[Federal Register Volume 76, Number 73 (Friday, April 15, 2011)]
[Proposed Rules]
[Pages 21256-21265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-9209]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 76, No. 73 / Friday, April 15, 2011 / 
Proposed Rules  

[[Page 21256]]



FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327


Proposed Assessment Rate Adjustment Guidelines for Large and 
Highly Complex Institutions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Request for comment.

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SUMMARY: The FDIC seeks comment on proposed guidelines that would be 
used to determine how adjustments could be made to the total scores 
that are used in calculating the deposit insurance assessment rates of 
large and highly complex insured institutions. Total scores are 
determined according to the Assessments and Large Bank Pricing approved 
by the FDIC Board on February 7, 2011.

DATES: Comments must be received on or before May 31, 2011.

ADDRESSES: You may submit comments, identified by ``Adjustment 
Guidelines,'' by any of the following methods:
     Agency Web site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on 
the Agency Web site.
     E-mail: [email protected]. Include ``Adjustment 
Guidelines'' in the subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
     Hand Delivery/Courier: Guard station at the rear of the 
550 17th Street Building (located on F Street) on business days between 
7 a.m. and 5 p.m.

Instructions: All submissions received must include the agency name and 
``Adjustment Guidelines'' in the heading. All comments received will be 
posted to the extent practicable and, in some instances, the FDIC may 
post summaries of categories of comments, with the comments themselves 
available in the FDIC's reading room. Comments will be posted at http://www.fdic.gov/regulations/laws/federal/propose.html, including any 
personal information provided.

FOR FURTHER INFORMATION CONTACT: Lisa Ryu, Chief, Large Bank Pricing 
Section, Division of Insurance and Research, (202) 898-3538; Andrew 
Felton, Acting Chief, Large Bank Pricing Section, Division of Insurance 
and Research, (202) 898-3823; Mike Anas, Senior Financial Analyst, 
Division of Insurance and Research, (630) 241-0359 x 8252; and 
Christopher Bellotto, Counsel, Legal Division, (202) 898-3801, 550 17th 
Street, NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION: 

I. Background

    On February 7, 2011 (76 FR 10672 (Feb. 25, 2011)), the FDIC Board 
amended its assessment regulations (the Amended Assessment 
Regulations), by, among other things, adopting a new methodology for 
determining assessment rates for large institutions.1 2 The 
Amended Assessment Regulations eliminate risk categories for large 
institutions and combine CAMELS ratings and forward-looking financial 
measures into one of two scorecards, one for highly-complex 
institutions and another for all other large institutions.\3\ Each of 
the two scorecards produces two scores--a performance score and a loss 
severity score--that are combined into a total score, which cannot be 
greater than 90 or less than 30. The FDIC can adjust a bank's total 
score up or down by no more than 15 points, but the resulting score 
cannot be greater than 90 or less than 30. The score is then converted 
to an initial base assessment rate, which, after application of other 
possible adjustments, results in a total assessment rate.\4\ The total 
assessment rate is multiplied by the bank's assessment base to 
calculate the amount of its assessment obligation.
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    \1\ Assessments, Large Bank Pricing, 76 FR 10672 (February 25, 
2011) (to be codified at 12 CFR 327.9).
    \2\ A large institution is defined 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.
    \3\ A ``highly complex institution'' is defined as: (1) 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 and 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.
    \4\ These adjustments are the unsecured debt adjustment, the 
depository institution debt adjustment, and the brokered deposit 
adjustment.
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    Tables 1 and 2 show the scorecards for large and highly complex 
institutions, respectively.

                Table 1--Scorecard for Large Institutions
------------------------------------------------------------------------
                                     Measure weights   Component weights
 Scorecard measures and components      (percent)           (percent)
------------------------------------------------------------------------
P Performance Score
------------------------------------------------------------------------
P.1 Weighted Average CAMELS Rating                100                 30
P.2 Ability to Withstand Asset-     .................                 50
 Related Stress:..................
    Tier 1 Leverage Ratio.........                 10  .................
    Concentration Measure.........                 35  .................
    Core Earnings/Average Quarter-                 20  .................
     End Total Assets *...........

[[Page 21257]]

 
    Credit Quality Measure........                 35  .................
P.3 Ability to Withstand Funding-   .................                 20
 Related Stress:..................
    Core Deposits/Total                            60  .................
     Liabilities..................
    Balance Sheet Liquidity Ratio.                 40  .................
------------------------------------------------------------------------
L Loss Severity Score
------------------------------------------------------------------------
L.1 Loss Severity Measure.........  .................                100
------------------------------------------------------------------------
* Average of five quarter-end total assets (most recent and four prior
  quarters).


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

    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 and 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.
    In most cases, the total score produced by the applicable scorecard 
will correctly reflect an institution's overall risk relative to other 
large institutions; however, the scorecard includes assumptions that 
may not be appropriate for all institutions. Therefore, the FDIC 
believes that it is important that it have the ability to consider 
idiosyncratic or other relevant risk factors that are not adequately 
captured in the scorecards and make appropriate adjustments to an 
institution's total score. The Amended Assessment Regulations state 
that, after consultation with an institution's primary Federal 
regulator, the FDIC may make a limited adjustment to an institution's 
total score based upon risks that are not adequately captured in the 
scorecard. The Amended Assessment Regulations provide that no new 
adjustments will be made until new guidelines have been published for 
comment and approved by the FDIC's Board of Directors.\5\
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    \5\ The Amended Assessment Regulations also require that the 
FDIC publish aggregate statistics on adjustments each quarter once 
the guidelines are adopted. 76 FR 10699.
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    The proposed guidelines describe the process the FDIC would follow 
to determine whether to make an adjustment and to determine the size of 
any adjustment. This request for comments also outlines the process the 
FDIC would use when notifying an institution regarding an adjustment.
    These proposed guidelines would supersede the large bank pricing 
adjustment guidelines published by the FDIC on May 14, 2007 (the 2007 
Guidelines).\6\ The 2007 Guidelines outline the adjustment process for 
the large bank assessment system then in effect. The Amended Assessment 
Regulations include scorecards that explicitly incorporate some of the 
risks that were previously captured primarily through large bank 
adjustments. The proposed guidelines take these changes into account; 
however, the processes for communicating with affected institutions and 
implementing adjustments once determined remain largely unchanged from 
the 2007 Guidelines, except that the FDIC is now explicitly allowing 
institutions to request a large bank adjustment.
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    \6\ Assessment Rate Adjustment Guidelines for Large Institutions 
and Insured Foreign Branches in Risk Category I, 72 FR 27122 (May 
14, 2007).
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    The FDIC seeks comments on the proposed guidelines and the 
procedures for making an adjustment to an institution's score. Although 
the FDIC has in this instance chosen to publish the proposed guidelines 
and solicit comment from the industry, notice and comment are not 
required and need not be employed to make future changes to the 
guidelines.

[[Page 21258]]

II. Overview of Proposed Guidelines on Large Bank Adjustment

    The proposed large bank adjustment process would be based on a set 
of guidelines designed to ensure that the adjustment process is fair 
and transparent and that any decision to adjust a score is well 
supported. The following general guidelines would govern the adjustment 
process, which is described in greater detail below.

Analytical Guidelines

     The FDIC would focus on identifying institutions for which 
a combination of risk measures and other information suggests either 
materially higher or lower risk than their total scores indicate. The 
FDIC would consider all available material information relating to the 
likelihood of failure or loss severity in the event of failure.
     The FDIC would primarily consider two types of information 
in determining whether to make a large bank adjustment: A scorecard 
ratio or measure that exceeds the maximum cutoff value for a ratio or 
measure or is less than the minimum cutoff value for a ratio or measure 
along with the degree to which the ratio or measure differs from the 
cutoff value (scorecard measure outliers); or information not directly 
captured in the scorecard, including complementary quantitative risk 
measures and qualitative risk considerations.
     If an institution has one or more scorecard measure 
outliers, the FDIC would conduct further analysis to determine whether 
underlying scorecard ratios are materially higher or lower than the 
established cutoffs for a given scorecard measure and whether other 
mitigating or supporting information exists.
     The FDIC would use complementary quantitative risk 
measures to determine whether a given scorecard measure is an 
appropriate measure for a particular institution.
     When qualitative risk considerations materially affect the 
FDIC's view of an institution's probability of failure or loss given 
failure, these considerations could be the primary factor supporting 
the adjustment. Qualitative risk considerations include, but are not 
limited to, underwriting practices related to material concentrations, 
risk management practices, strategic risk, the use and management of 
government support programs, and factors affecting loss severity.
     Specific risk measures would vary in importance for 
different types of institutions. In some cases, a single risk factor or 
indicator may support an adjustment if the factor suggests a 
significantly higher or lower likelihood of failure, or loss given 
failure, than the total score reflects.
     To the extent possible in comparing risk measures, the 
FDIC would consider the performance of similar institutions, taking 
into account that variations in risk measures exist among institutions 
with substantially different business models.
     Adjustments would be made only if the comprehensive 
analysis of an institution's risk, generally based on the two types of 
information listed above, and the institution's relative risk ranking 
warrant a meaningful adjustment of the institution's total score 
(generally, an adjustment of five points or more).

Procedural Guidelines

    The processes for communicating with affected institutions and 
implementing adjustments once determined would remain largely unchanged 
by this proposal, except that the FDIC would now explicitly allow 
institutions to request an adjustment.
     The FDIC would consult with an institution's primary 
Federal regulator and appropriate state banking supervisor before 
making any decision to adjust an institution's total score (and before 
removing a previously implemented adjustment).
     The FDIC would give institutions advance notice of any 
decision to make an upward adjustment to a total score, or to remove a 
previously implemented downward adjustment. The notice would include 
the reasons for the proposed adjustment or removal, the size of the 
proposed adjustment or removal, specify when the adjustment or removal 
would take effect, and provide institutions with up to 60 days to 
respond.
     The FDIC would re-evaluate the need for total score 
adjustments on a quarterly basis.
     Institutions could make written request to the FDIC for an 
adjustment, but must support the request with evidence of a material 
risk or risk-mitigating factor that is not adequately accounted for in 
the scorecard.
     An institution could request review of or appeal an upward 
adjustment, the magnitude of an upward adjustment, removal of a 
previously implemented downward adjustment or an increase in a 
previously implemented upward adjustment pursuant to 12 CFR 327.4(c). 
An institution could similarly request review of or appeal a decision 
not to apply an adjustment following a request by the institution for 
an adjustment.

III. The Assessment Rate Adjustment Process

A. Identifying the Need for an Adjustment

    The FDIC believes that any adjustment should improve the rank 
ordering of institutions according to risk. Institutions with similar 
risk profiles should have similar total scores and corresponding 
initial assessment rates, and institutions with higher or lower risk 
profiles should have higher or lower total scores and initial 
assessment rates, respectively. The FDIC would evaluate scorecard 
results each quarter to identify institutions with a score that is 
clearly too high or too low when considered in light of risks or risk-
mitigating factors that are inadequately accounted for by the 
scorecard. Some examples of these types of risks and risk-mitigating 
factors include considerations for purchased credit impaired (PCI) 
loans, accounting rule changes such as FAS 166/167, credit underwriting 
and credit administration practices, collateral and other risk 
mitigants, including the materiality of guarantees and franchise value. 
Commenters on the proposed large bank pricing rule published on 
November 9, 2010 (the Large Bank NPR) \7\ suggested that these factors 
be considered in determining an institution's assessment rate. As 
discussed in the preamble to the Final Rule on Assessments and Large 
Bank Pricing approved by the FDIC Board in February 2011, the FDIC 
stated that it would consider these factors in the large bank 
assessment rate adjustments.\8\
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    \7\ 75 FR 72612 (Nov. 24, 2010).
    \8\ 76 FR 10672 (Feb. 25, 2011).
---------------------------------------------------------------------------

    In addition to considering an institution's relative risk ranking 
among all large institutions, the FDIC would consider how an 
institution compares to similar institutions. The comparison would 
allow the FDIC to account for variations in risk measures that may 
exist among institutions with differing business models. For purposes 
of the comparison, the FDIC would, where appropriate, assign an 
institution to a peer group. The proposed peer groups are:
    Processing Banks and Trust Companies: Large institutions 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

[[Page 21259]]

are non-zero), and whose total fiduciary assets total $500 billion or 
more.
    Residential Mortgage Lenders: Large institutions not described in 
the peer group above whose mortgage loans plus mortgage-backed 
securities exceed 50 percent of total assets.
    Non-diversified Regional Institutions: Large institutions not 
described in a peer group above if: credit card plus securitized 
receivables exceed 50 percent of assets plus securitized receivables; 
or the sum of residential mortgage loans, credit card loans, and other 
loans to individuals exceeds 50 percent of assets.
    Large Diversified Institutions: Large institutions not described in 
a peer group above with over $150 billion in assets.
    Diversified Regional Institutions: Large institutions not described 
in a peer group above with less than $150 billion in assets.
    An institution can also request that the FDIC make an adjustment to 
its score by submitting a written request to the FDIC's Director of the 
Division of Insurance and Research in Washington, DC. Similar to FDIC-
initiated adjustments, an institution's request for an adjustment would 
be considered only if it is supported by evidence of a material risk or 
risk-mitigating factor that is not adequately accounted for in the 
scorecard. The FDIC would consider these requests as part of its 
ongoing effort to identify and adjust scores that require adjustment. 
An institution-initiated request would not preclude a subsequent 
request for review (12 CFR 327.4(c)) or appeal pursuant to the 
assessment appeals process.\9\
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    \9\ See Guidelines for Appeals of Deposit Insurance Assessment 
Determinations, 75 FR 20362 (April 19, 2010).
---------------------------------------------------------------------------

B. Determining the Adjustment Amount

    Once it determines that an adjustment may be warranted, the FDIC 
would determine the adjustment amount necessary to bring an 
institution's total score into better alignment with those of other 
institutions that pose similar levels of risk. The FDIC would initiate 
adjustments only when a combination of risk measures and other 
information suggests either materially higher or lower risk than their 
total scores indicate, generally resulting in an adjustment of an 
institution's total score by five points or more. The FDIC believes 
that the adjustment process should be used to address material 
idiosyncratic issues in a small number of institutions rather than as a 
fine-tuning mechanism for a large number of institutions. If the size 
of the adjustment required to align an institution's total score with 
institutions of similar risk is not material, no adjustment would be 
made.

B. Further Analysis and Consultation With Primary Federal Regulator

    As under the 2007 Guidelines, before making an adjustment, the FDIC 
would consult with an institution's primary Federal regulator and state 
banking supervisor to obtain further information and comment.

C. Advance Notice

    Decisions to lower an institution's total score would not be 
communicated to institutions in advance. Rather, as under the 2007 
Guidelines, they would be reflected in the invoices for a given 
assessment period along with the reasons for the adjustment.
    To give an institution an opportunity to respond, the FDIC would 
give advance notice to an institution when proposing to make an upward 
adjustment to the institution's total score.\10\ Consistent with the 
2007 Guidelines, the timing of the notice would correspond 
approximately to the invoice date for an assessment period. For 
example, an institution would be notified of a proposed upward 
adjustment to its assessment rates covering the period April 1 through 
June 30 by approximately June 15, which is the invoice date for the 
January 1 through March 31 assessment period.\11\
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    \10\ The institution would also be given advance notice when the 
FDIC determines to eliminate any downward adjustment to an 
institution's total score.
    \11\ The invoice covering the assessment period January 1 
through March 31 in this example would not reflect the upward 
adjustment.
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D. Institution's Opportunity To Respond

    Before implementing an upward adjustment to a total score, the FDIC 
would review the institution's response to the advance notice, along 
with any subsequent changes to supervisory ratings, scorecard measures, 
or other relevant risk factors. Similar to the 2007 Guidelines, if the 
FDIC decided to implement the upward adjustment, it would notify an 
institution of its decision along with the invoice for the quarter in 
which the adjustment would become effective.
    Extending the example above, if the FDIC notified an institution of 
a proposed upward adjustment on June 15, the institution would have 60 
days from this date to respond to the notification. If, after 
evaluating the institution's response and updated information for the 
quarterly assessment period ending June 30, the FDIC decided to proceed 
with the adjustment, it would communicate this decision to the 
institution by approximately September 15, which is the invoice date 
for the April 1 through June 30 assessment period. In this case, the 
adjusted rate would be reflected in the September 15 invoice.
    The time frames and example above also apply to a decision by the 
FDIC to remove a previously implemented downward adjustment as well as 
a decision to increase a previously implemented upward adjustment.

E. Duration of the Adjustment

    Consistent with the 2007 Guidelines, the adjustment would remain in 
effect for subsequent assessment periods until the FDIC determined 
either that the adjustment was no longer warranted or that the 
magnitude of the adjustment needed to be reduced or increased (subject 
to the 15-point limitation and the requirement for further advance 
notification).\12\
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    \12\ As noted in the Amended Assessments Regulation, an 
institution's assessment rate can increase without notice if the 
institution's supervisory, agency ratings, or financial ratios 
deteriorate.
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F. Requests for Review and Appeals

    An institution could request review of or appeal an upward 
adjustment, the magnitude of an upward adjustment, removal of a 
previously implemented downward adjustment or an increase in a 
previously implemented upward adjustment pursuant to 12 CFR 327.4(c). 
An institution could similarly request review of or appeal a decision 
not to apply an adjustment following a request by the institution for 
an adjustment.

IV. Additional Information on the Adjustment Process, Including 
Examples

    As discussed above, the FDIC would primarily consider two types of 
information in determining whether to make a large bank adjustment: 
Scorecard measure outliers or information not directly captured in the 
scorecard, including complementary quantitative risk measures and 
qualitative risk considerations.

A. Scorecard Measure Outliers

    In order to convert each scorecard ratio into a score that ranges 
between 0 and 100, the Amended Assessment Regulations use minimum and 
maximum cutoff values that generally correspond to the 10th and 90th 
percentile values for each ratio based on data for the 2000 to 2009 
period. All values less than the 10th percentile or all values greater 
than the 90th

[[Page 21260]]

percentile are assigned the same score. This process enables the FDIC 
to compare different ratios in a standardized way and assign 
statistically-based weights; however, it may mask significant 
differences in risk among institutions with the minimum or maximum 
score. The FDIC believes that an institution with one or more scorecard 
ratios well in excess of the maximum cutoffs or well below the minimum 
cutoffs may pose significantly greater or lower risk to the deposit 
insurance fund than its score suggests.
    The example below illustrates the analytical process the FDIC would 
follow in determining to propose a downward adjustment based on 
scorecard measure outliers. The example is merely illustrative. As 
shown in Chart 1, Bank A has a total score of 45 and two scorecard 
measures with a score of 0 (indicating lower risk).
[GRAPHIC] [TIFF OMITTED] TP15AP11.063

    Since at least one of the scorecard measures has a score of 0, the 
FDIC would further review whether the ratios underlying these measures 
materially differ from the cutoff value associated with a score of 0. 
Materiality would generally be determined by the amount that the 
underlying ratio differed from the relevant cutoff as a percentage of 
the overall scoring range (the maximum cutoff minus the minimum 
cutoff). Table 3 shows that Bank A's Tier 1 Leverage ratio (17 percent) 
far exceeds the cutoff value associated with a score of 0 (13 percent), 
with the difference representing 57 percent of the associated scoring 
range. Based on this additional information and assuming no other 
mitigating factors, the FDIC could determine that the Bank A's loss 
absorbing capacity is not fully recognized, particularly when compared 
with other institutions receiving the same overall score. By contrast, 
Bank A's Core ROA ratio is much closer to its cutoff values, suggesting 
that an adjustment based on consideration of those factors may not be 
justified.

                                      Table 3--Outlier Analysis for Bank A
----------------------------------------------------------------------------------------------------------------
                                                                   Cutoffs                              Outlier
                                                         --------------------------                     amount
                                                                                                        (value
                                                                                                         minus
                                                                                                      cutoff) as
             Scorecard measure                  Score       Minimum      Maximum    Value  (percent)  percentage
                                                           (percent)    (percent)                       of the
                                                                                                        scoring
                                                                                                         range
                                                                                                       (percent)
----------------------------------------------------------------------------------------------------------------
Core ROA...................................            0            0            2              2.08      4
Tier 1 Capital Ratio.......................            0            6           13                17     57
----------------------------------------------------------------------------------------------------------------


[[Page 21261]]

    Before initiating an adjustment, however, the FDIC would consider 
whether Bank A had significant risks that were not captured in the 
scorecard. If no information on such risks existed, the FDIC would 
initiate a downward adjustment to Bank A's total score.
    The amount of the adjustment would be the amount needed to make the 
total score consistent with those of banks of comparable overall risk, 
with particular emphasis on institutions of the same institution type 
(e.g., diversified regional institutions), as described above. 
Typically, however, adjustments supported by only one extreme outlier 
value would be less than the FDIC's potential adjustment authority of 
15 points. In the case of multiple outlier values, inconsistent outlier 
values, or outlier values that are exceptionally beyond the scoring 
range, an overall analysis of each measure's relative importance may 
call for higher or lower adjustment amounts. For Bank A, a 5-point 
adjustment may be most appropriate.
    The next example illustrates the analytical process the FDIC would 
follow in determining to propose an upward adjustment based on 
scorecard measure outliers. As in the example above, the example is 
merely illustrative; an institution with less extreme values could also 
receive an upward adjustment. As shown in Chart 2, Bank B has a total 
score of 72 and three scorecard measures with a score of 100 
(indicating higher risk).
[GRAPHIC] [TIFF OMITTED] TP15AP11.064

    Since at least one of the scorecard measures has a score of 100, 
the FDIC would further review whether the ratios underlying these 
measures materially exceed the cutoff value associated with a score of 
100. Table 4 shows that Bank B's Criticized and Classified Items to 
Tier 1 Capital and Reserves ratio (198 percent) far exceeds the cutoff 
value associated with a score of 100 (100 percent), with the difference 
representing 105 percent of the associated scoring range. Based on this 
additional information and assuming no other mitigating factors, the 
FDIC could determine that the risk associated with Bank B's ability to 
withstand asset-related stress and, therefore, its overall risk, may be 
materially greater than its score suggests, particularly when compared 
with other institutions receiving the same overall score. By contrast, 
the Core ROA and Underperforming Assets to Tier 1 Capital and Reserves 
values are much closer to their respective cutoff values, suggesting 
that an adjustment based on these factors may not be justified.

                                      Table 4--Outlier Analysis for Bank B
----------------------------------------------------------------------------------------------------------------
                                                                  Cutoffs                        Outlier amount
                                                        --------------------------                (value minus
                                                                                      Value        cutoff) as
             Scorecard measure                 Score       Minimum      Maximum     (percent)     percentage of
                                                          (percent)    (percent)                  the  scoring
                                                                                                range  (percent)
----------------------------------------------------------------------------------------------------------------
Core ROA..................................          100            0            2        -0.05                -3
Criticized and Classified to Tier 1                 100            7          100          198               105
 Capital & Reserves.......................
Underperforming Assets to Tier 1 Capital &          100            2           35           36                 3
 Reserves.................................
----------------------------------------------------------------------------------------------------------------


[[Page 21262]]

    After considering any risk-mitigating factors, the FDIC would 
determine the amount of adjustment needed to make the total score 
consistent with those of banks of comparable overall risk. For Bank B, 
a 5-point adjustment may be most appropriate.

B. Information Not Directly Captured by the Scorecard

1. Complementary Risk Measures
    Complementary risk measures are measures that are not included in 
the scorecard, but that can inform the appropriateness of a given 
scorecard measure for a particular institution. These measures are 
readily available for all institutions and include quantitative metrics 
and market indicators that provide further insights into an 
institution's ability to withstand financial adversity, and the 
severity of losses in the event of failure.\13\
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    \13\ In the context of large institution insurance pricing, loss 
severity refers to the relative loss, scaled to its current domestic 
deposits, that an institution poses to the Deposit Insurance Fund in 
the event of a failure.
---------------------------------------------------------------------------

    Analyzing complementary risk measures would help the FDIC determine 
whether the assumptions applied to a scorecard measure are appropriate 
for a particular institution. For example, as detailed in the Amended 
Assessments Regulation, the scorecard includes a loss severity measure 
based on the FDIC's loss severity model that applies a standard set of 
assumptions to all large banks to estimate potential losses to the 
insurance fund. These assumptions, including liability runoffs and 
asset recovery rates, are derived from actual bank failures; however, 
the FDIC recognizes that a large bank may have unique attributes that 
could have a bearing on the appropriateness of those assumptions. When 
data or quantitative metrics exist that support materially different 
runoff assumptions or asset recovery rates for a particular 
institution, the FDIC may consider an adjustment to the total score, 
particularly if such information is further supported by qualitative 
loss severity considerations as discussed below.
    The example below illustrates the analytical process the FDIC would 
follow in determining to propose an upward adjustment based on 
complementary risk measures. Again, the example is merely illustrative. 
Chart 3 shows that Bank C has a total score of 66. Some of Bank C's 
risk measure scores are significantly higher than the total score, 
while others, including the Tier 1 leverage ratio score (42), are 
significantly lower.
[GRAPHIC] [TIFF OMITTED] TP15AP11.065

    After reviewing complementary measures for all financial ratios 
contained in the scorecard, in the hypothetical example, the 
complementary measures for Tier 1 leverage ratio showed that the level 
and quality of capital protection may not be correctly reflected in the 
Tier 1 leverage ratio score. Chart 4 shows that two other complementary 
capital measures for Bank C--the total equity ratio and the ratio of 
other comprehensive income (OCI) to Tier 1 capital--suggest higher risk 
than the Tier 1 leverage ratio score suggests. Additional review 
reveals that sizeable unrealized losses in the securities portfolio 
account for these differences and that Bank C's loss absorbing capacity 
is potentially overstated by the Tier 1 leverage ratio.

[[Page 21263]]

[GRAPHIC] [TIFF OMITTED] TP15AP11.066

    An upward adjustment to Bank C's total score may be appropriate, 
again assuming that no significant risk mitigants are evident. An 
adjustment of 5 points would be likely since the underlying level of 
unrealized losses is extremely high (greater than 25% of Tier 1 
capital). While the adjustment in this case would likely be limited to 
5 points because the bank's concentration measure and credit quality 
measure already receive the maximum possible score, in other cases 
modest unrealized losses could lead to a higher overall adjustment 
amount, if the concentration and credit quality measures are 
understated as well.\14\
---------------------------------------------------------------------------

    \14\ The concentration measure and the credit quality measure 
are expressed as a percent of Tier 1 capital plus the allowance for 
loan loss reserves.
---------------------------------------------------------------------------

2. Qualitative Risk Considerations
    The FDIC believes that it is important to consider all relevant 
qualitative risk considerations in determining whether to apply a large 
bank adjustment. Qualitative information often provides significant 
insights into institution-specific or idiosyncratic risk factors that 
cannot be captured in the scorecard. Similar to scorecard outliers and 
complementary risk measures, the FDIC would use the qualitative 
information to consider whether potential discrepancies exist between 
the risk ranking of institutions based on their total score and the 
relative risk ranking suggested by a combination of risk measures and 
qualitative risk considerations. Such information includes, but is not 
limited to, analysis based on information obtained through the 
supervisory process, such as underwriting practices, interest rate risk 
exposure and other information obtained through public filings.
    Another example of qualitative information that the FDIC would 
consider is available information pertaining to an institution's 
ability to withstand adverse events. Sources of this information are 
varied but may include analyses produced by the institution or 
supervisory authorities, such as stress test results, capital adequacy 
assessments, or information detailing the risk characteristics of the 
institution's lending portfolios and other businesses. Information 
pertaining to internal stress test results and internal capital 
adequacy assessment would be used qualitatively to help inform the 
relative importance of other risk measures, especially concentrations 
of credit exposures and other material non-lending business activities. 
As an example, in cases where an institution has a significant 
concentration of credit risk, results of internal stress tests and 
internal capital adequacy assessments could obviate FDIC concerns about 
this risk and therefore provide support for a downward adjustment, or 
alternatively, provide additional mitigating information to forestall a 
pending upward adjustment. In some cases, stress testing results may 
suggest greater risk than would normally be evident through the 
scorecard methodology alone.
    Qualitative risk considerations would also include information that 
could have a bearing on potential loss severity, and could include, for 
example, the ease with which the FDIC could make quick deposit 
insurance determinations and depositor payments, or the availability of 
sufficient information on qualified financial contracts to allow the 
FDIC to make timely and correct determinations on these contracts in 
the event of failure.
    In general, qualitative factors would become more important in 
determining whether to apply an adjustment when an institution has high 
performance risk

[[Page 21264]]

or if the institution has high asset, earnings, or funding 
concentrations. For example, if a bank is near failure, qualitative 
loss severity information becomes more important in the adjustment 
process. Further, if a bank has material concentrations in some asset 
classes, the quality of underwriting becomes more important in the 
adjustment process.
    Additionally, engaging in certain business lines may warrant 
further consideration of qualitative factors. For instance, supervisory 
assessments of operational risk and controls at processing banks are 
likely to be important regardless of the institution's performance.
    The specific example below illustrates the analytical process the 
FDIC would follow to determine whether to make an adjustment based on 
qualitative information. Chart 5 shows that Bank D has a high score of 
82 that is largely driven by a high score for the ability to withstand 
asset-related stress component, which is, in turn, largely driven by 
the higher-risk asset concentration score and the underperforming asset 
score. The ability to withstand asset-related stress component is 
heavily weighted in the scorecard (50 percent weight), and, as a 
result, significant qualitative information that is not considered in 
the scorecard could lead to an adjustment to the institution's total 
score.
[GRAPHIC] [TIFF OMITTED] TP15AP11.067

    The FDIC would review qualitative information pertaining to the 
higher-risk asset concentration measure and the underperforming asset 
measure for Bank D to determine whether there are one or more important 
risk mitigants that are not factored into the scorecard. We assume that 
the further review revealed that, while Bank D has concentrations in 
non-traditional mortgages, its mortgage portfolio has the following 
characteristics that suggest lower risk:
    a. Most of the loan portfolio is composed of bank-originated 
residential real estate loans on owner-occupied properties;
    b. The portfolio has strong collateral protection (e.g., few or no 
loans with a high loan-to-value ratio) compared to the rest of the 
industry;
    c. Debt service coverage ratios are favorable (e.g., few or no 
loans with a high debt-to-income ratio) compared to the institution's 
peers;
    d. The primary Federal regulator notes in its examination report 
that the institution has strong collection practices and reports no 
identified risk management deficiencies.
    Additionally, these qualitative factors surrounding the bank's real 
estate portfolio suggest loss rate assumptions applied to Bank D's 
residential mortgage portfolio may be too severe, resulting in a loss 
severity score that is too high relative to its risk.
    Based on the information above, the bank would be a strong 
candidate for a 10- to 15-point reduction in total score, primarily 
since the ability to withstand asset-related stress score and loss 
severity score do not reflect a number of significant qualitative risk 
mitigants that suggest lower risk.

V. Request for Comment

    The FDIC seeks comment on all aspects of the proposed guidelines 
for determining how to make potential adjustments to the initial total 
score of large institutions. In particular, the FDIC seeks comment on:
    1. Whether the proposed guidelines governing the adjustment process 
are appropriate and sufficient to ensure fairness and consistency in 
deposit insurance pricing determinations. More specifically the FDIC 
seeks comment on the appropriateness of the following:
    a. Reviewing outlier values on scorecard risk measures;
    b. Augmenting the analysis of scorecard risk measures with a review 
of additional complementary and qualitative risk measures;
    c. Basing adjustment decisions on considerations of multiple risk 
indicators;
    d. Assessing financial performance risk measures relative to other 
institutions engaged in similar business activities; and

[[Page 21265]]

    e. Using additional risk information, including qualitative 
information, to determine the magnitude of adjustment to an 
institution's total score that would be necessary to bring its total 
score into better alignment with institutions with similar risk 
profiles.
    2. Are there additional guidelines that should govern the 
analytical process to ensure fairness and consistency in deposit 
insurance pricing determinations?
    3. What qualitative information should the FDIC use to best 
evaluate loss severity?
    4. Are the proposed guidelines for controlling the assessment rate 
adjustment process sufficient to ensure that adjustment decisions are 
justified, fully supported, and take into account the views of the 
primary Federal regulator and the institution?

VI. Paperwork Reduction Act

A. Request for Comment on Proposed Information Collection

    In accordance with the Paperwork Reduction Act (44 U.S.C. 3501 et 
seq.) the FDIC may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid Office of Management and Budget (OMB) control number. 
The collection of information contained in this proposed rule is being 
submitted to OMB for review.
    Interested parties may submit written comments to the FDIC 
concerning the Paperwork Reduction Act (PRA) implications of this 
proposal. Commenters should refer to ``PRA Comments--Adjustment 
Guidelines'' in the subject line. Comments may be submitted by any of 
the following methods:
     Agency Web site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on 
the Agency Web site.
     E-mail: [email protected]. Include ``PRA Comments--
Adjustment Guidelines, 3064-ADXX'' in the subject line of the message.
     Mail: Gary A. Kuiper, Counsel, F-1086, Federal Deposit 
Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.
     Hand Delivery/Courier: Guard station at the rear of the 
550 17th Street Building (located on F Street) on business days between 
7 a.m. and 5 p.m.
    A copy of the comments may also be submitted to the OMB desk 
officer for the FDIC, Office of Information and Regulatory Affairs, 
Office of Management and Budget, New Executive Office Building, 
Washington, DC 20503.
    Comment is solicited on:
    (1) Whether the proposed collection of information is necessary for 
the proper performance of the functions of the agency, including 
whether the information will have practical utility;
    (2) The accuracy of the agency's estimate of the burden of the 
proposed collection of information, including the validity of the 
methodology and assumptions used;
    (3) The quality, utility, and clarity of the information to be 
collected;
    (4) Ways to minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology; e.g., permitting 
electronic submission of responses; and
    (5) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchases of services to provide information.

B. Proposed Information Collection

    An information collection would occur when a large or highly 
complex insured depository institution makes a written request that the 
FDIC make an adjustment to its total score. An institution's request 
for adjustment would be considered only if it is supported by evidence 
of a material risk or risk-mitigating factor that is not adequately 
accounted for in the scorecard.
    Respondents: Large and Highly Complex insured depository 
institutions.
    Number of responses: 0-11 per year.
    Frequency of response: Occasional.
    Average number of hours to prepare a response: 8 hours.
    Total annual burden: 0-88 hours.

    Dated at Washington, DC, this 12th day of April 2011.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2011-9209 Filed 4-14-11; 8:45 am]
BILLING CODE 6714-01-P