[Federal Register Volume 80, Number 133 (Monday, July 13, 2015)]
[Proposed Rules]
[Pages 40838-40894]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-16514]



[[Page 40837]]

Vol. 80

Monday,

No. 133

July 13, 2015

Part IV





Federal Deposit Insurance Corporation





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12 CFR Part 327





Assessments; Proposed Rule

  Federal Register / Vol. 80 , No. 133 / Monday, July 13, 2015 / 
Proposed Rules  

[[Page 40838]]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AE37


Assessments

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking (NPR) and request for comment.

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SUMMARY: The FDIC is proposing to amend 12 CFR part 327 to refine the 
deposit insurance assessment system for small insured depository 
institutions that have been federally insured for at least 5 years 
(established small banks) by: revising the financial ratios method so 
that it would be based on a statistical model estimating the 
probability of failure over three years; updating the financial 
measures used in the financial ratios method consistent with the 
statistical model; and eliminating risk categories for established 
small banks and using the financial ratios method to determine 
assessment rates for all such banks (subject to minimum or maximum 
initial assessment rates based upon a bank's CAMELS composite rating). 
The FDIC does not propose changing the range of assessment rates that 
will apply once the Deposit Insurance Fund (DIF or fund) reserve ratio 
reaches 1.15 percent; thus, under the proposal, as under current 
regulations, the range of initial deposit insurance assessment rates 
will fall once the reserve ratio reaches 1.15 percent. The FDIC 
proposes that a final rule would go into effect the quarter after a 
final rule is adopted; by their terms, however, the proposed amendments 
would not become operative until the quarter after the DIF reserve 
ratio reaches 1.15 percent.

DATES: Comments must be received by the FDIC no later than September 
11, 2015.

ADDRESSES: You may submit comments on the notice of proposed rulemaking 
using any of the following methods:
     Agency Web site: http://www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments on the agency 
Web site.
     Email: [email protected]. Include RIN 3064-AE37 on 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: 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.
     Public Inspection: All comments received, including any 
personal information provided, will be posted generally without change 
to http://www.fdic.gov/regulations/laws/federal.

FOR FURTHER INFORMATION CONTACT: Munsell St.Clair, Chief, Banking and 
Regulatory Policy, Division of Insurance and Research, 202-898-8967; 
Nefretete Smith, Senior Attorney, Legal Division, 202-898-6851; Thomas 
Hearn, Counsel, Legal Division, 202-898-6967.

SUPPLEMENTARY INFORMATION:

I. Policy Objectives

    The Federal Deposit Insurance Act (FDI Act) requires that the FDIC 
Board of Directors (Board) establish a risk-based deposit insurance 
assessment system.\1\ Pursuant to this requirement, the FDIC adopted a 
risk-based deposit insurance assessment system effective in 1993 that 
applied to all banks.\2\ A risk-based assessment system reduces the 
subsidy that lower-risk banks provide higher-risk banks and provides 
incentives for banks to monitor and reduce risks that could increase 
potential losses to the DIF. Since 1993, the FDIC has met its statutory 
mandate and has pursued these policy goals by periodically introducing 
improvements in the deposit insurance assessment system's ability to 
differentiate for risk. The primary purpose of the proposals in this 
NPR is to improve the risk-based deposit insurance assessment system 
applicable to small banks to more accurately reflect risk.\3\
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    \1\ 12 U.S.C. 1817(b). A ``risk-based assessment system'' means 
a system for calculating an insured depository institution's 
assessment based on the institution's probability of causing a loss 
to the DIF due to the composition and concentration of the 
institution's assets and liabilities, the likely amount of any such 
loss, and the revenue needs of the DIF. See 12 U.S.C. 1817(b)(1)(C).
    \2\ As used in this NPR, the term ``bank'' is synonymous with 
the term ``insured depository institution'' as it is used in section 
3(c)(2) of the FDI Act, 12 U.S.C 1813(c)(2).
    On January 1, 2007, the FDIC instituted separate assessment 
systems for small and large banks. 71 FR 69282 (Nov. 30, 2006). See 
12 U.S.C. 1817(b)(1)(D) (granting the Board the authority to 
establish separate risk-based assessment systems for large and small 
insured depository institutions).
    \3\ As used in this NPR, the term ``small bank'' is synonymous 
with the term ``small institution'' as it is used in 12 CFR 327.8. 
In general, a ``small bank'' is one with less than $10 billion in 
total assets.
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II. Background

Risk-Based Deposit Insurance Assessments for Small Banks

    Since 2007, assessment rates for small banks have been determined 
by placing each bank into one of four risk categories, Risk Categories 
I, II, III, and IV. These four risk categories are based on two 
criteria: capital levels and supervisory ratings. The three capital 
groups--well capitalized, adequately capitalized, and 
undercapitalized--are based on the leverage ratio and three risk-based 
capital ratios used for regulatory capital purposes.\4\ The three 
supervisory groups, termed A, B, and C, are based upon supervisory 
evaluations by the small bank's primary federal regulator, state 
regulator or the FDIC.\5\ Group A consists of financially sound 
institutions with only a few minor weaknesses (generally, banks with 
CAMELS \6\ composite ratings of 1 or 2); Group B consists of 
institutions that demonstrate weaknesses that, if not corrected could 
result in significant deterioration of the institution and increased 
risk of loss to the DIF (generally, banks with CAMELS composite ratings 
of 3); and Group C consists of institutions that pose a substantial 
probability of loss to the DIF unless effective corrective action is 
taken (generally, banks with CAMELS composite ratings of 4 or 5). An 
institution's capital and supervisory group determine its risk category 
as set out in Table 1 below.
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    \4\ The common equity tier 1 capital ratio, a new risk-based 
capital ratio, was incorporated into the deposit insurance 
assessment system effective January 1, 2015. 79 FR 70427 (November 
26, 2014). Beginning January 1, 2018, a supplementary leverage ratio 
will also be used to determine whether an advanced approaches bank 
is: (a) well capitalized, if the bank is subject to the enhanced 
supplementary leverage ratio standards under 12 CFR 
6.4(c)(1)(iv)(B), 12 CFR 208.43(c)(1)(iv)(B), or 12 CFR 
324.403(b)(1)(vi), as each may be amended from time to time; and (b) 
adequately capitalized, if the bank is subject to the advanced 
approaches risk-based capital rules under 12 CFR 6.4(c)(2)(iv)(B), 
12 CFR 208.43(c)(2)(iv)(B), or 12 CFR 324.403(b)(2)(vi), as each may 
be amended from time to time. 79 FR 70427, 70437 (November 26, 
2014.) The supplementary leverage ratio is expected to affect the 
capital group assignment of few, if any, small banks.
    \5\ The term ``primary federal regulator'' is synonymous with 
the term ``appropriate federal banking agency'' as it is used in 
section 3(q) of the FDI Act, 12 U.S.C. 1813(q).
    \6\ A financial institution is assigned a composite rating based 
on an evaluation and rating of six essential components of an 
institution's financial condition and operations. These component 
factors address the adequacy of capital (C), the quality of assets 
(A), the capability of management (M), the quality and level of 
earnings (E), the adequacy of liquidity (L), and the sensitivity to 
market risk (S).

[[Page 40839]]



                                     Table 1--Determination of Risk Category
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                                                                   Supervisory group
            Capital group             --------------------------------------------------------------------------
                                           A CAMELS 1 or 2             B CAMELS 3            C CAMELS 4 or 5
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Well Capitalized.....................  Risk Category I........
                                      -------------------------
Adequately Capitalized...............                  Risk Category II                  Risk Category III.
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Under Capitalized....................                  Risk Category III                 Risk Category IV
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    To further differentiate risk within Risk Category I (which 
includes most small banks), the FDIC uses the financial ratios method, 
which combines supervisory CAMELS component ratings with current 
financial ratios to determine a small Risk Category I bank's initial 
assessment rate.\7\
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    \7\ New small banks in Risk Category I, however, are charged the 
highest initial assessment rate in effect for that risk category. 
Subject to exceptions, a new bank is one that has been federally 
insured for less than five years as of the last day of any quarter 
for which it is being assessed. 12 CFR 327.8(j).
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    Within Risk Category I, those institutions that pose the least risk 
are charged a minimum initial assessment rate and those that pose the 
greatest risk are charged an initial assessment rate that is four basis 
points higher than the minimum. All other banks within Risk Category I 
are charged a rate that varies between these rates. In contrast, all 
banks in Risk Category II are charged the same initial assessment rate, 
which is higher than the maximum initial rate for Risk Category I. A 
single, higher, initial assessment rate applies to each bank in Risk 
Category III and another, higher, rate to each bank in Risk Category 
IV.\8\
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    \8\ In 2011, the Board revised and approved regular assessment 
rate schedules. See 76 FR 10672 (Feb. 25, 2011); 12 CFR 327.10.
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    The financial ratios method determines the assessment rates in Risk 
Category I using a combination of weighted CAMELS component ratings and 
the following financial ratios:
     Tier 1 Leverage Ratio;
     Net Income before Taxes/Risk-Weighted Assets;
     Nonperforming Assets/Gross Assets;
     Net Loan Charge-Offs/Gross Assets;
     Loans Past Due 30-89 days/Gross Assets;
     Adjusted Brokered Deposit Ratio; and
     Weighted Average CAMELS Composite Rating.\9\
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    \9\ The weights applied to CAMELS components are as follows: 25 
percent each for Capital and Management; 20 percent for Asset 
quality; and 10 percent each for Earnings, Liquidity, and 
Sensitivity to market risk. These weights reflect the view of the 
FDIC regarding the relative importance of each of the CAMELS 
components for differentiating risk among institutions for deposit 
insurance purposes. The FDIC and other bank supervisors do not use 
such a system to determine CAMELS composite ratings.
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    To determine a Risk Category I bank's initial assessment rate, the 
weighted CAMELS components and financial ratios are multiplied by 
statistically derived pricing multipliers, the products are summed, and 
the sum is added to a uniform amount that applies to all Risk Category 
I banks. If, however, the rate is below the minimum initial assessment 
rate for Risk Category I, the bank will pay the minimum initial 
assessment rate; if the rate derived is above the maximum initial 
assessment rate for Risk Category I, then the bank will pay the maximum 
initial rate for the risk category.
    The financial ratios used to determine rates come from a 
statistical model that predicts the probability that a Risk Category I 
institution will be downgraded from a composite CAMELS rating of 1 or 2 
to a rating of 3 or worse within one year. The probability of a CAMELS 
downgrade is intended as a proxy for the bank's probability of failure. 
When the model was developed in 2006, the FDIC decided not to attempt 
to determine a bank's probability of failure because of the lack of 
bank failures in the years between the end of the bank and thrift 
crisis in the early 1990s and 2006.\10\
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    \10\ See 71 FR 41910, 41913 (July 24, 2006).
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    The financial ratios method does not apply to new small banks or to 
insured branches of foreign banks (insured branches).\11\ The manner in 
which assessment rates for these institutions is determined is 
described further below.
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    \11\ Insured branches of foreign banks are deemed small banks 
for purposes of the deposit insurance assessment system.
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Assessment Rates Under Current Rules

    The Dodd-Frank Wall Street Reform and Consumer Protection Act (the 
Dodd-Frank Act), enacted in July 2010, revised the statutory 
authorities governing the FDIC's management of the DIF. The Dodd-Frank 
Act granted the FDIC authority to manage the fund in a manner that 
would help maintain a positive fund balance during a banking crisis and 
promote moderate, steady assessment rates throughout economic credit 
cycles.\12\
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    \12\ 12 U.S.C. 1817(e) (granting the Board the discretion to 
suspend or limit dividends).
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    Among other things, the Dodd-Frank Act: (1) raised the minimum 
designated reserve ratio (DRR), which the FDIC must set each year, to 
1.35 percent (from the former minimum of 1.15 percent) and removed the 
upper limit on the DRR (which was formerly capped at 1.5 percent); \13\ 
(2) required that the fund reserve ratio reach 1.35 percent by 
September 30, 2020 (rather than 1.15 percent by the end of 2016, as 
formerly required); \14\ and (3) required that, in setting assessments, 
the FDIC ``offset the effect of [requiring that the reserve ratio reach 
1.35 percent by September 30, 2020 rather than 1.15 percent by the end 
of 2016] on insured depository institutions with total consolidated 
assets of less than $10,000,000,000.'' \15\
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    \13\ 12 U.S.C. 1817(b)(3)(B).
    \14\ Public Law 111-203, 334(d), 124 Stat. 1376, 1539 (12 U.S.C. 
1817(note)).
    \15\ Public Law 111-203, 334(e), 124 Stat. 1376, 1539 (12 U.S.C. 
1817(note)). The Dodd-Frank Act also: (1) eliminated the requirement 
that the FDIC provide dividends from the fund when the reserve ratio 
is between 1.35 percent and 1.5 percent, 12 U.S.C. 1817(e), and (2) 
continued the FDIC's authority to declare dividends when the reserve 
ratio at the end of a calendar year is at least 1.5 percent, but 
granted the FDIC sole discretion in determining whether to suspend 
or limit the declaration of payment or dividends, 12 U.S.C. 
1817(e)(2)(A)-(B).
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    In 2011, the FDIC adopted a schedule of assessment rates designed 
to ensure that the reserve ratio reaches 1.15 percent by September 30, 
2020.\16\ In the near future, the FDIC plans to propose a rule to 
implement the Dodd-Frank Act requirement that the cost of raising the 
reserve ratio from 1.15 percent to 1.35

[[Page 40840]]

percent be paid by banks with $10 billion or more in assets.
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    \16\ See 76 FR 10672.
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    The current initial assessment rates for small and large banks are 
set forth in Table 2 below.

                                                         Table 2--Initial Base Assessment Rates
                                                               [In basis points per annum]
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                                                                                                Risk category
                                                   -----------------------------------------------------------------------------------------------------
                                                                   I*                                                                     Large & highly
                                                   ----------------------------------        II              III               IV            complex
                                                        Minimum          Maximum                                                          institutions**
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points)....................               5                9               14               23               35             5-35
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* Initial base rates that are not the minimum or maximum will vary between these rates.
** See Sec.   327.8(f) and Sec.   327.8(g) for the definition of large and highly complex institutions.

    An institution's total assessment rate may vary from the initial 
assessment rate as the result of possible adjustments.\17\ After 
applying all possible adjustments, minimum and maximum total assessment 
rates for each risk category are set forth in Table 3 below.
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    \17\ A bank's total base assessment rate can vary from its 
initial base assessment rate as the result of three possible 
adjustments. Two of these adjustments--the unsecured debt adjustment 
and the depository institution debt adjustment (DIDA)--apply to all 
banks (except that the unsecured debt adjustment does not apply to 
new banks or insured branches). The unsecured debt adjustment lowers 
a bank's assessment rate based on the bank's ratio of long-term 
unsecured debt to the bank's assessment base. The DIDA increases a 
bank's assessment rate when it holds long-term, unsecured debt 
issued by another insured depository institution. The third possible 
adjustment--the brokered deposit adjustment--applies only to small 
banks in Risk Category II, III and IV (and to large and highly 
complex institutions that are not well capitalized or that are not 
CAMELS composite 1 or 2-rated). It does not apply to insured 
branches. The brokered deposit adjustment increases a bank's 
assessment when it holds significant amounts of brokered deposits. 
12 CFR 327.9 (d).

                                      Table 3--Total Base Assessment Rates*
                                           [In basis points per annum]
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                                                                                                  Large & highly
                                   Risk category   Risk category   Risk category   Risk category      complex
                                         I              II              III             IV         institutions
                                                                                                        **
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Initial Assessment Rate.........             5-9              14              23              35            5-35
Unsecured Debt Adjustment ***...       -4.5 to 0         -5 to 0         -5 to 0         -5 to 0         -5 to 0
Brokered Deposit Adjustment.....             N/A         0 to 10         0 to 10         0 to 10         0 to 10
Total Assessment Rate...........        2.5 to 9         9 to 24        18 to 33        30 to 45       2.5 to 45
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* Total base assessment rates do not include the DIDA.
** See Sec.   327.8(f) and (g) for the definition of large and highly complex institutions.
*** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured
  depository institution's initial base assessment rate. The unsecured debt adjustment does not apply to new
  banks or insured branches.

    Before adopting the current assessment rate schedules, the FDIC 
undertook a historical analysis to determine how high the reserve ratio 
would have to have been to have maintained both a positive balance and 
stable assessment rates from 1950 through 2010.\18\ The analysis shows 
that the fund reserve ratio would have needed to be approximately 2 
percent or more before the onset of the 1980s and 2008 crises to 
maintain both a positive fund balance and stable assessment rates, 
assuming, in lieu of dividends, that the long-term industry average 
nominal assessment rate would have been reduced by 25 percent when the 
reserve ratio reached 2 percent, and by 50 percent when the reserve 
ratio reached 2.5 percent.
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    \18\ The historical analysis and long-term fund management plan 
are described at 76 FR at 10675 and 75 FR 66272, 66272-281 (Oct. 27, 
2010).
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    In 2011, consistent with the FDIC's historical analysis and the 
FDIC's long-term fund management plan adopted as a result of the 
historical analysis, the Board adopted lower, moderate assessment rates 
that will go into effect when the DIF reserve ratio reaches 1.15 
percent.\19\ Pursuant to the FDIC's authority to set assessments, the 
initial base and total base assessment rates set forth in Table 4 below 
will take effect beginning the assessment period after the fund reserve 
ratio first meets or exceeds 1.15 percent, without the necessity of 
further action by the Board. The rates will remain in effect unless and 
until the reserve ratio meets or exceeds 2 percent.\20\
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    \19\ See 76 FR at 10717-720.
    \20\ For new banks, however, the rates will remain in effect 
even if the reserve ratio equals or exceeds 2 percent (or 2.5 
percent).
    \21\ The reserve ratio for the immediately prior assessment 
period must also be less than 2 percent.

[[Page 40841]]



                               Table 4--Initial and Total Base Assessment Rates *
                                           [In basis points per annum]
                               [Once the reserve ratio reaches 1.15 percent] \21\
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                                                                                                  Large & highly
                                   Risk category   Risk category   Risk category   Risk category      complex
                                         I              II              III             IV         institutions
                                                                                                        **
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Initial Base Assessment Rate....             3-7              12              19              30            3-30
Unsecured Debt Adjustment ***...       -3.5 to 0         -5 to 0         -5 to 0         -5 to 0         -5 to 0
Brokered Deposit Adjustment.....             N/A         0 to 10         0 to 10         0 to 10         0 to 10
Total Base Assessment Rate......        1.5 to 7         7 to 22        14 to 29        25 to 40       1.5 to 40
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* Total base assessment rates do not include the DIDA.
** See Sec.   327.8(f) and (g) for the definition of large and highly complex institutions.
** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured
  depository institution's initial base assessment rate; thus, for example, an insured depository institution
  with an initial base assessment rate of 3 basis points will have a maximum unsecured debt adjustment of 1.5
  basis points and cannot have a total base assessment rate lower than 1.5 basis points. The unsecured debt
  adjustment does not apply to new banks or insured branches.

    In lieu of dividends, and pursuant to the FDIC's authority to set 
assessments and consistent with the FDIC's long-term fund management 
plan, the initial base and total base assessment rates set forth in 
Table 5 below will come into effect without further action by the Board 
when the fund reserve ratio at the end of the prior assessment period 
meets or exceeds 2 percent, but is less than 2.5 percent.\22\
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    \22\ New small banks will remain subject to the assessment 
schedule in Table 5 when the reserve ratio reaches 2 percent and 2.5 
percent.

                                Table 5--Initial and Total Base Assessment Rates*
                                           [In basis points per annum]
  [If the reserve ratio for the prior assessment period is equal to or greater than 2 percent and less than 2.5
                                                    percent]
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                                                                                                  Large & highly
                                   Risk category   Risk category   Risk category   Risk category      complex
                                         I              II              III             IV         institutions
                                                                                                        **
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Initial Base Assessment Rate....             2-6              10              17              28            2-28
Unsecured Debt Adjustment ***...         -3 to 0         -5 to 0         -5 to 0         -5 to 0         -5 to 0
Brokered Deposit Adjustment.....             N/A         0 to 10         0 to 10         0 to 10         0 to 10
Total Base Assessment Rate......          1 to 6         5 to 20        12 to 27        23 to 38         1 to 38
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* Total base assessment rates do not include the DIDA.
** See Sec.   327.8(f) and (g) for the definition of large and highly complex institutions.
*** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured
  depository institution's initial base assessment rate; thus, for example, an insured depository institution
  with an initial base assessment rate of 2 basis points will have a maximum unsecured debt adjustment of 1
  basis point and cannot have a total base assessment rate lower than 1 basis point. The unsecured debt
  adjustment does not apply to insured branches.

    The initial base and total base assessment rates set forth in Table 
6 below will come into effect, again, without further action by the 
Board when the fund reserve ratio at the end of the prior assessment 
period meets or exceeds 2.5 percent.

                                Table 6--Initial and Total Base Assessment Rates*
                                           [In basis points per annum]
         [If the reserve ratio for the prior assessment period is equal to or greater than 2.5 percent]
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                                                                                                  Large & highly
                                   Risk category   Risk category   Risk category   Risk category      complex
                                         I              II              III             IV         institutions
                                                                                                        **
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Initial Base Assessment Rate....            1--5               9              15              25            1-25
Unsecured Debt Adjustment ***...       -2.5 to 0       -4.5 to 0         -5 to 0         -5 to 0         -5 to 0
Brokered Deposit Adjustment.....             N/A         0 to 10         0 to 10         0 to 10         0 to 10
Total Base Assessment Rate......        0.5 to 5       4.5 to 19        10 to 25        20 to 35       0.5 to 35
----------------------------------------------------------------------------------------------------------------
* Total base assessment rates do not include the DIDA.
** See Sec.   327.8(f) and (g) for the definition of large and highly complex institutions.
*** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured
  depository institution's initial base assessment rate; thus, for example, an insured depository institution
  with an initial base assessment rate of 1 basis point will have a maximum unsecured debt adjustment of 0.5
  basis points and cannot have a total base assessment rate lower than 0.5 basis points. The unsecured debt
  adjustment does not apply to insured branches.


[[Page 40842]]

    With respect to each of the four assessment rate schedules (Tables 
3, 4, 5 and 6), the Board has the authority to adopt rates without 
further notice and comment rulemaking that are higher or lower than the 
total assessment rates (also known as the total base assessment rates) 
shown in the tables, provided that: (1) The Board cannot increase or 
decrease rates from one quarter to the next by more than two basis 
points; and (2) cumulative increases and decreases cannot be more than 
two basis points higher or lower than the total base assessment 
rates.\23\
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    \23\ See 12 CFR 327.10(f); 76 FR at 10684.
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III. Justification for Proposal

    While the current deposit insurance assessment system effectively 
reflects the risk posed by small banks, it can be improved by 
incorporating newer data from the recent financial crisis and revising 
the methodology to directly estimate the probability of failure three 
years ahead. These improvements will allow the FDIC to more effectively 
price risk. The proposed improvements to the small bank risk-based 
assessment system will further the goals of reducing cross-
subsidization of high-risk institutions by low risk institutions and 
help ensure that banks that take on greater risks will pay more for 
deposit insurance.

IV. Description of the Proposed Rule

Summary of the Proposed Rule

    The FDIC proposes to improve the assessment system applicable to 
established small banks \24\ (that is, small banks other than new small 
banks and insured branches of foreign banks) by: (1) Revising the 
financial ratios method so that it is based on a statistical model 
estimating the probability of failure over three years; (2) updating 
the financial measures used in the financial ratios method consistent 
with the statistical model; and (3) eliminating risk categories for all 
established small banks and using the financial ratios method to 
determine assessment rates for all such banks. CAMELS composite 
ratings, however, would be used to place a maximum on the assessment 
rates that CAMELS composite 1- and 2-rated banks could be charged and 
minimums on the assessment rates that CAMELS composite 3-, 4- and 5-
rated banks could be charged.
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    \24\ Subject to exceptions, an established insured depository 
institution is one that has been federally insured for at least five 
years as of the last day of any quarter for which it is being 
assessed. 12 CFR 327.8(k).
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    Over 500 banks have failed since the end of 2007. These failures, 
together with the hundreds of failures during the banking crisis of the 
late 1980s and early 1990s, have generated a robust set of data on bank 
failures. The FDIC need no longer rely on a model that estimates a 
proxy for failure--the probability that a bank with a CAMELS composite 
rating of 1 or 2 will be downgraded to a CAMELS composite rating of 3, 
4, or 5 within 12 months; rather, the FDIC can base small bank deposit 
insurance assessments on a statistical model that estimates a bank's 
probability of failure directly.
    In addition to estimating probability of failure directly, the 
proposal improves the small bank deposit insurance assessment system in 
other ways. First, it allows the assessment system to better capture 
risk when the risk is assumed, rather than when the risk has already 
resulted in losses. The statistical model on which the proposed deposit 
insurance assessment system for small banks is based estimates the 
probability of failure within three years, balancing the need to 
capture risk when it is assumed with the need for accurate failure 
predictions. (The longer the prediction period, the less accurate a 
model's predictions will tend to be; so, for example, the FDIC cannot 
create a model that predicts failure ten years in the future with 
sufficient accuracy.) The risk-based assessment system established in 
2011 for large banks is also designed to capture performance over a 
period longer than one year. The FDIC would update the financial 
measures used in the financial ratios method to be consistent with the 
proposed statistical model. All of the proposed measures were 
statistically significant in predicting a bank's probability of failure 
within a three-year period.
    Second, because the model allows the FDIC to estimate the 
probability of failure directly, it allows the FDIC to apply the model 
to all established small banks, not just those in Risk Category I. In 
part because CAMELS ratings can incorporate information that the model 
cannot, the FDIC proposes to apply minimum or maximum initial base 
assessment rates that will depend on a bank's CAMELS composite rating. 
Thus, as it has with large banks, the FDIC would eliminate risk 
categories for small banks (other than new small banks and insured 
branches of foreign banks).
    Third, because the model predicts the probability of failure three 
years ahead using data on hundreds of failures (including failures 
during the recent crisis), it better reflects banks' actual risks and 
provides incentives to banks to monitor and reduce risks that increase 
potential losses to the DIF. Because it measures risk more accurately, 
the model reduces the subsidization of riskier banks by less risky 
banks.
    The FDIC intends to preserve the lower range of initial base 
assessment rates previously adopted by the Board. The FDIC is proposing 
that the new assessment system go into operation the quarter after the 
reserve ratio reaches 1.15 percent. At that time, under the initial 
base assessment rate schedules adopted by the Board in 2011, initial 
based assessment rates will fall automatically from the current 5 basis 
point to 35 basis point range to a 3 basis point to 30 basis point 
range, as reflected in Table 4.\25\ The FDIC adopted this schedule of 
assessment rates pursuant to its long-term fund management plan as the 
FDIC's best estimate of the assessment rates that would have been 
needed from 1950 to 2010 to maintain a positive fund balance during the 
past two banking crises.
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    \25\ As under current rules, the brokered deposit adjustment 
would continue to apply only to established small banks that are 
less than well capitalized or that have a CAMELS composite rating of 
3, 4 or 5.
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    The FDIC proposes to convert the statistical model to assessment 
rates within this 3 basis point to 30 basis point assessment range in a 
revenue neutral way; that is, in a manner that does not change the 
aggregate assessment revenue collected from established small banks. 
Specifically, the conversion would be done to ensure that aggregate 
assessments for an assessment period shortly before adoption of a final 
rule would have been approximately the same under the final rule as 
they would have been under the assessment rate schedule set forth in 
Table 4 (the rates that, under current rules, will automatically go 
into effect when the reserve ratio reaches 1.15 percent).
    To avoid unnecessary burden, the FDIC is proposing a revised small 
bank assessment system that does not require small banks to report any 
new data in their Reports of Condition and Income (Call Reports).

Implementation of the Proposed Rule

    The FDIC proposes that a final rule go into effect the quarter 
after a final rule is adopted; by their terms, however, the proposed 
revisions would not become operative until the quarter after the DIF 
reserve ratio reaches 1.15 percent.

[[Page 40843]]

Detailed Description of the Proposed Rule

Risk Differentiation
    As mentioned above, the FDIC is proposing to update the financial 
measures used in the financial ratios method consistent with the 
statistical model, eliminate risk categories for all established small 
banks, and use the financial ratios method to determine assessment 
rates for all such banks. CAMELS composite ratings would be used to 
place a maximum on the assessment rates that CAMELS composite 1- and 2-
rated banks could be charged, and minimums on the assessment rates that 
CAMELS composite 3-, 4- and 5-rated banks could be charged.
    The financial ratios method as revised would use the measures 
described in the right-hand column of Table 7 below. For comparison's 
sake, the measures currently used in the financial ratios method are 
set out on the left-hand column of the table.

  Table 7--Comparison of Current and Proposed Measures in the Financial
                              Ratios Method
------------------------------------------------------------------------
   Current risk category I financial        Proposed financial ratios
             ratios method                            method
------------------------------------------------------------------------
 Weighted Average CAMELS          Weighted Average
 Component Rating.                        CAMELS Component Rating.
 Tier 1 Leverage Ratio.........   Tier 1 Leverage Ratio.
 Net Income before Taxes/Risk-    Net Income before
 Weighted Assets.                         Taxes/Total Assets.
 Nonperforming Assets/Gross       Nonperforming Loans
 Assets.                                  and Leases/Gross Assets.
                                          Other Real Estate
                                          Owned/Gross Assets.
 Adjusted Brokered Deposit        Core Deposits/Total
 Ratio.                                   Assets.
                                          One Year Asset Growth.
 Net Loan Charge-Offs/Gross      ...............................
 Assets
 Loans Past Due 30-89 Days/      ...............................
 Gross Assets
                                          Loan Mix Index.
------------------------------------------------------------------------

    All of the proposed measures are derived from a statistical 
analysis that estimates a bank's probability of failure within three 
years. Each of the measures was statistically significant in predicting 
a bank's probability of failure over that period. The statistical 
analysis used bank financial data and CAMELS ratings from 1985 through 
2011, failure data from 1986 through 2014, and loan charge-off data 
from 2001 through 2014.\26\ Appendix 1 to the Supplementary Information 
section of this notice and the proposed Appendix E describe the 
statistical analysis and the derivation of these proposed measures in 
detail.
---------------------------------------------------------------------------

    \26\ For certain lagged variables, such as one-year asset growth 
rates, the statistical analysis also used bank financial data from 
1984.
---------------------------------------------------------------------------

    Two of the proposed measures--the weighted average CAMELS component 
rating and the tier 1 leverage ratio--are identical to the measures 
currently used in the financial ratios method.\27\ The proposed net 
income before taxes/total assets measure is also identical to the 
current measure, except that the denominator is total assets rather 
than risk-weighted assets. The current measure nonperforming assets/
gross assets includes other real estate owned. In the proposal, other 
real estate owned/gross assets is a separate measure from nonperforming 
loans and leases/gross assets.
---------------------------------------------------------------------------

    \27\ Current rules provide that, if a Risk Category I small 
bank's CAMELS component ratings change during a quarter in a way 
that changes the bank's initial base assessment rate, the initial 
base assessment rate for the period before the change shall be 
determined under the financial ratios method using the CAMELS 
component ratings in effect before the change. Beginning on the date 
of the CAMELS component ratings change, the initial base assessment 
rate for the remainder of the quarter is determined using the CAMELS 
component ratings in effect after the change. 12 CFR 
327.9(a)(4)(iv)(B). Under the proposal, this rule would remain 
essentially unchanged, but would apply to all established small 
banks rather than just banks within Risk Category I.
---------------------------------------------------------------------------

    The remaining three proposed measures--core deposits/total assets, 
one-year asset growth, and the loan mix index--are new.\28\
---------------------------------------------------------------------------

    \28\ Two measures in the current financial ratios method--net 
loan charge-offs/gross assets and loans past due 30-89 days/gross 
assets--are not used in the statistical analysis and are not among 
the proposed measures.
---------------------------------------------------------------------------

    Under the proposal, the core deposits/total assets and the one-year 
asset growth measures would replace the adjusted brokered deposit ratio 
currently used in the financial ratios method. The adjusted brokered 
deposit ratio increases a Risk Category I small bank's assessment rate 
only if the bank has both large amounts of brokered deposits and high 
asset growth.\29\ Few banks have both, so the ratio affects few 
banks.\30\ One of the proposed replacement measures--core deposits/
total assets--will tend to lower assessment rates for most small banks. 
The other proposed replacement measure--one-year asset growth--will 
tend to raise assessment rates for small banks that grow significantly 
over a year (other than through merger or by acquiring failed banks).
---------------------------------------------------------------------------

    \29\ The adjusted brokered deposit ratio can affect assessment 
rates only if a bank's brokered deposits (excluding reciprocal 
deposits) exceed 10 percent of its non-reciprocal brokered deposits 
and its assets have grown more than 40 percent in the previous 4 
years. 12 CFR 327 Appendix A to Subpart A.
    \30\ As of December 31, 2014, the adjusted brokered deposit 
ratio affected the assessment rate of 81 banks.
---------------------------------------------------------------------------

    The loan mix index is a measure of the extent to which a bank's 
total assets include higher-risk categories of loans. Each category of 
loan in a bank's loan portfolio is divided by the bank's total assets 
to determine the percentage of the bank's assets represented by that 
category of loan. Each percentage is then multiplied by that category 
of loan's historical weighted average industry-wide charge-off rate. 
The products are then summed to determine the loan mix index value for 
that bank.
    The loan categories in the loan mix index were selected based on 
the availability of category-specific charge-off rates over a 
sufficiently lengthy period (2001 through 2014) to be representative. 
The loan categories exclude credit card loans.\31\ For each loan 
category, the weighted average charge-off rate weights each industry-
wide charge-off rate for each year by the number of bank failures in 
that year. Thus, charge-off rates from 2009 through 2014, during the 
recent banking crisis, have a much greater influence on the weighted 
average charge-off rate than charge-off rates from the years before the 
crisis, when few failures occurred. The weighted averages assure that 
types of loans that have high

[[Page 40844]]

charge-off rates during downturns have an appropriate influence on 
assessment rates.
---------------------------------------------------------------------------

    \31\ Credit card loans were excluded from the loan mix index 
because they produced anomalously high assessment rates for banks 
with significant credit card loans. Credit card loans have very high 
charge-off rates, which the loan mix index can capture, but they 
also tend to have very high interest rates to compensate. In 
addition, few small banks have significant concentrations of credit 
card loans. Consequently, credit card loans are omitted from the 
index.
---------------------------------------------------------------------------

    Table 8 below illustrates how the loan mix index is calculated for 
a hypothetical bank.
---------------------------------------------------------------------------

    \32\ As discussed above, the loan mix index uses loan charge-off 
data from 2001 through 2014. As discussed in greater detail below, 
if financial, failure and charge-off data from later years is 
available at the time the FDIC adopts a final rule pursuant to this 
proposal, the FDIC may update the statistical model, including the 
loan mix index, using the methodology described in Appendix E.
    The table shows industry-wide weighted charge-off percentage 
rates, the loan category as a percentage of total assets and the 
products to two decimal places. In fact, the FDIC proposes to use 
seven decimal places for industry-wide weighted charge-off 
percentage rates, and as many decimal places as permitted by the 
FDIC's computer systems for the loan category as a percentage of 
total assets and the products. The total (the loan mix index itself) 
would use three decimal places.

                              Table 8--Loan Mix Index for a Hypothetical Bank \32\
----------------------------------------------------------------------------------------------------------------
                                                                                   Loan category
                                                                                   as a percent
                                                                     Weighted           of        Product of two
                                                                    charge-off     hypothetical   columns to the
                                                                   rate percent    bank's total        left
                                                                                      assets
----------------------------------------------------------------------------------------------------------------
Construction & Development......................................            4.50            1.40            6.29
Commercial & Industrial.........................................            1.60           24.24           38.75
Leases..........................................................            1.50            0.64            0.96
Other Consumer..................................................            1.46           14.93           21.74
Loans to Foreign Government.....................................            1.34            0.24            0.32
Real Estate Loans Residual......................................            1.02            0.11            0.11
Multifamily Residential.........................................            0.88            2.42            2.14
Nonfarm Nonresidential..........................................            0.73           13.71            9.99
1-4 Family Residential..........................................            0.70            2.27            1.58
Loans to Depository banks.......................................            0.58            1.15            0.66
Agricultural Real Estate........................................            0.24            3.43            0.82
Agriculture.....................................................            0.24            5.91            1.44
                                                                 -----------------------------------------------
    SUM (Loan Mix Index)........................................  ..............           70.45           84.79
----------------------------------------------------------------------------------------------------------------

    The weighted charge-off rates in the table are the same for all 
small banks. The remaining two columns vary from bank to bank, 
depending on the bank's loan portfolio. For each loan type, the value 
in the rightmost column is calculated by multiplying the weighted 
charge-off rate by the bank's loans of that type as a percent of its 
total assets. In this illustration, the sum of the right-hand column 
(84.79) is the loan mix index for this bank.
    As in the current methodology for Risk Category I small banks, 
under the proposal the weighted CAMELS components and financial ratios 
would be multiplied by statistically derived pricing multipliers, the 
products would be summed, and the sum would be added to a uniform 
amount that would be: (a) Derived from the statistical analysis, (b) 
adjusted for assessment rates set by the FDIC, and (c) applied to all 
established small banks. The total would equal the bank's initial 
assessment rate. If, however, the resulting rate were below the minimum 
initial assessment rate for small banks, the bank's initial assessment 
rate would be the minimum initial assessment rate; if the rate were 
above the maximum, then the bank's initial assessment rate would be the 
maximum initial rate for small banks. In addition, if the resulting 
rate for a small bank were below the minimum or above the maximum 
initial assessment rate applicable to banks with the bank's CAMELS 
composite rating, the bank's initial assessment rate would be the 
respective minimum or maximum assessment rate for a small bank with its 
CAMELS composite rating. This approach would allow rates to vary 
incrementally across a wide range of rates for all small banks (other 
than new small banks and insured branches). The conversion of the 
statistical model to pricing multipliers and uniform amount are 
discussed further below and in detail in the proposed Appendix E. 
Appendix E also discusses the derivation of the pricing multipliers and 
the uniform amount.
Adjustments to Initial Base Assessment Rates
    As under current rules: (1) The DIDA would continue to apply to all 
banks; (2) the unsecured debt adjustment would continue to apply to all 
banks except new banks and insured branches; and (3) the brokered 
deposit adjustment would continue to apply to all small banks except 
those that are well capitalized and have a CAMELS composite rating of 1 
or 2.\33\ As under current rules, if, during a quarter, a bank's 
supervisory rating changes from a CAMELS composite 1 or 2 rating to a 
CAMELS composite 3, 4 or 5 rating or vice versa, the bank would be 
subject to the brokered deposit adjustment for the portion of the 
quarter that it did not have a CAMELS composite 1 or 2 rating.\34\
---------------------------------------------------------------------------

    \33\ As under current rules, however, no adjustments would apply 
to bridge banks or conservatorships. These banks would continue to 
be charged the minimum assessment rate applicable to small banks. As 
under current rules, the brokered deposit adjustment would not apply 
to insured branches.
    \34\ If the bank were less than well capitalized, it would be 
subject to the brokered deposit adjustment for the whole quarter.
---------------------------------------------------------------------------

Proposed Assessment Rates
    As described above and as set out in the rate schedule in Table 9 
below, for established small banks, the FDIC proposes to eliminate risk 
categories, but maintain the range of initial assessment rates (3 basis 
points to 30 basis points) that the Board has previously determined 
will go into effect starting the quarter after the reserve ratio 
reaches 1.15 percent and include a maximum assessment rate that would 
apply to CAMELS composite 1- and 2-rated banks and the minimum 
assessment rates that would apply to CAMELS composite 3-rated banks and 
CAMELS composite 4- and 5-rated banks.\35\ Unless revised by the Board, 
these rates would remain in effect so long as the reserve ratio is less 
than 2 percent.
---------------------------------------------------------------------------

    \35\ See 12 CFR 327.10(b); 76 FR at 10718.

[[Page 40845]]



                               Table 9--Initial and Total Base Assessment Rates *
                                           [In basis points per annum]
                               [Once the reserve ratio reaches 1.15 percent] \36\
----------------------------------------------------------------------------------------------------------------
                                                              Established small banks
                                                 ------------------------------------------------ Large & highly
                                                                 CAMELS Composite                     complex
                                                 ------------------------------------------------  institutions
                                                      1 or 2             3            4.or 5            **
----------------------------------------------------------------------------------------------------------------
Initial Base Assessment Rate....................         3 to 16         6 to 30        16 to 30         3 to 30
Unsecured Debt Adjustment ***...................         -5 to 0         -5 to 0         -5 to 0         -5 to 0
Brokered Deposit Adjustment.....................     0 to10 ****          0 to10          0 to10         0 to 10
Total Base Assessment Rate......................       1.5 to 26         3 to 40        11 to 40       1.5 to 40
----------------------------------------------------------------------------------------------------------------
* Total base assessment rates in the table do not include the DIDA.
** See Sec.   327.8(f) and (g) for the definition of large and highly complex institutions.
*** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured
  depository institution's initial base assessment rate; thus, for example, an insured depository institution
  with an initial base assessment rate of 3 basis points will have a maximum unsecured debt adjustment of 1.5
  basis points and cannot have a total base assessment rate lower than 1.5 basis points.
**** The brokered deposit adjustment applies to established small banks with CAMELS composite ratings of 1 or 2
  only if they are less than well capitalized.

    As discussed above, the FDIC adopted the range of assessment rates 
in this rate schedule pursuant to its long-term fund management plan as 
the FDIC's best estimate of the assessment rates that would have been 
needed from 1950 to 2010 to maintain a positive fund balance during the 
past two banking crises. This assessment rate schedule remains the 
FDIC's best estimate of the long-term rates needed. Consequently, and 
as discussed in greater detail further below and in detail in Appendix 
E, the FDIC proposes to convert its statistical model to assessment 
rates within this 3 basis point to 30 basis point assessment range in a 
revenue neutral way.
---------------------------------------------------------------------------

    \36\ The reserve ratio for the immediately prior assessment 
period must also be less than 2 percent.
---------------------------------------------------------------------------

    The FDIC proposes to maintain the range of initial assessment 
rates, set out in the rate schedule in Table 10 below, that the Board 
has previously determined will go into effect starting the quarter 
after the reserve ratio reaches or exceeds 2 percent and is less than 
2.5 percent. Unless revised by the Board, these rates would remain in 
effect so long as the reserve ratio is in this range. Table 10 also 
includes the maximum assessment rates that will apply to CAMELS 
composite 1- and 2-rated banks and the minimum assessment rates that 
will apply to CAMELS composite 3-rated banks and CAMELS composite 4- 
and 5-rated banks.

                               Table 10--Initial and Total Base Assessment Rates *
                                           [In basis points per annum]
  [If the reserve ratio for the prior assessment period is equal to or greater than 2 percent and less than 2.5
                                                    percent]
----------------------------------------------------------------------------------------------------------------
                                                              Established small banks
                                                 ------------------------------------------------ Large & highly
                                                                 CAMELS Composite                     complex
                                                 ------------------------------------------------  institutions
                                                      1 or 2             3            4 or 5            **
----------------------------------------------------------------------------------------------------------------
Initial Base Assessment Rate....................         2 to 14         5 to 28        14 to 28         2 to 28
Unsecured Debt Adjustment ***...................         -5 to 0         -5 to 0         -5 to 0         -5 to 0
Brokered Deposit Adjustment.....................    0 to 10 ****         0 to 10         0 to 10         0 to 10
Total Base Assessment Rate......................         1 to 24       2.5 to 38         9 to 38         1 to 38
----------------------------------------------------------------------------------------------------------------
* Total base assessment rates in the table do not include the DIDA.
** See Sec.   327.8(f) and (g) for the definition of large and highly complex institutions.
*** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured
  depository institution's initial base assessment rate; thus, for example, an insured depository institution
  with an initial base assessment rate of 2 basis points will have a maximum unsecured debt adjustment of 1
  basis point and cannot have a total base assessment rate lower than 1 basis point.
**** The brokered deposit adjustment applies to established small banks with CAMELS composite ratings of 1 or 2
  only if they are less than well capitalized.

    The FDIC proposes to maintain the range of initial assessment 
rates, set out in the rate schedule in Table 11 below, that the Board 
has previously determined will go into effect, again without further 
action by the Board, when the fund reserve ratio at the end of the 
prior assessment period meets or exceeds 2.5 percent. Unless changed by 
the Board, these rates would remain in effect so long as the reserve 
ratio is at or above this level. Table 11 also includes the maximum 
assessment rates that will apply to CAMELS composite 1- and 2-rated 
banks and the minimum assessment rates that will apply to CAMELS 
composite 3-rated banks and CAMELS composite 4- and 5-rated banks.

[[Page 40846]]



                               Table 11--Initial and Total Base Assessment Rates *
                                           [In basis points per annum]
         [If the reserve ratio for the prior assessment period is equal to or greater than 2.5 percent]
----------------------------------------------------------------------------------------------------------------
                                                         Established small banks
                                       ---------------------------------------------------------- Large & highly
                                                            CAMELS Composite                          complex
                                       ----------------------------------------------------------  institutions
                                                 1 or 2                  3            4 or 5            **
----------------------------------------------------------------------------------------------------------------
Initial Base Assessment Rate..........  1 to 13.................         4 to 25        13 to 25         1 to 25
Unsecured Debt Adjustment ***.........  -5 to 0.................         -5 to 0         -5 to 0         -5 to 0
Brokered Deposit Adjustment...........  0 to 10 ****............         0 to 10         0 to 10         0 to 10
Total Base Assessment Rate............  0.5 to 23...............         2 to 35         8 to 35       0.5 to 35
----------------------------------------------------------------------------------------------------------------
* Total base assessment rates in the table do not include the DIDA.
** See Sec.   327.8(f) and (g) for the definition of large and highly complex institutions.
*** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured
  depository institution's initial base assessment rate; thus, for example, an insured depository institution
  with an initial base assessment rate of 1 basis point will have a maximum unsecured debt adjustment of 0.5
  basis points and cannot have a total base assessment rate lower than 0.5 basis points.
**** The brokered deposit adjustment applies to established small banks with CAMELS composite ratings of 1 or 2
  only if they are less than well capitalized.

    With respect to each of the three assessment rate schedules (Tables 
9, 10 and 11), the FDIC proposes that the Board would retain its 
authority to uniformly adjust assessment rates up or down from the 
total base assessment rate schedule without further rulemaking, as long 
as adjustment does not exceed 2 basis points. Also, with respect to 
each of the three schedules, the FDIC proposes that, if a bank's CAMELS 
composite or component ratings change during a quarter in a way that 
changes the institution's initial base assessment rate, then its 
assessment rate would be determined separately for each portion of the 
quarter in which it had different CAMELS composite or component 
ratings.
Conversion of Statistical Model to Pricing Multipliers and Uniform 
Amount
    As discussed above, the FDIC proposes to convert its statistical 
model to assessment rates set out in Table 9 in a revenue neutral 
manner.\37\ Specifically, and as described in detail in Appendix E, the 
FDIC proposes to convert the statistical model to assessment rates to 
ensure that aggregate assessments for an assessment period shortly 
before adoption of a final rule would have been approximately the same 
under the final rule as they would have been under the assessment rate 
schedule set forth in Table 4 (the rates that, under current rules, 
will automatically go into effect when the reserve ratio reaches 1.15 
percent).
---------------------------------------------------------------------------

    \37\ The FDIC proposes to convert a linear version of its model, 
which was estimated in a non-linear manner. (See Appendix E.) The 
conversion using a linear version of the model preserves the same 
rank ordering as the non-linear model, but using the linear version 
of the model allows initial assessment rates to be expressed as a 
linear function of the model variables. The FDIC also used a linear 
version of its original non-linear downgrade probability statistical 
model when it instituted variable rates within Risk Category 1 
(effective January 1, 2007).
---------------------------------------------------------------------------

    To illustrate the conversion, Table 12 below sets out the pricing 
multipliers and uniform amounts that would have resulted if the FDIC 
had converted the statistical model to the assessment rate schedule set 
out in Table 9 (with a range of assessment rates from 3 basis points to 
30 basis points) so that, for the fourth quarter of 2014, aggregate 
assessments for all established small banks under the proposal would 
have equaled, as closely as reasonably possible, aggregate assessments 
for all established small banks had the assessment rate schedule in 
Table 4 been in effect for that assessment period.\38\ Partly because 
the actual conversion will be based upon a later quarter (and partly 
for the reasons discussed directly below), the pricing multipliers and 
the uniform amount shown in Table 12 are likely to differ somewhat from 
those in the final rule.
---------------------------------------------------------------------------

    \38\ Initial assessment rates under the rate schedule actually 
in effect for the fourth quarter of 2014 ranged from 5 basis points 
to 35 basis points, since the DIF reserve ratio was under 1.15 
percent.

      Table 12--Pricing Multipliers and the Uniform Amount Under a
  Hypothetical Conversion of the Statistical Model to Assessment Rates
                   Based on the Fourth Quarter of 2014
------------------------------------------------------------------------
                                                              Pricing
                     Model measures                         multiplier
------------------------------------------------------------------------
Weighted Average CAMELS Component Rating................           1.731
Tier 1 Leverage Ratio...................................          -1.337
Net Income Before Taxes/Total Assets....................          -0.652
Nonperforming Loans and Leases/Gross Assets.............           0.924
Other Real Estate Owned/Gross Assets....................           0.620
Core Deposits/Total Assets..............................          -0.139
One Year Asset Growth...................................           0.043
Loan Mix Index..........................................           0.066
Uniform Amount..........................................          19.376
------------------------------------------------------------------------

Updating the Statistical Model, Pricing Multipliers and Uniform Amount
    The statistical analysis used bank financial data and CAMELS 
ratings from 1985 through 2011, failure data from 1986 through 2014 and 
loan charge-off data from 2001 through 2014. The FDIC proposes to 
retain the flexibility to update the statistical model from time to 
time using financial, failure and charge-off data from later years and 
publish a new loan mix index, uniform amount and pricing multipliers 
based on the updated model without further notice-and-comment 
rulemaking. Any update to the model would be done pursuant to the 
methodology described in Appendix E. No new financial ratios or other 
measures would be introduced into the model without notice-and-comment 
rulemaking. Because the analysis would continue to use earlier years' 
data as well, changes in estimations of failure probability should 
usually be relatively small. Similarly, if financial, failure and 
charge-off data from later years is available at the time the FDIC 
adopts a final rule pursuant to this proposal, the FDIC may update the 
statistical model,

[[Page 40847]]

including the loan mix index, using the methodology described in 
Appendix E.

Insured Branches of Foreign Banks and New Small Banks

    The FDIC proposes to make no changes to the rules governing the 
assessment rate schedules applicable to insured branches or to the 
assessment rate schedule applicable to new small banks. The FDIC also 
proposes to make no changes to the way in which assessment rates for 
insured branches and new small banks are determined.
Insured Branches
    The current risk-based deposit insurance assessment system for 
small banks assigns insured branches an assessment risk classification 
that is based on the FDIC's consideration of supervisory evaluations 
provided by the institution's primary federal regulator.\39\ Within 
Risk Category I, each insured branch's assessment rate is based on 
these supervisory evaluations.\40\ Insured branches not in Risk 
Category I are charged the initial base assessment rate for the risk 
category to which they are assigned.\41\ Once the DIF reserve ratio 
reaches 1.15 percent, 2 percent, and 2.5 percent, assessment rate 
schedules previously adopted by the Board will go into effect and 
remain in place for insured branches.
---------------------------------------------------------------------------

    \39\ These supervisory evaluations result in the assignment of 
supervisory ratings referred to as ROCA ratings. ROCA stands for 
Risk Management, Operational Controls, Compliance, and Asset 
Quality. Like CAMELS components, ROCA component ratings range from a 
``1'' (best rating) to a ``5'' rating (worst rating). A Risk 
Category I insured branch generally has a ROCA composite rating of 1 
or 2.
    \40\ Specifically, the assessment rate depends on the insured 
branch's weighted average ROCA component ratings. The weights 
applied to individual ROCA component ratings are 35 percent, 25 
percent, 25 percent, and 15 percent, respectively.
    \41\ No insured branch in any risk category is subject to the 
unsecured debt adjustment or brokered deposit adjustment. Insured 
branches are subject to the DIDA.
---------------------------------------------------------------------------

    The FDIC does not propose changing the way assessment rates 
applicable to insured branches are determined.\42\ Insured branches do 
not report the information that the FDIC would need to apply the 
financial ratios method to them.\43\ Moreover, because insured branches 
operate as extensions of a foreign bank's global banking operations, 
they pose unique risks, which the financial ratios method may not be 
able to capture. An insured branch operates without capital of its own 
(capital is held by the foreign bank), its business strategies are 
typically directed by the foreign bank, it relies extensively on the 
foreign bank for liquidity and funding, and it often has considerable 
country and transfer risk exposures not typically found in other 
insured institutions of similar size. Insured branches also present 
potentially challenging concerns in the event of failure.
---------------------------------------------------------------------------

    \42\ As of March 31, 2015, there were only 9 insured branches 
that file regulatory financial submissions (FFIEC Form 002). (One of 
these branches, however, files for itself and another branch of the 
same foreign bank that does not file separately.)
    \43\ For example, insured branches of foreign banks do not 
report earnings and report only limited balance sheet information in 
FFIEC Form 002.
---------------------------------------------------------------------------

New Small Banks
    New small banks are currently assigned to risk categories in the 
same manner as all other small banks. All new small banks in Risk 
Category I, however, are charged the maximum rate applicable to Risk 
Category I. New small banks not in Risk Category I are charged the 
initial base assessment rate for the risk category to which they are 
assigned.\44\ Once the DIF reserve ratio reaches 1.15 percent, new 
small banks will be charged initial rates under the previously adopted 
rate schedule that automatically goes into effect then. This rate 
schedule will remain in place even if the reserve ratio equals or 
exceeds 2 percent or 2.5 percent.\45\ After applying all possible 
adjustments, minimum and maximum total assessment rates for new small 
banks in each risk category are set forth in Table 13 below.
---------------------------------------------------------------------------

    \44\ New small banks are subject to the DIDA. New small banks in 
Risk Categories II, III, and IV are subject to the brokered deposit 
adjustment. New small banks are not subject to the unsecured debt 
adjustment.
    \45\ As with other assessment rates, the Board has the ability 
to adopt actual rates that are higher or lower than these total 
assessment rates without the necessity of further notice and comment 
rulemaking, provided that: (1) The Board cannot increase or decrease 
rates from one quarter to the next by more than two basis points; 
and (2) cumulative increases and decreases cannot be more than two 
basis points higher or lower than the total base rates.

                            Table 13--Total Base Assessment Rates, New Small Banks *
                                           [In basis points per annum]
----------------------------------------------------------------------------------------------------------------
                                                   Risk category   Risk category   Risk category   Risk category
                                                         I              II              III             IV
----------------------------------------------------------------------------------------------------------------
Initial Assessment Rate.........................               7              12              19              30
Brokered Deposit Adjustment (added).............             N/A         0 to 10         0 to 10         0 to 10
Total Assessment Rate...........................               7        12 to 22        19 to 29        30 to 40
----------------------------------------------------------------------------------------------------------------
* The unsecured debt adjustment does not apply to new banks. Total assessment rates do not include the DIDA.

    The FDIC does not propose changing the way assessment rates 
applicable to new small banks are determined.\46\ The financial data on 
which the financial ratios method is based tends to be harder to 
interpret and less meaningful for new small banks. A new bank undergoes 
rapid changes in the scale and scope of operations, often causing 
financial ratios to be fairly volatile. In addition, a new bank's loan 
portfolio is often unseasoned, and therefore it is difficult to assess 
credit risk based solely on current financial ratios.\47\

[[Page 40848]]

Further, on average, new banks have a higher failure rate than 
established institutions.
---------------------------------------------------------------------------

    \46\ Current rules provide that: (1) under specified conditions, 
certain subsidiary small banks will be considered established rather 
than new, 12 CFR 327.8(k)(4); and (2) the time that a bank has spent 
as a federally insured credit union is included in determining 
whether a bank is established, 12 CFR 327.8(k)(5). If a Risk 
Category I small bank is considered established under these rules, 
but has no CAMELS component ratings, its initial assessment rate is 
2 basis points above the minimum initial assessment rate applicable 
to Risk Category I (which is equivalent to 2 basis points above the 
minimum initial assessment rate for established small banks) until 
it receives CAMELS component ratings. Thereafter, the assessment 
rate is determined by annualizing, where appropriate, financial 
ratios obtained from all quarterly Call Reports that have been 
filed, until the bank files four quarterly Call Reports. For small 
banks that are considered established under these rules, but do not 
have CAMELS component ratings, the FDIC proposes the following:
    1. If the bank has no CAMELS composite rating, its initial 
assessment rate would be 2 basis points above the minimum initial 
assessment rate for established small banks until it receives a 
CAMELS composite rating; and
    2. If the bank has a CAMELS composite rating but no CAMELS 
component ratings, its initial assessment rate would be determined 
using the financial ratios method by substituting its CAMELS 
composite rating for its weighted average CAMELS component rating 
and, if the bank has not yet filed four quarterly Call Reports, by 
annualizing, where appropriate, financial ratios obtained from all 
quarterly Call Reports that have been filed.
    \47\ Empirical studies show that new banks exhibit a ``life 
cycle'' pattern, and it takes close to a decade after its 
establishment for a new bank to mature. Despite low profitability 
and rapid growth, banks that are three years or newer have, on 
average, a probability of failure lower than established banks, 
perhaps owing to large capital cushions and close supervisory 
attention. However, after three years, new banks' failure 
probability, on average, surpasses that of established banks. New 
banks typically grow more rapidly than established banks and tend to 
engage in more high-risk lending activities funded by large 
deposits. Studies based on data from the 1980s showed that asset 
quality deteriorated rapidly for many new banks as a result, and 
failure probability (conditional upon survival in prior years) 
reached a peak by the ninth year. Many financial ratios of new banks 
generally begin to resemble those of established banks by about the 
seventh or eighth year of their operation. See Chiwon Yom, 
``Recently Chartered Banks'' Vulnerability to Real Estate Crisis,'' 
FDIC Banking Review 17 (2005): 115 and Robert DeYoung, ``For How 
Long Are Newly Chartered Banks Financially Fragile?'' Federal 
Reserve Bank of Chicago Working Paper Series 2000-09.
---------------------------------------------------------------------------

V. Expected Effects of the Proposed Rule

Effect on Assessment Rates

    To illustrate the effects of the proposal on small bank assessment 
rates, the FDIC compared actual assessment rates of established small 
banks as of the end of 2014, using a range of initial assessment rates 
of 5 basis points to 35 basis points with hypothetical assessment rates 
under Table 9 of the proposal (which has an overall range of assessment 
rates of 3 basis points to 30 basis points).\48\ The proportion (and 
number) of established small banks paying the minimum initial 
assessment rate would have increased significantly, from 23.3 percent 
in actuality (1,493 small banks) to 56.0 percent under the proposal 
(3,584 small banks). The proportion (and number) of established small 
banks paying the maximum assessment rate would have decreased from 0.7 
percent of established small banks in actuality (43 small banks) to 0.1 
percent of established small banks under the proposal (7 small banks). 
Most established small banks (5,922 or 92.5 percent) would have had 
rate decreases. On average, Risk Category I established small banks 
would have had a rate decrease of 2.4 basis points, and Risk Category 
II, III, and IV established small banks would have had a rate decrease 
of 6.5 basis points. Of the Risk Category II, III, and IV established 
small banks, 96.3 percent would have had rate decreases; the average 
decrease would have been 6.8 basis points. 481 established small banks 
(7.5 percent of established small banks) would have had rate increases. 
Of the Risk Category I established small banks, 8.0 percent would have 
had rate increases; the average increase would have been 1.6 basis 
points.
---------------------------------------------------------------------------

    \48\ The proposal assumes a range of initial assessment rates 
from 3 basis points to 30 basis points. For purposes of determining 
assessment rates for the illustration, the FDIC converted the 
statistical model to a range of assessment rates from 3 basis points 
to 30 basis points so that, for the fourth quarter of 2014, 
aggregate assessments for all established small banks under the 
proposal would have equaled, as closely as reasonably possible, 
aggregate assessments for all established small banks under the rate 
schedule in Table 4 (the rates that, under current rules, will 
automatically go into effect when the reserve ratio reaches 1.15 
percent). Initial assessment rates under the rate schedule actually 
in effect for the fourth quarter of 2014 ranged from 5 basis points 
to 35 basis points, since the DIF reserve ratio was under 1.15 
percent.
---------------------------------------------------------------------------

    Chart 1 below graphically compares the distribution of established 
small bank initial assessment rates under this illustration. The 
horizontal axis in the chart represents established small banks ranked 
by risk, from the least risky on the left to the most risky on the 
right. Because actual risk rankings under the current small bank 
deposit insurance assessment system differ from risk rankings under the 
proposal, a particular point on the horizontal axis is not likely to 
represent the same bank for the current system and the proposal. Thus, 
the chart does not show how an individual bank's assessment would 
change under the proposal; it simply compares the distribution of 
assessment rates under the current system to the distribution under the 
proposal.

[[Page 40849]]

[GRAPHIC] [TIFF OMITTED] TP13JY15.147

    To further illustrate the effects of the proposal on small bank 
assessment rates, the FDIC compared hypothetical assessment rates under 
the proposal with the assessment rates established small banks would 
have been charged as of the end of 2014 if the assessment rate schedule 
that, under current rules, will go into effect when the reserve ratio 
reaches 1.15 percent had been in effect. The proportion of established 
small banks paying the minimum initial assessment rate would also have 
increased from 23.3 percent in actuality to 56.0 percent under the 
proposal and the proportion of established small banks paying the 
maximum assessment rate would also have decreased from 0.7 percent of 
established small banks in actuality to 0.1 percent of established 
small banks under the proposal. Most established small banks (3,814 or 
59.5 percent) would have had rate decreases. On average, Risk Category 
I established small banks would have had a rate decrease of 0.4 basis 
points, and Risk Category II, III, and IV established small banks would 
have had a rate decrease of 3.7 basis points. Of the Risk Category II, 
III, and IV established small banks, 90.9 percent would have had rate 
decreases; the average decrease would have been 4.4 basis points. 1,268 
established small banks (19.8 percent of established small banks) would 
have had rate increases. Of the Risk Category I established small 
banks, 21.4 percent would have had rate increases; the average increase 
would have been 1.9 basis points.
    Chart 2 below graphically compares the distribution of established 
small bank initial assessment rates under this illustration.

[[Page 40850]]

[GRAPHIC] [TIFF OMITTED] TP13JY15.148

Effect on Capital and Earnings

    Appendix 2 to the Supplementary Information section of this notice 
discusses the effect of the proposal on the capital and earnings of 
small established banks in detail. Annualizing fourth quarter 2014 
balance sheet data, Appendix 2 analyzes the effects of the proposal on 
capital and income in two ways: (1) The effect of the proposal compared 
to the current small bank deposit insurance assessment system under the 
rate schedule in Table 3 (with an initial assessment rate range of 5 
basis points to 35 basis points) (the first comparison); and (2) the 
effect of the proposal compared to the current small bank deposit 
insurance assessment system under the rate schedule in Table 4 (with an 
initial assessment rate range of 3 basis points to 30 basis points; 
this rate schedule is to go into effect the quarter after the DIF 
reserve ratio reaches 1.15 percent) (the second comparison).
    Under either comparison, the proposal would cause no small banks to 
fall below a 4 percent or 2 percent leverage ratio that would otherwise 
be above these thresholds. Similarly, the proposal would cause no small 
banks to rise above a 2 percent leverage ratio that would otherwise be 
below this threshold. Two established small banks facing a decrease in 
assessments under the first comparison and one established small bank 
facing a decrease in assessments under the second comparison would, as 
a result of the proposal, have their leverage ratios rise above 4 
percent, when they would have been below 4 percent otherwise.
    In the first comparison, only approximately 7 percent of profitable 
established small banks and approximately 6 percent of unprofitable 
small banks would face a rate increase; all but a very few (26) banks 
would have resulting declines in income (or increases in losses, where 
the bank is unprofitable) of 5 percent or less. As discussed above, 
assessment rates for approximately 92 percent of established small 
banks would decline, resulting in increases in income (or decreases in 
losses), some of which would be substantial.
    In the second comparison, approximately 20 percent of profitable 
established small banks and approximately 14 percent of unprofitable 
established small banks would face a rate increase; all but 111 
established small banks would have resulting declines in income (or 
increases in losses, where the bank is unprofitable) of 5 percent or 
less. As discussed above, assessment rates for approximately 60 percent 
of established

[[Page 40851]]

small banks would decline, resulting in increases in income (or 
decreases in losses), some of which would be substantial.
    In sum, because the proposed revisions are intended to generate the 
same total revenue from small banks as would have been generated absent 
the proposal, the revisions should, overall, have no effect on the 
capital and earnings of the banking industry, although the revisions 
will affect the earnings and capital of individual institutions.

VI. Backtesting

    To evaluate the proposed revisions to the risk-based deposit 
insurance assessment system for small banks, the FDIC tested how well 
the revised system would have differentiated between banks that failed 
and those that did not during the recent crisis compared to the current 
small bank deposit insurance assessment system.
    Table 14 compares accuracy ratios for the proposed system and the 
current small bank deposit insurance assessment system. An accuracy 
ratio compares how well each approach would have discriminated between 
banks that failed within the projection period and those that did not. 
The projection period in each case is the three years following the 
date of the projection (the first column), which is the last day of the 
year given. Thus, for example, the accuracy ratios for 2006 reflect how 
well each approach would have discriminated in its projection between 
banks that failed and those that did not from 2007 through 2009.\49\ A 
``perfect'' projection would receive an accuracy ratio of 1; a random 
projection would receive an accuracy ratio of 0.\50\
---------------------------------------------------------------------------

    \49\ The current small bank deposit insurance assessment system 
did not exist at the end of 2006 and existed in somewhat different 
forms in years before 2011. The comparison assumes that the small 
bank deposit insurance assessment system in its current form existed 
in each year of the comparison.
    \50\ A ``perfect'' projection is defined as one where the 
projection rates every bank that fails over the projection period as 
more risky than every bank that does not fail. A random projection 
is one where the projection does no better than chance; that is, any 
given percentage of banks with projected higher risk will include 
the same percentage of banks that fail over the projection period. 
Thus, for example, in a random projection, the 10 percent of banks 
that receive the highest risk projections will include 10 percent of 
the banks that fail over the projection period; the 20 percent of 
banks that receive the highest risk projections will include 20 
percent of the banks that fail over the projection period, and so 
on.

Table 14--Accuracy Ratio Comparison Between the Proposal and the Current Small Bank Deposit Insurance Assessment
                                                     System
----------------------------------------------------------------------------------------------------------------
                                                                                                 Accuracy ratio
                                                                              Accuracy ratio   for the proposal--
                                                           Accuracy ratio    for the current     accuracy ratio
                   Year of projection                     for the proposal      small bank      for the current
                                                                 *          assessment system        system
 
                                                                       (A)                (B)              (A-B)
                                                        --------------------------------------------------------
2006...................................................             0.7029             0.3491             0.3539
2007...................................................             0.7779             0.5616             0.2163
2008...................................................             0.8930             0.7825             0.1105
2009...................................................             0.9398             0.9015             0.0383
2010...................................................             0.9657             0.9394             0.0262
2011...................................................             0.9485             0.9323             0.0161
----------------------------------------------------------------------------------------------------------------
* The accuracy ratio for the proposal is based on the conversion of the statistical model as estimated through
  2014.

    The table reveals that, while the current system did relatively 
well at capturing risk and predicting failures in more recent years, 
the proposed system would have not only done significantly better 
immediately before the recent crisis and at the beginning of the 
crisis, but also better overall.\51\ In the early part of the crisis, 
when CAMELS ratings had not fully reflected the worsening condition of 
many banks, the proposed system would have recognized risk far better 
than the current system, primarily because the rates under the proposed 
system are not constrained by risk categories. As the crisis progressed 
and CAMELS ratings more fully reflected crisis conditions, the 
superiority of the proposed system decreased, but it still performed 
better than the current system.
---------------------------------------------------------------------------

    \51\ As implied in the footnote to Table 14, the accuracy ratios 
in the table for the proposed system are based on in-sample 
backtesting. In-sample backtesting compares model forecasts to 
actual outcomes where those outcomes are included in the data used 
in model development. Out-of-sample backtesting is the comparison of 
model predictions against outcomes where those outcomes are not used 
as part of the model development used to generate predictions. Out-
of-sample backtesting, discussed in Appendix 1 of the Supplementary 
Information section of this notice, also shows that, while the 
current assessment system for small banks did relatively well at 
predicting failures in more recent years, the proposed system would 
have done significantly better immediately before the recent crisis 
and at the beginning of the crisis, but also better overall.
---------------------------------------------------------------------------

    Appendix 1 to the Supplementary Information section of this notice 
contains a more detailed description of the FDIC's backtests of the 
proposal.

VII. Alternatives Considered

Alternative Minimum and Maximum Assessment Rates Based on CAMELS 
Composite Ratings

    The FDIC considered imposing no minimum or maximum initial 
assessment rates based on a bank's CAMELS composite rating, which would 
have allowed initial assessment rates to vary between the minimum and 
maximum initial assessment rates of the entire rate schedule without 
regard to a bank's CAMELS composite rating (the unbounded variation). 
Thus, for example, under the 3 basis point to 30 basis point initial 
assessment range, a CAMELS composite 5 rated bank could, in principle, 
have paid a 3 basis point initial rate and a CAMELS composite 1 rated 
bank could, in principle, have paid a 30 basis point initial rate. As 
Table 15 shows, the accuracy ratios for this unbounded variation would 
have been similar to the accuracy ratios for the proposal.

[[Page 40852]]



              Table 15--Accuracy Ratio Comparison Between the Proposal and the Unbounded Variation
----------------------------------------------------------------------------------------------------------------
                                                                                              Accuracy ratio for
                                                         Accuracy ratio     Accuracy ratio      the unbounded
                  Year of projection                   for the unbounded   for the proposal  variation--accuracy
                                                           variation              *             ratio for the
                                                                                                proposal (A-B)
                                                                     (A)                (B)  ...................
                                                      ----------------------------------------------------------
2006.................................................             0.6959             0.7029             -0.0070
2007.................................................             0.7779             0.7779              0.0001
2008.................................................             0.9121             0.8930              0.0191
2009.................................................             0.9407             0.9398              0.0010
2010.................................................             0.9670             0.9657              0.0013
2011.................................................             0.9514             0.9485              0.0029
----------------------------------------------------------------------------------------------------------------
* The accuracy ratios for the variation and for the proposal are based on the conversion of the statistical
  model as estimated through 2014.

    The FDIC decided not to propose the unbounded variation, however. 
Other than taking into account weighted average CAMELS component 
ratings, the statistical model uses historical financial data to 
estimate average relationships between financial measures and the risk 
of failure. The statistical model does not take into account 
idiosyncratic or unquantifiable risk or risk mitigators (e.g., entering 
or exiting a risky line of lending; having inexperienced or experienced 
management, reducing or tightening underwriting requirements), again 
except through weighted average CAMELS component ratings. The model 
does take into account weighted average CAMELS component ratings, but 
it assigns the same weight to them for each bank. Thus, for banks that 
have significant idiosyncratic or unquantifiable risk or risk 
mitigators, the model may not assign an assessment rate that reflects 
their actual risk. The proposal, however, ensures that the assessment 
system takes idiosyncratic and unquantifiable risks and risk mitigators 
into account to the extent that they are reflected in CAMELS composite 
ratings, and prevents the assessment system from assigning a rate that 
reflects either too little risk (for a bank with a CAMELS composite 3, 
4 or 5 rating) or too much risk (for a bank with a CAMELS composite 1 
or 2 rating). As a result, under the proposal, initial assessment rates 
for small banks that are well rated (those with CAMELS composite 
ratings of 1 or 2) would not overlap with initial assessment rates for 
troubled small banks (those with CAMELS composite ratings of 4 or 5), 
except at the maximum initial rate for CAMELS composite 1- and 2-rated 
banks and the minimum initial rate for CAMELS composite 4- and 5-rated 
banks.
    In seeking the proper balance between maintaining the accuracy of 
the assessment system overall and reducing the risk that a particular 
bank's assessment rate might be inappropriate, the FDIC considered many 
other variations of minimum and maximum initial assessment rates based 
on a bank's CAMELS composite rating. Some variations with lower (or no) 
minimums for CAMELS 3- and/or CAMELS 4- and 5-rated banks and/or higher 
(or no) maximums for CAMELS 1- and/or CAMELS 2-rated banks had slightly 
higher accuracy ratios, but would have increased the risk of 
inappropriate assessment rates for some banks. Some variations with 
higher minimums for CAMELS 3- and/or CAMELS 4- and 5-rated banks and/or 
lower maximums for CAMELS 1- and/or CAMELS 2-rated banks had somewhat 
lower (or significantly lower) accuracy ratios. The maximums and 
minimums in the proposal represent the FDIC's best judgment on the 
proper balance. The FDIC is requesting comment on whether the proposal 
achieves the proper balance and whether the final rule should, instead, 
use alternative (or no) maximums and minimums based on CAMELS composite 
ratings. Because the FDIC intends that the effect of the proposal be 
revenue neutral, any reduction in the maximum initial assessment rate 
applicable to CAMELS composite 1- or CAMELS 2-rated banks that lowers 
some banks' assessment rates will increase the assessment rates of 
other banks.\52\
---------------------------------------------------------------------------

    \52\ To be revenue neutral, using different maximums or minimums 
will lead to different uniform amounts and pricing multipliers from 
the proposal when the new statistical model is converted to 
assessment rates.
---------------------------------------------------------------------------

    The FDIC is particularly interested in comment on two alternatives 
to the proposal, both of which would distinguish between CAMELS 
composite 1- and 2-rated small banks. The first alternative would 
maintain the assessment rate schedule that would go into effect 
starting the quarter after the reserve ratio reaches 1.15 percent (with 
a range of initial assessment rates of 3 basis points to 30 basis 
points) and include the same maximum and minimum assessment rates based 
upon banks' CAMELS composite ratings (see Table 9), except that it 
would lower the maximum initial assessment rate for a CAMELS composite 
1-rated bank from 16 basis points to 12 basis points.\53\ As reflected 
in Table 16 below, compared to the proposal, this alternative would 
have virtually no effect on accuracy (that is, on how well the 
assessment system would have differentiated between banks that failed 
and those that did not during the recent crisis); the alternative, like 
the proposal, is also significantly more accurate than the current 
small bank deposit insurance assessment system. On the other hand, the 
FDIC has never before distinguished between CAMELS composite 1-rated 
banks and CAMELS composite 2-rated banks for deposit insurance 
assessment purposes.
---------------------------------------------------------------------------

    \53\ Similarly, the first alternative would maintain the 
proposed assessment rate schedule that would go into effect the 
quarter after the reserve ratio reaches or exceeds 2 percent, but is 
less than 2.5 percent, and include the same maximum and minimum 
assessment rates determined by CAMELS composite ratings (see Table 
10), except that it would lower the maximum initial assessment rate 
for a CAMELS composite 1 rated bank from 14 basis points to 10 basis 
points. Also, the first alternative would maintain the proposed 
assessment rate schedule that would go into effect the quarter after 
the reserve ratio reaches or exceeds 2.5 percent, and include the 
same maximum and minimum assessment rates determined by CAMELS 
composite ratings (see Table 11), except that it would lower the 
maximum initial assessment rate for a CAMELS composite 1 rated bank 
from 13 basis points to 9 basis points.

[[Page 40853]]



     Table 16--Accuracy Ratio Comparison Between the First Alternative, the Proposal and the Current Small Bank Deposit Insurance Assessment System
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                         Accuracy ratio for                          Accuracy ratio for
                                                                                         the alternative--     Accuracy ratio for    the alternative--
             Year of projection               Accuracy ratio for   Accuracy ratio for    accuracy ratio for    the current small     accuracy ratio for
                                              the alternative *      the proposal *      the proposal (A-B)     bank assessment    the current system (A-
                                                                                                                     system                  C)
                                                             (A)                  (B)                                         (C)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2006.......................................               0.7045               0.7029                0.0016                0.3491                0.3555
2007.......................................               0.7770               0.7779               -0.0009                0.5616                0.2154
2008.......................................               0.8895               0.8930               -0.0035                0.7825                0.1070
2009.......................................               0.9398               0.9398                0.0000                0.9015                0.0383
2010.......................................               0.9657               0.9657                0.0000                0.9394                0.0262
2011.......................................               0.9485               0.9485                0.0000                0.9323                0.0161
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The accuracy ratios for the alternative and for the proposal are based on the conversion of the statistical model as estimated through 2014.

    The second alternative is the same as the first, except that, for 
the rate schedule that would go into effect the quarter after the 
reserve ratio reaches 1.15 percent, the minimum initial assessment rate 
applicable to CAMELS composite 4- and 5-rated banks would be lowered 
from 16 basis points to 12 basis points.54 55 As reflected 
in Table 17 below, compared to the proposal, this alternative would 
also have little effect on accuracy and, like the proposal, is 
significantly more accurate than the current small bank deposit 
insurance assessment system.
---------------------------------------------------------------------------

    \54\ The second alternative would have the same assessment rate 
schedule go into effect the quarter after the reserve ratio reaches 
or exceeds 2 percent, but is less than 2.5 percent, as the first 
alternative and include the same maximum and minimum assessment 
rates determined by CAMELS composite ratings, except that it would 
lower the minimum initial assessment rate for a CAMELS composite 4 
and 5 rated banks from 14 basis points to 10 basis points. Also, the 
second alternative would have the same assessment rate schedule go 
into effect the quarter after the reserve ratio reaches or exceeds 
2.5 percent as the first alternative, and include the same maximum 
and minimum assessment rates determined by CAMELS composite ratings 
(see Table 11), except that it would lower the minimum initial 
assessment rate for a CAMELS composite 4- and 5-rated banks from 13 
basis points to 9 basis points.
    \55\ Under either alternative, if a bank's CAMELS composite or 
component ratings changed during a quarter (other than a change in 
CAMELS composite rating from a 4 to a 5 or a 5 to a 4 with no change 
in component ratings), including a change in CAMELS composite rating 
from a 1 to a 2 or a 2 to a 1, its assessment rate would be 
determined separately for each portion of the quarter in which it 
had different CAMELS composite or component ratings.

     Table 17--Accuracy Ratio Comparison Between the Second Alternative, the Proposal and the Current Small Bank Deposit Insurance Assessment System
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                      Accuracy ratio for
                                                                                            Accuracy ratio for   Accuracy ratio for    the alternative-
               Year of projection                 Accuracy ratio for   Accuracy ratio for    the alternative-    the current small    accuracy ratio for
                                                  the alternative *      the proposal *     accuracy ratio for    bank assessment     the current system
                                                                                            the proposal (A-B)         system               (A-C)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2006...........................................               0.7061               0.7029               0.0032               0.3491               0.3570
2007...........................................               0.7779               0.7779               0.0000               0.5616               0.2163
2008...........................................               0.8903               0.8930              -0.0027               0.7825               0.1078
2009...........................................               0.9407               0.9398               0.0009               0.9015               0.0392
2010...........................................               0.9671               0.9657               0.0014               0.9394               0.0276
2011...........................................               0.9504               0.9485               0.0019               0.9323               0.0180
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The accuracy ratios for the alternative and for the proposal are based on the conversion of the statistical model as estimated through 2014.

    In addition to the numerous variations on minimum and maximum 
initial assessment rates based on CAMELS composite ratings, the FDIC 
also considered other alternatives when developing this proposal.

Loss Given Default

    Though expected losses to the DIF are a function of both the 
probability of a failure (or probability of default (PD)) and the loss 
given failure (or loss given default (LGD)), the new statistical model 
estimates only the PD. As discussed in Appendix 1 to the Supplementary 
Information section of this notice, the FDIC did not model LGD. Actual 
losses for many failed banks during the recent crisis are still 
estimated, primarily because of the use of loss-sharing agreements that 
have not yet terminated. Until the losses are actually realized, 
estimating an LGD model using current data would be circular, as other 
FDIC models are used to estimate expected losses where losses have not 
yet been realized. Relying solely on realized losses would exclude much 
of the failure data from the recent crisis, leaving mainly failure data 
from the banking crisis of the late 1980s and early 1990s. However, the 
vast majority of the bank failures in that crisis occurred in a 
different regulatory regime (prior to the Federal Deposit Insurance 
Corporation Improvement Act of 1991) and may, therefore, not reflect 
expected LGD in the current environment as well. For these reasons, the 
FDIC considered but rejected including LGD in the new statistical 
model. Nevertheless, after losses from failures during the recent 
crisis are more fully realized, it may be appropriate to consider 
whether LGD should be included in a small bank pricing model.

No Change

    The FDIC also considered leaving the current small bank deposit 
insurance assessment system in place unchanged. While the backtesting 
discussed in Appendix 1 revealed that the new statistical model 
generally performed

[[Page 40854]]

better than the current small bank deposit insurance assessment system, 
the current system performed relatively well. Nevertheless, the FDIC is 
proposing to change the small bank deposit insurance assessment system 
and base it on the new statistical model because the new model is 
superior to the current small bank deposit insurance assessment system. 
Under the proposed system, fewer riskier small banks would pay lower 
assessments and fewer safer banks would pay higher assessments than 
their conditions warrant.

VIII. Request for Comments

    The FDIC seeks comment on every aspect of this proposed rulemaking, 
including the alternatives considered. In addition, the FDIC seeks 
comment on the following:
     Are there other variables, besides the eight included in 
the statistical model and proposal, that both predict the likelihood of 
bank failure with statistical significance and do not have perverse 
incentive effects?
     Are there variables that can be shown to predict likely 
losses given failure with statistical significance?
     Should the upper end of the assessment rate range decline 
from 35 basis points to 30 basis points as proposed or should higher 
assessment rates continue to apply to the riskiest banks?

IX. Regulatory Analysis

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that each federal 
agency either certify that a proposed rule would not, if adopted in 
final form, have a significant economic impact on a substantial number 
of small entities or prepare an initial regulatory flexibility analysis 
of the proposal and publish the analysis for comment.\56\ Certain types 
of rules, such as rules of particular applicability relating to rates 
or corporate or financial structures, or practices relating to such 
rates or structures, are expressly excluded from the definition of 
``rule'' for purposes of the RFA.\57\ The proposed rule relates 
directly to the rates imposed on insured depository institutions for 
deposit insurance and to the deposit insurance assessment system that 
measures risk and determines each established small bank's assessment 
rate. Nonetheless, the FDIC is voluntarily undertaking an initial 
regulatory flexibility analysis of the proposal and seeking comment on 
it.
---------------------------------------------------------------------------

    \56\ See 5 U.S.C. 603, 604 and 605.
    \57\ 5 U.S.C. 601.
---------------------------------------------------------------------------

    As of December 31, 2014, of the 6,509 insured commercial banks and 
savings institutions, there were 5,257 small insured depository 
institutions as that term is defined for purposes of the RFA (i.e., 
those with $550 million or less in assets).\58\
---------------------------------------------------------------------------

    \58\ Throughout this RFA analysis (unlike the rest of this NPR), 
a ``small institution'' refers to an institution with assets of $550 
million or less; a ``small bank,'' however, continues to refer to a 
small insured depository institution for purposes of deposit 
insurance assessments (generally, a bank with less than $10 billion 
in assets).
---------------------------------------------------------------------------

    For purposes of this analysis, whether the FDIC were to collect 
needed assessments under the existing rule or under the proposed rule, 
the total amount of assessments collected would be the same. The FDIC's 
total assessment needs are driven by the FDIC's aggregate projected and 
actual insurance losses, expenses, investment income, and insured 
deposit growth, among other factors, and assessment rates are set 
pursuant to the FDIC's long-term fund management plan. This analysis 
demonstrates how the new pricing system under the proposed range of 
assessment rates of 3 basis points to 30 basis points (P330) could 
affect small entities relative to the current assessment rate schedule 
(C535) and relative to the rate schedule that under current regulations 
will be in effect when the reserve ratio exceeds 1.15 percent (C330). 
Using data as of December 31, 2014, the FDIC calculated the total 
assessments that would be collected under both rate schedules and under 
the proposed rule.
    The economic impact of the proposal on each small institution for 
RFA purposes (i.e., institutions with assets of $550 million or less) 
was then calculated as the difference in annual assessments under the 
proposed rule compared to the existing rule as a percentage of the 
institution's annual revenue and annual profits, assuming the same 
total assessments collected by the FDIC from the banking industry.\59\
---------------------------------------------------------------------------

    \59\ For purposes of the analysis, an institution's total 
revenue is defined as the sum of its interest income and noninterest 
income and an institution's profit is defined as income before taxes 
and extraordinary items.
---------------------------------------------------------------------------

Projected Effects on Small Entities Assuming a Range of Assessment 
Rates Under Both the Current Established Small Bank Deposit Insurance 
Assessment System and the Proposed System of 3 Basis Points to 30 Basis 
Points (P330-C330)
    Based on the December 31, 2014 data, of the total of 5,257 small 
institutions, one institution would have experienced an increase in 
assessments equal to five percent or more of its total revenue. These 
figures do not reflect a significant economic impact on revenues for a 
substantial number of small insured institutions. Table 18 below sets 
forth the results of the analysis in more detail.

   Table 18--Percent Change in Assessments Resulting From the Proposal
            [Assuming No Change in the Assessment Rate Range]
------------------------------------------------------------------------
                                           Number of        Percent of
         Change in assessments            institutions     Institutions
------------------------------------------------------------------------
More than 10 percent lower............                0                0
5 to 10 percent lower.................                3                0
0 to 5 percent lower..................            3,296               63
0 to 5 percent higher.................            1,957               37
5 to 10 percent higher................                1                0
More than 10 percent higher...........                0                0
                                       ---------------------------------
    Total.............................            5,257              100
------------------------------------------------------------------------

    The FDIC performed a similar analysis to determine the impact on 
profits for small institutions. Based on December 31, 2014 data, of 
those small institutions with reported profits, 21 institutions would 
have an increase in assessments equal to 10 percent or more of their 
profits. Again, these figures do not reflect a significant economic 
impact on profits for a substantial number of small insured 
institutions.

[[Page 40855]]

Table 19 sets forth the results of the analysis in more detail.

 Table 19*--Assessment Changes Relative to Profits for Profitable Small
                     Institutions Under the Proposal
            [Assuming No Change in the Assessment Rate Range]
------------------------------------------------------------------------
    Change in assessments relative to        Number of      Percent of
                 profits                   institutions    institutions
------------------------------------------------------------------------
Decrease in assessments equal to more                 65               1
 than 40 percent of profits.............
Decrease in assessments equal to 20 to                64               1
 40 percent of profits..................
Decrease in assessments equal to 10 to               131               3
 20 percent of profits..................
Decrease in assessments equal to 5 to 10             306               6
 percent of profits.....................
Decrease in assessments equal to 0 to 5            3,541              73
 percent of profits.....................
Increase in assessments equal to 0 to 5              706              14
 percent of profits.....................
Increase in assessments equal to 5 to 10              40               1
 percent of profits.....................
Increase in assessments equal to 10 to                 8               0
 20 percent of profits..................
Increase in assessments equal to 20 to                 5               0
 40 percent of profits..................
Increase in assessments equal to more                  8               0
 than 40 percent of profits.............
    Total...............................           4,874             100
------------------------------------------------------------------------
*Institutions with negative or no profit were excluded. These
  institutions are shown in Table 20.

    Table 19 excludes small institutions that either show no profit or 
show a loss, because a percentage cannot be calculated. The FDIC 
analyzed the effect of the proposal on these institutions by 
determining the annual assessment change (either an increase or a 
decrease) that would result. Table 20 below shows that 27 (seven 
percent) of the 383 small insured institutions with negative or no 
reported profits would have an increase of $20,000 or more in their 
annual assessments.

   Table 20--Change in Assessments for Unprofitable Small Institutions
                       Resulting from the Proposal
            [Assuming No Change in the Assessment Rate Range]
------------------------------------------------------------------------
                                             Number of      Percent of
          Change in assessments            Institutions    Institutions
------------------------------------------------------------------------
$20,000 or more decrease................             170              44
$10,000-$20,000 decrease................              74              19
$5,000-$10,000 decrease.................              43              11
$1,000-$5,000 decrease..................              28               7
$0-$1,000 decrease......................              11               3
$0-$1,000 increase......................               3               1
$1,000-$5,000 increase..................              16               4
$5,000-$10,000 increase.................               6               2
$10,000-$20,000 increase................               5               1
$20,000 increase or more................              27               7
    Total...............................             383             100
------------------------------------------------------------------------

Projected Effects on Small Entities Assuming a Range of Assessment 
Rates Under the Current Established Small Bank Deposit Insurance 
Assessment System of 5 Basis Points to 35 Basis Points and Under the 
Proposed System of 3 Basis Points to 30 Basis Points (Assessment Change 
P330-C535)
    Based on the December 31, 2014 data, of the total of 5,257 small 
institutions, no institution would have experienced an increase in 
assessments equal to five percent or more of its total revenue. These 
figures do not reflect a significant economic impact on revenues for a 
substantial number of small insured institutions. Table 21 below sets 
forth the results of the analysis in more detail.

   Table 21--Percent Change in Assessments Resulting from the Proposal
    [Assuming Assessment Rate Range Change From 5-35 Bps to 3-30 Bps]
------------------------------------------------------------------------
                                             Number of      Percent of
          Change in assessments            institutions    institutions
------------------------------------------------------------------------
More than 10 percent or lower...........               4               0
5 to 10 percent lower...................               4               0
0 to 5 percent lower....................           4,969              95
0 to 5 percent higher...................             280               5
More than 5 percent higher..............               0               0
    Total...............................           5,257             100
------------------------------------------------------------------------


[[Page 40856]]

    The FDIC performed a similar analysis to determine the impact on 
profits for small institutions. Based on December 31, 2014 data, of 
those small institutions with reported profits, eight institutions 
would have an increase in assessments equal to 10 percent or more of 
their profits. Again, these figures do not reflect a significant 
economic impact on profits for a substantial number of small insured 
institutions. Table 22 sets forth the results of the analysis in more 
detail.

 Table 22*--Assessment Changes Relative to Profits for Profitable Small
                     Institutions Under the Proposal
    [Assuming Assessment Rate Range Change From 5-35 Bps to 3-30 Bps]
------------------------------------------------------------------------
    Change in assessments relative to        Number of      Percent of
                 profits                   institutions    institutions
------------------------------------------------------------------------
Decrease in assessments equal to more                119               2
 than 40 percent of profits.............
Decrease in assessments equal to 20 to                99               2
 40 percent of profits..................
Decrease in assessments equal to 10 to               285               6
 20 percent of profits..................
Decrease in assessments equal to 5 to 10             603              12
 percent of profits.....................
Decrease in assessments equal to 0 to 5            3,513              72
 percent of profits.....................
Increase in assessments equal to 0 to 5              239               5
 percent of profits.....................
Increase in assessments equal to 5 to 10               8               0
 percent of profits.....................
Increase in assessments equal to 10 to                 4               0
 20 percent of profits..................
Increase in assessments equal to 20 to                 3               0
 40 percent of profits..................
Increase in assessments equal to more                  1               0
 than 40 percent of profits.............
Total...................................           4,874             100
------------------------------------------------------------------------
* Institutions with negative or no profit were excluded. These
  institutions are shown in Table 23.

    Table 22 excludes small institutions that either show no profit or 
show a loss, because a percentage cannot be calculated. The FDIC 
analyzed the effect of the proposal on these institutions by 
determining the annual assessment change (either an increase or a 
decrease) that would result. Table 23 below shows that just 11 (three 
percent) of the 383 small insured institutions with negative or no 
reported profits would have an increase of $20,000 or more in their 
annual assessments. Again, these figures do not reflect a significant 
economic impact on profits for a substantial number of small insured 
institutions.

   Table 23--Change in Assessments for Unprofitable Small Institutions
                       Resulting From the Proposal
            [Assuming No Change in the Assessment Rate Range]
------------------------------------------------------------------------
                                             Number of      Percent of
          Change in assessments            institutions    institutions
------------------------------------------------------------------------
$20,000 or more decrease................             262              68
$10,000-$20,000 decrease................              57              15
$5,000-$10,000 decrease.................              23               6
$1,000-$5,000 decrease..................              14               4
$0-$1,000 decrease......................               3               1
$0-$1,000 increase......................               1               0
$1,000-$5,000 increase..................               6               2
$5,000-$10,000 increase.................               1               0
$10,000-$20,000 increase................               5               1
$20,000 increase or more................              11               3
    Total...............................             383             100
------------------------------------------------------------------------

    The proposed rule does not directly impose any ``reporting'' or 
``recordkeeping'' requirements within the meaning of the Paperwork 
Reduction Act. The compliance requirements for the proposed rule would 
not exceed (and, in fact, would be the same as) existing compliance 
requirements for the current risk-based deposit insurance assessment 
system for small banks. The FDIC is unaware of any duplicative, 
overlapping or conflicting federal rules.
    The initial RFA analysis set forth above demonstrates that, if 
adopted in final form, the proposed rule would not have a significant 
economic impact on a substantial number of small institutions within 
the meaning of those terms as used in the RFA.\60\
---------------------------------------------------------------------------

    \60\ 5 U.S.C. 605.
---------------------------------------------------------------------------

    Commenters are invited to provide the FDIC with any information 
they may have about the likely quantitative effects of the proposal on 
small insured depository institutions (those with $550 million or less 
in assets).

B. Riegle Community Development and Regulatory Improvement Act:

    The Riegle Community Development and Regulatory Improvement Act 
(RCDRIA) requires that the FDIC, in determining the effective date and 
administrative compliance requirements of new regulations that impose 
additional reporting, disclosure, or other requirements on insured 
depository institutions, consider, consistent with principles of safety 
and soundness and the public interest, any administrative burdens that 
such regulations would place on depository institutions, including 
small depository institutions, and customers of depository 
institutions, as well as the benefits of such regulations.\61\
---------------------------------------------------------------------------

    \61\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

    This NPR proposes no additional reporting or disclosure 
requirements on insured depository institutions, including small 
depository institutions, nor on the customers of depository 
institutions.

[[Page 40857]]

C. Paperwork Reduction Act:

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

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

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

E. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113 
Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The FDIC invites your comments on how to make this 
proposal easier to understand. For example:
     Has the FDIC organized the material to suit your needs? If 
not, how could the material be better organized?
     Are the requirements in the proposed regulation clearly 
stated? If not, how could the regulation be stated more clearly?
     Does the proposed regulation contain language or jargon 
that is unclear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand?

Appendix 1--Description of Statistical Model Underlying Proposed Method 
for Determining Deposit Insurance Assessments For Established Small 
Insured Depository Institutions

    This appendix provides a technical description of the statistical 
model (the ``new model'') \62\ underlying the proposed method for 
determining deposit insurance assessments for established small banks. 
The appendix provides background information, reviews the data and 
methodology used to estimate the new model underlying the proposed 
method, discusses estimation results and alternative specifications 
considered, and evaluates the results.
---------------------------------------------------------------------------

    \62\ The preamble to the NPR refers to the new model as the 
``statistical model.''
---------------------------------------------------------------------------

I. Background

A. RRPS

    The current small bank deposit insurance assessment system has been 
in effect, with some modifications, since January 1, 2007. The current 
small bank deposit insurance system assigns assessment rates in several 
steps. The first step assigns small banks to risk categories. The 
categories are jointly determined by bank capital and supervisory 
ratings. Well-capitalized small banks rated CAMELS 1 or 2 are placed in 
Risk Category I.\63\ Small banks with lower capital or weaker CAMELS 
ratings are placed in either Risk Category II, Risk Category III or 
Risk Category IV.
---------------------------------------------------------------------------

    \63\ Unless explicitly stated otherwise, references to CAMELS 
ratings are references to CAMELS composite ratings.
---------------------------------------------------------------------------

    The second step differentiates risk further among Risk Category I 
small banks using the financial ratios method, which combines 
supervisory CAMELS component ratings with current financial ratios to 
determine a Risk Category I small bank's initial assessment rate. The 
contribution of these variables (the CAMELS component ratings and the 
financial ratios) to assessment rates is determined using a linear 
model (the downgrade probability model or existing model) estimating 
the probability that a CAMELS 1- or 2-rated bank will be downgraded to 
a CAMELS rating of 3 or worse within 12 months.
    In November 2006, when the final rule establishing the current 
small bank deposit insurance system was adopted, it had been more than 
a decade since the United States experienced a significant number of 
bank failures. Consequently, historical downgrades were used as a proxy 
for the risk to the DIF of a bank's failure.
    The data generated by the rash of bank failures since the financial 
crisis of 2008 suggests that the model underlying the small bank 
deposit insurance assessment system can be improved and updated.

B. Probability of Default

    The data generated from the approximately 500 bank failures since 
2008 suggests that the probability of downgrade probability model can 
be replaced by a probability of default (that is, a probability of 
failure) model. Failures are nearly always costly to the FDIC, whereas 
downgrades lead to DIF losses relatively infrequently, since many 
downgraded banks do not fail.

C. Loss Given Default

    Though expected losses to the DIF are a function of both the 
probability of a default (PD) and the loss given default (LGD), the new 
model estimates only the PD. LGD was not modeled. Actual losses for 
many of the failed banks during the crisis are still estimated, 
primarily because of the use of loss-sharing agreements that have not 
yet terminated. Until the losses are actually realized, estimating a 
loss given default model using current data would be circular, as FDIC 
models are used to estimate expected losses where losses have not yet 
been realized. Relying solely on realized losses would exclude much of 
the failure data from the recent crisis, leaving mainly failure data 
from the banking crisis of the late 1980s and early 1990s. However, the 
vast majority of the bank failures in that crisis occurred in a 
different regulatory regime (prior to the Federal Deposit Insurance 
Corporation Improvement Act of 1991\64\) and may, therefore, not 
reflect expected LGD in the current environment as well. See Bennett 
and Unal (2014).
---------------------------------------------------------------------------

    \64\ FDIC (1998), Legislation Governing the FDIC's Roles as 
Insurer and Receiver,'' from Managing the Crisis, https://www.fdic.gov/bank/historical/managing/history3-A.pdf, p. 774-747.
---------------------------------------------------------------------------

    Notwithstanding these concerns, a careful consideration of whether 
future rulemaking should include LGD in a small bank deposit insurance 
assessment model may be appropriate after most losses are realized from 
failures during the recent crisis.

II. Methodology

A. Variable Selection

    In addition to the existing model, the FDIC relied on other 
existing models of bank risk, both regulatory and academic, to select 
candidate variables for inclusion in the new model.
1. SCOR
    The Statistical CAMELS Offsite Rating (SCOR) system is one of 
FDIC's offsite monitoring models and is used to identify banks whose 
financial condition has deteriorated since their last on-site 
examination. SCOR is designed as a short-term model with a one-year 
forecast horizon, to identify institutions that are currently CAMELS 1 
or 2 rated that might receive a rating of CAMELS 3, 4 or 5 at the next 
examination.
    The SCOR model uses an ordered logistic regression to predict the 
composite CAMELS rating and the six CAMELS component ratings. A 
logistic regression allows for nonlinear relationships between each 
explanatory

[[Page 40858]]

variable and the dependent variable (the variable that depends upon the 
explanatory variable). In an ordered logistic regression, the dependent 
variable (CAMELS) can only have discrete values that are ordered. (In 
the case of CAMELS, the ordered values are 1 through 5.) The other 
variables (the explanatory variables) are then used to predict the 
likelihood of observing each of the possible outcomes.
    SCOR uses twelve variables to measure banks' financial condition. 
These financial measures are (as a ratio to total assets): equity, loan 
loss reserves, loans past due 30-89 days, loans past due 90+ days, 
nonaccrual loans, other real estate owned, charge-offs, provisions for 
loan losses and transfer risk, income before taxes and extraordinary 
charges, volatile liabilities, liquid assets, and loans and long term 
securities.\65\
---------------------------------------------------------------------------

    \65\ Detailed description of the model and the variables used in 
SCOR can be found in ``The SCOR System of Off-Site Monitoring: Its 
Objectives, Functioning, and Performance,'' Collier, Forbush, 
Nuxoll, and O'Keefe (2003).
---------------------------------------------------------------------------

2. GMS
    The Growth Monitoring System (GMS) is one of FDIC's offsite 
monitoring models designed to monitor banks' risk taking associated 
with rapid growth and heavy reliance on non-traditional sources of 
funds. GMS is designed to identify distress and failure before bank 
conditions actually weaken, thereby allowing supervisors to take 
preventive action.
    GMS estimates the likelihood that a bank will be downgraded from a 
CAMELS 1 or 2 rating to a CAMELS 3, 4 or 5 rating within three years as 
a function of the bank's current risk characteristics. The explanatory 
variables include a bank's asset growth, equity ratio, loan to asset 
ratio, noncore funds to asset ratio, change in loan mix index, reserve 
coverage ratio and a binary variable indicating whether a bank is 
currently CAMELS 1 rated.\66\
---------------------------------------------------------------------------

    \66\ Detailed description of the GMS model can be found in 
``Bank Growth and Long Term Risk,'' Hwa, Jacewitz, and Yom (May 
2011).
---------------------------------------------------------------------------

3. Academic
    There exist numerous papers discussing models that predict bank 
failures. In these papers, the explanatory variables predicting bank 
failures are largely divided into measures of (1) capital; (2) asset 
quality; (3) earnings; (4) liquidity; (5) sensitivity to market risk; 
and (6) other risk measures.
    A bank's capital adequacy is an important predictor of its survival 
because it provides a cushion to withstand unanticipated losses. 
Studies have used a total equity to total assets ratio (Santoni, Ricci, 
and Kelshiker (2010), Betz, Oprica, Peltonen, Sarlin (2012)) or the 
leverage ratio (Santoni, Ricci, and Kelshiker (2010)) to measure a 
bank's equity position. These studies find that higher capital ratios 
are correlated with lower failure probability.
    To measure a bank's asset quality, nonperforming loans (Wheelock 
and Wilson (2000), Santoni, Ricci, and Kelshiker (2010), Gilbert, 
Meyer, and Vaughan (1999)) and other real estate owned to total assets 
ratios have been used. A large volume of nonperforming loans and other 
real estate owned relative to total loans (or total assets) signal low 
credit quality in a bank's loan portfolio.
    Higher bank earnings also provide a cushion to withstand adverse 
economic shocks and lower failure probability. To measure bank 
earnings, measures such as net income before taxes, interest expense 
(Betz, Oprica, Peltonen, Sarlin (2012)), and total operating income 
(Lane, Looney, and Wansley (1986)) have been used.
    Loan portfolio ratios, such as commercial and industrial (C&I) 
loans, commercial real estate loans, construction and development (C&D) 
loans, and consumer loans (Cole and Gunther (1995), Whalen (1991), 
Lane, Looney, and Wansley (1986)), have been used to measure a bank's 
concentration in different loan types.
    Rapid loan growth or asset growth can be indicators of a bank's 
aggressive risk-taking and of underwriting loans or acquiring assets 
with lower creditworthiness. A correlation between rapid credit growth 
and bank distress has been well documented in academic research 
(Solttila and Vihriala (1994), Clair (1992), Salas and Saurina (2002), 
Keeton (1999), Foos, Norden, and Weber (2009), and Logan (2001)).
    Liquidity measures include a core deposits to total assets ratio 
(Gilbert, Meyer, Vaughan (1999)) and a liquid assets to total assets 
ratio (Gilbert, Meyer, Vaughan (1999), Lane, Looney, and Wansley 
(1986)). These measures can indicate a bank's ability to meet 
unexpected liquidity needs. A high loans to total deposits ratio 
(Gilbert, Meyer, Vaughan (1999)) or loans to total assets ratio can 
indicate a bank's illiquidity, since loans are typically less liquid 
than other assets on a bank's balance sheet.
    Bank size (Gilbert, Meyer, Vaughan (1999), Wheelock and Wilson 
(2000)) can predict failure likelihood, since large banks can benefit 
from diversification across product lines and geographic regions.
    Whether a bank is a part of a holding company is another measure 
used by some studies (Gilbert, Meyer, Vaughan (1999), Wheelock and 
Wilson (2000)). An indicator of holding company affiliation can predict 
failure probability, since a holding company can serve as a source of 
strength to banks.
    Onali (2012) finds a positive relation between bank default risk 
and dividend payout ratios. This finding is consistent with the theory 
that dividend payouts exacerbate moral hazard. He finds, however, that 
the relationship is insignificant for banks that are very close to 
failure.

B. Variables

    Table 1.1 lists and describes the variables that are included in 
the new model as the result of reviewing academic studies on bank risk 
and testing candidate variables.

                Table 1.1--New Model Variable Description
------------------------------------------------------------------------
             Variables                           Description
------------------------------------------------------------------------
Tier 1 Leverage Ratio (%).........  Tier 1 capital divided by adjusted
                                     average assets. (Numerator and
                                     denominator are both based on the
                                     definition for prompt corrective
                                     action.)
Net Income before Taxes/Total       Income (before income taxes and
 Assets (%).                         extraordinary items and other
                                     adjustments) for the most recent
                                     twelve months divided by total
                                     assets.
Nonperforming Loans and Leases/     Sum of total loans and lease
 Gross Assets\67\ (%).               financing receivables past due 90
                                     or more days and still accruing
                                     interest and total nonaccrual loans
                                     and lease financing receivables
                                     (excluding, in both cases, the
                                     maximum amount recoverable from the
                                     U.S. Government, its agencies or
                                     government-sponsored enterprises,
                                     under guarantee or insurance
                                     provisions) divided by gross
                                     assets.*

[[Page 40859]]

 
Other Real Estate Owned/Gross       Other real estate owned divided by
 Assets (%).                         gross assets.
Core Deposits/Total Assets (%)....  Domestic office deposits (excluding
                                     time deposits over the deposit
                                     insurance limit and the amount of
                                     brokered deposits below the
                                     standard maximum deposit insurance
                                     amount) divided by total assets.
Weighted Average of C, A, M, E, L,  The weighted sum of the ``C,''
 and S Component Ratings.            ``A,'' ``M,'' ``E'', ``L'', and
                                     ``S'' CAMELS components, with
                                     weights of 25 percent each for the
                                     ``C'' and ``M'' components, 20
                                     percent for the ``A'' component,
                                     and 10 percent each for the ``E'',
                                     ``L'', and ``S'' components. In
                                     instances where the ``S'' component
                                     is missing, the remaining
                                     components are scaled by a factor
                                     of 10/9.**
Loan Mix Index....................  A measure of credit risk described
                                     below.
Asset Growth (%)..................  Growth in assets (merger adjusted)
                                     over the previous year. If growth
                                     is negative, then the value is set
                                     to zero.
------------------------------------------------------------------------
\67\ ``Gross assets'' are total assets plus the allowance for loan and
  lease financing receivable losses (ALLL); for purposes of estimating
  the statistical model, for years before 2001, when allocated transfer
  risk was not included in ALLL in Call Reports, allocated transfer risk
  was included in gross assets separately.
* Delinquency and non-accrual data on government guaranteed loans are
  not available for the entire estimation period. As a result, the model
  is estimated without deducting delinquent or past-due government
  guaranteed loans from the nonperforming loans and leases to gross
  assets ratio.
** The component rating for sensitivity to market risk (the ``S''
  rating) is not available for years before 1997. As a result, and as
  described in the table, the model is estimated using a weighted
  average of five component ratings excluding the ``S'' component where
  the component is not available.

1. Equity
    The new model includes the leverage ratio (as defined in the FDIC's 
capital regulations\68\). This variable was statistically significant 
across specifications (that is, it was statistically significant 
regardless of the other variables included in the model).
---------------------------------------------------------------------------

    \68\ 12 CFR 3.10; 12 CFR 217.10; 12 CFR 324.10.
---------------------------------------------------------------------------

2. Loan Mix Index
    Consistent with the GMS model, the FDIC included a loan mix index 
(``LMI'') variable that aggregates a bank's loan portfolio and 
historical loan category charge-offs into a single variable. 
Statistically, combining the loan categories into a single index 
increases the explanatory power of the model.
    For each loan category, the LMI assigns an industry-wide charge-off 
rate based on historical data. A bank's LMI value is then the sum of 
the products of each of that bank's loan category exposures as a 
percentage of total assets and the associated charge-off rate. Appendix 
1.1 to the Supplementary Information section of this notice shows how 
the LMI is constructed for a hypothetical bank.
    In constructing the LMI, many alternatives were considered, 
including: using the change in a bank's amount of loans in a loan 
category rather than simply the amount of loans in a loan category, 
weighting charge-offs more heavily during crises and evaluating loans 
in a loan category as a proportion of total loans rather than as a 
proportion of assets.
    Both in in-sample and out-of-sample backtesting, the LMI using a 
bank's amount of loans in a loan category had higher forecast accuracy 
than using the change in a bank's amount of loans in a loan category 
from a previous period. In-sample backtesting compares model forecasts 
to actual outcomes where those outcomes are included in the data used 
in model development. Out-of-sample backtesting is the comparison of 
model predictions against outcomes where those outcomes are not used as 
part of the model development used to generate predictions.
    In-sample, all of the explanatory power came from using the amount 
of loans in a loan category. Out-of-sample, including the change in a 
bank's amount of loans in a loan category in addition to the amount of 
loans in a loan category did not improve performance.
    Three alternative methods of averaging yearly historical industry-
wide charge-off rates were considered: an unweighted average of each 
year's industry-wide charge-off rate, an unweighted average of each of 
the recent crisis years' industry-wide charge-off rates, and an average 
of each year's industry-wide charge-off rate weighted by the number of 
bank failures in the year. Out-of-sample performance for the LMI 
variable using an average weighted by the number of bank failures in 
the year slightly outperformed the LMI variable using an unweighted 
average over recent crisis years and more significantly outperformed 
the LMI variable using an unweighted average. The LMI variable using an 
average weighted by the number of bank failures in a year was selected 
over the LMI variable using an unweighted average over recent crisis 
years because the latter variable requires a determination of what 
constitutes a crisis. No such determination is necessary using the 
variable selected.
    The FDIC also considered using total loans as the denominator of 
the LMI along with a liquidity variable, but elected to use total 
assets as the denominator to avoid imposing excessive penalties on 
banks that hold few loans relative to assets. (The liquidity variable 
was not statistically significant when total assets were used as the 
denominator.) Using loans as a proportion of total assets has the 
advantage of not extrapolating risk exposures in loans to a bank's 
entire asset portfolio, although it effectively assigns zero risk to 
all non-loan assets, implicitly treating loans as riskier than 
investments in other assets. Many of these other assets, however, are 
liquid assets. Out-of-sample performance of the models using total 
assets as the denominator did not differ much from the performance 
using total loans as the denominator along with a liquidity variable.
3. Asset Growth
    Among the variables included in the specifications was a one-year 
asset growth rate. The FDIC also considered a two-year growth rate and 
lagged one- and two-year growth rates. The one-year growth rates 
generally had the most explanatory power and additional growth rates 
did not tend to improve the model's fit.
    Mergers of troubled banks into healthier banks and purchases of 
failed banks help limit losses to the DIF. Penalizing banks for growth 
that occurs through the acquisition of troubled or failed banks would 
create a disincentive for such mergers. Consequently, bank

[[Page 40860]]

asset growth was adjusted to remove growth resulting from mergers and 
failed bank acquisitions.
4. Income
    Consistent with previous findings, net income before taxes was 
found to be a significant explanatory variable.
5. Core Deposits
    Early test versions of the new model used noncore liabilities as a 
variable predictive of failure. This variable was statistically 
significant in-sample across all specifications with a positive 
correlation with failure. Subsequent versions used core deposits as the 
alternative variable. It provides similar predictive power, and is the 
variable maintained for the proposed version of the new model.
6. Nonperforming Loans and Leases
    Nonperforming loans and leases are defined as the sum of total 
loans and leases past due 90 or more days and total nonaccrual loans 
and leases. This variable, which measures bank asset quality, was found 
to be a statistically significant predictor of failure.
7. Other Real Estate Owned
    The ratio of other real estate owned to gross assets is another 
measure of a bank's asset quality and was a significant predictor of 
failure across specifications.
8. CAMELS
    A weighted CAMELS component variable was included in the new model 
to capture examination ratings. The weighted CAMELS component variable 
is calculated with the following weights on the component ratings: 
Capital (25%), Asset quality (20%), Management (25%), Earnings (10%), 
Liquidity (10%), Sensitivity to market risk (10%). For model 
estimation, in instances where the ``S'' component is missing, the 
remaining components are scaled by a factor of 10/9.
    Other specifications tested separate dummy variables for CAMELS 
composite ratings of 3, 4, and 5. (A dummy variable for CAMELS 2 
composite ratings was not statistically significant.) However, the 
single weighted CAMELS component measure performed comparably in out-
of-sample tests and was chosen over the dummy variable specification 
for both the reduction in the number of variables, for its more 
continuous treatment of examination ratings and for its consistency 
with the current financial ratios method.

C. Considered Variables

1. Loan Loss Reserves
    Loan loss reserves were tested in the development of the new model 
and were a positive predictor of failure across all specifications. 
Including reserves in the new model, however, would lead to higher 
deposit insurance assessments for banks with higher loan loss reserves, 
creating a disincentive for banks to build these reserves. Because loan 
loss reserves protect the FDIC in the event of failure, they were 
ultimately excluded from the new model. (Loan loss reserves were 
excluded from the downgrade probability model for the same reason.) The 
losses to forecasting accuracy were small.
2. Lagged moving averages
    To capture the possibility that changes in variables (as opposed to 
point-in-time values of variables) are correlated with failure, the 
FDIC tested the model using lagged moving averages. In theory, these 
lagged moving averages could also capture the effect of variables that 
do not change frequently. However, lagged moving averages were not 
consistently significant across specifications.
3. Insignificant Variables
    A number of variables were also tested but ultimately not included 
in the model because they did not remain statistically significant 
across specifications. These variables are listed in Appendix 1.2 to 
the Supplementary Information section of this notice.

D. Excluded Variables

1. Distance to Default
    Distance to default measures, which compare the amount of loss 
absorbing capital against the volatility of the return on underlying 
assets, are commonly used in failure prediction models. These variables 
are generally constructed with market data. However, such measures are 
not available for most small banks.
2. Macroeconomic Variables
    Macroeconomic variables were excluded for three primary reasons. 
First, the assessment rates proposed are (and the rates previously 
adopted by the FDIC's Board were) explicitly intended to reduce 
procyclicality; that is, to maintain a positive reserve ratio while 
keeping relatively constant assessment rates.\69\ Second, macroeconomic 
factors would add considerable complexity to the model. Finally, 
macroeconomic factors are imprecise measures of economic conditions for 
small banks that often operate only locally.
---------------------------------------------------------------------------

    \69\ See 75 FR 66272, 66273-66281, 66292 (Oct. 27, 2010).
---------------------------------------------------------------------------

3. Holding Company Affiliation
    The FDIC does not believe it is appropriate to charge a small bank 
a higher assessment rate because it is not part of a multi-bank holding 
company; consequently, the new model does not include a measure 
indicating whether a bank is a part of a holding company.
4. Brokered Deposits
    The FDIC ultimately chose the related measure of core deposits (see 
above).
5. Bank Size
    The FDIC is disinclined to discriminate for deposit insurance 
assessment purposes based on the size of an established small bank. 
Assessing the smallest banks at higher rates because of their size 
would raise the costs of many banks that are the only bank in their 
community. Assessing the largest of the small banks at higher rates 
because of their size would impair their ability to compete with large 
banks, which are not charged higher rates based on their size.

III. Estimation Model

A. Shumway (2001)

    The FDIC chose to estimate failure using a discrete-time hazard 
model with a constant hazard rate. Hazard models are designed to 
capture the duration of time until a particular event occurs (in this 
case, bank failure). The defining feature of a hazard model is that at 
every interval of time, a bank is exposed to some risk of failure that 
depends on certain observed measures. If the bank fails during a 
period, then it is not in the sample for later periods. If the bank 
survives, then it remains in the sample the following period and is 
exposed to a new risk of failure that depends on any changes in the 
bank risk variables. The FDIC used a discrete time assumption because 
of the regular reporting schedule for Call Report data, and the 
simplicity and transparency of estimation. A discrete time assumption 
implies that only the failure or survival of the bank is modeled for a 
given time period. This is in contrast to a continuous time model that 
also considers the exact failure time within that time period.
    Shumway (2001) demonstrates that if each period's probability of 
failure (or default probability) follows a logistic function, then the 
discrete-time hazard model is equivalent to a multi-period logistic 
model. The logistic function relates a set of variables (in this case,

[[Page 40861]]

measures of bank risk) to a number between 0 and 1 (in this case, the 
probability of bank failure). It is nonlinear, so that the effect of a 
change in the values of bank risk variables on the probability of bank 
failure depends on the level of bank risk. A multi-period logistic 
model estimates the probability of failure for all observations across 
banks and time. However, relative to a pooled logistic model in which 
each bank-year observation is treated as an independent event, the 
standard errors of the coefficients of a discrete-time hazard model 
require an adjustment. The adjustment is required because of the serial 
dependence of the failure variable; a bank that is observed in any 
period necessarily has not failed in any previous period and any bank 
that fails necessarily drops out of the sample after failing.
    A multi-period model was chosen over a single time period model. A 
single time period failure model requires the choice of the appropriate 
estimation time period. Therefore, it is unable to exploit data outside 
of the chosen time horizon and cannot be readily adapted to include new 
data. For example, a single time period model could not be used to 
capture bank failures in the 1990s, stability in the early 2000s, and 
the bank failures following the 2008 financial crisis. Furthermore, 
there is no systematic way to choose the right sample period for a 
static model.
    The FDIC imposed a constant hazard rate on the model. A constant 
hazard rate implies that the age of the bank does not affect its 
likelihood of future failure. This is in contrast to a non-constant 
hazard rate that may be more appropriate for newer banks that do not 
yet have an established business model or management. However, new 
banks are excluded from the model. Because there is no relationship 
between the age of an established bank (one at least five years old) 
and failure, a constant hazard rate is more appropriate.

C. Time Horizon

    Because deposit insurance assessments should ideally reflect risks 
posed by banking activity as they are assumed rather than when they are 
realized, a three year time horizon was chosen for both the estimation 
and forecasting periods. To obtain predictions for the three-year 
forecast, the FDIC considered one-year, two-year, and three-year time 
horizons in estimating the new model. In each case, the FDIC used only 
contemporaneous data to calculate three-year forecasts. That is, the 
FDIC alternatively used one-year, two-year, and three-year intervals in 
the estimation period (1984--2010) to forecast failures out-of-sample 
from January 1, 2011 through December 31, 2013 based on yearend 2010 
data. The three-year interval tended to outperform the one- and two-
year intervals for three-year out-of-sample forecasting.

D. In-Sample Estimation

    The in-sample estimation time period was chosen to be 1985 through 
2011, incorporating Call Report data through the end of 2011 and 
failures through the end of 2014.
    To avoid having overlapping three-year look-ahead periods for a 
given regression, each regression uses data in which only every third 
year is included. One regression uses insured depository institutions' 
Call Report and TFR data for the end of 1985 and failures from 1986 
through 1988; Call Report and TFR data for the end of 1988 and failures 
from 1989 through 1991; and so on, ending with Call Report data for the 
end of 2009 and failures from 2010 through 2012. (See Table 1.2A 
below.) The second regression uses insured depository institutions' 
Call Report and TFR data for the end of 1986 and failures from 1987 
through 1989, and so on, ending with Call Report data for the end of 
2010 and failures from 2011 through 2013. (See Table 1.2B below.) The 
third regression uses insured depository institutions' Call Report and 
TFR data for the end of 1987 and failures from 1988 through 1990, and 
so on, ending with Call Report data for the end of 2011 and failures 
from 2012 through 2014. (See Table 1.2C below.) Since there is no 
particular reason for favoring any one of these three regressions over 
another, the actual model estimates are constructed as an average of 
each of the three regression estimates for each parameter.
    The regressions only include observations for institutions that are 
at least five years of age, since younger institutions will be subject 
to a different assessment methodology. Also, since the model will be 
applied to banks with under $10 billion in assets, larger banks are not 
included in the regressions.
    The data used for estimation is winsorized (that is, extreme values 
in the data are reset to reduce the effect of outliers) at the 1st 
percentile and 99th percentile levels for each year. For example, if a 
variable for a bank has a value greater than the 99th percentile value 
for that year, then the value for that bank is set to the 99th 
percentile value before estimation is made.
    The test statistics applied follow the analysis of Shumway (2001). 
In Shumway's formulation, the standard test statistics from a logistic 
regression used to assess statistical significance are divided by the 
average number of bank-years per bank; this adjustment corrects for the 
lack of independence between bank-year observations. That is, an 
adjustment is made to account for a bank no longer being observed after 
failure. In tables 1.2A, 1.2B, and 1.2C below, ``WaldChiSq2'' shows the 
adjusted [chi]-square statistic, and ``ProbChiSq2'' the associated 
probability value. (The lower the value of ProbChisSq2, the more 
statistically significant is the parameter estimate. Parameter 
estimates with a ProbChiSq2 below .05 are considered to be 
statistically significant at the .05 level.)
    As reported in Tables 1.2A, 1.2B, and 1.2C, banks with a higher 
leverage ratio are less likely to fail within the next three years. 
Similarly, banks' earnings before taxes and their core deposits to 
assets ratios are negatively correlated with failure probability. In 
contrast, nonperforming loans and the other real estate owned to assets 
ratios are positively correlated with failure probability. Moreover, 
banks with a higher LMI, faster asset growth, and worse weighted CAMELS 
component ratings are more likely to fail within the next three years.
    The estimated coefficients of the variables are statistically 
significant at the 5% level for all three regression sets except for 
the asset growth rate variable. The asset growth rate is statistically 
significant for two out of the three regressions.

             Table 1.2A.--Regression With December 2009 as Last Data Point for Independent Variables
----------------------------------------------------------------------------------------------------------------
                      Variable description                           Estimate       WaldChiSq2      ProbChiSq2
----------------------------------------------------------------------------------------------------------------
Intercept.......................................................         -2.8919         17.3025        0.000032
Tier 1 Leverage Ratio (%).......................................         -0.3522         82.6065        0.000000
Net Income before Taxes/Total Assets (%)........................         -0.1197          8.0705        0.004499
Loan Mix Index..................................................          0.0152         41.9399        0.000000
Core Deposits/Total Assets (%)..................................         -0.0265         23.7705        0.000001

[[Page 40862]]

 
Nonperforming Loans and Leases/Gross Assets (%).................          0.2597         53.1450        0.000000
Other Real Estate Owned/Gross Assets (%)........................          0.1498         10.8676        0.000979
Asset Growth....................................................          0.0161          8.1715        0.004255
Weighted Average of C, A, M, E, L and S Component Ratings.......          0.4888         20.4650        0.000006
----------------------------------------------------------------------------------------------------------------


             Table 1.2B--Regression With December 2010 as Last Data Point for Independent Variables
----------------------------------------------------------------------------------------------------------------
                      Variable description                           Estimate       WaldChiSq2      ProbChiSq2
----------------------------------------------------------------------------------------------------------------
Intercept.......................................................         -1.8213          7.9746        0.004744
Tier 1 Leverage Ratio (%).......................................         -0.3603         82.0847        0.000000
Net Income before Taxes/Total Assets (%)........................         -0.1585         12.7807        0.000350
Loan Mix Index..................................................          0.0210        106.2229        0.000000
Core Deposits/Total Assets (%)..................................         -0.0398         54.8076        0.000000
Nonperforming Loans and Leases/Gross Assets (%).................          0.2358         39.1907        0.000000
Other Real Estate Owned/Gross Assets (%)........................          0.1801         17.7846        0.000025
Asset Growth....................................................          0.0046          0.5448        0.460463
Weighted Average of C, A, M, E, L and S Component Ratings.......          0.3432          9.9098        0.001644
----------------------------------------------------------------------------------------------------------------


             Table 1.2C--Regression With December 2011 as Last Data Point for Independent Variables
----------------------------------------------------------------------------------------------------------------
                      Variable Description                           Estimate       WaldChiSq2      ProbChiSq2
----------------------------------------------------------------------------------------------------------------
Intercept.......................................................         -2.1862         10.9481        0.000937
Tier 1 Leverage Ratio (%).......................................         -0.3410         75.4433        0.000000
Net Income before Taxes/Total Assets (%)........................         -0.2354         31.0665        0.000000
Loan Mix Index..................................................          0.0157         43.3664        0.000000
Core Deposits/Total Assets (%)..................................         -0.0429         59.4956        0.000000
Nonperforming Loans and Leases/Gross Assets (%).................          0.2325         37.6910        0.000000
Other Real Estate Owned/Gross Assets (%)........................          0.1584         12.0705        0.000512
Asset Growth....................................................          0.0133          5.5076        0.018934
Weighted Average of C, A, M, E, L and S Component Ratings.......          0.5318         22.3623        0.000002
----------------------------------------------------------------------------------------------------------------

    The parameter estimates applied for the assessments are the average 
of the estimates from the three regressions above. These average values 
are show in table 1.2D.

  Table 1.2D--Average of the Parameter Estimates Over Three Regressions
------------------------------------------------------------------------
                  Variable description                       Estimate
------------------------------------------------------------------------
Intercept...............................................         -2.2998
Tier 1 Leverage Ratio (%)...............................         -0.3512
Net Income before Taxes/Total Assets (%)................         -0.1712
Loan Mix Index..........................................          0.0173
Core Deposits/Total Assets (%)..........................         -0.0364
Nonperforming Loans and Leases/Gross Assets (%).........          0.2427
Other Real Estate Owned/Gross Assets (%)................          0.1628
Asset Growth............................................          0.0113
Weighted Average of C, A, M, E, L and S Component                 0.4546
 Ratings................................................
------------------------------------------------------------------------

    When the new model is used to determine assessment rates, the 
variables Asset Growth and Net Income before Taxes/Total Assets are 
each bounded as follows:

Asset Growth <= 190-25 <= Net Income before Taxes/Total Assets <= 3.

For example, if Asset Growth is greater than 190 (percent) then it is 
reset to 190 to determine assessment rates. After the parameters shown 
in table 1.2D were obtained, the values of these bounds were determined 
by performing an iterative series of backtests covering data from 1985 
to 2011, with each iteration testing a different combination of bounds; 
the combination of bounds that resulted in the best rank correlation 
(Kendall's tau) between probability of failure and actual failure is 
the combination of bounds selected.

IV. Validation

A. Backtest Comparison of the Proposal to the Current RRPS System

    Using initial base assessment rates,\70\ the FDIC also compared the 
out-of-sample forecast accuracy of the proposal in this NPR, which is 
based on the new model, to the current small bank deposit insurance 
system's financial ratios method's assessment rankings.\71\ Comparisons 
were made for projections as of the end of six different years, 2006 
through 2011, and are shown graphically using cumulative accuracy 
profile (CAP) curves. A CAP curve is illustrated in Figure 1.1. Suppose 
that banks are ranked on a percentile basis according to a model's 
predicted probability of failure, with the ranking in descending order. 
Thus the banks with the highest predicted probability of failure would 
have a percentile rank near zero, while the banks with the

[[Page 40863]]

lowest predicted probability of failure would have a percentile rank 
near 100. In Figure 1.1, the horizontal axis represents this bank 
percentile rank. The vertical axis represents the cumulative percentage 
of actual failures. For example, the point marked by ``X'' indicates 
that the 30 percent of banks with the highest projected probability of 
failure included 50 percent of the banks that actually failed. In 
general, when comparing a CAP curve for alternative models, a model 
with a higher CAP curve (one with more area underneath it) would be the 
superior model.
---------------------------------------------------------------------------

    \70\ The current small bank deposit insurance assessment system 
did not exist at the end of 2006 and existed in somewhat different 
forms in years before 2011. The comparison assumes that the small 
bank deposit insurance assessment system in its current form and the 
proposal in this NPR (assuming a revenue neutral conversion to 
assessment rates as of the end of 2014) had been in effect in each 
year of the comparison.
    \71\ For the out-of-sample backtests, the parameters applied are 
the average of the parameters from three separate regressions, as in 
the new model, except with more recent three-year periods omitted. 
Using Table 1.3 as an example, one regression uses data from the end 
of 1985 and failures from 1986 through 1988; data for the end of 
1988 and failures from 1989 through 1991; and so on, ending with 
data for the end of 2003 and failures from 2004 through 2006. The 
second regression uses data from the end of 1987 and failures from 
1988 through 1990, and so on, ending with data for the end of 2002 
and failures from 2003 through 2005. The third regression uses data 
from the end of 1986 and failures from 1987 through 1989, and so on, 
ending with data for the end of 2001 and failures from 2002 through 
2004.
[GRAPHIC] [TIFF OMITTED] TP13JY15.149

    Figure 1.2 shows the CAP curve for a model (dotted line) compared 
with two limiting CAP curves. The ``random'' curve (single straight 
line) shows what the CAP would look like if the model prediction were 
purely random; for example, the 30 percent of banks with the highest 
failure projections would include 30 percent of actual failures. At the 
other extreme, the two solid straight lines show a CAP curve for a 
model that perfectly differentiates banks that fail from banks that do 
not in its projections; thus, for example, assuming that 20 percent of 
all banks actually failed, for the ``perfect'' model, the 20 percent of 
banks with the highest projected failure probability would identify 100 
percent of failures.\72\
---------------------------------------------------------------------------

    \72\ The accuracy ratio can be derived from the CAP curve. For 
the model depicted by the curved line in Figure 1.2, the area 
between the curved line and the dotted straight line is a measure of 
the superiority of the model over the random benchmark. The area 
between the solid line and the dotted straight line is a measure of 
the superiority of a ``perfect'' model over the random benchmark. 
The ratio of these two areas is the accuracy ratio for the model 
depicted by the curved line. The value is normalized so that it is 
always less than or equal to 1. An accuracy ratio of 1 occurs in the 
case of a perfect model, and is 0 in the case of a model that does 
no better than random guessing. (For the illustrative example in 
Figure 1.2, the accuracy ratio of the model depicted by the curved 
line is .396.)

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

[[Page 40864]]

[GRAPHIC] [TIFF OMITTED] TP13JY15.150

    To illustrate the application of CAP curves to the assessment 
system, Figure 1.3 shows a CAP curve for the current small bank deposit 
insurance system based on its risk ranking (as reflected in assessment 
rates) as of 2006 and on failures over the next three years (2007 
through 2009). The horizontal axis coordinates for four points on this 
curve, ``IV'', ``III'', ``II'', and ``I Max'', corresponding to the 
percentage of small banks reported in Column (A) in Table 1.3 below, 
and the vertical axis coordinates for the points correspond to the 
percentage of failures contained within these percentages of small 
banks, as shown in column (B) in Table 1.3. For example, the point in 
Figure 1.3 marked ``IV'' is 0.06 (percentage of small banks in Risk 
Category IV) on the horizontal axis and 0.65 (percentage of actual 
failures among small banks in Risk Category IV) on the vertical axis. 
Similarly, all points to the left of the point marked ``III'' in Figure 
1.3 are Risk Category III and IV rated small banks.
    The banks along the horizontal axis corresponding to the horizontal 
axis coordinates between the points ``II'' and ``I Max'' represent Risk 
Category I small banks that are assessed at the maximum assessment rate 
for that category. The banks corresponding to the horizontal axis 
coordinates between the points ``I Max'' and ``I Var'' represent Risk 
Category I small banks that are differentially assessed between the 
maximum and minimum assessment rates for Risk Category I. (Point ``I 
Var'' is not included in Table 1.3.) Banks to the right of the 
horizontal axis coordinate for the point ``I Var'' represent Risk 
Category I small banks that were assessed at the minimum assessment 
rate.

 Table 1.3--Comparisons of Out-of-Sample Projection of New Model To the Small Bank Deposit Insurance Assessment
                                          System's Rankings for 2006 *
----------------------------------------------------------------------------------------------------------------
                                                                        (A)             (B)             (C)
                                                                 -----------------------------------------------
                                                                                                   Percentage of
                                                                   Percentage of                      actual
                                                                    Small Banks    Percentage of  failures among
                                                                      in Risk         actual        riskiest X
                                                                   Categories (X  failures among    Percent of
                                                                     Percent)      the X Percent    banks under
                                                                                                   the proposal
----------------------------------------------------------------------------------------------------------------
Risk Category IV................................................            0.06            0.65            1.29
Risk Categories IV and III......................................            0.66            3.23            6.61
Risk Categories IV, III, and II.................................            5.35           14.19           40.00

[[Page 40865]]

 
Risk Categories IV, III, II, and Max. Rate RC I.................           12.79           34.19           57.42
----------------------------------------------------------------------------------------------------------------
* New Model Projections use 2003 as Last Year of Estimation Data.

    Where a group of banks along the horizontal axis all have the same 
risk ranking (that is, where they would all pay the same assessment 
rate), the CAP curve is constructed as if the failures that occur 
within this group are uniformly distributed, resulting in a straight 
line (shown as two parallel lines in CAP curve). Thus, for example, the 
26 failures that occurred among the banks on the horizontal axis to the 
right of ``I Var'', which represent the 3,011 Risk Category I small 
banks that were assessed at the minimum assessment rate as of the end 
of 2006, are shown as uniformly distributed among this group (that is, 
as if each successive bank represented 26/3,011 of a failure). This 
representation results in the straight line between point ``I Var'' and 
the point to the extreme upper right of the curve.
[GRAPHIC] [TIFF OMITTED] TP13JY15.151

    Figure 1.4 shows the same CAP curve as Figure 1.3, but adds a CAP 
curve based on the proposal's risk ranking (as reflected in assessment 
rates) as of 2006 and on failures over the next three years (2007 
through 2009).\73\ Just as Table 1.3 implies, the proposal is superior 
to the current system at all points. The proposal is obviously superior 
at the

[[Page 40866]]

points marked by ``III'', ``II'', and ``I Max''. The distinction 
between the point marked by ``IV'' (for the current small bank deposit 
insurance system) and the graph for the proposal is difficult to see in 
the graph, but Table 1.3 shows that the proposal has a vertical value 
of 1.29 at that point, which is superior to the value of 0.65 for the 
current small bank deposit insurance system.
---------------------------------------------------------------------------

    \73\ The horizontal axis shows the risk rank order percentile 
for each model (the current small bank deposit insurance assessment 
system and the proposal), but, because the rankings are different 
under the two models, as a general rule, the bank that corresponds 
to any given point along the horizontal axis is likely to be 
different from one model to the other.
---------------------------------------------------------------------------

    As discussed earlier, for the current small bank deposit insurance 
assessment system, banks along the horizontal axis corresponding to the 
horizontal axis coordinates between the points ``I Max'' and ``I Var'' 
represent Risk Category I small banks that are assessed between the 
maximum and minimum assessment rates for Risk Category I. The proposal 
is superior in this entire range for 2006.
[GRAPHIC] [TIFF OMITTED] TP13JY15.152

    Figure 1.5 shows the same CAP curve based on the proposal's 
projections as of 2007 and on failures over the next three years (2008 
through 2010). The proposal is superior at all points except ``IV'' and 
the points to the left of that point, where the two models yield 
identical results.

[[Page 40867]]

[GRAPHIC] [TIFF OMITTED] TP13JY15.153

    Figure 1.6 shows the same CAP curve based on the proposal's 
projections as of 2008 and on failures over the next three years (2009 
through 2011). The proposal is superior at most points (especially 
between ``III'' and the horizontal-axis 57-percentile level) and is 
nearly identical to the current model at remaining points.

[[Page 40868]]

[GRAPHIC] [TIFF OMITTED] TP13JY15.154

    Figure 1.7 shows CAP curves for 2009. (Note that the vertical axis 
is not zero based.) The proposal is superior at most points and 
approximately equal to the current model at some points (near IV, and 
at points to the right of the ``X'').

[[Page 40869]]

[GRAPHIC] [TIFF OMITTED] TP13JY15.155

    Figure 1.8 shows CAP curves for 2010. When using 2010 data to rank-
order small banks based on failure likelihood, the proposal performs 
worse than the current small bank deposit insurance system for the 2.76 
percent of worst-rated small banks (the percentage of banks in Risk 
Category IV). Bank failures after 2010 occurred in the earlier part of 
the three-year horizon (more failures in 2011 than in 2013). In such 
instances, the current small bank deposit insurance system, which has a 
one-year forecast horizon, can perform better than the proposal with a 
longer forecast horizon. However, the proposal performs better than or 
as well as the current model for all points to the right of the 
intersection of the two curves (near the point marked ``IV'').

[[Page 40870]]

[GRAPHIC] [TIFF OMITTED] TP13JY15.156

    A similar pattern is observed for projections from 2011, in Figure 
1.9. The current small bank deposit insurance system is superior at 
point IV, as well as a few points from the 51st to 60th percentiles on 
the horizontal axis. At all other points, the proposal is superior or 
equal to the current model.

[[Page 40871]]

[GRAPHIC] [TIFF OMITTED] TP13JY15.157

    Overall, the proposal is superior to the current small bank deposit 
insurance system for all years. The superiority of the new model is 
much stronger for projections from the years 2006, 2007, and 2008 than 
in the years 2010 and 2011. By 2010, CAMELS ratings largely reflected 
the weakened condition of many banks. Furthermore, for projections from 
2010 and 2011, a large portion of the failures of the subsequent three-
year horizon were near term--that is, in the earlier part of the three-
year horizon. For projections done from 2006, 2007 and 2008, a larger 
portion of the actual failures were further out in the three-year 
horizon. Thus, while CAMELS 4 and 5 ratings can be good predictors of 
near-term failures, the additional indicators from the new model 
contribute more to forecasting accuracy when the failures are further 
out in time.

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Appendix 1.1--Loan Mix Index

    The ``Loan Mix Index'' provides a measure of the extent to which 
banks hold higher risk types of assets. This index uses historical 
charge-off rates to identify loans types with higher risk. For each 
loan type, a ``weighted charge-off rate'' (shown in the table below) is 
calculated, which is the average charge-off rate for that loan type for 
each year since 2001 weighted by the number of bank failures in the 
year. (Thus charge-off rates during crisis years have more weight.) 
Table 1.1.1 below illustrates how the LMI is calculated for a 
hypothetical bank. The ``weighted charge-off rate'' values shown in the 
table are the same for all banks because they are industry-wide 
weighted averages. The remaining two columns will vary across banks, 
depending on the banks' portfolios. For each loan type, the value in 
the rightmost column is calculated by multiplying the ``weighted 
charge-off rate'' by the bank's loans (for that type) as a percent of 
its total assets. In this illustration, the sum of the right-hand 
column (84.79) is the LMI for this bank.

                             Table 1.1.1--Loan Mix Index for a Hypothetical Bank \1\
----------------------------------------------------------------------------------------------------------------
                                                                                   Loan category
                                                                                   as a percent
                                                                     Weighted           of        Product of two
                                                                    charge-off     hypothetical   columns to the
                                                                   rate percent    bank's total        left
                                                                                      assets
----------------------------------------------------------------------------------------------------------------
Construction & Development......................................            4.50            1.40            6.29
Commercial & Industrial.........................................            1.60           24.24           38.75
Leases..........................................................            1.50            0.64            0.96
Other Consumer..................................................            1.46           14.93           21.74
Loans to Foreign Government.....................................            1.34            0.24            0.32
Real Estate Loans Residual......................................            1.02            0.11            0.11
Multifamily Residential.........................................            0.88            2.42            2.14
Nonfarm Nonresidential..........................................            0.73           13.71            9.99
1-4 Family Residential..........................................            0.70            2.27            1.58
Loans to Depository banks.......................................            0.58            1.15            0.66
Agricultural Real Estate........................................            0.24            3.43            0.82
Agriculture.....................................................            0.24            5.91            1.44
                                                                 -----------------------------------------------
    SUM (Loan Mix Index)........................................  ..............           70.45           84.79
----------------------------------------------------------------------------------------------------------------

    Credit card loans are excluded from the list of ``loan types. 
Although credit card loans have high charge-off rates, they tend to 
also have high interest rates. The LMI also excludes obligations of 
states and other political subdivisions in the U.S., loans to 
nondepository financial institutions, and loans classified as ``other 
loans.'' There is no reported charge-off data for these types of loans.
---------------------------------------------------------------------------

    \1\ The table shows industry-wide weighted charge-off percentage 
rates, the loan category as a percentage of total assets, the 
products and the sum (the loan mix index) to two decimal places. The 
final rule will use seven decimal places for industry-wide weighted 
charge-off percentage rates, and as many decimal places as permitted 
by the FDIC's computer systems for the loan category as a percentage 
of total assets and the products. The total (the loan mix index 
itself) will use three decimal places.
---------------------------------------------------------------------------

Appendix 1.2--Variables Tested

Capital

Total equity/Total assets
Reserves/Total assets
Reserve coverage ratio = (allowance for loan & lease losses + allocated 
transfer risk reserve)/(past-due 90 days and non-accrual loans)

Asset Quality

Loans past due 30-89/Assets
Loans past due 90+ days/Assets
Nonaccrual loans and leases/Assets
Other real estate owned/Assets
Nonperforming Loans/Assets = SUM(past dues 90+, nonaccrual loans)/
Assets
Gross loan charge-offs/Assets
Net loan charge-offs/Assets
Loan loss provision/Assets
Loan loss provision/Gross charge-offs
Change in loan loss provision
Gross loan charge-offs/(Net income + Provisions of loan losses)

Earnings

Income before taxes/Assets
Interest income
Interest expense
Net operating income/Assets
Net interest income/Assets
Deposit interest expense/Total deposits
Earnings volatility: 4-quarter standard deviation of income before 
taxes, 8-quarter standard deviation of income before taxes

Liquidity

Noncore liabilities/Assets
Loans and Leases/Total deposits
Liquid assets/Assets

Other measures

Loan concentration index
One-year asset growth rate
Quartile ranking of one-year asset growth rate
Retained earnings/Assets
Cash dividends on capital stock/Net income

[[Page 40873]]

Efficiency Ratio = Non-interest expenses/(Interest income + Non-
interest income)

Supervisory Rating

Weighted average CAMELS component rating
CAMELS composite rating

Appendix 2--Analysis of the Projected Effects of the Payment of 
Assessments on the Capital and Earnings of Insured Depository 
Institutions

I. Introduction

    This analysis estimates the effect of the changes in the deposit 
insurance assessment system and assessment rates in the proposed rule 
on the equity capital and profitability of banks.\1\ The changes 
considered in the proposed rule affect only established small banks; 
they do not affect new banks, large banks or insured branches of 
foreign banks.
---------------------------------------------------------------------------

    \1\ As it is elsewhere in this NPR, in this appendix, the term 
``bank'' is synonymous with the term ``insured depository 
institution'' and the term ``established small bank'' is synonymous 
with the term ``established small depository institution'' as it is 
used in 12 CFR part 327. In general, an ``established small bank'' 
is one that has less than $10 billion in assets and that has been 
federally insured for at least five years as of the last day of any 
quarter for which it is being assessed.
---------------------------------------------------------------------------

    This appendix analyzes how the new assessment system under the 
proposed range of initial base assessment rates of 3 basis points to 30 
basis points (P330) could increase or decrease earnings and capital 
relative to the current initial base assessment rate schedule of 5 
basis points to 35 basis points (C535) and relative to the initial base 
assessment rate schedule of 3 basis points to 30 basis points (C330) 
that will take effect when the reserve ratio exceeds 1.15 percent under 
current regulations (i.e., absent adoption of the proposed rule as a 
final rule). The proposed rule (P330) is intended to maintain 
approximate revenue neutrality compared to C330. Therefore, for insured 
established small banks in aggregate, the proposed rule will not affect 
aggregate earnings and capital compared to C330. Compared to the 
current system under current assessment rates, however, banks in the 
aggregate will have higher earnings and capital under the proposal. 
This analysis focuses on the magnitude of increases or decreases to 
individual established small banks' earnings and capital resulting from 
the proposed rule.

II. Assumptions and Data

    The analysis assumes that pre-tax income for the next four quarters 
for each established small bank is equal to income in the fourth 
quarter of 2014. The analysis also assumes that the effects of changes 
in assessments are not transferred to customers in the form of changes 
in borrowing rates, deposit rates, or service fees. Since deposit 
insurance assessments are a tax-deductible operating expense, increases 
in the assessment expense can lower taxable income and decreases in the 
assessment expense can increase taxable income. Therefore, the analysis 
considers the effective after-tax cost of assessments in calculating 
the effect on capital.
    The effect of the change in assessments on an established small 
bank's income is measured by the change in deposit insurance 
assessments as a percent of income before assessments, taxes, and 
extraordinary items (hereafter referred to as ``income''). This income 
measure is used in order to eliminate the potentially transitory 
effects of extraordinary items and taxes on profitability. In order to 
facilitate a comparison of the impact of assessment changes, 
established small banks were assigned to one of two groups: those that 
were profitable and those that were unprofitable for the year ending 
December 31, 2014. For this analysis, data as of December 31, 2014 are 
used to calculate each bank's assessment base and risk-based assessment 
rate. The base and rate are assumed to remain constant throughout the 
one year projection period. An established small bank's earnings 
retention and dividend policies also influence the extent to which 
assessments affect equity levels. If an established small bank 
maintains the same dollar amount of dividends when it pays a higher 
deposit insurance assessment under the proposed rule, equity (retained 
earnings) will be less by the full amount of the after-tax cost of the 
increase in the assessment. This analysis instead assumes that an 
established small bank will maintain its dividend rate (that is, 
dividends as a fraction of net income) unchanged from the weighted 
average rate reported over the four quarters ending December 31, 2014.

III. Projected Effects on Capital and Earnings Assuming a Range of 
Assessment Rates under the Current Established Small Bank Deposit 
Insurance Assessment System of 5 Basis Points to 35 Basis Points and 
under the Proposed System of 3 Basis Points to 30 Basis Points 
(Assessment Change P330-C535)

    Under this scenario, no established small banks facing an increase 
in assessments would, as a result of the assessment increase, fall 
below a 4 percent or 2 percent leverage ratio. Two established small 
banks facing a decrease in assessments would, as a result of the 
decrease, have their leverage ratio rise above the 4 percent threshold. 
No established small banks facing a decrease in assessments would, as a 
result of the assessment decrease, have their leverage ratio rise above 
the 2 percent threshold.

[[Page 40874]]

    Table 2.1 shows that approximately 83 percent of profitable 
established small banks are projected to have a decrease in assessments 
in an amount between 0 and 10 percent of income. Another 9 percent of 
profitable established small banks would have a reduction in 
assessments exceeding 10 percent of their income. 453 profitable 
established small banks would have an increase in assessments, with all 
but 7 of them facing assessment increases between 0 and10 percent of 
their income.
[GRAPHIC] [TIFF OMITTED] TP13JY15.158


[[Page 40875]]


    Table 2.2 provides the same analysis for established small banks 
that were unprofitable during the year ending December 31, 2014. Table 
2.2 shows that about 51 percent of unprofitable established small banks 
are projected to have a decrease in assessments in an amount between 0 
and 10 percent of their losses. Another 43 percent will have lower 
assessments in amounts exceeding 10 percent income. Only 25 
unprofitable banks will face assessment increases, all but 2 of them in 
amounts between 0 and 10 percent of losses.
[GRAPHIC] [TIFF OMITTED] TP13JY15.159


[[Page 40876]]



IV. Projected Effects on Capital and Earnings Assuming a Range of 
Initial Base Assessment Rates Under Both the Current Established Small 
Bank Deposit Insurance Assessment System and the Proposed System of 3 
Basis Points to 30 Basis Points (P330-C330)

    Under this scenario, no established small banks facing an increase 
in assessments would, as a result of the assessment increase, fall 
below a 4 percent or 2 percent leverage ratio. One established small 
bank facing a decrease in assessments would, as a result of the 
assessment decrease, have its leverage ratio rise above the 4 percent 
threshold.
    Table 2.3 shows that approximately 54 percent of profitable 
established small banks are projected to have a decrease in assessments 
in an amount between 0 and 10 percent of income. Another 4 percent of 
profitable established small banks would have a reduction in 
assessments exceeding 10 percent of their income. 1,211 profitable 
established small banks would have an increase in assessments, with all 
but 27 facing assessment increases between 0 and10 percent of their 
income.
[GRAPHIC] [TIFF OMITTED] TP13JY15.160

    Table 2.4 provides the same analysis for established small banks 
that were unprofitable during the year ending December 31, 2014. Table 
2.4 shows that about 57 percent of unprofitable established small banks 
are projected to have a decrease in assessments in an amount between 0 
and 10 percent of their losses. Another 27 percent will have lower 
assessments in amounts exceeding 10 percent of their losses. Only 59 
unprofitable banks will face assessment increases, all but 6 of them in 
amounts between 0 and 10 percent of losses.

[[Page 40877]]

[GRAPHIC] [TIFF OMITTED] TP13JY15.161

X. Revisions to Code of Federal Regulations

List of subjects in 12 CFR Part 327.

    Bank deposit insurance, Banks, Savings Associations.
    For the reasons set forth above, the FDIC proposes to amend part 
327 as follows:

PART 327--ASSESSMENTS

0
1. The authority for 12 CFR part 327 continues to read as follows:

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


Sec.  327.3  [Amended]

0
2. Amend Sec.  327.3, in paragraph (b), by removing ``Sec. Sec.  
327.4(a) and 327.9'' and adding its place ``Sec.  327.4(a) and Sec.  
327.9 or Sec.  327.16''.


Sec.  327.4  [Amended]

0
3. Amend Sec.  327.4:
0
a. In paragraph (a), by removing ``Sec.  327.9'' and adding in its 
place ``Sec.  327.9 or Sec.  327.16''.
0
b. In paragraph (c), by removing ``Sec.  327.9(e)(3)'' and adding in 
its place ``Sec. Sec.  327.9(f)(3) and 327.16 (f)(3)''.
0
4. Amend Sec.  327.8:
0
a. In paragraph (e) and (f), by removing ``Sec.  327.9(e)'' and adding 
in its place ``Sec. Sec.  327.9(f) and 327.16 (f)''.
0
b. In paragraph (k)(1), by removing ``Sec.  327.9(f)(3) and (4)'' and 
adding in its place ``Sec. Sec.  327.9(g)(3) and (4) and 327.16 (f)(3) 
and (4)''.
0
c. By revising paragraph (l).
0
d. In paragraphs (m), (n), (o), and (p), by removing ``Sec.  
327.9(d)(1)'' and adding in its place ``Sec. Sec.  327.9(e)(1) and 
327.16(e)(1)'' and removing ``Sec.  327.9(d)(2)'' and adding in its 
place ``Sec. Sec.  327.9(e)(2) and 327.16(e)(2).''
0
e. By adding paragraphs (v) through (z).
    The revision and additions read as follows:


Sec.  327.8  Definitions.

* * * * *
    (l) Risk assignment. Under Sec.  327.9, for all small institutions 
and insured branches of foreign banks, risk assignment include 
assignment to Risk Category I, II, III, or IV and, within Risk Category 
I, assignment to an assessment rate. Under Sec.  327.16, for all new 
small institutions and insured branches of foreign banks, risk 
assignment includes assignment to Risk Category I, II, III, or IV, and 
for insured branches of foreign banks within Risk Category I, 
assignment to an assessment rate or rates. For all established small 
institutions, large institutions and highly complex institutions, risk 
assignment includes assignment to an assessment rate.
* * * * *
    (v) Established small institution--An established small institution 
is a ``small institution'' as defined under paragraph (e) of this 
section that meets the definition of ``established depository

[[Page 40878]]

institution'' under paragraph (k) of this section.
    (w) New small institution--A new small institution is a ``small 
institution'' as defined under paragraph (e) of this section that meets 
the definition of ``new depository institution'' under paragraph (j) of 
this section.
    (y) Deposit Insurance Fund and DIF--the Deposit Insurance Fund 
established pursuant to 12 U.S.C. 1813(y)(1).
    (z) Reserve ratio of the DIF--the reserve ratio as defined in 12 
U.S.C. 1813(y)(3).
0
5. Amend Sec.  327.9 by adding introductory text to read as follows:


Sec.  327.9  Assessment pricing methods.

    The following pricing methods shall apply through the calendar 
quarter in which the reserve ratio of the DIF reaches 1.15 percent for 
the first time after June 30, 2015.
* * * * *
0
6. Add Sec.  327.16 to read as follows:


Sec.  327.16  Assessment pricing methods--beginning the first calendar 
quarter after the calendar quarter in which the reserve ratio of the 
DIF reaches 1.15 percent.

    (a) Established small institutions. Beginning the first calendar 
quarter after June 30, 2015 in which the reserve ratio of the DIF 
reached or exceeded 1.15 percent in the previous calendar quarter, an 
established small institution shall have its initial base assessment 
rate determined by using the financial ratios methods set forth in 
paragraph (a)(1) of this section.
    (1) Under the financial ratios method, each of seven financial 
ratios and a weighted average of CAMELS component ratings will be 
multiplied by a corresponding pricing multiplier. The sum of these 
products will be added to a uniform amount. The resulting sum shall 
equal the institution's initial base assessment rate; provided, 
however, that no institution's initial base assessment rate shall be 
less than the minimum initial base assessment rate in effect for 
established small institutions with a particular CAMELS component 
rating for that quarter nor greater than the maximum initial base 
assessment rate in effect for established small institutions with a 
particular CAMELS component rating for that quarter. An institution's 
initial base assessment rate, subject to adjustment pursuant to 
paragraphs (e)(1), (2), and (3) of this section, as appropriate 
(resulting in the institution's total base assessment rate, which in no 
case can be lower than 50 percent of the institution's initial base 
assessment rate), and adjusted for the actual assessment rates set by 
the Board under Sec.  327.10(g), will equal an institution's assessment 
rate. The seven financial ratios are: Tier 1 Leverage Ratio (%); Net 
Income before Taxes/Total Assets (%); Nonperforming Loans and Leases/
Gross Assets (%); Other Real Estate Owned/Gross Assets (%); Core 
Deposits/Total Assets (%); One Year Asset Growth (%); and Loan Mix 
Index. The ratios are defined in Table A.1 of Appendix A to this 
subpart. The ratios will be determined for an assessment period based 
upon information contained in an institution's report of condition 
filed as of the last day of the assessment period as set out in 
paragraph (a)(2) of this section. The weighted average of CAMELS 
component ratings is created by multiplying each component by the 
following percentages and adding the products: Capital adequacy--25%, 
Asset quality--20%, Management--25%, Earnings--10%, Liquidity--10%, and 
Sensitivity to market risk--10%. The following table sets forth the 
initial values of the pricing multipliers:

------------------------------------------------------------------------
                                                     Pricing multipliers
                  Risk measures *                             **
------------------------------------------------------------------------
Tier 1 Leverage ratio..............................                [__]
Net Income before Taxes/Total Assets...............                [__]
Nonperforming Loans and Leases/Gross Assets........                [__]
Other Real Estate Owned/Gross Assets...............                [__]
Core Deposits/Total Assets.........................                [__]
One Year Asset Growth..............................                [__]
Loan Mix Index.....................................                [__]
Weighted Average CAMELS Component Rating...........                [__]
------------------------------------------------------------------------
* Ratios are expressed as percentages.
** Multipliers are rounded to three decimal places.

    (i) The seven financial ratios and the weighted average CAMELS 
component rating will be multiplied by the respective pricing 
multiplier, and the products will be summed. To this result will be 
added the uniform amount. The resulting sum shall equal the 
institution's initial base assessment rate; provided, however, that no 
institution's initial base assessment rate shall be less than the 
minimum initial base assessment rate in effect for the applicable 
CAMELS composite grouping set out in Sec.  327.10 for that quarter nor 
greater than the maximum initial base assessment rate in effect for the 
applicable CAMELS composite grouping set out in Sec.  327.10 for that 
quarter.
    (ii) Uniform amount and pricing multipliers. Except as adjusted for 
the actual assessment rates set by the Board under Sec.  327.10(f), the 
uniform amount shall be:
    (A) __ whenever the assessment rate schedule set forth in Sec.  
327.10(b) is in effect;
    (C) __ whenever the assessment rate schedule set forth in Sec.  
327.10(c) is in effect; or
    (D) __ whenever the assessment rate schedule set forth in Sec.  
327.10(d) is in effect.
    (iii) Implementation of CAMELS rating changes--(A) Composite rating 
change. If, during a quarter, a CAMELS composite rating change occurs 
in a way that changes the institution's initial base assessment rate, 
then the institution's initial base assessment rate for the portion of 
the quarter prior to the change shall be determined using the 
assessment schedule for the appropriate CAMELS composite rating in 
effect before the change, including any minimum or maximum initial base 
assessment rates, and subject to adjustment pursuant to paragraphs 
(e)(1) through (3) of this section, as appropriate, and adjusted for 
actual assessment rates set by the Board under Sec.  327.10(f). For the 
portion of the quarter after the CAMELS composite rating change, the 
institution's initial base assessment rate shall be determined using 
the assessment schedule for the applicable CAMELS composite rating in 
effect, including any minimum or maximum initial base assessment rates, 
and subject to adjustment pursuant to paragraphs (e)(1) through (3) of 
this section, as appropriate, and adjusted for actual assessment rates 
set by the Board under Sec.  327.10(f).

[[Page 40879]]

    (B) Component ratings changes. If, during a quarter, a CAMELS 
component rating change occurs in a way that changes the institution's 
initial base assessment rate, the initial base assessment rate for the 
period before the change shall be determined under the financial ratios 
method using the CAMELS component ratings in effect before the change, 
subject to adjustment under paragraphs (e)(1) through (3) of this 
section, as appropriate. Beginning on the date of the CAMELS component 
rating change, the initial base assessment rate for the remainder of 
the quarter shall be determined under the financial ratios method using 
the CAMELS component ratings in effect after the change, again subject 
to adjustment under paragraphs (e)(1) through (3), as appropriate.
    (2) Applicable reports of condition. The financial ratios used to 
determine the assessment rate for an established small institution 
shall be based upon information contained in an institution's 
Consolidated Reports of Condition and Income or Thrift Financial Report 
(or successor report, as appropriate) dated as of March 31 for the 
assessment period beginning the preceding January 1; dated as of June 
30 for the assessment period beginning the preceding April 1; dated as 
of September 30 for the assessment period beginning the preceding July 
1; and dated as of December 31 for the assessment period beginning the 
preceding October 1.
    (b) Large and Highly Complex institutions--(1) Assessment scorecard 
for large institutions (other than highly complex institutions). (i) A 
large institution other than a highly complex institution shall have 
its initial base assessment rate determined using the scorecard for 
large institutions.

                    Scorecard for Large Institutions
------------------------------------------------------------------------
                                              Measure        Component
                  Scorecard measures and      weights         weights
                        components           (percent)       (percent)
------------------------------------------------------------------------
P..............  Performance Score......  ..............  ..............
P.1............  Weighted Average CAMELS             100              30
                  Rating.
P.2............  Ability to Withstand     ..............              50
                  Asset-Related Stress.
                 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).

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

------------------------------------------------------------------------
                                                              Weight
                    CAMELS component                         (percent)
------------------------------------------------------------------------
C.......................................................              25
A.......................................................              20
M.......................................................              25
E.......................................................              10
L.......................................................              10
S.......................................................              10
------------------------------------------------------------------------

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

[[Page 40880]]



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

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

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

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

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

    (C) Total score. (1) The performance and loss severity scores are 
combined to produce a total score. The loss severity score is converted 
into a loss severity factor that ranges from 0.8 (score of 5 or lower) 
to 1.2 (score of 85 or higher). Scores at or below the minimum cutoff 
of 5 receive a loss severity factor of 0.8, and scores at or above the 
maximum cutoff of 85 receive a loss severity factor of 1.2. The 
following linear interpolation converts loss severity scores between 
the cutoffs into a loss severity factor:

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

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

[[Page 40881]]

a total score of 90 pays the maximum initial base assessment rate. For 
total scores between 30 and 90, initial base assessment rates rise at 
an increasing rate as the total score increases, calculated according 
to the following formula:
[GRAPHIC] [TIFF OMITTED] TP13JY15.162


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

    (2) Assessment scorecard for highly complex institutions. (i) A 
highly complex institution shall have its initial base assessment rate 
determined using the scorecard for highly complex institutions.

                Scorecard for Highly Complex Institutions
------------------------------------------------------------------------
                                              Measure        Component
                 Measures and components      weights         weights
                                             (percent)       (percent)
------------------------------------------------------------------------
P..............  Performance Score......  ..............  ..............
P.1............  Weighted Average CAMELS             100              30
                  Rating.
P.2............  Ability To Withstand     ..............              50
                  Asset-Related Stress.
                 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
------------------------------------------------------------------------

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

------------------------------------------------------------------------
                                                              Weight
                    CAMELS component                         (percent)
------------------------------------------------------------------------
C.......................................................              25
A.......................................................              20
M.......................................................              25
E.......................................................              10
L.......................................................              10
S.......................................................              10
------------------------------------------------------------------------

    (ii) A weighted average CAMELS rating converts to a score that 
ranges from 25 to 100. A weighted average rating of 1 equals a score of 
25 and a weighted average of 3.5 or greater equals a score of 100. 
Weighted average CAMELS ratings between 1 and 3.5 are assigned a score 
between 25 and 100. The score increases at an increasing rate as the 
weighted average CAMELS rating increases. Appendix B of this subpart 
describes the conversion of a weighted average CAMELS rating to a 
score.
    (2) Ability to withstand asset-related stress score. (i) The 
ability to withstand asset-related stress score is a weighted average 
of the scores for four measures: Leverage ratio; concentration measure; 
ratio of core earnings to average quarter-end total assets; credit 
quality measure and market risk measure. Appendix A of this subpart 
describes these measures.
    (ii) The Leverage ratio and the ratio of core earnings to average 
quarter-end total assets are described in appendix A and the method of 
calculating the scores is described in appendix B of this subpart.
    (iii) The score for the concentration measure for highly complex 
institutions is the greatest of the higher-risk assets to the sum of 
Tier 1 capital and reserves score, the top 20 counterparty exposure to 
the sum of Tier 1 capital and reserves score, or the largest 
counterparty exposure to the sum of Tier 1 capital and reserves score. 
Each ratio is described in appendix A of this subpart. The method used 
to convert the concentration measure into a score is described in 
appendix C of this subpart.
    (iv) The credit quality score is the greater of the criticized and 
classified items to Tier 1 capital and reserves score or the 
underperforming assets to Tier 1 capital and reserves score. The market 
risk score is the weighted average of three scores--the trading revenue 
volatility to Tier 1 capital score, the market risk capital to Tier 1 
capital score, and the level 3 trading assets to Tier 1 capital score. 
All of these ratios are described in appendix A of this subpart and the 
method of calculating the scores is described in appendix B. Each score 
is multiplied by its respective weight, and the resulting

[[Page 40882]]

weighted score is summed to compute the score for the market risk 
measure. An overall weight of 35 percent is allocated between the 
scores for the credit quality measure and market risk measure. The 
allocation depends on the ratio of average trading assets to the sum of 
average securities, loans and trading assets (trading asset ratio) as 
follows:
    (v) Weight for credit quality score = 35 percent * (1--trading 
asset ratio); and,
    (vi) Weight for market risk score = 35 percent * trading asset 
ratio.
    (vii) Each of the measures used to calculate the ability to 
withstand asset-related stress score is assigned the following cutoff 
values and weights:

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

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

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

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

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


[[Page 40883]]

    (C) Total score. The performance and loss severity scores are 
combined to produce a total score. The loss severity score is converted 
into a loss severity factor that ranges from 0.8 (score of 5 or lower) 
to 1.2 (score of 85 or higher). Scores at or below the minimum cutoff 
of 5 receive a loss severity factor of 0.8, and scores at or above the 
maximum cutoff of 85 receive a loss severity factor of 1.2. The 
following linear interpolation converts loss severity scores between 
the cutoffs into a loss severity factor: (Loss Severity Factor = 0.8 + 
[0.005 * (Loss Severity Score - 5)]. The performance score is 
multiplied by the loss severity factor to produce a total score (total 
score = performance score * loss severity factor). The total score can 
be up to 20 percent higher or lower than the performance score but 
cannot be less than 30 or more than 90. The total score is subject to 
adjustment, up or down, by a maximum of 15 points, as set forth in 
paragraph (b)(3) of this section. The resulting total score after 
adjustment cannot be less than 30 or more than 90.
    (D) Initial base assessment rate. A highly complex institution with 
a total score of 30 pays the minimum initial base assessment rate and 
an institution with a total score of 90 pays the maximum initial base 
assessment rate. For total scores between 30 and 90, initial base 
assessment rates rise at an increasing rate as the total score 
increases, calculated according to the following formula:
[GRAPHIC] [TIFF OMITTED] TP13JY15.163


where Rate is the initial base assessment rate (expressed in basis 
points), Maximum Rate is the maximum initial base assessment rate then 
in effect (expressed in basis points), and Minimum Rate is the minimum 
initial base assessment rate then in effect (expressed in basis 
points). Initial base assessment rates are subject to adjustment 
pursuant to paragraphs (b)(3), (e)(1), and (e)(2) of this section; 
highly complex institutions that are not well capitalized or have a 
CAMELS composite rating of 3, 4 or 5 shall be subject to the adjustment 
at paragraph (e)(3) of this section; these adjustments shall result in 
the institution's total base assessment rate, which in no case can be 
lower than 50 percent of the institution's initial base assessment 
rate.
    (3) Adjustment to total score for large institutions and highly 
complex institutions. The total score for large institutions and highly 
complex institutions is subject to adjustment, up or down, by a maximum 
of 15 points, based upon significant risk factors that are not 
adequately captured in the appropriate scorecard. In making such 
adjustments, the FDIC may consider such information as financial 
performance and condition information and other market or supervisory 
information. The FDIC will also consult with an institution's primary 
federal regulator and, for state chartered institutions, state banking 
supervisor.
    (i) Prior notice of adjustments--(A) Prior notice of upward 
adjustment. Prior to making any upward adjustment to an institution's 
total score because of considerations of additional risk information, 
the FDIC will formally notify the institution and its primary federal 
regulator and provide an opportunity to respond. This notification will 
include the reasons for the adjustment and when the adjustment will 
take effect.
    (B) Prior notice of downward adjustment. Prior to making any 
downward adjustment to an institution's total score because of 
considerations of additional risk information, the FDIC will formally 
notify the institution's primary federal regulator and provide an 
opportunity to respond.
    (ii) Determination whether to adjust upward; effective period of 
adjustment. After considering an institution's and the primary federal 
regulator's responses to the notice, the FDIC will determine whether 
the adjustment to an institution's total score is warranted, taking 
into account any revisions to scorecard measures, as well as any 
actions taken by the institution to address the FDIC's concerns 
described in the notice. The FDIC will evaluate the need for the 
adjustment each subsequent assessment period. Except as provided in 
paragraph (b)(3)(iv) of this section, the amount of adjustment cannot 
exceed the proposed adjustment amount contained in the initial notice 
unless additional notice is provided so that the primary federal 
regulator and the institution may respond.
    (iii) Determination whether to adjust downward; effective period of 
adjustment. After considering the primary federal regulator's responses 
to the notice, the FDIC will determine whether the adjustment to total 
score is warranted, taking into account any revisions to scorecard 
measures. Any downward adjustment in an institution's total score will 
remain in effect for subsequent assessment periods until the FDIC 
determines that an adjustment is no longer warranted. Downward 
adjustments will be made without notification to the institution. 
However, the FDIC will provide advance notice to an institution and its 
primary federal regulator and give them an opportunity to respond 
before removing a downward adjustment.
    (iv) Adjustment without notice. Notwithstanding the notice 
provisions set forth above, the FDIC may change an institution's total 
score without advance notice under this paragraph, if the institution's 
supervisory ratings or the scorecard measures deteriorate.
    (c) New small institutions--(1) Risk Categories. Each new small 
institution shall be assigned to one of the following four Risk 
Categories based upon the institution's capital evaluation and 
supervisory evaluation as defined in this section.
    (i) Risk Category I. New small institutions in Supervisory Group A 
that are Well Capitalized will be assigned to Risk Category I.
    (ii) Risk Category II. New small institutions in Supervisory Group 
A that are Adequately Capitalized, and new small institutions in 
Supervisory Group B that are either Well Capitalized or Adequately 
Capitalized will be assigned to Risk Category II.
    (iii) Risk Category III. New small institutions in Supervisory 
Groups A and B that are Undercapitalized, and new small institutions in 
Supervisory Group C that are Well Capitalized or Adequately Capitalized 
will be assigned to Risk Category III.
    (iv) Risk Category IV. New small institutions in Supervisory Group 
C that are Undercapitalized will be assigned to Risk Category IV.
    (2) Capital evaluations. Each new small institution will receive 
one of the following three capital evaluations on the basis of data 
reported in the institution's Consolidated Reports of Condition and 
Income or Thrift Financial Report (or successor report, as appropriate) 
dated as of March 31 for the assessment period beginning the preceding 
January 1; dated as of June 30 for the assessment period beginning the

[[Page 40884]]

preceding April 1; dated as of September 30 for the assessment period 
beginning the preceding July 1; and dated as of December 31 for the 
assessment period beginning the preceding October 1.
    (i) Well Capitalized. A Well Capitalized institution is one that 
satisfies each of the following capital ratio standards: Total risk-
based capital ratio, 10.0 percent or greater; tier 1 risk-based capital 
ratio, 8.0 percent or greater; leverage ratio, 5.0 percent or greater; 
and common equity tier 1 capital ratio, 6.5 percent or greater, and 
after January 1, 2018, if the institution is an insured depository 
institution subject to the enhanced supplementary leverage ratio 
standards under 12 CFR 6.4(c)(1)(iv)(B), 12 CFR 208.43(c)(1)(iv)(B), or 
12 CFR 324.403(b)(1)(vi), as each may be amended from time to time, a 
supplementary leverage ratio of 6.0 percent or greater.
    (ii) Adequately Capitalized. An Adequately Capitalized institution 
is one that does not satisfy the standards of Well Capitalized in 
paragraph (c)(2)(i) of this section but satisfies each of the following 
capital ratio standards: Total risk-based capital ratio, 8.0 percent or 
greater; tier 1 risk-based capital ratio, 6.0 percent or greater; 
leverage ratio, 4.0 percent or greater; and common equity tier 1 
capital ratio, 4.5 percent or greater, and after January 1, 2018, if 
the institution is an insured depository institution subject to the 
advanced approaches risk-based capital rules under 12 CFR 
6.4(c)(2)(iv)(B), 12 CFR 208.43(c)(2)(iv)(B), or 12 CFR 
324.403(b)(2)(vi), as each may be amended from time to time, a 
supplementary leverage ratio of 3.0 percent or greater.
    (iii) Undercapitalized. An undercapitalized institution is one that 
does not qualify as either Well Capitalized or Adequately Capitalized 
under paragraphs (c)(2)(i) and (ii) of this section.
    (3) Supervisory evaluations. Each new small institution will be 
assigned to one of three Supervisory Groups based on the Corporation's 
consideration of supervisory evaluations provided by the institution's 
primary federal regulator. The supervisory evaluations include the 
results of examination findings by the primary federal regulator, as 
well as other information that the primary federal regulator determines 
to be relevant. In addition, the Corporation will take into 
consideration such other information (such as state examination 
findings, as appropriate) as it determines to be relevant to the 
institution's financial condition and the risk posed to the Deposit 
Insurance Fund. The three Supervisory Groups are:
    (i) Supervisory Group ``A.'' This Supervisory Group consists of 
financially sound institutions with only a few minor weaknesses;
    (ii) Supervisory Group ``B.'' This Supervisory Group consists of 
institutions that demonstrate weaknesses which, if not corrected, could 
result in significant deterioration of the institution and increased 
risk of loss to the Deposit Insurance Fund; and
    (iii) Supervisory Group ``C.'' This Supervisory Group consists of 
institutions that pose a substantial probability of loss to the Deposit 
Insurance Fund unless effective corrective action is taken.
    (4) Assessment method for new small institutions in Risk Category 
I--(i) Maximum Initial Base Assessment Rate for Risk Category I New 
Small Institutions. A new small institution in Risk Category I shall be 
assessed the maximum initial base assessment rate for Risk Category I 
small institutions in the relevant assessment period.
    (ii) New small institutions not subject to certain adjustments. No 
new small institution in any risk category shall be subject to the 
adjustment in (e)(1) of this section.
    (iii) Implementation of CAMELS rating changes--(A) Changes between 
risk categories. If, during a quarter, a CAMELS composite rating change 
occurs that results in a Risk Category I institution moving from Risk 
Category I to Risk Category II, III or IV, the institution's initial 
base assessment rate for the portion of the quarter that it was in Risk 
Category I shall be the maximum initial base assessment rate for the 
relevant assessment period, subject to adjustment pursuant to paragraph 
(e)(2) of this section, as appropriate, and adjusted for the actual 
assessment rates set by the Board under Sec.  327.10(g). For the 
portion of the quarter that the institution was not in Risk Category I, 
the institution's initial base assessment rate, which shall be subject 
to adjustment pursuant to paragraphs (e)(2) and (3) of this section, as 
appropriate, shall be determined under the assessment schedule for the 
appropriate Risk Category. If, during a quarter, a CAMELS composite 
rating change occurs that results in an institution moving from Risk 
Category II, III or IV to Risk Category I, then the maximum initial 
base assessment rate for new small institutions in Risk Category I 
shall apply for the portion of the quarter that it was in Risk Category 
I, subject to adjustment pursuant to paragraph (e)(2) of this section, 
as appropriate, and adjusted for the actual assessment rates set by the 
Board under Sec.  327.10(g). For the portion of the quarter that the 
institution was not in Risk Category I, the institution's initial base 
assessment rate, which shall be subject to adjustment pursuant to 
paragraphs (e)(2) and (3) of this section shall be determined under the 
assessment schedule for the appropriate Risk Category.
    (d) Insured branches of foreign banks--(1) Risk categories for 
insured branches of foreign banks. Insured branches of foreign banks 
shall be assigned to risk categories as set forth in paragraph (c)(1) 
of this section.
    (2) Capital evaluations for insured branches of foreign banks. Each 
insured branch of a foreign bank will receive one of the following 
three capital evaluations on the basis of data reported in the 
institution's Report of Assets and Liabilities of U.S. Branches and 
Agencies of Foreign Banks dated as of March 31 for the assessment 
period beginning the preceding January 1; dated as of June 30 for the 
assessment period beginning the preceding April 1; dated as of 
September 30 for the assessment period beginning the preceding July 1; 
and dated as of December 31 for the assessment period beginning the 
preceding October 1.
    (i) Well Capitalized. An insured branch of a foreign bank is Well 
Capitalized if the insured branch:
    (A) Maintains the pledge of assets required under Sec.  347.209 of 
this chapter; and
    (B) Maintains the eligible assets prescribed under Sec.  347.210 of 
this chapter at 108 percent or more of the average book value of the 
insured branch's third-party liabilities for the quarter ending on the 
report date specified in paragraph (d)(2) of this section.
    (ii) Adequately Capitalized. An insured branch of a foreign bank is 
Adequately Capitalized if the insured branch:
    (A) Maintains the pledge of assets required under Sec.  347.209 of 
this chapter; and
    (B) Maintains the eligible assets prescribed under Sec.  347.210 of 
this chapter at 106 percent or more of the average book value of the 
insured branch's third-party liabilities for the quarter ending on the 
report date specified in paragraph (d)(2) of this section; and
    (C) Does not meet the definition of a Well Capitalized insured 
branch of a foreign bank.
    (iii) Undercapitalized. An insured branch of a foreign bank is 
undercapitalized institution if it does

[[Page 40885]]

not qualify as either Well Capitalized or Adequately Capitalized under 
paragraphs (d)(2)(i) and (ii) of this section.
    (3) Supervisory evaluations for insured branches of foreign banks. 
Each insured branch of a foreign bank will be assigned to one of three 
supervisory groups as set forth in paragraph (c)(3) of this section.
    (4) Assessment method for insured branches of foreign banks in Risk 
Category I. Insured branches of foreign banks in Risk Category I shall 
be assessed using the weighted average ROCA component rating.
    (i) Weighted average ROCA component rating. The weighted average 
ROCA component rating shall equal the sum of the products that result 
from multiplying ROCA component ratings by the following percentages: 
Risk Management--35%, Operational Controls--25%, Compliance--25%, and 
Asset Quality--15%. The weighted average ROCA rating will be multiplied 
by 5.076 (which shall be the pricing multiplier). To this result will 
be added a uniform amount. The resulting sum--the initial base 
assessment rate--will equal an institution's total base assessment 
rate; provided, however, that no institution's total base assessment 
rate will be less than the minimum total base assessment rate in effect 
for Risk Category I institutions for that quarter nor greater than the 
maximum total base assessment rate in effect for Risk Category I 
institutions for that quarter.
    (ii) Uniform amount. Except as adjusted for the actual assessment 
rates set by the Board under Sec.  327.10(g), the uniform amount for 
all insured branches of foreign banks shall be:
    (A) -3.127 whenever the assessment rate schedule set forth in Sec.  
327.10(a) is in effect;
    (B) -5.127 whenever the assessment rate schedule set forth in Sec.  
327.10(b) is in effect;
    (C) -6.127 whenever the assessment rate schedule set forth in Sec.  
327.10(c) is in effect; or
    (D) -7.127 whenever the assessment rate schedule set forth in Sec.  
327.10(d) is in effect.
    (iii) Insured branches of foreign banks not subject to certain 
adjustments. No insured branch of a foreign bank in any risk category 
shall be subject to the adjustments in paragraphs (b)(3) or (e)(1) or 
(3) of this section.
    (iv) Implementation of changes between Risk Categories for insured 
branches of foreign banks. If, during a quarter, a ROCA rating change 
occurs that results in an insured branch of a foreign bank moving from 
Risk Category I to Risk Category II, III or IV, the institution's 
initial base assessment rate for the portion of the quarter that it was 
in Risk Category I shall be determined using the weighted average ROCA 
component rating. For the portion of the quarter that the institution 
was not in Risk Category I, the institution's initial base assessment 
rate shall be determined under the assessment schedule for the 
appropriate Risk Category. If, during a quarter, a ROCA rating change 
occurs that results in an insured branch of a foreign bank moving from 
Risk Category II, III or IV to Risk Category I, the institution's 
assessment rate for the portion of the quarter that it was in Risk 
Category I shall equal the rate determined as provided using the 
weighted average ROCA component rating. For the portion of the quarter 
that the institution was not in Risk Category I, the institution's 
initial base assessment rate shall be determined under the assessment 
schedule for the appropriate Risk Category.
    (v) Implementation of changes within Risk Category I for insured 
branches of foreign banks. If, during a quarter, an insured branch of a 
foreign bank remains in Risk Category I, but a ROCA component rating 
changes that will affect the institution's initial base assessment 
rate, separate assessment rates for the portion(s) of the quarter 
before and after the change(s) shall be determined under this paragraph 
(d)(4) of this section.
    (e) Adjustments--(1) Unsecured debt adjustment to initial base 
assessment rate for all institutions. All institutions, except new 
institutions as provided under paragraphs (g)(1) and (2) of this 
section and insured branches of foreign banks as provided under 
paragraph (d)(4)(iii) of this section, shall be subject to an 
adjustment of assessment rates for unsecured debt. Any unsecured debt 
adjustment shall be made after any adjustment under paragraph (b)(3) of 
this section.
    (i) Application of unsecured debt adjustment. The unsecured debt 
adjustment shall be determined as the sum of the initial base 
assessment rate plus 40 basis points; that sum shall be multiplied by 
the ratio of an insured depository institution's long-term unsecured 
debt to its assessment base. The amount of the reduction in the 
assessment rate due to the adjustment is equal to the dollar amount of 
the adjustment divided by the amount of the assessment base.
    (ii) Limitation. No unsecured debt adjustment for any institution 
shall exceed the lesser of 5 basis points or 50 percent of the 
institution's initial base assessment rate.
    (iii) Applicable quarterly reports of condition. Unsecured debt 
adjustment ratios for any given quarter shall be calculated from 
quarterly reports of condition (Consolidated Reports of Condition and 
Income and Thrift Financial Reports, or any successor reports to 
either, as appropriate) filed by each institution as of the last day of 
the quarter.
    (2) Depository institution debt adjustment to initial base 
assessment rate for all institutions. All institutions shall be subject 
to an adjustment of assessment rates for unsecured debt held that is 
issued by another depository institution. Any such depository 
institution debt adjustment shall be made after any adjustment under 
paragraphs (b)(3) and (e)(1) of this section.
    (i) Application of depository institution debt adjustment. An 
insured depository institution shall pay a 50 basis point adjustment on 
the amount of unsecured debt it holds that was issued by another 
insured depository institution to the extent that such debt exceeds 3 
percent of the institution's Tier 1 capital. The amount of long-term 
unsecured debt issued by another insured depository institution shall 
be calculated using the same valuation methodology used to calculate 
the amount of such debt for reporting on the asset side of the balance 
sheets.
    (ii) Applicable quarterly reports of condition. Depository 
institution debt adjustment ratios for any given quarter shall be 
calculated from quarterly reports of condition (Consolidated Reports of 
Condition and Income and Thrift Financial Reports, or any successor 
reports to either, as appropriate) filed by each institution as of the 
last day of the quarter.
    (3) Brokered Deposit Adjustment. All new small institutions in Risk 
Categories II, III, and IV, all established small institutions, all 
large institutions and all highly complex institutions, except 
established small institutions and large and highly complex 
institutions (including new large and new highly complex institutions) 
that are well capitalized and have a CAMELS composite rating of 1 or 2, 
shall be subject to an assessment rate adjustment for brokered 
deposits. Any such brokered deposit adjustment shall be made after any 
adjustment under paragraphs (b)(3) and (e)(1) and (2) of this section. 
The brokered deposit adjustment includes all brokered deposits as 
defined in Section 29 of the Federal Deposit Insurance Act (12 U.S.C. 
1831f), and 12 CFR 337.6, including reciprocal deposits as defined in 
Sec.  327.8(p), and brokered deposits that

[[Page 40886]]

consist of balances swept into an insured institution from another 
institution. The adjustment under this paragraph is limited to those 
institutions whose ratio of brokered deposits to domestic deposits is 
greater than 10 percent; asset growth rates do not affect the 
adjustment. Insured branches of foreign banks are not subject to the 
brokered deposit adjustment as provided in paragraph (d)(4)(iii) of 
this section.
    (i) Application of brokered deposit adjustment. The brokered 
deposit adjustment shall be determined by multiplying 25 basis points 
by the ratio of the difference between an insured depository 
institution's brokered deposits and 10 percent of its domestic deposits 
to its assessment base.
    (ii) Limitation. The maximum brokered deposit adjustment will be 10 
basis points; the minimum brokered deposit adjustment will be 0.
    (iii) Applicable quarterly reports of condition. Brokered deposit 
ratios for any given quarter shall be calculated from the quarterly 
reports of condition (Call Reports and Thrift Financial Reports, or any 
successor reports to either, as appropriate) filed by each institution 
as of the last day of the quarter.
    (f) Request to be treated as a large institution--(1) Procedure. 
Any institution with assets of between $5 billion and $10 billion may 
request that the FDIC determine its assessment rate as a large 
institution. The FDIC will consider such a request provided that it has 
sufficient information to do so. Any such request must be made to the 
FDIC's Division of Insurance and Research. Any approved change will 
become effective within one year from the date of the request. If an 
institution whose request has been granted subsequently reports assets 
of less than $5 billion in its report of condition for four consecutive 
quarters, the institution shall be deemed a small institution for 
assessment purposes.
    (2) Time limit on subsequent request for alternate method. An 
institution whose request to be assessed as a large institution is 
granted by the FDIC shall not be eligible to request that it be 
assessed as a small institution for a period of three years from the 
first quarter in which its approved request to be assessed as a large 
institution became effective. Any request to be assessed as a small 
institution must be made to the FDIC's Division of Insurance and 
Research.
    (3) Request for review. An institution that disagrees with the 
FDIC's determination that it is a large, highly complex, or small 
institution may request review of that determination pursuant to Sec.  
327.4(c).
    (g) New and established institutions and exceptions--(1) New small 
institutions. A new small Risk Category I institution shall be assessed 
the Risk Category I maximum initial base assessment rate for the 
relevant assessment period. No new small institution in any risk 
category shall be subject to the unsecured debt adjustment as 
determined under paragraph (e)(1) of this section. All new small 
institutions in any Risk Category shall be subject to the depository 
institution debt adjustment as determined under paragraph (e)(2) of 
this section. All new small institutions in Risk Categories II, III, 
and IV shall be subject to the brokered deposit adjustment as 
determined under paragraph (e)(3) of this section.
    (2) New large institutions and new highly complex institutions. All 
new large institutions and all new highly complex institutions shall be 
assessed under the appropriate method provided at paragraph (b)(1) or 
(2) of this section and subject to the adjustments provided at 
paragraphs (b)(3) and (e)(2) and (3) of this section. No new highly 
complex or large institutions are entitled to adjustment under 
paragraph (e)(1) of this section. If a large or highly complex 
institution has not yet received CAMELS ratings, it will be given a 
weighted CAMELS rating of 2 for assessment purposes until actual CAMELS 
ratings are assigned.
    (3) CAMELS ratings for the surviving institution in a merger or 
consolidation. When an established institution merges with or 
consolidates into a new institution, if the FDIC determines the 
resulting institution to be an established institution under Sec.  
327.8(k)(1), its CAMELS ratings for assessment purposes will be based 
upon the established institution's ratings prior to the merger or 
consolidation until new ratings become available.
    (4) Rate applicable to institutions subject to subsidiary or credit 
union exception--(i) Established small institutions. A small 
institution that is established under Sec.  327.8(k)(4) or (5) shall be 
assessed as follows:
    (A) If the institution does not have a CAMELS composite rating, its 
initial base assessment rate shall be 2 basis points above the minimum 
initial base assessment rate applicable to established small 
institutions until it receives a CAMELS composite rating.
    (B) If the institution has a CAMELS composite rating but no CAMELS 
component ratings, its initial assessment rate shall be determined 
using the financial ratios method, as set forth in (a)(1) of this 
section, but its CAMELS composite rating will be substituted for its 
weighted average CAMELS component rating and, if the institution has 
not filed four quarterly reports of condition, then the assessment rate 
will be determined by annualizing, where appropriate, financial ratios 
from all quarterly reports of condition that have been filed.
    (ii) Large or highly complex institutions. If a large or highly 
complex institution is considered established under Sec.  327.8(k)(4) 
or (5), but does not have CAMELS component ratings, it will be given a 
weighted CAMELS rating of 2 for assessment purposes until actual CAMELS 
ratings are assigned.
    (5) Request for review. An institution that disagrees with the 
FDIC's determination that it is a new institution may request review of 
that determination pursuant to Sec.  327.4(c).
    (h) Assessment rates for bridge depository institutions and 
conservatorships. Institutions that are bridge depository institutions 
under 12 U.S.C. 1821(n) and institutions for which the Corporation has 
been appointed or serves as conservator shall, in all cases, be 
assessed at the Risk Category I minimum initial base assessment rate, 
which shall not be subject to adjustment under paragraphs (b)(3), 
(e)(1), (2), or (3) of this section.
0
7. In Sec.  327.10, revise paragraphs (b) through (f) to read as 
follows:
    (b) Assessment rate schedules for established small institutions 
and large and highly complex institutions applicable in the first 
calendar quarter after June 30, 2015, that the reserve ratio of the DIF 
reaches or exceeds 1.15 percent for the previous calendar quarter and 
in all subsequent quarters that the reserve ratio is less than 2 
percent.
    (1) Initial base assessment rate schedule for established small 
institutions and large and highly complex institutions. In the first 
calendar quarter after June 30, 2015, that the reserve ratio of the DIF 
reaches or exceeds 1.15 percent for the previous calendar quarter and 
in all subsequent quarters that the reserve ratio is less than 2 
percent, the initial base assessment rate for established small 
institutions and large and highly complex institutions, except as 
provided in paragraph (f) of this section, shall be the rate prescribed 
in the following schedule:

[[Page 40887]]



  Initial Base Assessment Rate Schedule Once the Reserve Ratio of the DIF Reaches 1.15 Percent and the Reserve
                   Ratio for the Immediately Prior Assessment Period Is Less Than 2 Percent *
----------------------------------------------------------------------------------------------------------------
                                                        Established small institutions
                                             ---------------------------------------------------  Large & highly
                                                               CAMELS Composite                      complex
                                             ---------------------------------------------------   institutions
                                                   1 or 2             3              4 or 5
----------------------------------------------------------------------------------------------------------------
Initial Base Assessment Rate................         3 to 16          6 to 30         16 to 30          3 to 30
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Initial base rates that are not the minimum
  or maximum rate will vary between these rates.

    (i) CAMELS Composite 1- and 2-rated Established Small Institutions 
Initial Base Assessment Rate Schedule. The annual initial base 
assessment rates for all established small institutions with a CAMELS 
composite rating of 1 or 2 shall range from 3 to 16 basis points.
    (ii) CAMELS Composite 3-rated Established Small Institutions 
Initial Base Assessment Rate Schedule. The annual initial base 
assessment rates for all established small institutions with a CAMELS 
composite rating of 3 shall range from 6 to 30 basis points.
    (iii) CAMELS Composite 4- and 5-rated Established Small 
Institutions Initial Base Assessment Rate Schedule. The annual initial 
base assessment rates for all established small institutions with a 
CAMELS composite rating of 4 or 5 shall range from 16 to 30 basis 
points.
    (iv) Large and Highly Complex Institutions Initial Base Assessment 
Rate Schedule. The annual initial base assessment rates for all large 
and highly complex institutions shall range from 3 to 30 basis points.
    (2) Total base assessment rate schedule after adjustments. Once the 
reserve ratio of the DIF first reaches 1.15 percent, and the reserve 
ratio for the immediately prior assessment period is less than 2 
percent, the total base assessment rates after adjustments for 
established small institutions and large and highly complex 
institutions shall be as prescribed in the following schedule.

 Total Base Assessment Rate Schedule (After Adjustments) * If Reserve Ratio of the DIF Reaches 1.15 Percent and
             the Reserve Ratio for the Immediately Prior Assessment Period is Less Than 2 Percent **
----------------------------------------------------------------------------------------------------------------
                                                Established small institutions
                                 ------------------------------------------------------------   Large & highly
                                                       CAMELS composite                             complex
                                 ------------------------------------------------------------    institutions
                                        1 or 2                 3                4 or 5
----------------------------------------------------------------------------------------------------------------
Initial Base Assessment Rate....  3 to 16...........  6 to 30...........  16 to 30..........  3 to 30.
Unsecured Debt Adjustment.......  -5 to 0...........  -5 to 0...........  -5 to 0...........  -5 to 0
Brokered Deposit Adjustment.....  0 to 10 ***.......  0 to 10...........  0 to 10...........  0 to 10
Total Base Assessment Rate......  1.5 to 26.........  3 to 40...........  11 to 40..........  1.5 to 40
----------------------------------------------------------------------------------------------------------------
* The depository institution debt adjustment, which is not included in the table, can increase total base
  assessment rates above the maximum assessment rates shown in the table.
** All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum
  or maximum rate will vary between these rates.
*** The brokered deposit adjustment applies to established small banks with CAMELS composite ratings of 1 or 2
  only if they are less than well capitalized.

    (i) CAMELS Composite 1- and 2-rated Established Small Institutions 
Total Base Assessment Rate Schedule. The annual total base assessment 
rates for all established small institutions with a CAMELS composite 
rating of 1 or 2 shall range from 1.5 to 26 basis points.
    (ii) CAMELS Composite 3-rated Established Small Institutions Total 
Base Assessment Rate Schedule. The annual total base assessment rates 
for all established small institutions with a CAMELS composite rating 
of 3 shall range from 3 to 40 basis points.
    (iii) CAMELS Composite 4- and 5-rated Established Small 
Institutions Total Base Assessment Rate Schedule. The annual total base 
assessment rates for all established small institutions with a CAMELS 
composite rating of 4 or 5 shall range from 11 to 40 basis points.
    (iv) Large and Highly Complex Institutions Total Base Assessment 
Rate Schedule. The annual total base assessment rates for all large and 
highly complex institutions shall range from 1.5 to 40 basis points.
    (c) Assessment rate schedules if the reserve ratio of the DIF for 
the prior assessment period is equal to or greater than 2 percent and 
less than 2.5 percent--(1) Initial base assessment rate schedule for 
established small institutions and large and highly complex 
institutions. If the reserve ratio of the DIF for the prior assessment 
period is equal to or greater than 2 percent and less than 2.5 percent, 
the initial base assessment rate for established small institutions and 
large and highly complex institutions, except as provided in paragraph 
(f) of this section, shall be the rate prescribed in the following 
schedule:

[[Page 40888]]



Initial Base Assessment Rate Schedule If Reserve Ratio for Prior Assessment Period Is Equal to or Greater Than 2
                                       Percent But Less Than 2.5 Percent *
----------------------------------------------------------------------------------------------------------------
                                                           Established small banks
                                             ---------------------------------------------------  Large & highly
                                                               CAMELS Composite                      complex
                                             ---------------------------------------------------   institutions
                                                   1 or 2             3              4 or 5
----------------------------------------------------------------------------------------------------------------
Initial Base Assessment Rate................         2 to 14          5 to 28         14 to 28          2 to 28
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Initial base rates that are not the minimum
  or maximum rate will vary between these rates.

    (i) CAMELS Composite 1- and 2-rated Established Small Institutions 
Initial Base Assessment Rate Schedule. The annual initial base 
assessment rates for all established small institutions with a CAMELS 
composite rating of 1 or 2 shall range from 2 to 14 basis points.
    (ii) CAMELS Composite 3-rated Established Small Institutions 
Initial Base Assessment Rate Schedule. The annual initial base 
assessment rates for all established small institutions with a CAMELS 
composite rating of 3 shall range from 5 to 28 basis points.
    (iii) CAMELS Composite 4- and 5-rated Established Small 
Institutions Initial Base Assessment Rate Schedule. The annual initial 
base assessment rates for all established small institutions with a 
CAMELS composite rating of 4 or 5 shall range from 14 to 28 basis 
points.
    (iv) Large and Highly Complex Institutions Initial Base Assessment 
Rate Schedule. The annual initial base assessment rates for all large 
and highly complex institutions shall range from 2 to 28 basis points.
    (2) Total Base Assessment Rate Schedule after Adjustments for 
Established Small Institutions and Large and Highly Complex 
Institutions. If the reserve ratio of the DIF for the prior assessment 
period is equal to or greater than 2 percent and less than 2.5 percent, 
the total base assessment rates after adjustments for established small 
institutions and large and highly complex institutions, except as 
provided in paragraph (f) of this section, shall be as prescribed in 
the following schedule.

 Total Base Assessment Rate Schedule (After Adjustments) * If Reserve Ratio for Prior Assessment Period Is Equal
                            to or Greater Than 2 Percent But Less Than 2.5 Percent **
----------------------------------------------------------------------------------------------------------------
                                                    Established small banks
                                 ------------------------------------------------------------   Large & highly
                                                       CAMELS composite                             complex
                                 ------------------------------------------------------------    institutions
                                        1 or 2                 3                4 or 5
----------------------------------------------------------------------------------------------------------------
Initial Base Assessment Rate....  2 to 14...........  5 to 28...........  14 to 28..........  2 to 28.
Unsecured Debt Adjustment **....  -5 to 0...........  -5 to 0...........  -5 to 0...........  -5 to 0.
Brokered Deposit Adjustment.....  0 to 10 ***.......  0 to 10...........  0 to 10...........  0 to 10.
Total Base Assessment Rate......  1 to 24...........  2.5 to 38.........  9 to 38...........  1 to 38.
----------------------------------------------------------------------------------------------------------------
* The depository institution debt adjustment, which is not included in the table, can increase total base
  assessment rates above the maximum assessment rates shown in the table.
** All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum
  or maximum rate will vary between these rates.
*** The brokered deposit adjustment applies to established small banks with CAMELS composite ratings of 1 or 2
  only if they are less than well capitalized.

    (i) CAMELS Composite 1- and 2-rated Established Small Institutions 
Total Base Assessment Rate Schedule. The annual total base assessment 
rates for all established small institutions with a CAMELS composite 
rating of 1 or 2 shall range from 1 to 24 basis points.
    (ii) CAMELS Composite 3-rated Established Small Institutions Total 
Base Assessment Rate Schedule. The annual total base assessment rates 
for all established small institutions with a CAMELS composite rating 
of 3 shall range from 2.5 to 38 basis points.
    (iii) CAMELS Composite 4- and 5-rated Established Small 
Institutions Total Base Assessment Rate Schedule. The annual total base 
assessment rates for all established small institutions with a CAMELS 
composite rating of 4 or 5 shall range from 9 to 38 basis points.
    (iv) Large and Highly Complex Institutions Total Base Assessment 
Rate Schedule. The annual total base assessment rates for all large and 
highly complex institutions shall range from 1 to 38 basis points.
    (d) Assessment rate schedules if the reserve ratio of the DIF for 
the prior assessment period is greater than 2.5 percent--(1) Initial 
Base Assessment Rate Schedule. If the reserve ratio of the DIF for the 
prior assessment period is greater than 2.5 percent, the initial base 
assessment rate for established small institutions and a large and 
highly complex institutions, except as provided in paragraph (f) of 
this section, shall be the rate prescribed in the following schedule:

[[Page 40889]]



 Initial Base Assessment Rate Schedule If Reserve Ratio for Prior Assessment Period Is Greater Than or Equal to
                                                  2.5 Percent *
----------------------------------------------------------------------------------------------------------------
                                                           Established small banks
                                             ---------------------------------------------------  Large & highly
                                                               CAMELS composite                      complex
                                             ---------------------------------------------------   institutions
                                                   1 or 2             3              4 or 5
----------------------------------------------------------------------------------------------------------------
Initial Base Assessment Rate................         1 to 13          4 to 25         13 to 25          1 to 25
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Initial base rates that are not the minimum
  or maximum rate will vary between these rates.

    (i) CAMELS Composite 1- and 2-rated Established Small Institutions 
Initial Base Assessment Rate Schedule. The annual initial base 
assessment rates for all established small institutions with a CAMELS 
composite rating of 1 or 2 shall range from 1 to 13 basis points.
    (ii) CAMELS Composite 3-rated Established Small Institutions 
Initial Base Assessment Rate Schedule. The annual initial base 
assessment rates for all established small institutions with a CAMELS 
composite rating of 3 shall range from 4 to 25 basis points.
    (iii) CAMELS Composite 4- and 5-rated Established Small 
Institutions Initial Base Assessment Rate Schedule. The annual initial 
base assessment rates for all established small institutions with a 
CAMELS composite rating of 4 or 5 shall range from 13 to 25 basis 
points.
    (iv) Large and Highly Complex Institutions Initial Base Assessment 
Rate Schedule. The annual initial base assessment rates for all large 
and highly complex institutions shall range from 1 to 25 basis points.
    (2) Total Base Assessment Rate Schedule after Adjustments. If the 
reserve ratio of the DIF for the prior assessment period is greater 
than 2.5 percent, the total base assessment rates after adjustments for 
established small institutions and large and highly complex 
institutions, except as provided in paragraph (f) of this section, 
shall be the rate prescribed in the following schedule.

    Total Base Assessment Rate Schedule (After Adjustments) * If Reserve Ratio for Prior Assessment Period Is
                                     Greater Than or Equal to 2.5 Percent **
----------------------------------------------------------------------------------------------------------------
                                                          Small banks
                                 ------------------------------------------------------------   Large & highly
                                                       CAMELS composite                             complex
                                 ------------------------------------------------------------    institutions
                                        1 or 2                 3                4 or 5
----------------------------------------------------------------------------------------------------------------
Initial Base Assessment Rate....  1 to 13...........  4 to 25...........  13 to 25..........  1 to 25.
Unsecured Debt Adjustment **....  -5 to 0...........  -5 to 0...........  -5 to 0...........  -5 to 0.
Brokered Deposit Adjustment.....  0 to 10 ***.......  0 to 10...........  0 to 10...........  0 to 10.
Total Base Assessment Rate......  .5 to 23..........  2 to 35...........  8 to 35...........  .5 to 35.
----------------------------------------------------------------------------------------------------------------
* The depository institution debt adjustment, which is not included in the table, can increase total base
  assessment rates above the maximum assessment rates shown in the table.
** All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum
  or maximum rate will vary between these rates.
*** The brokered deposit adjustment applies to established small banks with CAMELS composite ratings of 1 or 2
  only if they are less than well capitalized.

    (i) CAMELS Composite 1- and 2-rated Established Small Institutions 
Total Base Assessment Rate Schedule. The annual total base assessment 
rates for all established small institutions with a CAMELS composite 
rating of 1 or 2 shall range from 0.5 to 23 basis points.
    (ii) CAMELS Composite 3-rated Established Small Institutions Total 
Base Assessment Rate Schedule. The annual total base assessment rates 
for all established small institutions with a CAMELS composite rating 
of 3 shall range from 2 to 35 basis points.
    (iii) CAMELS Composite 4- and 5-rated Established Small 
Institutions Total Base Assessment Rate Schedule. The annual total base 
assessment rates for all established small institutions with a CAMELS 
composite rating of 4 or 5 shall range from 8 to 35 basis points.
    (iv) Large and Highly Complex Institutions Total Base Assessment 
Rate Schedule. The annual total base assessment rates for all large and 
highly complex institutions shall range from 0.5 to 35 basis points.
    (e) Assessment Rate Schedules for New Institutions and Insured 
Branches of Foreign Banks.
    (1) New depository institutions, as defined in 327.8(j), shall be 
subject to the assessment rate schedules as follows:
    (i) Prior to the reserve ratio of the DIF first reaching 1.15 
percent after June 30, 2015. Prior to the reserve ratio of the DIF 
reaching 1.15 percent for the first time after June 30, 2015, all new 
institutions shall be subject to the initial and total base assessment 
rate schedules provided for in paragraph (a) of this section.
    (ii) Assessment rate schedules for new large and highly complex 
institutions once the DIF reserve ratio first reaches 1.15 percent 
after June 30, 2015. Beginning the first calendar quarter after June 
30, 2015 in which the reserve ratio of the DIF reaches or exceeds 1.15 
percent in the previous calendar quarter, new large and highly complex 
institutions shall be subject to the initial and total base assessment 
rate schedules provided for in paragraph (b) of this section, even if 
the reserve ratio equals or exceeds 2 percent or 2.5 percent.
    (iii) Assessment rate schedules for new small institutions once the 
DIF reserve ratio first reaches 1.15 percent after June 30, 2015.
    (A) Initial Base Assessment Rate Schedule for New Small 
Institutions. Beginning the first calendar quarter after June 30, 2015 
in which the reserve ratio

[[Page 40890]]

of the DIF reaches or exceeds 1.15 percent in the previous calendar 
quarter, the initial base assessment rate for a new small institution 
shall be the rate prescribed in the following schedule, even if the 
reserve ratio equals or exceeds 2 percent or 2.5 percent.

 Initial Base Assessment Rate Schedule If Reserve Ratio for Prior Assessment Period Is Equal to or Greater Than
                                                  1.15 Percent
----------------------------------------------------------------------------------------------------------------
                                                                Risk category    Risk category    Risk category
                                              Risk category I         II              III               IV
----------------------------------------------------------------------------------------------------------------
Initial Assessment Rate.....................               7               12               19               30
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually.

    (1) Risk Category I Initial Base Assessment Rate Schedule. The 
annual initial base assessment rates for all new small institutions in 
Risk Category I shall be 7 basis points.
    (2) Risk Category II, III, and IV Initial Base Assessment Rate 
Schedule. The annual initial base assessment rates for all new small 
institutions in Risk Categories II, III, and IV shall be 12, 19, and 30 
basis points, respectively.
    (3) All new small institutions in any one risk category, other than 
Risk Category I, will be charged the same initial base assessment rate, 
subject to adjustment as appropriate.
    (B) Total Base Assessment Rate Schedule for New Small Institutions. 
Beginning the first calendar quarter after June 30, 2015 in which the 
reserve ratio of the DIF reaches or exceeds 1.15 percent in the 
previous calendar quarter, the total base assessment rates after 
adjustments for a new small institution shall be the rate prescribed in 
the following schedule, even if the reserve ratio equals or exceeds 2 
percent or 2.5 percent.

 Total Base Assessment Rate Schedule (After Adjustments) * If Reserve Ratio for Prior Assessment Period Is Equal
                                       to or Greater Than 1.15 Percent **
----------------------------------------------------------------------------------------------------------------
                                    Risk category I    Risk category II    Risk category III   Risk category IV
----------------------------------------------------------------------------------------------------------------
Initial Assessment Rate.........  7.................  12................  19................  30.
Brokered Deposit Adjustment       N/A...............  0 to 10...........  0 to 10...........  0 to 10.
 (added).
Total Assessment Rate...........  7.................  12 to 22..........  19 to 29..........  30 to 40.
----------------------------------------------------------------------------------------------------------------
* The depository institution debt adjustment, which is not included in the table, can increase total base
  assessment rates above the maximum assessment rates shown in the table.
** All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum
  or maximum rate will vary between these rates.

    (1) Risk Category I Total Assessment Rate Schedule. The annual 
total base assessment rates for all new small institutions in Risk 
Category I shall be 7 basis points.
    (2) Risk Category II Total Assessment Rate Schedule. The annual 
total base assessment rates for all new small institutions in Risk 
Category II shall range from 12 to 22 basis points.
    (3) Risk Category III Total Assessment Rate Schedule. The annual 
total base assessment rates for all new small institutions in Risk 
Category III shall range from 19 to 29 basis points.
    (4) Risk Category IV Total Assessment Rate Schedule. The annual 
total base assessment rates for all new small institutions in Risk 
Category IV shall range from 30 to 40 basis points.
    (2) Insured branches of foreign banks--(i) Assessment rate schedule 
for insured branches of foreign banks once the reserve ratio of the DIF 
first reaches 1.15 percent, and the reserve ratio for the immediately 
prior assessment period is less than 2 percent. Once the reserve ratio 
of the DIF first reaches 1.15 percent, and the reserve ratio for the 
immediately prior assessment period is less than 2 percent, the initial 
and total base assessment rates for an insured branch of a foreign 
bank, except as provided in paragraph (f) of this section, shall be the 
rate prescribed in the following schedule.

Initial and Total Base Assessment Rate Schedule * Once the Reserve Ratio of the DIF Reaches 1.15 Percent and the
               Reserve Ratio for the Immediately Prior Assessment Period Is Less Than 2 Percent **
----------------------------------------------------------------------------------------------------------------
                                                                Risk category    Risk category    Risk category
                                              Risk category I         II              III               IV
----------------------------------------------------------------------------------------------------------------
Initial and Total Assessment Rate...........          3 to 7               12               19               30
----------------------------------------------------------------------------------------------------------------
* The depository institution debt adjustment, which is not included in the table, can increase total base
  assessment rates above the maximum assessment rates shown in the table.
** All amounts for all risk categories are in basis points annually. Initial and total base rates that are not
  the minimum or maximum rate will vary between these rates.

    (A) Risk Category I Initial and Total Base Assessment Rate 
Schedule. The annual initial and total base assessment rates for an 
insured branch of a foreign bank in Risk Category I shall range from 3 
to 7 basis points.

[[Page 40891]]

    (B) Risk Category II, III, and IV Initial and Total Base Assessment 
Rate Schedule. The annual initial and total base assessment rates for 
Risk Categories II, III, and IV shall be 12, 19, and 30 basis points, 
respectively.
    (C) All insured branches of foreign banks in any one risk category, 
other than Risk Category I, will be charged the same initial base 
assessment rate, subject to adjustment as appropriate.
    (ii) Assessment rate schedule for insured branches of foreign banks 
if the reserve ratio of the DIF for the prior assessment period is 
equal to or greater than 2 percent and less than 2.5 percent. If the 
reserve ratio of the DIF for the prior assessment period is equal to or 
greater than 2 percent and less than 2.5 percent, the initial and total 
base assessment rates for an insured branch of a foreign bank, except 
as provided in paragraph (f), shall be the rate prescribed in the 
following schedule.

  Initial and Total Base Assessment Rate Schedule * If Reserve Ratio for Prior Assessment Period Is Equal to or
                               Greater Than 2 Percent But Less Than 2.5 Percent **
----------------------------------------------------------------------------------------------------------------
                                                                Risk category    Risk category    Risk category
                                              Risk category I         II              III               IV
----------------------------------------------------------------------------------------------------------------
Initial and Total Assessment Rate...........          2 to 6               10               17               28
----------------------------------------------------------------------------------------------------------------
* The depository institution debt adjustment, which is not included in the table, can increase total base
  assessment rates above the maximum assessment rates shown in the table.
** All amounts for all risk categories are in basis points annually. Initial and total base rates that are not
  the minimum or maximum rate will vary between these rates.

    (A) Risk Category I Initial and Total Base Assessment Rate 
Schedule. The annual initial and total base assessment rates for an 
insured branch of a foreign bank in Risk Category I shall range from 2 
to 6 basis points.
    (B) Risk Category II, III, and IV Initial and Total Base Assessment 
Rate Schedule. The annual initial and total base assessment rates for 
Risk Categories II, III, and IV shall be 10, 17, and 28 basis points, 
respectively.
    (C) All insured branches of foreign banks in any one risk category, 
other than Risk Category I, will be charged the same initial base 
assessment rate, subject to adjustment as appropriate.
    (iii) Assessment rate schedule for insured branches of foreign 
banks if the reserve ratio of the DIF for the prior assessment period 
is greater than 2.5 percent. If the reserve ratio of the DIF for the 
prior assessment period is greater than 2.5 percent, the initial and 
total base assessment rate for an insured branch of foreign bank, 
except as provided in paragraph (f) of this section, shall be the rate 
prescribed in the following schedule:

 Initial and Total Base Assessment Rate Schedule * If Reserve Ratio for Prior Assessment Period Is Greater Than
                                           or Equal to 2.5 Percent **
----------------------------------------------------------------------------------------------------------------
                                                                Risk category    Risk category    Risk category
                                              Risk category I         II              III               IV
----------------------------------------------------------------------------------------------------------------
Initial Assessment Rate.....................          1 to 5                9               15               25
----------------------------------------------------------------------------------------------------------------
* The depository institution debt adjustment, which is not included in the table, can increase total base
  assessment rates above the maximum assessment rates shown in the table.
** All amounts for all risk categories are in basis points annually. Initial and total base rates that are not
  the minimum or maximum rate will vary between these rates.

    (A) Risk Category I Initial and Total Base Assessment Rate 
Schedule. The annual initial and total base assessment rates for an 
insured branch of a foreign bank in Risk Category I shall range from 1 
to 5 basis points.
    (B) Risk Category II, III, and IV Initial and Total Base Assessment 
Rate Schedule. The annual initial and total base assessment rates for 
Risk Categories II, III, and IV shall be 9, 15, and 25 basis points, 
respectively.
    (C) All insured branches of foreign banks in any one risk category, 
other than Risk Category I, will be charged the same initial base 
assessment rate, subject to adjustment as appropriate.
    (f) Total Base Assessment Rate Schedule adjustments and 
procedures--(1) Board Rate Adjustments. The Board may increase or 
decrease the total base assessment rate schedule in paragraphs (a) 
through (e) of this section up to a maximum increase of 2 basis points 
or a fraction thereof or a maximum decrease of 2 basis points or a 
fraction thereof (after aggregating increases and decreases), as the 
Board deems necessary. Any such adjustment shall apply uniformly to 
each rate in the total base assessment rate schedule. In no case may 
such rate adjustments result in a total base assessment rate that is 
mathematically less than zero or in a total base assessment rate 
schedule that, at any time, is more than 2 basis points above or below 
the total base assessment schedule for the Deposit Insurance Fund in 
effect pursuant to paragraph (b) of this section, nor may any one such 
adjustment constitute an increase or decrease of more than 2 basis 
points.
    (2) Amount of revenue. In setting assessment rates, the Board shall 
take into consideration the following:
    (i) Estimated operating expenses of the Deposit Insurance Fund;
    (ii) Case resolution expenditures and income of the Deposit 
Insurance Fund;
    (iii) The projected effects of assessments on the capital and 
earnings of the institutions paying assessments to the Deposit 
Insurance Fund;
    (iv) The risk factors and other factors taken into account pursuant 
to 12 U.S.C. 1817(b)(1); and
    (v) Any other factors the Board may deem appropriate.
    (3) Adjustment procedure. Any adjustment adopted by the Board 
pursuant to this paragraph will be adopted by rulemaking, except that 
the Corporation may set assessment rates as necessary to manage the 
reserve ratio,

[[Page 40892]]

within set parameters not exceeding cumulatively 2 basis points, 
pursuant to paragraph (f)(1) of this section, without further 
rulemaking.
    (4) Announcement. The Board shall announce the assessment schedules 
and the amount and basis for any adjustment thereto not later than 30 
days before the quarterly certified statement invoice date specified in 
Sec.  327.3(b) of this part for the first assessment period for which 
the adjustment shall be effective. Once set, rates will remain in 
effect until changed by the Board.
0
8. Add Appendix E to part 327 to read as follows:

Appendix E--Method To Derive Pricing Multipliers and Uniform Amount

I. Introduction

    The uniform amount and pricing multipliers are derived from:
     A model (the Statistical Model) that estimates the 
probability of failure of an institution over a three-year horizon;
     The minimum initial base assessment rate;
     The maximum initial base assessment rate;
     Thresholds marking the points at which the maximum and 
minimum assessment rates become effective.

II. The Statistical Model

    The Statistical Model estimates the probability of an insured 
depository institution failing within three years using a logistic 
regression and pooled time-series cross-sectional data; \1\ that is, 
the dependent variable in the estimation is whether an insured 
depository institution failed during the following three-year 
period. Actual model parameters for the Statistical Model are an 
average of each of three regression estimates for each parameter. 
Each of the three regressions uses end-of-year data from insured 
depository institutions' quarterly reports of condition and income 
(Call Reports and Thrift Financial Reports or TFRs \2\) for every 
third year to estimate probability of failure within the ensuing 
three years. One regression (Regression 1) uses insured depository 
institutions' Call Report and TFR data for the end of 1985 and 
failures from 1986 through 1988; Call Report and TFR data for the 
end of 1988 and failures from 1989 through 1991; and so on, ending 
with Call Report data for the end of 2009 and failures from 2010 
through 2012. The second regression (Regression 2) uses insured 
depository institutions' Call Report and TFR data for the end of 
1986 and failures from 1987 through 1989, and so on, ending with 
Call Report data for the end of 2010 and failures from 2011 through 
2013. The third regression (Regression 3) uses insured depository 
institutions' Call Report and TFR data for the end of 1987 and 
failures from 1988 through 1990, and so on, ending with Call Report 
data for the end of 2011 and failures from 2012 through 2014. The 
regressions include only Call Report data and failures for 
established small institutions.
---------------------------------------------------------------------------

    \1\ Tests for the statistical significance of parameters use 
adjustments discussed by Tyler Shumway (2001) ``Forecasting 
Bankruptcy More Accurately: A Simple Hazard Model,'' Journal of 
Business 74:1, 101-124.
    \2\ Beginning in 2012, all insured depository institutions began 
filing quarterly Call Reports and the TFR was no longer filed.
---------------------------------------------------------------------------

    Table E.1 lists and defines the explanatory variables 
(regressors) in the Statistical Model and the measures used in Sec. 
327.16(a)(1).

                  Table E.1--Definitions of Regressors
------------------------------------------------------------------------
               Variables                           Description
------------------------------------------------------------------------
Tier 1 Leverage Ratio (%)..............  Tier 1 capital divided by
                                          adjusted average assets.
                                          (Numerator and denominator are
                                          both based on the definition
                                          for prompt corrective action.)
Net Income before Taxes/Total Assets     Income (before income taxes and
 (%).                                     extraordinary items and other
                                          adjustments) for the most
                                          recent twelve months divided
                                          by total assets.\1\
Nonperforming Loans and Leases/Gross     Sum of total loans and lease
 Assets (%).                              financing receivables past due
                                          90 or more days and still
                                          accruing interest and total
                                          nonaccrual loans and lease
                                          financing receivables
                                          (excluding, in both cases, the
                                          maximum amount recoverable
                                          from the U.S. Government, its
                                          agencies or government-
                                          sponsored enterprises, under
                                          guarantee or insurance
                                          provisions) divided by gross
                                          assets.\2 3\
Other Real Estate Owned/Gross Assets     Other real estate owned divided
 (%).                                     by gross assets.\2\
Core Deposits/Total Assets (%).........  Domestic office deposits
                                          (excluding time deposits over
                                          the deposit insurance limit
                                          and the amount of brokered
                                          deposits below the standard
                                          maximum deposit insurance
                                          amount) divided by total
                                          assets.
Weighted Average of C, A, M, E, L, and   The weighted sum of the ``C,''
 S Component Ratings.                     ``A,'' ``M,'' ``E'', ``L'',
                                          and ``S'' CAMELS components,
                                          with weights of 25 percent
                                          each for the ``C'' and ``M''
                                          components, 20 percent for the
                                          ``A'' component, and 10
                                          percent each for the ``E'',
                                          ``L'', and ``S'' components.
                                          In instances where the ``S''
                                          component is missing, the
                                          remaining components are
                                          scaled by a factor of 10/9.\4\
Loan Mix Index.........................  A measure of credit risk
                                          described below.
Asset Growth (%).......................  Growth in assets (adjusted for
                                          mergers \5\) over the previous
                                          year. If growth is negative,
                                          then the value is set to
                                          zero.\6\
------------------------------------------------------------------------
\1\ For purposes of calculating actual assessment rates (as opposed to
  model estimation), the ratio of Net Income Before Taxes to Total
  Assets is bounded below by (and cannot be less than) -25 percent and
  is bounded above by (and cannot exceed) 3 percent.
\2\ For purposes of calculating actual assessment rates (as opposed to
  model estimation), ``Gross assets'' are total assets plus the
  allowance for loan and lease financing receivable losses (ALLL); for
  purposes of estimating the Statistical Model, for years before 2001,
  when allocated transfer risk was not included in ALLL in Call Reports,
  allocated transfer risk is included in gross assets separately.
\3\ Delinquency and non-accrual data on government guaranteed loans are
  not available for the entire estimation period. As a result, the
  Statistical Model is estimated without deducting delinquent or past-
  due government guaranteed loans from the nonperforming loans and
  leases to gross assets ratio.
\4\ The component rating for sensitivity to market risk (the ``S''
  rating) is not available for years before 1997. As a result, and as
  described in the table, the Statistical Model is estimated using a
  weighted average of five component ratings excluding the ``S''
  component where the component is not available.
\5\ Growth in assets is also adjusted for acquisitions of failed banks.
\6\ For purposes of calculating actual assessment rates (as opposed to
  model estimation), Asset Growth is bounded above by (and cannot
  exceed) 190 percent.


[[Page 40893]]

    The financial variable regressors used to estimate the failure 
probabilities are obtained from Call Reports and TFRs. The weighted 
average of the ``C,'' ``A,'' ``M,'' ``E'', ``L'', and ``S'' 
component ratings regressor is based on component ratings obtained 
from the most recent bank examination conducted within 24 months 
before the date of the Call Report or TFR.
    The Loan Mix Index assigns loans to the categories of loans 
described in Table E.2. For each loan category, a charge-off rate is 
calculated for each year from 2001 through 2014. The charge-off rate 
for each year is the aggregate charge-off rate on all such loans 
held by small institutions in that year. A weighted average charge-
off rate is then calculated for each loan category, where the weight 
for each year is based on the number of small-bank failures during 
that year.\3\ A Loan Mix Index for each established small 
institution is calculated by: (1) Multiplying the ratio of the 
institution's amount of loans in a particular loan category to its 
total assets by the associated weighted average charge-off rate for 
that loan category; and (2) summing the products for all loan 
categories. Table E.2 gives the weighted average charge-off rate for 
each category of loan, as calculated through the end of 2014. The 
Loan Mix Index excludes credit card loans.
---------------------------------------------------------------------------

    \3\ An exception is ``Real Estate Loans Residual,'' which 
consists of real estate loans held in foreign offices. Few small 
insured depository institutions report this item and a statistically 
reliable estimate of the weighted average charge-off rate could not 
be obtained. Instead, a weighted average of the weighted average 
charge-off rates of the other real estate loan categories is used. 
(The other categories are construction & development, multifamily 
residential, nonfarm nonresidential, 1-4 family residential, and 
agricultural real estate.) The weight for each of the other real 
estate loan categories is based on the aggregate amount of the loans 
held by small insured depository institutions as of December 31, 
2014.

                  Table E.2--Loan Mix Index Categories
------------------------------------------------------------------------
                                                             Weighted
                                                            charge-off
                                                           rate percent
------------------------------------------------------------------------
Construction & Development..............................       4.4965840
Commercial & Industrial.................................       1.5984506
Leases..................................................       1.4974551
Other Consumer..........................................       1.4559717
Loans to Foreign Government.............................       1.3384093
Real Estate Loans Residual..............................       1.0169338
Multifamily Residential.................................       0.8847597
Nonfarm Nonresidential..................................       0.7286274
1-4 Family Residential..................................       0.6973778
Loans to Depository banks...............................       0.5760532
Agricultural Real Estate................................       0.2376712
Agricultural............................................       0.2432737
------------------------------------------------------------------------

    For each of the three regression estimates (Regression 1, 
Regression 2 and Regression 3), the estimated probability of failure 
(over a three-year horizon) of institution i at time T is
[GRAPHIC] [TIFF OMITTED] TP13JY15.164

where
[GRAPHIC] [TIFF OMITTED] TP13JY15.165

where the [beta] variables are parameter estimates. As stated 
earlier, for actual assessments, the [beta] values that are applied 
are averages of each of the individual parameters over three 
separate regressions. Pricing multipliers (discussed in the next 
section) are based on ZiT.\4\
---------------------------------------------------------------------------

    \4\ The ZiT values have the same rank ordering as the 
probability measures PiT.
---------------------------------------------------------------------------

III. Derivation of Uniform Amount and Pricing Multipliers

    The uniform amount and pricing multipliers used to compute the 
annual initial base assessment rate in basis points, RiT, for any 
such institution i at a given time T will be determined from the 
Statistical \5\ Model as follows:
---------------------------------------------------------------------------

    \5\ RiT is also subject to the minimum and maximum assessment 
rates applicable to established small institutions based upon their 
CAMELS composite ratings.
[GRAPHIC] [TIFF OMITTED] TP13JY15.166

where [alpha]0 and [alpha]1 are a constant 
term and a scale factor used to convert ZiT to an assessment rate, 
Max is the maximum initial base assessment rate in effect and Min is 
the minimum initial base assessment rate in effect. (RiT is 
expressed as an annual rate, but the actual rate applied in any 
quarter will be RiT/4.)
    Solving equation 3 for minimum and maximum initial base 
assessment rates simultaneously,
Min = [alpha]0 + [alpha]1 * ZN and 
Max = [alpha]0 + [alpha]1 * ZX
where ZX is the value of ZiT above which the maximum 
initial assessment rate (Max) applies and ZN is the value 
of ZiT below which the minimum initial assessment rate (Min) 
applies,
results in values for the constant amount, [alpha]0, and 
the scale factor, [alpha]1:

[[Page 40894]]

[GRAPHIC] [TIFF OMITTED] TP13JY15.167

    The values for ZX and ZN will be selected 
to ensure that, for an assessment period shortly before adoption of 
a final rule, aggregate assessments for all established small 
institutions would have been approximately the same under the final 
rule as they would have been under the assessment rate schedule 
that, under rules in effect before adoption of the final rule, would 
have automatically gone into effect when the reserve ratio reached 
1.15 percent. As an example, using aggregate assessments for all 
established small institutions for the fourth quarter of 2014 to 
determine ZX and ZN, and assuming that Min had 
equaled 3 basis points and Max had equaled 30 basis points, the 
value of ZX would have been 0.49 and ZN -6.60. 
Hence based on equations 4 and 5,
[alpha]0 = 28.134 and
[alpha]1 = 3.808.
    Therefore from equation 3, it follows that
    [GRAPHIC] [TIFF OMITTED] TP13JY15.168
    
Substituting equation 2 produces an annual initial base assessment 
rate for institution i at time T, RiT, in terms of the uniform 
amount, the pricing multipliers and model variables:
[GRAPHIC] [TIFF OMITTED] TP13JY15.169

again subject to 3 <= RiT <= 30 \6\
---------------------------------------------------------------------------

    \6\ As stated above, RiT is also subject to the minimum and 
maximum assessment rates applicable to established small 
institutions based upon their CAMELS composite ratings.
---------------------------------------------------------------------------

where 28.134 + 3.808 * [beta]0 equals the uniform amount, 
3.808 * [beta]j is a pricing multiplier for the 
associated risk measure j, and T is the date of the report of 
condition corresponding to the end of the quarter for which the 
assessment rate is computed.
    Once the minimum and maximum cutoff values, ZX and 
ZN, are established as described in Section III of this 
Appendix, they will not change without additional notice-and-comment 
rulemaking. If Max (the maximum initial assessment rate) in effect 
or Min (the minimum initial assessment rate) in effect change, the 
uniform amount and pricing multipliers will be recalculated as 
described in equations 3 through 7 without additional notice-and-
comment rulemaking.

IV. Updating the Statistical Model, Uniform Amount, and Pricing 
Multipliers

    The Statistical Model is estimated using year-end financial 
ratios and the weighted average of the ``C,'' ``A,'' ``M,'' ``E'' 
and ``L'' component ratings (and the ``S'' component where it was 
available) from the end of 1984 through the end of 2011, failure 
data from the 1985 through 2014 and data for the weighted average 
charge-off rates for the Loan Mix Index from 2001 through 2014. The 
FDIC may, from time to time, but no more frequently than annually, 
re-estimate the Statistical Model with financial, failure and 
charge-off data from later years and publish a new Loan Mix Index, 
uniform amount and pricing multipliers based upon the methodology 
described in Sections I through III of this Appendix without further 
notice-and-comment rulemaking.

    By order of the Board of Directors.
    Dated at Washington, DC, this 16th day of June, 2015.

    Federal Deposit Insurance Corporation.
Robert Feldman,
Executive Secretary.

[FR Doc. 2015-16514 Filed 7-10-15; 8:45 am]
 BILLING CODE 6714-01-P