[Federal Register Volume 76, Number 38 (Friday, February 25, 2011)]
[Rules and Regulations]
[Pages 10672-10733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-3086]



[[Page 10671]]

Vol. 76

Friday,

No. 38

February 25, 2011

Part II





Federal Deposit Insurance Corporation





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



12 CFR Part 327



Assessments, Large Bank Pricing; Final Rule

  Federal Register / Vol. 76 , No. 38 / Friday, February 25, 2011 / 
Rules and Regulations  

[[Page 10672]]


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

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AD66


Assessments, Large Bank Pricing

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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

SUMMARY: The FDIC is amending its regulations to implement revisions to 
the Federal Deposit Insurance Act made by the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank'') by modifying the 
definition of an institution's deposit insurance assessment base; to 
change the assessment rate adjustments; to revise the deposit insurance 
assessment rate schedules in light of the new assessment base and 
altered adjustments; to implement Dodd-Frank's dividend provisions; to 
revise the large insured depository institution assessment system to 
better differentiate for risk and better take into account losses from 
large institution failures that the FDIC may incur; and to make 
technical and other changes to the FDIC's assessment rules.

DATES: Effective Date: April 1, 2011.

FOR FURTHER INFORMATION CONTACT: Munsell St. Clair, Chief, Banking and 
Regulatory Policy Section, Division of Insurance and Research, (202) 
898-8967, Rose Kushmeider, Senior Economist, Division of Insurance and 
Research, (202) 898-3861; Heather Etner, Financial Analyst, Division of 
Insurance and Research, (202) 898-6796; Lisa Ryu, Chief, Large Bank 
Pricing Section, Division of Insurance and Research, (202) 898-3538; 
Christine Bradley, Senior Policy Analyst, Banking and Regulatory Policy 
Section, Division of Insurance and Research, (202) 898-8951; Brenda 
Bruno, Senior Financial Analyst, Division of Insurance and Research, 
(630) 241-0359 x 8312; Robert L. Burns, Chief, Exam Support and 
Analysis, Division of Supervision and Consumer Protection (704) 333-
3132 x 4215; Christopher Bellotto, Counsel, Legal Division, (202) 898-
3801; and Sheikha Kapoor, Counsel, Legal Division, (202) 898-3960, 550 
17th Street, NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Dates

    Except as specifically provided, the final rule will take effect 
for the quarter beginning April 1, 2011, and will be reflected in the 
June 30, 2011, fund balance and the invoices for assessments due 
September 30, 2011.

II. Background

A. Current Deposit Insurance Assessments

    At present, for deposit insurance assessment purposes, an insured 
depository institution is placed into one of four risk categories each 
quarter, determined primarily by the institution's capital levels and 
supervisory evaluation. Current annual initial base assessment rates 
are set forth in Table 1 below.
---------------------------------------------------------------------------

    \1\ Within Risk Category I, there are different assessment 
systems for large and small insured depository institutions, but the 
possible range of rates is the same for all insured depository 
institutions in Risk Category I.

                        Table 1--Current Initial Base Assessment Rates \1\ Risk Category
----------------------------------------------------------------------------------------------------------------
                                                            I *
                                                --------------------------      II          III           IV
                                                   Minimum      Maximum
----------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points).................           12           16           22           32           45
----------------------------------------------------------------------------------------------------------------
* Rates for institutions that do not pay the minimum or maximum rate will vary between these rates.

    Within Risk Category I, initial base assessment rates vary between 
12 and 16 basis points. For all institutions in Risk Category I, rates 
depend upon weighted average CAMELS component ratings and certain 
financial ratios. For a large institution (generally, one with at least 
$10 billion in assets) that has debt issuer ratings, rates also depend 
upon these ratings.
    Initial base assessment rates are subject to adjustment. An insured 
depository institution's total base assessment rate can vary from its 
initial base assessment rate as the result of an unsecured debt 
adjustment and a secured liability adjustment. The unsecured debt 
adjustment lowers an insured depository institution's initial base 
assessment rate using its ratio of long-term unsecured debt (and, for 
small insured depository institutions, certain amounts of Tier 1 
capital) to domestic deposits.\2\ The secured liability adjustment 
increases an insured depository institution's initial base assessment 
rate if the insured depository institution's ratio of secured 
liabilities to domestic deposits is greater than 25 percent.\3\ In 
addition, insured depository institutions in Risk Categories II, III 
and IV are subject to an adjustment for large levels of brokered 
deposits (the brokered deposit adjustment).\4\
---------------------------------------------------------------------------

    \2\ Unsecured debt excludes debt guaranteed by the FDIC under 
its Temporary Liquidity Guarantee Program.
    \3\ The initial base assessment rate cannot increase more than 
50 percent as a result of the secured liability adjustment.
    \4\ 12 CFR 327.9(d)(7).
---------------------------------------------------------------------------

    After applying all possible adjustments, the current minimum and 
maximum total annual base assessment rates for each risk category are 
set out in Table 2 below.

[[Page 10673]]

[GRAPHIC] [TIFF OMITTED] TR25FE11.000

    The FDIC may uniformly adjust the total base rate assessment 
schedule up or down by up to 3 basis points without further 
rulemaking.\5\
---------------------------------------------------------------------------

    \5\ Specifically:
    The Board may increase or decrease the total base assessment 
rate 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 total base assessment rate schedule. In no case may 
such Board rate adjustments result in a total base assessment rate 
that is mathematically less than zero or in a total base assessment 
rate schedule that, at any time, is more than 3 basis points above 
or below the total base assessment schedule for the Deposit 
Insurance Fund, nor may any one such Board adjustment constitute an 
increase or decrease of more than 3 basis points.
    12 CFR 327.10(c). On October 19, 2010, the FDIC adopted a new 
Restoration Plan that foregoes a uniform 3 basis point increase in 
assessment rates scheduled to go into effect on January 1, 2011. 
Thus, the assessment rates in this final rule reflect that change.
---------------------------------------------------------------------------

    An institution's assessment is determined by multiplying its 
assessment rate by its assessment base. Its assessment base is, and has 
historically been, domestic deposits, with some adjustments. (These 
adjustments have changed over the years.)

B. The Dodd-Frank Wall Street Reform and Consumer Protection Act

    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank), enacted in July 2010, revised the statutory authorities 
governing the FDIC's management of the Deposit Insurance Fund (the DIF 
or the fund). Dodd-Frank granted the FDIC the ability to achieve goals 
for fund management that it has sought to achieve for decades but 
lacked the tools to accomplish: maintaining a positive fund balance 
even during a banking crisis and maintaining moderate, steady 
assessment rates throughout economic and credit cycles.
    Among other things, Dodd-Frank: (1) Raised the minimum designated 
reserve ratio (DRR), which the FDIC must set each year, to 1.35 percent 
(from the former minimum of 1.15 percent) and removed the upper limit 
on the DRR (which was formerly capped at 1.5 percent) and therefore on 
the size of the fund; \6\ (2) required that the fund reserve ratio 
reach 1.35 percent by September 30, 2020 (rather than 1.15 percent by 
the end of 2016, as formerly required); \7\ (3) required that, in 
setting assessments, the FDIC ``offset the effect of [requiring that 
the reserve ratio reach 1.35 percent by September 30, 2020 rather than 
1.15 percent by the end of 2016] on insured depository institutions 
with total consolidated assets of less than $10,000,000,000''; \8\ (4) 
eliminated the requirement that the FDIC provide dividends from the 
fund when the reserve ratio is between 1.35 percent and 1.5 percent; 
\9\ and (5) continued the FDIC's authority to declare dividends when 
the reserve ratio at the end of a calendar year is at least 1.5 
percent, but granted the FDIC sole discretion in determining whether to 
suspend or limit

[[Page 10674]]

the declaration or payment of dividends.\10\
---------------------------------------------------------------------------

    \6\ Public Law 111-203, Sec.  334(a), 124 Stat. 1376, 1539 (to 
be codified at 12 U.S.C. 1817(b)(3)(B)).
    \7\ Public Law 111-203, Sec.  334(d), 124 Stat. 1376, 1539 (to 
be codified at 12 U.S.C. 1817(nt)).
    \8\ Public Law 111-203, Sec.  334(e), 124 Stat. 1376, 1539 (to 
be codified at 12 U.S.C. 1817(nt)).
    \9\ Public Law 111-203, Sec.  332(d), 124 Stat. 1376, 1539 (to 
be codified at 12 U.S.C. 1817(e)).
    \10\ Public Law 111-203, Sec.  332, 124 Stat. 1376, 1539 (to be 
codified at 12 U.S.C. 1817(e)(2)(B)).
---------------------------------------------------------------------------

    Dodd-Frank also required that the FDIC amend its regulations to 
redefine the assessment base used for calculating deposit insurance 
assessments. Under Dodd-Frank, the assessment base must, with some 
possible exceptions, equal average consolidated total assets minus 
average tangible equity.\11\
---------------------------------------------------------------------------

    \11\ Public Law 111-203, Sec.  331(b), 124 Stat. 1376, 1538 (to 
be codified at 12 U.S.C. 1817(nt)).
---------------------------------------------------------------------------

C. Notice of Proposed Rulemaking on Assessment Dividends, Assessment 
Rates and the Designated Reserve Ratio

    Given the greater discretion to manage the DIF granted by Dodd-
Frank, the FDIC developed a comprehensive, long-range management plan 
for the DIF. In October 2010, the FDIC adopted a Notice of Proposed 
Rulemaking on Assessment Dividends, Assessment Rates and the Designated 
Reserve Ratio (the October NPR) setting out the plan, which is designed 
to: (1) Reduce the pro-cyclicality in the existing risk-based 
assessment system by allowing moderate, steady assessment rates 
throughout economic and credit cycles; and (2) maintain a positive fund 
balance even during a banking crisis by setting an appropriate target 
fund size and a strategy for assessment rates and dividends.\12\
---------------------------------------------------------------------------

    \12\ 75 FR 66262 (Oct. 27, 2010). Pursuant to the comprehensive 
plan, the FDIC also adopted a new Restoration Plan to ensure that 
the DIF reserve ratio reaches 1.35 percent by September 30, 2020, as 
required by the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. 75 FR 66293 (Oct. 27, 2010).
---------------------------------------------------------------------------

    In developing the comprehensive plan, the FDIC analyzed historical 
fund losses and used simulated income data from 1950 to the present to 
determine how high the reserve ratio would have to have been before the 
onset of the two banking crises that occurred during this period to 
maintain a positive fund balance and stable assessment rates. Based on 
this analysis and the statutory factors that the FDIC must consider 
when setting the DRR, the FDIC proposed setting the DRR at 2 percent. 
The FDIC also proposed that a moderate assessment rate schedule, based 
on the long-term average rate needed to maintain a positive fund 
balance, take effect when the fund reserve ratio exceeds 1.15 
percent.\13\ This schedule would be lower than the current schedule. 
Finally, the FDIC proposed suspending dividends when the fund reserve 
ratio exceeds 1.5 percent.\14\ In lieu of dividends, the FDIC proposed 
to adopt progressively lower assessment rate schedules when the reserve 
ratio exceeds 2 percent and 2.5 percent.
---------------------------------------------------------------------------

    \13\ Under section 7 of the Federal Deposit Insurance Act, the 
FDIC has authority to set assessments in such amounts as it 
determines to be necessary or appropriate. In setting assessments, 
the FDIC must consider certain enumerated factors, including the 
operating expenses of the DIF, the estimated case resolution 
expenses and income of the DIF, and the projected effects of 
assessments on the capital and earnings of insured depository 
institutions.
    \14\ 12 U.S.C. 1817(e)(2), as amended by Sec.  332 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act.
---------------------------------------------------------------------------

D. Final Rule Setting the Designated Reserve Ratio

    In December 2010, the FDIC adopted a final rule setting the DRR at 
2 percent (the DRR final rule), but deferred action on the other 
subjects of the October NPR (dividends and assessment rates) until this 
final rule. The FDIC's decision to set the DRR at 2 percent was based 
partly on additional historical analysis, which is described below.

E. Notice of Proposed Rulemaking on the Assessment Base, Assessment 
Rate Adjustments and Assessment Rates

    In a notice of proposed rulemaking adopted by the FDIC Board on 
November 9, 2010 (the Assessment Base NPR), the FDIC proposed to amend 
the definition of an institution's deposit insurance assessment base 
consistent with the requirements of Dodd-Frank, modify the unsecured 
debt adjustment and the brokered deposit adjustment in light of the 
changes to the assessment base, add an adjustment for long-term debt 
held by an insured depository institution where the debt is issued by 
another insured depository institution, and eliminate the secured 
liability adjustment. The Assessment Base NPR also proposed revising 
the current deposit insurance assessment rate schedule in light of the 
larger assessment base required by Dodd-Frank and the revised 
adjustments. The FDIC's goal was to determine a rate schedule that 
would have generated approximately the same revenue as that generated 
under the current rate schedule in the second quarter of 2010 under the 
current assessment base. The Assessment Base NPR also proposed 
revisions to the rate schedules proposed in the October NPR, in light 
of the changes to the assessment base and the adjustments. These 
revised rate schedules were also intended to generate the same revenue 
as the corresponding rates in the October NPR.

F. Notices of Proposed Rulemaking on the Assessment System Applicable 
to Large Insured Depository Institutions

    In April 2010, the FDIC adopted a notice of proposed rulemaking 
with request for comment to revise the risk-based assessment system for 
all large insured depository institutions to better capture risk at the 
time large institutions assume the risk, to better differentiate among 
institutions for risk and take a more forward-looking view of risk, to 
better take into account the losses that the FDIC may incur if such an 
insured depository institution fails, and to make technical and other 
changes to the rules governing the risk-based assessment system (the 
April NPR).\15\
---------------------------------------------------------------------------

    \15\ The preamble to the Large Bank NPR incorrectly summarized 
the definition of a ``large institution''; however, the definition 
was correct in the proposed regulation. The final rule, like the 
proposed regulation, defines a large institution as an insured 
depository institution: (1) That had assets of $10 billion or more 
as of December 31, 2006 (unless, by reporting assets of less than 
$10 billion for four consecutive quarters since then, it has become 
a small institution); or (2) that had assets of less than $10 
billion as of December 31, 2006, but has since had $10 billion or 
more in total assets for at least four consecutive quarters, whether 
or not the institution is new. In almost all cases, an insured 
depository institution that has had $10 billion or more in total 
assets for four consecutive quarters will have a CAMELS rating; 
however, in the rare event that such an institution has not yet 
received a CAMELS rating, it will be given a weighted average CAMELS 
rating of 2 for assessment purposes until actual CAMELS ratings are 
assigned. An insured branch of a foreign bank is excluded from the 
definition of a large institution.
---------------------------------------------------------------------------

    Largely as a result of changes made by Dodd-Frank and the 
Assessment Base NPR, the FDIC reissued its proposal applicable to large 
insured depository institutions for comment on November 9, 2010 (the 
Large Bank NPR), taking into account comments received on the April 
NPR.
    In the Large Bank NPR, the FDIC proposed eliminating risk 
categories and the use of long-term debt issuer ratings for large 
institutions, using a scorecard method to calculate assessment rates 
for large and highly complex institutions, and retaining the ability to 
make a limited adjustment after considering information not included in 
the scorecard. In the Large Bank NPR, the FDIC stated that it would not 
make adjustments until the guidelines for making such adjustments are 
published for comment and subsequently adopted by the FDIC Board.

G. Update of Historical Analysis of Loss, Income and Reserve Ratios

    The analysis set out in the October NPR to determine how high the 
reserve ratio would have had to have been to have maintained both a 
positive fund

[[Page 10675]]

balance and stable assessment rates from 1950 through 2010 assumed 
assessment rates based upon an assessment base related to domestic 
deposits rather than the assessment base required by Dodd-Frank 
(average consolidated total assets minus average tangible equity).\16\ 
The FDIC undertook additional analysis (described in the DRR final rule 
and repeated here) to determine how the results of the original 
analysis would change had the new assessment base been in place from 
1950 to 2010. Due to the larger assessment base resulting from Dodd-
Frank, the constant nominal assessment rate required to maintain a 
positive fund balance from 1950 to 2010 would have been 5.29 basis 
points (compared with 8.47 basis points using a domestic-deposit-
related assessment base). (See Chart 1.)
---------------------------------------------------------------------------

    \16\ The historical analysis contained in the October NPR is 
incorporated herein by reference.
---------------------------------------------------------------------------

    The assessment base resulting from Dodd-Frank, had it been applied 
to prior years, would have been larger than the domestic-deposit-
related assessment base, and the rates of growth of the two assessment 
bases would have differed both over time and from each other. At any 
given time, therefore, applying a constant nominal rate of 8.47 basis 
points to the domestic-deposit-related assessment base would not 
necessarily have yielded exactly the same revenue as applying 5.29 
basis points to the Dodd-Frank assessment base.
    Despite these differences, the new analysis applying a 5.29 basis 
point assessment rate to the Dodd-Frank assessment base resulted in 
peak reserve ratios prior to the two crises similar to those seen when 
applying an 8.47 basis point assessment rate to a domestic- deposit-
related assessment base.\17\ (See Chart 2.) Both analyses show that the 
fund reserve ratio would have needed to be approximately 2 percent or 
more before the onset of the 1980s and 2008 crises to maintain both a 
positive fund balance and stable assessment rates, assuming, in lieu of 
dividends, that the long-term industry average nominal assessment rate 
would have been reduced by 25 percent when the reserve ratio reached 2 
percent, and by 50 percent when the reserve ratio reached 2.5 
percent.\18\ Eliminating dividends and reducing rates would have 
successfully limited rate volatility, whichever assessment base was 
used.
---------------------------------------------------------------------------

    \17\ Using the domestic-deposit-related assessment base, reserve 
ratios would have peaked at 2.31 percent and 2.01 percent before the 
two crises. (See Chart G in the October NPR.) Using the Dodd-Frank 
assessment base, reserve ratios would have peaked at 2.27 percent 
and 1.95 percent before the two crises.
    \18\ Dodd-Frank provides that the assessment base be changed to 
average consolidated total assets minus average tangible equity. See 
Public Law 111-203, Sec.  331(b). For this simulation, from 1990 to 
2010, the assessment base equals year-end total industry assets 
minus Tier 1 capital. For earlier years (before the Tier 1 capital 
measure existed) it equals year-end total industry assets minus 
total equity. Other than as noted, the methodology used in the 
additional analysis was the same as that used in the October NPR.
[GRAPHIC] [TIFF OMITTED] TR25FE11.001


[[Page 10676]]


[GRAPHIC] [TIFF OMITTED] TR25FE11.002

H. Scope of the Final Rule

    This final rule encompasses all of the proposals contained in the 
October NPR, the Assessment Base NPR and the Large Bank NPR, except the 
proposal setting the DRR, which was covered in the DRR final rule.

I. Structure of the Next Sections of the Preamble

    The next sections of this preamble are structured as follows:
     Section II briefly discusses the number of comments 
received;
     Section III discusses the portion of the final rule 
related to changes to the assessment base and adjustments to assessment 
rates proposed in the Assessment Base NPR;
     Subsection IV discusses the portion of the final rule 
related to dividends and assessment rates proposed in the Assessment 
Base NPR and the October NPR; and
     Subsection V discusses the portion of the final rule 
related to the assessment system applicable to large insured depository 
institutions proposed in the Large Bank NPR.

III. Comments Received

    The FDIC sought comments on every aspect of the proposed rules. The 
FDIC received a total of 55 written comments on the October NPR, the 
Assessment Base NPR and the Large Bank NPR, although some were 
duplicative. Comments are discussed in the relevant sections below.

IV. The Final Rule: The Assessment Base and Adjustments to Assessment 
Rates

A. Assessment Base

    As stated above, Dodd-Frank requires that the FDIC amend its 
regulations to redefine the assessment base used for calculating 
deposit insurance assessments. Specifically, Dodd-Frank directs the 
FDIC:

    To define the term ``assessment base'' with respect to an 
insured depository institution * * * as an amount equal to--
    (1) the average consolidated total assets of the insured 
depository institution during the assessment period; minus
    (2) the sum of--
    (A) the average tangible equity of the insured depository 
institution during the assessment period, and
    (B) in the case of an insured depository institution that is a 
custodial bank (as defined by the Corporation, based on factors 
including the percentage of total revenues generated by custodial 
businesses and the level of assets under custody) or a banker's bank 
(as that term is used in * * * (12 U.S.C. 24)), an amount that the 
Corporation determines is necessary to establish assessments 
consistent with the definition under section 7(b)(1) of the Federal 
Deposit Insurance Act (12 U.S.C. 1817(b)(1)) for a custodial bank or 
a banker's bank.\19\
---------------------------------------------------------------------------

    \19\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, Sec.  331(b), 124 Stat. 1376, 1538 (codified at 
12 U.S.C. 1817(nt)).

    To implement this requirement, the FDIC, in this final rule, 
defines ``average consolidated total assets,'' ``average tangible 
equity,'' and ``tangible equity,'' and sets forth the basis for 
reporting consolidated total assets and tangible equity.
    To establish assessments consistent with the definition of the 
``risk-based assessment system'' under the Federal Deposit Insurance 
Act (the FDI Act), Dodd-Frank also requires the FDIC to determine 
whether and to what extent adjustments to the assessment base are 
appropriate for banker's banks and custodial banks. The final rule 
outlines these adjustments and provides a definition of ``custodial 
bank.''
1. Average Consolidated Total Assets
    The final rule, like the proposed rule, requires that all insured 
depository institutions report their average consolidated total assets 
using the accounting methodology established for reporting total assets 
as applied to Line 9 of Schedule RC-K of the Consolidated

[[Page 10677]]

Reports of Condition and Income (Call Report) (that is, the methodology 
established by Schedule RC-K regarding when to use amortized cost, 
historical cost, or fair value, and how to treat deferred tax effects). 
The final rule differs from the proposed rule, however, by allowing 
certain institutions to report average consolidated total assets on a 
weekly, rather than daily, basis. The final rule requires institutions 
with total assets greater than or equal to $1 billion and all 
institutions that are newly insured after March 31, 2011, to average 
their balances as of the close of business for each day during the 
calendar quarter. Institutions with less than $1 billion in quarter-end 
consolidated total assets on their March 31, 2011 Call Report or Thrift 
Financial Report (TFR) may report an average of the balances as of the 
close of business on each Wednesday during the calendar quarter or may, 
at any time, permanently opt to calculate average consolidated total 
assets on a daily basis. Once an institution that reports average 
consolidated total assets using a weekly average reports average 
consolidated total assets of $1 billion or more for two consecutive 
quarters, it shall permanently report average consolidated total assets 
using daily averaging starting in the next quarter.
    While some commenters supported the requirement that all 
institutions average their assets using daily balances, one trade group 
requested that all institutions be allowed to choose between daily and 
weekly averages. In the FDIC's view, institutions with at least $1 
billion in assets should be able to compute averages using daily 
balances. (Many already do so.) However, to avoid imposing transition 
costs on smaller institutions (those with less than $1 billion in 
assets), the final rule allows these institutions to calculate an 
average of Wednesday asset balances, unless they opt permanently to 
report daily averages.\20\ Newly insured institutions incur no 
transition costs (since they have no existing systems) and, thus, must 
average using daily balances.
---------------------------------------------------------------------------

    \20\ Institutions currently may report a daily average or an 
average of Wednesday assets on Call Report Schedule RC-K.
---------------------------------------------------------------------------

    Under the final rule, an institution's daily average consolidated 
total assets equal the sum of the gross amount of consolidated total 
assets for each calendar day during the quarter divided by the number 
of calendar days in the quarter. An institution's weekly average 
consolidated total assets equal the sum of the gross amount of 
consolidated total assets for each Wednesday during the quarter divided 
by the number of Wednesdays in the quarter. For days that an office of 
the reporting institution (or any of its subsidiaries or branches) is 
closed (e.g., Saturdays, Sundays, or holidays), the amounts outstanding 
from the previous business day will be used. An office is considered 
closed if there are no transactions posted to the general ledger as of 
that date.
    In the case of a merger or consolidation, the calculation of the 
average assets of the surviving or resulting institution must include 
the assets of all the merged or consolidated institutions for the days 
in the quarter prior to the merger or consolidation, regardless of the 
method used to account for the merger or consolidation.
    In the case of an insured depository institution that is the parent 
company of other insured depository institutions, the final rule, like 
the proposed rule, requires that the parent insured depository 
institution report its daily or weekly, average consolidated total 
assets without consolidating its insured depository institution 
subsidiaries into the calculations.\21\ Because of intercompany 
transactions, a simple subtraction of the subsidiary insured depository 
institutions' assets and equity from the parent insured depository 
institution's assets and equity will not usually result in an accurate 
statement of the parent insured depository institution's assets and 
equity. This treatment is consistent with current assessment base 
practice and ensures that all parent insured depository institutions 
are assessed only for their own assessment base and not that of their 
subsidiary insured depository institutions, which will be assessed 
separately.
---------------------------------------------------------------------------

    \21\ The amount of the institution's average consolidated total 
assets without consolidating its insured depository institution 
subsidiaries determines whether the institution may report a weekly 
average.
---------------------------------------------------------------------------

    For all other subsidiaries, assets, including those eliminated in 
consolidation, will also be calculated using a daily or weekly 
averaging method, corresponding to the daily or weekly averaging 
requirement of the parent institution. The final rule clarifies that 
Call Report instructions in effect for the quarter being reported will 
govern calculation of the average amount of subsidiaries' assets, 
including those eliminated in consolidation. Current Call Report 
instructions state that the calculation should be for the same quarter 
as the assets reported by the parent institution to the extent 
practicable, but in no case differ by more than one quarter. However, 
under the final rule, once an institution reports the average amount of 
subsidiaries' assets, including those eliminated in consolidation, 
using concurrent data, the institution must do so for all subsequent 
quarters.
    Finally, for insured branches of foreign banks, as in the proposed 
rule, average consolidated total assets are defined as total assets of 
the branch (including net due from related depository institutions) in 
accordance with the schedule of assets and liabilities in the Report of 
Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks, 
but using the accounting methodology for reporting total assets 
established in Schedule RC-K of the Call Report, and calculated using 
the appropriate daily or weekly averaging method as described above.
    In choosing to require all but smaller insured institutions to 
report ``average consolidated total assets'' using daily averaging, the 
FDIC sought to develop a measure that would be a truer reflection of 
the assessment base during the entire quarter.\22\ By using a 
methodology already established in the Call Report, the FDIC believes 
the reporting requirements for the new assessment base will be 
minimized. Finally, by using the Call Report methodology for reporting 
average consolidated total assets, all institutions will report average 
consolidated total assets consistently.
---------------------------------------------------------------------------

    \22\ In this way, the daily averaging requirement is consistent 
with the actions taken by the FDIC in 2006 when it determined that 
using quarter-end deposit data as a proxy for balances over an 
entire quarter did not accurately reflect an insured depository 
institution's typical deposit level. As a result, the FDIC required 
certain institutions to report a daily average deposit assessment 
base.
---------------------------------------------------------------------------

2. Comments
    Commenters favored the use of an existing measure for average 
consolidated total assets because it will minimize the burden of the 
rulemaking on institutions.
    A few commenters suggested that the FDIC deduct goodwill and 
intangibles from average consolidated total assets. According to one 
commenter, a loss in value or write-off of goodwill (unlike other 
assets) poses no additional risk of loss to the FDIC in the event of a 
failure of an insured institution; goodwill is not an asset for which 
the FDIC as receiver could have any expectation of recovery. Moreover, 
failing to deduct goodwill could lead to anomalous results--two 
institutions that merge and create goodwill would have a combined 
assessment base greater than the sum of the two assessment bases 
separately. The FDIC is not persuaded by these

[[Page 10678]]

arguments. Dodd-Frank specifically states that the assessment base 
should be ``average consolidated total assets minus average tangible 
equity.'' Subtracting intangibles from assets as well as equity negates 
the purposeful use of the word ``tangible'' in the definition of the 
new assessment base and, in the FDIC's view, is counter to the intent 
of Congress.
    A number of commenters stated that the FDIC should exclude 
transactions between affiliated banks from the assessment base to avoid 
double counting the assets associated with these transactions in the 
assessment base. Commenters acknowledge that the FDIC currently 
assesses deposits received from affiliated banks, but believe that, 
with the requirement to change the assessment base, the FDIC should now 
exclude transactions between affiliated banks. The FDIC has generally 
assessed risk at the insured institution level and is not persuaded to 
change this practice.
3. Tangible Equity
    The final rule, like the proposed rule, uses Tier 1 capital as the 
definition of tangible equity. Although this measure does not eliminate 
all intangibles, it eliminates many of them, and it requires no 
additional reporting by insured depository institutions. The FDIC may 
reconsider the definition of tangible equity once new Basel capital 
definitions have been implemented.
    The final rule, like the proposed rule, defines the averaging 
period for tangible equity to be monthly; however, institutions that 
report less than $1 billion in quarter-end consolidated total assets on 
their March 31, 2011 Call Report or TFR may report average tangible 
equity using an end-of-quarter balance or may, at any time, opt to 
report average tangible equity using a monthly average balance 
permanently. Once an institution that reports average tangible equity 
using an end-of-quarter balance reports average consolidated total 
assets of $1 billion or more for two consecutive quarters, it shall 
permanently report average tangible equity using monthly averaging 
starting in the next quarter. Newly insured institutions must report 
monthly averages. Monthly averaging means the average of the three 
month-end balances within the quarter. For the surviving institution in 
a merger or consolidation, Tier 1 capital must be calculated as if the 
merger occurred on the first day of the quarter in which the merger or 
consolidation actually occurred.
    Under the final rule, as in the proposed rule, an insured 
depository institution with one or more consolidated insured depository 
institution subsidiaries must report average tangible equity (or end-
of-quarter tangible equity, as appropriate) without consolidating its 
insured depository institution subsidiaries into the calculations. This 
requirement conforms to the method for reporting consolidated total 
assets above and ensures that all parent insured depository 
institutions will be assessed only on their own assessment base and not 
that of their subsidiary insured depository institutions.
    As in the proposed rule, an insured depository institution that 
reports average tangible equity using a monthly averaging method and 
that has subsidiaries that are not insured depository institutions must 
use monthly average data for the subsidiaries. The monthly average data 
for these subsidiaries, however, may be calculated for the current 
quarter or for the prior quarter consistent with the method used to 
report average consolidated total assets.
    As in the proposed rule, for insured branches of foreign banks, 
tangible equity is defined as eligible assets (determined in accordance 
with Section 347.210 of the FDIC's regulations) less the book value of 
liabilities (exclusive of liabilities due to the foreign bank's head 
office, other branches, agencies, offices, or wholly owned 
subsidiaries). This value is to be calculated on a monthly average or 
end-of-quarter basis, according to the branch's size.
    The FDIC does not foresee a need for any institution to report 
daily average balances for tangible equity, since the components of 
tangible equity appear to be subject to less fluctuation than are 
consolidated total assets. Thus, the definition of average tangible 
equity in the final rule achieves a true reflection of tangible equity 
over the entire quarter by requiring monthly averaging of capital for 
institutions that account for the majority of industry assets and end-
of-quarter balances for all other institutions.
    Defining tangible equity as Tier 1 capital provides a clearly 
understood capital buffer for the DIF in the event of the institution's 
failure, while avoiding an increase in regulatory burden that a new 
definition of capital could cause.\23\ This methodology should not 
increase regulatory burden, since institutions with assets of $1 
billion or more generally compute their regulatory capital ratios no 
less frequently than monthly. To minimize regulatory burden for small 
institutions, the proposal allows these institutions to report an end-
of-quarter balance.
---------------------------------------------------------------------------

    \23\ The changes needed to implement the new assessment base 
will require the FDIC to collect some information from insured 
depository institutions that is not currently collected on the Call 
Report or TFR. However, the burden of requiring new data will be 
partly offset by allowing some assessment data that are currently 
collected to be deleted from the Call Report or TFR.
---------------------------------------------------------------------------

4. Comments
    A number of commenters explicitly supported the use of Tier 1 
capital for average tangible equity because this would minimize the 
burden of the rulemaking on institutions. One trade group asked that 
institutions with less than $10 billion in assets (as opposed to less 
than $1 billion) be allowed to report end-of-quarter balances rather 
than an average of month-end balances on the grounds that these 
institutions experience few fluctuations in capital and allowing them 
to report end-of-quarter balances would reduce burden. The FDIC 
believes that many institutions of this size already determine their 
capital more frequently than once a quarter, so that the requested 
change is not needed.
5. Banker's Bank Adjustment
    Like the proposed rule, the final rule will require a banker's bank 
to certify on its Call Report or TFR that it meets the definition of 
``banker's bank'' as that term is used in 12 U.S.C. 24. The self-
certification will be subject to verification by the FDIC. The final 
rule, however, clarifies that banker's banks that have funds from 
government capital infusion programs (such as TARP and the Small 
Business Lending Fund), stock owned by the FDIC resulting from bank 
failures or stock that is issued as part of an equity compensation 
program will not be excluded from the definition of banker's bank 
solely for these reasons.\24\ As in the proposed rule, for an 
institution that meets the definition (with the exception noted below), 
the FDIC will exclude from its assessment base the average amount of 
reserve balances ``passed through'' to the Federal Reserve, the average 
amount of reserve balances held at the Federal Reserve for the 
institution's own account, and the average amount of the institution's 
federal funds sold. (In each case, the average is to be calculated 
daily or weekly depending on how the

[[Page 10679]]

institution calculates its average consolidated total assets.) The 
collective amount of this exclusion, however, cannot exceed the sum of 
the bank's average amount of total deposits of commercial banks and 
other depository institutions in the United States and the average 
amount of its federal funds purchased. (Again, in each case, the 
average is to be calculated daily or weekly depending on how the 
institution calculates its average consolidated total assets.) Thus, 
for example, if a banker's bank has a total average balance of $300 
million of federal funds sold plus reserve balances (including pass-
through reserve balances), and it has a total average balance of $200 
million of deposits from commercial banks and other depository 
institutions and federal funds purchased, it can deduct $200 million 
from its assessment base. Federal funds purchased and sold on an agency 
basis will not be included in these calculations as they are not 
reported on the balance sheet of a banker's bank.
---------------------------------------------------------------------------

    \24\ Some commenters had asked that the FDIC use the definition 
of banker's bank contained in 12 U.S.C. 461(b)(9) (which is repeated 
verbatim in the implementing regulation, 12 CFR 204.121) in lieu of 
12 U.S.C. 24. The definition of banker's bank in the final rule 
adheres to the requirement in Dodd-Frank that the potential 
assessment base reduction apply to banker's banks ``as that term is 
used in * * * 12 U.S.C. 24.'' However, in the FDIC's view, the 
clarification in the preamble should meet the concerns of these 
commenters.
---------------------------------------------------------------------------

    As in the proposed rule, the assessment base adjustment applicable 
to a banker's bank is only available to an institution that conducts 
less than 50 percent of its business with affiliates (as defined in 
section 2(k) of the Bank Holding Company Act (12 U.S.C. 1841(k)) and 
section 2 of the Home Owners' Loan Act (12 U.S.C. 1462)). Providing a 
benefit to a banker's bank that primarily serves affiliated companies 
would undermine the intent of the benefit by providing a way for 
banking companies to reduce deposit insurance assessments simply by 
establishing a subsidiary for that purpose.
    Currently, the corresponding deposit liabilities that result in 
``pass-through'' reserve balances are excluded from the assessment 
base. The final rule, like the proposal, retains this exception for 
banker's banks.
    A typical banker's bank provides liquidity and other services to 
its member banks that may result in higher than average amounts of 
federal funds purchased and deposits from other insured depository 
institutions and financial institutions on a banker's bank's balance 
sheet. To offset its relatively high levels of these short-term 
liabilities, a banker's bank often holds a relatively high amount of 
federal funds sold and reserve balances for its own account. The final 
rule, therefore, like the proposed rule, adjusts the assessment base of 
a banker's bank to reflect its greater need to maintain liquidity to 
service its member banks.
6. Comments
    Several commenters addressed the issue of providing an adjustment 
to banker's banks. The most common comment among the respondents was a 
concern that the adjustment for federal funds sold may have unintended 
consequences for the federal funds market. The commenters argued that 
federal funds are generally sold on thin margins and that, if non-
banker's banks pay even a few basis points of FDIC assessments on 
federal funds sold when banker's banks do not, the non-banker's banks 
will not be able to compete in this market. The comments further state 
that banker's banks alone cannot provide sufficient funding to maintain 
the federal funds market at its current size and that by providing a 
deduction from assets solely for banker's banks, the proposal could 
potentially lead to a considerable contraction of the federal funds 
market with detrimental implications for bank liquidity. The comments 
suggested that the FDIC provide a deduction for federal funds sold for 
all insured depository institutions or, alternatively, assign a zero 
premium weight to federal funds sold for all institutions.
    The FDIC recognizes that, by allowing banker's banks to subtract 
federal funds sold from their assessment base, the cost of providing 
those funds for banker's banks will be reduced relative to other banks 
that are not afforded such a deduction. However, there is no uniform 
assessment rate for all banks, and since assessment rates will now be 
applied to an assessment base of average consolidated total assets, the 
cost--due to the assessment rate--of providing federal funds will 
potentially differ for every institution. While banker's banks may gain 
an incentive to sell more federal funds than they currently have and 
may gain a larger profit from doing so than would some other banks, it 
is not clear, a priori, what their total cost of funding will be, given 
that the assessment rate is only one factor in the cost of providing 
federal funds. Further, it is not likely that non-banker's banks will 
completely withdraw from providing federal funds as long as the market 
finds such funding more attractive than the alternatives.
    Three commenters called for all excess reserve balances maintained 
by banker's banks to be included in the banker's bank deduction; some 
also called for the FDIC to allow a deduction for balances due from 
other banks. The FDIC clarifies that the proposed deduction for reserve 
balances held at the Federal Reserve would include all balances due 
from the Federal Reserve as reported on Schedule RC-A, line 4 of the 
Call Report. Balances due from other banks include assets that are 
relatively less liquid, such as time deposits. The FDIC does not 
believe it is appropriate to include these balances in the banker's 
bank deduction.
    One banker's bank argues that banker's banks are subject to 
``double taxation'' because every dollar on deposit has been received 
from another bank that is also being assessed a deposit insurance 
premium on its deposits. In the FDIC's view, there is no double 
assessment, since each institution is receiving the benefit of deposit 
insurance and is paying for it. This view is consistent with the 
treatment of interbank deposits under the current deposit insurance 
assessment system, which includes these deposits in an institution's 
assessment base.
    Another bank argues that there is no reasonable basis to deny the 
banker's bank assessment base deduction to banker's banks that conduct 
business primarily with affiliated insured depository institutions. 
This bank also argues that the interaffiliate transactions that such a 
banker's bank engages in result in counting the same assets twice, once 
at the banker's bank and again at its affiliate, although overall risk 
is not increased because of cross-guarantees. The FDIC believes that, 
while such a bank may meet the technical definition of a banker's bank, 
it does not serve the same function as a true banker's bank. Moreover, 
as discussed above, the FDIC has generally assessed risk at the insured 
depository institution level (for example, it currently assesses 
separately on interaffiliate deposits) and is not persuaded to change 
this practice. The FDIC cannot invariably collect on cross-guarantees 
from affiliated institutions, since the guarantor may also be insolvent 
or could be made insolvent by fulfilling the guarantee.
7. Custodial Bank Definition
    The final rule identifies custodial banks as insured depository 
institutions with previous calendar year-end trust assets (that is, 
fiduciary and custody and safekeeping assets, as reported on Schedule 
RC-T of the Call Report) of at least $50 billion or those insured 
depository institutions that derived more than 50 percent of their 
revenue (interest income plus non-interest income) from trust activity 
over the previous calendar year. Using this definition, the FDIC 
estimates that 62 insured depository institutions would have qualified 
as custodial banks for deposit insurance purposes using data as of 
December 31, 2009.

[[Page 10680]]

    This definition differs from the definition in the Assessment Base 
NPR, in that it expands the definition to include fiduciary assets and 
revenue as well as custody and safekeeping assets and revenue. 
Commenters have convinced the FDIC that fiduciary accounts have a 
custodial component, which, in many cases, is the primary reason for 
the account. This change will mean that more institutions will qualify 
under the definition.
8. Custodial Bank Adjustment
    The final rule states that the assessment base adjustment for 
custodial banks should be the daily or weekly average--in accordance 
with the way the bank reports its average consolidated total assets--of 
a certain amount of low-risk assets--designated as assets with a Basel 
risk weighting of 0 percent, regardless of maturity,\25\ plus 50 
percent of those assets with a Basel risk weighting of 20 percent, 
again regardless of maturity \26\--subject to the limitation that the 
daily or weekly average value of these assets cannot exceed the daily 
or weekly average value of those deposits classified as transaction 
accounts (as reported on Schedule RC-E of the Call Report) and 
identified by the institution as being directly linked to a fiduciary 
or custodial and safekeeping account.
---------------------------------------------------------------------------

    \25\ Specifically, all asset types described in the instructions 
to lines 34, 35, 36, and 37 of Schedule RC-R of the Call Report as 
of December 31, 2010 with a Basel risk weight of 0 percent, 
regardless of maturity. These types of assets are also currently 
reported on corresponding line items in the TFR. These same asset 
types will be used regardless of changes to the Call Report or TFR.
    \26\ Specifically, 50 percent of those asset types described in 
the instructions to lines 34, 35, 36, and 37 of Schedule RC-R of the 
Call Report (or corresponding items in the TFR) with a Basel risk 
weighting of 20 percent. These types of assets are also currently 
reported on corresponding line items in the TFR. These same asset 
types will be used regardless of changes to the Call Report or TFR.
---------------------------------------------------------------------------

    The final rule differs from the Assessment Base NPR in that it 
allows the deduction of all 0 percent risk-weighed assets and 50 
percent of 20 percent risk-weighted assets without regard to specific 
maturity (although the purpose of the 50 percent reduction in the 20 
percent risk weighted assets is to apply a sufficient haircut to those 
assets to account for the risk posed by longer-term maturities). Again 
based upon comments, the FDIC has concluded that transaction accounts 
associated with fiduciary and custody and safekeeping assets generally 
display the characteristics of core deposits, justifying a relaxation 
of the maturity length requirement in the proposal.\27\
---------------------------------------------------------------------------

    \27\ All of the commenters on the issue disagreed with limiting 
the assets eligible for the deduction to those with a stated 
maturity of 30 days or less. Most of the comments noted that assets 
with 20 percent or lower Basel risk weightings are high-quality and 
liquid, regardless of maturity, and one commenter stated that any 
breakdown of these assets by maturity would require additional 
reporting as such information is not currently collected. A number 
of the comments noted that the maturity of an asset is not the only 
indicator of the asset's liquidity. Comments from the banks 
generally argued that custodial deposits are relatively stable--akin 
to core deposits, rather than wholesale deposits--and, as such, it 
would be imprudent for them to manage their portfolios by matching 
these deposits strictly to assets with a maturity of 30 days or 
less.
---------------------------------------------------------------------------

    The final rule also differs from the proposed rule in two other 
ways. First, it allows a deduction up to the daily or weekly average 
value of those deposits classified as transaction accounts that are 
identified by the institution as being linked to a fiduciary or 
custodial and safekeeping account. The final rule includes fiduciary 
accounts, rather than just custodial and safekeeping accounts, for the 
reasons stated above. Second, the final rule limits the deduction to 
transaction accounts, rather than all deposit accounts, because 
deposits generated in the course of providing custodial services 
(regardless of whether there is a fiduciary aspect to the account) are 
used for payments and clearing purposes, as opposed to deposits held in 
non-transaction accounts, which may be part of a wealth management 
strategy.

B. Assessment Rate Adjustments

    In February 2009, the FDIC adopted a final rule incorporating three 
adjustments into the risk-based pricing system.\28\ These adjustments--
the unsecured debt adjustment, the secured liability adjustment, and 
the brokered deposit adjustment--were added to better account for risk 
among insured depository institutions based on their funding sources. 
In light of the changes to the deposit insurance assessment base 
required by Dodd-Frank, the final rule modifies these adjustments. In 
addition, the final rule adds an adjustment for long-term debt held by 
an insured depository institution where the debt is issued by another 
insured depository institution.
---------------------------------------------------------------------------

    \28\ 74 FR 9525 (March 4, 2009).
---------------------------------------------------------------------------

1. Unsecured Debt Adjustment
    The final rule maintains the long-term unsecured debt adjustment, 
but the amount of the adjustment is now equal to the amount of long-
term unsecured liabilities \29\ an insured depository institution 
reports times the sum of 40 basis points plus the institution's initial 
base assessment rate divided by the amount of the institution's new 
assessment base; that is: \30\
---------------------------------------------------------------------------

    \29\ Unsecured debt remains as defined in the 2009 Final Rule on 
Assessments, with the exceptions (discussed below) of the exclusion 
of Qualified Tier 1 capital and certain redeemable debt. See 74 FR 
9537 (March 4, 2009).
    \30\ The IBAR is the institution's initial base assessment rate.

UDA = (Long-term unsecured liabilities/New assessment base) * (40 basis 
---------------------------------------------------------------------------
points + IBAR)

    Thus, if an institution with a $10 billion assessment base issued 
$100 million in long-term unsecured liabilities and had an initial base 
assessment rate of 20 basis points, its unsecured debt adjustment would 
be 0.6 basis points, which would result in an annual reduction in the 
institution's assessment of $600,000.
    All other things equal, greater amounts of long-term unsecured debt 
can reduce the FDIC's loss in the event of a failure, thus reducing the 
risk to the DIF. Because of this, under the current assessment system, 
an insured depository institution's assessment rate is reduced through 
the unsecured debt adjustment, which is based on the amount of long-
term, unsecured liabilities the insured depository institution issues. 
Adding the initial base assessment rate to the adjustment formula 
maintains the value of the incentive to issue long-term unsecured debt, 
providing insured depository institutions with the same incentive to 
issue long-term unsecured debt that they have under the current 
assessment system.
    Unless this revision is made, the cost of issuing long-term 
unsecured liabilities will rise (as will the cost of funding for all 
other liabilities except, in most cases, domestic deposits) as there 
will no longer be a distinction, in terms of the cost of deposit 
insurance, among the types of liabilities funding the new assessment 
base. The FDIC remains concerned that this will reduce the incentive 
for insured depository institutions to issue long-term unsecured debt. 
Therefore, the final rule, like the proposed rule, revises the 
adjustment so that the relative cost of issuing long-term unsecured 
debt will not rise with the implementation of the new assessment base.
    The final rule, like the proposed rule, also changes the cap on the 
unsecured debt adjustment from the current 5 basis points to the lesser 
of 5 basis points or 50 percent of the institution's initial base 
assessment rate. This cap will apply to the new assessment base. This 
change allows the maximum dollar amount of the unsecured debt 
adjustment to increase because the assessment base is larger, but 
ensures that the assessment rate after the

[[Page 10681]]

adjustment is applied does not fall to zero.
    In addition, the final rule, like the proposed rule, eliminates 
Qualified Tier 1 capital from the definition of unsecured debt. Under 
the current assessment system, the unsecured debt adjustment includes 
certain amounts of Tier 1 capital (Qualified Tier 1 capital) for 
insured depository institutions with less than $10 billion in assets. 
Since the new assessment base excludes Tier 1 capital, defining long-
term, unsecured liabilities to include Qualified Tier 1 capital would 
have the effect of providing a double deduction for this capital.
    Finally, the final rule, unlike the proposed rule, slightly alters 
the definition of long-term unsecured debt. At present, and under the 
proposed rule, long-term unsecured debt is defined as long-term if the 
unsecured debt has at least one year remaining until maturity. The 
final rule provides that long-term unsecured debt is long-term if the 
debt has at least one year remaining until maturity, unless the 
investor or holder of the debt has a redemption option that is 
exercisable within one year of the reporting date. Such a redemption 
option negates the benefit of long-term debt to the DIF.
2. Comments
    Some commenters expressed support for increasing the adjustment to 
40 basis points plus the initial base assessment rate.
    A number of commenters believed that the long-term unsecured 
liability definition should be expanded to include short-term unsecured 
liabilities, uninsured deposits and foreign office deposits or all 
liabilities subordinate to the FDIC. A few commenters also stated that 
the original, rather than remaining, maturity of unsecured debt should 
be used to determine whether unsecured debt qualifies as long term.
    The FDIC does not believe that the definition of long-term 
liabilities should be expanded. Short-term unsecured liabilities 
(including those that were long-term at issuance) provide less 
protection to the DIF in the event of failure. By the time an 
institution fails, unsecured debt remaining at an institution is 
primarily longer-term debt that has not yet come due. Thus, providing a 
benefit for short-term unsecured debt does not make sense, since this 
kind of debt is unlikely to provide any cushion to absorb losses in the 
event of failure. Similarly, the FDIC does not agree that unsecured 
debt should include foreign office deposits, since there is likely to 
be a significant reduction in these deposits by the time of failure. In 
addition, while, under U.S. law, foreign deposits are subordinate to 
domestic deposits in the event an institution fails, they can be 
subject to asset ring-fencing that effectively makes them similar to 
secured liabilities.
    One commenter stated that the long-term unsecured liability 
definition should include goodwill and other intangibles. The FDIC does 
not agree. The purpose of this adjustment is to provide an incentive 
for insured depository institutions to issue long-term unsecured debt 
to absorb losses in the event an institution fails. Goodwill and other 
intangibles are assets (rather than liabilities) and they provide 
little to no value to the FDIC in a resolution.
    One commenter recommended that the unsecured debt adjustment cap 
should be increased or removed. The commenter argued that all long-term 
unsecured claims subordinate to the FDIC reduce the FDIC's risk equally 
and the cap artificially and arbitrarily mutes the effect. Further, the 
commenter noted that a bank with a lower initial base assessment rate 
and arguably less risk to the FDIC should not have a lower cap simply 
due to its lower initial base assessment rate. The FDIC disagrees. An 
excessive deduction could create moral hazard. While the FDIC 
acknowledges that an institution with a lower initial base assessment 
rate may have a lower cap than one with a higher initial base 
assessment rate, the FDIC believes that, to avoid the potential for 
moral hazard that would ensue from an assessment rate at or near zero, 
all institutions should pay some assessment. Thus, setting the cap at 
half of the initial base assessment rate is appropriate.
3. Depository Institution Debt Adjustment
    Like the proposed rule, the final rule creates a new adjustment, 
the depository institution debt adjustment (DIDA), which is meant to 
offset the benefit received by institutions that issue long-term, 
unsecured liabilities when those liabilities are held by other insured 
depository institutions.\31\ However, in response to comments, the 
final rule allows an institution to exclude from the unsecured debt 
amount used in calculating the DIDA an amount equal to no more than 3 
percent of the institution's Tier 1 capital as posing de minimis risk. 
Therefore, the final rule will apply a 50 basis point DIDA to every 
dollar (above 3 percent of an institution's Tier 1 capital) of long-
term unsecured debt held by an insured depository institution when that 
debt is issued by another insured depository institution.\32\ 
Specifically, the adjustment will be determined according to the 
following formula:
---------------------------------------------------------------------------

    \31\ For this reason, the long-term unsecured debt that is 
subject to the DIDA is defined in the same manner as the long-term 
unsecured debt that qualifies for the unsecured debt adjustment.
    \32\ Debt issued by an entity other than an insured depository 
institution, including such an uninsured entity that owns or 
controls, either directly or indirectly, an insured depository 
institution, is not subject to the DIDA.

DIDA = [(Long-term unsecured debt issued by another insured depository 
institution--3% * Tier 1 capital) * 50 basis points]/New assessment 
---------------------------------------------------------------------------
base

    An institution should use the same valuation methodology to 
calculate the amount of long-term unsecured debt issued by another 
insured depository institution that it holds as it uses to calculate 
the amount of such debt for reporting on the asset side of the balance 
sheets.
    Although issuance of unsecured debt by an insured depository 
institution lessens the potential loss to the DIF in the event of an 
insured depository institution's failure, when this debt is held by 
other insured depository institutions, the overall risk to the DIF is 
not reduced as much. For this reason, the final rule increases the 
assessment rate of an insured depository institution that holds this 
debt. The FDIC considered reducing the benefit from the unsecured debt 
adjustment received by insured depository institutions when their long-
term unsecured debt is held by other insured depository institutions, 
but debt issuers generally do not track which entities hold their debt. 
The FDIC believes that the magnitude of the DIDA will approximately 
offset the decrease in the assessment rate of the issuing institution, 
and will discourage insured depository institutions from holding 
excessive amounts of other insured depository institutions' debt.
4. Comments
    A number of commenters noted that the proposed level of 50 basis 
points for the DIDA is excessive relative to the risk presented to the 
FDIC. The FDIC disagrees. A fixed level of 50 basis points was 
established to generally offset the deduction received by the issuing 
institution of 40 basis points plus the initial base assessment rate. 
While the initial base assessment rate for the issuing institution may 
be less or greater than 10 basis points, the FDIC believes that 50 
basis points is an appropriate approximation to offset the deduction to 
the issuing insured depository institution and to discourage insured 
depository institutions from

[[Page 10682]]

holding excessive amounts of each other's debt, which leaves the risk 
from such debt within the banking system.
    A few commenters noted that a 50 basis point increase is punitive 
towards insured depository institutions that wish to manage a 
diversified portfolio of earning assets, including unsecured debt 
issued by strong depository insured institutions. The FDIC recognizes 
that the 50 basis point charge represents a disincentive to insured 
depository institutions to purchase the unsecured debt of another 
insured institution. That is one of the goals of the adjustment. 
However, the FDIC concedes that a small amount of debt that would 
otherwise be subject to the DIDA could be held to facilitate prudent 
portfolio management activities and, as discussed above, has created a 
de minimis exception.
    Another commenter noted that the implementation of the 50-basis 
point adjustment could cause banks that issue unsecured debt to face 
reduced access to liquidity and funding, resulting from an increased 
cost of issuing unsecured debt to insured depository institutions. The 
FDIC believes that an increase, if any, in the cost of funding as the 
result of this adjustment will be significantly less than the long-term 
unsecured debt reduction an issuer receives. Further, the FDIC's 
exclusion of a de minimis amount of debt issued by insured depository 
institutions should minimize or eliminate any potential effect. The 
FDIC's intent is only to permit a net reduction in insurance premiums 
in the event that the risk of default on unsecured debt issued by an 
insured depository institution has limited or no effect on any other 
insured depository institution.
    A few commenters stated that a cap should be set for the DIDA. The 
FDIC disagrees, since a cap would undermine the purpose of the DIDA.
    A few commenters stated that the DIDA will result in a reporting 
burden for insured depository institutions, particularly since CUSIP 
numbers do not identify industries. The FDIC disagrees. The FDIC 
believes that a bank should know and understand the attributes of its 
investments, including, among other things, the name of the issuer and 
the industry that the issuer operates in. While the FDIC acknowledges 
some reporting modifications may have to be made at some institutions, 
the FDIC believes those changes can be accomplished at minimal time and 
cost.
5. Secured Liability Adjustment
    The final rule, like the proposed rule, discontinues the secured 
liability adjustment. In arguing for the secured liability adjustment 
the FDIC stated that, ``[t]he exclusion of secured liabilities can lead 
to inequity. An institution with secured liabilities in place of 
another's deposits pays a smaller deposit insurance assessment, even if 
both pose the same risk of failure and would cause the same losses to 
the FDIC in the event of failure.'' The change in the assessment base 
will eliminate the advantage of funding with secured liabilities 
associated with the current assessment base (domestic deposits), thus 
eliminating the rationale for continuing the adjustment.
6. Comments
    A few commenters stated support for the removal of the secured 
liability adjustment, although one commenter opined that FHLB funding 
is more damaging to the FDIC than brokered deposits. On balance, the 
FDIC believes that including secured liabilities in the assessment base 
has removed the need for the secured liability adjustment.
7. Brokered Deposit Adjustment
    The final rule, like the proposed rule, retains the current 
adjustment for brokered deposits, but scales the adjustment to the new 
assessment base by the insured depository institution's ratio of 
domestic deposits to the new assessment base. The new formula for 
brokered deposits is the following:

BDA = ((Brokered deposits - (Domestic deposits * 10%))/New assessment 
base) * 25 basis points

    As discussed below, the final rule changes the assessment system 
for large institutions and eliminates risk categories for these 
institutions. Based on comments, however, the final rule provides an 
exemption from the brokered deposit adjustment for certain large 
institutions. The brokered deposit adjustment will not apply to those 
large institutions that are well-capitalized and have a composite 
CAMELS rating of 1 or 2. The FDIC believes that this exemption will 
result in a more equitable distribution of assessments. The brokered 
deposit adjustment does not apply to small institutions that are well-
capitalized and have a composite CAMELS rating of 1 or 2. The brokered 
deposit adjustment will continue to apply to all other large 
institutions and to small institutions in risk categories II, III, and 
IV when the ratio of brokered deposits to domestic deposits exceeds 10 
percent. As discussed, small Risk Category I institutions will continue 
to be excluded.
    The final rule, like the proposed rule, maintains a cap on the 
adjustment of 10 basis points. The FDIC recognizes that keeping the cap 
constant could result in an increase in the amount an institution is 
assessed due to the adjustment, since the cap will apply to a larger 
assessment base. However, the FDIC remains concerned that significant 
reliance on brokered deposits tends to increase an institution's risk 
profile, particularly as its financial condition weakens.
8. Comments
    A few commenters noted that the FDIC has not demonstrated a 
positive correlation between bank failures and the use of brokered 
deposits, which is inconsistent with a risk-based assessment system. 
The FDIC disagrees. A number of costly institution failures, including 
some recent failures, involved rapid asset growth funded through 
brokered deposits. Moreover, the presence of brokered deposits in a 
failed institution tends to reduce its franchise value, resulting in 
increased losses to the DIF.
    Numerous comment letters argued that certain types of brokered 
deposits, including reciprocal deposits and sweeps, should be excluded 
from the brokered deposit adjustment because they are more stable than 
other types of brokered deposits. The FDIC considered the substance of 
these comments when it originally adopted the brokered deposit 
adjustment and remains unpersuaded. The final rule does not apply the 
brokered deposit adjustment to a well-capitalized, CAMELS 1- or 2-rated 
institution. When an institution's condition declines and it becomes 
less than well capitalized or is not rated CAMELS 1 or 2, statutory and 
market restrictions on brokered deposits become much more relevant. For 
this reason, the FDIC has decided to continue to include all brokered 
deposits above 10 percent of an institution's domestic deposits in the 
brokered deposit adjustment.
    A few commenters noted that Dodd-Frank directs the FDIC to study 
the definition of brokered deposits. The commenters contend that 
determining the definition of brokered deposit prior to completion of 
the study is counter to the intent of Congress. The FDIC will continue 
to use its current definition for the present, but will examine the 
definition in light of the completed study and will consider changes 
then, if appropriate.
    One commenter argued for a reduction of the cap from 10 basis 
points to 6.5 basis points given the increase in assessment base. While 
the FDIC acknowledges that maintaining the 10 basis point cap could 
increase the size of the adjustment as a result in the

[[Page 10683]]

change in assessment base, the FDIC believes this increase is 
appropriate. The FDIC remains concerned that significant reliance on 
brokered deposits tends to increase an institution's risk profile, 
particularly as it weakens.

V. The Final Rule: Dividends and Assessment Rates

A. Dividends

1. Final Rule
    As proposed in the October NPR and consistent with the FDIC's long-
term, comprehensive plan for fund management, the final rule suspends 
dividends indefinitely whenever the fund reserve ratio exceeds 1.5 
percent to increase the probability that the fund reserve ratio will 
reach a level sufficient to withstand a future crisis.\33\ In lieu of 
dividends, and pursuant to its authority to set risk-based assessments, 
the final rule adopts progressively lower assessment rate schedules 
when the reserve ratio exceeds 2 percent and 2.5 percent, as discussed 
below. These lower assessment rate schedules serve much the same 
function as dividends in preventing the DIF from growing unnecessarily 
large but, as discussed in the October NPR, provide more stable and 
predictable effective assessment rates, a feature that industry 
representatives said was very important at the September 24, 2010 
roundtable organized by the FDIC.
---------------------------------------------------------------------------

    \33\ As discussed above, Dodd-Frank continued the FDIC's 
authority to declare dividends when the reserve ratio at the end of 
a calendar year is at least 1.5 percent, but granted the FDIC sole 
discretion in determining whether to suspend or limit the 
declaration or payment of dividends. Dodd-Frank Wall Street Reform 
and Consumer Protection Act, Public Law 111-203, Sec.  332, 124 
Stat. 1376, 1539 (codified at 12 U.S.C. 1817(e)(2)(B)).
---------------------------------------------------------------------------

2. Comments
    In the October NPR, the FDIC had proposed suspending dividends 
``permanently.'' One trade group, representing community banks, agreed 
that permanently foregoing dividends:

    [I]s much more likely to ensure steady, predictable assessment 
rates. While we think that the FDIC should never completely rule out 
the possibility of paying a dividend from the DIF, we believe that 
at least until the DIF reserve ratio reaches 2.5 percent, it is 
prudent to forego a dividend in favor of steady, predictable 
assessment rates.

    Another trade group argued that a permanent suspension of dividends 
is an unnecessary limitation on the FDIC's discretion under Dodd-Frank. 
The trade group argued that decisions on dividends should be based on 
facts and circumstances whenever the reserve ratio exceeds 1.5 percent. 
If the suspension is adopted, the trade group believes that the FDIC 
should provide that it could be lifted in appropriate circumstances.
    The FDIC is persuaded that the word ``indefinitely'' should be used 
in place of the word ``permanently,'' although the distinction is 
semantic. The rule is not intended to, and in any event, could not 
abrogate the authority of future FDIC Boards of Directors to adopt a 
different rule governing dividends.
    Another trade group argued that the FDIC should establish a 
dividend policy to slow the growth of the insurance fund as it 
approaches an upper limit. In the FDIC's view, the historical analysis 
set out in the October NPR and updated in the DRR final rule, as 
described above, reveals that lower rates, like dividends, can 
effectively slow the growth of the reserve ratio, but can lead to less 
volatility in effective assessment rates.

B. Assessment Rate Schedules

1. Rate Schedule Effective April 1, 2011
    Pursuant to the FDIC's authority to set assessments, the initial 
and total base assessment rates described in Table 3 below will become 
effective April 1, 2011. These rates are identical to those proposed in 
the Assessment Base NPR. (The rate schedule does not include the 
depository institution debt adjustment.)

                               Table 3--Initial and Total Base Assessment Rates *
----------------------------------------------------------------------------------------------------------------
                                                                                                     Large and
                                   Risk category   Risk category   Risk category   Risk category  highly complex
                                         I              II              III             IV         institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate....             5-9              14              23              35            5-35
Unsecured debt adjustment **....         (4.5)-0           (5)-0           (5)-0           (5)-0           (5)-0
Brokered deposit adjustment.....                            0-10            0-10            0-10            0-10
                                 -------------------------------------------------------------------------------
    Total Base Assessment Rate..           2.5-9            9-24           18-33           30-45          2.5-45
----------------------------------------------------------------------------------------------------------------
* Total base assessment rates do not include the depository institution debt adjustment.
** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured
  depository institution's initial base assessment rate; thus for example, an insured depository institution
  with an initial base assessment rate of 5 basis points will have a maximum unsecured debt adjustment of 2.5
  basis points and cannot have a total base assessment rate lower than 2.5 basis points.

    The FDIC believes that the change to a new, expanded assessment 
base should not change the overall amount of assessment revenue that 
the FDIC would otherwise have collected using the assessment rate 
schedule under the Restoration Plan adopted by the Board on October 19, 
2010.\34\ Several industry trade groups and insured institutions 
supported this approach. Based on the FDIC's estimations, the rate 
schedule in Table 3 above will result in the collection of assessment 
revenue that is approximately revenue neutral.35 36 Because 
the new assessment base under Dodd-Frank is larger than the current 
assessment base, the assessment rates in Table 3 above are lower than 
current rates.
---------------------------------------------------------------------------

    \34\ 75 FR 66293 (October 27, 2010).
    \35\ Specifically, the FDIC has attempted to determine a rate 
schedule that would have generated approximately the same revenue as 
that generated under the current rate schedule in the second and 
third quarters of 2010 using the current assessment base.
    \36\ As discussed earlier, under Dodd-Frank, the FDIC is 
required to offset the effect on small institutions (those with less 
than $10 billion in assets) of the statutory requirement that the 
fund reserve ratio increase from 1.15 percent to 1.35 percent by 
September 30, 2020. Thus, assessment rates applicable to all insured 
depository institutions need only be set high enough to reach 1.15 
percent. The Restoration Plan postpones until later this year 
rulemaking regarding the method that will be used to reach 1.35 
percent by the statutory deadline of September 30, 2020, and the 
manner of offset.
---------------------------------------------------------------------------

    The rate schedule in Table 3 includes a column for institutions 
with at least $10 billion in total assets. This column represents the 
assessment rates that will be applied to institutions of this size 
pursuant to the changes to the large institution pricing system 
discussed below. The range of total base assessment rates (2.5 basis 
points to 45 basis points) is the same for institutions of all sizes; 
however, institutions with at least $10 billion in total assets will 
not be assigned to risk categories.

[[Page 10684]]

    The final rule retains the FDIC Board's flexibility to adopt actual 
rates that are higher or lower than total base assessment rates without 
the necessity of further notice-and-comment rulemaking, but provides 
that: (1) The Board cannot increase or decrease rates from one quarter 
to the next by more than 2 basis points (rather than the current and 
proposed 3 basis points); and (2) cumulative increases and decreases 
cannot be more than 2 basis points higher or lower than the total base 
assessment rates. Retention of this flexibility (with the proportionate 
reduction in the size of the adjustment) will continue to allow the 
Board to act in a timely manner to fulfill its mandate to raise the 
reserve ratio in accordance with the Restoration Plan, particularly in 
light of the increased uncertainty about expected revenue resulting 
from the change in the assessment base. The reduction from 3 to 2 basis 
points was prompted by an industry trade group, which noted that 2 
basis points of the new assessment base is approximately equal to 3 
basis points of the domestic deposit assessment base.
2. Analysis of Statutory Factors for the New Rate Schedule
    In setting assessment rates, the FDIC's Board of Directors is 
authorized to set assessments for insured depository institutions in 
such amounts as the Board of Directors may determine to be necessary or 
appropriate.\37\ In setting assessment rates, the FDIC's Board of 
Directors is required by statute to consider the following factors:
---------------------------------------------------------------------------

    \37\ 12 U.S.C. 1817(b)(2)(A).
---------------------------------------------------------------------------

    (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 section 7(b)(1) of the Federal Deposit Insurance Act (12 U.S.C 
Section 1817(b)(1)) under the risk-based assessment system, including 
the requirement under section 7(b)(1)(A) of the Federal Deposit 
Insurance Act (12 U.S.C Section 1817(b)(1)(A)) to maintain a risk-based 
system.\38\
---------------------------------------------------------------------------

    \38\ 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.
    Section 7(b)(1)(C) of the Federal Deposit Insurance Act (12 
U.S.C. 1817(b)(1)(C)).
---------------------------------------------------------------------------

    (v) Other factors the Board of Directors has determined to be 
appropriate.
    Section 7(b)(2) of the Federal Deposit Insurance Act, 12 U.S.C. 
1817(b)(2)(B).
    When the Board adopted the most recent Restoration Plan, it left 
the current assessment rate schedule in effect and took these statutory 
factors into account. The Restoration Plan requires that the FDIC 
update income and loss projections semiannually. The Board's decision 
to leave current assessment rates in effect was based on the FDIC's 
most recent projections, which projected lower expected losses for the 
period 2010 through 2014 than the FDIC's projections in June 2010 
(approximately $50 billion rather than approximately $60 billion as 
projected in June 2010).\39\ Because of the lower expected losses and 
the additional time provided by Dodd-Frank to meet the minimum (albeit 
higher) required reserve ratio, the FDIC opted, in the new Restoration 
Plan, to forego the uniform 3 basis point increase in assessment rates 
previously scheduled to go into effect on January 1, 2011. The FDIC 
estimated that the fund reserve ratio will reach 1.15 percent in 2018, 
even without the 3 basis point uniform increase in rates. As stated 
above, the final rule changes the current assessment rate schedule such 
that the new assessment rate schedule (applied against the new 
assessment base) will result in the collection of about the same amount 
of assessment revenue as the current assessment rate schedule applied 
against the domestic deposit assessment base.
---------------------------------------------------------------------------

    \39\ The projections also cover expenses and the reserve ratio. 
The FDIC anticipates that the next semiannual update of projections 
will occur in the first half of 2011.
---------------------------------------------------------------------------

    For this reason, as stated in the Assessment Base NPR, the new 
assessment rates and assessment base should, overall, have no effect on 
the capital and earnings of the banking industry, although the new 
rates and base will affect the earnings and capital of individual 
institutions. The great majority of institutions will pay assessments 
at least 5 percent lower than currently and would thus have higher 
earnings and capital. However, 117 insured depository institutions, 
comprising 71 small institutions and 46 large institutions, would pay 
assessments at least 5 percent higher than they currently do. Appendix 
1 contains additional detail on the projected effects of increases or 
decreases in assessments on the capital and earnings of insured 
depository institutions.
3. Comments on New Rate Schedule
    Comments on the new rate schedule effective April 1, 2011, focused 
on two areas: The appropriateness of the shift in the rate schedule due 
to the new assessment base and the speed at which these rates would 
restore the DIF to 1.15 percent. As stated above, commenters generally 
supported the rate schedule in light of the new assessment base, since 
it maintains approximate revenue neutrality.
    Several trade groups believed that the FDIC's projection for how 
quickly the reserve ratio will recover was too pessimistic and, thus, 
the rate schedule to restore the DIF was too high. A trade group 
believed that the revenue from the Temporary Liquidity Guarantee 
Program will allow the reserve ratio to reach 1.35 percent by 2017. A 
trade group also suggested basing reserve ratio projections on loss 
rates from the recovery period after the crisis of the early 1990s. 
Some commenters urged the FDIC to monitor progress of the Restoration 
Plan and reduce rates if the DIF reserve ratio reaches 1.35 percent 
more quickly than the FDIC has projected.
    The FDIC has projected that the reserve ratio will reach 1.15 
percent at the end of 2018. This projection was based on approximately 
$50 billion in losses from bank failures in 2010 through 2014 with 
markedly lower losses thereafter. (In fact, losses for 2017 and each 
year thereafter were assumed to equal average annual losses from 1995 
to 2004, a period of very low fund losses.) The FDIC did not include 
income from the TLGP, because it believes that it is too early to 
determine the amount that may be transferred to the DIF when the TLGP 
ends at the end of 2012.
    The FDIC does not believe that its projections are too pessimistic. 
Given the uncertainty of the pace of recovery in the economy and 
banking industry, as well as the uncertainty inherent in projecting 
reserve ratios eight years in advance, the FDIC believes that lowering 
assessment rates now (in addition to foregoing the 3 basis point rate 
increase previously scheduled to take effect in 2011) would not be 
prudent. However, under the Restoration Plan, the FDIC is required to 
update its loss and income projections

[[Page 10685]]

for the fund at least semiannually and, if necessary--for example, if 
there is a change in the projected losses from bank failures--increase 
or decrease assessment rates to meet the statutory minimum reserve 
ratio by September 2020. (Such an increase or decrease would not affect 
the assessment rate schedules below.)
    An industry trade group commented that, given the FDIC's decision 
in October 2010 to forego the uniform 3 basis point increase in 
assessment rates scheduled to go into effect on January 1, 2011, the 
FDIC should reassess its cash needs and return excess prepaid 
assessments earlier, such as by December 2011. The FDIC will continue 
to monitor its cash resources to determine whether to undertake a 
rulemaking to return unused portions of the prepayments before the 
scheduled return date.
4. Rate Schedule Once the Reserve Ratio Reaches 1.15 Percent
    Pursuant to the FDIC's authority to set assessments, the initial 
base and total base assessment rates set forth in Table 4 below will 
take effect beginning the assessment period after the fund reserve 
ratio first meets or exceeds 1.15 percent, without the necessity of 
further action by the FDIC's Board. These rates are identical to those 
proposed in the Assessment Base NPR. The rates will remain in effect 
unless and until the reserve ratio meets or exceeds 2 percent. The 
FDIC's Board will retain its authority to uniformly adjust the total 
base rate assessment schedule up or down without further rulemaking, 
but the adjustment cannot exceed 2 basis points.
---------------------------------------------------------------------------

    \40\ The Assessment Base NPR contained a typographical error in 
the lower range of the total base assessment rates for Risk Category 
IV. It stated that the range of rates was 29 basis points to 40 
basis points; it should have stated that the range was 25 basis 
points to 40 basis points. The final rule corrects the error.

                               Table 4--Initial and Total Base Assessment Rates *
 [Once the reserve ratio reaches 1.15 percent and the reserve ratio for the immediately prior assessment period
                                          Is less than 2 percent \40\]
----------------------------------------------------------------------------------------------------------------
                                                                                                     Large and
                                   Risk category   Risk category   Risk category   Risk category  highly complex
                                         I              II              III             IV         institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate....             3-7              12              19              30            3-30
Unsecured debt adjustment **....         (3.5)-0           (5)-0           (5)-0           (5)-0           (5)-0
Brokered deposit adjustment.....  ..............            0-10            0-10            0-10            0-10
                                 -------------------------------------------------------------------------------
    Total Base Assessment Rate..           1.5-7            7-22           14-29           25-40          1.5-40
----------------------------------------------------------------------------------------------------------------
* Total base assessment rates do not include the depository institution debt adjustment.
** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured
  depository institution's initial base assessment rate; thus, for example, an insured depository institution
  with an initial base assessment rate of 3 basis points will have a maximum unsecured debt adjustment of 1.5
  basis points and cannot have a total base assessment rate lower than 1.5 basis points.

    When the reserve ratio reaches 1.15 percent, the FDIC believes that 
it is appropriate to lower assessment rates so that the average 
assessment rate will approximately equal the long-term moderate, steady 
assessment rate--5.29 basis points, as discussed in the October NPR and 
the DRR final rule--that would have been needed to maintain a positive 
fund balance throughout past crises.\41\ Doing so is consistent with 
the goals of the FDIC's comprehensive, long-term fund management plan, 
which are to: (1) Reduce the pro-cyclicality in the existing risk-based 
assessment system by allowing moderate, steady assessment rates 
throughout economic and credit cycles; and (2) maintain a positive fund 
balance even during a banking crisis by setting an appropriate target 
fund size and a strategy for assessment rates and dividends.
---------------------------------------------------------------------------

    \41\ The FDIC arrived at the rate schedule in Table 4 as 
follows. First, the FDIC determined the rate schedule that would 
have been needed during a period when insured depository 
institutions had strong earnings to achieve approximately an 8.5 
basis point average assessment rate, which is the long-term, 
moderate, steady assessment rate that would have been needed to 
maintain a positive fund balance throughout past crises using a 
domestic deposit assessment base. Based on the FDIC's analysis of 
weighted average assessment rates paid immediately prior to the 
current crisis (when the industry was relatively prosperous, and had 
both good CAMELS ratings and substantial capital), weighted average 
rates during times of industry prosperity tend to be somewhat less 
than 1 basis point greater than the minimum initial base assessment 
rate applicable to Risk Category I (for rates applicable to a 
domestic deposit assessment base). The first year in which rates 
applicable to Risk Category I spanned a range (as opposed to being a 
single rate) was 2007, when initial assessment rates ranged between 
5 and 7 basis points. During that year, weighted average annualized 
industry assessment rates for the first three quarters varied 
between 5.41 and 5.44 basis points. (By the end of 2007, 
deterioration in the industry became more marked and weighted 
average rates began increasing.) The difference between the minimum 
rate and the weighted average rate (approximately 0.4 basis points) 
is 20 percent of the 2 basis point difference between the then 
existing minimum and maximum rates. 20 percent of the 4 basis point 
difference between the current, domestic deposit minimum and maximum 
rates is 0.8 basis points. By analogy, in 2007 the current 
assessment schedule would have produced average assessment rates of 
about 12.8 basis points. Thus, to achieve, during prosperous times, 
approximately an 8.5 basis point average assessment rate, initial 
base rates would have to be set about 4 basis points lower than 
current initial base assessment rates (applied against the domestic 
deposit assessment base). This analysis underlay the rate schedule 
in the October NPR that was proposed to become effective when the 
reserve ratio reaches 1.15 percent. As of June 30, 2010, the rate 
schedule in Table 4 applied against the Dodd-Frank mandated 
assessment base would have produced approximately the same amount of 
revenue as the October NPR's proposed rate schedule applied against 
the domestic deposit assessment base.
---------------------------------------------------------------------------

    The FDIC considers these goals important for several reasons. 
During an economic and banking downturn, insured institutions can least 
afford to pay high deposit insurance assessment rates. Moreover, high 
assessment rates during a downturn reduce the amount that banks can 
lend when the economy most needs new lending. Consequently, it is 
important to reduce pro-cyclicality in the assessment system and allow 
moderate, steady assessment rates throughout economic and credit 
cycles. As discussed above, at a September 24, 2010 roundtable 
organized by the FDIC, bank executives and industry trade group 
representatives uniformly favored steady, predictable assessments and 
objected to high assessment rates during crises.
    It is also important that the fund not decline to a level that 
could risk undermining public confidence in federal deposit insurance. 
Furthermore, although the FDIC has significant authority to borrow from 
the Treasury to cover losses when the fund balance approaches zero, the 
FDIC views the Treasury line of credit as available to cover unforeseen 
losses, not as a source of financing projected losses. A sufficiently 
large fund is a necessary precondition to maintaining a positive fund 
balance during a banking crisis

[[Page 10686]]

and allowing for long-term, steady assessment rates.
5. Rate Schedule Once the Reserve Ratio Reaches 2.0 Percent
    In lieu of dividends, and pursuant to the FDIC's authority to set 
assessments, the initial base and total base assessment rates set forth 
in Table 5 below will come into effect without further action by the 
FDIC Board when the fund reserve ratio at the end of the prior 
assessment period meets or exceeds 2 percent, but is less than 2.5 
percent.\42\ These rates are identical to those proposed in the 
Assessment Base NPR. The FDIC's Board will retain its authority to 
uniformly adjust the total base rate assessment schedule up or down 
without further rulemaking, but the adjustment cannot exceed 2 basis 
points.\43\
---------------------------------------------------------------------------

    \42\ New institutions will remain subject to the assessment 
schedule in Table 4 when the reserve ratio reaches 2 percent. 
Subject to exceptions, a new insured depository institution is a 
bank or savings association that has been federally insured for less 
than five years as of the last day of any quarter for which it is 
being assessed. 12 CFR 327.8(j).
    \43\ However, the lowest total base assessment rate cannot be 
negative.

                               Table 5--Initial and Total Base Assessment Rates *
    [If the reserve ratio for prior assessment period is equal to or greater than 2 percent and less than 2.5
                                                    percent]
----------------------------------------------------------------------------------------------------------------
                                                                                                     Large and
                                   Risk category   Risk category   Risk category   Risk category  highly complex
                                         I              II              III             IV         institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate....             2-6              10              17              28            2-28
Unsecured debt adjustment **....           (3)-0           (5)-0           (5)-0           (5)-0           (5)-0
Brokered deposit adjustment.....  ..............            0-10            0-10            0-10            0-10
                                 -------------------------------------------------------------------------------
    Total Base Assessment Rate..             1-6            5-20           12-27           23-38            1-38
----------------------------------------------------------------------------------------------------------------
* Total base assessment rates do not include the depository institution debt adjustment.
** The unsecured debt adjustment could not exceed the lesser of 5 basis points or 50 percent of an insured
  depository institution's initial base assessment rate; thus, for example, an insured depository institution
  with an initial assessment rate of 2 basis points will have a maximum unsecured debt adjustment of 1 basis
  point and could not have a total base assessment rate lower than 1 basis point.

    The historical analysis discussed above revealed that, in lieu of 
dividends, reducing the 5.29 basis point weighted average assessment 
rate by 25 percent when the reserve ratio reached 2 percent allowed the 
fund to remain positive during prior banking crises and successfully 
limited rate volatility. The assessment rates in Table 5 should produce 
a weighted average assessment rate approximately 25 percent lower than 
the assessment rates in Table 4 during periods of industry 
prosperity.\44\
---------------------------------------------------------------------------

    \44\ The FDIC arrived at the rate schedule in Table 5 as 
follows. As described in an earlier footnote, based on the FDIC's 
analysis of weighted average assessment rates paid immediately prior 
to the current crisis (when the industry was relatively prosperous, 
and had both good CAMELS ratings and substantial capital), weighted 
average rates during times of industry prosperity tend to be 
somewhat less than 1 basis point greater than the minimum initial 
base assessment rate applicable to Risk Category I (for rates 
applicable to a domestic deposit assessment base). Given this 
relationship, as described in an earlier footnote, the FDIC 
determined that the rate schedule that would have been needed during 
prosperous times to achieve approximately an 8.5 basis point average 
assessment rate would have had a minimum initial base assessment 
rate of 8 basis points. Similarly, the assessment rate schedule 
that, when applied to the domestic deposit assessment base would 
reduce the weighted average assessment rate by approximately 25 
percent, would have had a minimum initial base assessment rate of 6 
basis points (Table 4 in the October NPR). The FDIC then determined 
the relative diminution in assessment revenue that would have 
occurred using Table 4, rather than current assessment rates, 
applied against the domestic deposit assessment base as of June 30, 
2010. Applying the rates in Table 5 rather than those in Table 4 
against the Dodd-Frank assessment base as of June 30, 2010, would 
have produced a similar relative diminution in assessment revenue.
---------------------------------------------------------------------------

6. Rate Schedule Once the Reserve Ratio Reaches 2.5 Percent
    Also in lieu of dividends, and pursuant to the FDIC's authority to 
set assessments, the initial base and total base assessment rates set 
forth in Table 6 below will come into effect without further action by 
the FDIC Board when the fund reserve ratio at the end of the prior 
assessment period meets or exceeds 2.5 percent.\45\ These rates are 
identical to those proposed in the Assessment Base NPR. The FDIC's 
Board will retain its authority to uniformly adjust the total base rate 
assessment schedule up or down without further rulemaking, but the 
adjustment cannot exceed 2 basis points.\46\
---------------------------------------------------------------------------

    \45\ New institutions will remain subject to the assessment 
schedule in Table 4 when the reserve ratio reaches 2.5 percent.
    \46\ However, the lowest initial base assessment rate cannot be 
negative.

                                                   Table 6--Initial and Total Base Assessment Rates *
                             [If the reserve ratio for the prior assessment period is equal to or greater than 2.5 percent]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                               Large and
                                                             Risk category   Risk category   Risk category   Risk category  highly complex
                                                                   I              II              III             IV         institutions
------------------------------------------------------------------------------------------------------------------------------------------
Initial base assessment rate..............................             1-5               9              15              25            1-25
Unsecured debt adjustment **..............................         (2.5)-0         (4.5)-0           (5)-0           (5)-0           (5)-0
Brokered deposit adjustment...............................  ..............            0-10            0-10            0-10            0-10
                                                           ---------------------------------------------------------------------------------------------
    Total Base Assessment Rate............................           0.5-5          4.5-19           10-25           20-35          0.5-35
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Total base assessment rates do not include the depository institution debt adjustment.
** The unsecured debt adjustment could not exceed the lesser of 5 basis points or 50 percent of an insured depository institution's initial base
  assessment rate; thus, for example, an insured depository institution with an initial assessment rate of 1 basis point will have a maximum unsecured
  debt adjustment of 0.5 basis points and could not have a total base assessment rate lower than 0.5 basis points.


[[Page 10687]]

    The historical analysis discussed above revealed that, in lieu of 
dividends, further reducing the 5.29 basis point weighted average 
assessment rate by 25 percent when the reserve ratio reached 2 percent 
and by 50 percent when the reserve ratio reached 2.5 percent allowed 
the fund to remain positive during prior banking crises and 
successfully limited rate volatility. The assessment rates in Table 6 
should produce a weighted average assessment rate approximately 50 
percent lower than the assessment rates in Table 4 during periods of 
industry prosperity.\47\
---------------------------------------------------------------------------

    \47\ The FDIC arrived at the rate schedule in Table 6 as 
follows. As described in an earlier footnote, based on the FDIC's 
analysis of weighted average assessment rates paid immediately prior 
to the current crisis (when the industry was relatively prosperous, 
and had both good CAMELS ratings and substantial capital), weighted 
average rates during times of industry prosperity tend to be 
somewhat less than 1 basis point greater than the minimum initial 
base assessment rate applicable to Risk Category I (for rates 
applicable to a domestic deposit assessment base). Given this 
relationship, as described in an earlier footnote, the FDIC 
determined that the rate schedule that would have been needed during 
prosperous times to achieve approximately an 8.5 basis point average 
assessment rate would have had a minimum initial base assessment 
rate of 8 basis points. Similarly, the assessment rate schedule 
that, when applied to the domestic deposit assessment base would 
reduce the weighted average assessment rate by approximately 50 
percent, would have had a minimum initial base assessment rate of 4 
basis points (Table 5 in the October NPR). The FDIC then determined 
the relative diminution in assessment revenue that would have 
occurred using Table 5, rather than current assessment rates, 
applied against the domestic deposit assessment base as of June 30, 
2010. Applying the rates in Table 6 rather than those in Table 4 
against the Dodd-Frank assessment base as of June 30, 2010, would 
have produced a similar relative diminution in assessment revenue.
---------------------------------------------------------------------------

7. Analysis of Statutory Factors for Future Rate Schedules
    The FDIC Board took into account the required statutory factors 
when adopting the rate schedules that will take effect when the reserve 
ratio reaches 1.15 percent, 2 percent and 2.5 percent.\48\ These rate 
schedules were based on the historical analysis in the October NPR and 
the updated historical analysis in the DRR final rule. These analyses 
took into account fund operating expenses, resolution expenses and 
income over many decades to determine assessment rates that would keep 
the fund positive and assessment rates stable even during crises like 
those that have occurred within the past 30 years.
---------------------------------------------------------------------------

    \48\ As noted earlier, in setting assessment rates, the FDIC's 
Board of Directors is authorized to set assessments for insured 
depository institutions in such amounts as the Board of Directors 
may determine to be necessary. 12 U.S.C. 1817(b)(2)(A). In so doing, 
the Board must consider certain statutorily defined factors. 12 
U.S.C. 1817(b)(2)(B). As reflected in the text, the FDIC has taken 
into account all of these statutory factors.
---------------------------------------------------------------------------

    As the FDIC stated in the October NPR, it anticipates that when the 
reserve ratio exceeds 1.15 percent, and particularly when it exceeds 2 
or 2.5 percent, the industry is likely to be prosperous. Consequently, 
to determine the effect on earnings and capital of lowering rates (once 
the reserve ratio thresholds are met) after taking into account the new 
assessment base, the FDIC examined the effect of the lower rates on the 
industry at the end of 2006, when the industry was prosperous. Under 
that scenario, reducing assessment rates when the reserve ratio reaches 
1.15 percent would have increased average after-tax income by 1.25 
percent and average capital by 0.14 percent. Reducing assessment rates 
when the reserve ratio reaches 2 percent would have further increased 
average after-tax income by 0.62 percent and average capital by 0.07 
percent. Similarly, reducing assessment rates when the reserve ratio 
reaches 2.5 percent would have further increased average after-tax 
income by 0.61 percent and average capital by 0.07 percent. Decreasing 
assessment rates as provided in the final rule would not negatively 
affect the capital or earnings of any insured depository institution.
8. Comments on Future Rate Schedules
    Commenters generally favored the establishment of a long-term, 
steady, predictable rate schedule that does not fluctuate with economic 
and credit cycles. One trade group stated that ``[t]he more consistent 
and steady the premiums can be, the better bankers are able to plan and 
continue their work in their local communities.'' The FDIC agrees that 
setting this long-term rate schedule now will bring more stability and 
transparency to the deposit insurance system.
    However, an industry trade group argued that, by maintaining the 4 
basis point difference between minimum and maximum Risk Category I 
initial base assessment rates and applying these rates to a larger 
assessment base, the proposed assessment rates would effectively widen 
the assessment spread within Risk Category I. The trade group 
recommended that the spread be reduced when the FDIC lowers the overall 
assessment schedule in the future. The FDIC is not convinced. In the 
FDIC's view, risk differentiation becomes more important during times 
of banking prosperity, particularly when an expansion continues for a 
long period. During these periods, insured depository institutions are 
lending more and taking on more risk and greater risk differentiation 
allows this risk to be captured.
    One trade group argued that these assessment rates would cause the 
reserve ratio to increase from 1.15 percent to 2 percent within 3 years 
and were therefore too high. The FDIC disagrees. The FDIC projects that 
it will take about 9 years for the fund to grow from 1.15 percent to 2 
percent, assuming very low fund losses (the average loss rate from 1995 
to 2004, a period of very low fund losses) and forward interest rates 
as of the date the projection was made.\49\
---------------------------------------------------------------------------

    \49\ Using forward interest rates as of December 3, 2010, when 
forward rates were slightly higher than those used in the original 
projection, the FDIC still projects that it will take 8 years for 
the fund to grow from 1.15 percent to 2 percent.
---------------------------------------------------------------------------

    This trade group also stated that the rate reductions at 2 and 2.5 
percent do not effectively restrict the growth of the insurance fund 
and instead create an ``effective floor'' for the fund. The trade group 
also argued that the FDIC's analysis ignored the large amount of 
interest income that would be generated by a fund with a reserve ratio 
of 2 percent, and that this would be particularly significant during 
periods of stability and low losses to the fund.
    As described in the section on dividends above, the FDIC believes 
the rate decreases do effectively limit the growth of the insurance 
fund while preventing the moral hazard that would occur if institutions 
paid no assessments at all. Furthermore, the FDIC's analysis reveals 
that it would require very low losses over many years for the fund to 
reach 2.5 percent. Given the experience of the past 30 years, the FDIC 
considers it unlikely that the fund would experience such a prolonged 
period of low losses. Moreover, in the FDIC's 75 year history, the fund 
reserve ratio has never reached 2 percent.\50\
---------------------------------------------------------------------------

    \50\ In addition, the rule does not create an effective floor 
above 2 percent. In the analysis, when the reserve ratio fell below 
2 percent, rates did not need to rise above the necessary long-term 
assessment rate to keep the fund from becoming negative. Instead, 
rates could be held constant at the long-term assessment rate in 
keeping with the goal of reducing pro-cyclicality.
---------------------------------------------------------------------------

    Moreover, the FDIC's analysis did not ignore interest income. The 
analysis simulated fund growth by combining assessment income and 
investment income earned based on historical interest rates. The 
analysis covered periods of stability and low losses as well as crisis 
periods accompanied by high losses. It covered periods of high interest 
rates as well as low rates. The simulated fund also covered an extended 
period during which the fund reached or exceeded a reserve ratio of 2 
percent. This period was not

[[Page 10688]]

accompanied by rapid fund growth, and fund growth was limited by 
assessment rate reductions. Had fund growth not been interrupted by 
periods of high losses during the 60-year period, the fund might 
gradually have reached a much larger size, but, historically, unbroken 
periods of stability are not the norm--rather they are interrupted by 
periods of high losses when the fund's growth decreases significantly.

VI. The Final Rule: Risk-Based Assessment System for Large Insured 
Depository Institutions

A. Overview of the Large Bank Risk-Based Assessment System

    The final rule amends the assessment system applicable to large 
insured depository institutions to better capture risk at the time the 
institution assumes the risk, to better differentiate risk among large 
insured depository institutions during periods of good economic and 
banking conditions based on how they would fare during periods of 
stress or economic downturns, and to better take into account the 
losses that the FDIC may incur if a large insured depository 
institution fails. Except where noted, the final rule adopts the 
proposals in the Large Bank NPR.
    The final rule eliminates risk categories and the use of long-term 
debt issuer ratings for calculating risk-based assessments for large 
institutions.\51\ Instead, assessment rates will be calculated using a 
scorecard that combines CAMELS ratings and certain forward-looking 
financial measures to assess the risk a large institution poses to the 
DIF. One scorecard will apply to most large institutions and another to 
institutions that are structurally and operationally complex or that 
pose unique challenges and risk in the case of failure (highly complex 
institutions).\52\
---------------------------------------------------------------------------

    \51\ Dodd-Frank requires all federal agencies to review and 
modify regulations to remove reliance upon credit ratings and 
substitute an alternative standard of creditworthiness. Public Law 
111-203, Sec.  939A, 124 Stat. 1376, 1886 (15 U.S.C. 78o-7 note).
    \52\ A ``highly complex institution'' is defined as: (1) An IDI 
(excluding a credit card bank) that has had $50 billion or more in 
total assets for at least four consecutive quarters that either is 
controlled by a U.S. parent holding company that has had $500 
billion or more in total assets for four consecutive quarters, or is 
controlled by one or more intermediate U.S. parent holding companies 
that are controlled by a U.S. holding company that has had $500 
billion or more in assets for four consecutive quarters, and (2) a 
processing bank or trust company. A processing bank or trust company 
is an insured depository institution whose last three years' non-
lending interest income, fiduciary revenues, and investment banking 
fees, combined, exceed 50 percent of total revenues (and its last 
three years fiduciary revenues are non-zero), whose total fiduciary 
assets total $500 billion or more and whose total assets for at 
least four consecutive quarters have been $10 billion or more. The 
final rule clarifies that only U.S. holding companies come within 
the definition of highly complex institution. Control has the same 
meaning as in section 3(w)(5) of the FDI Act. See 12 USC 
1813(w)(5)(2001). A credit card bank is defined as a bank for which 
credit card plus securitized receivables exceed 50 percent of assets 
plus securitized receivables. The final rule makes a technical 
change to the definition of a highly complex institution to avoid 
including certain non-complex institutions by requiring, among other 
things, that for an institution to be defined as a processing bank 
or trust company (one type of highly complex institution), it must 
have total fiduciary assets total $500 billion or more.
---------------------------------------------------------------------------

    The scorecards use quantitative measures that are readily available 
and useful in predicting a large institution's long-term 
performance.\53\ These measures are meant to differentiate risk based 
on how large institutions would fare during periods of economic stress. 
Experience during the recent crisis shows that periods of stress reveal 
risks that remained hidden during periods of prosperity. As discussed 
in the Large Bank NPR and shown in Chart 3, over the 2005 to 2008 
period, the new measures were useful in predicting performance of large 
institutions in 2009.
---------------------------------------------------------------------------

    \53\ Most of the data are publicly available, but data elements 
to compute four scorecard measures--higher-risk assets, top 20 
counterparty exposures, the largest counterparty exposure, and 
criticized/classified items--are not. The FDIC proposes that insured 
depository institutions provide these data elements in the 
Consolidated Reports of Condition and Income (Call Report) or the 
Thrift Financial Report (TFR) beginning with the second quarter of 
2011.

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

[[Page 10689]]

[GRAPHIC] [TIFF OMITTED] TR25FE11.003

B. Scorecard for Large Insured Depository Institutions (Other Than 
Highly Complex Insured Depository Institutions)

    The scorecard for large institutions (other than highly complex 
institutions) produces two scores--a performance score and a loss 
severity score--that are combined and converted to an initial base 
assessment rate.
    The performance score measures a large institution's financial 
performance and its ability to withstand stress. To arrive at a 
performance score, the scorecard combines a weighted average of CAMELS 
component ratings and certain financial measures into a single 
performance score between 0 and 100.
    The loss severity score measures the relative magnitude of 
potential losses to the FDIC in the event of a large institution's 
failure. The scorecard converts a loss severity measure into a loss 
severity score between 0 and 100. The loss severity score is converted 
into a loss severity factor that ranges between 0.8 and 1.2.
    Multiplying the performance score by the loss severity factor 
produces a combined score (total score) that can be up to 20 percent 
higher or lower than the performance score. Any score less than 30 will 
be set at 30; any score greater than 90 will be set at 90. As discussed 
below, the FDIC will have a limited ability to alter a large 
institution's total score based on quantitative or qualitative measures 
not captured in the scorecard. The resulting total score after 
adjustment cannot be less than 30 or more than 90. The total score is 
converted to an initial base assessment rate.
    Table 7 shows scorecard measures and components, and their relative 
contribution to the performance score or loss severity score. Scorecard 
measures (other than the weighted average CAMELS rating) are converted 
to scores between 0 and 100 based on minimum and maximum cutoff values 
for each measure. A score of 100 reflects the highest risk and a score 
of 0 reflects the lowest risk. A value reflecting lower risk than the 
cutoff value receives a score of 0. A value reflecting higher risk than 
the cutoff value receives a score of 100. A risk measure value between 
the minimum and maximum cutoff values converts linearly to a score 
between 0 and 100, which is rounded to 3 decimal points. The weighted 
average CAMELS rating is converted to a score between 25 and 100 where 
100 reflects the highest risk and 25 reflects the lowest risk.
    Most of the minimum and maximum cutoff values are equal to the 10th 
and 90th percentile values for each measure, which are derived using 
data on large institutions over a ten-year period beginning with the 
first quarter of 2000 through the fourth quarter of 2009--a period that 
includes both good and bad economic times.\56\ \57\
---------------------------------------------------------------------------

    \54\ The rank ordering of risk for large institutions as of the 
end of 2009 (based on a consensus view of staff analysts) is largely 
based on the information available through the FDIC's Large Insured 
Depository Institution (LIDI) program. Large institutions that 
failed or received significant government support over the period 
are assigned the worst risk ranking and are included in the 
statistical analysis. Appendix 1 to the NPR describes the 
statistical analysis.
    \55\ The percentage approximated by factors is based on the 
statistical model for that particular year. Actual weights assigned 
to each scorecard measure are largely based on the average 
coefficients for 2005 to 2008, and do not equal the weight implied 
by the coefficient for that particular year (See Appendix 1 to the 
NPR).
    \56\ Appendix 2 shows selected percentile values of each 
scorecard measure over this period. The detailed results of the 
statistical analysis used to select risk measures and the weights 
are also provided. An online calculator is available on the FDIC's 
Web site to allow institutions to determine how their assessment 
rates will be calculated under this final rule.
    \57\ Some cutoff values have been updated since the Large Bank 
NPR to reflect data updates.
---------------------------------------------------------------------------

    Appendix B describes how each scorecard measure is converted to a 
score.

[[Page 10690]]



                Table 7--Scorecard for Large Institutions
------------------------------------------------------------------------
                                              Measure        Component
                     Scorecard measures       weights         weights
                       and components        (percent)       (percent)
------------------------------------------------------------------------
P................  Performance Score....  ..............  ..............
P.1..............  Weighted Average                  100              30
                    CAMELS Rating.
P.2..............  Ability to Withstand   ..............              50
                    Asset-Related Stress.
                    Tier 1 Leverage                   10  ..............
                    Ratio.
                    Concentration                     35  ..............
                    Measure.
                    Core Earnings/                    20  ..............
                    Average Quarter-End
                    Total Assets *.
                    Credit Quality                    35  ..............
                    Measure.
P.3..............  Ability to Withstand   ..............              20
                    Funding-Related
                    Stress.
                    Core Deposits/Total               60  ..............
                    Liabilities.
                    Balance Sheet                     40  ..............
                    Liquidity Ratio.
L................  Loss Severity Score..  ..............  ..............
L.1..............  Loss Severity Measure  ..............             100
------------------------------------------------------------------------
* Average of five quarter-end total assets (most recent and four prior
  quarters).
 

1. Performance Score
    The performance score for large institutions is a weighted average 
of the scores for three components: (1) Weighted average CAMELS rating 
score; (2) ability to withstand asset-related stress score; and (3) 
ability to withstand funding-related stress score. Table 7 shows the 
weight given to the score for each of these components.
a. Weighted Average CAMELS Rating Score
    To compute the weighted average CAMELS rating score, a weighted 
average of the large institution's CAMELS component ratings is first 
calculated using the weights shown in Table 8. These weights are the 
same as the weights used in the financial ratios method, which is 
currently used to determine assessment rates for all insured depository 
institutions in Risk Category I.\58\
---------------------------------------------------------------------------

    \58\ 12 CFR part 327, Subpt. A, App. A (2010).

              Table 8--Weights for CAMELS Component Ratings
------------------------------------------------------------------------
                                                              Weight
                    CAMELS component                         (percent)
------------------------------------------------------------------------
C.......................................................              25
A.......................................................              20
M.......................................................              25
E.......................................................              10
L.......................................................              10
S.......................................................              10
------------------------------------------------------------------------

    A weighted average CAMELS rating converts to a score that ranges 
from 25 to 100. A weighted average rating of 1 equals a score of 25 and 
a weighted average of 3.5 or greater equals a score of 100. Weighted 
average CAMELS ratings between 1 and 3.5 are assigned a score between 
25 and 100. The score increases at an increasing rate as the weighted 
average CAMELS rating increases. Appendix B describes how the FDIC 
converts a weighted average CAMELS rating to a score.
    b. Ability To Withstand Asset-Related Stress Score
    The score for the ability to withstand asset-related stress is a 
weighted average of the scores for the four measures that the FDIC 
finds most relevant to assessing a large institution's ability to 
withstand such stress; they are:
     Tier 1 leverage ratio;
     Concentration measure (the greater of the higher-risk 
assets to the sum of Tier 1 capital and reserves score or the growth-
adjusted portfolio concentrations score);
     The ratio of core earnings to average quarter-end total 
assets; and
     Credit quality measure (the greater of the criticized and 
classified items to the sum of Tier 1 capital and reserves score or the 
underperforming assets to the sum of Tier 1 capital and reserves 
score).

In general, these measures proved to be the most statistically 
significant measures of a large institution's ability to withstand 
asset-related stress, as described in Appendix 2. Appendix A describes 
these measures.
    The method for calculating the scores for the Tier 1 leverage ratio 
and the ratio of core earnings to average quarter-end total assets is 
described in Appendix B.
    The score for the concentration measure is the greater of the 
higher-risk assets to Tier 1 capital and reserves score or the growth-
adjusted portfolio concentrations score.\59\ Appendix B describes the 
conversion of these ratios to scores. Appendix C describes the ratios.
---------------------------------------------------------------------------

    \59\ The ratio of higher-risk assets to Tier 1 capital and 
reserves gauges concentrations that are currently deemed to be high 
risk. The growth-adjusted portfolio concentration measure does not 
solely consider high-risk portfolios, but considers most loan 
portfolio concentrations, along with growth of the concentration.
---------------------------------------------------------------------------

    The score for the credit quality measure is the greater of the 
criticized and classified items to Tier 1 capital and reserves score or 
the underperforming assets to Tier 1 capital and reserves score.\60\ 
Appendix B describes conversion of the credit quality measure into a 
credit quality score.
---------------------------------------------------------------------------

    \60\ The criticized and classified items ratio measures 
commercial credit quality while the underperforming assets ratio is 
often a better indicator for consumer portfolios.
---------------------------------------------------------------------------

    Table 9 shows the ability to withstand asset related stress 
measures, gives the cutoff values for each measure and shows the weight 
assigned to the measure to derive a score. Appendix B describes how 
each of the risk measures is converted to a score between 0 and 100 
based upon the minimum and maximum cutoff values.\61\
---------------------------------------------------------------------------

    \61\ Most of the minimum and maximum cutoff values for each risk 
measure equal the 10th and 90th percentile values of the measure 
among large institutions based upon data from the period between the 
first quarter of 2000 and the fourth quarter of 2009. The 10th and 
90th percentiles are not used for the higher-risk assets to Tier 1 
capital and reserves ratio and the criticized and classified items 
ratio due to data availability. Data on the higher-risk assets to 
Tier 1 capital and reserves ratio are available consistently since 
second quarter 2008, while criticized and classified items are 
available consistently since first quarter 2007. The maximum cut off 
value for the higher-risk assets to Tier 1 capital and reserves 
measure is close to but does not equal the 75th percentile. The 
maximum cutoff value for the criticized and classified items ratio 
is close to but does not equal the 80th percentile value. These 
alternative cutoff values are based on recent experience since 
earlier data is unavailable. Appendix 2 includes information 
regarding the percentile values for each risk measure.

[[Page 10691]]



  Table 9--Cutoff Values and Weights for Measures To Calculate Ability To Withstand Asset-Related Stress Score
----------------------------------------------------------------------------------------------------------------
                                                                           Cutoff values
                                                                 --------------------------------     Weights
    Measures of the ability to withstand asset-related stress         Minimum         Maximum        (percent)
                                                                     (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
Tier 1 Leverage Ratio...........................................               6              13              10
Concentration Measure...........................................  ..............  ..............              35
    Higher-Risk Assets to Tier 1 Capital and Reserves; or.......               0             135  ..............
    Growth-Adjusted Portfolio Concentrations....................               4              56  ..............
Core Earnings/Average Quarter-End Total Assets*.................               0               2              20
Credit Quality Measure..........................................  ..............  ..............              35
    Criticized and Classified Items/Tier 1 Capital and Reserves;               7             100  ..............
     or.........................................................
    Underperforming Assets/Tier 1 Capital and Reserves..........               2              35  ..............
----------------------------------------------------------------------------------------------------------------
* Average of five quarter-end total assets (most recent and four prior quarters).
 

    The score for each measure is multiplied by its respective weight 
and the resulting weighted score is summed to arrive at a score for an 
ability to withstand asset-related stress, which can range from 0 to 
100.
    Table 10 illustrates how the score for the ability to withstand 
asset-related stress is calculated for a hypothetical bank, Bank A.

                Table 10--Calculation of Bank A's Ability To Withstand Asset-Related Stress Score
----------------------------------------------------------------------------------------------------------------
   Measures of the ability to withstand asset-         Value                          Weight
                 related stress                      (percent)        Score *        (percent)    Weighted score
----------------------------------------------------------------------------------------------------------------
Tier 1 Leverage Ratio...........................            6.98           86.00              10            8.60
Concentration Measure...........................  ..............          100.00              35           35.00
    Higher Risk Assets/Tier 1 Capital and                 162.00          100.00  ..............  ..............
     Reserves; or...............................
    Growth-Adjusted Portfolio Concentrations....           43.62           76.19  ..............  ..............
Core Earnings/Average Quarter-End Total Assets..            0.67           66.50              20           13.30
Credit Quality Measure..........................  ..............          100.00              35           35.00
    Criticized and Classified Items/Tier 1                114.00          100.00  ..............  ..............
     Capital and Reserves; or...................
    Underperforming Assets/Tier 1 Capital and              34.25           97.73  ..............  ..............
     Reserves...................................
                                                 ---------------------------------------------------------------
    Total ability to withstand asset-related      ..............  ..............  ..............           91.90
     stress score...............................
----------------------------------------------------------------------------------------------------------------
* In the example, scores are rounded to two decimal points for Bank A. In actuality, scores will be rounded to
  three decimal places.
 

    Bank A's higher risk assets to Tier 1 capital and reserves score 
(100.00) is higher than its growth-adjusted portfolio concentration 
score (76.19). Thus, the higher risk assets to Tier 1 capital and 
reserves score is multiplied by the 35 percent weight to get a weighted 
score of 35.00 and the growth-adjusted portfolio concentrations score 
is ignored. Similarly, Bank A's criticized and classified items to Tier 
1 capital and reserves score (100.00) is higher than its 
underperforming assets to Tier 1 capital and reserves score (97.73). 
Therefore, the criticized and classified items to Tier 1 capital and 
reserves score is multiplied by the 35 percent weight to get a weighted 
score of 35.00 and the underperforming assets to Tier 1 capital and 
reserves score is ignored. These weighted scores, along with the 
weighted scores for the Tier 1 leverage ratio (8.60) and core earnings 
to average quarter-end total assets ratio (13.30), are added together, 
resulting in the ability to withstand asset-related stress score of 
91.90.
c. Comments on Ability To Withstand Asset-Related Stress
    The FDIC received a number of comments that relate to scorecard 
measures used to assess an institution's ability to withstand asset-
related stress.
Criticized and Classified Items Ratio
    The FDIC received several comments suggesting that the FDIC 
discount or exclude certain items, such as purchased credit impaired 
(PCI) loans or performing restructured loans, from the definition of 
criticized and classified items, since these items do not result in the 
same degree of loss as other, typical, classified and criticized items.
    The FDIC acknowledges that losses associated with various items 
included in criticized and classified items may vary, depending on 
collateral, the degree of previous loss recognition and other factors. 
However, relying on greater detail on these types of assets would 
increase, not decrease, the complexity of the model and would require 
additional data elements to be collected from institutions. The FDIC 
believes that the added complexity and burden of collecting more 
detailed data outweighs the additional benefit, but, relying upon data 
obtained through the examination process, will consider the 
idiosyncratic and qualitative factors that may influence potential 
losses associated with various criticized and classified items in 
determining whether to apply a large bank adjustment (discussed below).
    One commenter cautioned against potential inconsistencies in 
reported criticized and classified items, particularly when examination 
classifications differ from an institution's internal classifications. 
For the purpose of the large bank scorecard, criticized and classified 
items are defined as those items that the institution has internally 
identified as Special Mention, Substandard, Doubtful, or Loss on its 
own management reports or items identified as Special Mention or worse 
by an institution's primary federal regulator.

[[Page 10692]]

Appendix A of the final rule describes the definition.
Growth-Adjusted Portfolio Concentrations Ratio
    Several commenters stated that the growth-adjusted portfolio 
concentrations ratio unfairly captures growth attributed to the 
Statement of Financial Accounting Standards No. 166, Accounting for 
Transfers of Financial Assets, an Amendment of FASB Statement No. 140, 
and Statement of Financial Accounting Standards No. 167, Amendments to 
FASB Interpretation No. 46(R), which are one-time accounting 
adjustments (FAS 166/167).
    FDIC analysis shows that asset growth associated with FAS 166/167 
guidelines has a one-time effect on only a small number of 
institutions. Weighing the benefit of collecting additional information 
on the effect of FAS 166/167 against the added complexity and 
associated data collection burden, the FDIC has concluded that it would 
be better to consider the effect of FAS 166/167 as it determines 
whether to apply a large bank adjustment.
Higher-Risk Assets Ratio
    A number of commenters stated that certain elements of the higher-
risk assets ratio contain data items that are not Call Report items and 
could lead to inconsistent reporting among banks. As proposed in the 
Large Bank NPR, the FDIC will collect all data elements, other than 
CAMELS ratings, directly from institutions through the Call Reports and 
TFRs. These measures are defined in Appendix A.
    The FDIC also received a number of comments suggesting changes in 
the definition of leveraged lending, subprime loans and nontraditional 
mortgages, which are used in the higher-risk assets ratio. These 
comments are discussed below.
Leveraged Lending
    Several commenters asked for a change in the definition of 
leveraged lending to exclude small business loans, real estate loans or 
loans for buyout, acquisition, and recapitalization that do not 
otherwise meet the definition of leveraged lending. Commenters also 
cautioned against using specific ``bright line'' financial metrics to 
determine whether a loan is leveraged. In addition, commenters stated 
that regular updating of loan data for the purposes of identifying 
leveraged loans is burdensome and costly.
    The FDIC agrees that several of these comments have merit. For the 
purpose of this rule, leveraged loans exclude all real estate loans and 
those small business loans with an original amount of $1 million or 
less.\62\ The FDIC believes that some bright-line metrics are necessary 
to ensure consistency in reporting among institutions; however, the 
final rule removes the total liabilities to asset ratio test from the 
definition of leveraged loans.\63\ Any other commercial loan or 
security, regardless of the stated purpose, will be considered 
leveraged only if it meets one of the two remaining criteria described 
in Appendix C.
---------------------------------------------------------------------------

    \62\ The original amount is defined in Appendix C.
    \63\ The remaining tests for determining whether a loan is 
leveraged are consistent with the Office of the Comptroller of the 
Currency's Handbook, http://www.occ.gov/static/publications/handbook/LeveragedLending.pdf.
---------------------------------------------------------------------------

Subprime Loans
    Several commenters asked that the definition of a subprime loan be 
revised to comport with the 2001 Interagency Guidance and to exclude 
loans that have deteriorated subsequent to origination, citing the 
burden and cost associated with regular updating of borrower 
information.\64\ One commenter argued against referencing the FICO 
score in defining subprime loans, stating that the rule should not 
endorse a specific brand. A couple of commenters cautioned about 
potential inconsistencies among institutions in identifying subprime 
loans.
---------------------------------------------------------------------------

    \64\ FDIC Press Release PR-9-2001 01-31-2001, http://www.fdic.gov/news/news/press/2001/pr0901a.html.
---------------------------------------------------------------------------

    To reduce any potential burden, the final rule defines subprime 
loans as those that meet the criteria for being subprime at origination 
or refinancing. The definition in the final rule deletes the reference 
to FICO and other credit bureau scores. While the FDIC is aware that 
originators often use credit scores in the loan underwriting process, 
the FDIC has decided not to use a credit score threshold as a potential 
characteristic of a subprime borrower. Such a definition would require 
reliance on credit scoring models that are controlled by credit rating 
bureaus; thus, the models may change materially at the discretion of 
the credit rating bureaus. There also may be inconsistencies among the 
various models that the credit rating bureaus use. Research has 
consistently found that borrower credit history is among the most 
important predictors of default.\65\ The final rule focuses on credit 
history as a characteristic of a subprime borrower, but, to avoid 
underreporting of subprime loans, the definition now includes loans 
that an institution itself identifies as subprime based upon similar 
borrower characteristics. Appendix A describes the definition.
---------------------------------------------------------------------------

    \65\ See, e.g., Board of Governors of the Federal Reserve 
System, Report to the Congress on Credit Scoring and Its Effects on 
the Availability and Affordability of Credit, August 2007, http://www.federalreserve.gov/boarddocs/rptcongress/creditscore/creditscore.pdf.
---------------------------------------------------------------------------

Nontraditional Mortgages
    A number of commenters argued that interest-only loans should not 
be included in the definition of non-traditional mortgages for the 
higher risk concentration measure, given that the risk they pose 
differs from other non-traditional mortgages. The FDIC disagrees. The 
FDIC believes that interest-only loans generally exhibit higher risk 
than traditional amortizing mortgage loans, particularly in a stressful 
economic environment. The FDIC understands that qualitative factors 
such as credit underwriting or credit administration are important in 
determining potential losses associated with interest-only loans; 
however, these factors can influence potential losses for any type of 
loan and, in addition, are not easily measurable systematically. The 
FDIC will consider these qualitative factors in determining whether to 
apply a large bank adjustment.
    One comment asked for a specific definition of a teaser rate 
mortgage. For the purpose of the final rule, a teaser-rate mortgage is 
a mortgage with a discounted initial rate and lower payments for part 
of the mortgage term.
Averaging the Credit Quality and Concentration Scores
    A number of commenters suggested that the FDIC should average the 
two concentration scores and the two credit quality scores, rather than 
using the greater of the two scores in each case. The FDIC disagrees. 
The two credit quality ratios capture credit risk in different ways: 
the criticized and classified items ratio is more relevant for the 
performance of an institution's commercial portfolio; the 
underperforming asset ratio is more relevant for the performance of an 
institution's retail portfolio. Depending on an institution's asset 
composition, one measure may better capture the institution's credit 
quality than another. Therefore, averaging the two scores could 
understate credit quality concerns.
    Similarly, the two concentration ratios are designed to capture 
different concentration risk. The high-risk asset concentration ratio 
captures the risk associated with concentrated lending in high-risk 
areas that directly contributed to the failure of a number of large

[[Page 10693]]

institutions during the recent economic downturn. The FDIC recognizes, 
however, that other types of concentrations may lead to failure in the 
future, particularly if the concentrations are accompanied by rapid 
growth, which is what the growth-adjusted portfolio concentration ratio 
is designed to measure. Recent experience shows that many institutions 
that subsequently experienced problems eased underwriting standards and 
expanded beyond their traditional areas of expertise to grow rapidly. 
Since these two concentration ratios are designed to capture different 
types of concentration risk, averaging the two scores could reduce the 
scorecard's ability to differentiate risk.
d. Ability To Withstand Funding-Related Stress Score
    The ability to withstand funding-related stress component contains 
two measures that are most relevant to assessing a large institution's 
ability to withstand such stress--a core deposits to total liabilities 
ratio and a balance sheet liquidity ratio, which measures the amount of 
highly liquid assets needed to cover potential cash outflows in the 
event of stress.66 67 These ratios are significant in 
predicting a large institution's long-term performance in the 
statistical test described in Appendix 2. Appendix A describes these 
risk measures. Appendix B describes how each of these measures is 
converted to a score between 0 and 100.
---------------------------------------------------------------------------

    \66\ The final rule clarifies that all securities included in 
the definition of liquid assets are measured at fair value.
    \67\ The deposit runoff assumptions proposed in the Large Bank 
NPR were based on the Basel liquidity measure. The final rule 
modified deposit runoff rates for the balance sheet liquidity ratio 
to reflect changes issued by the Basel Committee on Banking 
Supervision in its December 2010 document, ``Basel III: 
International framework for liquidity risk measurement, standards 
and monitoring,'' http://www.bis.org/publ/bcbs188.pdf.
---------------------------------------------------------------------------

    The score for the ability to withstand funding-related stress is 
the weighted average of the scores for two measures. Table 11 shows the 
cutoff values and weights for these measures. Weights assigned to each 
of these two risk measures are based on a statistical analysis 
described in Appendix 2.

       Table 11--Cutoff Values and Weights To Calculate Ability To Withstand Funding-Related Stress Score
----------------------------------------------------------------------------------------------------------------
                                                                           Cutoff values
                                                                 --------------------------------     Weight
   Measures of the ability to withstand funding-related stress        Minimum         Maximum        (percent)
                                                                     (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
Core Deposits/Total Liabilities.................................               5              87              60
Balance Sheet Liquidity Ratio...................................               7             243              40
----------------------------------------------------------------------------------------------------------------

    Table 12 illustrates how the score for the ability to withstand 
funding-related stress for hypothetical bank, Bank A, is calculated.

             Table 12--Calculation of Bank A's Score for Ability To Withstand Funding-Related Stress
----------------------------------------------------------------------------------------------------------------
    Measures of the ability to           Value                          Weight
 withstand funding-related stress      (percent)        Score *        (percent)    Weighted score
--------------------------------------------------------------------------------------------------
Core Deposits/Total Liabilities...           60.25           32.62              60           19.57
Balance Sheet Liquidity Ratio.....           69.58           73.48              40           29.39
                                   -----------------------------------------------------------------------------
    Total ability to withstand      ..............  ..............  ..............           48.96
     funding-related stress score.
----------------------------------------------------------------------------------------------------------------
* In the example, scores are rounded to two decimal points for Bank A. In actuality, scores will be rounded to
  three decimal places.

e. Comments on the Ability To Withstand Funding-Related Stress
Definition of Core Deposits and Brokered Deposits
    Several commenters stated that the definitions for core deposits 
and brokered deposits as used in the core deposits to total liabilities 
ratio are outdated and should be revised. These commenters stated that 
reciprocal deposits, affiliated broker-dealer sweeps and long-term 
brokered deposits are stable deposits, and therefore, should be 
included in the definition of core deposits. In the final rule, for 
this purpose, core deposits exclude all brokered deposits. However, as 
mentioned in Section III, Dodd-Frank mandated that the FDIC conduct a 
study to evaluate the existing brokered deposit and core deposit 
definitions. The FDIC will examine the definition in light of the 
completed study and will consider changes then, if appropriate.
Balance Sheet Liquidity Ratio
    Several commenters argued that unencumbered agency mortgage-backed 
securities (MBSs) should be included as liquid assets in calculating 
the balance sheet liquidity ratio, arguing that they are a reliable 
source of liquidity. These commenters also pointed to the Basel 
liquidity measures, which include unencumbered agency MBSs as highly 
liquid assets, with appropriate haircuts.
    The FDIC believes that an institution's ability to withstand 
funding-related stress can be best measured by highly liquid assets 
that can be readily converted to cash with little or no loss in value, 
relative to potential short-term funding outflows. While agency MBSs 
are generally liquid, they are not as highly liquid as other assets 
included as liquid assets in the definition of balance sheet liquidity 
ratio, particularly given the greater interest rate risk inherent in 
these securities.
    One commenter noted that deposits owned by a parent should not be 
subjected to the same runoff rates as other deposits for the purpose of 
the balance sheet liquidity ratio, given that these deposits behave 
similarly to long-term unsecured debt. The same comment was made in the 
context of loss severity. The FDIC disagrees. Parent companies, as well 
as other creditors, can have incentives to withdraw deposits from a 
troubled institution. Deposits are not equivalent to long-term 
unsecured debt.

[[Page 10694]]

Calculation of Performance Score
    The scores for the weighted average CAMELS rating, the ability to 
withstand asset-related stress component, and the ability to withstand 
funding-related stress component are multiplied by their respective 
weights and the results are summed to arrive at the performance score. 
The performance score cannot be less than 0 or more than 100, where a 
score of 0 reflects the lowest risk and a score of 100 reflects the 
higher risk. In the example in Table 13, Bank A's performance score 
would be 70.92, assuming that Bank A's score for its weighted average 
CAMELS score of 50.60, which results from a weighted average CAMELS 
rating of 2.2.

                                     Table 13--Performance Score for Bank A
----------------------------------------------------------------------------------------------------------------
                                                                      Weight
                  Performance score components                       (percent)        Score *     Weighted score
----------------------------------------------------------------------------------------------------------------
Weighted Average CAMELS Rating..................................              30           50.60           15.18
Ability to Withstand Asset-Related Stress.......................              50           91.90           45.95
Ability to Withstand Funding-Related Stress.....................              20           48.96            9.79
                                                                 -----------------------------------------------
    Total Performance Score.....................................  ..............  ..............           70.92
----------------------------------------------------------------------------------------------------------------
* In the example, scores are rounded to two decimal points for Bank A. In actuality, scores will be rounded to
  three decimal places.

2. Loss Severity Score
    The loss severity score is based on a loss severity measure that 
estimates the relative magnitude of potential losses to the FDIC in the 
event of a large institution's failure. The loss severity measure 
applies a standardized set of assumptions--based on recent failures--
regarding liability runoffs and the recovery value of asset categories 
to calculate possible losses to the FDIC. (Appendix D describes the 
calculation of this measure.) Asset loss rate assumptions are based on 
estimates of recovery values for insured depository institutions that 
either failed or came close to failure. Run-off assumptions are based 
on the actual experience of insured depository institutions that either 
failed or came close to failure during the 2007 through 2009 period.
    The loss severity measure is a quantitative measure that is derived 
from readily available data. Appendix A defines this measure. Appendix 
B describes how the loss severity measure is converted to a loss 
severity score between 0 and 100. Table 14 shows cutoff values for the 
loss severity measure. The loss severity score cannot be less than 0 or 
more than 100.

        Table 14--Cutoff Values To Calculate Loss Severity Score
------------------------------------------------------------------------
                                                     Cutoff values
                                             ---------------------------
          Measure of loss severity               Minimum       Maximum
                                                (percent)     (percent)
------------------------------------------------------------------------
Loss Severity...............................            0            28
------------------------------------------------------------------------

    In the example in Table 15, Bank A's loss severity measure is 23.62 
percent, which represents potential losses in the event of Bank A's 
failure relative to its domestic deposits. This measure would result in 
a loss severity score of 84.36.

                Table 15--Loss Severity Score for Bank A
------------------------------------------------------------------------
                                                  Ratio
          Measure of loss severity              (percent)      Score *
------------------------------------------------------------------------
Potential Losses/Total Domestic Deposits            23.62         84.36
 (Loss severity measure)....................
------------------------------------------------------------------------
* In the example, the score is rounded to two decimal points for Bank A.
  In actuality, scores will be rounded to three decimal places.

3. Comments on Loss Severity Score
    In general, commenters did not oppose including loss severity in 
the initial base assessment rate calculation. However, many commenters 
questioned the proposed assumptions regarding the loss rates applied to 
various asset types and regarding liability runoff rates, arguing that 
they were too harsh or lacked empirical support. These comments are 
discussed below.
a. Loss Rate Assumptions
    Some commenters disagreed with the loss rates assigned to various 
asset categories and argued that:
     The FDIC should not discount asset values;
     Using the same loss rates for all institutions is not 
reasonable and the loan-to-value ratio should be considered in 
determining the loss rate;
     A zero loss rate should be applied to government-
guaranteed loans;
     Loss rates applied to acquired loans booked at fair value 
are too high; and
     Asset categories (e.g., leases, first-lien home equities, 
all other loans, all other assets) should be further subdivided to 
provide the less-risky assets within those categories a lower loss 
rate.
    The FDIC disagrees with these comments. The current value of an 
institution's assets is not a good indicator of the recovery value of 
these assets in the event of failure. To estimate potential recovery 
values, the loss severity measure applies a standardized set of loss 
rates to various asset categories, based on independent valuations 
obtained by the FDIC in 2009 on assets expected to be taken into 
receivership.
    The FDIC recognizes that collateral value, the loan-to-value ratio 
and the existence of a government guarantee may have a bearing on 
recovery rates; however, data on collateral value and other risk 
mitigants are not systematically available for all institutions. Also, 
government guarantees may or may not reduce the FDIC's risk of loss, 
depending on the agency issuing the guaranty and the transferability of 
the guaranty in the event of failure. In these cases, the FDIC will 
consider available information on collateral and other risk mitigants, 
including the materiality of guarantees, in determining whether to 
apply a large bank adjustment.
    The FDIC does not believe the loss severity measure should 
systematically try to adjust for loans booked at fair value. Loans 
booked at fair value are typically not material for most institutions, 
and, even when they are, their recovery values in the event of failure 
are often well below current fair values.
    The FDIC recognizes that the loss rates applied to broad categories 
of assets may overstate or understate potential losses, depending on 
the composition of those assets. However, the FDIC believes that 
further subdividing asset categories introduces greater complexity and 
is not practical without imposing undue burden.

[[Page 10695]]

b. Runoff Assumptions
    A number of commenters stated that the proposed insured deposit 
growth assumption used in the loss severity measure is too high and 
unrealistic given the supervisory constraint that will restrict growth 
as an institution nears failure. The FDIC agrees. Runoff and growth 
assumptions for deposits proposed in the Large Bank NPR were based on 
the actual experience of eleven large institutions that failed between 
2007 and 2009 over a two-year period leading up to their failure. The 
FDIC has re-estimated deposit runoffs based on data for all insured 
depository institutions that failed since 2007--including small 
institutions, which were added to improve the robustness of the 
analysis--over a one-year period leading up to their failure, and 
reduced the growth rate for insured deposits from 32 percent to 10 
percent while increasing the run-off rate for uninsured deposits from 
28.6 percent to 58 percent.\68\ The changes are primarily due to 
shorter time-to-failure, not the inclusion of small institutions in the 
sample. The FDIC believes that data based on shorter time-to-failure 
(one year) better reflect changes in deposit composition experienced by 
failed institutions as they approach failure.
---------------------------------------------------------------------------

    \68\ This updated analysis also resulted in changing the runoff 
assumptions for Federal funds purchased and for repurchase 
agreements. These new assumptions are set forth in Appendix D.
---------------------------------------------------------------------------

c. Foreign Deposits
    Several commenters stated that runoff and ring-fencing assumptions 
applied to foreign deposits are excessive and unsupported. Foreign 
deposits are not insured by the FDIC and would be treated as unsecured 
claims in a receivership. Unsecured claims in a receivership rarely 
receive any payment since they have a lower priority than domestic 
deposits. The FDIC believes that these deposits were more stable during 
the recent crisis primarily because of extraordinary government action, 
both by the U.S. and European governments. In the absence of ``too big 
to fail'' perceptions or policies, the FDIC believes that foreign 
deposits are more likely to run off than domestic deposits. Moreover, 
foreign governments may ring-fence assets to protect these deposits and 
reduce their own losses. As a result, the final rule retains the Large 
Bank NPR's assumptions regarding foreign deposit runoff.
d. Noncore Funding
    In the Large Bank NPR, the FDIC proposed including a noncore 
funding ratio in the loss severity scorecard as a potential proxy for 
franchise value. Most commenters stated that the noncore funding ratio 
should not be included because this risk is considered elsewhere. They 
also questioned the weight assigned to the measure. The FDIC continues 
to believe that potential franchise value is an important factor to 
consider in the overall assessment of loss severity. However, given 
that liability composition is explicitly considered in the loss 
severity measure, the final rule eliminates the noncore funding ratio 
from the loss severity scorecard. Instead, qualitative factors that 
affect an institution's franchise value will be considered in 
determining whether to apply a large bank adjustment.
e. Capital
    One commenter stated that assuming capital will fall to 2 percent 
and that assets will be reduced pro rata is unreasonable. The FDIC 
disagrees. Path-to-failure assumptions are a necessary feature of a 
potential loss severity calculation, particularly for institutions that 
are not close to failure. Using assumptions regarding reductions in 
specific categories of assets introduces significant complexity. The 
FDIC believes that the pro rata assumption is both reasonable and 
practical. This may be an area, however, that lends itself to further 
research and analysis as the FDIC continues to pursue improvements to 
the risk-based assessment system.
C. Scorecard for Highly Complex Institutions
    As mentioned above, those institutions that are structurally and 
operationally complex or that pose unique challenges and risks in case 
of failure have a different scorecard with measures tailored to the 
risks these institutions pose.
    The structure and much of the scorecard for a highly complex 
institution are, however, similar to the scorecard for other large 
institutions. Like the scorecard for other large institutions, the 
scorecard for highly complex institutions contains a performance score 
and a loss severity score. Table 16 shows the measures and components 
and their relative contribution to a highly complex institution's 
performance score and loss severity score. As with the scorecard for 
large institutions, most of the minimum and maximum cutoff values for 
each scorecard measure used in the highly complex institution's 
scorecard equal the 10th and 90th percentile values of the particular 
measure among these institutions based upon data from the period 
between the first quarter of 2000 and the fourth quarter of 2009.\69\
---------------------------------------------------------------------------

    \69\ Three measures used in the highly complex institution's 
scorecard (that are not used in the scorecard for other large 
institutions) do not use the 10th and 90th percentile values as 
cutoffs due to lack of historical data. The cutoffs for these 
measures are based partly upon recent experience; the maximum 
cutoffs range from approximately the 75th through the 78th 
percentile of these measures among only highly complex institutions.

           Table 16--Scorecard for Highly Complex Institutions
------------------------------------------------------------------------
                                              Measure        Component
                 Measures and components      weights         weights
                                             (percent)       (percent)
------------------------------------------------------------------------
P..............  Performance Score......  ..............  ..............
P.1............  Weighted Average CAMELS             100              30
                  Rating.
P.2............  Ability to Withstand     ..............              50
                  Asset-Related Stress.
                    Tier 1 Leverage                   10  ..............
                     Ratio.
                    Concentration                     35  ..............
                     Measure.
                    Core Earnings/                    20  ..............
                     Average Quarter-End
                     Total Assets.
                    Credit Quality                    35  ..............
                     Measure and Market
                     Risk Measure.
P.3............  Ability to Withstand     ..............              20
                  Funding-Related Stress.
                    Core Deposits/Total               50  ..............
                     Liabilities.
                    Balance Sheet                     30  ..............
                     Liquidity Ratio.
                    Average Short-Term                20  ..............
                     Funding/Average
                     Total Assets.
L..............  Loss Severity Score....  ..............  ..............
L.1............  Loss Severity Measure..  ..............             100
------------------------------------------------------------------------


[[Page 10696]]

1. Performance Score
    The performance score for highly complex institutions is the 
weighted average of the scores for three components: weighted average 
CAMELS rating score, weighted at 30 percent; ability to withstand 
asset-related stress score, weighted at 50 percent; and ability to 
withstand funding-related stress score, weighted at 20 percent.
a. Weighted Average CAMELS Rating Score
    The score for the weighted average CAMELS rating for highly complex 
institutions is derived in the same manner as in the scorecard for 
other large institutions.
b. Ability To Withstand Asset-Related Stress Score
    The ability to withstand asset-related stress score contains 
measures that the FDIC finds most relevant to assessing a highly 
complex institution's ability to withstand such stress:
     Tier 1 leverage ratio;
     Concentration measure (the greatest of the higher-risk 
assets to the sum of Tier 1 capital and reserves score, the top 20 
counterparty exposure to the sum of Tier 1 capital and reserves score, 
or the largest counterparty exposure to the sum of Tier 1 capital and 
reserves score);
     The ratio of core earnings to average quarter-end total 
assets;
     Credit quality measure (the greater of the criticized and 
classified items to the sum of Tier 1 capital and reserves score or the 
underperforming assets to the sum of Tier 1 capital and reserves score) 
and market risk measure (the weighted average of the four-quarter 
trading revenue volatility to Tier 1 capital score, the market risk 
capital to Tier 1 capital score, and the level 3 trading assets to Tier 
1 capital score).
    Two of the four measures used to assess a highly complex 
institution's ability to withstand asset-related stress (the Tier 1 
leverage ratio and the core earnings to average quarter-end total 
assets ratio) are determined in the same manner as in the scorecard for 
other large institutions. However, the method used to calculate the 
score for the other remaining measures--the concentration measure and 
the credit quality and market risk measure--differ and are discussed 
below.
Concentration Measure
    As in the scorecard for large institutions, the concentration 
measure for highly complex institutions includes the higher-risk assets 
to Tier 1 capital and reserves ratio described in Appendix C. However, 
the concentration measure in the highly complex institution's scorecard 
considers the top 20 counterparty exposures to Tier 1 capital and 
reserves ratio and the largest counterparty exposure to Tier 1 capital 
and reserves ratio instead of the growth-adjusted portfolio 
concentrations measure used in the scorecard for large institutions. 
The highly complex institution's scorecard uses these measures because 
recent experience shows that the concentration of a highly complex 
institution's exposures to a small number of counterparties--either 
through lending or trading activities--significantly increases the 
institution's vulnerability to unexpected market events. The FDIC uses 
the top 20 counterparty exposure and the largest counterparty exposure 
to capture this risk.
Credit Quality Measure and Market Risk Measure Scores
    As in the scorecard for large institutions, the ability to 
withstand asset-related stress component includes a credit quality 
measure. However, the highly complex institution scorecard also 
includes a market risk measure that considers trading revenue 
volatility, market risk capital, and level 3 trading assets. All three 
risk measures are calculated relative to a highly complex institution's 
Tier 1 capital and multiplied by their respective weights to calculate 
the score for the market risk measure. All three risk measures can be 
calculated using data from an insured depository institution's 
quarterly Call Reports or TFRs. The FDIC believes that combining these 
three risk measures better captures a highly complex institution's 
market risk than any single measure.
    The trading revenue volatility ratio measures the sensitivity of a 
highly complex institution's trading revenue to market volatility. The 
market risk capital ratio uses historical experience to estimate the 
effect on capital of potential losses in the trading portfolio due to 
market volatility.\70\ However, this ratio may not be a good measure of 
market risk when an institution holds a large volume of hard-to-value 
trading assets. Therefore, the level 3 trading assets ratio is included 
as an indicator of the volume of hard-to-value trading assets held by 
an institution.
---------------------------------------------------------------------------

    \70\ Market risk capital is defined in Appendix C of Part 325 of 
the FDIC Rules and Regulations,. http://www.fdic.gov/regulations/laws/rules/2000-4800.html#fdic2000appendixctopart325.
---------------------------------------------------------------------------

    The FDIC recognizes that the relevance of credit risk and market 
risk in assessing a highly complex institution's vulnerability to 
stress depends on an institution's asset composition. A highly complex 
institution with a significant amount of trading assets can be as risky 
as an institution that focuses on lending even though the primary 
source of risk may differ. In order to treat both types of institutions 
fairly, the FDIC allocates an overall weight of 35 percent between the 
credit risk measure and the market risk measure. The allocation will 
vary depending on the ratio of average trading assets to the sum of 
average securities, loans, and trading assets (the trading asset ratio) 
as follows:
     Weight for Credit Quality Measure = (1 - Trading Asset 
Ratio) * 0.35.
     Weight for Market Risk Measure = Trading Asset Ratio * 
0.35.
    Table 18 shows cutoff values and weights for the ability to 
withstand asset-related stress measures.

  Table 18--Cutoff Values and Weights for Measures To Calculate Ability To Withstand Asset-Related Stress Score
----------------------------------------------------------------------------------------------------------------
                                                 Cutoff values
 Measures of the ability to withstand  --------------------------------   Market risk
         asset-related stress               Minimum         Maximum        measures              Weight
                                           (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
Tier 1 Leverage Ratio.................               6              13  ..............  10%.
Concentration Measure.................  ..............  ..............  ..............  35%.
    Higher Risk Assets/Tier 1 Capital                0             135
     and Reserves.
    Top 20 Counterparty Exposure/Tier                0             125
     1 Capital and Reserves; or

[[Page 10697]]

 
    Largest Counterparty Exposure/Tier               0              20
     1 Capital and Reserves.
Core Earnings/Average Quarter-end                    0               2  ..............  20%.
 Total Assets.
Credit Quality Measure*...............  ..............  ..............  ..............  35% * (1 - Trading Asset
                                                                                         Ratio).
    Criticized and Classified Items to               7             100
     Tier 1 Capital and Reserves; or
    Underperforming Assets/Tier 1                    2              35
     Capital and Reserves.
Market Risk Measure*..................  ..............  ..............  ..............  35% * Trading Asset
                                                                                         Ratio.
    Trading Revenue...................               0               2              60
Volatility/Tier 1 Capital
    Market Risk Capital/Tier 1 Capital               0              10              20
    Level 3 Trading Assets/Tier 1                    0              35              20
     Capital.
----------------------------------------------------------------------------------------------------------------
* Combined, the credit quality measure and the market risk measure will be assigned a 35 percent weight. The
  relative weight of each of the two measures will depend on the ratio of average trading assets to sum of
  average securities, loans and trading assets (trading asset ratio).

c. Ability To Withstand Funding-Related Stress Score
    The score for the ability to withstand funding-related stress 
contains three measures that are most relevant to assessing a highly 
complex institution's ability to withstand such stress--a core deposits 
to total liabilities ratio, a balance sheet liquidity ratio, and an 
average short-term funding to average total assets ratio.
    Two of the measures (the core deposits to total liabilities ratio 
and the balance sheet liquidity ratio) in the ability to withstand 
funding-related stress score are determined in the same manner as in 
the scorecard for large institutions, although their weights differ. 
The FDIC has added the average short-term funding to average total 
assets ratio to the ability to withstand funding-related stress 
component of the highly complex institution scorecard because 
experience during the recent crisis shows that heavy reliance on short-
term funding significantly increases a highly complex institution's 
vulnerability to unexpected adverse developments in the funding market.
    Table 19 shows cutoff values and weights for the ability to 
withstand funding-related stress measures.

      Table 19--Cutoff Values and Weights To Calculate Ability To Withstand Funding-Related Stress Measures
----------------------------------------------------------------------------------------------------------------
                                                                                   Cutoff values
                                                                 -----------------------------------------------
   Measures of the ability to withstand funding-related stress        Minimum         Maximum         Weight
                                                                     (percent)       (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
Core Deposits/Total Liabilities.................................               5              87              50
Balance Sheet Liquidity Ratio...................................               7             243              30
Average Short-term Funding/Average Total Assets.................               2              19              20
----------------------------------------------------------------------------------------------------------------

d. Calculating the Performance Score
    To calculate the performance score for a highly complex 
institution, the scores for the weighted average CAMELS score, the 
ability to withstand asset-related stress score, and the ability to 
withstand funding-related stress score are multiplied by their 
respective weights and the results are summed to arrive at the 
performance score.
2. The Loss Severity Score
    The loss severity score for highly complex institutions is 
calculated the same way as the loss severity score for other large 
institutions.

D. Total Score

1. Calculating the Total Score
    The method for calculating the total score for large institutions 
and highly complex institutions is the same. Once the performance and 
loss severity scores are calculated for these institutions, their 
scores are converted to a total score. Each institution's total score 
is calculated by multiplying its performance score by a loss severity 
factor as follows:
    First, the loss severity score is converted into a loss severity 
factor that ranges from 0.8 (score of 5 or lower) to 1.2 (score of 85 
or higher). Scores at or below the minimum cutoff of 5 receive a loss 
severity factor of 0.8 and scores at or above the maximum cutoff of 85 
receive a loss severity factor of 1.2. Again, a linear interpolation is 
used to convert loss severity scores between the cutoffs into a loss 
severity factor. The conversion is made using the following formula:

Loss Severity Factor = 0.8 + [0.005 * (Loss Severity Score - 5]

    For example, if Bank A's loss severity score is 68.57, its loss 
severity factor would be 1.12, calculated as follows:

0.8 + (0.005 * (68.57 - 5)) = 1.12

    Next, the performance score is multiplied by the loss severity 
factor to produce a total score (total score = performance score * loss 
severity factor). Since the loss severity factor ranges from 0.8 to 
1.2, the total score can be up to 20 percent higher or lower than the 
performance score but cannot be less than 30 or more than 90. For

[[Page 10698]]

example, if Bank A's performance score is 69.33 and its loss severity 
factor is 1.12, its total score would be calculated as follows:

69.33 * 1.12 = 77.65

    Extreme values for certain risk measures make an institution more 
vulnerable to risk, which the FDIC believes should be addressed on a 
bank-by-bank basis. To do this, the FDIC can adjust a large 
institution's or highly complex institution's total score, up or down, 
by a maximum of 15 points, based upon significant risk factors that are 
not adequately captured in the scorecard. The FDIC will use a process 
similar to the current large bank adjustment to determine the amount of 
the adjustment to the total score.\71\ The resulting total score cannot 
be less than 30 or more than 90. This adjustment is discussed in more 
detail below.
---------------------------------------------------------------------------

    \71\ 12 CFR 327.9(d)(4) (2010).
---------------------------------------------------------------------------

2. Comments on Total Score
    Some commenters stated that limiting the effect of the loss 
severity score on the total score to 20 percent has no support and that 
loss severity should have a greater effect to account for institutions 
that pose little to no risk to the insurance fund. The FDIC believes 
that loss severity should be considered in determining an insured 
institution's deposit assessments; this rulemaking is the first time 
that the FDIC has explicitly incorporated loss severity in the 
calculation of an institution's assessment rate. While the FDIC 
believes that the loss severity measure provides a reasonable risk 
ranking of institutions' potential losses to the DIF, the FDIC believes 
that it is prudent at this time to incorporate this measure in a 
limited way and evaluate it further before increasing its effect on the 
assessment rate. Furthermore, the loss severity measure does not yet 
incorporate off-balance sheet obligations, complex funding structures 
and other qualitative factors that can have a significant effect on DIF 
losses in the event of failure.

E. Initial Base Assessment Rate

    A large institution or highly complex institution with a total 
score of 30 will pay the minimum initial base assessment rate and a 
large institution or highly complex institution with a total score of 
90 will pay the maximum initial base assessment rate; for total scores 
between 30 and 90, initial base assessment rates will rise at an 
increasing rate as the total score increases.72 73 The 
initial base assessment rate (in basis points) is calculated using the 
following formula: \74\
---------------------------------------------------------------------------

    \72\ Scores of 30 and 90 equal about the 13th and about the 99th 
percentile values, respectively, based on scorecard results as of 
first quarter 2006 through fourth quarter 2007.
    \73\ The assessment rates that the FDIC will apply to large and 
highly complex insured depository institutions pursuant to this 
final rule are set out in Section IV above.
    \74\ The initial base assessment rate (in basis points) will be 
rounded to two decimal points.
[GRAPHIC] [TIFF OMITTED] TR25FE11.004

where Rate is the initial base assessment rate (expressed in basis 
points), Maximum Rate is the maximum initial base assessment rate 
then in effect (expressed in basis points), and Minimum Rate is the 
minimum initial base assessment rate then in effect (expressed in 
---------------------------------------------------------------------------
basis points).

    The calculation of an initial base assessment rate is based on an 
approximated statistical relationship between large institutions' total 
scores and their estimated three-year cumulative failure probabilities, 
as shown in Appendix 3.
    Chart 4 illustrates the initial base assessment rate for a range of 
total scores, assuming minimum and maximum initial base assessment 
rates of 5 basis points and 35 basis points, respectively.

[[Page 10699]]

[GRAPHIC] [TIFF OMITTED] TR25FE11.005

    The initial base assessment rate of a large or highly complex 
institution can be adjusted as a result of the unsecured debt 
adjustment, the depository institution debt adjustment, and the 
brokered deposit adjustment, as discussed above.

F. Large Bank Adjustment to the Total Score

1. Adjustment to Total Score for Large or Highly Complex Institutions
    The FDIC will retain the ability to adjust the total score for 
large institutions and highly complex institutions by a maximum of 15 
points, up or down, based upon significant risk factors that are not 
captured in the scorecards. While the scorecards should improve the 
relative risk ranking of large institutions, the FDIC believes that it 
is important that it have the ability to consider idiosyncratic factors 
or other relevant risk factors that are not adequately captured in the 
scorecards. This large bank adjustment will be similar to the 
assessment rate adjustment that large institutions and insured branches 
of foreign banks within Risk Category I have been subject to in recent 
years.\75\
---------------------------------------------------------------------------

    \75\ 12 CFR 327.9(d)(4) (2010).
---------------------------------------------------------------------------

    In general, the adjustments to the total score will have a 
proportionally greater effect on the assessment rate of those 
institutions with a higher total score since the assessment rate rises 
at an increasing rate as the total score rises.
    In determining whether to make a large bank adjustment, the FDIC 
may consider such information as financial performance and condition 
information and other market or supervisory information. The FDIC will 
also consult with an institution's primary federal regulator and, for 
state chartered institutions, state banking supervisor.
    The FDIC acknowledges the need to clarify its processes for making 
adjustments to ensure fair treatment and accountability and plans to 
propose and seek comment on updated guidelines. As noted in the Large 
Bank NPR, the FDIC will not adjust assessment rates until the updated 
guidelines are published for comment and approved by the Board. In 
addition, the FDIC will publish aggregate statistics on adjustments 
each quarter.
    Similar to the current adjustment process, the FDIC will notify a 
large institution or highly complex institution before an upward 
adjustment to the institution's assessment rate takes effect, so that 
the institution will have an opportunity to respond to the FDIC's 
rationale for proposing an upward adjustment. An adjustment will be 
implemented only after considering the institution's response and any 
subsequent changes to the inputs or other risk factors that informed 
the FDIC's decision.\76\
---------------------------------------------------------------------------

    \76\ The final rule does not affect the procedures or timetable 
for appealing assessment rates. The procedures and timetable are 
described on the FDIC's Web site: http://www.fdic.gov/deposit/insurance/assessments/requests_review.html.
---------------------------------------------------------------------------

2. Comments on the Large Bank Adjustment
    Several commenters voiced concern that the large bank adjustment is 
disproportionately large, given the detail and complexity of the 
scorecard. Two commenters questioned the need for any large bank 
adjustment. Two commenters recommended that the adjustment should be 
only used to lower an institution's score.
    The FDIC disagrees. Based on statistical analysis, the FDIC 
believes that the scorecard will generally improve the relative risk 
ranking of

[[Page 10700]]

large institutions, particularly based on their long-term performance. 
However, the scorecard relies on only a limited number of quantitative 
ratios and applies a standardized set of assumptions, and it does not 
consider firm-specific idiosyncratic or qualitative factors that can 
have significant bearing on an institution's probability of failure or 
loss given failure. In fact, many commenters criticized the scorecard 
for not considering qualitative factors such as underwriting, 
collateral, or other risk mitigants. The FDIC agrees that these 
qualitative factors should be considered in assessments, and believes 
that it needs the flexibility to consider them. In addition, the FDIC 
believes that the complexity and the dynamic nature of many large 
institutions warrant a large bank adjustment that is significant enough 
for the FDIC to consider current or future risk factors not adequately 
captured in the scorecard.
    Several commenters maintained that the large bank adjustment is too 
subjective and not transparent. The FDIC disagrees. Currently, the FDIC 
determines the large bank adjustment following the process set forth in 
the guidelines that were adopted in 2007.\77\ The guidelines detail 
broad-based and focused benchmarks used to determine whether the 
adjustment should be made to an institution's assessment rate and set 
out adjustment processes. The FDIC consults with an institution's 
primary federal regulator and notifies the institution one quarter in 
advance of the FDIC's intent to make an upward adjustment to the 
institution's rate, so that the institution will have an opportunity to 
respond and provide additional information. The FDIC implements the 
adjustment only after considering the response and any subsequent 
changes to the inputs or other risk factors that informed the FDIC's 
decision.\78\ This process will remain unchanged in this rulemaking. In 
addition, as proposed in the Large Bank NPR, the FDIC will not adjust a 
large or highly complex institution's assessment rates until the 
updated guidelines are published for comment and approved by the Board.
---------------------------------------------------------------------------

    \77\ 72 FR 27122 (May 14, 2007); http://edocket.access.gpo.gov/2007/pdf/E7-9196.pdf.
    \78\ The final rule does not affect the procedures or timetable 
for appealing assessment rates. The procedures and timetable are 
described on the FDIC's Web site: http://www.fdic.gov/deposit/insurance/assessments/requests_review.html.
---------------------------------------------------------------------------

G. Data Sources

1. Data Sources in Final Rule
    In most cases, the FDIC will use data that are publicly available 
to compute scorecard measures. Data elements required to compute four 
scorecard measures--higher-risk assets, top 20 counterparty exposures, 
the largest counterparty exposure and criticized and classified items--
are gathered during the examination process. Rather than relying on the 
examination process, the FDIC will collect the data elements for these 
four scorecard measures directly from each institution. The FDIC 
anticipates that the necessary changes will be made to Call Reports and 
TFRs beginning with second quarter of 2011. These data elements will 
remain confidential.
2. Comments on the Data Sources
    A bank commented that the data reported for use in scorecard 
calculations may not be consistent among banks and is subject to 
definitional interpretation. The final rule incorporates detailed 
definitions and industry recommendations for various data elements, 
which should eliminate any significant inconsistencies among the data 
collected. Another commenter stated that nonpublic data used in the 
scorecard may be incorrect. The FDIC will collect all data through the 
Call Reports and TFRs, and each institution's management will attest to 
the accuracy of the information.

H. Updating the Scorecard

    The FDIC will have the flexibility to update the minimum and 
maximum cutoff values used in each scorecard annually without further 
rulemaking as long as the method of selecting cut-off values remains 
unchanged. The FDIC can add new data for subsequent years to its 
analysis and can, from time to time, exclude some earlier years from 
its analysis. Updating the minimum and maximum cutoff values and 
weights will allow the FDIC to use the most recent data, thereby 
improving the accuracy of the scorecard method.
    If, as a result of its review and analysis, the FDIC concludes that 
measures should be used to determine risk-based assessments, that the 
method of additional or alternative selecting cutoff values should be 
revised, that the weights assigned to the scorecard measures should be 
recalibrated, or that a new method should be used to differentiate risk 
among large institutions or highly complex institutions, changes will 
be made through a future rulemaking.
    The data used to calculate scorecard measures for any given quarter 
will be calculated from the Call Reports and TFRs filed by each insured 
depository institution as of the last day of the quarter. CAMELS 
component rating changes will be effective as of the date that the 
rating change is transmitted to the insured depository institution for 
purposes of determining assessment rates.\79\
---------------------------------------------------------------------------

    \79\ 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 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.
---------------------------------------------------------------------------

I. Additional Comments

    The FDIC received approximately 25 comments related to the Large 
Bank NPR. Most commenters opposed the rule because they claimed it is 
not risk-based when combined with the proposed new assessment base, is 
too complex and is not transparent. Two commenters expressed support 
for the proposal, including the elimination of long-term debt issuer 
ratings and risk-based categories for large banks. In addition to the 
comments described above, responders also commented on other issues 
discussed below.
1. Risk-Based Assessment System
    Some commenters stated that the rule unfairly penalizes large 
insured depository institutions without demonstrating that they pose 
greater risk to the DIF. Several commenters argued that the FDIC should 
lower rates applicable to large banks because the proposed rates, when 
applied to the new assessment base, increase large banks' assessments 
and misrepresent the actual risk posed by large banks and, therefore, 
violate the statutory requirement that the assessment system be risk-
based. One commenter argued that large banks should not be penalized 
with a greater share of overall assessments because large banks caused 
little of the recent losses to the DIF. Some commenters argued that the 
assessment rates and the new large bank pricing system result in 
assessments for small banks that are too low, thus underpricing risk 
and creating moral hazard.
    In the FDIC's view, the final rule preserves and improves the risk-
based assessment system. Under the FDI Act, the FDIC's Board of 
Directors must establish a risk-based assessment system so that a 
depository institution's deposit insurance assessment is calculated 
based on the probability that the DIF will incur a loss with respect to 
the institution (taking into consideration the

[[Page 10701]]

risks attributable to different categories and concentrations of 
assets, different categories and concentrations of liabilities, and any 
other relevant factors regarding loss); the likely amount of any loss 
to the DIF; and the revenue needs of the DIF.
    The assessment system complies with this requirement. For a large 
insured depository institution, the performance score (which explicitly 
takes into consideration the risks attributable to different categories 
and concentrations of assets, different categories and concentrations 
of liabilities, and many other relevant factors regarding loss), the 
loss severity score, the assessment rate adjustments (the unsecured 
debt adjustment, the depository institution debt adjustment and the 
brokered deposit adjustment) and the Dodd-Frank-required assessment 
base, taken together, reasonably represent both the probability that 
the DIF will incur a loss with respect to the institution and the 
likely amount of any such loss.
    For a small institution, capital levels and CAMELS ratings (both of 
which correlate with probability of failure) and, if the institution is 
well capitalized and well managed, the financial ratios method (which 
measures the probability that an institution's supervisory CAMELS 
rating will decline to a CAMELS 3, 4 or 5), combined with the 
assessment rate adjustments and the new assessment base determine the 
probability that the DIF will incur a loss with respect to the 
institution and the likely amount of any such loss.\80\
---------------------------------------------------------------------------

    \80\ This system is simpler than the system that will be applied 
to large insured depository institutions, but large depository 
institutions are much more complex and pose more complex risks. The 
FDI Act explicitly allows the FDIC to create different risk-based 
assessment systems for small and large insured depository 
institutions. 12 U.S.C. 1817(b)(1)(D).
---------------------------------------------------------------------------

    For several reasons, the FDIC disagrees with any implication that 
new assessment base mandated by Dodd-Frank is a poorer measure of 
exposure to loss than domestic deposits. In most instances, when an 
institution fails, the great majority of its liabilities are insured 
deposits and secured liabilities, both of which expose the FDIC to 
loss. Unlike the old assessment base, the new assessment base captures 
both types of liabilities. In addition, the new assessment base 
includes other liabilities (uninsured deposits, foreign deposits, and 
short-term unsecured liabilities) that, in large part, are either paid 
before the institution fails, reducing the assets available to the DIF 
to cover losses, or are replaced by insured deposits or secured 
liabilities. Thus, including short-term unsecured debt and foreign 
deposits in the assessment base makes sense, since this kind of debt 
provides no cushion to absorb losses in the event of failure. While 
Congress also included long-term unsecured debt in the assessment base, 
the unsecured debt adjustment for long-term debt recognizes that this 
form of liability provides a cushion to absorb losses ahead of the FDIC 
in the event of failure.
    Using data as of September 30, 2010, under the current assessment 
system, the 110 large insured depository institutions hold about 70 
percent of the assessment base and pay about 70 percent of total 
assessments. Under the new assessment base and large bank pricing 
system, they will hold about 78 percent of the assessment base and pay 
about 79 percent of total assessments.
    Congress expressly intended this result and viewed the new 
assessment base as a better measure of risk than the previous base of 
domestic deposits:

    Community banks with less than $10 billion in assets rely 
heavily on customer deposits for funding. This penalizes safe 
institutions by forcing them to pay deposit insurance premiums above 
and beyond the risk they pose to the banking system.
    Despite making up just 20 percent of the Nation's assets, these 
community banks contribute 30 percent of the premiums to the deposit 
insurance fund. At the same time, large banks hold 80 percent of the 
banking industry's assets. Yet they just pay 70 percent of the 
premiums. There is no reason for community banks to have to make up 
this gap.
    What we need is a level playing field. * * * Community banks 
didn't cause the problems. To have them pay more proportionately in 
FDIC insurance than the big banks do is unfair.

Statements of Senator Hutchison, 156 Cong. Rec. S3154 (May 5, 2010) 
(Co-Sponsor of Amendment No. 3749, which contains the new assessment 
base).

    We must fix this inequality. That is what the Tester-Hutchison 
measure does. It will do so by requiring the FDIC to change the 
assessment base to a more accurate measure: a bank's total assets, 
less tangible capital. This change will broaden the assessment base 
and will better measure the risk a bank poses.
    A bank's assets include its loans outstanding and securities 
held. One need only look back to the last 2 years to know those are 
the assets that are more likely to show a bank's exposure to risk 
than just plain deposits. It wasn't a bank's deposits that 
contributed to the financial meltdown. The meltdown was caused by 
bad mortgages which were packaged into risky mortgage-backed 
securities which were used to create derivatives. These risky 
financial instruments and the large institutions that created and 
held them are what led to our financial crisis.

    Statements of Senator Hutchison, 156 Cong. Rec. S3297 (May 6, 
2010).\81\
---------------------------------------------------------------------------

    \81\ Similar arguments in favor of the amendment were made by 
co-sponsor Senator Tester and Senators Johanns and Brown. Statements 
of Senators Tester, Senator Johanns and Senator Brown, 156 Cong. 
Rec. S3296, S3297, S3298 (May 6, 2010).
---------------------------------------------------------------------------

    Consequently, the FDIC's assessment system fully comports with the 
requirements of the FDI Act.\82\ Furthermore, the combined effect of 
the new assessment base, assessment rates and the large bank pricing 
system does not result in uniformly higher assessments for all large 
institutions. Based on September 30, 2010 data, for 59 of the 110 large 
depository institutions, assessments will decline as a result of this 
combined effect of changes to the assessment base, assessment rates, 
and the large bank pricing system.
---------------------------------------------------------------------------

    \82\ As discussed earlier, the assessment system also takes into 
account the DIF's revenue needs.
---------------------------------------------------------------------------

    The changes in the assessment system applicable to large insured 
depository institutions are intended to increase risk differentiation, 
with safer institutions paying less and riskier ones paying more. As a 
result of the recent financial crisis, the FDIC is now better able to 
measure and price for risks that result in failures and losses at large 
institutions. Higher assessments for some of these institutions are 
entirely consistent with the express intent of Congress that Dodd-Frank 
would revise ``the FDIC's assessment base for deposit insurance, 
maintaining the risk-based nature of the assessment structure but 
transitioning to a broader assessment base for bank premiums based on 
total assets (minus tangible equity).'' U.S. House. Dodd-Frank Wall 
Street Reform and Consumer Protection Act, Conference Report (to 
Accompany H.R. 4173) (111 H. Rpt. 517).
2. Complexity of the Scorecard
    Several commenters, including an industry trade group, criticized 
the proposed scorecard for being overly complex, making it difficult to 
make meaningful suggestions on how to improve the model and to 
accurately predict assessments. An industry trade group stated that, 
given the overall complexity, the FDIC should demonstrate that the 
model fairly differentiates risk consistent with the risk-based model 
for small banks.
    The FDIC recognizes that the scorecards remain somewhat complex 
despite simplifying revisions made in response to comments on the April 
NPR. However, many large insured depository institutions themselves use 
a scorecard approach to assess

[[Page 10702]]

counterparty risk. Moreover, given the complexity of large 
institutions--both in terms of their operations and activities--the 
FDIC believes that further simplifying the scorecard would materially 
reduce its ability to differentiate risk among large institutions.
    The FDIC also believes that the measures that best assess a large 
institution's ability to withstand stress are different from those for 
small institutions. As discussed above and in the Large Bank NPR, 
statistical analysis supports the conclusion that scorecard measures 
predict the long-term performance of large institutions significantly 
better than the measures included in the small bank model, which is 
calibrated on the performance of smaller institutions.
3. Weights of the Scorecard Measures
    Several commenters suggested that several of the weights assigned 
to a scorecard measure or a scorecard component should be altered. 
Scorecard measures and the weights assigned to each measure are based 
on the statistical analysis of historical performance over the 2005 to 
2008 period, focusing on how well these measures predict a large 
institution's long-term performance. Altering the weights without 
empirical support would reduce the scorecard's ability to differentiate 
institution's long-term risk to the DIF and add subjectivity to the 
model. If future statistical analysis should indicate that the weights 
assigned to the scorecard measures should be recalibrated, 
recalibration will be undertaken through rulemaking.
4. Lack of Transparency
    Several comments mentioned the lack of transparency in the model, 
stating that validation is difficult given that all of the information 
in the scorecard is not publicly available. Another comment stated that 
the FDIC should periodically seek bids in the reinsurance market (for 
aggregate and large bank exposures) as an independent verification of 
the accuracy of the FDIC's deposit insurance pricing.
    While most of the measures used to calculate an institution's score 
are publicly available, a few are not. Nevertheless, each institution 
has the information it needs to determine the effect of the scorecard 
on its own assessment. In addition, the FDIC has published the 
assessment calculator so that a large institution can determine how its 
assessment rate is calculated and analyze the sensitivity of its 
assessments to changes in scorecard measure values. Appendix 2 contains 
the detailed description of the scorecard model, the result of 
statistical analysis, and the derivation of weights.
    The FDIC has previously investigated the possibility of seeking 
bids in the reinsurance market, and has not found a practicable way to 
implement it for large institutions.
5. Pro-Cyclicality
    Several commenters stated that although the FDIC's stated intent is 
to reduce pro-cyclicality in the assessment system, the proposed system 
remains pro-cyclical since many of the scorecard measures, including 
the CAMELS ratings, would be worse under adverse economic conditions.
    In selecting scorecard measures and assigning respective weights, 
the FDIC relied on statistical analysis that identified how well each 
measure predicts a large institution's long-term performance. While 
some of scorecard measures have pro-cyclical features, the FDIC 
believes that, by focusing on long-term performance, the scorecard, 
which combines these measures with other more forward looking measures, 
is less procyclical than the system it replaces.
6. Request to Extend the Comment Period and Delay Implementation
    Several commenters stated that the FDIC should extend the comment 
period and delay implementation of this rulemaking so that the industry 
can fully analyze the complex proposed system and study the effects 
that the proposed pricing and assessment base rules would have on the 
banking industry and the economy. The FDIC believes that the industry 
has had ample time to analyze the proposal given that the Large Bank 
NPR is very similar to the April NPR, on which institutions had an 
opportunity to review and provide comments. Furthermore, delaying 
implementation would adversely affect those institutions that will 
benefit from lower assessments under the new system.
7. Ceiling on Dollar Amount of Assessments
    Two commenters stated that the dollar amount of assessments paid 
should not exceed the amount of insured deposits. Another commenter 
noted that the proposed assessment base and scorecard are causing 
unreasonably high assessments for banks with small deposit bases.
    The FDIC believes that a ceiling on the assessment rate or total 
assessment is not consistent with the intent of Congress to change the 
assessment base from one based on deposits to one based on assets. In 
addition, it could create an incentive for an institution to hold risky 
assets or to move assets among its various affiliates to avoid higher 
deposit insurance assessments. Therefore, the final rule does not 
include a ceiling on the total assessment payment.
8. Cliff Effect
    Two commenters criticized the proposal for unfairly punishing 
institutions that are close to the $10 billion asset threshold, 
claiming that assessments increase significantly once the institution's 
assets exceed $10 billion. The same commenters suggested that the FDIC 
should develop a plan that incrementally increases assessment rates for 
banks that exceed the $10 billion asset threshold.
    The FDIC disagrees. Analysis based on September 2010 data show that 
under the final rule, as under the existing system, some institutions' 
assessment rates would increase, while others would decrease, when 
changing size classification. However, movement from one size category 
to another will not occur without warning. To reduce potential 
volatility in assessment rates, a small institution does not become 
large until it reports assets of $10 billion or greater for four 
consecutive quarters; similarly, a large institution does not become 
small until it reports assets of less than $10 billion for four 
consecutive quarters.
9. Statistical Analysis
    Several commenters questioned the validity of the statistical 
analysis used to support the proposed changes. In particular, 
commenters expressed concern that the scorecard was calibrated using 
data on small bank failures and CAMELS downgrades, which would not 
reflect the risks and behaviors of large institutions. Commenters also 
noted that, since the analysis only covers the most recent period of 
heightened bank failures, it may fail to identify or adequately weight 
factors that are likely to lead to problems in the future. One 
commenter was critical of including failures in the sample that did not 
result in a loss to the DIF.
    The FDIC agrees that using the recent experience of small banks to 
determine the scorecard factors and weights would likely result in a 
system that misprices the risk posed by large institutions. For this 
reason, the FDIC chose not to use small bank failures or downgrades as 
the basis for its statistical analysis. Instead, as described in 
Appendix 1 of the NPR, the risk measures included in the performance 
score and the weights assigned to those measures were generally based 
on results from a

[[Page 10703]]

regression (OLS) model using FDIC expert judgment rankings of large 
institutions. In addition, the FDIC tested the robustness of scorecard 
measures in predicting a large institution's long-term performance 
using a logistic regression model that estimates the ability of those 
same measures to predict whether a large institution would fail or 
receive significant government support prior to year-end 2009. The 
analysis included institutions that failed but did not cause a loss to 
the DIF in the sample, since these models were used to select measures 
and assign appropriate weights for the performance score, not the loss 
severity score.
    The FDIC recognizes that any statistical analysis is necessarily 
backward looking and that risks may arise in the future that are not 
adequately captured in the scorecard. However, the FDIC feels that the 
proposed framework is more comprehensive and reduces the likelihood of 
such an occurrence compared to the current system, which was less 
effective in capturing the risks that resulted in recent failures. The 
FDIC believes that the scorecard should allow us to differentiate risk 
during periods of good economic and banking conditions based on how 
institutions would fare during periods of economic stress. To achieve 
that goal, the FDIC focused on risk measures that best predicted how 
institutions fared during the period of most recent stress using the 
data during the period of favorable economic conditions.
    A few commenters suggested that regression results provided in 
Appendix 1 of the Large Bank NPR actually undermine support for the 
performance score factors. In particular, one commenter stated that the 
estimated OLS coefficients for several ratios had the wrong sign, and 
concluded that the regression was mis-specified. Further, the commenter 
stated that the relationship between the expert judgment rankings and 
true risk to the DIF was unsupported. Another commenter stated that 
Chart 2.1 in Appendix 2 to the Large Bank NPR (showing the relationship 
between total scores and failures) demonstrates that the scorecard does 
a poor job of discriminating between failures and non-failures, and 
should, therefore, be abandoned until a more robust model is developed.
    The FDIC disagrees with this assessment. As described in Appendix B 
to this final rule, the FDIC normalized all scorecard measures into a 
score that ranges between 0 and 100--0 indicating the lowest risk and 
100 indicating the highest risk, before conducting the statistical 
analysis--both OLS and logistic regression. Once normalized in such a 
way, all scorecard measures should be and were positively correlated 
with risk, that is, a high score indicates high risk and a low score 
indicates low risk, and the relative difference in coefficients can be 
easily converted to weights.
    In addition, Chart 3.1 in Appendix 3 to this final rule shows that 
large institutions with a total score in the top decile as of year-end 
2006 represented a disproportionately high percentage of failures 
between 2006 and 2009. Given that the performance score factors and 
weights were largely calibrated to the FDIC's expert judgment rankings, 
this result also provides indirect support for a relationship between 
the FDIC's expert view and actual risk to.

VII. Effective Date

    Except as specifically noted above, the final rule will take effect 
for the quarter beginning April 1, 2011, and will be reflected in the 
invoices for assessments due September 30, 2011. The FDIC has 
considered the possibility of making the application of the new 
assessment base, the revised assessment rates, and the changes to the 
assessment rate adjustments retroactive to passage of Dodd-Frank. 
However, as this rule details, implementation of Dodd-Frank requires 
that a number of changes be made to the Call Report and TFR that render 
a retroactive application operationally infeasible. Additionally, 
retroactively applying these changes would introduce significant legal 
complexity as well as unacceptable levels of litigation risk. The FDIC 
is committed to implementing Dodd-Frank in the most expeditious manner 
possible and is contemporaneously pursuing necessary changes to the 
Call Report and TFR. The effective date is contingent upon these 
changes being made; if there is a delay in changing the Call Report and 
TFR, the effective date of this rule may be delayed.

VIII. Regulatory Analysis and Procedure

A. Regulatory Flexibility Act

    Under the Regulatory Flexibility Act (RFA), each federal agency 
must prepare a final regulatory flexibility analysis in connection with 
the promulgation of a final rule,\83\ or certify that the final rule 
will not have a significant economic impact on a substantial number of 
small entities.\84\ 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.\85\ 
The final rule relates to the rates imposed on insured depository 
institutions for deposit insurance, to the risk-based assessment system 
components that measure risk and weigh that risk in determining an 
insured depository institution's assessment rate and to the assessment 
base on which rates are charged. Consequently, a regulatory flexibility 
analysis is not required. Nevertheless, the FDIC is voluntarily 
undertaking a regulatory flexibility analysis.
---------------------------------------------------------------------------

    \83\ 5 U.S.C. 604.
    \84\ See 5 U.S.C. 605(b).
    \85\ See 5 U.S.C. 601.
---------------------------------------------------------------------------

    As of September 30, 2010, of the 7,770 insured commercial banks and 
savings associations, there were 4,229 small insured depository 
institutions as that term is defined for purposes of the RFA (i.e., 
institutions with $175 million or less in assets).
    The final rule will adopt the Dodd-Frank definition of assessment 
base and alter assessment rates and the adjustments to those rates at 
the same time that the new assessment base takes effect. Under this 
part of the rule, 99 percent of small institutions will be subject to 
lower assessments. In effect, the rule will decrease small institution 
assessments by an average of $10,320 per quarter and will alter the 
present distribution of assessments by reducing the percentage of the 
assessments borne by small institutions. As of September 30, 2010, 
small institutions, as that term is defined for purposes of the RFA, 
actually accounted for 3.7 percent of total assessments. Also as of 
that date, but applying the new assessment rates against an estimate of 
the new assessment base, small institutions would have accounted for 
2.4 percent of the total cost of insurance assessments.
    Other parts of the final rule will progressively lower assessment 
rates when the reserve ratio reaches 1.15 percent, 2 percent and 2.5 
percent. Pursuant to section 605(b) of the RFA, the FDIC certifies that 
the rule will not have a significant economic effect on small entities 
unless and until the DIF reserve ratio exceeds specific thresholds of 
1.15, 1.5, 2, and 2.5 percent. The reserve ratio is unlikely to reach 
these levels for many years. When it does, the overall effect of the 
rule will be positive for entities of all sizes. All entities, 
including small entities, will receive a net benefit as a result of 
lower assessments paid. The rate reductions in the rule should not 
alter the distribution of the assessment burden between small entities 
and all others. It is difficult to realistically quantify the benefit 
at the

[[Page 10704]]

present time. However, the initial magnitude of the benefit (when the 
reserve ratio reaches 1.15 percent) is likely to be less than a 2 
percent increase in after-tax income and less than a 20 basis point 
increase in capital.
    The portion of the final rule that relates to the assessment system 
applicable to large insured depository institutions applies only to 
institutions with $10 billion or greater in total assets. Consequently, 
small institutions will experience no significant economic impact as 
the result of this portion of the final rule.

B. 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 Act of 1996 
(SBREFA) Public Law 110-28 (1996). As required by law, the FDIC will 
file the appropriate reports with Congress and the Government 
Accountability Office so that the final rule may be reviewed.

C. Paperwork Reduction Act

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

D. 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. No comments addressing this issue were received.

E. The Treasury and General Government Appropriation 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 
(Pub. L. 105-277, 112 Stat. 2681).

List of Subjects in 12 CFR Part 327

    Bank deposit insurance, Banks, Banking, Savings associations.

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

PART 327--ASSESSMENTS

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

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


0
2. Amend Sec.  327.4 by revising paragraphs (c) and (f) to read as 
follows:


Sec.  327.4  Assessment rates.

* * * * *
    (c) Requests for review. An institution that believes any 
assessment risk assignment provided by the Corporation pursuant to 
paragraph (a) of this section is incorrect and seeks to change it must 
submit a written request for review of that risk assignment. An 
institution cannot request review through this process of the CAMELS 
ratings assigned by its primary federal regulator or challenge the 
appropriateness of any such rating; each federal regulator has 
established procedures for that purpose. An institution may also 
request review of a determination by the FDIC to assess the institution 
as a large, highly complex, or a small institution (Sec.  327.9(e)(3)) 
or a determination by the FDIC that the institution is a new 
institution (Sec.  327.9(f)(5)). Any request for review must be 
submitted within 90 days from the date the assessment risk assignment 
being challenged pursuant to paragraph (a) of this section appears on 
the institution's quarterly certified statement invoice. The request 
shall be submitted to the Corporation's Director of the Division of 
Insurance and Research in Washington, DC, and shall include 
documentation sufficient to support the change sought by the 
institution. If additional information is requested by the Corporation, 
such information shall be provided by the institution within 21 days of 
the date of the request for additional information. Any institution 
submitting a timely request for review will receive written notice from 
the Corporation regarding the outcome of its request. Upon completion 
of a review, the Director of the Division of Insurance and Research (or 
designee) or the Director of the Division of Supervision and Consumer 
Protection (or designee) or any successor divisions, as appropriate, 
shall promptly notify the institution in writing of his or her 
determination of whether a change is warranted. If the institution 
requesting review disagrees with that determination, it may appeal to 
the FDIC's Assessment Appeals Committee. Notice of the procedures 
applicable to appeals will be included with the written determination.
* * * * *
    (f) Effective date for changes to risk assignment. Changes to an 
insured institution's risk assignment resulting from a supervisory 
ratings change become effective as of the date of written notification 
to the institution by its primary federal regulator or state authority 
of its supervisory rating (even when the CAMELS component ratings have 
not been disclosed to the institution), if the FDIC, after taking into 
account other information that could affect the rating, agrees with the 
rating. If the FDIC does not agree, the FDIC will notify the 
institution of the FDIC's supervisory rating; resulting changes to an 
insured institution's risk assignment become effective as of the date 
of written notification to the institution by the FDIC.
* * * * *

0
3. Revise Sec.  327.5 to read as follows:


Sec.  327.5  Assessment base.

    (a) Assessment base for all insured depository institutions. Except 
as provided in paragraphs (b), (c), and (d) of this section, the 
assessment base for an insured depository institution shall equal the 
average consolidated total assets of the insured depository institution 
during the assessment period minus the average tangible equity of the 
insured depository institution during the assessment period.
    (1) Average consolidated total assets defined and calculated. 
Average consolidated total assets are defined in the schedule of 
quarterly averages in the Consolidated Reports of Condition and Income, 
using either a daily averaging method or a weekly averaging method as 
described in paragraphs (a)(1)(i) or (ii) of this section. The amounts 
to be reported as daily averages are the sum of the gross amounts of 
consolidated total assets for each calendar day during the quarter 
divided by the number of calendar days in the quarter. The amounts to 
be reported as weekly averages are the sum of the gross amounts of 
consolidated total assets for each Wednesday during the quarter divided 
by the number of Wednesdays in the quarter. For days that an office of 
the reporting institution (or any of its subsidiaries or branches) is 
closed (e.g., Saturdays, Sundays, or holidays), the amounts outstanding 
from the previous business day will be used. An office is considered 
closed if there are no transactions posted to the general ledger as of 
that date. For institutions that begin operating during the calendar 
quarter, the amounts to be reported as daily averages are the sum of 
the gross amounts of consolidated total assets for each calendar day 
the institution was

[[Page 10705]]

operating during the quarter divided by the number of calendar days the 
institution was operating during the quarter.
    (i) Institutions that must report average consolidated total assets 
using a daily averaging method. All insured depository institutions 
that report $1 billion or more in quarter-end consolidated total assets 
on their March 31, 2011 Consolidated Report of Condition and Income or 
Thrift Financial Report (or successor report), and all institutions 
that become insured after March 31, 2011, shall report average 
consolidated total assets as of the close of business for each day of 
the calendar quarter.
    (ii) Institutions that may report average consolidated total assets 
using a weekly averaging method. All insured depository institutions 
that report less than $1 billion in quarter-end consolidated total 
assets on their March 31, 2011, Consolidated Report of Condition and 
Income or Thrift Financial Report may report average consolidated total 
assets as an average of the balances as of the close of business on 
each Wednesday during the calendar quarter, or may at any time opt 
permanently to report average consolidated total assets on a daily 
basis as set forth in paragraph (a)(1)(i) of this section. Once an 
institution that reports average consolidated total assets using a 
weekly average reports average consolidated total assets equal to or 
greater than $1 billion for two consecutive quarters, it shall 
permanently report average consolidated total assets using daily 
averaging starting in the next quarter.
    (iii) Mergers and consolidations. The average calculation of the 
assets of the surviving or resulting institution in a merger or 
consolidation shall include the assets of all the merged or 
consolidated institutions for the days in the quarter prior to the 
merger or consolidation, whether reported by the daily or weekly 
method.
    (2) Average tangible equity defined and calculated. Tangible equity 
is defined as Tier 1 capital.
    (i) Calculation of average tangible equity. Except as provided in 
paragraph (a)(2)(ii) of this section, average tangible equity shall be 
calculated using monthly averaging. Monthly averaging means the average 
of the three month-end balances within the quarter.
    (ii) Alternate calculation of average tangible equity. Institutions 
that report less than $1 billion in quarter-end consolidated total 
assets on their March 31, 2011 Consolidated Reports of Condition and 
Income or Thrift Financial Reports may report average tangible equity 
using an end-of-quarter balance or may at any time opt permanently to 
report average tangible equity using a monthly average balance. An 
institution that reports average tangible equity using an end-of-
quarter balance and reports average daily or weekly consolidated assets 
of $1 billion or more for two consecutive quarters shall permanently 
report average tangible equity using monthly averaging starting in the 
next quarter. Newly insured institutions shall report using monthly 
averaging.
    (iii) Calculation of average tangible equity for the surviving 
institution in a merger or consolidation. For the surviving institution 
in a merger or consolidation, Tier 1 capital shall be calculated as if 
the merger occurred on the first day of the quarter in which the merger 
or consolidation occurred.
    (3) Consolidated subsidiaries--(i) Reporting for insured depository 
institutions with consolidated subsidiaries that are not insured 
depository institutions. For insured institutions with consolidated 
subsidiaries that are not insured depository institutions, assets, 
including assets eliminated in consolidation, shall be calculated using 
a daily or weekly averaging method, corresponding to the daily or 
weekly averaging requirement of the parent institution. The 
Consolidated Reports of Condition and Income instructions in effect for 
the quarter for which data is being reported shall govern calculation 
of the average amount of subsidiaries' assets, including those assets 
eliminated in consolidation. An insured depository institution that 
reports average tangible equity using a monthly averaging method and 
that has subsidiaries that are not insured depository institutions 
shall use monthly average reporting for the subsidiaries. The monthly 
average data for these subsidiaries, however, may be calculated for the 
current quarter or for the prior quarter consistent with the method 
used to report average consolidated total assets and in conformity with 
Consolidated Reports of Condition and Income requirements. Once the 
method of reporting the subsidiaries' assets and tangible equity is 
chosen, however (current quarter or prior quarter), insured depository 
institutions cannot change the reporting method from quarter to 
quarter. An institution that reports consolidated assets and tangible 
equity using data for the prior quarter may switch to concurrent 
reporting on a permanent basis.
    (ii) Reporting for insured depository institutions with 
consolidated insured depository subsidiaries. Insured depository 
institutions that consolidate with other insured depository 
institutions for financial reporting purposes shall report for the 
parent and for each subsidiary individually, daily average consolidated 
total assets or weekly average consolidated total assets, as 
appropriate under paragraph (a)(1)(i) or (ii) above, and tangible 
equity, without consolidating their insured depository institution 
subsidiaries into the calculations. Investments in insured depository 
institution subsidiaries should be included in total assets using the 
equity method of accounting.
    (b) Assessment base for banker's banks--(1) Bankers bank defined. A 
banker's bank for purposes of calculating deposit insurance assessments 
shall meet the definition of banker's bank as that term is used in 12 
U.S.C. 24. Banker's banks that have funds from government capital 
infusion programs (such as TARP and the Small Business Lending Fund), 
and stock owned by the FDIC resulting from banks failures, as well as 
non-bank-owned stock resulting from equity compensation programs, are 
not thereby excluded from the definition of banker's banks.
    (2) Self-certification. Institutions that meet the requirements of 
paragraph (b)(1) of this section shall so certify to that effect each 
quarter on the Consolidated Reports of Condition and Income or Thrift 
Financial Report or successor report.
    (3) Assessment base calculation for banker's banks. A banker's bank 
shall pay deposit insurance assessments on its assessment base as 
calculated in paragraph (a) of this section provided that it conducts 
50 percent or more of its business with entities other than its parent 
holding company or entities other than those controlled (control has 
the same meaning as in section 3(w)(5) of the FDI Act) either directly 
or indirectly by its parent holding company. The assessment base will 
exclude the average (daily or weekly depending on how the institution 
calculates its average consolidated total assets) amount of reserve 
balances passed through to the Federal Reserve, the average amount of 
reserve balances held at the Federal Reserve for its own account 
(including all balances due from the Federal Reserve as described in 
the instructions to line 4 of Schedule RC-A of the Consolidated Report 
of Condition and Income as of December 31, 2010), and the average 
amount of the institution's federal funds sold, but in no case shall 
the amount excluded exceed the sum of the bank's average amount of 
total deposits of commercial

[[Page 10706]]

banks and other depository institutions in the United States and the 
average amount of its federal funds purchased.
    (c) Assessment base for custodial banks--(1) Custodial bank 
defined. A custodial bank for purposes of calculating deposit insurance 
assessments shall be an insured depository institution with previous 
calendar-year trust assets (fiduciary and custody and safekeeping 
assets, as described in the instructions to Schedule RC-T of the 
Consolidated Report of Condition and Income as of December 31, 2010) of 
at least $50 billion or an insured depository institution that derived 
more than 50 percent of its total revenue (interest income plus non-
interest income) from trust activity over the previous calendar year.
    (2) Assessment base calculation for custodial banks. A custodial 
bank shall pay deposit insurance assessments on its assessment base as 
calculated in paragraph (a) of this section, but the FDIC will exclude 
from that assessment base the daily or weekly average (depending on how 
the bank reports its average consolidated total assets) of all asset 
types described in the instructions to lines 34, 35, 36, and 37 of 
Schedule RC-R of the Consolidated Report of Condition and Income as of 
December 31, 2010 with a Basel risk weighting of 0 percent, regardless 
of maturity, plus 50 percent of those asset types described in lines 
34, 35, 36, and 37 of Schedule RC-R as of December 31, 2010 with a 
Basel risk weighting of 20 percent regardless of maturity subject to 
the limitation that the daily or weekly average value of these assets 
cannot exceed the daily or weekly average value of those deposits 
classified as transaction accounts in the instructions to Schedule RC-E 
of the Consolidated Report of Condition and Income as of December 31, 
2010, and identified by the institution as being directly linked to a 
fiduciary or custodial and safekeeping account asset.
    (d) Assessment base for insured branches of foreign banks. Average 
consolidated total assets for an insured branch of a foreign bank are 
defined as total assets of the branch (including net due from related 
depository institutions) in accordance with the schedule of assets and 
liabilities in the Report of Assets and Liabilities of U.S. Branches 
and Agencies of Foreign Banks as of the assessment period for which the 
assessment is being calculated, but measured using the definition for 
reporting total assets in the schedule of quarterly averages in the 
Consolidated Reports of Condition and Income, and calculated using the 
appropriate daily or weekly averaging method under paragraph (a)(1)(i) 
or (ii) of this section. Tangible equity for an insured branch of a 
foreign bank is eligible assets (determined in accordance with Sec.  
347.210 of the FDIC's regulations) less the book value of liabilities 
(exclusive of liabilities due to the foreign bank's head office, other 
branches, agencies, offices, or wholly owned subsidiaries) calculated 
on a monthly or end-of-quarter basis, according to the branch's size.
    (e) Newly insured institutions. A newly insured institution shall 
pay an assessment for the assessment period during which it became 
insured. The FDIC will prorate the newly insured institution's 
assessment amount to reflect the number of days it was insured during 
the period.


0
4. Revise Sec.  327.6 to read as follows:


Sec.  327.6  Mergers and consolidations; other terminations of 
insurance.

    (a) Final quarterly certified invoice for acquired institution. An 
institution that is not the resulting or surviving institution in a 
merger or consolidation must file a report of condition for every 
assessment period prior to the assessment period in which the merger or 
consolidation occurs. The surviving or resulting institution shall be 
responsible for ensuring that these reports of condition are filed and 
shall be liable for any unpaid assessments on the part of the 
institution that is not the resulting or surviving institution.
    (b) Assessment for quarter in which the merger or consolidation 
occurs. For an assessment period in which a merger or consolidation 
occurs, consolidated total assets for the surviving or resulting 
institution shall include the consolidated total assets of all insured 
depository institutions that are parties to the merger or consolidation 
as if the merger or consolidation occurred on the first day of the 
assessment period. Tier 1 capital shall be reported in the same manner.
    (c) Other termination. When the insured status of an institution is 
terminated, and the deposit liabilities of such institution are not 
assumed by another insured depository institution--
    (1) Payment of assessments; quarterly certified statement invoices. 
The depository institution whose insured status is terminating shall 
continue to file and certify its quarterly certified statement invoice 
and pay assessments for the assessment period its deposits are insured. 
Such institution shall not be required to certify its quarterly 
certified statement invoice and pay further assessments after it has 
paid in full its deposit liabilities and the assessment to the 
Corporation required to be paid for the assessment period in which its 
deposit liabilities are paid in full, and after it, under applicable 
law, goes out of business or transfers all or substantially all of its 
assets and liabilities to other institutions or otherwise ceases to be 
obliged to pay subsequent assessments.
    (2) Payment of deposits; certification to Corporation. When the 
deposit liabilities of the depository institution have been paid in 
full, the depository institution shall certify to the Corporation that 
the deposit liabilities have been paid in full and give the date of the 
final payment. When the depository institution has unclaimed deposits, 
the certification shall further state the amount of the unclaimed 
deposits and the disposition made of the funds to be held to meet the 
claims. For assessment purposes, the following will be considered as 
payment of the unclaimed deposits:
    (i) The transfer of cash funds in an amount sufficient to pay the 
unclaimed and unpaid deposits to the public official authorized by law 
to receive the same; or
    (ii) If no law provides for the transfer of funds to a public 
official, the transfer of cash funds or compensatory assets to an 
insured depository institution in an amount sufficient to pay the 
unclaimed and unpaid deposits in consideration for the assumption of 
the deposit obligations by the insured depository institution.
    (3) Notice to depositors. (i) The depository institution whose 
insured status is terminating shall give sufficient advance notice of 
the intended transfer to the owners of the unclaimed deposits to enable 
the depositors to obtain their deposits prior to the transfer. The 
notice shall be mailed to each depositor and shall be published in a 
local newspaper of general circulation. The notice shall advise the 
depositors of the liquidation of the depository institution, request 
them to call for and accept payment of their deposits, and state the 
disposition to be made of their deposits if they fail to promptly claim 
the deposits.
    (ii) If the unclaimed and unpaid deposits are disposed of as 
provided in paragraph (c)(2)(i) of this section, a certified copy of 
the public official's receipt issued for the funds shall be furnished 
to the Corporation.
    (iii) If the unclaimed and unpaid deposits are disposed of as 
provided in paragraph (c)(2)(ii) of this section, an affidavit of the 
publication and of the mailing of the notice to the depositors, 
together with a copy of the notice and a certified copy of the contract 
of

[[Page 10707]]

assumption, shall be furnished to the Corporation.
    (4) Notice to Corporation. The depository institution whose insured 
status is terminating shall advise the Corporation of the date on which 
it goes out of business or transfers all or substantially all of its 
assets and liabilities to other institutions or otherwise ceases to be 
obligated to pay subsequent assessments and the method whereby the 
termination has been effected.
    (d) Resumption of insured status before insurance of deposits 
ceases. If a depository institution whose insured status has been 
terminated is permitted by the Corporation to continue or resume its 
status as an insured depository institution before the insurance of its 
deposits has ceased, the institution will be deemed, for assessment 
purposes, to continue as an insured depository institution and must 
thereafter file and certify its quarterly certified statement invoices 
and pay assessments as though its insured status had not been 
terminated. The procedure for applying for the continuance or 
resumption of insured status is set forth in Sec.  303.248 of this 
chapter.
0
5. Amend Sec.  327.8 by:


0
A. Removing paragraphs (e) and (f);
0
B. Redesignating paragraphs (g) through (s) as paragraphs (e) through 
(q) respectively;
0
C. Revising newly redesignated paragraphs (e), (f), (g), (k), (l), (m), 
(n), (o), and (p); and
0
D. Adding new paragraphs (r), (s), (t), and (u) to read as follows:


Sec.  327.8  Definitions.

* * * * *
    (e) Small Institution. An insured depository institution with 
assets of less than $10 billion as of December 31, 2006, and an insured 
branch of a foreign institution shall be classified as a small 
institution. If, after December 31, 2006, an institution classified as 
large under paragraph (f) of this section (other than an institution 
classified as large for purposes of Sec.  327.9(e)) reports assets of 
less than $10 billion in its quarterly reports of condition for four 
consecutive quarters, the FDIC will reclassify the institution as small 
beginning the following quarter.
    (f) Large Institution. An institution classified as large for 
purposes of Sec.  327.9(e) or an insured depository institution with 
assets of $10 billion or more as of December 31, 2006 (other than an 
insured branch of a foreign bank or a highly complex institution) shall 
be classified as a large institution. If, after December 31, 2006, an 
institution classified as small under paragraph (e) of this section 
reports assets of $10 billion or more in its quarterly reports of 
condition for four consecutive quarters, the FDIC will reclassify the 
institution as large beginning the following quarter.
    (g) Highly Complex Institution. (1) A highly complex institution 
is:
    (i) An insured depository institution (excluding a credit card 
bank) that has had $50 billion or more in total assets for at least 
four consecutive quarters that is controlled by a U.S. parent holding 
company that has had $500 billion or more in total assets for four 
consecutive quarters, or controlled by one or more intermediate U.S. 
parent holding companies that are controlled by a U.S. holding company 
that has had $500 billion or more in assets for four consecutive 
quarters; or
    (ii) A processing bank or trust company.
    (2) Control has the same meaning as in section 3(w)(5) of the FDI 
Act. A U.S. parent holding company is a parent holding company 
incorporated or organized under the laws of the United States or any 
State, as the term ``State'' is defined in section 3(a)(3) of the FDI 
Act. If, after December 31, 2010, an institution classified as highly 
complex under paragraph (g)(1)(i) of this section falls below $50 
billion in total assets in its quarterly reports of condition for four 
consecutive quarters, or its parent holding company or companies fall 
below $500 billion in total assets for four consecutive quarters, the 
FDIC will reclassify the institution beginning the following quarter. 
If, after December 31, 2010, an institution classified as highly 
complex under paragraph (a)(1)(ii) of this section falls below $10 
billion in total assets for four consecutive quarters, the FDIC will 
reclassify the institution beginning the following quarter.
* * * * *
    (k) Established depository institution. An established insured 
depository institution is a bank or savings association that has been 
federally insured for at least five years as of the last day of any 
quarter for which it is being assessed.
    (1) Merger or consolidation involving new and established 
institution(s). Subject to paragraphs (k)(2), (3), (4), and (5) of this 
section and Sec.  327.9(f)(3) and (4), when an established institution 
merges into or consolidates with a new institution, the resulting 
institution is a new institution unless:
    (i) 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
    (ii) Substantially all of the management of the established 
institution continued as management of the resulting or surviving 
institution.
    (2) Consolidation involving established institutions. When 
established institutions consolidate, the resulting institution is an 
established institution.
    (3) 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 part.
    (4) Subsidiary exception. Subject to paragraph (k)(5) of this 
section, a new institution will be considered established if it is a 
wholly owned subsidiary of:
    (i) 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 savings association 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 
savings and loan 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
    (ii) 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.
    (5) Effect of credit union conversion. In determining whether an 
insured depository institution is new or established, the FDIC will 
include any period of time that the institution was a federally insured 
credit union.
    (l) Risk assignment. For all small institutions and insured 
branches of foreign banks, risk assignment includes assignment to Risk 
Category I, II, III, or IV, and, within Risk Category I, assignment to 
an assessment rate or rates. For all large institutions and highly 
complex institutions, risk assignment includes assignment to an 
assessment rate or rates.

[[Page 10708]]

    (m) Unsecured debt--For purposes of the unsecured debt adjustment 
as set forth in Sec.  327.9(d)(1) and the depository institution debt 
adjustment as set forth in Sec.  327.9(d)(2), unsecured debt shall 
include senior unsecured liabilities and subordinated debt.
    (n) Senior unsecured liability--For purposes of the unsecured debt 
adjustment as set forth in Sec.  327.9(d)(1) and the depository 
institution debt adjustment as set forth in Sec.  327.9(d)(2), senior 
unsecured liabilities shall be the unsecured portion of other borrowed 
money as defined in the quarterly report of condition for the reporting 
period as defined in paragraph (b) of this section, but shall not 
include any senior unsecured debt that the FDIC has guaranteed under 
the Temporary Liquidity Guarantee Program, 12 CFR Part 370.
    (o) Subordinated debt--For purposes of the unsecured debt 
adjustment as set forth in Sec.  327.9(d)(1) and the depository 
institution debt adjustment as set forth in Sec.  327.9(d)(2), 
subordinated debt shall be as defined in the quarterly report of 
condition for the reporting period; however, subordinated debt shall 
also include limited-life preferred stock as defined in the quarterly 
report of condition for the reporting period.
    (p) Long-term unsecured debt--For purposes of the unsecured debt 
adjustment as set forth in Sec.  327.9(d)(1) and the depository 
institution debt adjustment as set forth in Sec.  327.9(d)(2), long-
term unsecured debt shall be unsecured debt with at least one year 
remaining until maturity; however, any such debt where the holder of 
the debt has a redemption option that is exercisable within one year of 
the reporting date shall not be deemed long-term unsecured debt.
* * * * *
    (r) Parent holding company--A parent holding company has the same 
meaning as ``depository institution holding company,'' as defined in 
Sec.  3(w) of the FDI Act.
    (s) Processing bank or trust company--A processing bank or trust 
company is an institution whose last three years' non-lending interest 
income, fiduciary revenues, and investment banking fees, combined, 
exceed 50 percent of total revenues (and its last three years fiduciary 
revenues are non-zero), and whose total fiduciary assets total $500 
billion or more, and whose total assets for at least four consecutive 
quarters have been $10 billion or more.
    (t) Credit Card Bank--A credit card bank is a bank for which credit 
card receivables plus securitized receivables exceed 50 percent of 
assets plus securitized receivables.
    (u) Control--Control has the same meaning as in section 2 of the 
Bank Holding Company Act of 1956, 12 U.S.C. 1841(a)(2).


0
6. Revise Sec.  327.9 to read as follows:


Sec.  327.9  Assessment pricing methods.

    (a) Small institutions--(1) Risk Categories. Each small 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.
    (i) Risk Category I. Small institutions in Supervisory Group A that 
are Well Capitalized will be assigned to Risk Category I.
    (ii) Risk Category II. Small institutions in Supervisory Group A 
that are Adequately Capitalized, and small institutions in Supervisory 
Group B that are either Well Capitalized or Adequately Capitalized will 
be assigned to Risk Category II.
    (iii) Risk Category III. Small institutions in Supervisory Groups A 
and B that are Undercapitalized, and small institutions in Supervisory 
Group C that are Well Capitalized or Adequately Capitalized will be 
assigned to Risk Category III.
    (iv) Risk Category IV. Small institutions in Supervisory Group C 
that are Undercapitalized will be assigned to Risk Category IV.
    (2) Capital evaluations. Each small 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 or 
Thrift Financial Report (or successor report, as appropriate) 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.
    (i) Well Capitalized. 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) Adequately Capitalized. 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.
    (iii) Undercapitalized. An undercapitalized institution is one that 
does not qualify as either Well Capitalized or Adequately Capitalized 
under paragraphs (a)(2)(i) and (ii) of this section.
    (3) Supervisory evaluations. Each small 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, as 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:
    (i) Supervisory Group ``A.'' This Supervisory Group consists of 
financially sound institutions with only a few minor weaknesses;
    (ii) 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
    (iii) 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.
    (4) Financial ratios method. A small insured depository institution 
in Risk Category I shall have its initial base assessment rate 
determined using the financial ratios method.
    (i) Under the financial ratios method, each of six 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 a uniform amount. The resulting sum shall equal the 
institution's initial base assessment rate; provided, however, that no 
institution's initial base assessment rate shall be less than the 
minimum initial base assessment rate in effect for Risk Category I 
institutions for that quarter nor greater than the maximum initial base 
assessment rate in effect for Risk Category I institutions for that 
quarter. An institution's initial base

[[Page 10709]]

assessment rate, subject to adjustment pursuant to paragraphs (d)(1), 
(2), and (3) of this section, as appropriate (resulting in the 
institution's total base assessment rate, which in no case can be lower 
than 50 percent of the institution's initial base assessment rate), and 
adjusted for the actual assessment rates set by the Board under Sec.  
327.10(f), will equal an institution's assessment rate. The six 
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; Net income before taxes/risk-weighted assets; and the 
Adjusted brokered deposit ratio. 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 paragraph (a)(2) of this section. 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%. The following table sets 
forth the initial values of the pricing multipliers:

------------------------------------------------------------------------
                                                            Pricing
                   Risk measures *                      multipliers **
------------------------------------------------------------------------
Tier 1 Leverage Ratio...............................             (0.056)
Loans Past Due 30-89 Days/Gross Assets..............              0.575
Nonperforming Assets/Gross Assets...................              1.074
Net Loan Charge-Offs/Gross Assets...................              1.210
Net Income before Taxes/Risk-Weighted Assets........             (0.764)
Adjusted brokered deposit ratio.....................              0.065
Weighted Average CAMELS Component Rating............              1.095
------------------------------------------------------------------------
* Ratios are expressed as percentages.
** Multipliers are rounded to three decimal places.

    (ii) The six financial ratios and the weighted average CAMELS 
component rating will be multiplied by the respective pricing 
multiplier, and the products will be summed. To this result will be 
added the uniform amount. The resulting sum shall equal the 
institution's initial base assessment rate; provided, however, that no 
institution's initial base assessment rate shall be less than the 
minimum initial base assessment rate in effect for Risk Category I 
institutions for that quarter nor greater than the maximum initial base 
assessment rate in effect for Risk Category I institutions for that 
quarter.
    (iii) Uniform amount and pricing multipliers. Except as adjusted 
for the actual assessment rates set by the Board under Sec.  327.10(f), 
the uniform amount shall be:
    (A) 4.861 whenever the assessment rate schedule set forth in Sec.  
327.10(a) is in effect;
    (B) 2.861 whenever the assessment rate schedule set forth in Sec.  
327.10(b) is in effect;
    (C) 1.861 whenever the assessment rate schedule set forth in Sec.  
327.10(c) is in effect; or
    (D) 0.861 whenever the assessment rate schedule set forth in Sec.  
327.10(d) is in effect.
    (iv) Implementation of CAMELS rating changes--(A) Changes between 
risk categories. If, during a quarter, a CAMELS composite rating change 
occurs that results in a Risk Category I institution moving from Risk 
Category I to Risk Category II, III or IV, the institution's initial 
base assessment rate for the portion of the quarter that it was in Risk 
Category I shall be determined using the supervisory ratings in effect 
before the change and the financial ratios as of the end of the 
quarter, subject to adjustment pursuant to paragraphs (d)(1), (2), and 
(3) of this section, as appropriate, and adjusted for the actual 
assessment rates set by the Board under Sec.  327.10(f). For the 
portion of the quarter that the institution was not in Risk Category I, 
the institution's initial base assessment rate, which shall be subject 
to adjustment pursuant to paragraphs (d)(1), (2), and (3), shall be 
determined under the assessment schedule for the appropriate Risk 
Category. If, during a quarter, a CAMELS composite rating change occurs 
that results in an institution moving from Risk Category II, III or IV 
to Risk Category I, then the financial ratios method shall apply for 
the portion of the quarter that it was in Risk Category I, subject to 
adjustment pursuant to paragraphs (d)(1), (2) and (3) of this section, 
as appropriate, and adjusted for the actual assessment rates set by the 
Board under Sec.  327.10(f). For the portion of the quarter that the 
institution was not in Risk Category I, the institution's initial base 
assessment rate, which shall be subject to adjustment pursuant to 
paragraphs (d)(1), (2), and (3) of this section 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 will change 
the institution's initial base assessment rate within Risk Category I, 
the initial base assessment rate for the period before the change shall 
be determined under the financial ratios method using the CAMELS 
component ratings in effect before the change, subject to adjustment 
pursuant to paragraphs (d)(1), (2), and (3) of this section, as 
appropriate. Beginning on the date of the CAMELS component ratings 
change, the initial base assessment rate for the remainder of the 
quarter shall be determined using the CAMELS component ratings in 
effect after the change, again subject to adjustment pursuant to 
paragraphs (d)(1), (2), and (3) of this section, as appropriate.
    (b) Large and Highly Complex institutions--(1) Assessment scorecard 
for large institutions (other than highly complex institutions). (i) A 
large institution other than a highly complex institution shall have 
its initial base assessment rate determined using the scorecard for 
large institutions.

[[Page 10710]]



                    Scorecard for Large Institutions
------------------------------------------------------------------------
                                              Measure        Component
                     Scorecard measures       weights         weights
                       and components        (percent)       (percent)
------------------------------------------------------------------------
P................  Performance Score      ..............  ..............
P.1..............  Weighted Average                  100              30
                    CAMELS Rating.
P.2..............  Ability to Withstand   ..............              50
                    Asset-Related Stress.
                    Tier 1 Leverage                   10  ..............
                    Ratio.
                    Concentration                     35  ..............
                    Measure.
                    Core Earnings/                    20  ..............
                    Average Quarter-End
                    Total Assets *.
                    Credit Quality                    35  ..............
                    Measure.
P.3..............  Ability to Withstand   ..............              20
                    Funding-Related
                    Stress.
                    Core Deposits/Total               60  ..............
                    Liabilities.
                    Balance Sheet                     40  ..............
                    Liquidity Ratio.
L................  Loss Severity Score..  ..............  ..............
L.1..............  Loss Severity Measure  ..............             100
------------------------------------------------------------------------
* Average of five quarter-end total assets (most recent and four prior
  quarters)

    (ii) The scorecard for large institutions produces two scores: 
performance score and loss severity score.
    (A) Performance score for large institutions. The performance score 
for large institutions is a weighted average of the scores for three 
measures: the weighted average CAMELS rating score, weighted at 30 
percent; the ability to withstand asset-related stress score, weighted 
at 50 percent; and the ability to withstand funding-related stress 
score, weighted at 20 percent.
    (1) Weighted average CAMELS rating score. (i) To compute the 
weighted average CAMELS rating score, a weighted average of an 
institution's CAMELS component ratings is calculated using the 
following weights:
[GRAPHIC] [TIFF OMITTED] TR25FE11.006

    (ii) A weighted average CAMELS rating converts to a score that 
ranges from 25 to 100. A weighted average rating of 1 equals a score of 
25 and a weighted average of 3.5 or greater equals a score of 100. 
Weighted average CAMELS ratings between 1 and 3.5 are assigned a score 
between 25 and 100. The score increases at an increasing rate as the 
weighted average CAMELS rating increases. Appendix B of this subpart 
describes the conversion of a weighted average CAMELS rating to a 
score.
    (2) Ability to withstand asset-related stress score. (i) The 
ability to withstand asset-related stress score is a weighted average 
of the scores for four measures: Tier 1 leverage ratio; concentration 
measure; the ratio of core earnings to average quarter-end total 
assets; and the credit quality measure. Appendices A and C of this 
subpart define these measures.
    (ii) The Tier 1 leverage ratio and the ratio of core earnings to 
average quarter-end total assets are described in Appendix A and the 
method of calculating the scores is described in Appendix C of this 
subpart.
    (iii) The score for the concentration measure is the greater of the 
higher-risk assets to Tier 1 capital and reserves score or the growth-
adjusted portfolio concentrations score. Both ratios are described in 
Appendix C.
    (iv) The score for the credit quality measure is the greater of the 
criticized and classified items to Tier 1 capital and reserves score or 
the underperforming assets to Tier 1 capital and reserves score.
    (v) The following table shows the cutoff values and weights for the 
measures used to calculate the ability to withstand asset-related 
stress score. Appendix B of this subpart describes how each measure is 
converted to a score between 0 and 100 based upon the minimum and 
maximum cutoff values, where a score of 0 reflects the lowest risk and 
a score of 100 reflects the highest risk.

       Cutoff Values and Weights for Measures To Calculate Ability To Withstand Asset-Related Stress Score
----------------------------------------------------------------------------------------------------------------
                                                                           Cutoff values
                                                                 --------------------------------     Weights
    Measures of the ability to withstand asset-related stress         Minimum         Maximum        (percent)
                                                                     (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
Tier 1 Leverage Ratio...........................................               6              13              10

[[Page 10711]]

 
Concentration Measure...........................................  ..............  ..............              35
    Higher-Risk Assets to Tier 1 Capital and Reserves; or.......               0             135  ..............
    Growth-Adjusted Portfolio Concentrations....................               4              56  ..............
Core Earnings/Average Quarter-End Total Assets *................               0               2              20
Credit Quality Measure..........................................  ..............  ..............              35
    Criticized and Classified Items/Tier 1 Capital and Reserves;               7             100  ..............
     or.........................................................
    Underperforming Assets/Tier 1 Capital and Reserves..........               2              35  ..............
----------------------------------------------------------------------------------------------------------------
* Average of five quarter-end total assets (most recent and four prior quarters).

    (vi) The score for each measure in the table in paragraph 
(b)(1)(ii)(A)(2)(v) is multiplied by its respective weight and the 
resulting weighted score is summed to arrive at the score for an 
ability to withstand asset-related stress, which can range from 0 to 
100, where a score of 0 reflects the lowest risk and a score of 100 
reflects the highest risk.
    (3) Ability to withstand funding-related stress score. Two measures 
are used to compute the ability to withstand funding-related stress 
score: a core deposits to total liabilities ratio, and a balance sheet 
liquidity ratio. Appendix A of this subpart describes these measures. 
Appendix B of this subpart describes how these measures are converted 
to a score between 0 and 100, where a score of 0 reflects the lowest 
risk and a score of 100 reflects the highest risk. The ability to 
withstand funding-related stress score is the weighted average of the 
scores for the two measures. In the following table, cutoff values and 
weights are used to derive an institution's ability to withstand 
funding-related stress score:

            Cutoff Values and Weights To Calculate Ability To Withstand Funding-Related Stress Score
----------------------------------------------------------------------------------------------------------------
                                                                           Cutoff values
                                                                 --------------------------------     Weights
   Measures of the ability to withstand funding-related stress        Minimum         Maximum        (percent)
                                                                     (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
Core Deposits/Total Liabilities.................................               5              87              60
Balance Sheet Liquidity Ratio...................................               7             243              40
----------------------------------------------------------------------------------------------------------------

    (4) Calculation of Performance Score. In paragraph 
(b)(1)(ii)(A)(3), the scores for the weighted average CAMELS rating, 
the ability to withstand asset-related stress, and the ability to 
withstand funding-related stress are multiplied by their respective 
weights (30 percent, 50 percent and 20 percent, respectively) and the 
results are summed to arrive at the performance score. The performance 
score cannot be less than 0 or more than 100, where a score of 0 
reflects the lowest risk and a score of 100 reflects the highest risk.
    (B) Loss severity score. The loss severity score is based on a loss 
severity measure that is described in Appendix D of this subpart. 
Appendix B also describes how the loss severity measure is converted to 
a score between 0 and 100. The loss severity score cannot be less than 
0 or more than 100, where a score of 0 reflects the lowest risk and a 
score of 100 reflects the highest risk. Cutoff values for the loss 
severity measure are:

             Cutoff Values To Calculate Loss Severity Score
------------------------------------------------------------------------
                                                   Cutoff values
                                         -------------------------------
        Measure of loss severity              Minimum         Maximum
                                             (percent)       (percent)
------------------------------------------------------------------------
Loss Severity...........................               0              28
------------------------------------------------------------------------

    (C) Total Score. The performance and loss severity scores are 
combined to produce a total score. The loss severity score is converted 
into a loss severity factor that ranges from 0.8 (score of 5 or lower) 
to 1.2 (score of 85 or higher). Scores at or below the minimum cutoff 
of 5 receive a loss severity factor of 0.8, and scores at or above the 
maximum cutoff of 85 receive a loss severity factor of 1.2. The 
following linear interpolation converts loss severity scores between 
the cutoffs into a loss severity factor: (Loss Severity Factor = 0.8 + 
[0.005 * (Loss Severity Score - 5)].

The performance score is multiplied by the loss severity factor to 
produce a total score (total score = performance score * loss severity 
factor). The total score can be up to 20 percent higher or lower than 
the performance score but cannot be less than 30 or more than 90. The 
total score is subject to adjustment, up or down, by a maximum of 15 
points, as set forth in paragraph (b)(3) of this section. The resulting 
total score after adjustment cannot be less than 30 or more than 90.
    (D) Initial base assessment rate. A large institution with a total 
score of 30 pays the minimum initial base assessment rate and an 
institution with a total score of 90 pays the maximum initial base 
assessment rate. For total

[[Page 10712]]

scores between 30 and 90, initial base assessment rates rise at an 
increasing rate as the total score increases, calculated according to 
the following formula:
[GRAPHIC] [TIFF OMITTED] TR25FE11.007


where Rate is the initial base assessment rate (expressed in basis 
points), Maximum Rate is the maximum initial base assessment rate then 
in effect (expressed in basis points), and Minimum Rate is the minimum 
initial base assessment rate then in effect (expressed in basis 
points). Initial base assessment rates are subject to adjustment 
pursuant to paragraphs (b)(3), (d)(1), (d)(2), of this section; large 
institutions that are not well capitalized or have a CAMELS composite 
rating of 3, 4 or 5 shall be subject to the adjustment at paragraph 
(d)(3); these adjustments shall result in the institution's total base 
assessment rate, which in no case can be lower than 50 percent of the 
institution's initial base assessment rate.
    (2) Assessment scorecard for highly complex institutions. (i) A 
highly complex institution shall have its initial base assessment rate 
determined using the scorecard for highly complex institutions.

                Scorecard for Highly Complex Institutions
------------------------------------------------------------------------
                                              Measure        Component
                 Measures and components      weights         weights
                                             (percent)       (percent)
------------------------------------------------------------------------
P..............  Performance Score
P.1............  Weighted Average CAMELS             100              30
                  Rating.
P.2............  Ability To Withstand     ..............              50
                  Asset-Related Stress.
                  Tier 1 Leverage Ratio.              10  ..............
                  Concentration Measure.              35  ..............
                  Core Earnings/Average               20  ..............
                  Quarter-End Total
                  Assets.
                  Credit Quality Measure              35  ..............
                  and Market Risk
                  Measure.
P.3............  Ability To Withstand     ..............              20
                  Funding-Related Stress.
                  Core Deposits/Total                 50  ..............
                  Liabilities.
                  Balance Sheet                       30  ..............
                  Liquidity Ratio.
                  Average Short-Term                  20  ..............
                  Funding/Average Total
                  Assets.
L..............  Loss Severity Score....  ..............  ..............
L.1............  Loss Severity..........  ..............             100
------------------------------------------------------------------------

    (ii) The scorecard for highly complex institutions produces two 
scores: performance and loss severity.
    (A) Performance score for highly complex institutions. The 
performance score for highly complex institutions is the weighted 
average of the scores for three components: weighted average CAMELS 
rating, weighted at 30 percent; ability to withstand asset-related 
stress score, weighted at 50 percent; and ability to withstand funding-
related stress score, weighted at 20 percent.
    (1) Weighted average CAMELS rating score. (i) To compute the score 
for the weighted average CAMELS rating, a weighted average of an 
institution's CAMELS component ratings is calculated using the 
following weights:
[GRAPHIC] [TIFF OMITTED] TR25FE11.008

    (ii) A weighted average CAMELS rating converts to a score that 
ranges from 25 to 100. A weighted average rating of 1 equals a score of 
25 and a weighted average of 3.5 or greater equals a score of 100. 
Weighted average CAMELS ratings between 1 and 3.5 are assigned a score 
between 25 and 100. The score increases at an increasing rate as the 
weighted average CAMELS rating increases. Appendix B of this subpart 
describes the conversion of a weighted average CAMELS rating to a 
score.
    (2) Ability to withstand asset-related stress score. (i) The 
ability to withstand asset-related stress score is a weighted average 
of the scores for four measures:

[[Page 10713]]

Tier 1 leverage ratio; concentration measure; ratio of core earnings to 
average quarter-end total assets; credit quality measure and market 
risk measure. Appendix A of this subpart describes these measures.
    (ii) The Tier 1 leverage ratio and the ratio of core earnings to 
average quarter-end total assets are described in Appendix A and the 
method of calculating the scores is described in Appendix B of this 
subpart.
    (iii) The score for the concentration measure for highly complex 
institutions is the greatest of the higher-risk assets to the sum of 
Tier 1 capital and reserves score, the top 20 counterparty exposure to 
the sum of Tier 1 capital and reserves score, or the largest 
counterparty exposure to the sum of Tier 1 capital and reserves score. 
Each ratio is described in Appendix A of this subpart. The method used 
to convert the concentration measure into a score is described in 
Appendix C of this subpart.
    (iv) The credit quality score is the greater of the criticized and 
classified items to Tier 1 capital and reserves score or the 
underperforming assets to Tier 1 capital and reserves score. The market 
risk score is the weighted average of three scores--the trading revenue 
volatility to Tier 1 capital score, the market risk capital to Tier 1 
capital score, and the level 3 trading assets to Tier 1 capital score. 
All of these ratios are described in Appendix A of this subpart and the 
method of calculating the scores is described in Appendix B. Each score 
is multiplied by its respective weight, and the resulting weighted 
score is summed to compute the score for the market risk measure. An 
overall weight of 35 percent is allocated between the scores for the 
credit quality measure and market risk measure. The allocation depends 
on the ratio of average trading assets to the sum of average 
securities, loans and trading assets (trading asset ratio) as follows:
    (v) Weight for credit quality score = 35 percent * (1--trading 
asset ratio); and,
    (vi) Weight for market risk score = 35 percent * trading asset 
ratio.
    (vii) Each of the measures used to calculate the ability to 
withstand asset-related stress score is assigned the following cutoff 
values and weights:

     Cutoff Values and Weights for Measures To Calculate the Ability To Withstand Asset-Related Stress Score
----------------------------------------------------------------------------------------------------------------
                                                  Cutoff values
 Measures of the ability to withstand asset- ----------------------  Market risk
               related stress                  Minimum    Maximum      measure           Weights (percent)
                                              (percent)  (percent)    (percent)
----------------------------------------------------------------------------------------------------------------
Tier 1 Leverage Ratio.......................          6         13  ............  10.
Concentration Measure.......................  .........  .........  ............  35.
    Higher Risk Assets/Tier 1 Capital and             0        135  ............  ..............................
     Reserves;.
    Top 20 Counterparty Exposure/Tier 1               0        125  ............  ..............................
     Capital and Reserves; or.
    Largest Counterparty Exposure/Tier 1              0         20  ............  ..............................
     Capital and Reserves.
Core Earnings/Average Quarter-end Total               0          2  ............  20.
 Assets.
Credit Quality Measure *....................  .........  .........  ............  35 * (1 - Trading Asset
                                                                                   Ratio).
    Criticized and Classified Items to Tier           7        100  ............  ..............................
     1 Capital and Reserves; or.
    Underperforming Assets/Tier 1 Capital             2         35  ............  ..............................
     and Reserves.
Market Risk Measure *.......................  .........  .........  ............  35 * Trading Asset Ratio.
    Trading Revenue Volatility/Tier 1                 0          2            60  ..............................
     Capital.
    Market Risk Capital/Tier 1 Capital......          0         10            20  ..............................
    Level 3 Trading Assets/Tier 1 Capital...          0         35            20  ..............................
----------------------------------------------------------------------------------------------------------------
* Combined, the credit quality measure and the market risk measure are assigned a 35 percent weight. The
  relative weight of each of the two scores depends on the ratio of average trading assets to the sum of average
  securities, loans and trading assets (trading asset ratio).

    (ix) The score of each measure is multiplied by its respective 
weight and the resulting weighted score is summed to compute the 
ability to withstand asset-related stress score, which can range from 0 
to 100, where a score of 0 reflects the lowest risk and a score of 100 
reflects the highest risk.
    (3) Ability to withstand funding related stress score. Three 
measures are used to calculate the score for the ability to withstand 
funding-related stress: a core deposits to total liabilities ratio, a 
balance sheet liquidity ratio, and average short-term funding to 
average total assets ratio. Appendix A of this subpart describes these 
ratios. Appendix B of this subpart describes how each measure is 
converted to a score. The ability to withstand funding-related stress 
score is the weighted average of the scores for the three measures. In 
the following table, cutoff values and weights are used to derive an 
institution's ability to withstand funding-related stress score:

           Cutoff Values and Weights To Calculate Ability To Withstand Funding-Related Stress Measures
----------------------------------------------------------------------------------------------------------------
                                                                           Cutoff values
                                                                 --------------------------------     Weights
   Measures of the ability to withstand funding-related stress        Minimum         Maximum        (percent)
                                                                     (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
Core Deposits/Total Liabilities.................................               5              87              50
Balance Sheet Liquidity Ratio...................................               7             243              30
Average Short-term Funding/Average Total Assets.................               2              19              20
----------------------------------------------------------------------------------------------------------------


[[Page 10714]]

    (4) Calculation of Performance Score. The weighted average CAMELS 
score, the ability to withstand asset-related stress score, and the 
ability to withstand funding-related stress score are multiplied by 
their respective weights (30 percent, 50 percent and 20 percent, 
respectively) and the results are summed to arrive at the performance 
score, which cannot be less than 0 or more than 100.
    (B) Loss severity score. The loss severity score is based on a loss 
severity measure described in Appendix D of this subpart. Appendix B of 
this subpart also describes how the loss severity measure is converted 
to a score between 0 and 100. Cutoff values for the loss severity 
measure are:

                 Cutoff Values for Loss Severity Measure
------------------------------------------------------------------------
                                                   Cutoff values
                                         -------------------------------
        Measure of loss severity              Minimum         Maximum
                                             (percent)       (percent)
------------------------------------------------------------------------
Loss Severity...........................               0              28
------------------------------------------------------------------------

     (C) Total Score. The performance and loss severity scores are 
combined to produce a total score. The loss severity score is converted 
into a loss severity factor that ranges from 0.8 (score of 5 or lower) 
to 1.2 (score of 85 or higher). Scores at or below the minimum cutoff 
of 5 receive a loss severity factor of 0.8, and scores at or above the 
maximum cutoff of 85 receive a loss severity factor of 1.2. The 
following linear interpolation converts loss severity scores between 
the cutoffs into a loss severity factor: (Loss Severity Factor = 0.8 + 
[0.005 * (Loss Severity Score - 5)]. The performance score is 
multiplied by the loss severity factor to produce a total score (total 
score = performance score * loss severity factor). The total score can 
be up to 20 percent higher or lower than the performance score but 
cannot be less than 30 or more than 90. The total score is subject to 
adjustment, up or down, by a maximum of 15 points, as set forth in 
paragraph (b)(3) of this section. The resulting total score after 
adjustment cannot be less than 30 or more than 90.
    (D) Initial base assessment rate. A highly complex institution with 
a total score of 30 pays the minimum initial base assessment rate and 
an institution with a total score of 90 pays the maximum initial base 
assessment rate. For total scores between 30 and 90, initial base 
assessment rates rise at an increasing rate as the total score 
increases, calculated according to the following formula:
[GRAPHIC] [TIFF OMITTED] TR25FE11.009


where Rate is the initial base assessment rate (expressed in basis 
points), Maximum Rate is the maximum initial base assessment rate then 
in effect (expressed in basis points), and Minimum Rate is the minimum 
initial base assessment rate then in effect (expressed in basis 
points). Initial base assessment rates are subject to adjustment 
pursuant to paragraphs (b)(3), (d)(1), and (d)(2) of this section; 
highly complex institutions that are not well capitalized or have a 
CAMELS composite rating of 3, 4 or 5 shall be subject to the adjustment 
at paragraph (d)(3); these adjustments shall result in the 
institution's total base assessment rate, which in no case can be lower 
than 50 percent of the institution's initial base assessment rate.
    (3) Adjustment to total score for large institutions and highly 
complex institutions. The total score for large institutions and highly 
complex institutions is subject to adjustment, up or down, by a maximum 
of 15 points, based upon significant risk factors that are not 
adequately captured in the appropriate scorecard. In making such 
adjustments, the FDIC may consider such information as financial 
performance and condition information and other market or supervisory 
information. The FDIC will also consult with an institution's primary 
federal regulator and, for state chartered institutions, state banking 
supervisor.
    (i) Prior notice of adjustments--(A) Prior notice of upward 
adjustment. Prior to making any upward adjustment to an institution's 
total score 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 total score because of 
considerations of additional risk information, the FDIC will formally 
notify the institution's primary federal regulator and provide an 
opportunity to respond.
    (ii) 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 total score is warranted, taking 
into account any revisions to scorecard measures, 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. Except as provided in 
paragraph (b)(3)(iv) of this section, the amount of adjustment cannot 
exceed the proposed adjustment amount contained in the initial notice 
unless additional notice is provided so that the primary federal 
regulator and the institution may respond.
    (iii) 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 total 
score is warranted, taking into account any revisions to scorecard 
measures. Any downward adjustment in an institution's total score will 
remain in effect for subsequent assessment periods until the FDIC 
determines that an

[[Page 10715]]

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.
    (iv) Adjustment without notice. Notwithstanding the notice 
provisions set forth above, the FDIC may change an institution's total 
score without advance notice under this paragraph, if the institution's 
supervisory ratings or the scorecard measures deteriorate.
    (c) Insured branches of foreign banks--(1) Risk categories for 
insured branches of foreign banks. Insured branches of foreign banks 
shall be assigned to risk categories as set forth in paragraph (a)(1) 
of this section.
    (2) Capital evaluations for insured branches of foreign banks. Each 
insured branch of a foreign bank will receive one of the following 
three capital evaluations on the basis of data reported in the 
institution's Report of Assets and Liabilities of U.S. Branches and 
Agencies of Foreign Banks 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.
    (i) Well Capitalized. An insured branch of a foreign bank is 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 (c)(2) of this section.
    (ii) Adequately Capitalized. An insured branch of a foreign bank is 
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 (c)(2) of this section; and
    (C) Does not meet the definition of a Well Capitalized insured 
branch of a foreign bank.
    (iii) Undercapitalized. An insured branch of a foreign bank is 
undercapitalized institution if it does not qualify as either Well 
Capitalized or Adequately Capitalized under paragraphs (c)(2)(i) and 
(ii) of this section.
    (3) Supervisory evaluations for insured branches of foreign banks. 
Each insured branch of a foreign bank will be assigned to one of three 
supervisory groups as set forth in paragraph (a)(3) of this section.
    (4) Assessment method for 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.
    (i) 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 5.076 (which shall be the pricing multiplier). To this result will 
be added a uniform amount. The resulting sum--the initial base 
assessment rate--will equal an institution's total base assessment 
rate; provided, however, that no institution's total base assessment 
rate will be less than the minimum total base assessment rate in effect 
for Risk Category I institutions for that quarter nor greater than the 
maximum total base assessment rate in effect for Risk Category I 
institutions for that quarter.
    (ii) Uniform amount. Except as adjusted for the actual assessment 
rates set by the Board under Sec.  327.10(f), the uniform amount for 
all insured branches of foreign banks shall be:
    (A) -3.127 whenever the assessment rate schedule set forth in Sec.  
327.10(a) is in effect;
    (B) -5.127 whenever the assessment rate schedule set forth in Sec.  
327.10(b) is in effect;
    (C) --6.127 whenever the assessment rate schedule set forth in 
Sec.  327.10(c) is in effect; or
    (D) -7.127 whenever the assessment rate schedule set forth in Sec.  
327.10(d) is in effect.
    (iii) Insured branches of foreign banks not subject to certain 
adjustments. No insured branch of a foreign bank in any risk category 
shall be subject to the adjustments in paragraphs (b)(3), (d)(1), or 
(d)(3) of this section.
    (iv) Implementation of changes between Risk Categories for insured 
branches of foreign banks. If, during a quarter, a ROCA rating change 
occurs that results in an insured branch of a foreign bank moving from 
Risk Category I to Risk Category II, III or IV, the institution's 
initial base assessment rate for the portion of the quarter that it was 
in Risk Category I shall be determined using the weighted average ROCA 
component rating. For the portion of the quarter that the institution 
was not in Risk Category I, the institution's initial base assessment 
rate shall be determined under the assessment schedule for the 
appropriate Risk Category. If, during a quarter, a ROCA rating change 
occurs that results in 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 as provided using the 
weighted average ROCA component rating. For the portion of the quarter 
that the institution was not in Risk Category I, the institution's 
initial base assessment rate shall be determined under the assessment 
schedule for the appropriate Risk Category.
    (v) Implementation of changes within Risk Category I for insured 
branches of foreign banks. If, during a quarter, an insured branch of a 
foreign bank remains in Risk Category I, but a ROCA component rating 
changes that will affect the institution's initial base assessment 
rate, separate assessment rates for the portion(s) of the quarter 
before and after the change(s) shall be determined under this paragraph 
(c)(4) of this section.
    (d) Adjustments--(1) Unsecured debt adjustment to initial base 
assessment rate for all institutions. All institutions, except new 
institutions as provided under paragraphs (f)(1) and (2) of this 
section and insured branches of foreign banks as provided under 
paragraph (c)(4)(iii) of this section, shall be subject to an 
adjustment of assessment rates for unsecured debt. Any unsecured debt 
adjustment shall be made after any adjustment under paragraph (b)(3) of 
this section.
    (i) Application of unsecured debt adjustment. The unsecured debt 
adjustment shall be determined as the sum of the initial base 
assessment rate plus 40 basis points; that sum shall be multiplied by 
the ratio of an insured depository institution's long-term unsecured 
debt to its assessment base. The amount of the reduction in the 
assessment rate due to the adjustment is equal to the dollar amount of 
the

[[Page 10716]]

adjustment divided by the amount of the assessment base.
    (ii) Limitation--No unsecured debt adjustment for any institution 
shall exceed the lesser of 5 basis points or 50 percent of the 
institution's initial base assessment rate.
    (iii) Applicable quarterly reports of condition--Unsecured debt 
adjustment ratios for any given quarter shall be calculated from 
quarterly reports of condition (Consolidated Reports of Condition and 
Income and Thrift Financial Reports, or any successor reports to 
either, as appropriate) filed by each institution as of the last day of 
the quarter.
    (2) Depository institution debt adjustment to initial base 
assessment rate for all institutions. All institutions shall be subject 
to an adjustment of assessment rates for unsecured debt held that is 
issued by another depository institution. Any such depository 
institution debt adjustment shall be made after any adjustment under 
paragraphs (b)(3) and (d)(1) of this section.
    (i) Application of depository institution debt adjustment. An 
insured depository institution shall pay a 50 basis point adjustment on 
the amount of unsecured debt it holds that was issued by another 
insured depository institution to the extent that such debt exceeds 3 
percent of the institution's Tier 1 capital. The amount of long-term 
unsecured debt issued by another insured depository institution shall 
be calculated using the same valuation methodology used to calculate 
the amount of such debt for reporting on the asset side of the balance 
sheets.
    (ii) Applicable quarterly reports of condition. Depository 
institution debt adjustment ratios for any given quarter shall be 
calculated from quarterly reports of condition (Consolidated Reports of 
Condition and Income and Thrift Financial Reports, or any successor 
reports to either, as appropriate) filed by each institution as of the 
last day of the quarter.
    (3) Brokered Deposit Adjustment. All small institutions in Risk 
Categories II, III, and IV, all large institutions and all highly 
complex institutions, except large and highly complex institutions 
(including new large and new highly complex institutions) that are well 
capitalized and have a CAMELS composite rating of 1 or 2, shall be 
subject to an assessment rate adjustment for brokered deposits. Any 
such brokered deposit adjustment shall be made after any adjustment 
under paragraphs (b)(3), (d)(1), and (d)(2) of this section. The 
brokered deposit adjustment includes all brokered deposits as defined 
in Section 29 of the Federal Deposit Insurance Act (12 U.S.C. 1831f), 
and 12 CFR 337.6, including reciprocal deposits as defined in Sec.  
327.8(p), and brokered deposits that consist of balances swept into an 
insured institution from another institution. The adjustment under this 
paragraph is limited to those institutions whose ratio of brokered 
deposits to domestic deposits is greater than 10 percent; asset growth 
rates do not affect the adjustment. Insured branches of foreign banks 
are not subject to the brokered deposit adjustment as provided in 
paragraph (c)(4)(iii) of this section.
    (i) Application of brokered deposit adjustment. The brokered 
deposit adjustment shall be determined by multiplying 25 basis points 
by the ratio of the difference between an insured depository 
institution's brokered deposits and 10 percent of its domestic deposits 
to its assessment base.
    (ii) Limitation. The maximum brokered deposit adjustment will be 10 
basis points; the minimum brokered deposit adjustment will be 0.
    (iii) Applicable quarterly reports of condition. Brokered deposit 
ratios for any given quarter shall be calculated from the quarterly 
reports of condition (Call Reports and Thrift Financial Reports, or any 
successor reports to either, as appropriate) filed by each institution 
as of the last day of the quarter.
    (e) Request to be treated as a large institution--(1) Procedure. 
Any institution 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 consider such a request provided that it has 
sufficient information to do so. 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 institution shall be deemed a small institution for 
assessment purposes.
    (2) 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 
institution became effective. Any request to be assessed as a small 
institution must be made to the FDIC's Division of Insurance and 
Research.
    (3) An institution that disagrees with the FDIC's determination 
that it is a large, highly complex, or small institution may request 
review of that determination pursuant to Sec.  327.4(c).
    (f) New and established institutions and exceptions--(1) New small 
institutions. A new small Risk Category I institution shall be assessed 
the Risk Category I maximum initial base assessment rate for the 
relevant assessment period. No new small institution in any risk 
category shall be subject to the unsecured debt adjustment as 
determined under paragraph (d)(1) of this section. All new small 
institutions in any Risk Category shall be subject to the depository 
institution debt adjustment as determined under paragraph (d)(2) of 
this section. All new small institutions in Risk Categories II, III, 
and IV shall be subject to the brokered deposit adjustment as 
determined under paragraph (d)(3) of this section.
    (2) New large institutions and new highly complex institutions. All 
new large institutions and all new highly complex institutions shall be 
assessed under the appropriate method provided at paragraph (b)(1) or 
(2) of this section and subject to the adjustments provided at 
paragraphs (b)(3), (d)(2), and (d)(3) of this section. No new highly 
complex or large institutions are entitled to adjustment under 
paragraph (d)(1) of this section. If a large or highly complex 
institution has not yet received CAMELS ratings, it will be given a 
weighted CAMELS rating of 2 for assessment purposes until actual CAMELS 
ratings are assigned.
    (3) 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 Sec.  
327.8(k)(1), its CAMELS ratings for assessment purposes will be based 
upon the established institution's ratings prior to the merger or 
consolidation until new ratings become available.
    (4) Rate applicable to institutions subject to subsidiary or credit 
union exception. A small Risk Category I institution that is 
established under Sec.  327.8(k)(4) or (5), but does not have CAMELS 
component ratings, shall be assessed at 2 basis points above the 
minimum initial base assessment rate applicable to Risk Category I 
institutions until it receives CAMELS component ratings. Thereafter, 
the assessment rate will be determined by annualizing, where 
appropriate, financial ratios

[[Page 10717]]

obtained from all quarterly reports of condition that have been filed, 
until the institution files four quarterly reports of condition. If a 
large or highly complex institution is considered established under 
Sec.  327.8(k)(4) or (5), but does not have CAMELS component ratings, 
it will be given a weighted CAMELS rating of 2 for assessment purposes 
until actual CAMELS ratings are assigned.
    (5) 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).
    (g) Assessment rates for bridge depository institutions and 
conservatorships. Institutions that are bridge depository institutions 
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 initial base assessment rate, 
which shall not be subject to adjustment under paragraphs (b)(3), 
(d)(1), (2) or (3) of this section.


0
7. Revise Sec.  327.10 to read as follows:


Sec.  327.10  Assessment rate schedules.

    (a) Assessment rate schedules before the reserve ratio of the DIF 
reaches 1.15 percent--
    (1) Applicability. The assessment rate schedules in paragraph (a) 
of this section will cease to be applicable when the reserve ratio of 
the DIF first reaches 1.15 percent.
    (2) Initial Base Assessment Rate Schedule. Before the reserve ratio 
of the DIF reaches 1.15 percent, the initial base assessment rate for 
an insured depository institution shall be the rate prescribed in the 
following schedule:

         Initial Base Assessment Rate Schedule Before the Reserve Ratio of the DIF Reaches 1.15 Percent
----------------------------------------------------------------------------------------------------------------
                                                                                                     Large and
                                   Risk category   Risk category   Risk category   Risk category  highly complex
                                         I              II              III             IV         institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate....             5-9              14              23              35            5-35
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Initial base rates that are not the minimum
  or maximum rate will vary between these rates.

    (i) Risk Category I Initial Base Assessment Rate Schedule. The 
annual initial base assessment rates for all institutions in Risk 
Category I shall range from 5 to 9 basis points.
    (ii) Risk Category II, III, and IV Initial Base Assessment Rate 
Schedule. The annual initial base assessment rates for Risk Categories 
II, III, and IV shall be 14, 23, and 35 basis points, respectively.
    (iii) All institutions in any one risk category, other than Risk 
Category I, will be charged the same initial base assessment rate, 
subject to adjustment as appropriate.
    (iv) Large and Highly Complex Institutions Initial Base Assessment 
Rate Schedule. The annual initial base assessment rates for all large 
and highly complex institutions shall range from 5 to 35 basis points.
    (3) Total Base Assessment Rate Schedule after Adjustments. Before 
the reserve ratio of the DIF reaches 1.15 percent, the total base 
assessment rates after adjustments for an insured depository 
institution shall be as prescribed in the following schedule.

    Total Base Assessment Rate Schedule (After Adjustments)* Before the Reserve Ratio of the DIF Reaches 1.15
                                                   Percent **
----------------------------------------------------------------------------------------------------------------
                                                                                                     Large and
                                   Risk category   Risk category   Risk category   Risk category  highly complex
                                         I              II              III             IV         institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate....             5-9              14              23              35            5-35
Unsecured debt adjustment.......         (4.5)-0           (5)-0           (5)-0           (5)-0           (5)-0
Brokered deposit adjustment.....  ..............            0-10            0-10            0-10            0-10
    Total base assessment rate..           2.5-9            9-24           18-33           30-45          2.5-45
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum or
  maximum rate will vary between these rates.
** Total base assessment rates do not include the depository institution debt adjustment.

    (i) Risk Category I Total Base Assessment Rate Schedule. The annual 
total base assessment rates for all institutions in Risk Category I 
shall range from 2.5 to 9 basis points.
    (ii) Risk Category II Total Base Assessment Rate Schedule. The 
annual total base assessment rates for Risk Category II shall range 
from 9 to 24 basis points.
    (iii) Risk Category III Total Base Assessment Rate Schedule. The 
annual total base assessment rates for Risk Category III shall range 
from 18 to 33 basis points.
    (iv) Risk Category IV Total Base Assessment Rate Schedule. The 
annual total base assessment rates for Risk Category IV shall range 
from 30 to 45 basis points.
    (v) Large and Highly Complex Institutions Total Base Assessment 
Rate Schedule. The annual total base assessment rates for all large and 
highly complex institutions shall range from 2.5 to 45 basis points.
    (b) Assessment rate schedules once the reserve ratio of the DIF 
first reaches 1.15 percent, and the reserve ratio for the immediately 
prior assessment period is less than 2 percent-- (1) Initial Base 
Assessment Rate Schedule. Once the reserve ratio of the DIF first 
reaches 1.15 percent, and the reserve ratio for the immediately prior 
assessment period is less than 2 percent, the initial base assessment 
rate for an insured depository institution shall be the rate prescribed 
in the following schedule:

[[Page 10718]]



  Initial Base Assessment Rate Schedule Once the Reserve Ratio of the DIF Reaches 1.15 Percent and the Reserve
                    Ratio for the Immediately Prior Assessment Period Is Less Than 2 Percent
----------------------------------------------------------------------------------------------------------------
                                                                                                     Large and
                                   Risk category   Risk category   Risk category   Risk category  highly complex
                                         I              II              III             IV         institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate....             3-7              12              19              30            3-30
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Initial base rates that are not the minimum
  or maximum rate will vary between these rates.

    (i) Risk Category I Initial Base Assessment Rate Schedule. The 
annual initial base assessment rates for all institutions in Risk 
Category I shall range from 3 to 7 basis points.
    (ii) Risk Category II, III, and IV Initial Base Assessment Rate 
Schedule. The annual initial base assessment rates for Risk Categories 
II, III, and IV shall be 12, 19, and 30 basis points, respectively.
    (iii) All institutions in any one risk category, other than Risk 
Category I, will be charged the same initial base assessment rate, 
subject to adjustment as appropriate.
    (iv) Large and Highly Complex Institutions Initial Base Assessment 
Rate Schedule. The annual initial base assessment rates for all large 
and highly complex institutions shall range from 3 to 30 basis points.
    (2) Total Base Assessment Rate Schedule after Adjustments. Once the 
reserve ratio of the DIF first reaches 1.15 percent, and the reserve 
ratio for the immediately prior assessment period is less than 2 
percent, the total base assessment rates after adjustments for an 
insured depository institution shall be as prescribed in the following 
schedule.

Total Base Assessment Rate Schedule (After Adjustments) * Once the Reserve Ratio of the DIF Reaches 1.15 Percent
           and the Reserve Ratio for the Immediately Prior Assessment Period Is Less Than 2 Percent **
----------------------------------------------------------------------------------------------------------------
                                                                                                     Large and
                                   Risk category   Risk category   Risk category   Risk category  highly complex
                                         I              II              III             IV         institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate....             3-7              12              19              30            3-30
Unsecured debt adjustment.......         (3.5)-0           (5)-0           (5)-0           (5)-0           (5)-0
Brokered deposit adjustment.....  ..............            0-10            0-10            0-10            0-10
Total base assessment rate......           1.5-7            7-22           14-29           25-40          1.5-40
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum or
  maximum rate will vary between these rates.
** Total base assessment rates do not include the depository institution debt adjustment.

    (i) Risk Category I Total Base Assessment Rate Schedule. The annual 
total base assessment rates for institutions in Risk Category I shall 
range from 1.5 to 7 basis points.
    (ii) Risk Category II Total Base Assessment Rate Schedule. The 
annual total base assessment rates for Risk Category II shall range 
from 7 to 22 basis points.
    (iii) Risk Category III Total Base Assessment Rate Schedule. The 
annual total base assessment rates for Risk Category III shall range 
from 14 to 29 basis points.
    (iv) Risk Category IV Total Base Assessment Rate Schedule. The 
annual total base assessment rates for Risk Category IV shall range 
from 25 to 40 basis points.
    (v) Large and Highly Complex Institutions Total Base Assessment 
Rate Schedule. The annual total base assessment rates for all large and 
highly complex institutions shall range from 1.5 to 40 basis points.
    (c) Assessment rate schedules if the reserve ratio of the DIF for 
the prior assessment period is equal to or greater than 2 percent and 
less than 2.5 percent--(1) Initial Base Assessment Rate Schedule. If 
the reserve ratio of the DIF for the prior assessment period is equal 
to or greater than 2 percent and less than 2.5 percent, the initial 
base assessment rate for an insured depository institution, except as 
provided in paragraph (e) of this section, shall be the rate prescribed 
in the following schedule:

Initial Base Assessment Rate Schedule if Reserve Ratio for Prior Assessment Period Is Equal to or Greater Than 2
                                        Percent But Less Than 2.5 Percent
----------------------------------------------------------------------------------------------------------------
                                                                                                     Large and
                                   Risk category   Risk category   Risk category   Risk category  highly complex
                                         I              II              III             IV         institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate....             2-6              10              17              28            2-28
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Initial base rates that are not the minimum
  or maximum rate will vary between these rates.

    (i) Risk Category I Initial Base Assessment Rate Schedule. The 
annual initial base assessment rates for all institutions in Risk 
Category I shall range from 2 to 6 basis points.
    (ii) Risk Category II, III, and IV Initial Base Assessment Rate 
Schedule. The annual initial base assessment rates for Risk Categories 
II, III, and IV shall be 10, 17, and 28 basis points, respectively.

[[Page 10719]]

    (iii) All institutions in any one risk category, other than Risk 
Category I, will be charged the same initial base assessment rate, 
subject to adjustment as appropriate.
    (iv) Large and Highly Complex Institutions Initial Base Assessment 
Rate Schedule. The annual initial base assessment rates for all large 
and highly complex institutions shall range from 2 to 28 basis points.
    (2) Total Base Assessment Rate Schedule after Adjustments. If the 
reserve ratio of the DIF for the prior assessment period is equal to or 
greater than 2 percent and less than 2.5 percent, the total base 
assessment rates after adjustments for an insured depository 
institution, except as provided in paragraph (e) of this section, shall 
be as prescribed in the following schedule.

 Total Base Assessment Rate Schedule (After Adjustments) * if Reserve Ratio for Prior Assessment Period Is Equal
                            to or Greater Than 2 Percent But Less Than 2.5 Percent **
----------------------------------------------------------------------------------------------------------------
                                                                                                     Large and
                                   Risk category   Risk category   Risk category   Risk category  highly complex
                                         I              II              III             IV         institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate....             2-6              10              17              28            2-38
Unsecured debt adjustment.......           (3)-0           (5)-0           (5)-0           (5)-0           (5)-0
Brokered deposit adjustment.....  ..............            0-10            0-10            0-10            0-10
Total base assessment rate......             1-6            5-20           12-27           23-38            1-38
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum or
  maximum rate will vary between these rates.
** Total base assessment rates do not include the depository institution debt adjustment.

    (i) Risk Category I Total Base Assessment Rate Schedule. The annual 
total base assessment rates for institutions in Risk Category I shall 
range from 1 to 6 basis points.
    (ii) Risk Category II Total Base Assessment Rate Schedule. The 
annual total base assessment rates for Risk Category II shall range 
from 5 to 20 basis points.
    (iii) Risk Category III Total Base Assessment Rate Schedule. The 
annual total base assessment rates for Risk Category III shall range 
from 12 to 27 basis points.
    (iv) Risk Category IV Total Base Assessment Rate Schedule. The 
annual total base assessment rates for Risk Category IV shall range 
from 23 to 38 basis points.
    (v) Large and Highly Complex Institutions Total Base Assessment 
Rate Schedule. The annual total base assessment rates for all large and 
highly complex institutions shall range from 1 to 38 basis points.
    (d) Assessment rate schedules if the reserve ratio of the DIF for 
the prior assessment period is greater than 2.5 percent--(1) Initial 
Base Assessment Rate Schedule. If the reserve ratio of the DIF for the 
prior assessment period is greater than 2.5 percent, the initial base 
assessment rate for an insured depository institution, except as 
provided in paragraph (e) of this section, shall be the rate prescribed 
in the following schedule:

 Initial Base Assessment Rate Schedule if Reserve Ratio for Prior Assessment Period Is Greater Than or Equal to
                                                   2.5 Percent
----------------------------------------------------------------------------------------------------------------
                                                                                                     Large and
                                   Risk category   Risk category   Risk category   Risk category  highly complex
                                         I              II              III             IV         institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate....             1-5               9              15              25            1-25
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Initial base rates that are not the minimum
  or maximum rate will vary between these rates.
 

    (i) Risk Category I Initial Base Assessment Rate Schedule. The 
annual initial base assessment rates for all institutions in Risk 
Category I shall range from 1 to 5 basis points.
    (ii) Risk Category II, III, and IV Initial Base Assessment Rate 
Schedule. The annual initial base assessment rates for Risk Categories 
II, III, and IV shall be 9, 15, and 25 basis points, respectively.
    (iii) All institutions in any one risk category, other than Risk 
Category I, will be charged the same initial base assessment rate, 
subject to adjustment as appropriate.
    (iv) Large and Highly Complex Institutions Initial Base Assessment 
Rate Schedule. The annual initial base assessment rates for all large 
and highly complex institutions shall range from 1 to 25 basis points.
    (2) Total Base Assessment Rate Schedule after Adjustments. If the 
reserve ratio of the DIF for the prior assessment period is greater 
than 2.5 percent, the total base assessment rates after adjustments for 
an insured depository institution, except as provided in paragraph (e) 
of this section, shall be the rate prescribed in the following 
schedule.

    Total Base Assessment Rate Schedule (After Adjustments) * if Reserve Ratio for Prior Assessment Period Is
                                     Greater Than or Equal to 2.5 Percent **
----------------------------------------------------------------------------------------------------------------
                                                                                                     Large and
                                   Risk category   Risk category   Risk category   Risk category  highly complex
                                         I              II              III             IV         institutions
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate....             1-5               9              15              25            1-25

[[Page 10720]]

 
Unsecured debt adjustment.......         (2.5)-0         (4.5)-0           (5)-0           (5)-0           (5)-0
Brokered deposit adjustment.....  ..............            0-10            0-10            0-10            0-10
                                 -------------------------------------------------------------------------------
    Total Base Assessment Rate..           0.5-5          4.5-19           10-25           20-35          0.5-35
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum or
  maximum rate will vary between these rates.
**Total base assessment rates do not include the depository institution debt adjustment.

    (i) Risk Category I Total Base Assessment Rate Schedule. The annual 
total base assessment rates for institutions in Risk Category I shall 
range from 0.5 to 5 basis points.
    (ii) Risk Category II Total Base Assessment Rate Schedule. The 
annual total base assessment rates for Risk Category II shall range 
from 4.5 to 19 basis points.
    (iii) Risk Category III Total Base Assessment Rate Schedule. The 
annual total base assessment rates for Risk Category III shall range 
from 10 to 25 basis points.
    (iv) Risk Category IV Total Base Assessment Rate Schedule. The 
annual total base assessment rates for Risk Category IV shall range 
from 20 to 35 basis points.
    (v) Large and Highly Complex Institutions Total Base Assessment 
Rate Schedule. The annual total base assessment rates for all large and 
highly complex institutions shall range from 0.5 to 35 basis points.
    (e) Assessment Rate Schedules for New Institutions. New depository 
institutions, as defined in 327.8(j), shall be subject to the 
assessment rate schedules as follows:
    (1) Prior to the reserve ratio of the DIF first reaching 1.15 
percent after September 30, 2010. After September 30, 2010, if the 
reserve ratio of the DIF has not reached 1.15 percent, new institutions 
shall be subject to the initial and total base assessment rate 
schedules provided for in paragraph (a) of this section.
    (2) Assessment rate schedules once the DIF reserve ratio first 
reaches 1.15 percent after September 30, 2010. After September 30, 
2010, once the reserve ratio of the DIF first reaches 1.15 percent, new 
institutions shall be subject to the initial and total base assessment 
rate schedules provided for in paragraph (b) of this section, even if 
the reserve ratio equals or exceeds 2 percent or 2.5 percent.
    (f) Total Base Assessment Rate Schedule adjustments and 
procedures--(1) Board Rate Adjustments. The Board may increase or 
decrease the total base assessment rate schedule in paragraphs (a) 
through (d) of this section up to a maximum increase of 2 basis points 
or a fraction thereof or a maximum decrease of 2 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 total base assessment rate schedule. In no case may 
such rate adjustments result in a total base assessment rate that is 
mathematically less than zero or in a total base assessment rate 
schedule that, at any time, is more than 2 basis points above or below 
the total base assessment schedule for the Deposit Insurance Fund in 
effect pursuant to paragraph (b) of this section, nor may any one such 
adjustment constitute an increase or decrease of more than 2 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 2 basis 
points, pursuant to paragraph (f)(1) of this section, without further 
rulemaking.
    (4) Announcement. The Board shall announce the assessment schedules 
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
8. Revise appendices A, B, and C to subpart A of part 327 to read as 
follows:

Appendix A to Subpart A of Part 327--Description of Scorecard Measures

 
------------------------------------------------------------------------
 
------------------------------------------------------------------------
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.
Concentration Measure for Large Insured  The concentration score for
 depository institutions (excluding       large institutions is the
 Highly Complex Institutions).            higher of the following two
                                          scores:
(1) Higher-Risk Assets/Tier 1 Capital    Sum of construction and land
 and Reserves.                            development (C&D) loans
                                          (funded and unfunded),
                                          leveraged loans (funded and
                                          unfunded), nontraditional
                                          mortgages, and subprime
                                          consumer loans divided by Tier
                                          1 capital and reserves. See
                                          Appendix C for the detailed
                                          description of the ratio.
(2) Growth-Adjusted Portfolio            The measure is calculated in
 Concentrations.                          the following steps:
                                         (1) Concentration levels (as a
                                          ratio to Tier 1 capital and
                                          reserves) are calculated for
                                          each broad portfolio category:

[[Page 10721]]

 
                                             C&D,
                                             Other commercial
                                             real estate loans,
                                             First lien
                                             residential mortgages
                                             (including non-agency
                                             residential mortgage-backed
                                             securities),
                                             Closed-end junior
                                             liens and home equity lines
                                             of credit (HELOCs),
                                             Commercial and
                                             industrial loans,
                                             Credit card loans,
                                             and
                                             Other consumer
                                             loans.
                                         (2) Risk weights are assigned
                                          to each loan category based on
                                          historical loss rates.
                                         (3) Concentration levels are
                                          multiplied by risk weights and
                                          squared to produce a risk-
                                          adjusted concentration ratio
                                          for each portfolio.
                                         (4) Three-year merger-adjusted
                                          portfolio growth rates are
                                          then scaled to a growth factor
                                          of 1 to 1.2 where a 3-year
                                          cumulative growth rate of 20
                                          percent or less equals a
                                          factor of 1 and a growth rate
                                          of 80 percent or greater
                                          equals a factor of 1.2. If
                                          three years of data are not
                                          available, a growth factor of
                                          1 will be assigned.
                                         (5) The risk-adjusted
                                          concentration ratio for each
                                          portfolio is multiplied by the
                                          growth factor and resulting
                                          values are summed.
                                         See Appendix C for the detailed
                                          description of the measure.
Concentration Measure for Highly         Concentration score for highly
 Complex Institutions.                    complex institutions is the
                                          highest of the following three
                                          scores:
(1) Higher-Risk Assets/Tier 1 Capital    Sum of C&D loans (funded and
 and Reserves.                            unfunded), leveraged loans
                                          (funded and unfunded),
                                          nontraditional mortgages, and
                                          subprime consumer loans
                                          divided by Tier 1 capital and
                                          reserves. See Appendix C for
                                          the detailed description of
                                          the measure.
(2) Top 20 Counterparty Exposure/Tier 1  Sum of the total exposure
 Capital and Reserves.                    amount to the largest 20
                                          counterparties (in terms of
                                          exposure amount) divided by
                                          Tier 1 capital and reserves.
                                          Counterparty exposure is equal
                                          to the sum of Exposure at
                                          Default (EAD) associated with
                                          derivatives trading and
                                          Securities Financing
                                          Transactions (SFTs) and the
                                          gross lending exposure
                                          (including all unfunded
                                          commitments) for each
                                          counterparty or borrower at
                                          the consolidated entity
                                          level.\1\
(3) Largest Counterparty Exposure/Tier   The amount of exposure to the
 1 Capital and Reserves.                  largest counterparty (in terms
                                          of exposure amount) divided by
                                          Tier 1 capital and reserves.
                                          Counterparty exposure is equal
                                          to the sum of Exposure at
                                          Default (EAD) associated with
                                          derivatives trading and
                                          Securities Financing
                                          Transactions (SFTs) and the
                                          gross lending exposure
                                          (including all unfunded
                                          commitments) for each
                                          counterparty or borrower at
                                          the consolidated entity level.
Core Earnings/Average Quarter-End Total  Core earnings are defined as
 Assets.                                  net income less extraordinary
                                          items and tax-adjusted
                                          realized gains and losses on
                                          available-for-sale (AFS) and
                                          held-to-maturity (HTM)
                                          securities, adjusted for
                                          mergers. The ratio takes a
                                          four-quarter sum of merger-
                                          adjusted core earnings and
                                          divides it by an average of
                                          five quarter-end total assets
                                          (most recent and four prior
                                          quarters). If four quarters of
                                          data on core earnings are not
                                          available, data for quarters
                                          that are available will be
                                          added and annualized. If five
                                          quarters of data on total
                                          assets are not available, data
                                          for quarters that are
                                          available will be averaged.
Credit Quality Measure.................  The credit quality score is the
                                          higher of the following two
                                          scores:
(1) Criticized and Classified Items/     Sum of criticized and
 Tier 1 Capital and Reserves.             classified items divided by
                                          the sum of Tier 1 capital and
                                          reserves. Criticized and
                                          classified items include items
                                          an institution or its primary
                                          federal regulator have graded
                                          ``Special Mention'' or worse
                                          and include retail items under
                                          Uniform Retail Classification
                                          Guidelines, securities, funded
                                          and unfunded loans, other real
                                          estate owned (ORE), other
                                          assets, and marked-to-market
                                          counterparty positions, less
                                          credit valuation
                                          adjustments.\2\ Criticized and
                                          classified items exclude loans
                                          and securities in trading
                                          books, and the amount
                                          recoverable from the U.S.
                                          government, its agencies, or
                                          government-sponsored agencies,
                                          under guarantee or insurance
                                          provisions.
(2) Underperforming Assets/Tier 1        Sum of loans that are 30 days
 Capital and Reserves.                    or more past due and still
                                          accruing interest, nonaccrual
                                          loans, restructured loans
                                          (including restructured 1-4
                                          family loans), and ORE,
                                          excluding the maximum amount
                                          recoverable from the U.S.
                                          government, its agencies, or
                                          government-sponsored agencies,
                                          under guarantee or insurance
                                          provisions, divided by a sum
                                          of Tier 1 capital and
                                          reserves.
Core Deposits/Total Liabilities........  Total domestic deposits
                                          excluding brokered deposits
                                          and uninsured non-brokered
                                          time deposits divided by total
                                          liabilities.

[[Page 10722]]

 
Balance Sheet Liquidity Ratio..........  Sum of cash and balances due
                                          from depository institutions,
                                          federal funds sold and
                                          securities purchased under
                                          agreements to resell, and the
                                          market value of available for
                                          sale and held to maturity
                                          agency securities (excludes
                                          agency mortgage-backed
                                          securities but includes all
                                          other agency securities issued
                                          by the U.S. Treasury, U.S.
                                          government agencies, and U.S.
                                          government sponsored
                                          enterprises) divided by the
                                          sum of federal funds purchased
                                          and repurchase agreements,
                                          other borrowings (including
                                          FHLB) with a remaining
                                          maturity of one year or less,
                                          5 percent of insured domestic
                                          deposits, and 10 percent of
                                          uninsured domestic and foreign
                                          deposits.\3\
Potential Losses/Total Domestic          Potential losses to the DIF in
 Deposits (Loss Severity Measure).        the event of failure divided
                                          by total domestic deposits.
                                          Appendix D describes the
                                          calculation of the loss
                                          severity measure in detail.
Market Risk Measure for Highly Complex   The market risk score is a
 Institutions.                            weighted average of the
                                          following three scores:
(1) Trading Revenue Volatility/Tier 1    Trailing 4-quarter standard
 Capital.                                 deviation of quarterly trading
                                          revenue (merger-adjusted)
                                          divided by Tier 1 capital.
(2) Market Risk Capital/Tier 1 Capital.  Market risk capital divided by
                                          Tier 1 capital.\4\
(3) Level 3 Trading Assets/Tier 1        Level 3 trading assets divided
 Capital.                                 by Tier 1 capital.
Average Short-term Funding/Average       Quarterly average of federal
 Total Assets.                            funds purchased and repurchase
                                          agreements divided by the
                                          quarterly average of total
                                          assets as reported on Schedule
                                          RC-K of the Call Reports.
------------------------------------------------------------------------
\1\ EAD and SFTs are defined and described in the compilation issued by
  the Basel Committee on Banking Supervision in its June 2006 document,
  ``International Convergence of Capital Measurement and Capital
  Standards.'' The definitions are described in detail in Annex 4 of the
  document. Any updates to the Basel II capital treatment of
  counterparty credit risk would be implemented as they are adopted.
  http://www.bis.org/publ/bcbs128.pdf.
\2\ A marked-to-market counterparty position is equal to the sum of the
  net marked-to-market derivative exposures for each counterparty. The
  net marked-to-market derivative exposure equals the sum of all
  positive marked-to-market exposures net of legally enforceable netting
  provisions and net of all collateral held under a legally enforceable
  CSA plus any exposure where excess collateral has been posted to the
  counterparty. For purposes of the Criticized and Classified Items/Tier
  1 Capital and Reserves definition a marked-to-market counterparty
  position less any credit valuation adjustment can never be less than
  zero.
\3\ Deposit runoff rates for the balance sheet liquidity ratio reflect
  changes issued by the Basel Committee on Banking Supervision in its
  December 2010 document, ``Basel III: International Framework for
  liquidity risk measurement, standards, and monitoring,'' http://www.bis.org/publ/bcbs188.pdf.
\4\ Market risk capital is defined in Appendix C of Part 325 of the FDIC
  Rules and Regulations,. http://www.fdic.gov/regulations/laws/rules/2000-4800.html#fdic2000appendixctopart325.

Appendix B to Subpart A of Part 327--Conversion of Scorecard Measures 
into Score

1. Weighted Average CAMELS Rating

    Weighted average CAMELS ratings between 1 and 3.5 are assigned a 
score between 25 and 100 according to the following equation:

S = 25 + [(20/3) * (C2 -1)],

where:
S = the weighted average CAMELS score; and
C = the weighted average CAMELS rating.

2. Other Scorecard Measures

    For certain scorecard measures, a lower ratio implies lower risk 
and a higher ratio implies higher risk. These measures include:
     Concentration measure;
     Credit quality measure;
     Market risk measure;
     Average short-term funding to average total assets 
ratio; and
     Potential losses to total domestic deposits ratio (loss 
severity measure).
    For those measures, a value between the minimum and maximum 
cutoff values is converted linearly to a score between 0 and 100, 
according to the following formula:

S = (V -Min) * 100/(Max -Min),

where S is score (rounded to three decimal points), V is the value 
of the measure, Min is the minimum cutoff value and Max is the 
maximum cutoff value.
    For other scorecard measures, a lower value represents higher 
risk and a higher value represents lower risk. These measures 
include:
     Tier 1 leverage ratio;
     Core earnings to average quarter-end total assets 
ratio;
     Core deposits to total liabilities ratio; and
     Balance sheet liquidity ratio.
    For those measures, a value between the minimum and maximum 
cutoff values is converted linearly to a score between 0 and 100, 
according to the following formula:

S = (Max -V) * 100/(Max -Min),

where S is score (rounded to three decimal points), V is the value 
of the measure, Max is the maximum cutoff value and Min is the 
minimum cutoff value.

Appendix C to Subpart A to Part 327--Concentration Measures

    The concentration score is the higher of the higher-risk assets 
to Tier 1 capital and reserves score or the growth-adjusted 
portfolio concentrations score. The concentration score for highly 
complex institutions is the highest of the higher-risk assets to 
Tier 1 capital and reserves score, the Top 20 counterparty exposure 
to Tier 1 capital and reserves score, or the largest counterparty to 
Tier 1 capital and reserves score. The higher-risk assets to Tier 1 
capital and reserve ratio and the growth-adjusted portfolio 
concentration measure are described below.

A. Higher-Risk Assets/Tier 1 Capital and Reserves

    The higher-risk assets to Tier 1 capital and reserves ratio is 
the sum of the concentrations in each of four risk areas described 
below and is calculated as:
[GRAPHIC] [TIFF OMITTED] TR25FE11.010


[[Page 10723]]


where:
H is institution i's higher-risk concentration measure and
k is a risk area.\1\ The four risk areas (k) are defined as:
---------------------------------------------------------------------------

    \1\ The high-risk concentration ratio is rounded to two decimal 
points.

     Construction and land development loans (funded and 
unfunded);
     Leveraged loans (funded and unfunded); \2\
---------------------------------------------------------------------------

    \2\ Unfunded amounts include irrevocable and revocable 
commitments.
---------------------------------------------------------------------------

     Nontraditional mortgage loans; and
     Subprime consumer loans.\3\
---------------------------------------------------------------------------

    \3\ Each loan concentration category should include purchased 
credit impaired loans and should exclude the amount recoverable from 
the U.S. government, its agencies, or government-sponsored agencies, 
under guarantee or insurance provisions.
---------------------------------------------------------------------------

    The risk areas are defined according to the interagency guidance 
for a given product with specific modifications made to minimize 
reporting discrepancies. The definitions for each risk area are as 
follows:
    1. Construction and Land Development Loans: Construction and 
development loans include construction and land development loans 
outstanding and unfunded commitments.
    2. Leveraged Loans: Leveraged loans include: (1) All commercial 
loans (funded and unfunded) with an original amount greater than $1 
million that meet any one of the conditions below at either 
origination or renewal, except real estate loans; (2) securities 
issued by commercial borrowers that meet any one of the conditions 
below at either origination or renewal, except securities classified 
as trading book; and (3) and securitizations that are more than 50 
percent collateralized by assets that meet any one of the conditions 
below at either origination or renewal, except securities classified 
as trading book.4 5
---------------------------------------------------------------------------

    \4\ The following guidelines should be used to determine the 
``original amount'' of a loan:
    (1) For loans drawn down under lines of credit or loan 
commitments, the ``original amount'' of the loan is the size of the 
line of credit or loan commitment when the line of credit or loan 
commitment was most recently approved, extended, or renewed prior to 
the report date. However, if the amount currently outstanding as of 
the report date exceeds this size, the ``original amount'' is the 
amount currently outstanding on the report date.
    (2) For loan participations and syndications, the ``original 
amount'' of the loan participation or syndication is the entire 
amount of the credit originated by the lead lender.
    (3) For all other loans, the ``original amount'' is the total 
amount of the loan at origination or the amount currently 
outstanding as of the report date, whichever is larger.
    \5\ Leveraged loans criteria are consistent with guidance issued 
by the Office of the Comptroller of the Currency in its 
Comptroller's Handbook, http://www.occ.gov/static/publications/handbook/LeveragedLending.pdf, but do not include all of the 
criteria in the handbook.
---------------------------------------------------------------------------

     Loans or securities where borrower's total or senior 
debt to trailing twelve-month EBITDA \6\ (i.e. operating leverage 
ratio) is greater than 4 or 3 times, respectively. For purposes of 
this calculation, the only permitted EBITDA adjustments are those 
adjustments specifically permitted for that borrower in its credit 
agreement; or
---------------------------------------------------------------------------

    \6\ Earnings before interest, taxes, depreciation, and 
amortization.
---------------------------------------------------------------------------

     Loans or securities that are designated as highly 
leveraged transactions (HLT) by syndication agent.\7\
---------------------------------------------------------------------------

    \7\ http://www.fdic.gov/news/news/press/2001/pr2801.html.
---------------------------------------------------------------------------

    3. Nontraditional Mortgage Loans: Nontraditional mortgage loans 
includes all residential loan products that allow the borrower to 
defer repayment of principal or interest and includes all interest-
only products, teaser rate mortgages, and negative amortizing 
mortgages, with the exception of home equity lines of credit 
(HELOCs) or reverse mortgages.8 9 10
---------------------------------------------------------------------------

    \8\ For purposes of this rule making, a teaser-rate mortgage 
loan is defined as a mortgage with a discounted initial rate where 
the lender offers a lower rate and lower payments for part of the 
mortgage term.
    \9\ http://www.fdic.gov/regulations/laws/federal/2006/06noticeFINAL.html.
    \10\ A mortgage loan is no longer considered a nontraditional 
mortgage once the teaser rate has expired. An interest only loan is 
no longer considered nontraditional once the loan begins to 
amortize.
---------------------------------------------------------------------------

    For purposes of the higher-risk concentration ratio, 
nontraditional mortgage loans include securitizations where more 
than 50 percent of the assets backing the securitization meet one or 
more of the preceding criteria for nontraditional mortgage loans, 
with the exception of those securities classified as trading book.
    4. Subprime Loans: Subprime loans include loans made to 
borrowers that display one or more of the following credit risk 
characteristics (excluding subprime loans that are previously 
included as nontraditional mortgage loans) at origination or upon 
refinancing, whichever is more recent.
     Two or more 30-day delinquencies in the last 12 months, 
or one or more 60-day delinquencies in the last 24 months;
     Judgment, foreclosure, repossession, or charge-off in 
the prior 24 months;
     Bankruptcy in the last 5 years; or
     Debt service-to-income ratio of 50 percent or greater, 
or otherwise limited ability to cover family living expenses after 
deducting total monthly debt-service requirements from monthly 
income.\11\
---------------------------------------------------------------------------

    \11\ http://www.fdic.gov/news/news/press/2001/pr0901a.html; 
however, the definition in the text above excludes any reference to 
FICO or other credit bureau scores.
---------------------------------------------------------------------------

    Subprime loans also include loans identified by an insured 
depository institution as subprime loans based upon similar borrower 
characteristics and securitizations where more than 50 percent of 
assets backing the securitization meet one or more of the preceding 
criteria for subprime loans, excluding those securities classified 
as trading book.

B. Growth-Adjusted Portfolio Concentration Measure

    The growth-adjusted concentration measure is the sum of the 
concentration ratio for each of seven portfolios, adjusted for risk 
weights and growth. The product of the risk weight and the 
concentration ratio for each portfolio is first squared and then 
multiplied by the growth factor for each. The measure is calculated 
as:
[GRAPHIC] [TIFF OMITTED] TR25FE11.011

where:
N is institution i's growth-adjusted portfolio concentration 
measure; \12\
---------------------------------------------------------------------------

    \12\ The growth-adjusted portfolio concentration measure is 
rounded to two decimal points.
---------------------------------------------------------------------------

k is a portfolio;
g is a growth factor for institution i's portfolio k; and,
w is a risk weight for portfolio k.
    The seven portfolios (k) are defined based on the Call Report/
TFR data and they are:
     Construction and land development loans;
     Other commercial real estate loans;
     First-lien residential mortgages and non-agency 
residential mortgage-backed securities (excludes CMOs, REMICS, CMO 
and REMIC residuals, and stripped MBS issued by non-U.S. Government 
issuers for which the collateral consists of MBS issued or 
guaranteed by U.S. government agencies);
     Closed-end junior liens and home equity lines of credit 
(HELOCs);
     Commercial and industrial loans;
     Credit card loans; and
     Other consumer loans.13 14
---------------------------------------------------------------------------

    \13\ All loan concentrations should include the fair value of 
purchased credit impaired loans.
    \14\ Each loan concentration category should exclude the amount 
of loans recoverable from the U.S. government, its agencies, or 
government-sponsored agencies, under guarantee or insurance 
provisions.
---------------------------------------------------------------------------

    The growth factor, g, is based on a three-year merger-adjusted 
growth rate for a given portfolio; g ranges from 1 to 1.2 where a 20 
percent growth rate equals a factor of 1 and an 80 percent growth 
rate equals a factor of 1.2.\15\ For growth rates less than 20 
percent, g is 1; for growth rates greater than 80 percent, g is 1.2. 
For growth rates between 20 percent and 80 percent, the growth 
factor is calculated as:
---------------------------------------------------------------------------

    \15\ The growth factor is rounded to two decimal points.

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

[[Page 10724]]

[GRAPHIC] [TIFF OMITTED] TR25FE11.012

    The risk weight for each portfolio reflects relative peak loss 
rates for banks at the 90th percentile during the 1990-2009 
period.\16\ These loss rates were converted into equivalent risk 
weights as shown in Table C.1.
---------------------------------------------------------------------------

    \16\ The risk weights are based on loss rates for each portfolio 
relative to the loss rate for C&I loans, which is given a risk 
weight of 1. The peak loss rates were derived as follows. The loss 
rate for each loan category for each bank with over $5 billion in 
total assets was calculated for each of the last twenty calendar 
years (1990-2009). The highest value of the 90th percentile of each 
loan category over the twenty year period was selected as the peak 
loss rate.

  TABLE C.1--90th Percentile Annual Loss Rates for 1990-2009 Period and
                       Corresponding Risk Weights
------------------------------------------------------------------------
                                         Loss rates
                                            (90th
              Portfolio                  percentile)      Risk weights
                                          (percent)
------------------------------------------------------------------------
First-Lien Mortgages................               2.3               0.5
Second/Junior Lien Mortgages........               4.6               0.9
Commercial and Industrial (C&I)                    5.0               1.0
 Loans..............................
Construction and Development (C&D)                15.0               3.0
 Loans..............................
Commercial Real Estate Loans,                      4.3               0.9
 excluding C&D......................
Credit Card Loans...................              11.8               2.4
Other Consumer Loans................               5.9               1.2
------------------------------------------------------------------------


0
9. Add appendix D to subpart A of part 327 to read as follows:

Appendix D to Subpart A of Part 327--Description of the Loss Severity 
Measure

    The loss severity measure applies a standardized set of 
assumptions to an institution's balance sheet to measure possible 
losses to the FDIC in the event of an institution's failure. To 
determine an institution's loss severity rate, the FDIC first 
applies assumptions about uninsured deposit and other unsecured 
liability runoff, and growth in insured deposits, to adjust the size 
and composition of the institution's liabilities. Assets are then 
reduced to match any reduction in liabilities.\1\ The institution's 
asset values are then further reduced so that the Tier 1 leverage 
ratio reaches 2 percent.\2\ In both cases, assets are adjusted pro 
rata to preserve the institution's asset composition. Assumptions 
regarding loss rates at failure for a given asset category and the 
extent of secured liabilities are then applied to estimated assets 
and liabilities at failure to determine whether the institution has 
enough unencumbered assets to cover domestic deposits. Any projected 
shortfall is divided by current domestic deposits to obtain an end-
of-period loss severity ratio. The loss severity measure is an 
average loss severity ratio for the three most recent quarters of 
data available.
---------------------------------------------------------------------------

    \1\ In most cases, the model would yield reductions in 
liabilities and assets prior to failure. Exceptions may occur for 
institutions primarily funded through insured deposits, which the 
model assumes to grow prior to failure.
    \2\ Of course, in reality, runoff and capital declines occur 
more or less simultaneously as an institution approaches failure. 
The loss severity measure assumptions simplify this process for ease 
of modeling.
---------------------------------------------------------------------------

Runoff and Capital Adjustment Assumptions

    Table D.1 contains run-off assumptions.

                   Table D.1--Runoff Rate Assumptions
------------------------------------------------------------------------
                                                      Runoff rate *
                 Liability type                         (percent)
------------------------------------------------------------------------
Insured Deposits...............................                     (10)
Uninsured Deposits.............................                       58
Foreign Deposits...............................                       80
Federal Funds Purchased........................                      100
Repurchase Agreements..........................                       75
Trading Liabilities............................                       50
Unsecured Borrowings <= 1 Year.................                       75
Secured Borrowings <= 1 Year...................                       25
Subordinated Debt and Limited Liability                               15
 Preferred Stock...............................
------------------------------------------------------------------------
* A negative rate implies growth.

    Given the resulting total liabilities after runoff, assets are 
then reduced pro rata to preserve the relative amount of assets in 
each of the following asset categories and to achieve a Tier 1 
leverage ratio of 2 percent:
     Cash and Interest Bearing Balances;
     Trading Account Assets;
     Federal Funds Sold and Repurchase Agreements;
     Treasury and Agency Securities;
     Municipal Securities;
     Other Securities;
     Construction and Development Loans;
     Nonresidential Real Estate Loans;
     Multifamily Real Estate Loans;
     1-4 Family Closed-End First Liens;
     1-4 Family Closed-End Junior Liens;
     Revolving Home Equity Loans; and

[[Page 10725]]

     Agricultural Real Estate Loans.

Recovery Value of Assets at Failure

    Table D.2 shows loss rates applied to each of the asset 
categories as adjusted above.

                 Table D.2--Asset Loss Rate Assumptions
------------------------------------------------------------------------
                                                             Loss rate
                     Asset category                          (percent)
------------------------------------------------------------------------
Cash and Interest Bearing Balances......................             0.0
Trading Account Assets..................................             0.0
Federal Funds Sold and Repurchase Agreements............             0.0
Treasury and Agency Securities..........................             0.0
Municipal Securities....................................            10.0
Other Securities........................................            15.0
Construction and Development Loans......................            38.2
Nonresidential Real Estate Loans........................            17.6
Multifamily Real Estate Loans...........................            10.8
1-4 Family Closed-End First Liens.......................            19.4
1-4 Family Closed-End Junior Liens......................            41.0
Revolving Home Equity Loans.............................            41.0
Agricultural Real Estate Loans..........................            19.7
Agricultural Loans......................................            11.8
Commercial and Industrial Loans.........................            21.5
Credit Card Loans.......................................            18.3
Other Consumer Loans....................................            18.3
All Other Loans.........................................            51.0
Other Assets............................................            75.0
------------------------------------------------------------------------

Secured Liabilities at Failure

    Federal home loan bank advances, secured federal funds purchased 
and repurchase agreements are assumed to be fully secured. Foreign 
deposits are treated as fully secured because of the potential for 
ring fencing.

Loss Severity Ratio Calculation

    The FDIC's loss given failure (LGD) is calculated as:
    [GRAPHIC] [TIFF OMITTED] TR25FE11.013
    
    An end-of-quarter loss severity ratio is LGD divided by total 
domestic deposits at quarter-end and the loss severity measure for 
the scorecard is an average of end-of-period loss severity ratios 
for three most recent quarters.

0
10. Revise Sec.  327.50 to read as follows:


Sec.  327.50  Dividends.

    (a) Suspension of Dividends. The Board will suspend dividends 
indefinitely whenever the DIF reserve ratio exceeds 1.50 percent at the 
end of any year.
    (b) Assessment Rate Schedule if DIF Reserve Ratio Exceeds 1.50 
Percent. In lieu of dividends, when the DIF reserve ratio exceeds 1.50 
percent, assessment rates shall be determined as set forth in section 
327.10, as appropriate.


Sec. Sec.  327.51 through 327.54  [Removed]

0
11. Remove Sec. Sec.  327.51 through 327.54.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations:

Appendices

Appendix 1--Analysis of the Projected Effects of the Payment of 
Assessments on the Capital and Earnings of Insured Depository 
Institutions

I. Introduction

    This analysis estimates the effect of the changes in deposit 
insurance assessments adopted in the final rule on the equity 
capital and profitability of insured institutions. These changes 
include the new assessment base and assessment rates effective April 
1, 2011. The FDIC set the rates in the final rule (shown in Table 4) 
to maintain approximate revenue neutrality upon adoption of the new 
assessment base required by Dodd-Frank. Therefore, for insured 
institutions in aggregate, the changes in assessment rates and the 
assessment base will not affect aggregate earnings and capital. This 
analysis, therefore, focuses on the magnitude of increases or 
decreases to individual institutions' earnings and capital resulting 
from the adoption of the final rule.

II. Assumptions and Data

    The analysis assumes that pre-tax income for the next four 
quarters (beginning in the fourth quarter of 2010) for each 
institution is equal to annualized income in the second and third 
quarters of 2010, adjusted for mergers. The analysis also assumes 
that the effects of changes in assessments are not transferred to 
customers in the form of changes in borrowing rates, deposit rates, 
or service fees. Since deposit insurance assessments are a tax-
deductible operating expense, increases in the assessment expense 
can lower taxable income and decreases in the assessment expense can 
increase taxable income. Therefore, the analysis considers the 
effective after-tax cost of assessments in calculating the effect on 
capital.\3\
---------------------------------------------------------------------------

    \3\ The analysis does not incorporate any tax effects from an 
operating loss carry forward or carry back.
---------------------------------------------------------------------------

    The effect of the change in assessments on an institution's 
income is measured by the change in deposit insurance assessments as 
a percent of income before assessments, taxes, and extraordinary 
items (hereafter referred to as ``income''). This income measure is 
used in order to eliminate the potentially transitory effects of 
extraordinary items and taxes on profitability. In order to 
facilitate a comparison of the impact of assessment changes, 
institutions were assigned to one of two groups: Those that were 
profitable and those that were unprofitable in the period covering 
the second and third quarters of 2010.
    For this analysis, data as of September 30, 2010 are used to 
calculate each bank's assessment base and risk-based assessment 
rate, both absent the changes in the final rule and under the final 
rule. The base and rate

[[Page 10726]]

are assumed to remain constant throughout the one year projection 
period.\4\
---------------------------------------------------------------------------

    \4\ All income statement items used in this analysis were 
adjusted for the effect of mergers. Institutions for which four 
quarters of non-zero earnings data were unavailable, including 
insured branches of foreign banks, were excluded from this analysis.
---------------------------------------------------------------------------

    An institution's earnings retention and dividend policies also 
influence the extent to which assessments affect equity levels. If 
an institution maintains the same dollar amount of dividends when it 
pays a higher deposit insurance assessment under the final rule, 
equity (retained earnings) will be less by the full amount of the 
after-tax cost of the increase in the assessment. This analysis 
instead assumes that an institution will maintain its dividend rate 
(that is, dividends as a fraction of net income) unchanged from the 
weighted average rate reported over the four quarters ending 
September 30, 2010. In the event that the ratio of equity to assets 
falls below 4 percent, however, this assumption is modified such 
that an institution retains the amount necessary to achieve a 4 
percent minimum and distributes any remaining funds according to the 
dividend payout rate.\5\
---------------------------------------------------------------------------

    \5\ The analysis uses 4 percent as the threshold because an 
insured institution generally needs to maintain Tier 1 capital of at 
least 4 percent of assets to be considered ``adequately 
capitalized'' under Prompt Corrective Action standards (12 CFR 
325.103). In this analysis, equity to assets is used as the measure 
of capital adequacy.
---------------------------------------------------------------------------

III. Projected Effects on Capital and Earnings

    The analysis indicates that projected decreases in assessments 
prevent 3 institutions from becoming under-capitalized (i.e., from 
falling below 4 percent equity to assets) that were projected to do 
so otherwise. Lower assessments would also prevent 1 institution 
from declining below 2 percent equity to assets that would have 
otherwise. No bank facing an increase in assessments would, as a 
result of the assessment increase, fall below the 4 percent or 2 
percent thresholds.
    Table 1.1 shows that approximately 84 percent of profitable 
institutions are projected to have a decrease in assessments in an 
amount between 0 and 10 percent of income. Another 14 percent of 
profitable institutions would have a reduction in assessments 
exceeding 10 percent of their income. Only 91 institutions would 
have an increase in assessments, with all but 12 of them between 
facing assessment increases between 0 and 10 percent of their 
income.
[GRAPHIC] [TIFF OMITTED] TR25FE11.014

    Table 1.2 provides the same analysis for institutions that were 
unprofitable during the period covering the second and third 
quarters of 2010. Table 1.2 shows that about 65 percent of 
unprofitable institutions are projected to have a decrease in 
assessments in an amount between 0 and 10 percent of their losses. 
Another 33 percent will have lower assessments in amounts exceeding 
10 percent income. Only 42 unprofitable banks will face assessment 
increases, all but 10 of them in amounts between 0 and 10 percent of 
losses.

[[Page 10727]]

[GRAPHIC] [TIFF OMITTED] TR25FE11.015

Appendix 2--Statistical Analysis of Measures

    The risk measures included in the performance score and the 
weights assigned to those measures are generally based on the 
results of an ordinary least square (OLS) model, and in some cases, 
a logistic regression model. The OLS model estimates how well a set 
of risk measures in 2005 through 2008 can predict the FDIC's view, 
based on its experience and judgment, of the proper rank ordering of 
risk (the expert judgment ranking) for large institutions as of 
year-end 2009.
    The OLS model is specified as:
    [GRAPHIC] [TIFF OMITTED] TR25FE11.016
    
where:
k is a risk measure;
n is the number of risk measures; and
t is the quarter that is being assessed.

The logistic regression model estimates how well the same set of 
risk measures in 2005 through 2008 can predict whether a large bank 
fails and it is specified as:
[GRAPHIC] [TIFF OMITTED] TR25FE11.017

where:
    Fail is whether an institution i failed on or prior to year-end 
2009 or not.\1\
---------------------------------------------------------------------------

    \1\ For the purpose of regression analysis, large institutions 
that received significant government support or that came close to 
failure are deemed to have failed.
---------------------------------------------------------------------------

    To select the risk measures for the scorecard, the FDIC first 
considered those measures deemed to be most relevant in assessing 
large institutions' ability to withstand stress. These candidate 
risk measures were converted to a score between 0 and 100, using 
specified minimum and maximum cutoff values, and then tested for 
statistical significance in both the expert judgment ranking and 
failure prediction models.
    Table 2.1 provides descriptive statistics for all risk measures 
used in the large institution scorecard and highly complex 
institution scorecard. Most but not all of the minimum and maximum 
cutoff values for each scorecard measure equal the 10th and 90th 
percentile values among large institutions based upon data from 2000 
through 2009.

[[Page 10728]]

[GRAPHIC] [TIFF OMITTED] TR25FE11.018

    Table 2.2 provides the same statistics for each of the scored 
risk measures used in the expert judgment ranking and failure 
prediction models.\2\ The figures are based on data from 2005 
through 2008. The loss severity measure was excluded from the 
analysis, since neither of the dependent variables in the two 
regressions reflect the expected (or actual) loss given failure. 
Most of the performance measures, other than concentration and 
credit quality measures, are based on Call Report or TFR data and 
are defined in Appendix A. The concentration measure is described in 
detail in Appendix C.
---------------------------------------------------------------------------

    \2\ The FDIC has conducted a number of robustness tests with 
alternative ratios for capital and earnings, a log transformation of 
several variables--the balance sheet liquidity and growth-adjusted 
concentration measures--and alternative dependent variables--CAMELS 
and the FDIC's internal risk ratings. These robustness tests show 
that the same set of variables are generally statistically 
significant in most models; that converting to a score from a raw 
ratio generally resolves any potential concern related to a 
nonlinear relationship between the dependent variable and several 
explanatory variables; and, finally, that alternative ratios for 
capital and earnings are not better in predicting expert judgment 
ranking or failure.
[GRAPHIC] [TIFF OMITTED] TR25FE11.019

OLS Model Results and Derivation of Weights

    Table 2.3 shows the results of the OLS model using the scored 
measures for years 2005 through 2008. The dependent variable for the 
model is an expert judgment ranking as of year-end 2009. All of the 
measures are statistically significant in several years at the 5 
percent level. Three of the seven measures--the weighted average 
CAMELS rating, concentration measure, and core deposits ratio--are 
significant at the 1 percent level in all years. All of the 
estimated coefficients have a positive sign, which is consistent 
with expectations since each measure was normalized into a score 
that increases with risk.

[[Page 10729]]

[GRAPHIC] [TIFF OMITTED] TR25FE11.020

    The weight for each scorecard measure was generally based on the 
weight implied by coefficients for 2005 to 2008, with some 
adjustments to account for more recent experience. The implied 
weights are computed by dividing the average of scorecard measure 
coefficients for 2005 to 2008 by the sum of the average 
coefficients. For example, the average coefficient on the weighted 
average CAMELS rating was 0.56, which is about 32 percent of the sum 
of the average coefficients (1.74). The current proposal assigns a 
weight of 30 percent to this measure. Similarly, the average 
coefficient of 0.37 on the concentration measure implies a weight of 
21 percent (0.37/1.74 = 0.21). The proposal effectively assigns a 
weight of 17.5 percent (50 percent weight on the ability to 
withstand asset-related stress score x 35 percent weight on the 
concentration measure). Table 2.4 shows the average coefficients and 
implied and actual weights.
[GRAPHIC] [TIFF OMITTED] TR25FE11.021

Logistic Model Results

    Table 2.5 shows the results of the logistic regression model, 
where the dependent variable for the model is whether an institution 
failed before year-end 2009. The weighted average CAMELS rating, 
Tier 1 leverage ratio, concentration measure, and core deposits 
ratio are significant at the 5 percent level in all years and have 
the expected sign. The core earnings ratio, credit quality measure, 
and balance sheet liquidity

[[Page 10730]]

ratio are not statistically significant in several years.
[GRAPHIC] [TIFF OMITTED] TR25FE11.022

OLS Regression Results: CAMELS and the Current Small Bank Financial 
Ratios

    Table 2.6 shows the results of the OLS regression model with the 
weighted average CAMELS rating only. These results show that while 
the weighted average CAMELS rating is statistically significant in 
predicting an expert judgment ranking as of year-end 2009, it only 
explains a small percentage of the variation in the year-end 2009 
expert judgment ranking--particularly in models for 2005 (10 
percent) through 2007 (19 percent).
[GRAPHIC] [TIFF OMITTED] TR25FE11.023

    Table 2.7 shows the results of the OLS regression model with a 
weighted average CAMELS rating and the current small bank financial 
ratios. These results show that adding the current small bank model 
financial ratios improves the ability to predict the year-end 2009 
expert judgment ranking; however, the improvement is not as 
significant as in the model with scorecard model. For example, in 
2006, the model using small bank financial ratios explained 21 
percent of the variation in the current expert judgment ranking. 
This compares to 46 percent for the scorecard.

[[Page 10731]]

[GRAPHIC] [TIFF OMITTED] TR25FE11.024


Appendix 3--Conversion of Total Score into Initial Base Assessment Rate

    The formula for converting an insured depository institution 
(IDI's) total score into an initial assessment rate is based on a 
single-variable logistic regression model, which uses a large IDI's 
total score as of year-end 2006 to predict whether the large IDI has 
failed on or before year-end 2009. The logistic model is estimated 
as:
[GRAPHIC] [TIFF OMITTED] TR25FE11.025

where
    Fail is whether a large IDI i. failed on or before year-end 2009 
or not; and \1\
---------------------------------------------------------------------------

    \1\ For the purpose of regression analysis, large institutions 
that received significant government support or that came close to 
failure are deemed to have failed.
---------------------------------------------------------------------------

    Score is a large IDI i's total score as of year-end 2006.
    Chart 3.1 below shows that the total score can reasonably 
differentiate large insured depository institutions that failed 
after 2006. The worst 12 percent of insured depository institutions 
in terms of their total score as of year-end 2006 accounted for more 
than 60 percent of failures over the next three years. This 
indicates a high correlation between the year-end 2006 total score 
and risk of failure, as results show that the failure rate was five 
times higher for institutions in the top 12 percent.

[[Page 10732]]

[GRAPHIC] [TIFF OMITTED] TR25FE11.026

    The plotted points in Chart 3.2 show the large bank failure 
probabilities estimated from the total scores using the logistic 
model and the results are nonlinear.

[[Page 10733]]

[GRAPHIC] [TIFF OMITTED] TR25FE11.027

    The calculation of the initial assessment rates approximates 
this nonlinear relationship for scores between 30 and 90.\2\ A score 
of 30 or lower results in the minimum initial base assessment rate 
and a score of 90 or higher results in the maximum initial base 
assessment rate. Assuming an assessment rate range of 40 basis 
points, the initial base assessment rate for an IDI with a score 
greater than 30 and less than 90 is:
---------------------------------------------------------------------------

    \2\ The initial assessment rate formula is simplified while 
maintaining the nonlinear relationship.
[GRAPHIC] [TIFF OMITTED] TR25FE11.028



    Dated at Washington, DC, this 7th day of February 2011.
    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2011-3086 Filed 2-24-11; 8:45 am]
BILLING CODE 6714-01-P