[Federal Register Volume 76, Number 181 (Monday, September 19, 2011)]
[Notices]
[Pages 57992-58003]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-23835]


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FEDERAL DEPOSIT INSURANCE CORPORATION


Assessment Rate Adjustment Guidelines for Large and Highly 
Complex Institutions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final guidelines.

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SUMMARY: The FDIC is adopting guidelines that it will use to determine 
how adjustments may be made to an institution's total score when 
calculating the deposit insurance assessment rates of large and highly 
complex insured institutions. Total scores are determined according to 
the Final Rule on Assessments and Large Bank Pricing that was approved 
by the FDIC Board on February 7, 2011 (76 FR 10672 (Feb. 25, 2011)).

FOR FURTHER INFORMATION CONTACT: Patrick Mitchell, Acting Chief, Large 
Bank Pricing Section, Division of Insurance and Research, (202) 898-
3943; and Christopher Bellotto, Counsel, Legal Division, (202) 898-
3801, 550 17th Street, NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION: 

I. Dates

    These guidelines supersede the assessment rate adjustment 
guidelines published by the FDIC on May 15, 2007 (the 2007 
Guidelines).\1\
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    \1\ 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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II. Background

    On February 7, 2011, the FDIC Board amended its assessment 
regulations by, among other things, adopting a new methodology for 
determining assessment rates for large and highly complex institutions 
(the Amended Assessment Regulations).\2\ The Amended Assessment 
Regulations eliminated risk categories and combined 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.\4\
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    \2\ Assessments, Large Bank Pricing, 76 FR 10672 (Feb. 25, 2011) 
(codified at 12 CFR 327.9-10).
    \3\ 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. 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\ In the context of large institution insurance pricing, the 
performance score measures a large institution's financial 
performance and its ability to withstand stress. The loss severity 
score refers to the relative loss that an institution poses to the 
Deposit Insurance Fund in the event of a failure.
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    Tables 1 and 2 show the scorecards for large and highly complex 
institutions, respectively.

[[Page 57993]]



                Table 1--Scorecard for Large Institutions
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   Scorecard measures and        Measure weights      Component weights
         components                 (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  ....................
------------------------------------------------------------------------
P.3 Ability to Withstand      ....................                    20
 Funding-Related Stress
    Core Deposits/Total                         60  ....................
     Liabilities............
    Balance Sheet Liquidity                     40  ....................
     Ratio..................
------------------------------------------------------------------------
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                    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 Liquidity                     30  ....................
     Ratio..................
    Average Short-Term                          20  ....................
     Funding/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).

    In most cases, the total score produced by an institution's 
scorecard should correctly reflect the institution's overall risk 
relative to other large institutions; however, the FDIC believes it is 
important that it have the ability to consider idiosyncratic or other 
relevant risk factors not reflected in the scorecards. The Amended 
Assessment Regulations, therefore, allow the FDIC to make a limited 
adjustment to an institution's total score up or down by no more than 
15 points (the large bank adjustment). The resulting score is then 
converted to an initial base assessment rate, which, after application 
of other possible adjustments, results in the institution's total 
assessment rate.\5\ The total assessment rate is multiplied by the 
institution's assessment base to calculate the amount of its assessment 
obligation. Adjustments are made to ensure that the total score 
produced by an institution's scorecard appropriately reflects the 
institution's overall risk relative to other large institutions.
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    \5\ Adjustments to the initial base assessment rate may include 
an unsecured debt adjustment, depository institution debt 
adjustment, and a brokered deposit adjustment.
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    The FDIC promulgated regulations allowing for the adjustment of 
large institutions' quarterly assessment rates in 2006.\6\ The FDIC set 
forth the procedures for these adjustments in guidelines that were 
published in 2007 (2007 Guidelines). The 2007 Guidelines were designed 
to ensure that the adjustment process was fair and transparent and that 
any decision to make an adjustment was well supported. The FDIC has 
exercised its adjustment authority when warranted since that time.
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    \6\ 71 FR 69282 (Nov. 30, 2006).
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    Following adoption of the Amended Assessment Regulations in 
February 2011, the FDIC proposed new guidelines that reflect the 
methodology it now uses to determine assessment rates for large and 
highly complex institutions. The FDIC sought comment on all aspects of 
the proposed guidelines.\7\ The FDIC received eight comments related to 
the guidelines, which are described below in the relevant portion of 
the guidelines.
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    \7\ 76 FR 21256 (April 15, 2011). The Amended Assessment 
Regulations provided that the FDIC would not make any new large bank 
adjustments until revised guidelines were published for comment and 
approved by the FDIC's Board of Directors. Although the FDIC chose 
in this instance to publish the proposed guidelines and solicit 
comment, notice and comment are not required and need not be 
employed to make future changes to the guidelines.

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[[Page 57994]]

    In addition to comments on the Guidelines, the FDIC also received a 
number of comments related to the scorecard methodology and measures 
used in the scorecard. The FDIC, however, previously provided two 
opportunities to comment on the scorecard methodology and all measures 
through the publication of two notices of proposed rulemaking on the 
large bank pricing system.\8\ The FDIC received a large number of 
comments on these issues in response to the two notices of proposed 
rulemaking and carefully considered them before finalizing the Amended 
Assessment Regulations in February 2011. Since the Amended Assessment 
Regulations are final, and the FDIC has not proposed changing them, 
suggestions or comments related to the scorecard methodology or the 
measures used within the scorecard have not been considered in 
finalizing these adjustment guidelines. Rather, the FDIC has focused on 
comments related to the guidelines and how the guidelines will apply 
when making a large bank adjustment.
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    \8\ 75 FR 23516 (May 3, 2011); 75 FR 72612 (Nov. 24, 2010).
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III. Overview of the Large Bank Adjustment Guidelines

    The following general guidelines will govern the large bank 
adjustment process.

Analytical Guidelines

     The FDIC will focus on identifying institutions for which 
a combination of risk measures and other information suggests either 
materially higher or lower risk than the total scores indicate. The 
FDIC will consider all available material information relating to an 
institution's likelihood of failure or loss severity in the event of 
failure.
     The FDIC will primarily consider two types of information 
in determining whether to make a large bank adjustment: (a) 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); and (b) 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 will conduct further analysis to determine whether 
underlying scorecard ratios are materially higher or lower than the 
established cutoffs for the measure and whether other mitigating or 
supporting information exists.
     The FDIC will use complementary quantitative risk measures 
to determine whether a 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 may 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, stress test results, 
interest rate risk exposure, and factors affecting loss severity.
     Specific risk measures may vary in importance for 
different 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 when comparing risk measures, the 
FDIC will consider the performance of similar institutions, taking into 
account that variations in risk measures exist among institutions with 
substantially different business models.
     Adjustments to an institution's total score will 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 material adjustment of 
the institution's score. For purposes of these guidelines, a material 
adjustment is an adjustment of five points or more to an institution's 
total score.

Procedural Guidelines

    The processes for communicating to affected institutions and 
implementing a large bank adjustment remain largely unchanged from the 
2007 Guidelines, except that the revised guidelines provide for an 
adjustment made as a result of a request by the institution (an 
institution-initiated adjustment).
     The FDIC will 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 will give institutions advance notice of any 
decision to make an upward adjustment, or to remove a previously 
implemented downward adjustment. The notice will include the reasons 
for the proposed adjustment or removal, the size of the proposed 
adjustment or removal, specify when the adjustment or removal will take 
effect, and provide institutions with up to 60 days to respond.
     The FDIC will re-evaluate the need for an adjustment to an 
institution's total score on a quarterly basis.
     An institution may make a written request to the FDIC for 
an adjustment to its total score no later than 35 days following the 
end of the quarter for which the institution is requesting the 
adjustment. Such a request must be supported with evidence of a 
material risk or risk-mitigating factor that is not adequately captured 
or considered in the scorecard. For example, for the quarter ending 
March 31, 2012, the request should be received by the FDIC no later 
than May 5, 2012. Institutions may request an adjustment at any time; 
however, those well-supported requests received after the deadline may 
not be considered until the following quarter and the FDIC may require 
the institution to update the supporting evidence at that time. Further 
details regarding an institution-initiated request for adjustment are 
provided below.
     An institution may 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 may similarly request review of or appeal a decision not 
to apply an adjustment following a request by the institution for an 
adjustment.

IV. The Large Bank Adjustment Process

A. Identifying the Need for an Adjustment

    The FDIC will analyze the results of the large bank methodology 
under the Amended Assessment Regulations and determine the relative 
risk ranking of institutions prior to implementing any large bank 
adjustments. When an institution's total score is consistent with the 
total score of other institutions with similar risk profiles, the 
resulting assessment rate of the institutions should be comparable and 
a large bank adjustment should be unnecessary. When an institution's 
total score is not consistent with the total scores of other

[[Page 57995]]

institutions with similar risk profiles, the FDIC will consider an 
adjustment. The FDIC only intends to pursue material adjustments (an 
adjustment of at least five points) to an institution's total score, 
which should result in only a limited number of adjustments on a 
quarterly basis.
    Given the implementation of a new assessment system and the 
collection of new data items, the FDIC does not intend to use its 
ability to adjust scores precipitously. The FDIC expects to take some 
time analyzing all institutions' unadjusted scores, the reporting of 
new data items, and the resulting risk ranking of institutions before 
making any adjustments. While the FDIC is not precluded from making a 
large bank adjustment immediately following adoption of these 
guidelines, the FDIC expects that few, if any, adjustments will be made 
at that time.
    The FDIC will evaluate scorecard results each quarter to identify 
institutions with a score that is materially too high or too low when 
considered in light of risks or risk-mitigating factors that are 
inadequately captured by the institution's scorecard. Examples of the 
types of risks and risk-mitigating factors include considerations for 
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.
    The FDIC received several comments regarding risk mitigants 
considered in the large bank adjustment process. One commenter agreed 
that the FDIC should retain the ability to adjust an institution's 
total score based upon risks that are not adequately or fully captured 
in the scorecard, while another commenter suggested that loss mitigants 
should be directly factored into the pricing model. Two commenters 
stated that more detail should be provided regarding consideration of 
mitigants and the potential impact such mitigants may have on the large 
bank adjustment process. These same two commenters noted that any 
adjustment methodology regarding higher risk concentrations should 
include consideration of an institution's historical risk and loss 
data. One commenter stated that the FDIC should consider offsetting 
outliers as a mitigant when considering whether an adjustment is 
warranted for a different outlier.
    Loss mitigants and their effect on individual institutions tend to 
be idiosyncratic. While the FDIC agrees that it would be ideal for all 
risk mitigants to be factored into the scorecard model for deposit 
insurance assessment purposes, it is impossible in practice to include 
all potential risk mitigants, particularly mitigants of a qualitative 
nature, into a quantitative scoring model. For similar reasons, the 
FDIC is unable to provide precise details of how mitigants will be 
specifically considered in the adjustment process. The FDIC will 
consider each institution's risk profile, including consideration of 
loss mitigants, offsetting outliers, and historical data, when 
determining the institution's pricing and relative risk ranking among 
the universe of large institutions. The FDIC believes, however, that 
historical loss or risk data may be insufficient in isolation to 
warrant an adjustment given the forward looking nature of the 
scorecard.
    One commenter recommended that the FDIC use the large bank 
adjustment process to eliminate the effect of FAS 166/167 in the 
growth-adjusted portfolio concentration measure. As noted in the 
Amended Assessments Regulation, the FDIC will consider exclusion of the 
effect of FAS 166/167 through the adjustment process where the FDIC 
receives sufficient information to make an adjustment and the possible 
adjustment would have a material effect on an institution's total 
score.
    In addition to considering an institution's relative risk ranking 
among all large institutions, the FDIC will consider how an 
institution's total score compares to the total scores of institutions 
in a peer group. This comparison will allow the FDIC to account for 
variations in risk measures that exists among institutions with 
differing business models. For purposes of the comparison, the FDIC 
will, where appropriate, assign an institution to a peer group. The 
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 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 residential mortgage loans, which include 
home equity lines of credit plus residential mortgage backed 
securities, exceed 50 percent of total assets.
    Non-diversified Regional Institutions: Large institutions not 
described in a peer group above if: (1) Credit card plus securitized 
receivables exceed the sum of 50 percent of assets plus securitized 
receivables; or (2) the sum of residential mortgage loans, credit card 
loans, and other loans to individuals exceeds 50 percent of assets.
    Large Diversified Institutions: Large institutions with over $150 
billion in assets not described in a peer group above.
    Diversified Regional Institutions: Large institutions with less 
than $150 billion in assets not described in a peer group above.
    The FDIC received a comment suggesting that the definition of 
Residential Mortgage Lenders as a peer group should clarify whether the 
definition is limited to residential mortgages and whether home-equity 
lines of credit are included. The FDIC agrees. The definition of has 
been clarified to include residential mortgages, including home-equity 
lines of credit and residential mortgage-backed securities.

B. Institution-Initiated Request for a Large Bank Adjustment

    An institution may request a large bank adjustment by submitting a 
written request to the FDIC no later than 35 days following the end of 
the quarter for which the institution is requesting the adjustment. 
Such a request must be supported with evidence of a material risk or 
risk-mitigating factor that is not adequately captured or considered in 
the scorecard.\9\ Similar to FDIC-initiated adjustments, an 
institution-initiated request for adjustment will 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 and 
results in a material change to the total score. Furthermore, the 
overall risk profile must be materially higher or lower than that 
produced by the scorecard. The FDIC will consider these requests as 
part of its ongoing effort to identify and adjust scores so that 
institutions with similar risk profiles receive similar total scores.
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    \9\ A request for adjustment with supporting evidence should be 
addressed to Director, Division of Insurance and Research, Federal 
Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 
20429.
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    An institution-initiated request for adjustment that is received by 
the FDIC later than 35 days after the end of the quarter for which the 
institution is requesting the adjustment may not provide the FDIC with 
sufficient time to appropriately assess and respond to the request for 
adjustment; therefore, the FDIC may not be able to consider adjusting 
an institution's assessment for that quarter if the request is received 
after this time. Although institutions may request an adjustment at any 
time, those well-supported requests received

[[Page 57996]]

after the deadline may not be considered until the following quarter. 
In conjunction with the next quarter's consideration, the FDIC may 
require that the institution update the information supporting the 
institution-initiated request. The FDIC's determination that an 
adjustment request was received after the deadline and there was 
insufficient time to appropriately respond to it may be challenged by 
the institution in a request for review pursuant to the assessment 
appeals process (12 CFR 327.4(c)).
    For example, a request for adjustment of an institution's third 
quarter total score with supporting evidence must be received no later 
than November 4 by the FDIC's Director of the Division of Insurance and 
Research in Washington, DC. If the request for adjustment is received 
after November 4, it may not be considered by the FDIC until the fourth 
quarter and the FDIC may request updated information at that time. 
Pursuant to 12 CFR 327.4(c), the institution may file a request for 
review challenging the FDIC's determination to consider the request in 
the fourth quarter or file a request for review of its third quarter 
assessment rate once it receives its invoice for the third quarter 
assessment. An institution that files a request for adjustment more 
than 35 days after the end of the quarter for which it is requesting an 
adjustment is not precluded from requesting adjustments for future 
quarters.
    The FDIC received three positive comments regarding the FDIC's 
willingness to explicitly permit written requests from institutions for 
a large bank adjustment. One commenter suggested that the FDIC provide 
the number of challenges to deposit insurance assessment adjustments 
and rulings for or against such challenges in its quarterly publication 
of statistics. Another commenter recommended that the FDIC provide a 
prompt response for any downward adjustment request. Finally, one 
commenter requested clarification about whether the national or 
regional office of the FDIC would recommend an adjustment to a large 
institution's total score, stating that the national office is better 
suited to consider the entire banking industry when determining 
outliers for pricing purposes.
    As noted in the Amended Assessment Regulations, the FDIC will 
publish aggregate statistics on adjustments each quarter. The FDIC's 
Assessment Appeals Committee publishes all appeals and the results of 
such appeals. In addition, the FDIC will respond promptly to all well-
supported requests for a downward large bank adjustment. As noted 
previously, a well-supported request (the requests must also be 
material, as defined above) should be received by the FDIC within 35 
days after the end of the quarter for which the adjustment is being 
requested. Finally, the FDIC will ensure that appropriate staff is 
involved in the decision-making process relevant to large bank 
adjustments.

C. Determining the Adjustment Amount

    Once the FDIC determines that an adjustment may be warranted, the 
FDIC will determine the adjustment necessary to bring an institution's 
total score into better alignment with those of other institutions that 
pose similar levels of risk. The FDIC will initiate an adjustment or 
consider an institution-initiated request for adjustment only when a 
combination of risk measures and other information suggest either 
materially higher or lower risk than an institution's total score 
indicates. The FDIC expects that the adjustment process will be needed 
for only a relatively small 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 will be 
made. The FDIC will only initiate adjustments either upward or downward 
that warrant an adjustment of 5 points or more and adjustments will 
generally only be made in 5, 10, or 15 point increments.
    One commenter stated that the proper size of an adjustment would be 
subject to differences of opinion. The FDIC agrees that there is 
subjectivity involved in the large bank adjustment process; however, 
the FDIC expects that differences of opinion on the appropriate size of 
the adjustment should be limited. The FDIC will only initiate 
adjustments or consider reviews for adjustment if the comprehensive 
analysis of the institution's risk and the institution's relative risk 
ranking warrant a material adjustment of the institution's total score. 
To reduce the potential subjectivity regarding the precision of the 
size of an adjustment, the FDIC has determined that any adjustment will 
be limited to a minimum of 5 points and generally limited to 5, 10, or 
15 point increments. The FDIC believes a minimum 5 point adjustment 
provides a threshold that clarifies how the FDIC will determine whether 
an adjustment is material. In addition, the discrete adjustment levels 
should reduce potential disagreements regarding the appropriate size of 
any adjustment applied.

D. Further Analysis and Consultation With Primary Federal Regulator

    As under the 2007 Guidelines, the FDIC will 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).
    One commenter recommended that any adjustment to an institution's 
total score should require concurrence by an institution's primary 
federal regulator, rather than simply consultation. The FDIC disagrees. 
Large bank adjustments are made only after consideration of the 
institution's relative risk ranking among the entire large bank 
universe. Such consideration requires knowledge and data of the total 
scores for every institution in the large bank universe, which is 
information that other primary federal regulators do not have. 
Furthermore, only the FDIC has the legal authority to assess 
institutions for deposit insurance. Therefore, the FDIC will continue 
to consult with an institution's primary federal regulator and consider 
the primary federal regulator's comments prior to making a large bank 
adjustment, but, ultimately, the decision concerning any adjustment 
will be made by the FDIC. This process is consistent with the procedure 
used in the 2007 Guidelines.

E. Advance Notice

    To give an institution an opportunity to respond, the FDIC will 
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 will correspond approximately 
to the invoice date for an assessment period. For example, an 
institution will be notified of a proposed upward adjustment to its 
assessment rates for 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 will 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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    Decisions to lower an institution's total score will not be 
communicated to institutions in advance. Rather, as under the 2007 
Guidelines, downward adjustments will be reflected in the invoices for 
a given assessment period along with the reasons for the adjustment.

[[Page 57997]]

F. Institution's Opportunity To Respond

    An institution that has been notified of the FDIC's intent to apply 
an upward adjustment will have 60 days to respond to the notice. Before 
implementing an upward adjustment, the FDIC will review the 
institution's response, along with any subsequent changes to 
supervisory ratings, scorecard measures, or other relevant risk 
factors. Similar to the 2007 Guidelines, the FDIC will notify the 
institution of its decision to proceed or not to proceed with the 
upward adjustment along with the invoice for the quarter in which the 
adjustment will 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 that 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, the FDIC 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 assessment 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.

G. Duration of the Adjustment

    Consistent with the 2007 Guidelines, the large bank adjustment will 
remain in effect for subsequent assessment periods until the FDIC 
determines either that the adjustment is no longer warranted or that 
the magnitude of the adjustment needs 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 may increase without notice if the 
institution's supervisory, agency ratings, or financial ratios 
deteriorate.
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H. Requests for Review and Appeals

    In making a decision regarding an adjustment, the FDIC will 
consider all material information available to it, including any 
information provided by an institution, but ultimately, all decisions 
concerning adjustments will be made by the FDIC. An institution may 
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 may similarly request 
review of or appeal a decision not to apply an adjustment following an 
institution-initiated request for an adjustment.

V. Additional Information on the Adjustment Process, Including Examples

    As discussed previously, the FDIC will primarily consider two types 
of information in determining whether to make a large bank adjustment: 
scorecard measure outliers and 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 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, the process 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 will 
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).
BILLING CODE 6714-01-P

[[Page 57998]]

[GRAPHIC] [TIFF OMITTED] TN19SE11.000

    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 will generally be determined by the amount that the 
underlying ratio differs 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 may conclude that 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 Return on Assets (ROA) ratio is much closer to its cutoff values, 
suggesting that an adjustment based on consideration of this factor may 
not be justified.

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

    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 to the extent 
that the FDIC determined that such a downward adjustment warranted at 
least a 5 point adjustment.
    The amount of the adjustment will 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 peer group (e.g., 
diversified regional institutions), as described above. Typically, 
however, adjustments supported by only one extreme outlier value will 
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 could result in 
varying adjustment amounts depending on each institution's unique set 
of circumstances. For Bank A, a 5-point adjustment may be most 
appropriate.
    The next example illustrates the analytical process the FDIC will 
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 may also 
receive an upward adjustment. As shown in Chart 2, Bank B has a total 
score of 72 and three scorecard

[[Page 57999]]

measures with a score of 100 (indicating higher risk).
[GRAPHIC] [TIFF OMITTED] TN19SE11.001

    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 may determine that the risk associated with Bank B's ability to 
withstand asset-related stress and, therefore, its overall risk, is 
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                              (%)      percentage of
                                                                Minimum     Maximum                the scoring
                                                                                                      range
----------------------------------------------------------------------------------------------------------------
Core ROA..........................................       100           0           2     -0.05                -3
Criticized and Classified to Tier 1 Capital &            100           7         100       198               105
 Reserves.........................................
Underperforming Assets to Tier 1 Capital &               100           2          35        36                 3
 Reserves.........................................
----------------------------------------------------------------------------------------------------------------


[[Page 58000]]

    After considering any risk-mitigating factors, the FDIC will 
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 insight into an 
institution's ability to withstand financial adversity, and the 
severity of losses in the event of failure.
    Analyzing complementary risk measures will 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. The measure 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 the information is further supported by qualitative 
loss severity considerations as discussed below.
    Two commenters suggested that the FDIC provide an exhaustive list 
of complementary benchmarks or qualitative factors that may be 
considered during the large bank adjustment process. A few commenters 
stated that the FDIC has not provided sufficient detail regarding the 
factors that may trigger a large bank adjustment.
    The FDIC agrees that providing an exhaustive list of factors that 
may be considered in the large bank adjustment process would be ideal, 
but has concluded that this is not reasonable or practical. The FDIC 
will consider all factors that may affect an institution's risk 
profile, including idiosyncratic risks and the dynamic nature of the 
industry.
    The example below illustrates the analytical process the FDIC will 
follow when determining whether 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] TN19SE11.002

    In this hypothetical, following a review of complementary measures 
for all financial ratios in the scorecard, the complementary measures 
for Tier 1 leverage ratio shows 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

[[Page 58001]]

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.
[GRAPHIC] [TIFF OMITTED] TN19SE11.003

    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 were 
understated as well.\13\
---------------------------------------------------------------------------

    \13\ 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 
are impossible to capture in the scorecard. Similar to scorecard 
outliers and complementary risk measures, the FDIC will 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, including information gained through 
the FDIC's special examination authority, such as underwriting 
practices, interest rate risk exposure and other information obtained 
through public filings.\14\
---------------------------------------------------------------------------

    \14\ 12 U.S.C. 1820(b)(3); see Interagency Memorandum of 
Understanding on Special Examinations dated July 12, 2010. http://www.fdic.gov/news/news/press/2010/pr10153.html.
---------------------------------------------------------------------------

    Another example of qualitative information that the FDIC will 
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 will 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

[[Page 58002]]

internal capital adequacy assessments could alleviate 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 is normally evident through the 
scorecard methodology alone.
    Qualitative risk considerations will also include information that 
could have a bearing on potential loss severity, and could include, for 
example, the ease with which the FDIC can make quick deposit insurance 
determinations and depositor payments, or the availability of 
sufficient information on qualified financial contracts to allow the 
FDIC to accurately analyze these contracts in a timely manner in the 
event of the institution's failure.
    In general, qualitative factors will become more important in 
determining whether to apply an adjustment when an institution has high 
performance risk 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 will 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] TN19SE11.004

    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. The example 
assumes that FDIC's 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 that the 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

[[Page 58003]]

asset-related stress score and loss severity score do not reflect a 
number of significant qualitative risk mitigants that suggest lower 
risk.

VI. Additional Comments

    The FDIC received two comments stating that including Troubled Debt 
Restructurings (TDR) in the Criticized and Classified items and/or 
underperforming assets ratios and/or the higher-risk concentration 
measure is inconsistent with the FDIC's public remarks encouraging 
institutions to enter into loan modifications. In particular, the 
commenter cited remarks made in ``Supervisory Insights: Regulatory 
Actions Related to Foreclosure Activities by Large Servicers and 
Practical Implications for Community Banks.'' One commenter suggested 
that the FDIC include in the guidelines a method to adjust 
institutions' scores that actively demonstrates support for the FDIC's 
guidance on mortgage loan modifications.
    Many loan modifications, such as those to reduce the interest rate 
for competitive reasons, are not TDRs. However, a loan modification 
results in a TDR when a creditor for economic or legal reasons related 
to the borrower's financial difficulties grants a concession to the 
borrower that the creditor would not otherwise have considered if it 
were not for the borrower's financial difficulties. Restructured 
workout loans typically present an elevated level of credit risk as the 
borrowers are not able to perform according to the original contractual 
terms. The FDIC is interested in pricing for risk; therefore, TDRs 
(which display higher risk) are included in certain scorecard ratios.
    The FDIC does not believe the definitions and the application of 
those definitions in the pricing rule for these higher risk assets is 
inconsistent with the FDIC's guidance to ``avoid unnecessary 
foreclosures and consider mortgage loan modifications or other workouts 
that are affordable and sustainable.'' To the extent that TDRs have 
risk mitigants that materially lower an institution's risk profile 
relative to that institution's total score, the FDIC would consider 
those specific mitigants in the adjustment process.

VII. Effective Date: September 13, 2011

VIII. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501 et seq.), an agency may not conduct or sponsor, and a person is 
not required to respond to, a collection of information unless it 
displays a currently valid OMB control number. This Notice of 
Assessment Rate Adjustment Guidelines for Large and Highly Complex 
Institutions includes a provision allowing large and highly complex 
institutions to make a written request to the FDIC for an adjustment to 
an institution's total score. An institution's request for adjustment 
is 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.
    In conjunction with publication of the Proposed Assessment Rate 
Adjustment Guidelines for Large and Highly Complex Institutions, the 
FDIC submitted to OMB a request for clearance of the paperwork burden 
associated with the request for adjustment. That request is still 
pending. The proposal requested comment on the estimated paperwork 
burden. One comment addressing the estimated paperwork burden was 
received; the commenter stated that the number of hours required to 
prepare an institution-initiated request for adjustment was 
underestimated. The FDIC agrees that there can be significant 
variations in the amount of time required to provide a written request 
for an adjustment and has altered its initial burden estimates 
accordingly. The revised estimated burden for the application 
requirement is as follows:
    Title: ``Assessment Rate Adjustment Guidelines for Large and Highly 
Complex Institutions--Request for Adjustment.''
    OMB Number: 3064-0179.
    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: 8-80.
    Total Annual Burden: 0-880 hours.
    Comment Request: The FDIC has an ongoing interest in public 
comments on its collections of information, including comments on: (1) 
Whether this collection of information is necessary for the proper 
performance of the FDIC's functions, including whether the information 
has practical utility; (2) the accuracy of the estimates of the burden 
of the information collection, including the validity of the 
methodologies and assumptions used; (3) ways to enhance the quality, 
utility, and clarity of the information to be collected; and (4) ways 
to minimize the burden of the information collection on respondents, 
including through the use of automated collection techniques or other 
forms of information technology. Comments may be submitted to the FDIC 
by any of the following methods:
     http://www.FDIC.gov/regulations/laws/federal/propose.html.
     E-mail: [email protected]: Include the name and number of 
the collection in the subject line of the message.
     Mail: Gary Kuiper (202-898-3877), Counsel, Federal Deposit 
Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.
     Hand Delivery: Comments may be hand-delivered to the guard 
station at the rear of the 550 17th Street Building (located on F 
Street), on business days between 7 a.m. and 5 p.m. A copy of the 
comment 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, Room 3208, Washington, DC 20503. 
All comments should refer to the ``Assessment Rate Adjustment 
Guidelines for Large and Highly Complex Institutions--Request for 
Adjustment.'' (OMB No. 3064-0179).

    By order of the Board of Directors.

    Dated at Washington, DC, this 13th day of September, 2011.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2011-23835 Filed 9-16-11; 8:45 am]
BILLING CODE 6714-01-P