibility analysis was 
published in the Federal Register (71 FR 60674) on October 16, 2006. 
Public comment was invited and the comment period closed on October 26, 
2006. The FDIC received no comments on the Initial Regulatory 
Flexibility Act analysis.
    In its analysis, the FDIC used data as of December 31, 2005, and 
calculated the total assessments that would be collected under the base 
rate schedule in the final rule. The economic impact on each small 
institution for RFA purposes (i.e., institutions with assets of $165 
million or less) was then calculated as the difference in annual 
assessments under the base rate schedule compared to the prior rule as 
a percentage of the institution's annual revenue and annual profits, 
assuming the same total assessments collected by the FDIC from the 
banking industry.
    Based on the December 2005 data, under the final base rate 
schedule, for more than 99 percent of small institutions (as defined 
for RFA purposes), the change in the assessment system would result in 
assessment changes (up or down) totaling one percent or less of annual 
revenue.\78\ Of the total of 5,362 small institutions for RFA purposes, 
just 10 would have experienced an increase or decrease equal to 2 
percent or greater of their total revenue. These figures do not reflect 
a significant economic impact on revenues for a substantial number of 
small insured institutions.
---------------------------------------------------------------------------

    \78\ For about half of the small institutions analyzed, the 
change reflected an assessment decrease and a revenue increase.
---------------------------------------------------------------------------

    The FDIC performed a similar analysis to determine the impact on 
profits for small (again, as defined for RFA purposes) institutions. 
Based on December 2005 data, under the final base rate schedule, 85 
percent of the small institutions (as defined for RFA purposes) with 
reported profits would have experienced an increase or decrease in 
their annual profits of one percent or less.79-81 The data 
indicate that, out of those small institutions, as defined for RFA 
purposes, with reported profits, just 4 percent would have experienced 
an increase or decrease in their total profits of 3 percent or greater. 
Again, these figures do not reflect a significant economic impact on 
profits for a substantial number of small (as defined for RFA purposes) 
insured institutions.
---------------------------------------------------------------------------

    \79-81\ For about half of the small institutions analyzed, the 
change reflected an assessment decrease and a profit increase.
---------------------------------------------------------------------------

    The FDIC analyzed the effect of the proposal on these institutions 
that showed no profit or loss by determining the annual assessment 
change (either an increase or a decrease) that would result. The 
analysis showed that 56 percent (224) of the 399 small insured 
institutions in this category would have experienced a change (increase 
or decrease) in annual assessments of $5,000 or less. Of the remainder, 
3 percent (12) would have experienced assessment changes (increases or 
decreases) of $20,000 or more.
    The final rule makes only minor modifications to the way assessment 
rates are calculated for small institutions (although the final rule 
does set assessment rates higher than the base rates). Again assuming 
that the same assessment revenue would be collected under the old 
system as under the final rule, these modifications have a minimal 
effect on almost all small institutions. The effect of the final rule 
on a small institution's annualized profit and revenue as of June 30, 
2006 is nearly identical to the effect shown under the proposal.
    The final rule does not directly impose any ``reporting'' or 
``recordkeeping'' requirements within the meaning of the Paperwork 
Reduction Act. The compliance requirements for the final rule do not 
exceed existing compliance requirements for the present system of FDIC 
deposit insurance assessments, which, in any event, are governed by 
separate regulations. The FDIC is unaware of any duplicative, 
overlapping or conflicting Federal rules. Accordingly, the FDIC 
certifies that the final rule will not have a significant economic 
impact on a substantial number of small institutions for purposes of 
the RFA.

[[Page 69309]]

C. Paperwork Reduction Act

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

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

    The FDIC has determined that the final rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, enacted as part of the Omnibus 
Consolidated and Emergency Supplemental Appropriations Act of 1999 
(Public Law 105-277, 112 Stat. 2681).

E. Small Business Regulatory Enforcement Fairness Act

    The Office of Management and Budget has determined that the final 
rule is not a ``major rule'' within the meaning of the relevant 
sections of the Small Business Regulatory Enforcement Fairness Act of 
1996 (SBREFA) (5 U.S.C. 801 et seq.). As required by SBREFA, the FDIC 
will file the appropriate reports with Congress and the Government 
Accountability Office so that the final rule may be reviewed.

List of Subjects in 12 CFR Part 327

    Bank deposit insurance, Banks, banking, Savings associations.


0
For the reasons set forth in the preamble, the FDIC hereby amends 
chapter III of title 12 of the Code of Federal Regulations as follows:

PART 327--ASSESSMENTS

0
1. The authority citation for part 327 continues to read as follows:

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


0
2. Revise Sec. Sec.  327.9 and 327.10 of Subpart A to read as follows:


Sec.  327.9  Assessment risk categories and pricing methods.

    (a) Risk Categories. Each insured depository institution shall be 
assigned to one of the following four Risk Categories based upon the 
institution's capital evaluation and supervisory evaluation as defined 
in this section.
    (1) Risk Category I. All institutions in Supervisory Group A that 
are Well Capitalized;
    (2) Risk Category II. All institutions in Supervisory Group A that 
are Adequately Capitalized, and all institutions in Supervisory Group B 
that are either Well Capitalized or Adequately Capitalized;
    (3) Risk Category III. All institutions in Supervisory Groups A and 
B that are Undercapitalized, and all institutions in Supervisory Group 
C that are Well Capitalized or Adequately Capitalized; and
    (4) Risk Category IV. All institutions in Supervisory Group C that 
are Undercapitalized.
    (b) Capital evaluations. An institution will receive one of the 
following three capital evaluations on the basis of data reported in 
the institution's Consolidated Reports of Condition and Income, Report 
of Assets and Liabilities of U.S. Branches and Agencies of Foreign 
Banks, or Thrift Financial Report dated as of March 31 for the 
assessment period beginning the preceding January 1; dated as of June 
30 for the assessment period beginning the preceding April 1; dated as 
of September 30 for the assessment period beginning the preceding July 
1; and dated as of December 31 for the assessment period beginning the 
preceding October 1.
    (1) Well Capitalized. (i) Except as provided in paragraph 
(b)(1)(ii) of this section, a Well Capitalized institution is one that 
satisfies each of the following capital ratio standards: Total risk-
based ratio, 10.0 percent or greater; Tier 1 risk-based ratio, 6.0 
percent or greater; and Tier 1 leverage ratio, 5.0 percent or greater.
    (ii) For purposes of this section, an insured branch of a foreign 
bank will be deemed to be Well Capitalized if the insured branch:
    (A) Maintains the pledge of assets required under Sec.  347.209 of 
this chapter; and
    (B) Maintains the eligible assets prescribed under Sec.  347.210 of 
this chapter at 108 percent or more of the average book value of the 
insured branch's third-party liabilities for the quarter ending on the 
report date specified in paragraph (b) of this section.
    (2) Adequately Capitalized. (i) Except as provided in paragraph 
(b)(2)(ii) of this section, an Adequately Capitalized institution is 
one that does not satisfy the standards of Well Capitalized under this 
paragraph but satisfies each of the following capital ratio standards: 
Total risk-based ratio, 8.0 percent or greater; Tier 1 risk-based 
ratio, 4.0 percent or greater; and Tier 1 leverage ratio, 4.0 percent 
or greater.
    (ii) For purposes of this section, an insured branch of a foreign 
bank will be deemed to be Adequately Capitalized if the insured branch:
    (A) Maintains the pledge of assets required under Sec.  347.209 of 
this chapter; and
    (B) Maintains the eligible assets prescribed under Sec.  347.210 of 
this chapter at 106 percent or more of the average book value of the 
insured branch's third-party liabilities for the quarter ending on the 
report date specified in paragraph (b) of this section; and
    (C) Does not meet the definition of a Well Capitalized insured 
branch of a foreign bank.
    (3) Undercapitalized. An undercapitalized institution is one that 
does not qualify as either Well Capitalized or Adequately Capitalized 
under paragraphs (b)(1) and (b)(2) of this section.
    (c) Supervisory evaluations. Each institution will be assigned to 
one of three Supervisory Groups based on the Corporation's 
consideration of supervisory evaluations provided by the institution's 
primary federal regulator. The supervisory evaluations include the 
results of examination findings by the primary federal regulator, as 
well as other information that the primary federal regulator determines 
to be relevant. In addition, the Corporation will take into 
consideration such other information (such as state examination 
findings, if appropriate) as it determines to be relevant to the 
institution's financial condition and the risk posed to the Deposit 
Insurance Fund. The three Supervisory Groups are:
    (1) Supervisory Group ``A.'' This Supervisory Group consists of 
financially sound institutions with only a few minor weaknesses;
    (2) Supervisory Group ``B.'' This Supervisory Group consists of 
institutions that demonstrate weaknesses which, if not corrected, could 
result in significant deterioration of the institution and increased 
risk of loss to the Deposit Insurance Fund; and
    (3) Supervisory Group ``C.'' This Supervisory Group consists of 
institutions that pose a substantial probability of loss to the Deposit 
Insurance Fund unless effective corrective action is taken.
    (d) Determining Assessment Rates for Risk Category I Institutions. 
Subject to paragraphs (d)(4), (6), (7) and (8) of this section, an 
insured depository institution in Risk Category I, except for a large 
institution that has at least one long-term debt issuer rating, as 
defined in Sec.  327.8(i), shall have its assessment rate determined 
using the supervisory ratings and financial ratios method set forth in 
paragraph (d)(1) of this section. A large insured depository 
institution in Risk Category I that has at least one

[[Page 69310]]

long-term debt issuer rating shall have its assessment rate determined 
using the supervisory and debt ratings method set forth in paragraph 
(d)(2) of this section (subject to paragraphs (d)(4), (6), (7) and (8) 
of this section). The assessment rate for a large institution whose 
assessment rate in the prior quarter was determined using the 
supervisory and debt ratings method, but which no longer has a long-
term debt issuer rating, shall be determined using the supervisory 
ratings and financial ratios method.
    (1) Supervisory ratings and financial ratios method. Under the 
supervisory ratings and financial ratios method for Risk Category I 
institutions, each of five financial ratios and a weighted average of 
CAMELS component ratings will be multiplied by a corresponding pricing 
multiplier. The sum of these products will be added to or subtracted 
from a uniform amount. The resulting sum, subject to adjustment 
pursuant to paragraph (d)(4) of this section, if appropriate, and 
adjusted for the actual assessment rates set by the Board under Sec.  
327.10, will equal an institution's assessment rate; provided, however, 
that no institution's assessment rate will be less than the minimum 
rate in effect for Risk Category I institutions for that quarter nor 
greater than the maximum rate in effect for Risk Category I 
institutions for that quarter. The five financial ratios are: Tier 1 
Leverage Ratio; Loans past due 30-89 days/gross assets; Nonperforming 
assets/gross assets; Net loan charge-offs/gross assets; and Net income 
before taxes/risk-weighted assets. The ratios are defined in Table A.1 
of Appendix A to this subpart. The ratios will be determined for an 
assessment period based upon information contained in an institution's 
report of condition filed as of the last day of the assessment period 
as set out in Sec.  327.9(b). The weighted average of CAMELS component 
ratings is created by multiplying each component by the following 
percentages and adding the products: Capital adequacy--25%, Asset 
quality--20%, Management--25%, Earnings--10%, Liquidity--10%, and 
Sensitivity to market risk--10%. Appendix A to this subpart contains 
the initial values of the pricing multipliers and uniform amount, 
describes their derivation, and explains how they will be periodically 
updated.
    (i) Publication of uniform amount and pricing multipliers. The FDIC 
will publish notice in the Federal Register whenever a change is made 
to the uniform amount or the pricing multipliers for the supervisory 
ratings and financial ratios method.
    (ii) Implementation of CAMELS rating changes--(A) Changes between 
risk categories. If, during a quarter, a CAMELS rating change occurs 
that results in an institution whose Risk Category I assessment rate is 
determined using the supervisory ratings and financial ratios method 
moving from Risk Category I to Risk Category II, III or IV, the 
institution's assessment rate for the portion of the quarter that it 
was in Risk Category I shall be determined using the CAMELS rating in 
effect before the change, subject to adjustment pursuant to paragraph 
(d)(4) of this section, if appropriate, and adjusted for the actual 
assessment rates set by the Board under Sec.  327.10. For the portion 
of the quarter that the institution was not in Risk Category I, the 
institution's assessment rate shall be determined under the assessment 
schedule for the appropriate Risk Category. If, during a quarter, a 
CAMELS rating change occurs that results in an institution (other than 
a large institution that has at least one long-term debt issuer rating) 
moving from Risk Category II, III or IV to Risk Category I, the 
institution's assessment rate for the portion of the quarter that it 
was in Risk Category I shall be determined using the supervisory 
ratings and financial ratios method, subject to adjustment pursuant to 
paragraph (d)(4) of this section, if appropriate, and adjusted for the 
actual assessment rates set by the Board under Sec.  327.10. For the 
portion of the quarter that the institution was not in Risk Category I, 
the institution's assessment rate shall be determined under the 
assessment schedule for the appropriate Risk Category.
    (B) Changes within Risk Category I. If, during a quarter, an 
institution's CAMELS component ratings change in a way that would 
change the institution's assessment rate within Risk Category I, the 
assessment rate for the period before the change shall be determined 
under the supervisory ratings and financial ratios method using the 
CAMELS component ratings in effect before the change. Beginning on the 
date of the CAMELS component ratings change, the assessment rate for 
the remainder of the quarter shall be determined using the CAMELS 
component ratings in effect after the change.
    (2) Supervisory and debt ratings method. A large insured depository 
institution in Risk Category I that has at least one long-term debt 
issuer rating shall have its assessment rate determined using the 
supervisory and debt ratings method (subject to paragraphs (d)(4) 
through (8) of this section). Its CAMELS component ratings will be 
weighted to derive a weighted average CAMELS rating using the same 
weights applied in the supervisory ratings and financial ratios method 
as set forth under paragraph (d)(1) of this section. Long-term debt 
issuer ratings will be converted to numerical values between 1 and 3 as 
provided in Appendix B to this subpart and the converted values will be 
averaged. The weighted average CAMELS rating and the average of 
converted long-term debt issuer ratings each will be multiplied by 
1.176 (which shall be the pricing multiplier), and the products will be 
summed. To this result will be added -1.882 (which shall be a uniform 
amount for all institutions subject to the supervisory and debt ratings 
method). The resulting sum, subject to adjustment pursuant to paragraph 
(d)(4) of this section, if appropriate, and adjusted for the actual 
assessment rates set by the Board pursuant to Sec.  327.10, will equal 
an institution's assessment rate; provided, however, that no 
institution's assessment rate will be less than the minimum rate in 
effect for Risk Category I institutions for that quarter nor greater 
than the maximum rate in effect for Risk Category I institutions for 
that quarter.
    (3) Assessment rate for insured branches of foreign banks--(i) 
Insured branches of foreign banks in Risk Category I. Insured branches 
of foreign banks in Risk Category I shall be assessed using the 
weighted average ROCA component rating, as determined under paragraph 
(d)(3)(ii) of this section.
    (ii) Weighted average ROCA component rating. The weighted average 
ROCA component rating shall equal the sum of the products that result 
from multiplying ROCA component ratings by the following percentages: 
Risk Management--35%, Operational Controls--25%, Compliance--25%, and 
Asset Quality--15%. The weighted average ROCA rating will be multiplied 
by 2.353 (which shall be the pricing multiplier). To this result will 
be added -1.882 (which shall be a uniform amount for all insured 
branches of foreign banks). The resulting sum, subject to adjustment 
pursuant to paragraph (d)(4) of this section and adjusted for 
assessment rates set by the FDIC pursuant to Sec.  327.10(b), will 
equal an institution's assessment rate; provided, however, that no 
institution's assessment rate will be less than the minimum rate in 
effect for Risk Category I institutions for that quarter nor greater 
than the maximum rate in effect for Risk Category I institutions for 
that quarter.
    (4) Adjustments to the initial risk assignment for large banks or 
insured branches of foreign banks--(i) Basis for and size of 
adjustment. Within Risk

[[Page 69311]]

Category I, large institutions and insured branches of foreign banks 
are subject to risk assignment adjustment. In determining whether to 
make an adjustment for a large institution or an insured branch of a 
foreign bank, the FDIC may consider other relevant information in 
addition to the factors used to derive the risk assignment under 
paragraphs (d)(1), (2), or (3) of this section. Relevant information 
includes financial performance and condition information, other market 
information, and stress considerations, as described in Appendix C to 
this subpart. Any such adjustment shall be limited to a change in 
assessment rate of up to 0.5 basis points higher or lower than the rate 
determined using the supervisory ratings and financial ratios method, 
the supervisory and debt ratings method, or the weighted average ROCA 
component rating method, whichever is applicable.
    (ii) Adjustment subject to maximum and minimum rates. No rate will 
be adjusted below the minimum rate or above the maximum rate for Risk 
Category I institutions in effect for the quarter.
    (iii) Prior notice of adjustments--(A) Prior notice of upward 
adjustment. Prior to making any upward adjustment to an institution's 
rate because of considerations of additional risk information, the FDIC 
will formally notify the institution and its primary federal regulator 
and provide an opportunity to respond. This notification will include 
the reasons for the adjustment and when the adjustment will take 
effect.
    (B) Prior notice of downward adjustment. Prior to making any 
downward adjustment to an institution's rate because of considerations 
of additional risk information, the FDIC will formally notify the 
institution's primary federal regulator and provide an opportunity to 
respond.
    (iv) Determination whether to adjust upward; effective period of 
adjustment. After considering an institution's and the primary federal 
regulator's responses to the notice, the FDIC will determine whether 
the adjustment to an institution's assessment rate is warranted, taking 
into account any revisions to weighted average CAMELS component 
ratings, long-term debt issuer ratings, and financial ratios, as well 
as any actions taken by the institution to address the FDIC's concerns 
described in the notice. The FDIC will evaluate the need for the 
adjustment each subsequent assessment period, until it determines that 
an adjustment is no longer warranted. The amount of adjustment will in 
no event be larger than that contained in the initial notice without 
further notice to, and consideration of, responses from the primary 
federal regulator and the institution.
    (v) Determination whether to adjust downward; effective period of 
adjustment. After considering the primary federal regulator's responses 
to the notice, the FDIC will determine whether the adjustment to an 
institution's assessment rate is warranted, taking into account any 
revisions to weighted average CAMELS component ratings, long-term debt 
issuer ratings, and financial ratios, as well as any actions taken by 
the institution to address the FDIC's concerns described in the notice. 
Any downward adjustment in an institution's assessment rate will remain 
in effect for subsequent assessment periods until the FDIC determines 
that an adjustment is no longer warranted. Downward adjustments will be 
made without notification to the institution. However, the FDIC will 
provide advance notice to an institution and its primary federal 
regulator and give them an opportunity to respond before removing a 
downward adjustment.
    (vi) Adjustment without notice. Notwithstanding the notice 
provisions set forth above, the FDIC may change an institution's 
assessment rate without advance notice under this paragraph, if the 
institution's supervisory or agency ratings or the financial ratios set 
forth in Appendix A to this subpart (for an institution without long-
term debt issuer ratings) deteriorate.
    (5) Implementation of Supervisory and Long-Term Debt Issuer Rating 
Changes--(i) Changes between risk categories. If, during a quarter, a 
CAMELS rating change occurs that results in an institution whose Risk 
Category I assessment rate is determined using the supervisory and debt 
ratings method or an insured branch of a foreign bank moving from Risk 
Category I to Risk Category II, III or IV, the institution's assessment 
rate for the portion of the quarter that it was in Risk Category I 
shall be based upon its assessment rate for the prior quarter; no new 
Risk Category I assessment rate will be developed for the quarter in 
which the institution moved to Risk Category II, III or IV. If, during 
a quarter, a CAMELS rating change occurs that results in a large 
institution with a long-term debt issuer rating or an insured branch of 
a foreign bank moving from Risk Category II, III or IV to Risk Category 
I, the institution's assessment rate for the portion of the quarter 
that it was in Risk Category I shall equal the rate determined under 
paragraphs (d)(2) and (4) or (d)(3) and (4) of this section, as 
appropriate.
    (ii) Changes within Risk Category I. If, during a quarter, an 
institution whose Risk Category I assessment rate is determined using 
the supervisory and debt ratings method remains in Risk Category I, but 
a CAMELS component or a long-term debt issuer rating changes that would 
affect the institution's assessment rate, or if, during a quarter, an 
insured branch of a foreign bank remains in Risk Category I, but a ROCA 
component rating changes that would affect the institution's assessment 
rate, separate assessment rates for the portion(s) of the quarter 
before and after the change(s) shall be determined under paragraphs 
(d)(2) and (4) or (d)(3) and (4) of this section, as appropriate.
    (6) Request to be treated as a large institution--(i) Procedure. 
Any institution in Risk Category I with assets of between $5 billion 
and $10 billion may request that the FDIC determine its assessment rate 
as a large institution. The FDIC will grant such a request if it 
determines that it has sufficient information to do so. The absence of 
long-term debt issuer ratings alone will not preclude the FDIC from 
granting a request. The assessment rate for an institution without a 
long-term debt issuer rating will be derived using the supervisory 
ratings and financial ratios method, but will be subject to adjustment. 
Any such request must be made to the FDIC's Division of Insurance and 
Research. Any approved change will become effective within one year 
from the date of the request. If an institution whose request has been 
granted subsequently reports assets of less than $5 billion in its 
report of condition for four consecutive quarters, the FDIC will 
consider such institution to be a small institution subject to the 
supervisory ratings and financial ratios method. An institution that 
disagrees with the FDIC's determination that it is a large or small 
institution may request review of that determination pursuant to Sec.  
327.4(c).
    (ii) Time limit on subsequent request for alternate method. An 
institution whose request to be assessed as a large institution is 
granted by the FDIC shall not be eligible to request that it be 
assessed as a small institution for a period of three years from the 
first quarter in which its approved request to be assessed as a large 
bank became effective. Any request to be assessed as a small 
institution must be made to the FDIC's Division of Insurance and 
Research.
    (7) New and established institutions and exceptions--(i) New Risk 
Category I institutions--(A) Rule as of January 1,

[[Page 69312]]

2010. Effective for assessment periods beginning on or after January 1, 
2010, a new institution shall be assessed the Risk Category I maximum 
rate for the relevant assessment period, except as provided in 
paragraphs (d)(7)(ii)-(viii) of this section.
    (B) Rule prior to January 1, 2010. Prior to January 1, 2010, a new 
institution's risk assignment shall be determined under paragraph 
(d)(1) or (2) of this section, as appropriate. Prior to January 1, 
2010, a Risk Category I institution that has no CAMELS component 
ratings shall be assessed at one basis point above the minimum rate 
applicable to Risk Category I institutions until it receives CAMELS 
component ratings. If an institution has less than $10 billion in 
assets or has at least $10 billion in assets and no long-term debt 
issuer rating, its assessment rate will be determined under the 
supervisory ratings and financial ratios method once it receives CAMELS 
component ratings. The assessment rate will be determined by 
annualizing, where appropriate, financial ratios obtained from the 
reports of condition that have been filed, until the earlier of the 
following two events occurs: the institution files four reports of 
condition, or, if it has at least $10 billion in assets, it receives a 
long-term debt issuer rating.
    (ii) Merger or consolidation involving new and established 
institution(s). Subject to paragraphs (d)(7)(iii)-(viii) of this 
section, when an established institution merges into or consolidates 
with a new institution, the resulting institution is a new institution 
unless:
    (A) The assets of the established institution, as reported in its 
report of condition for the quarter ending immediately before the 
merger, exceeded the assets of the new institution, as reported in its 
report of condition for the quarter ending immediately before the 
merger; and
    (B) Substantially all of the management of the established 
institution continued as management of the resulting or surviving 
institution.
    (iii) Consolidation involving established institutions. When 
established institutions consolidate into a new institution, the 
resulting institution is an established institution.
    (iv) Grandfather exception. If a new institution merges into an 
established institution, and the merger agreement was entered into on 
or before July 11, 2006, the resulting institution shall be deemed to 
be an established institution for purposes of this section.
    (v) Subsidiary exception. Subject to paragraph (d)(7)(vi) of this 
section, a new institution will be considered established if it is a 
wholly owned subsidiary of:
    (A) A company that is a bank holding company under the Bank Holding 
Company Act of 1956 or a savings and loan holding company under the 
Home Owners' Loan Act, and:
    (1) At least one eligible depository institution (as defined in 12 
CFR 303.2(r)) that is owned by the holding company has been chartered 
as a bank or savings association for at least five years as of the date 
that the otherwise new institution was established; and
    (2) The holding company has a composite rating of at least ``2'' 
for bank holding companies or an above average or ``A'' rating for 
savings association holding companies and at least 75 percent of its 
insured depository institution assets are assets of eligible depository 
institutions, as defined in 12 CFR 303.2(r); or
    (B) An eligible depository institution, as defined in 12 CFR 
303.2(r), that has been chartered as a bank or savings association for 
at least five years as of the date that the otherwise new institution 
was established.
    (vi) Effect of credit union conversion. In determining whether an 
insured depository institution is new or established, as those terms 
are defined in Sec.  327.8, the FDIC will include any period of time 
that the institution was a federally insured credit union.
    (vii) CAMELS ratings for the surviving institution in a merger or 
consolidation. When an established institution merges with or 
consolidates into a new institution, if the FDIC determines the 
resulting institution to be an established institution under paragraph 
(d)(ii) of this section, its CAMELS ratings will be based upon the 
established institution's ratings prior to the merger or consolidation 
until new ratings become available.
    (viii) Rate applicable to institutions subject to subsidiary or 
credit union exception. On or after January 1, 2010, if an institution 
is considered established under paragraph (d)(7)(v) or (vi) of this 
section, but does not have CAMELS component ratings, it shall be 
assessed at one basis point above the minimum rate applicable to Risk 
Category I institutions until it receives CAMELS component ratings. If 
an institution has less than $10 billion in assets or has at least $10 
billion in assets and no long-term debt issuer rating, its assessment 
rate will be determined under the supervisory ratings and financial 
ratios method once it receives CAMELS component ratings. The assessment 
rate will be determined by annualizing, where appropriate, financial 
ratios obtained from all reports of condition that have been filed, 
until the earlier of the following two events occurs: the institution 
files four reports of condition, or, if it has at least $10 billion in 
assets, it receives a long-term debt issuer rating.
    (ix) Request for review. An institution that disagrees with the 
FDIC's determination that it is a new institution may request review of 
that determination pursuant to Sec.  327.4(c).
    (8) Assessment rates for bridge banks and conservatorships. 
Institutions that are bridge banks under 12 U.S.C. 1821(n) and 
institutions for which the Corporation has been appointed or serves as 
conservator shall, in all cases, be assessed at the Risk Category I 
minimum rate.


Sec.  327.10  Assessment rate schedules.

    (a) Base Assessment Schedule. The base annual assessment rate for 
an insured depository institution shall be the rate prescribed in the 
following schedule:

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

    (1) Risk Category I Base Rate Schedule. The base annual assessment 
rates for all institutions in Risk Category I shall range from 2 to 4 
basis points.
    (2) Risk Category II, III, and IV Base Rate Schedule. The base 
annual

[[Page 69313]]

assessment rates for Risk Categories II, III, and IV shall be 7, 25, 
and 40 basis points respectively.
    (3) All institutions in any one risk category, other than Risk 
Category I, will be charged the same assessment rate.
    (b) Adjusted Rate Schedule. Beginning on January 1, 2007, the 
adjusted annual assessment rate for an insured depository institution 
shall be the rate prescribed in the following schedule:

                        Table 1 to Paragraph (b)
------------------------------------------------------------------------
                                             Risk Category
                             -------------------------------------------
                                       I*
                             ----------------------   II     III     IV
                               Minimum    Maximum
------------------------------------------------------------------------
Annual Rates (in basis                5          7     10      28     43
 points)....................
------------------------------------------------------------------------
*Rates for institutions that do not pay the minimum or maximum rate vary
  between these rates.

    (1) Risk Category I Adjusted Rate Schedule. The adjusted annual 
assessment rates for all institutions in Risk Category I shall range 
from 5 to 7 basis points.
    (2) Risk Category II, III, and IV Adjusted Rate Schedule. The 
adjusted annual assessment rates for Risk Categories II, III, and IV 
shall be 10, 28, and 43 basis points respectively.
    (3) All institutions in any one risk category, other than Risk 
Category I, will be charged the same assessment rate.
    (c) Rate schedule adjustments and procedures--(1) Adjustments. The 
Board may increase or decrease the base assessment schedule up to a 
maximum increase of 3 basis points or a fraction thereof or a maximum 
decrease of 3 basis points or a fraction thereof (after aggregating 
increases and decreases), as the Board deems necessary. Any such 
adjustment shall apply uniformly to each rate in the base assessment 
schedule. In no case may such adjustments result in an assessment rate 
that is mathematically less than zero or in a rate schedule that, at 
any time, is more than 3 basis points above or below the base 
assessment schedule for the Deposit Insurance Fund, nor may any one 
such adjustment constitute an increase or decrease of more than 3 basis 
points.
    (2) Amount of revenue. In setting assessment rates, the Board shall 
take into consideration the following:
    (i) Estimated operating expenses of the Deposit Insurance Fund;
    (ii) Case resolution expenditures and income of the Deposit 
Insurance Fund;
    (iii) The projected effects of assessments on the capital and 
earnings of the institutions paying assessments to the Deposit 
Insurance Fund;
    (iv) The risk factors and other factors taken into account pursuant 
to 12 U.S.C. 1817(b)(1); and
    (v) Any other factors the Board may deem appropriate.
    (3) Adjustment procedure. Any adjustment adopted by the Board 
pursuant to this paragraph will be adopted by rulemaking, except that 
the Corporation may set assessment rates as necessary to manage the 
reserve ratio, within set parameters not exceeding cumulatively 3 basis 
points, pursuant to paragraph (c)(1) of this section, without further 
rulemaking.
    (4) Announcement. The Board shall announce the assessment schedule 
and the amount and basis for any adjustment thereto not later than 30 
days before the quarterly certified statement invoice date specified in 
Sec.  327.3(b) of this part for the first assessment period for which 
the adjustment shall be effective. Once set, rates will remain in 
effect until changed by the Board.

0
3-4. Add Appendices A through C to subpart A to read as follows:

Appendix A to Subpart A

Method to Derive Pricing Multipliers and Uniform Amount

I. Introduction

    The uniform amount and pricing multipliers are derived from:
     A model (the Statistical Model) that estimates the 
probability that a Risk Category I institution will be downgraded to 
a composite CAMELS rating of 3 or worse within one year;
     Minimum and maximum downgrade probability cutoff 
values, based on data from June 2006, that will determine which 
small institutions will be charged the minimum and maximum 
assessment rates in Risk Category I;
     The minimum base assessment rate for Risk Category I, 
equal to two basis points, and
     The maximum base assessment rate for Risk Category I, 
which is two basis points higher than the minimum rate.

II. The Statistical Model

    The Statistical Model is defined in equation 1a below.
    [GRAPHIC] [TIFF OMITTED] TR30NO06.022
    
where Downgrade(0,1)i,t (the dependent variable--the 
event being explained) is the incidence of downgrade from a 
composite rating of 1 or 2 to a rating of 3 or worse during an on-
site examination for an institution i between 3 and 12 months after 
time t. Time t is the end of a year within the multi-year period 
over which the model was estimated (as explained below). The

[[Page 69314]]

dependent variable takes a value of 1 if a downgrade occurs and 0 if 
it does not.
    The explanatory variables (regressors) in the model are five 
financial ratios and a weighted average of the ``C,'' ``A,'' ``M,'' 
``E'' and ``L'' component ratings. The five financial ratios 
included in the model are:
     Tier 1 leverage ratio
     Loans past due 30-89 days/Gross assets
     Nonperforming assets/Gross assets
     Net loan charge-offs/Gross assets
     Net income before taxes/Risk-weighted assets.
    The financial ratios and the weighted average of the ``C,'' 
``A,'' ``M,'' ``E'' and ``L'' component ratings (collectively, the 
regressors) are defined in Table A.1. The component rating for 
sensitivity to market risk (the ``S'' rating) is not available for 
years prior to 1997. As a result, and as described in Table A.1, the 
Statistical Model is estimated using a weighted average of five 
component ratings excluding the ``S'' component. In addition, 
delinquency and non-accrual data on government guaranteed loans are 
not available before 1993 for Call Report filers and before the 
third quarter of 2005 for TFR filers. As a result, and as also 
described in Table A.1, the Statistical Model is estimated without 
deducting delinquent or past-due government guaranteed loans from 
either the loans past due 30-89 days to gross assets ratio or the 
nonperforming assets to gross assets ratio.

                                      Table A.1.--Definitions of Regressors
----------------------------------------------------------------------------------------------------------------
                      Regressor                                               Description
----------------------------------------------------------------------------------------------------------------
Tier 1 Leverage Ratio (%)                             Tier 1 capital for Prompt Corrective Action (PCA) divided
                                                       by adjusted average assets based on the definition for
                                                       prompt corrective action
----------------------------------------------------------------------------------------------------------------
Loans Past Due 30-89 Days/Gross Assets (%)            Total loans and lease financing receivables past due 30
                                                       through 89 days and still accruing interest divided by
                                                       gross assets (gross assets equal total assets plus
                                                       allowance for loan and lease financing receivable losses
                                                       and allocated transfer risk)
----------------------------------------------------------------------------------------------------------------
Nonperforming Assets/Gross Assets (%)                 Sum of total loans and lease financing receivables past
                                                       due 90 or more days and still accruing interest, total
                                                       nonaccrual loans and lease financing receivables, and
                                                       other real estate owned divided by gross assets
----------------------------------------------------------------------------------------------------------------
Net Loan Charge-Offs/Gross Assets (%)                 Total charged-off loans and lease financing receivables
                                                       debited to the allowance for loan and lease losses less
                                                       total recoveries credited to the allowance to loan and
                                                       lease losses for the most recent twelve months divided by
                                                       gross assets
----------------------------------------------------------------------------------------------------------------
Net Income before Taxes/Risk-Weighted Assets (%)      Income before income taxes and extraordinary items and
                                                       other adjustments for the most recent twelve months
                                                       divided by risk-weighted assets
----------------------------------------------------------------------------------------------------------------
Weighted Average of C, A, M, E and L Component        The weighted sum of the ``C,'' ``A,'' ``M,'' ``E'' and
 Ratings                                               ``L'' CAMELS components, with weights of 28 percent each
                                                       for the ``C'' and ``M'' components, 22 percent for the
                                                       ``A'' component, and 11 percent each for the ``E'' and
                                                       ``L'' components. (For the regression, the ``S''
                                                       component is omitted.)
----------------------------------------------------------------------------------------------------------------

    The financial ratio regressors used to estimate the downgrade 
probabilities are obtained from quarterly reports of condition 
(Reports of Condition and Income and Thrift Financial Reports). The 
weighted average of the ``C,'' ``A,'' ``M,'' ``E'' and ``L'' 
component ratings regressor is based on component ratings obtained 
from the most recent bank examination conducted within 24 months 
before the date of the report of condition.
    The Statistical Model uses ordinary least squares (OLS) 
regression to estimate downgrade probabilities. The model is 
estimated with data from a multi-year period (as explained below) 
for all institutions in Risk Category I, except for institutions 
established within five years before the date of the report of 
condition.
    The OLS regression estimates coefficients, [beta]j, 
for a given regressor j and a constant amount, [beta]0, 
as specified in equation 1a. As shown in equation 1b below, these 
coefficients are multiplied by values of risk measures at time T, 
which is the date of the report of condition corresponding to the 
end of the quarter for which the assessment rate is computed. The 
sum of the products is then added to the constant amount to produce 
an estimated probability, di,T, that an institution will 
be downgraded to 3 or worse within 3 to 12 months from time T.
    The risk measures are financial ratios as defined in Table A.1, 
except that the loans past due 30 to 89 days ratio and the 
nonperforming asset ratio are adjusted to exclude the maximum amount 
recoverable from the U.S. Government, its agencies or government-
sponsored agencies, under guarantee or insurance provisions. Also, 
the weighted sum of six CAMELS component ratings is used, with 
weights of 25 percent each for the ``C'' and ``M'' components, 20 
percent for the ``A'' component, and 10 percent each for the ``E,'' 
``L,'' and ``S'' components.
[GRAPHIC] [TIFF OMITTED] TR30NO06.023


[[Page 69315]]



III. Minimum and maximum downgrade probability cutoff values

    The pricing multipliers are also determined by minimum and 
maximum downgrade probability cutoff values, which will be computed 
as follows:
     The minimum downgrade probability cutoff value will be 
the maximum downgrade probability among the forty-five percent of 
all small insured institutions in Risk Category I (excluding new 
institutions) with the lowest estimated downgrade probabilities, 
computed using values of the risk measures as of June 30, 2006.\1\ 
The minimum downgrade probability cutoff value is approximately 2 
percent.
---------------------------------------------------------------------------

    \1\ As used in this context, a ``new institution'' means an 
institution that has been chartered as a bank or thrift for less 
than five years.
---------------------------------------------------------------------------

     The maximum downgrade probability cutoff value will be 
the minimum downgrade probability among the five percent of all 
small insured institutions in Risk Category I (excluding new 
institutions) with the highest estimated downgrade probabilities, 
computed using values of the risk measures as of June 30, 2006.\2\ 
The maximum downgrade probability cutoff value is approximately 14 
percent.
---------------------------------------------------------------------------

    \2\ As used in this context, a ``new institution'' means an 
institution that has been chartered as a bank or thrift for less 
than five years.
---------------------------------------------------------------------------

IV. Derivation of uniform amount and pricing multipliers

    The uniform amount and pricing multipliers used to compute the 
annual base assessment rate in basis points, PiT, for any 
such institution i at a given time T will be determined from the 
Statistical Model, the minimum and maximum downgrade probability 
cutoff values, and minimum and maximum base assessment rates in Risk 
Category I as follows:
[GRAPHIC] [TIFF OMITTED] TR30NO06.026

where [alpha]0 and [alpha]1 are a constant 
term and a scale factor used to convert diT (the 
estimated downgrade probability for institution i at a given time T 
from the Statistical Model) to an assessment rate, respectively. The 
numbers 2 and 4 in the restriction to equation 2 are the minimum 
base assessment rate and maximum base assessment rate, respectively, 
and they are expressed in basis points.
[GRAPHIC] [TIFF OMITTED] TR30NO06.027

    Solving equation 2 for minimum and maximum base assessment rates 
simultaneously, (2 = [alpha]0 + [alpha]1 * 
0.02 and 4 = [alpha]0 + [alpha]1 * 0.14), 
where 0.02 is the minimum downgrade probability cutoff value and 
0.14 is the maximum downgrade probability cutoff value, results in 
values for the constant amount, [alpha]0, and the scale 
factor, [alpha]1:
[GRAPHIC] [TIFF OMITTED] TR30NO06.028

[GRAPHIC] [TIFF OMITTED] TR30NO06.024

    Substituting equations 1b, 3 and 4 into equation 2 produces an 
annual base assessment rate for institution i at time T, 
PiT, in terms of the uniform amount, the pricing 
multipliers and the ratios and weighted average CAMELS component 
rating referred to in 12 CFR 327.9(d)(2)(i):
[GRAPHIC] [TIFF OMITTED] TR30NO06.025

where 1.67+16.67*[beta]0 equals the uniform amount, 
16.67*[beta]j is a pricing multiplier for the associated 
risk measure j, and T is the date of the report of condition 
corresponding to the end of the quarter for which the assessment 
rate is computed.

V. Updating the Statistical Model, uniform amount, and pricing 
multipliers

    The initial Statistical Model is estimated using year-end 
financial ratios and the weighted average of the ``C,'' ``A,'' 
``M,'' ``E'' and ``L'' component ratings over the 1984 to 2004 
period and downgrade data from the 1985 to 2005 period. The FDIC 
may, from time to time, but no more frequently than annually, re-
estimate the Statistical Model with updated data and publish a new 
formula for determining assessment rates--equation 5--based on 
updated uniform amounts and pricing multipliers. However, the 
minimum and maximum downgrade probability cutoff values will not 
change without additional notice-and-comment rulemaking. The period 
covered by the analysis will be lengthened by one year each year; 
however, from time to time, the FDIC may drop some earlier years 
from its analysis.

Appendix B to Subpart A

          Numerical Conversion of Long-term Debt Issuer Ratings
------------------------------------------------------------------------
                                                               Converted
           Current long-term  debt issuer rating *               value
------------------------------------------------------------------------
Standard & Poor's

[[Page 69316]]

 
  AAA.......................................................        1.00
  AA+.......................................................        1.05
  AA........................................................        1.15
  AA-.......................................................        1.30
  A+........................................................        1.50
  A.........................................................        1.80
  A-........................................................        2.20
  BBB+......................................................        2.70
  BBB or worse..............................................        3.00
Moody's
  Aaa.......................................................        1.00
  Aa1.......................................................        1.05
  Aa2.......................................................        1.15
  Aa3.......................................................        1.30
  A1........................................................        1.50
  A2........................................................        1.80
  A3........................................................        2.20
  Baa1......................................................        2.70
  Baa2 or worse.............................................        3.00
Fitch's
  AAA.......................................................        1.00
  AA+.......................................................        1.05
  AA........................................................        1.15
  AA-.......................................................        1.30
  A+........................................................        1.50
  A.........................................................        1.80
  A-........................................................        2.20
  BBB+......................................................        2.70
  BBB or worse..............................................        3.00
------------------------------------------------------------------------
* A current rating is defined as one that has been assigned or reviewed
  in the last 12 months. Stale ratings are not considered.

Appendix C to Subpart A

[[Page 69317]]



  Additional Risk Considerations for Large Risk Category I Institutions
------------------------------------------------------------------------
                            Examples of Associated Risk Indicators or
   Information source                      Information
------------------------------------------------------------------------
Financial Performance    Capital Measures (Level and Trend)
 and Condition
 Information
                             Regulatory capital ratios
                             Capital composition
                             Dividend payout ratios
                             Internal capital growth rates
                             relative to asset growth
                         Profitability Measures (Level and Trend)
                             Return on assets and return on risk-
                             adjusted assets
                             Net interest margins, funding costs
                             and volumes, earning asset yields and
                             volumes
                             Noninterest revenue sources
                             Operating expenses
                             Loan loss provisions relative to
                             problem loans
                             Historical volatility of various
                             earnings sources
                         Asset Quality Measures (Level and Trend)
                          Loan and securities portfolio
                          composition and volume of higher risk lending
                          activities (e.g., sub-prime lending)
                             Loan performance measures (past
                             due, nonaccrual, classified and criticized,
                             and renegotiated loans) and portfolio
                             characteristics such as internal loan
                             rating and credit score distributions,
                             internal estimates of default, internal
                             estimates of loss given default, and
                             internal estimates of exposures in the
                             event of default
                             Loan loss reserve trends
                             Loan growth and underwriting trends
                             Off-balance sheet credit exposure
                             measures (unfunded loan commitments,
                             securitization activities, counterparty
                             derivatives exposures) and hedging
                             activities
                         Liquidity and Funding Measures (Level and
                          Trend)
                             Composition of deposit and non-
                             deposit funding sources
                             Liquid resources relative to short-
                             term obligations, undisbursed credit lines,
                             and contingent liabilities
                         Interest Rate Risk and Market Risk (Level and
                          Trend)
                             Maturity and repricing information
                             on assets and liabilities, interest rate
                             risk analyses
                             Trading book composition and Value-
                             at-Risk information
------------------------------------------------------------------------
Market Information           Subordinated debt spreads
                             Credit default swap spreads
                             Parent's debt issuer ratings and
                             equity price volatility
                             Market-based measures of default
                             probabilities
                             Rating agency watch lists
                             Market analyst reports
------------------------------------------------------------------------
Stress Considerations    Ability to Withstand Stress Conditions
                             Internal analyses of portfolio
                             composition and risk concentrations, and
                             vulnerabilities to changing economic and
                             financial conditions
                             Stress scenario development and
                             analyses
                             Results of stress tests or scenario
                             analyses that show the degree of
                             vulnerability to adverse economic,
                             industry, market, and liquidity events.
                             Examples include:
                              i. an evaluation of credit portfolio
                               performance under varying stress
                               scenarios
                              ii. an evaluation of non-credit business
                               performance under varying stress
                               scenarios.
                              iii. an analysis of the ability of
                               earnings and capital to absorb losses
                               stemming from unanticipated adverse
                               events
                             Contingency or emergency funding
                             strategies and analyses
                             Capital adequacy assessments
                         Loss Severity Indicators
                          Nature of and breadth of an
                          institution's primary business lines and the
                          degree of variability in valuations for firms
                          with similar business lines or similar
                          portfolios
                             Ability to identify and describe
                             discrete business units within the banking
                             legal entity
                             Funding structure considerations
                             relating to the order of claims in the
                             event of liquidation (including the extent
                             of subordinated claims and priority claims)
                             Extent of insured institutions
                             assets held in foreign units
                             Degree of reliance on affiliates
                             and outsourcing for material mission-
                             critical services, such as management
                             information systems or loan servicing, and
                             products
                             Availability of sufficient
                             information, such as information on insured
                             deposits and qualified financial contracts,
                             to resolve an institution in an orderly and
                             cost-efficient manner
------------------------------------------------------------------------


    By order of the Board of Directors.

    Dated at Washington, D.C., this 2nd day of November, 2006.

    Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.

BILLING CODE 6714-01-P

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[GRAPHIC] [TIFF OMITTED] TR30NO06.019


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[GRAPHIC] [TIFF OMITTED] TR30NO06.020

[FR Doc. 06-9204 Filed 11-29-06; 8:45 am]
BILLING CODE 6714-01-C