[Federal Register Volume 72, Number 34 (Wednesday, February 21, 2007)]
[Notices]
[Pages 7878-7888]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-2906]



[[Page 7878]]

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FEDERAL DEPOSIT INSURANCE CORPORATION


Proposed Assessment Rate Adjustment Guidelines for Large 
Institutions and Insured Foreign Branches in Risk Category I

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice and request for comment.

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SUMMARY: The FDIC is seeking comment on proposed guidelines it will use 
for determining how adjustments of up to 0.50 basis points would be 
made to the quarterly assessment rates of insured institutions defined 
as large Risk Category I institutions, and insured foreign branches in 
Risk Category I, according to the Final Assessments Rule (the final 
rule).\1\ These guidelines are intended to further clarify the 
analytical processes, and the controls applied to these processes, in 
making assessment rate adjustment determinations.
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    \1\ 71 Fr 69282 (Nov. 30, 2006).

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DATES: Comments must be submitted on or before March 23, 2007.

ADDRESSES: You may submit comments, identified by ``Adjustment 
Guidelines'', by any of the following methods:
     Agency Web site: http://www.fdic.gov/regulations/laws/federal. Follow instructions for submitting comments on the Agency Web 
site.
     E-mail: [email protected]. Include ``Adjustment 
Guidelines'' in the subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
     Hand Delivery/Courier: Guard station at the rear of the 
550 17th Street Building (located on F Street) on business days between 
7 a.m. and 5 p.m.
    Instructions: All comments received will be posted without change 
to http://www.fdic.gov/regulations/laws/federal including any personal 
information provided. Comments may be inspected and photocopied in the 
FDIC Public Information Center, 3501 North Fairfax Drive, Room E-1002, 
Arlington, VA 22226, between 9 a.m. and 5 p.m. (EST) on business days. 
Paper copies of public comments may be ordered from the Public 
Information Center by telephone at (877) 275-3342 or (703) 562-2200.

FOR FURTHER INFORMATION CONTACT: Miguel Browne, Associate Director, 
Division of Insurance and Research, (202) 898-6789; Steven Burton, 
Senior Financial Analyst, Division of Insurance and Research, (202) 
898-3539; and Christopher Bellotto, Counsel, Legal Division, (202) 898-
3801.

SUPPLEMENTARY INFORMATION:

I. Background

    Under the final rule, the assessment rates of large Risk Category I 
institutions are first determined using either supervisory and long-
term debt issuer ratings, or supervisory ratings and financial ratios 
for large institutions that have no publicly available long-term debt 
issuer ratings. While the resulting assessment rates are largely 
reflective of the rank ordering of risk, the final rule indicates that 
FDIC may determine, in consultation with the primary federal regulator, 
whether limited adjustments to these initial assessment rates are 
warranted based upon consideration of additional risk information. Any 
adjustments will be limited to no more than 0.50 basis points higher or 
lower than the initial assessment rate and in no case would the 
resulting rate exceed the maximum rate or fall below the minimum rate 
in effect for an assessment period. Further, upward adjustments will 
not take effect without notification being made to the primary federal 
regulator and the institution or without consideration of any 
additional information provided by the primary federal regulator and 
the institution to these notifications; and downward adjustments will 
not take effect without notification being made to the primary federal 
regulator or without consideration of any additional information 
provided by the primary federal regulator to these notifications. 
Examples of additional risk information that would be considered in 
making such adjustments, and a general description of how this 
information would be evaluated, are also discussed in the final rule. 
However, in the final rule, the FDIC acknowledged the need to further 
clarify its processes for making adjustments to assessment rates and 
indicated that no adjustments would be made until additional guidelines 
were approved by the FDIC's Board.
    The FDIC seeks comments on these proposed guidelines for evaluating 
how assessment rate adjustments, if warranted, will be made, and the 
size of any adjustments.\2\ Following a 30-day comment period, the FDIC 
will review comments and revise the guidelines as appropriate. Although 
the FDIC has in this instance chosen to publish the proposed guidelines 
and solicit comment from the industry, notice and comment are not 
required and need not be employed to make future changes to the 
guidelines.
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    \2\ These guidelines are also intended to apply to assessment 
rate adjustment determinations for insured foreign branches, whose 
initial assessment rates are determined from ROCA ratings under the 
final rule.
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II. Broad Objectives

    In the majority of cases, the use of agency and supervisory 
ratings, or the use of supervisory ratings and financial ratios when 
agency ratings are not available, will sufficiently reflect the risk 
profile and rank orderings of risk in large Risk Category I 
institutions. However, in certain cases, the FDIC may need to make 
adjustments to assessment rates determined from these inputs in order 
to preserve consistency in the orderings of risk indicated by these 
assessment rates, ensure fairness among all large institutions, and 
ensure that assessment rates take into account all available 
information that is relevant to the FDIC's risk-based assessment 
decision. The FDIC expects that adjustments will be made relatively 
infrequently and for a limited number of institutions. If this is not 
the case, the FDIC would likely reevaluate the underlying assessment 
rate methodology involving supervisory and long-term debt issuer 
ratings, and financial ratios for institutions without long-term debt 
issuer ratings.
    The following broad objectives helped inform the formulation of a 
process for determining how adjustments to an institution's initial 
assessment rate, if appropriate, will be made, as well as the 
guidelines that will govern the adjustment process:
    1. Assessment rates should reflect a logical and reasonable rank 
ordering of risk among large Risk Category I institutions. That is, 
institutions with similar risk profiles should pay similar assessment 
rates; and institutions with higher (lower) risk profiles should pay 
higher (lower) assessment rates.
    2. Assessment rates for any given quarter should be based on the 
most recent information that pertains to an institution's risk profile.
    3. The rank ordering of risk represented by assessment rates should 
be reconcilable to other risk measures including supervisory ratings, 
financial performance information, market information, quantitative 
measures of an institution's ability to withstand adverse events, and 
loss severity indicators.
    4. Assessment rate determinations should consider all available 
information relating to both the likelihood of failure and loss 
severity in the event of failure. Loss severity information should 
include quantitative and qualitative considerations that relate to 
potential resolution costs.

[[Page 7879]]

III. Overview of the Adjustment Process

    The FDIC adjustment process will include the following steps. In 
the first step, an initial risk ranking will be developed for all large 
institutions based on their initial assessment rates as derived from 
agency and supervisory ratings, or the use of supervisory ratings and 
financial ratios when agency ratings are not available, in accordance 
with the final rule.
    In the second step, the risk rankings associated with these initial 
assessment rates will be compared with risk rankings associated with 
broad-based and focused risk measures as well as the risk rankings 
associated with other market indicators such as spreads on subordinated 
debt. Broad-based risk measures include each of the inputs to the 
initial assessment rate considered separately, other summary risk 
measures such as alternative publicly available debt issuer ratings, 
and loss severity estimates, which are not always sufficiently 
reflected in the inputs to the initial assessment rate or in other debt 
issuer ratings. Focused risk measures include financial performance 
measures, measures of an institution's ability to withstand financial 
adversity, and factors relating to the severity of losses to the 
insurance fund in the event of failure.
    In the third step, the FDIC will perform further analysis and 
review in those cases where the risk rankings from multiple measures 
(such as broad-based risk measures, focused risk measures, and other 
market indicators) appear to be inconsistent with the risk rankings 
associated with the initial assessment rate. This step will include 
consultation with an institution's primary federal regulator and state 
banking supervisor. Although any additional information or feedback 
provided by the primary federal regulator or state banking supervisor 
will be considered in the FDIC's ultimate decision concerning such 
adjustments, participation by the primary federal regulator or state 
banking supervisory in this consultation process should not be 
construed as concurrence with the FDIC's deposit insurance pricing 
decisions.
    In the final step, the FDIC will notify an institution when it 
proposes to make an upward adjustment to the institution's assessment 
rate. As indicated in the final rule, notifications involving an upward 
adjustment in an institution's initial assessment rate will be made in 
advance of implementing such an adjustment so that the institution has 
sufficient opportunity to respond to or address the FDIC's concerns.\3\ 
Adjustments will be implemented after considering institution responses 
to this notification along with any subsequent changes either to the 
inputs to the initial assessment rate or any other risk factor that 
relates to the decision to make an assessment rate adjustment.
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    \3\ The institution will also be given advance notice when the 
FDIC determines to eliminate any downward adjustment to an 
institution's assessment rate.
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    The following paragraphs elaborate further on the adjustment 
process just described. These paragraphs introduce proposed guidelines 
relating to the analytical process, show an example of how these 
guidelines will be applied, and present proposed guidelines intended to 
serve as controls over the assessment rate adjustment process.

IV. Proposed Guidelines for the Analytical Process and Illustrative 
Examples

    To ensure consistency, fairness, and transparency, the FDIC 
proposes that the following guidelines be applied to its analytical 
process for determining how to make adjustments to the assessment rates 
of large Risk Category I institutions when appropriate. An example of 
how the guidelines would be applied in a sample institution follows the 
enumeration of the principal analytical guidelines.

Principal Analytical Guidelines

    Guideline 1: The analytical process will focus on identifying 
inconsistencies between the rank orderings of risk suggested by initial 
assessment rates and the rank orderings of risk indicated by other risk 
measures. This process will consider all available information relating 
to the likelihood of failure and loss severity in the event of failure.
    The purpose of the analytical process is to identify those 
institutions whose risk measures appear to be significantly different 
than other institutions with similarly assigned initial assessment 
rates. This analytical process involves the identification of possible 
inconsistencies between the rank orderings of risk associated with the 
initial assessment rate and the risk rankings associated with other 
risk measures. The intent of this analysis is not to override 
supervisory evaluations or to question the validity of long-term debt 
issuer ratings or financial ratios when applicable. Rather, the 
analysis is meant to ensure that the assessment rates, produced from 
the combination of these information sources, result in a reasonable 
rank ordering of risk that is consistent with risk profiles of large 
Risk Category I institutions.
    The starting point in the analytical process will be the comparison 
of risk rankings associated with the initial assessment rate to risk 
rankings associated with a number of broad-based risk measures. This 
analysis will be supplemented with additional comparisons of risk 
rankings associated with focused risk measures and other market 
indicators to the risk rankings associated with an institution's 
initial assessment rate.\4\
    The FDIC will consider adjusting an institution's initial 
assessment rate when there is sufficient corroborating information from 
a combination of broad-based risk measures, focused risk measures, and 
other market indicators to support an adjustment. The likelihood of an 
adjustment will increase when: (1) The rank orderings of risk suggested 
by multiple broad-based measures are directionally consistent and 
materially different from the rank ordering implied by the initial 
assessment rate; (2) there is sufficient corroborating information from 
focused risk measures and other market indicators to support 
differences in risk levels suggested by broad-based risk measures; (3) 
information pertaining to loss severity considerations raise prospects 
that an institution's resolution costs, when scaled by assets, would be 
materially higher or lower than those of other large institutions; or 
(4) additional qualitative information from the supervisory process or 
other feedback provided by the primary federal regulator or state 
banking supervisor is consistent with differences in risk suggested by 
the combination of broad-based risk measures, focused risk measures, 
and other market indicators.
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    \4\ Comparisons of risk measures will generally treat as 
indicative of low risk that portion of the risk rankings falling 
within the lowest X percentage of assessment rate rankings, with X 
being the proportion of large Risk Category I institutions assigned 
the minimum assessment rate. For example, as of June 30, 2006, 46 
percent of large Risk Category I institutions would have been 
assigned a minimum assessment rate. Therefore, as of June 30, 2006, 
risk rankings from the 1st to the 46th percentile for any given risk 
measure would generally have been considered suggestive of low risk.
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    The FDIC believes that its insurance pricing determinations should 
take into account risk information that relates both to the likelihood 
of failure and to the level of insurance fund losses (loss severity) 
that might reasonably be expected if an institution were to fail. 
Developing risk measures related to loss severity is especially 
important since the inputs to the initial assessment rate (supervisory 
and agency ratings) relate primarily to the likelihood of failure.

[[Page 7880]]

    The loss severity factors the FDIC will consider include both 
quantitative and qualitative information. Quantitative information will 
be used to develop estimates of deposit insurance claims and the extent 
of coverage of those claims by an institution's assets. These 
quantitative estimates can in turn be converted into a relative risk 
ranking and compared with the risk rankings produced by the initial 
assessment rate. Factors that will be used to produce loss severity 
estimates include: Estimates for the amount of insured and non-insured 
deposit funding at the time of failure; the extent of an institution's 
obligations that would be subordinated to depositor claims in the event 
of failure; the extent of an institution's obligations that would be 
secured or would otherwise take priority over depositor claims in the 
event of failure; and the estimated value of assets in the event of 
failure.
    In addition, the FDIC will consider other qualitative factors that 
could magnify or mitigate the resolution costs of a failed institution. 
These qualitative factors will be evaluated by determining when a given 
risk factor suggests materially higher or lower loss severity risks 
relative to the loss severity risks posed by other institutions. These 
qualitative factors include, but are not limited to, the following:
     The ease with which the FDIC could make quick deposit 
insurance determinations and depositor payments in the event of failure 
as discussed further below;
     The ability of the FDIC to isolate and control the main 
assets and critical business functions of a failed institution without 
incurring high costs;
     The level of an institution's foreign assets relative to 
its foreign deposits and prospects of foreign governments using these 
assets to satisfy local depositors and creditors in the event of 
failure; and
     The availability of sufficient information on qualified 
financial contracts to allow the FDIC to identify the counterparties 
to, and other details about, such contracts in the event of failure.
    With respect to the first factor noted above, the FDIC has issued 
an Advanced Notice of Proposed Rulemaking (ANPR) on Large Bank Deposit 
Insurance Determination Modernization.\5\ This ANPR seeks comment on 
whether the FDIC should require certain large institutions to implement 
various enhancements to their deposit account systems. The intent of 
any required enhancements would be to preserve the FDIC's ability to 
make timely deposit insurance determinations and provide insured 
depositors speedy access to their funds in the event of a large 
institution failure.
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    \5\ 71 FR 74857 (December 13, 2006).
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    Notwithstanding any requirements that may result from this separate 
notice and comment process begun with the ANPR, the FDIC believes that 
the existing capabilities of an institution's deposit account systems 
should be considered as part of the assessment rate adjustment analysis 
process since the presence or absence of these capabilities would 
mitigate or magnify the resolution costs likely to be sustained by the 
FDIC in the event of failure. These capabilities include the ability of 
an institution's systems to place and remove holds on deposit accounts 
en masse as well as the ability of an institution to readily identify 
the owner(s) of each deposit account (for example, by using a unique 
identifier) and identify the ownership category of each deposit 
account. As with the other risk factors considered in the analytical 
process for making assessment rate adjustments, the FDIC will evaluate 
this factor by gauging the capabilities of an institution's deposit 
account systems relative to the capabilities of other institutions' 
systems. As part of these proposed guidelines, the FDIC is seeking 
comment on what information it should use to evaluate the existing 
capabilities of institution's deposit account systems.
    Guideline 2: Broad-based indicators and other market information 
that represent an overall view of an institution's risk will be 
weighted more heavily in adjustment determinations than focused 
indicators as will loss severity information that has bearing on the 
ability of the FDIC to resolve institutions in a cost effective and 
timely manner.
    While it is prudent to evaluate all available risk information when 
determining whether an adjustment in an institution's assessment rate 
is necessary, the FDIC recognizes that some risk indicators are more 
comprehensive than others and should therefore be weighted more heavily 
in assessment rate adjustment decisions. Examples of such comprehensive 
or broad-based risk measures include, but are not limited to, each of 
the inputs to the initial assessment rate (that is, weighted average 
CAMELS ratings, long-term debt issuer ratings, and the combination of 
weighted average CAMELS ratings and the five financial ratios used to 
determine assessment rates for institutions when long-term debt issuer 
ratings are not available), and other ratings intended to provide a 
comprehensive view of an institution's risk profile (see the Appendix 
for additional descriptions of broad-based risk measures). Likewise, 
the FDIC views some market indicators, such as spreads on subordinated 
debt, as more important than other market indicators since these 
spreads represent an evaluation of risk from institution investors 
whose risks are similar to those faced by the FDIC.\6\ The FDIC also 
believes that certain qualitative loss severity factors, such as those 
discussed in Guideline 1, should be accorded greater weight in 
assessment rate determinations relative to other risk measures since 
these have a direct bearing on the resolutions costs that would be 
incurred by the FDIC in the event of failure.
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    \6\ The FDIC recognizes that in order to be comparable, this 
spread information would have to be available for debt issues with 
sufficient liquidity and adjusted for differing maturities and other 
bond-specific characteristics.
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    Guideline 3: Focused risk measures and other market indicators will 
be used to compare with and supplement the comparative analysis using 
broad-based risk measures.
    Individual financial ratios, such as a return on assets or a 
liquidity ratio, are examples of focused risk measures that, while 
important to consider, will generally not be as heavily relied upon as 
more comprehensive risk measures in deposit insurance pricing 
decisions. Rather, the FDIC will use focused risk measures, along with 
other market indicators, to supplement the risk comparisons of broad-
based risk measures with initial assessment rates and to provide 
corroborating evidence of material differences in risk suggested by 
such comparisons. More specifically, the risk rankings associated with 
initial assessment rates will be compared with the risk rankings 
suggested by various financial performance measures, other market 
indicators, measures of an institution's ability to withstand adverse 
events, and loss severity indicators. The focused risk measures and 
other market indicators that will be considered during the analysis 
process are described in detail in the Appendix. The listing of risk 
measures in the Appendix is not intended to be exhaustive, but 
represents the FDIC's view of the most important focused risk measures 
to consider in the adjustment process. The development of risk 
measurement and monitoring capabilities is an ongoing and evolving 
process. As a result, the FDIC may revise the listing in the Appendix 
over time as a result of these development activities and consistent 
with the objective to consider all available risk information in its 
assessment rate decisions.

[[Page 7881]]

    Guideline 4: Generally, no single risk factor or indicator will 
control the decision on whether to make an adjustment.
    In general, no single risk indicator such as a profitability ratio 
or a capitalization ratio can fully capture the risks posed by large 
depository institutions. Rather, the FDIC's intent is to consider all 
the information available to it, including supervisory ratings, to 
determine if, on balance, the risk indicators support an adjustment to 
the institution's initial assessment rate. Even when multiple risk 
indicators appear to support an adjustment, additional information 
would have to be evaluated, including qualitative supervisory 
information from the supervisory process, to further corroborate and 
support the need for an adjustment. In certain cases, the FDIC may 
determine that an assessment rate adjustment is appropriate when 
certain qualitative risk factors pertaining to loss severity suggest 
materially higher or lower risk relative to the same types of risks 
posed by other institutions. As noted above, the FDIC intends to place 
greater weight on these factors since they have a direct bearing on 
resolution costs and since these factors are generally not considered 
in other risk measures.

Example of the Analytical Process

    An example will help illustrate the analytical process used to 
identify how assessment rate adjustments will be made through the 
application of the above guidelines. In this example, an institution's 
initial assessment rate is calculated at 5.55 basis points, which 
places it in the 73rd percentile of all large Risk Category I 
institutions.
    Chart 1 depicts the first step in the analytical process, which is 
the comparison of the risk ranking associated with the institution's 
initial assessment rate with other broad-based risk measures. In this 
case, the risk ranking associated with the institution's initial 
assessment rate is materially higher than the risk rankings associated 
with a number of broad-based risk measures including its weighted 
average CAMELS score, the combination of weighted average CAMELS and 
financial ratios that are used to determine assessment rates for 
institutions without debt ratings, the institution's Bank Financial 
Strength Rating (BFSR) assigned by Moody's, and an estimate of loss 
severity (referred to in the chart as a loss severity measure). Based 
solely on these broad-based risk measures, the institution's risk 
appears more closely aligned to institutions paying around 5.00 and 
5.10 basis points. Only the institution's long-term debt issuer ratings 
tend to confirm the initial assessment rate risk ranking.
[GRAPHIC] [TIFF OMITTED] TN21FE07.000

    To extend this example, the review of broad-based risk measures 
would be supplemented with an evaluation of additional focused risk 
measures, some of which are shown in Chart 2. For this institution, 
several key financial performance measures, including its capital 
ratios and problem loan measures, appear to confirm the lower levels of 
risk suggested by four of the five broad-based risk measures shown in 
Chart 1.

[[Page 7882]]

[GRAPHIC] [TIFF OMITTED] TN21FE07.001

    When evaluating financial performance information, the FDIC 
recognizes the importance of also considering qualitative information 
and mitigating factors that relate to these measures. For instance, the 
FDIC will:
     When evaluating profitability measures, determine how risk 
ranking comparisons would be affected when earnings are adjusted to 
control for risk (i.e., using risk-adjusted and provision-adjusted 
returns), or unusual or nonrecurring earnings or expenses;
     When evaluating capital measures, determine how risk 
ranking comparisons would be affected when capitalization levels are 
adjusted to control for risk (i.e., using risk-based capital measures), 
how capital levels compare to historical and anticipated earnings 
volatility, and how anticipated capital growth compares to anticipated 
asset growth; and
     When evaluating asset quality measures, use additional 
information from the supervisory process to determine if differences in 
risk rankings can be explained by other risk measures, such as 
estimated portfolio-level probabilities of default, losses given 
default, credit bureau scores, or collateral coverage, or by the 
existence or absence of credit risk concentrations and credit risk 
mitigants.
    Continuing the example, the FDIC would also review other market 
risk indicators, as shown in Chart 3, to further supplement the 
evaluation of broad-based and focused risk measures. These additional 
market risk indicators will be useful in evaluating the risk rankings 
suggested by an institution's agency ratings. In this case, market 
information relating to the cost of the institution's debt obligations 
and other market-based measures are clearly inconsistent with the risk 
levels suggested by the institution's long-term debt issuer ratings (as 
depicted in Chart 1).\7\
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    \7\ This situation might occur when recent changes in an 
institution's risk profile have not yet been fully reflected in the 
agency rating, or when investors in an institution's obligations 
have different views of risk than one or more rating agencies.

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[[Page 7883]]

[GRAPHIC] [TIFF OMITTED] TN21FE07.002

    As with the evaluation of performance risk measures, it is 
important to consider other factors that may influence any particular 
market risk measure. For instance, the FDIC will determine how market 
indicator risk rankings are affected when credit spreads or required 
rates of return are adjusted to control for differences in maturities, 
the existence of any embedded options (e.g., callable vs. non-
callable), and differences in seniority in the event of default.
    Extending the example further, the FDIC would also evaluate an 
institution's ability to withstand financial stress and the specific 
components of its loss severity estimates (referred to collectively as 
stress considerations). Chart 4 illustrates the comparison of rank 
orderings of two components of an institution's loss severity measure 
with the rank ordering associated with its initial assessment rate. As 
with other risk measures previously mentioned, these loss severity 
components appear to further support a lower level of risk than what is 
suggested by the initial assessment rate. Specifically, the institution 
has a higher level of non-deposit liabilities, which could serve as a 
buffer against losses in the event of failure, than institutions with 
similar initial assessment rate risk rankings. The institution also has 
a lower level of secured liabilities, which may take priority to FDIC 
claims in the event of failure, than institutions with similar initial 
assessment rate risk rankings.

[[Page 7884]]

[GRAPHIC] [TIFF OMITTED] TN21FE07.003

    To the extent possible, the FDIC will use stress consideration 
information to formulate comparisons of risk across institutions. 
Sources of this information are varied but might include analyses 
produced by the institution or the primary federal regulator, such as 
stress test results and capital adequacy assessments, as well as 
information about the risk characteristics of institution's lending 
portfolios and other businesses. The types of comparisons that might be 
possible using this information include evaluating differences between 
institutions in the level of protection provided by capital and 
earnings to varying stress scenarios and the implications of these 
scenarios to loss severity in the event of failure. Other factors that 
would be considered when making these comparisons are the degree to 
which results are influenced by differences in stress test assumptions 
or other model parameters.
    To conclude the example, the FDIC would consider lowering this 
institution's assessment rate to better align its assessment rate with 
the risk levels suggested by other risk measures. In this case, lower 
levels of risk are supported by the rank orderings of risk associated 
with multiple broad-based measures. These rank orderings of risk are 
further supported by risk rankings derived from a number of financial 
performance measures, other market indicators, and loss severity 
components. Before proceeding with any adjustment, however, the FDIC 
will perform additional analyses and review, including the attainment 
of corroborating information from the supervisory process, as indicated 
in the guidelines that follow.

Additional Analytical Guidelines

    Guideline 5: Comparisons of risk information will consider normal 
variations in performance measures and other risk indicators that exist 
among institutions with differing business lines.
    The FDIC recognizes that it would not be reasonable to compare 
certain indicators across institutions engaged in fundamentally 
different businesses (e.g., comparing a mortgage lender's profitability 
and asset quality measures to that of a diversified lender). As a 
result, the FDIC will consider the effect of business line 
concentrations in its risk ranking comparisons. One possible way to 
consider business line concentrations is to evaluate risk rankings when 
institutions are grouped by their predominant business activity. The 
FDIC's notice of proposed rulemaking for deposit insurance assessments, 
issued in July 2006, referenced one possible set of business line 
groupings that included processing institutions and trust companies, 
residential mortgage lenders, non-diversified regional institutions, 
large diversified institutions, and diversified regional 
institutions.\8\ Risk ranking comparisons within these business line 
groupings is one way the FDIC can control for business line 
concentrations when making assessment rate adjustment decisions.
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    \8\ See 71 FR 41910 (July 24, 2006).
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    Guideline 6: Adjustment will be made only if additional analysis 
suggests a meaningful risk differential between the institution's 
initial and adjusted assessment rates.
    Where material inconsistencies between initial assessment rates and 
other risk indicators are present, additional analysis will determine 
the magnitude of adjustment necessary to

[[Page 7885]]

align the assessment rate better with the rates of other institutions 
with similar risk profiles. The objective of this analysis will be to 
determine the amount of 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. This process will entail a number of considerations, including: 
(1) The number of rank ordering comparisons that identify the 
institution as a potential outlier relative to institutions with 
similar assessment rates; (2) the direction and magnitude of 
differences in rank ordering comparisons; (3) a qualitative assessment 
of the relative importance of any apparent outlier risk indicators to 
the overall risk profile of the institution, and (4) an identification 
of mitigating factors. One example of a mitigating factor might be an 
institution that has significantly lower profitability measures than 
other institutions with similarly ranked initial assessment rates, but 
is engaged in fundamentally lower-risk businesses as evidenced by 
superior asset quality measures relative to institutions with similarly 
ranked initial assessment rates.
    Based upon these considerations, the FDIC will determine the 
magnitude of adjustment that would be necessary to better align its 
assessment rate with institutions that pose similar levels or risk. 
When the assessment rate adjustment suggested by these considerations 
is not material, or when there are a number of risk comparisons that 
offer conflicting or inconclusive evidence of material inconsistencies, 
no assessment rate adjustment will be made.

V. Controls Over the Assessment Rate Adjustment Process

    The FDIC proposes to implement various controls over the adjustment 
process to ensure fairness and transparency in its pricing decisions. 
These controls, many of which are contained in the final rule, are 
enumerated in the guidelines below.
    Guideline 7: Decisions to adjust an institution's assessment rate 
must be well supported.
    The FDIC will perform internal reviews of pending adjustments to an 
institution's assessment rate to ensure the adjustment is justified, 
well supported, based on the most current information available, and 
results in an adjusted assessment rate that is consistent with rates 
paid by other institutions with similar risk profiles.
    Guideline 8: The FDIC will consult with an institution's primary 
federal regulator and appropriate state banking supervisor prior to 
making any decision to adjust an institution's initial assessment rate 
(or prior to removing a previously implemented adjustment). 
Participation by the primary federal regulator or state banking 
supervisor in this consultation process should not be construed as 
concurrence with the FDIC's deposit insurance pricing decisions.
    Consistent with current practice, FDIC analysts and management will 
consult with the primary federal regulator and state banking 
supervisors on an ongoing basis regarding risk issues facing large 
institutions and recent events that may influence an institution's 
overall risk profile or supervisory ratings. Because of this ongoing 
contact, the primary federal regulator and state banking supervisor 
should always be aware when the FDIC views a need for an assessment 
rate adjustment. Nevertheless, the FDIC will formalize its 
determinations with the following steps:
    1. The FDIC will formally notify the primary federal regulator, and 
state banking supervisors, of the pending adjustment in advance of the 
first opportunity to implement any adjustment.
    2. Documentation related to any pending adjustment will include a 
discussion of why the adjusted assessment rate is more consistent with 
the risk profiles represented by institutions with similar assessment 
rates.
    3. The FDIC will consider any additional information provided by 
either the primary federal regulator or state banking supervisor prior 
to proceeding with an adjustment of an institution's assessment rate.
    Guideline 9: The FDIC will give institutions advance notice of any 
decision to make an upward adjustment to its initial assessment rate, 
or to remove a previously implemented downward adjustment.
    The FDIC will notify institutions when it intends to make an upward 
adjustment to its initial assessment rate (or remove a downward 
adjustment). This notification will include the reasons for the 
adjustment, when the adjustment would take effect, and provide the 
institution up to 60 days to respond. Adjustments would not become 
effective until the quarterly assessment period following the date the 
notification was made. During this subsequent assessment period, the 
FDIC will determine whether an adjustment is still warranted based on 
an institution's response to the notification as well as any subsequent 
changes to an institution's weighted average CAMELS, long-term debt 
issuer ratings, financial ratios (when applicable), or other risk 
measures used to support the adjustment. The FDIC will also consider 
any actions taken by the institution, during the period for which the 
institution is being assessed, in response to the FDIC's concerns 
described in the notice.
    Guideline 10: The FDIC will continually re-evaluate the need for an 
assessment rate adjustment.
    The FDIC will re-evaluate the need for the adjustment during each 
subsequent quarterly assessment period. These evaluations will be based 
on any new information that becomes available, as well as any changes 
to an institution's weighted average CAMELS, long-term debt issuer 
ratings, financial ratios (when applicable), or other risk measures 
used to support the adjustment.
    The institution can request a review of the FDIC's decision to 
adjust its assessment rate.\9\ It would do so by submitting a written 
request for review of the assessment rate assignment, as adjusted, in 
accordance with 12 CFR 327.4(c). This same section allows an 
institution to bring an appeal before the FDIC's Assessment Appeals 
Committee if it disagrees with determinations made in response to a 
submitted request for review.
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    \9\ The institution can also request a review of the FDIC's 
decision to remove a previous downward adjustment.
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VI. Timing of Notifications and Adjustments

Upward Adjustments

    As noted above, institutions will be given advance notice when the 
FDIC determines that an upward adjustment in its assessment rate 
appears to be warranted. The timing of this advance notification will 
correspond approximately to the invoice date for an assessment period. 
For example, an institution would be notified of a pending upward 
adjustment to its assessment rates covering the period April 1st 
through June 30th sometime around June 15th. June 15th is the invoice 
date for the January 1st through March 31st assessment period.\10\ 
Institutions will have up to 60 days to respond to notifications of 
pending upward adjustments.
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    \10\ Since the intent of the notification is to provide advance 
notice of a pending upward adjustment, the invoice covering the 
assessment period January 1st through March 31st in this case would 
not reflect the upward adjustment.
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    The FDIC would notify an institution of its decision to either 
proceed with or not proceed with the upward adjustment approximately 90 
days following the initial notification of a

[[Page 7886]]

pending upward adjustment. If a decision were made to proceed with the 
adjustment, the adjustment would be reflected in the institution's next 
assessment rate invoice. Extending the example above, if an institution 
were notified of an upward adjustment on June 15th, it would have 60 
days from this date to respond to the notification. If, after 
evaluating the institution's response and following an evaluation of 
updated information for the quarterly assessment period ending June 
30th, the FDIC decides to proceed with the adjustment, it would 
communicate this decision to the institution on September 15th, which 
is the invoice date for the April 1st through June 30th assessment 
period. In this case, the adjusted rate would be reflected in the 
September 15th invoice. The adjustment would remain in effect for 
subsequent assessment periods until the FDIC determined that the 
adjustment is no longer warranted.\11\
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    \11\ The timeframes and example illustrated here would also 
apply to a decision by the FDIC to remove a previously implemented 
downward adjustment as well as a decision to increase a previously 
implemented upward adjustment (the increase could not cause the 
total adjustment to exceed the 0.50 basis point limitation).
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Downward Adjustments

    Decisions to lower an institution's assessment rate will not be 
communicated to institutions in advance. Rather, they would be 
reflected in the invoices for a given assessment period along with the 
reasons for the adjustment. Downward adjustments may take effect as 
soon as the first insurance collection for the January 1st through 
March 31, 2007 assessment period subject to timely approval of the 
guidelines by the Board of the FDIC. Downward adjustments will remain 
in effect for subsequent assessment periods until the FDIC determines 
that the adjustment is no longer warranted (and subject to the advance 
notification requirements indicated above for upward adjustments).\12\
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    \12\ As noted in the final rule, the FDIC may raise an 
institution's assessment rate without notice if the institution's 
supervisory or agency ratings or financial ratios (for institutions 
without debt ratings) deteriorate.
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VII. Request for Comment

    The FDIC seeks comment on all aspects of the proposed guidelines 
for determining how to make adjustments to the initial assessment rates 
of large Risk Category I institutions. In particular, the FDIC seeks 
comments on:
    1. Whether the objectives, listed under the heading Broad 
Objectives, for making assessment rate adjustments are appropriate?
    2. Whether the proposed guidelines governing the analytical process 
are appropriate and sufficient to ensure fairness and consistency in 
deposit insurance pricing determinations? More specifically:
    a. The appropriateness of considering additional risk information, 
including information pertaining to loss severity, to identify possible 
inconsistencies between an institution's initial assessment rate and 
risk measures of institutions with similar assessment rates;
    b. The appropriateness of applying greater emphasis on broad-based 
risk measures than more focused measures when making assessment rate 
adjustment determinations;
    c. The appropriateness of augmenting the analysis of broad-based 
risk measures with a review of more focused risk measures;
    d. The appropriateness of basing adjustment decisions on 
considerations of multiple risk indicators;
    e. The appropriateness of assessing financial performance risk 
measures relative to other institutions engaged in similar business 
activities; and
    f. The appropriateness of using additional risk information to 
determine the magnitude of adjustment to an institution's assessment 
rate that would be necessary to bring its rate into better alignment 
with institutions with similar risk measures.
    3. What information should the FDIC use to evaluate the qualitative 
loss severity factors enumerated under Guideline 1? For example, in the 
absence of a final rule that might implement certain requirements 
relating to deposit account system capabilities as described in the 
Advanced Notice of Proposed Rulemaking on Large Bank Deposit Insurance 
Determination Modernization,\13\ to what extent should the FDIC 
consider the existing capabilities of deposit account systems? More 
specifically, should the FDIC consider whether an institution's systems 
have the ability to place and remove holds on deposit accounts en masse 
as well as the ability to readily identify the owner(s) of each deposit 
account (for example, by using a unique identifier) and identify the 
ownership category of each deposit account, be included in risk-based 
pricing determinations? If so, what should be the form of information 
that would demonstrate the existence of these capabilities, to include 
the scope of any account testing and the types of assurances that would 
document any such testing (as one example, an institution could 
demonstrate these capabilities by performing appropriate testing 
against a sufficiently large sample of deposit accounts and by 
confirming positive results of this testing to the FDIC in statement 
certified by a compliance officer or internal auditor of the 
institution)? Additionally, what information could the institution 
provide to assist the FDIC in evaluating the ability of the FDIC to 
isolate and control the main assets and critical business functions of 
a failed institution without incurring high costs; the level of an 
institution's foreign assets relative to its foreign deposits and 
prospects of foreign governments using these assets to satisfy local 
depositors and creditors in the event of failure; and the availability 
of sufficient information on qualified financial contracts to allow the 
FDIC to identify the counterparties to, and other details about, such 
contracts in the event of failure?
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    \13\ 71 FR 74857 (December 13, 2006).
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    4. Whether there are additional guidelines that should govern the 
analytical process to ensure fairness and consistency in deposit 
insurance pricing determinations?
    5. Whether it is appropriate for the FDIC to consider information, 
such as the results of an institution's stress testing or capital 
adequacy assessment analyses, that pertains to an institution's ability 
to withstand adverse events and if so, how such information should be 
incorporated into the analytical process described in these proposed 
guidelines?
    6. Whether it is appropriate for the FDIC to consider risk 
information that will be developed from the implementation of proposed 
international capital standards into its analytical process for 
determining whether an assessment rate adjustment is appropriate and 
the magnitude of any such adjustments?
    7. Whether it is appropriate for the FDIC to consider the 
willingness and ability of an institution's parent company or its 
affiliates to provide financial support to the institution or to 
mitigate the FDIC's loss in the event of failure? If so, what factors 
or characteristics might be useful in evaluating such considerations?
    8. Whether the FDIC should consider certain additional supervisory 
information when determining whether a downward adjustment in 
assessment rates is appropriate? For example, should the FDIC preclude 
from consideration for a downward adjustment those situations where an 
institution has an outstanding supervisory order in place that may be 
less directly related to the institution's

[[Page 7887]]

safety and soundness (such as a memorandum of understanding or consent 
and decree order relating to compliance regulations or the Bank Secrecy 
Act)?
    9. Whether the proposed guidelines for controlling the assessment 
rate adjustment process are sufficient to ensure that adjustment 
decisions are justified, fully supported, and take into account 
responses and additional information from the primary federal regulator 
and the institution?
    10. Whether there are additional guidelines that should control the 
assessment rate adjustment process?

Appendix--Examples of Risk Measures That Will Be Considered in 
Assessment Rate Adjustment Determinations \14\
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    \14\ This listing is not intended to be exhaustive but 
represents the FDIC's view of the most important risk measures that 
should be considered in the assessment rate determinations of large 
Risk Category I institutions. This listing may be revised over time 
as improved risk measures are developed through an ongoing effort to 
enhance the FDIC's risk measurement and monitoring capabilities.
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Broad-Based Risk Measures

     Composite and weighted average CAMELS ratings: the 
composite rating assigned to an insured institution under the 
Uniform Financial Institutions Rating System and the weighted 
average CAMELS rating determined under the final rule.
     Long-term debt issuer rating: a current, publicly 
available, long-term debt issuer rating assigned to an insured 
institution by Moody's, Standard & Poor's, or Fitch.
     Financial ratio measure: the assessment rate determined 
for large Risk Category I institutions without long-term debt issuer 
ratings, using a combination of weighted average CAMELS ratings and 
five financial ratios as described in the final rule.
     Offsite ratings: ratings or numerical risk rankings, 
developed by either supervisors or industry analysts, that are based 
primarily on off-site data and incorporate multiple measures of 
insured institutions' risks.
     Other agency ratings: current and publicly available 
ratings, other than long-term debt issuer ratings, assigned by any 
rating agency that reflect the ability of an institution to perform 
on its obligations. One such rating is Moody's Bank Financial 
Strength Rating BFSR, which is intended to provide creditors with a 
measure of a bank's intrinsic safety and soundness, excluding 
considerations of external support factors that might reduce default 
risk, or country risk factors that might increase default risk.
     Loss severity measure: an estimate of insurance fund 
losses that would be incurred in the event of failure. This measure 
takes into account such factors as estimates of insured and non-
insured deposit funding, obligations that would be subordinated to 
depositor claims, obligations that would be secured or would 
otherwise take priority claim over depositor claims, the estimated 
value of assets, prospects for ``ring-fencing'' whereby foreign 
assets are used to satisfy foreign obligor claims over FDIC claims, 
and other factors that could affect resolution costs.

Financial Performance and Condition Measures

Profitability

     Return on assets: net income (pre- and post-tax) 
divided by average assets.
     Return on risk-weighted assets: net income (pre- and 
post-tax) divided by average risk-weighted assets.
     Core earnings volatility: volatility of quarterly 
earnings before tax, extraordinary items, and securities gains 
(losses) measured over one, three, and five years.
     Net interest margin: interest income less interest 
expense divided by average earning assets.
     Earning asset yield: interest income divided by average 
earning assets.
     Funding cost: interest expense divided by interest 
bearing obligations.
     Provision to net charge-offs: loan loss provisions 
divided by losses applied to the loan loss reserve (net of 
recoveries).
     Burden ratio: overhead expenses less non-interest 
revenues divided by average assets.
     Qualitative and mitigating profitability factors: 
includes considerations such as earnings prospects and 
diversification of revenue sources.

Capitalization

     Tier 1 leverage ratio: tier 1 capital for Prompt 
Corrective Action (PCA) divided by adjusted average assets as 
defined for PCA.
     Tier 1 risk-based ratio: PCA tier 1 capital divided by 
risk-weighted assets.
     Total risk-based ratio: PCA total capital divided by 
risk-weighted assets.
     Tier 1 growth to asset growth: annual growth of PCA 
tier 1 capital divided by annual growth of total assets.
     Regulatory capital to internally-determined capital 
needs: PCA tier 1 and total capital divided by internally-determined 
capital needs as determined from economic capital models, internal 
capital adequacy assessments processes (ICAAP), or similar 
processes.
     Qualitative and mitigating capitalization factors: 
includes considerations such as strength of capital planning and 
ICAAP processes, and the strength of financial support provided by 
the parent.

Asset Quality

     Non-performing assets to tier 1 capital: nonaccrual 
loans, loans past due over 90 days, and other real estate owned 
divided by PCA tier 1 capital.
     ALLL to loans: allowance for loan and lease losses plus 
allocated transfer risk reserves divided by total loans and leases.
     Net charge-off rate: loan and lease losses charged to 
the allowance for loan and lease losses (less recoveries) divided by 
average total loans and leases.
     Higher risk loans to tier 1 capital: sum of sub-prime 
loans, alternative or exotic mortgage products, leveraged lending, 
and other high risk lending (e.g., speculative construction or 
commercial real estate financing) divided by PCA tier 1 capital.
     Criticized and classified assets to tier 1 capital: 
assets assigned to regulatory categories of Special Mention, 
Substandard, Doubtful, or Loss (and not charged-off) divided by PCA 
tier 1 capital.
     EAD-weighted average PD: weighted average estimate of 
the probability of default (PD) for an institution's obligors where 
the weights are the estimated exposures-at-default (EAD). PD and EAD 
risk metrics can be defined using either the Basel II framework or 
internally defined estimates.
     EAD-weighted average LGD: weighted average estimate of 
loss given default (LGD) for an institution's credit exposures where 
the weights are the estimated EADs for each exposure. LGD and PD 
risk metrics can be defined using either the Basel II framework or 
internally defined estimates.
     Qualitative and mitigating asset quality factors: 
includes considerations such as the extent of credit risk mitigation 
in place; underwriting trends; strength of credit risk monitoring; 
and the extent of securitization, derivatives, and off-balance sheet 
financing activities that could result in additional credit 
exposure.

Liquidity and Market Risk Indicators

     Core deposits to total funding: the sum of demand, 
savings, MMDA, and time deposits under $100 thousand divided by 
total funding sources.
     Net loans to assets: loans and leases (net of the 
allowance for loan and lease losses) divided by total assets.
     Liquid and marketable assets to short-term obligations 
and certain off-balance sheet commitments: the sum of cash, balances 
due from depository institutions, marketable securities (fair 
value), federal funds sold, securities purchased under agreement to 
resell, and readily marketable loans (e.g., securitized mortgage 
pools) divided by the sum of obligations maturing within one year, 
undrawn commercial and industrial loans, and letters of credit.
     Qualitative and mitigating liquidity factors: includes 
considerations such as the extent of back-up lines, pledged assets, 
and the strength of contingency and funds management practices.
     Earnings and capital at risk to fluctuating market 
prices: quantified measures of earnings or capital at risk to shifts 
in interest rates, changes in foreign exchange values, or changes in 
market and commodity prices. This would include measures of value-
at-risk (VaR) on trading book assets.
     Qualitative and mitigating market risk factors: 
includes considerations of the strength of interest rate risk and 
market risk measurement systems and management practices, and the 
extent of risk mitigation (e.g, interest rate hedges) in place.

Other Market Indicators

     Subordinated debt spreads: dealer-provided quotes of 
interest rate spreads paid on subordinated debt issued by insured 
subsidiaries relative to comparable maturity treasury obligations.
     Credit default swap spreads: dealer-provided quotes of 
interest rate spreads paid by a credit protection buyer to a credit

[[Page 7888]]

protection seller relative to a reference obligation issued by an 
insured institution.
     Market-based default indicators: estimates of the 
likelihood of default by an insured organization that are based on 
either traded equity or debt prices.
     Qualitative market indicators or mitigating market 
factors: includes considerations such as agency rating outlooks, 
debt and equity analyst opinions and outlooks, and the relative 
level of liquidity of any debt and equity issues used to develop 
market indicators defined above.

Risk Measures Pertaining to Stress Conditions

Ability To Withstand Stress Conditions

     Concentration measures: measures of the level of 
concentrated risk exposures and extent to which an insured 
institution's capital and earnings would be adversely affected due 
to exposures to common risk factors such as the condition of a 
single obligor, poor industry sector conditions, poor local or 
regional economic conditions, or poor conditions for groups of 
related obligors (e.g., subprime borrowers).
     Results of stress tests or scenario analyses: measures 
of the extent of capital, earnings, or liquidity depletion under 
varying degrees of financial stress such as adverse economic, 
industry, market, and liquidity events.
     Qualitative and mitigating factors relating to the 
ability to withstand stress conditions: includes considerations such 
as the comprehensiveness of risk identification and stress testing 
analyses, the plausibility of stress scenarios considered, and the 
sensitivity of scenario analyses to changes in assumptions.

Loss Severity Indicators

     Non-deposit liabilities to total liabilities: the sum 
of obligations, such as subordinated debt, that would have a 
subordinated claim to the institution's assets in the event of 
failure divided by total liabilities.
     Secured (priority) liabilities to total liabilities: 
the sum of claims, such as trade payables and secured borrowings, 
that would have priority claim to the institution's assets in the 
event of failure divided by total liabilities.
     Foreign deposits to total liabilities: foreign deposits 
divided by total liabilities.
     Extent of insured assets held in foreign units: amount 
of assets held in foreign offices.
     Liquidation value of assets: estimated value of assets, 
based largely on historical loss rates experienced by the FDIC on 
various asset classes, in the event of liquidation.
     Qualitative and mitigating factors relating to loss 
severity: includes considerations such as the sufficiency of 
information and systems capabilities relating to qualified financial 
contracts and deposits to facilitate quick and cost efficient 
resolution, the extent to which critical functions or staff are 
housed outside the insured entity, and prospects for ring-fencing in 
the event of failure.

    By order of the Board of Directors.
    Dated at Washington, DC, this 15th day of February, 2007.

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

[FR Doc. E7-2906 Filed 2-20-07; 8:45 am]
BILLING CODE 6714-01-P