[Federal Register Volume 84, Number 35 (Thursday, February 21, 2019)]
[Proposed Rules]
[Pages 5380-5389]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-02761]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AE98


Assessments

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) invites 
public comment on a notice of proposed rulemaking (NPR or proposal) 
that would amend its deposit insurance assessment regulations to apply 
the community bank leverage ratio (CBLR) framework to the deposit 
insurance assessment system. The FDIC, the Board of Governors of the 
Federal Reserve System (Federal Reserve) and the Office of the 
Comptroller of the Currency (OCC) (collectively, the Federal banking 
agencies) recently issued an interagency proposal to implement the 
community bank leverage ratio (the CBLR NPR). Under this proposal, the 
FDIC would assess all banks that elect to use the CBLR framework (CBLR 
banks) as small banks. Through amendments to the assessment regulations 
and corresponding changes to the Consolidated Reports of Condition and 
Income (Call Report), CBLR banks would have the option of using either 
CBLR tangible equity or tier 1 capital for their assessment base 
calculation, and using either the CBLR or the tier 1 leverage ratio for 
the Leverage Ratio that the FDIC uses to calculate an established small 
bank's assessment rate. Through this NPR, the FDIC also would clarify 
that a CBLR bank that meets the definition of a custodial bank would 
have no change to its custodial bank deduction or reporting items 
required to calculate the deduction; and the assessment regulations 
would continue to reference the prompt corrective action (PCA) 
regulations for the definitions of capital categories used in the 
deposit insurance assessment system, with technical amendments to align 
with the CBLR NPR. To assist banks in understanding the effects of the 
NPR, the FDIC plans to provide on its website an assessment estimation 
tool that estimates deposit insurance assessment amounts under the 
proposal.

DATES: Comments must be received on or before April 22, 2019.

ADDRESSES: You may submit comments, identified by RIN 3064-AE98, by any 
of the following methods:
     Agency website: https://www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments on the Agency 
website.
     Email: [email protected]. Include RIN 3064-AE98 in the 
subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW, 
Washington, DC 20429. Include RIN 3064-AE98 in the subject line of the 
letter.
     Hand Delivery/Courier: Guard station at the rear of the 
550 17th Street NW building (located on F Street) on business days 
between 7 a.m. and 5 p.m. (EDT).
     Public Inspection: All comments received, including any 
personal information provided, will be posted without change to https://www.fdic.gov/regulations/laws/federal. Paper copies of public comments 
may be ordered from the FDIC Public Information Center, 3501 North 
Fairfax Drive, Room E-1002, Arlington, VA 22226 or by telephone at 
(877) 275-3342 or (703) 562-2200.

FOR FURTHER INFORMATION CONTACT: Ashley Mihalik, Chief, Banking and 
Regulatory Policy Section, Division of Insurance and Research, (202) 
898-3793, [email protected]; Daniel Hoople, Financial Economist, 
Banking and Regulatory Policy Section, Division of Insurance and 
Research, [email protected]; (202) 898-3835; Nefretete Smith, Counsel, 
Legal Division, (202) 898-6851, [email protected].

SUPPLEMENTARY INFORMATION:

I. Policy Objectives

    The Federal Deposit Insurance Act (FDI Act) requires that the FDIC 
establish a risk-based deposit insurance assessment system.\1\ Pursuant 
to this requirement, the FDIC first adopted a risk-based deposit 
insurance assessment system effective in 1993 that applied to all 
insured depository institutions (IDIs).\2\ The FDIC implemented a risk-
based assessment system with the goals of making the deposit insurance 
system fairer to well-run institutions and encouraging weaker 
institutions to improve their condition, and thus, promote the safety 
and soundness of IDIs.\3\ Deposit insurance assessments based on risk 
also provide incentives for IDIs 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 to the deposit insurance assessment system's 
ability to differentiate for risk.
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    \1\ 12 U.S.C. 1817(b). Generally, a ``risk-based assessment 
system'' means a system for calculating a depository institution's 
assessment based on the institution's probability of causing a loss 
to the Deposit Insurance Fund (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\ 57 FR 45263 (Oct. 1, 1992).
    \3\ See 57 FR at 45264.
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    The primary objective of this proposal is to incorporate the CBLR 
framework \4\ into the current risk-based deposit insurance assessment 
system in a manner that: (1) Maximizes regulatory relief for small 
institutions that use the CBLR framework; and (2) minimizes increases 
in deposit insurance assessments that may arise without a change in 
risk. The rulemaking also would maintain fair and appropriate pricing 
of deposit insurance for institutions that use the CBLR.
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    \4\ In this proposal, the term ``CBLR framework'' refers to the 
simplified measure of capital adequacy provided in the CBLR NPR, as 
well as any subsequent changes to that proposal that are adopted 
during the rulemaking process.
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II. Background

    The FDIC assesses all IDIs an amount for deposit insurance equal to 
the bank's \5\ deposit insurance assessment base multiplied by its 
risk-based assessment rate.\6\ A bank's assessment base and risk-based 
assessment rate depend in part, on tier 1 capital and the tier 1 
leverage ratio. This information would no longer be reported on the 
Consolidated Reports of Condition and Income (Call Report) by banks 
that elect the CBLR framework.
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    \5\ 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. 1817(c)(2).
    \6\ See 12 CFR 327.3(b)(1).
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A. Notice of Proposed Rulemaking: Community Bank Leverage Ratio

    On February 8, 2019, the Federal banking agencies published in the 
Federal Register the CBLR NPR.\7\ The CBLR NPR would provide for a

[[Page 5381]]

simplified measure of capital adequacy for qualifying community banking 
organizations, consistent with Section 201 of the Economic Growth, 
Regulatory Relief, and Consumer Protection Act (EGRRCPA or the Act).\8\ 
The Act defines a qualifying community banking organization as a 
depository institution or depository institution holding company with 
total consolidated assets of less than $10 billion.\9\ In addition, the 
Act states that the Federal banking agencies may determine that a 
banking organization is not a qualifying community bank based on its 
risk profile.\10\ A qualifying community banking organization that 
reports a community bank leverage ratio, or CBLR (defined as the ratio 
of tangible equity capital to average total consolidated assets, both 
as reported on an institution's applicable regulatory filing), 
exceeding the level established by the Federal banking agencies of not 
less than 8 percent and not more than 10 percent would be considered 
well capitalized. The CBLR NPR proposed to define tangible equity 
capital (CBLR tangible equity) as total bank equity capital, prior to 
including minority interests, and excluding accumulated other 
comprehensive income (AOCI), deferred tax assets arising from net 
operating loss and tax credit carryforwards, goodwill, and certain 
other intangible assets, calculated in accordance with a qualifying 
community bank organization's regulatory reports.\11\ The Federal 
banking agencies further proposed that qualifying community banking 
organizations \12\ that elect to use the CBLR framework (CBLR banks) 
would report their CBLR and other relevant information on a simpler 
regulatory capital schedule in the Call Report, as opposed to the 
current schedule RC-R of the Call Report.\13\ Finally, under the CBLR 
NPR, a CBLR bank must have a CBLR greater than 9 percent to be 
considered well capitalized.\14\ The Federal banking agencies also 
proposed proxy CBLR thresholds for the adequately capitalized, 
undercapitalized, and significantly undercapitalized PCA 
categories.\15\
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    \7\ See 84 FR 3062 (February 8, 2019).
    \8\ Public Law 115-174 (May 24, 2018).
    \9\ See section 201(a)(3)(A) of the Act.
    \10\ See section 201(a)(3)(B) of the Act.
    \11\ See 84 FR at 3068-69.
    \12\ In accordance with the Act, the Federal banking agencies 
propose to define a qualifying community bank generally as a 
depository institution or depository institution holding company 
with less than $10 billion in total consolidated assets and that has 
limited amounts of off-balance sheet exposures, trading assets and 
liabilities, mortgage servicing assets, and certain deferred tax 
assets. An advanced approaches banking organization, including a 
subsidiary of a depository institution, bank holding company, or 
intermediate holding company that is an advanced approaches banking 
organization, would not be a qualifying community bank. See 84 FR at 
3065-67.
    \13\ In the CBLR NPR, the Federal banking agencies state that 
they intend to separately seek comment on the proposed changes to 
regulatory reports for qualifying community banking organizations 
that elect to use the CBLR framework; however, the CBLR NPR provides 
an illustrative reporting form, using the Call Report as an example, 
as an indication of the potential reporting format and potential 
reporting burden relief for CBLR banks. See 84 FR at 3065 and 3074.
    \14\ See 84 FR at 3064 and 3071. However, to be considered and 
treated as well capitalized under the CBLR framework, and consistent 
with the Federal banking agencies' current PCA rule, the qualifying 
community banking organization must demonstrate that it is not 
subject to any written agreement, order, capital directive, or 
prompt corrective action directive to meet and maintain a specific 
capital level for any capital measure. See 84 FR at 3064.
    \15\ See 84 FR at 3071-72.
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    In the interagency CBLR NPR, the Federal banking agencies noted 
that deposit insurance assessment regulations would be affected by the 
proposed CBLR framework.\16\ CBLR banks would no longer be required to 
calculate or report the components of regulatory capital used in the 
calculation of the tier 1 leverage ratio or risk-based capital, such as 
tier 1 capital or risk weighted assets.\17\
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    \16\ See 84 FR at 3073-74.
    \17\ See 84 FR at 3073.
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B. Use of Capital Measures in the Current Deposit Insurance Assessment 
System

Assessment Base
    In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank Act) required that the FDIC amend its regulations to 
redefine the assessment base to equal average consolidated total assets 
minus average tangible equity.\18\ In implementing this requirement, 
the FDIC defined tangible equity as tier 1 capital, in part, because it 
minimized regulatory reporting.\19\ The FDIC also provides a deduction 
to the assessment base for custodial banks \20\ equal to a certain 
amount of low risk-weighted assets.\21\
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    \18\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 331(b), 124 Stat. 1376, 1538 (codified at 12 
U.S.C. 1817(note)).
    \19\ See 76 FR 10673, 10678 (Feb. 25, 2011) (``Defining tangible 
equity as Tier 1 capital provides a clearly understood capital 
buffer for the DIF in the event of the institution's failure, while 
avoiding an increase in regulatory burden that a new definition of 
capital could cause.'').
    \20\ Generally, a custodial bank is defined as an IDI with 
previous calendar year-end trust assets (that is, fiduciary and 
custody and safekeeping assets, as reported on Schedule RC-T of the 
Call Report) of at least $50 billion or those insured depository 
institutions that derived more than 50 percent of their revenue 
(interest income plus non-interest income) from trust activity over 
the previous calendar year. See 12 CFR 327.5(c)(1).
    \21\ The adjustment to the assessment base for banker's banks 
under 12 CFR 327.5(b) would not be affected by this proposal.
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    In addition, the FDIC applies certain adjustments to a bank's 
assessment rate as part of the risk-based assessment system to better 
account for risk among banks based on their funding sources. The 
adjustments are calculated, in part, using a bank's assessment base. 
One adjustment, the depository institution debt adjustment (DIDA), is 
limited based on a bank's tier 1 capital.\22\
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    \22\ See 12 CFR 327.16(e)(2).
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Assessment Rate
    Under the FDI Act, the FDIC has the authority to ``establish 
separate risk-based assessment systems for large and small members of 
the Deposit Insurance Fund.'' \23\ Separate systems for large banks and 
small banks have been in place since 2007.\24\ Assessment rates for 
established small banks \25\ are calculated based on a formula that 
uses financial measures and a weighted average of supervisory ratings 
(CAMELS).\26\ The financial measures are derived from a statistical 
model estimating the probability of failure over three years. The 
measures are shown in Table 1 below.
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    \23\ 12 U.S.C. 1817(b)(1)(D).
    \24\ Under the assessment regulations, a ``small institution'' 
generally is an institution with less than $10 billion in total 
assets, and a ``large institution'' generally is an institution with 
$10 billion or more in total assets. See 12 CFR 327.8(e) and (f). A 
separate system for highly complex institutions has been in place 
since 2011. See 12 CFR 326.16(b)(2).
    \25\ Generally, an established institution is one that has been 
federally insured for at least five years. See 12 CFR 327.8(v).
    \26\ See 12 CFR 327.16(a)(1).

   Table 1--Financial Measures Used To Determine Assessment Rates for
                         Established Small Banks
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                           Financial measures
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 Leverage Ratio.
 Net Income before Taxes/Total Assets.
 Nonperforming Loans and Leases/Gross Assets.
 Other Real Estate Owned/Gross Assets.
 Brokered Deposit Ratio.
 One Year Asset Growth.
 Loan Mix Index.
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    One of the measures, the Leverage Ratio, is defined as tier 1 
capital divided by adjusted average assets (herein referred to as the 
tier 1 leverage ratio). The numerator and denominator of the Leverage 
Ratio are both based on the

[[Page 5382]]

definitions for the relevant PCA measure.\27\
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    \27\ See 12 CFR 327.16(a)(1)(ii).
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III. Summary of Proposal

Summary

    In this NPR, the FDIC is proposing to apply the CBLR framework to 
the deposit insurance assessment system in a way that minimizes or 
eliminates any resulting increase in assessments that may arise without 
a change in risk and, to the fullest extent practicable, reduces 
regulatory reporting burden consistent with the objective of the CBLR 
framework, as discussed in the CBLR NPR.\28\ As discussed more fully 
below, the FDIC is proposing to price all CBLR banks as small banks. 
The FDIC is also proposing to amend its assessment regulations to 
calculate the assessment base of CBLR banks using either CBLR tangible 
equity or tier 1 capital, and the assessment rate of established CBLR 
banks using the higher of either the CBLR or the tier 1 leverage ratio. 
For a minority of small banks, the use of the CBLR or CBLR tangible 
equity could result in a higher assessment rate or a larger assessment 
base, respectively. Therefore, through corresponding changes to the 
Call Report, the FDIC would propose to allow CBLR banks the option to 
use tier 1 capital in lieu of CBLR tangible equity when reporting 
``average tangible equity'' on their Call Report, for purposes of 
calculating their assessment base. Through Call Report changes, CBLR 
banks also would have the option to report the tier 1 leverage ratio on 
Schedule RC-O of the Call Report, in addition to the CBLR on the 
simpler regulatory capital schedule under the CBLR framework, and the 
FDIC would apply the value that would result in the lower assessment 
rate (i.e., the higher value). The FDIC, in coordination with the 
Federal Financial Institutions Examination Council (FFIEC), would seek 
comment on proposed changes to Schedule RC-O and its instructions in 
the Call Reports in a separate Paperwork Reduction Act notice that 
would align with the proposed amendments to the assessment regulations. 
This proposal meets the FDIC's goal of extending the regulatory relief 
made available to small institutions under the proposed CBLR framework 
while minimizing or potentially eliminating increases in deposit 
insurance assessments that are unrelated to a change in risk.
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    \28\ The changes proposed in this rulemaking do not apply to 
insured branches of foreign banks. These institutions file the FFIEC 
002, which does not include many of the items, including capital 
measures, found in the Call Report schedules filed by other IDIs.
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    The FDIC, through this NPR, also proposes to clarify that a CBLR 
bank that meets the definition of a custodial bank would have no change 
to its custodial bank deduction or reporting items required to 
calculate the deduction. A CBLR bank that meets the definition of a 
custodial bank would continue to report items related to the custodial 
bank deduction on Schedule RC-O of the Call Report for assessment 
purposes, one of which is calculated based on the risk weighting of 
qualifying low-risk liquid assets; however, to utilize the deduction 
the bank would not be required to report the more detailed schedule of 
risk-weighted assets for regulatory capital purposes consistent with 
adoption of the CBLR framework. In addition, the proposal would clarify 
that the assessment regulations would continue to reference the PCA 
regulations for the definitions of capital categories for deposit 
insurance assessment purposes, including the proposed CBLR capital 
categories.

A. Assessment Base and Assessment Rate Adjustments

Tangible Equity
    The FDIC is proposing to amend the definition of ``tangible 
equity,'' for purposes of calculating a CBLR bank's average tangible 
equity and the assessment base, to mean either CBLR tangible equity or 
tier 1 capital.\29\ For CBLR banks that do not elect the option, 
discussed below, to use tier 1 capital when reporting average tangible 
equity, CBLR tangible equity would be used to calculate the bank's 
assessment base. All other banks would continue to use tier 1 capital 
when reporting average tangible equity, which the FDIC would use to 
calculate a bank's assessment base.
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    \29\ As previously stated, the assessment base is equal to 
average consolidated total assets minus average tangible equity. 
This proposal would not change the calculation of average 
consolidated total assets as it relates to an IDI's assessment base.
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    The proposed change minimizes increases in deposit insurance 
assessments for CBLR banks that may arise without a change in risk. 
Based on Call Report data as of September 30, 2018, the FDIC estimates 
that for most, but not all, CBLR banks, CBLR tangible equity would 
equal or exceed tier 1 capital. However, in the event that a bank's 
CBLR tangible equity is less than tier 1 capital, calculating a bank's 
assessment base using CBLR tangible equity instead of tier 1 capital 
could result in a larger assessment base and a higher assessment 
amount. Therefore, the FDIC is proposing to give CBLR banks the option 
to use either tier 1 capital or CBLR tangible equity when calculating 
``average tangible equity'' for purposes of the bank's assessment base 
calculation.\30\ Banks currently report average tangible equity on item 
5 of Schedule RC-O of their Call Report. Through changes to the Call 
Report, the FDIC would propose to retain this item, but amend the Call 
Report instructions to allow CBLR banks to report average tangible 
equity using either CBLR tangible equity or, if using tier 1 capital 
would result in a higher amount for average tangible equity (and 
subsequently a lower assessment base), the bank would have the option 
to use tier 1 capital.\31\ As discussed above, the FDIC, in 
coordination with the FFIEC, would seek comment on corresponding 
changes to Schedule RC-O and its instructions in a separate Paperwork 
Reduction Act notice.
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    \30\ All IDIs are instructed to calculate average tangible 
equity using the average of the three month-end balances within a 
quarter (monthly averaging). Some institutions with total 
consolidated assets of less than $1 billion may report average 
tangible equity using an end-of-quarter balance. See 12 CFR 
327.5(a)(2).
    \31\ To illustrate the effect of using CBLR tangible equity or 
tier 1 capital on an IDI's assessment, the FDIC plans to provide on 
its website an assessment estimation tool that banks can use to 
estimate deposit insurance assessment amounts under the proposal.
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    The proposed change to ``tangible equity'' also maximizes 
regulatory relief for CBLR banks. A CBLR bank would experience a 
decrease in reporting burden as a result of this proposal. If the bank 
chooses the option to use tier 1 capital for assessment purposes, the 
bank would experience an increase in reporting burden relative to other 
CBLR banks by having to calculate tier 1 capital for purposes of 
reporting average tangible equity. Compared to current reporting, 
however, this would still result in an overall reduction in reporting, 
because the number of items reported by a CBLR bank that elects to use 
tier 1 capital for assessment purposes would not increase (tier 1 
capital would be used in lieu of CBLR tangible equity in calculating 
and reporting ``average tangible equity'' on Schedule RC-O of its Call 
Report). The FDIC would continue to require all banks to maintain 
records required to verify the correctness of any assessment for three 
years from the due date of the assessment.\32\ The FDIC expects that a 
CBLR bank would only elect the option to use tier 1 capital if it would 
result in a lower assessment.
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    \32\ See 12 U.S.C. 1817(b)(4).

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[[Page 5383]]

    The proposed definition of ``tangible equity'' for purposes of 
calculating an IDI's assessment base would affect adjustments that 
could apply to a CBLR bank's initial base assessment rate because the 
assessment base is used in the denominator of each adjustment.\33\ The 
FDIC expects that a CBLR bank would consider how the proposed change to 
``tangible equity'' for purposes of calculating its assessment base 
could affect adjustments to its assessment rate when it makes its 
decision of whether to optionally report average tangible equity using 
tier 1 capital for deposit insurance assessment purposes. Thus, the 
FDIC does not propose any additional change to the assessment base as 
it is used for purposes of calculating the adjustments referenced 
above.
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    \33\ For example, the unsecured debt adjustment applied to an 
IDI's assessment rate equals the amount of long-term unsecured 
liabilities an IDI reports times the sum of 40 basis points plus the 
bank's initial base assessment rate (that is, the assessment rate 
before any adjustments) divided by the assessment base. The other 
two adjustments affected by the proposed change to the definition of 
``tangible equity'' for purposes of calculating an IDI's assessment 
base are: the depository institution debt adjustment and the 
brokered deposit adjustment. See 12 CFR 327.16(e).
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    Question 1: The FDIC invites comment on providing a CBLR bank with 
the option to use tier 1 capital for purposes of reporting average 
tangible equity, which is used in the assessment base calculation. Is 
the proposed change appropriate? Should the FDIC only use CBLR tangible 
equity to calculate the assessment base of a CBLR bank, even if it 
could result in a higher assessment amount? Should CBLR banks be 
required to specify whether they are reporting tier 1 capital or CBLR 
tangible equity for assessments purposes in a separate line item of the 
Call Report? Should this option only stay in effect for a limited time 
to permit a transition to the new CBLR?
Depository Institution Debt Adjustment
    The FDIC also proposes to amend the DIDA to incorporate CBLR 
tangible equity for CBLR banks. Under the proposal, the FDIC would 
exclude from the unsecured debt amount used in calculating the DIDA of 
a CBLR bank an amount equal to no more than 3 percent of CBLR tangible 
equity. For all other banks, the FDIC would continue to exclude an 
amount equal to no more than 3 percent of tier 1 capital, and thus 
those banks would see no change.\34\ The NPR would not change the 3 
percent cap for the exclusion and would not require any change in 
reporting. For a CBLR bank, the FDIC would calculate the exclusion 
using end-of-quarter CBLR tangible equity, as reported in the simpler 
regulatory capital schedule under the CBLR framework. For a non-CBLR 
bank, the FDIC would continue to calculate the exclusion using end-of-
quarter tier 1 capital, as reported in Schedule RC-R of the Call 
Report.
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    \34\ The FDIC implemented the DIDA in a 2011 final rule to 
offset the benefit received by institutions that issue long-term, 
unsecured liabilities when these liabilities are held by another 
IDI. The exclusion of no more than 3 percent of tier 1 capital 
represents a de minimis amount of risk. See 76 FR at 10681.
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    The FDIC is proposing to only use CBLR tangible equity for purposes 
of calculating the DIDA for CBLR banks because the adjustment currently 
applies to so few banks. Based on Call Report data as of September 30, 
2018, 24 IDIs are subject to the DIDA and 22 of those could qualify as 
a CBLR bank. The majority of the 22 CBLR banks subject to the DIDA 
would experience little to no effect if the FDIC substitutes CBLR 
tangible equity for tier 1 capital. Based on the latest Call Report 
data, only 2 of the 22 CBLR banks subject to the DIDA would experience 
a change in their DIDA calculation, and the effect would be 
approximately $1,500 per quarter. As such, the FDIC is proposing to 
substitute CBLR tangible equity, as reported on the simpler regulatory 
capital schedule under the CBLR framework, for tier 1 capital so that 
CBLR banks subject to the DIDA would not have to report tier 1 capital 
separately. The proposed change would extend the regulatory relief made 
available to small institutions under the proposed CBLR framework while 
minimizing increases to the DIDA that may arise without a corresponding 
increase to the debt issued by another IDI that is held by the bank.
    Question 2: Should the FDIC allow CBLR banks to use either CBLR 
tangible equity or tier 1 capital for the DIDA calculation, whichever 
is highest? If so, should CBLR banks be required to report an 
additional line item for tier 1 capital?
    Question 3: Should the FDIC use average tangible equity as a proxy 
for tier 1 capital for CBLR banks only, so that such banks do not have 
to report an additional line item for tier 1 capital? In this case, for 
CBLR banks only, the FDIC would use the amount reported in line item 5 
of Schedule RC-O of their Call Report for the DIDA calculation in place 
of tier 1 capital.

B. Assessment Rates for Established Small Institutions

    The FDIC is proposing to amend the definition of the Leverage Ratio 
in the small bank pricing methodology, which is used to calculate an 
established small bank's assessment rate, to mean the higher of either 
the CBLR or tier 1 leverage ratio, as applicable. For established CBLR 
banks, the CBLR would be used to calculate the bank's assessment rate 
unless the bank opts to additionally report the tier 1 leverage ratio. 
For all other established small banks, the FDIC would continue to use 
the tier 1 leverage ratio to calculate an institution's assessment 
rate. As discussed in more detail below, FDIC analysis suggests that 
substituting the CBLR for the current Leverage Ratio in the small bank 
pricing methodology would not materially change the predictive accuracy 
of the underlying statistical model used to determine assessment rates 
for established small banks.
    The proposed change to ``Leverage Ratio'' minimizes increases in 
deposit insurance assessments that may arise without a change in risk. 
Based on Call Report data as of September 30, 2018, the FDIC estimates 
that for most, but not all, CBLR banks, the CBLR would equal or exceed 
the tier 1 leverage ratio and, therefore, would reduce or have no 
effect on an established small bank's deposit insurance assessment 
rate. In the event that an established small bank's CBLR is less than 
its tier 1 leverage ratio, however, calculating the bank's assessment 
rate using the CBLR instead of the tier 1 leverage ratio could result 
in a higher assessment rate and a higher assessment amount.\35\ 
Therefore, through upcoming Call Report changes, CBLR banks would have 
the option to separately report their tier 1 leverage ratio, in 
addition to the CBLR. As reflected in the proposed changes to the 
definition of ``Leverage Ratio,'' the FDIC would then use the higher 
value (i.e., the value that results in the lower assessment when 
calculating the institution's assessment rate). To provide for this 
option in reporting, the FDIC, through changes to the Call Report, 
would retain and transfer item 44 from Schedule RC-R of the Call 
Report, to Schedule RC-O. A CBLR bank that elects to report its tier 1 
leverage ratio for purposes of calculating its assessment rate would 
report that ratio on the item transferred to Schedule RC-O. A CBLR bank 
that does not elect to report the tier 1 leverage ratio would leave 
this item blank.\36\ All CBLR banks

[[Page 5384]]

would report their CBLR as part of the simpler capital schedule under 
the CBLR framework. As discussed above, to effectuate this option, the 
FDIC, in coordination with the FFIEC, would seek comment on 
corresponding changes to Schedule RC-O and its instructions in a 
separate Paperwork Reduction Act notice.
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    \35\ To illustrate the effect of using the CBLR or tier 1 
leverage ratio on an IDI's assessment rate, the FDIC will provide on 
its website an assessment estimation tool that banks can use to 
estimate deposit insurance assessment rates under the proposal.
    \36\ By leaving this item blank, the FDIC would consider the 
value for the tier 1 leverage ratio to be zero and the CBLR would be 
used to calculate a CBLR bank's assessment rate because it would be 
the higher amount.
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    The proposed change to ``Leverage Ratio'' also maximizes regulatory 
relief for CBLR banks. A CBLR bank would experience a decrease in its 
reporting burden under the proposal. If the bank chooses the option to 
report the tier 1 leverage ratio for assessment purposes, the bank 
would experience an increase in reporting burden relative to other CBLR 
banks by having to calculate and report this additional line item on 
Schedule RC-O. The FDIC expects that a CBLR bank would only elect the 
option to calculate and report its tier 1 capital ratio if it would 
result in a lower assessment. A CBLR bank that elects to report its 
tier 1 leverage ratio would still benefit from the reduced reporting 
provided by the simpler regulatory capital schedule under the CBLR 
framework, relative to non-CBLR banks. All banks would continue to be 
required to maintain all records that the FDIC may require for 
verifying the correctness of any assessment for three years from the 
due date of the assessment.\37\
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    \37\ See 12 U.S.C. 1817(b)(4).
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    Question 4: The FDIC invites comment on allowing a CBLR bank to 
additionally report the tier 1 leverage ratio to determine its deposit 
insurance assessment rate. Is the proposed change appropriate? Should 
the FDIC only use the CBLR to calculate the assessment rate of a CBLR 
bank, even if it could result in a higher assessment amount?

C. Pricing CBLR Banks as Small Institutions

    The FDIC is proposing to amend the definition of ``small 
institution'' to include all banks that elect to adopt the CBLR 
framework, even if such a bank would otherwise be classified as a 
``large institution'' under the assessment regulations.\38\ This 
modification is necessary because otherwise the different eligibility 
thresholds used to define a small bank in assessment regulations and a 
CBLR bank under the CBLR framework could result in a CBLR bank being 
assessed as a large bank.\39\
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    \38\ A CBLR bank that meets the definition of an established 
institution under 12 CFR 327.8(v), generally one that has been 
federally insured for at least five years, would be assessed as an 
established small bank. A CBLR bank that has been federally insured 
for less than five years would be assessed as a new small bank. See 
12 CFR 327.8(w).
    \39\ Under the current assessment regulations, a large bank is 
reclassified as small once it has reported less than $10 billion in 
total assets for four consecutive quarters, and a small bank is 
reclassified as large once it has reported $10 billion or more in 
total assets for four consecutive quarters. See 12 CFR 327.8(e). 
Under the CBLR NPR, a qualifying community banking organization is 
defined generally as a depository institution or depository 
institution holding company with less than $10 billion in total 
consolidated assets at the end of the most recent quarter and that 
meet certain qualifying criteria. See 84 FR at 3065.
---------------------------------------------------------------------------

    For example, a substantial divestiture might cause a bank 
classified as large for the purpose of pricing deposit insurance to 
have less than $10 billion in total consolidated assets in a particular 
quarter. Assuming that the bank meets the other criteria to be a 
qualifying community banking organization, the bank would be eligible 
to report under the CBLR framework beginning with the following 
quarter. Under existing assessment regulations, however, the bank would 
still be classified as a large institution until it reported total 
assets below $10 billion for four consecutive quarters. Therefore, the 
bank could report the CBLR for regulatory capital purposes but, for a 
short period, it would continue to be priced as a large bank.
    The proposed change to the assessment definition of ``small 
institution'' would prevent a scenario, such as the one described 
above, where a CBLR bank is priced as a large bank because it has not 
yet reported total assets below $10 billion for four consecutive 
quarters. In addition, the FDIC also proposes to clarify that a CBLR 
bank with assets of between $5 billion and $10 billion cannot request 
to be treated as a large bank.\40\ The FDIC believes that pricing a 
CBLR bank as a large bank would be inconsistent with the intention of 
the proposed CBLR framework to provide regulatory relief to small, 
community banks with a limited risk profile.\41\ The pricing 
methodology for large banks uses measures that are not reported by 
small banks and are meant to measure the risk of banks with more 
complex operations and organizational structures.\42\ Further, CBLR 
banks would no longer report the tier 1 leverage ratio or tier 1 
capital, which are used for multiple measures in the large bank pricing 
methodology. Substituting the CBLR for the tier 1 leverage ratio or 
CBLR tangible equity for tier 1 capital in the large bank assessment 
methodology would require more extensive modifications to ensure that 
risk is priced appropriately.
---------------------------------------------------------------------------

    \40\ Under current regulations, a bank with between $5 billion 
and $10 billion may request treatment as a large bank for deposit 
insurance assessments. See 12 CFR 327.16(f).
    \41\ See 84 FR at 3067.
    \42\ For example, the FDIC uses data on Schedule RC-O regarding 
higher-risk assets to calculate financial ratios used to determine a 
large or highly complex institution's assessment rate, and small 
institutions are not required to report such information.
---------------------------------------------------------------------------

    Question 5: The FDIC invites comment on amending the definition of 
``small institution'' to include CBLR banks. Are there limited 
instances where the FDIC should permit CBLR banks to be assessed as 
large institutions? If so, what are they and how should such 
institutions report the data necessary to be priced as a large bank (as 
determined under the assessment regulations)?

D. Clarifications Not Requiring a Substantive Change to Regulations

    The FDIC, through this NPR, proposes to clarify that for any CBLR 
bank that meets the definition of a custodial bank there is no change 
in the reporting that is necessary to calculate and receive the 
custodial bank deduction under the assessment regulations. The NPR 
would not change the custodial bank deduction. A CBLR bank that also 
meets the definition of a custodial bank under the assessment 
regulations would continue to report items related to the custodial 
bank deduction on Schedule RC-O of the Call Report for assessment 
purposes, one of which is calculated based on the risk weighting of 
qualifying low-risk liquid assets. However, consistent with the CBLR 
framework, CBLR banks that meet the definition of a custodial bank 
would not be required to report the more detailed schedule of its risk-
weighted assets for regulatory capital purposes in order to utilize the 
deduction.
    In calculating the assessment base for custodial banks, the FDIC 
excludes a certain amount of low-risk assets, which are reported in 
Schedule RC-R of the Call Report, subject to the deduction limit.\43\ 
Under the CBLR framework, these line items would not be included in the 
simpler regulatory capital schedule that would be filed by CBLR banks 
in the Call Report.\44\ However, the FDIC is clarifying that it would 
not

[[Page 5385]]

require a custodial bank that elects to use the CBLR framework to 
separately report these items in order to continue utilizing the 
custodial bank deduction. A custodial bank would continue to report the 
numerical value of its custodial bank deduction and custodial bank 
deduction limit in Schedule RC-O of the Call Report. Also, the FDIC 
would require custodial banks to continue to maintain the proper 
documentation of their calculation for the custodial bank adjustment, 
and to make that documentation available upon request.\45\
---------------------------------------------------------------------------

    \43\ See 12 CFR 327.5(c)(2) (the FDIC will exclude from a 
custodial bank's assessment base the daily or weekly average 
(depending on how the bank reports its average consolidated total 
assets) of all asset types described in the instructions to lines 1, 
2, and 3 of Schedule RC of the Call Report with a standardized 
approach risk weight of 0 percent, regardless of maturity, plus 50 
percent of those asset types described in the instructions to lines 
1, 2, and 3 of Schedule RC of the Call Report, with a standardized 
approach risk-weight greater than 0 and up to and including 20 
percent, regardless of maturity).
    \44\ See 84 FR at 3073.
    \45\ See 12 U.S.C. 1817(b)(4).
---------------------------------------------------------------------------

    Question 6: The FDIC invites comment on allowing a custodial bank 
that is a CBLR bank to continue to utilize the custodial bank deduction 
by only reporting its custodial bank deduction and custodial bank limit 
on Schedule RC-O of its Call Report. Should such a bank be required to 
report additional items on the Call Report to support its calculation 
of the custodial bank deduction?
    The FDIC also proposes to clarify that the assessment regulations 
would continue to reference the PCA regulations for the definitions of 
capital categories used in the deposit insurance assessment system. 
Capital categories for deposit insurance assessment purposes are 
defined by reference to the agencies' regulatory capital rules that 
would be amended under the CBLR NPR.\46\ Any changes to the thresholds 
that are made as a result of the CBLR rulemaking process will be 
automatically incorporated into the assessment regulations. In the NPR, 
the FDIC also proposes to make technical amendments to the FDIC's 
assessment regulations to align with the changes in the CBLR NPR.
---------------------------------------------------------------------------

    \46\ See 12 CFR 327.8(z).
---------------------------------------------------------------------------

IV. Expected Effects

    Based on Call Report data as of September 30, 2018, the FDIC does 
not expect that the proposed changes to the assessment regulations 
would have a material impact on aggregate assessment revenue or on 
rates paid by individual institutions. The FDIC estimates that 4,450 
out of 5,477 IDIs (81.2 percent) would meet the proposed qualifying 
community banking organization criteria for the CBLR framework and 
would have a CBLR greater than 9 percent.\47\ Of all banks, 4,479 (81.8 
percent) would see no change in their deposit insurance assessment 
under the proposal.
---------------------------------------------------------------------------

    \47\ In the CBLR NPR, the Federal banking agencies estimated 
that 4,469 IDIs met all of the proposed qualifying criteria, as of 
June 30, 2018. See 84 FR at 3072. The estimate of 4,450 qualifying 
community banking organizations in this NPR is based on data as of 
September 30, 2018. The difference of 19 institutions is 
attributable to changes in the number of institutions and to 
relevant Call Report data and was not the result of any change to 
the proposed qualifying criteria.
---------------------------------------------------------------------------

    Certain CBLR banks, however, could see a decrease or, potentially 
an increase, in their assessments under the proposal. A CBLR bank could 
experience a decreased assessment amount because its tier 1 capital is 
less than its CBLR tangible equity (resulting in a smaller assessment 
base and any applicable assessment adjustments) or because its tier 1 
leverage ratio is lower than its CBLR (resulting in a higher Leverage 
Ratio and potentially a lower assessment rate). Conversely, a CBLR bank 
could experience an increased assessment amount if its tier 1 capital 
is greater than its CBLR tangible equity (resulting in a larger 
assessment base) or because its tier 1 leverage ratio is higher than 
its CBLR (resulting in a lower Leverage Ratio and potentially a higher 
assessment rate).
    The FDIC estimates that the proposal would decrease assessments for 
560 CBLR banks (10.2 percent of all banks). Of those, 458 (8.4 percent 
of all banks) would experience a decrease of less than 1 percent, and 
40 (0.7 percent of all banks) would experience a decrease greater than 
5 percent. On the other hand, the proposal could also result in 
increased assessments for 438 banks (8.0 percent of all banks). Of 
those, 347 (6.3 percent of all banks) could experience an increase of 
less than 1 percent, and 22 (0.4 percent of all banks) could experience 
an increase greater than 5 percent. CBLR banks facing an increase in 
assessments would have the option of avoiding that increase by using 
tier 1 capital for the assessment base calculation, reporting the tier 
1 leverage ratio for the assessment rate calculation, or both. 
Therefore, the number of banks that would experience an increase in 
assessments as the result of this proposal is likely to be less than 
438, depending on the number of banks that utilize the options.
    If all CBLR banks that could experience an increase in assessments 
by opting into the CBLR framework choose to use tier 1 capital for the 
assessment base calculation and the tier 1 leverage ratio for the 
assessment rate calculation (in order to prevent an increase in 
assessments), and assessments for the remaining CBLR banks are 
determined using CBLR tangible equity and the CBLR, the FDIC estimates 
that aggregate revenue to the DIF would decline by $4.3 million 
annually (0.08% of annual assessments), based on Call Report data as of 
September 30, 2018.
    Based on Call Report data as of September 30, 2018, five custodial 
banks would meet the definition of a ``qualifying community banking 
organization'' under the CBLR NPR. Under the proposal, a custodial bank 
that is a CBLR bank would be able to continue to report the custodial 
bank deduction for its assessment base and would be able to report the 
simpler regulatory capital schedule proposed under the CBLR NPR. All 
five custodial banks that would meet the definition of a ``qualifying 
community banking organization'' would see no change to their 
assessments.
    The relatively small change in aggregate deposit insurance 
assessment revenue suggests that substituting the CBLR for the tier 1 
leverage ratio, as proposed, would have minimal impact on the FDIC's 
ability to fairly and adequately price a bank's risk to the DIF. The 
FDIC further evaluated this claim by performing out-of-sample 
backtesting to compare the accuracy ratio \48\ of a model that uses the 
CBLR to the accuracy ratio of the current model that uses the tier 1 
leverage ratio.
---------------------------------------------------------------------------

    \48\ Briefly, an accuracy ratio is a number between 0 and 1 
(inclusive) that measures how well the model performs a correct 
rank-ordering of banks that failed over the projection horizon. A 
``perfect'' model is one that always assigns a higher probability of 
failure to a bank that subsequently failed in the projection horizon 
compared to a bank that does not fail; such a model receives an 
accuracy ratio of 1. At the other extreme, a model that performs no 
better than random guessing would receive an accuracy ratio of 0. A 
technical explanation of an accuracy ratio can be found at 81 FR 
6127-28 (Feb. 4, 2016).
---------------------------------------------------------------------------

    The backtests show that substituting the CBLR for the tier 1 
leverage ratio would not materially change the predictive accuracy of 
the underlying statistical model used to determine assessment rates for 
established small banks. To make this point, the table below compares 
the accuracy ratios of the statistical model using a close 
approximation of the CBLR in lieu of the tier 1 leverage ratio (column 
A) with the current model using the tier 1 leverage ratio (column 
B).\49\ Column A shows that the resulting accuracy ratio when 
substituting the CBLR for the tier 1 leverage ratio is 0.646. Column B 
shows that the current small bank assessment system basically performed

[[Page 5386]]

the same, with an accuracy ratio of 0.645. Similar backtests are 
repeated for other years with the average accuracy ratio for all of the 
backtests virtually the same between a model that uses the CBLR in lieu 
of the tier 1 leverage ratio and a model that reflects the current 
small bank assessment system. These results provide a strong case that 
substituting the CBLR for the tier 1 leverage ratio has little impact 
on predictive accuracy of the underlying model used to determine 
assessments for established small banks.
---------------------------------------------------------------------------

    \49\ The substitution of the CBLR for the tier 1 leverage ratio 
is made only for cases in which the bank is estimated to meet the 
definition of a qualifying community bank organization. Regressions 
were done on an out-of-sample basis. For example, the backtest from 
the first row is based on parameter estimates based on data from 
2003 and earlier. Then the projection is made using data available 
at the end of 2006 to make projections over the next three years.

    Table 2--Accuracy Ratio Comparison Between the Proposed Rule and the Current Small Bank Deposit Insurance
                                                Assessment System
----------------------------------------------------------------------------------------------------------------
                                                                         Accuracy ratio for   Accuracy ratio for
                                                    Accuracy ratio for   the current small      the proposal--
                Year of projection                    the proposal *      bank assessment     accuracy ratio for
                                                                               system         the current system
                                                                   (A)                  (B)                (A-B)
----------------------------------------------------------------------------------------------------------------
2006.............................................                0.646                0.645                0.001
2007.............................................          0.746-0.754                0.748        (0.002)-0.006
2008.............................................          0.910-0.912                0.910          0.000-0.002
2009.............................................          0.937-0.938                0.938          0.000-0.001
2010.............................................                0.969                0.969                0.000
2011.............................................          0.952-0.953                0.953        (0.001)-0.000
2012.............................................          0.917-0.919                0.918        (0.001)-0.001
2013.............................................          0.958-0.960                0.960        (0.002)-0.000
2014.............................................          0.879-0.887                0.889      (0.010)-(0.002)
2015.............................................                0.857                0.857                0.000
Average..........................................          0.877-0.879                0.879        (0.002)-0.000
----------------------------------------------------------------------------------------------------------------
Note: Table only includes institutions with less than $10 billion in assets that filed a Call Report. Thus, for
  projections made from 2011 and earlier, Thrift Financial Report filers are excluded.
* Data necessary to calculate the CBLR, as defined in the CBLR rule, are not available prior to 2015 (except for
  a small number of banks in 2014). Instead, the FDIC used two alternative capital ratio definitions that are
  upper and lower bounds of the CBLR in over 99 percent of cases. Column (A) reflects a range of estimates of
  accuracy ratios for the proposal based on those two alternative capital ratio definitions.
** The difference uses the midpoint of the range in column (A).

    Question 7: The FDIC invites comments on all aspects of the 
information provided in this Expected Effects section. In particular, 
would this proposal have any significant effects on institutions that 
the FDIC has not identified?

V. Alternatives

    The FDIC considered the reasonable and possible alternatives 
described below. On balance, the FDIC believes the current proposal 
would meet its stated policy objectives in the most appropriate and 
straightforward manner.
    One alternative would be to leave in place the current assessment 
regulations and require CBLR banks to report all of the necessary data 
related to tier 1 capital and the tier 1 leverage ratio, to determine 
the bank's assessment base and rate. In other words, the FDIC would not 
incorporate CBLR tangible equity or the CBLR into the current 
assessment regulations and require CBLR banks to report all of the 
necessary data related to tier 1 capital and the tier 1 leverage ratio, 
to determine an institution's assessment base and rate. This option, 
however, would not accomplish the policy objective of aligning with the 
CBLR framework to reduce regulatory reporting burden for small 
institutions.
    The FDIC could also require all CBLR banks to use CBLR tangible 
equity and the CBLR, as appropriate, for determining deposit insurance 
assessments, either without the option to use tier 1 capital or report 
the tier 1 leverage ratio if it resulted in a lower deposit insurance 
assessment, or with a time limit on a bank's ability to elect that 
option. This alternative would be easy to understand and implement, but 
it would raise costs for some banks and, therefore, would fail to meet 
the policy objective of minimizing increases in deposit insurance 
assessments for some banks with no corresponding change in their risk 
profile.
    Under a third alternative, the FDIC could use historical data to 
estimate each CBLR bank's assessment amount based on the CBLR framework 
and compare this estimate to the bank's assessment amount based on tier 
1 capital and the tier 1 leverage ratio. For CBLR banks that are 
expected to experience an assessment increase, the FDIC could estimate 
the amount of the increase using historical data and reduce the bank's 
assessment by the estimated increase for one year. This alternative 
would temporarily eliminate the unintended consequence of higher 
assessments for banks with no change in risk profile, but the estimates 
would only be valid for the historical quarter estimated and the 
relationship between the estimate and the actual amount would likely 
become less accurate over time. At the conclusion of the one year 
period, a CBLR bank may continue to experience a higher assessment, but 
would no longer receive an assessment reduction and would have no other 
option to offset that increase other than to alter its risk profile. 
Finally, this alternative would also be operationally complex, 
particularly in comparison to the current proposal, which the FDIC 
believes would achieve a similar result in a more straightforward 
manner.
    Question 8: The FDIC invites comment on the reasonable and possible 
alternatives described in this proposed rule. Should the FDIC consider 
other reasonable and possible alternatives?

VI. Request for Comments

    In addition to its request for comment on specific parts of the 
proposal, the FDIC seeks comment on all aspects of this proposed 
rulemaking.

VII. Effective Date

    The effective date of amendments to the assessment regulations that 
accommodate reduced reporting under the CBLR framework would coincide 
with the effective date of a final rule establishing the CBLR 
framework, but is not expected to occur prior to September 30, 2019.

[[Page 5387]]

VIII. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \50\ requires the Federal 
banking agencies to use plain language in all proposed final rules 
published after January 1, 2000. The FDIC has sought to present the 
proposed regulation in a simple and straightforward manner, and invites 
your comments on how to make this proposal easier to understand. For 
example:
---------------------------------------------------------------------------

    \50\ Public Law 106-102, sec. 722, 113 Stat. 1338, 1471 (1999).
---------------------------------------------------------------------------

     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?

IX. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
generally requires an agency, in connection with a proposed rule, to 
prepare and make available for public comment an initial regulatory 
flexibility analysis that describes the impact of a proposed rule on 
small entities.\51\ However, a regulatory flexibility analysis is not 
required if the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
The Small Business Administration (SBA) has defined ``small entities'' 
to include banking organizations with total assets of less than or 
equal to $550 million.\52\ Certain types of rules, such as rules of 
particular applicability relating to rates, 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.\53\ Because the proposed rule relates directly to the rates 
imposed on IDIs for deposit insurance and to the deposit insurance 
assessment system that measures risk and determines each bank's 
assessment rate, the proposed rule is not subject to the RFA. 
Nonetheless, the FDIC is voluntarily presenting information in this RFA 
section.
---------------------------------------------------------------------------

    \51\ 5 U.S.C. 601 et seq.
    \52\ The SBA defines a small banking organization as having $550 
million or less in assets, where ``a financial institution's assets 
are determined by averaging the assets reported on its four 
quarterly financial statements for the preceding year.'' See 13 CFR 
121.201 (as amended, effective December 2, 2014). ``SBA counts the 
receipts, employees, or other measure of size of the concern whose 
size is at issue and all of its domestic and foreign affiliates.'' 
See 13 CFR 121.103. Following these regulations, the FDIC uses a 
covered entity's affiliated and acquired assets, averaged over the 
preceding four quarters, to determine whether the covered entity is 
``small'' for the purposes of RFA.
    \53\ 5 U.S.C. 601.
---------------------------------------------------------------------------

    As of June 30, 2018--the most recent period for which full data on 
small entities is available--there were 4,062 FDIC-insured depository 
institutions considered to be small entities for the purposes of 
RFA.\54\ Of these, 3,450 (84.9 percent) institutions are currently 
eligible to use the CBLR. The proposed rule could affect deposit 
insurance assessments for these FDIC-insured small entities, but as 
explained below, these effects are likely to be small.
---------------------------------------------------------------------------

    \54\ This is the latest date for which data from bank holding 
company financial reports (Y-9C) is available for determining which 
banks are small under the SBA definition.
---------------------------------------------------------------------------

    Using data from the Call Report as of September 30, 2018, the FDIC 
calculated that 2,870 small, FDIC-insured institutions (83.2 percent) 
are unlikely to experience a change in their assessments because of 
this rule. The FDIC estimates that 378 small, FDIC-insured institutions 
(11.0 percent) are likely to experience a decrease in their assessments 
under the proposal; however 305 of these (7.5 percent) are likely to 
see assessments reduced by less than one percent. Only 30 small 
institutions (0.7 percent) are likely to see their assessments reduced 
by more than five percent. The FDIC estimates that 202 small, FDIC-
insured institutions (5.9 percent) could experience an increase in 
their assessments under the proposal. However, since the proposal 
allows banks the option to report tier 1 capital or the tier 1 leverage 
ratio if it results in a lower assessment, the FDIC presumes that none 
of these banks would choose higher assessments.
    The proposed changes would not require any additional reporting, 
unless a CBLR bank chooses the option to report its tier 1 leverage 
ratio to calculate its assessment rate or use tier 1 capital in the 
calculation of its assessment base. The FDIC expects that a CBLR bank 
would only elect to use tier 1 capital or the tier 1 leverage ratio if 
it would result in a lower assessment.
    The proposed rule could pose some additional regulatory costs for 
covered institutions associated with changes to internal systems or 
processes, or changes to reporting requirements. However, the FDIC 
believes that these additional costs are likely to be de minimis 
because the banks likely already collect and report the data that would 
be used in revised calculations. Banks opting to report the tier 1 
leverage ratio on Schedule RC-O would have an offsetting reduction in 
burden from no longer reporting the current Schedules RC-R and would 
benefit from a lower assessment than it would have using the CBLR.
    Question 9: The FDIC invites comments on all aspects of the 
supporting information provided in this RFA section. In particular, 
would this rule have any significant effects on small entities that the 
FDIC has not identified?

X. Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
(PRA) of 1995,\55\ the FDIC may not conduct or sponsor, and the 
respondent is not required to respond to, an information collection 
unless it displays a currently-valid Office of Management and Budget 
(OMB) control number. The FDIC's OMB control numbers for its assessment 
regulations are 3064-0057, 3064-0151, and 3064-0179. The proposed rule 
does not revise any of these existing assessment information 
collections pursuant to the PRA and consequently, no submissions in 
connection with these OMB control numbers will be made to the OMB for 
review. However, the proposed rule will require changes to Schedule RC-
O of the Call Reports (FFIEC 031, FFIEC 041, and FFIEC 051 (OMB No. 
3064-0052 (FDIC), 7100-0036 (Federal Reserve System) and 1557-0081 
(Office of the Comptroller of the Currency)), which will be coordinated 
by the Federal Financial Institutions Examination Council and addressed 
in a separate Federal Register notice.
---------------------------------------------------------------------------

    \55\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

XI. Riegle Community Development and Regulatory Improvement Act of 1994

    Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act (RCDRIA),\56\ in determining the effective 
date and administrative compliance requirements for new regulations 
that impose additional reporting, disclosure, or other requirements on 
insured depository institutions, each Federal banking agency must 
consider, consistent with principles of safety and soundness and the 
public interest, any administrative burdens that such

[[Page 5388]]

regulations would place on depository institutions, including small 
depository institutions, and customers of depository institutions, as 
well as the benefits of such regulations. In addition, section 302(b) 
of RCDRIA requires new regulations and amendments to regulations that 
impose additional reporting, disclosures, or other new requirements on 
insured depository institutions generally to take effect on the first 
day of a calendar quarter that begins on or after the date on which the 
regulations are published in final form.\57\
---------------------------------------------------------------------------

    \56\ 12 U.S.C. 4802(a).
    \57\ Id.
---------------------------------------------------------------------------

    The FDIC notes that comment on these matters has been solicited in 
other sections of this SUPPLEMENTARY INFORMATION section, and that the 
requirements of RCDRIA will be considered as part of the overall 
rulemaking process. In addition, FDIC invites any other comments that 
further will inform the FDIC's consideration of RCDRIA.

List of Subjects in 12 CFR Part 327

    Bank deposit insurance, Banks, Banking, Savings associations.

Authority and Issuance

    For the reasons set forth above, the FDIC proposes to amend part 
327 of title 12 of the Code of Federal Regulations 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.

0
2. In Sec.  327.5 revise paragraphs (a)(2) and (a)(2)(iii) to read as 
follows:


Sec.  327.5   Assessment base.

    (a) * * *
    (1) * * *
    (2) Average tangible equity defined and calculated. Average 
tangible equity is defined as tangible equity using either the monthly 
averaging or quarter-end averaging in paragraphs (a)(2)(i) or (ii) of 
this section, as applicable. Tangible equity is defined as Tier 1 
capital, except that in the case of a qualifying community banking 
organization that elects to use the community bank leverage ratio 
framework under 12 CFR 3.12(a)(3), 12 CFR 217.12(a)(3), or 12 CFR 
324.12(a)(3), tangible equity is defined as Tier 1 capital or CBLR 
tangible equity as defined in 12 CFR 3.12(b)(2), 12 CFR 217.12(b)(2), 
and 12 CFR 324.12(b)(2).
    (i) * * *
    (ii) * * *
    (iii) Calculation of average tangible equity for the surviving 
institution in a merger or consolidation. For the surviving institution 
in a merger or consolidation, tangible equity shall be calculated as if 
the merger occurred on the first day of the quarter in which the merger 
or consolidation occurred.
* * * * *
0
3. Revise Sec.  327.6, paragraph (b) to read as follows:


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

* * * * *
    (b) Assessment for quarter in which the merger or consolidation 
occurs. For an assessment period in which a merger or consolidation 
occurs, consolidated total assets for the surviving or resulting 
institution shall include the consolidated total assets of all insured 
depository institutions that are parties to the merger or consolidation 
as if the merger or consolidation occurred on the first day of the 
assessment period. Tangible equity shall be reported in the same 
manner.
* * * * *
0
4. Revise Sec.  327.8, paragraphs (e) and (z) to read as follows:


Sec.  327.8   Definitions.

* * * * *
    (e) Small institution. An insured depository institution with 
assets of less than $10 billion as of December 31, 2006, and an insured 
branch of a foreign institution shall be classified as a small 
institution. If, after December 31, 2006, an institution classified as 
large under paragraph (f) of this section (other than an institution 
classified as large for purposes of Sec. Sec.  327.9(e) and 327.16(f)) 
reports assets of less than $10 billion in its quarterly reports of 
condition for four consecutive quarters, the FDIC will reclassify the 
institution as small beginning the following quarter. An insured 
depository institution that elects to use the community bank leverage 
ratio framework under 12 CFR 3.12(a)(3), 12 CFR 217.12(a)(3), or 12 CFR 
324.12(a)(3) shall be classified as a small institution, even if that 
institution otherwise would be classified as a large institution under 
paragraph (f) of this section.
* * * * *
    (z) Well capitalized, adequately capitalized and undercapitalized. 
For any insured depository institution other than an insured branch of 
a foreign bank, Well Capitalized, Adequately Capitalized and 
Undercapitalized have the same meaning as in: 12 CFR 6.4 (for national 
banks and federal savings associations), as either may be amended from 
time to time, except that 12 CFR 6.4(b)(1)(E) and (e), as they may be 
amended from time to time, shall not apply; 12 CFR 208.43 (for state 
member institutions), as either may be amended from time to time, 
except that 12 CFR 208.43(b)(1)(E) and (c), as they may be amended from 
time to time, shall not apply; and 12 CFR 324.403 (for state nonmember 
institutions and state savings associations), as either may be amended 
from time to time, except that 12 CFR 324.403(b)(1)(E) and (d), as they 
may be amended from time to time, shall not apply.
0
5. Revise the table under Sec.  327.16, paragraph (a)(1)(ii)(A) to read 
as follows:


Sec.  327.16   Assessment pricing methods--beginning the first 
assessment period after June 30, 2016, where the reserve ratio of the 
DIF as of the end of the prior assessment period has reached or 
exceeded 1.15 percent.

    (a) * * *
    (1) * * *
    (i) * * *
    (ii) Definitions of measures used in the financial ratios method--
(A) Definitions. The following table lists and defines the measures 
used in the financial ratios method:

       Definitions of Measures Used in the Financial Ratios Method
------------------------------------------------------------------------
          Variables                           Description
------------------------------------------------------------------------
Leverage Ratio (%)...........  The Leverage Ratio means Tier 1 capital
                                divided by adjusted average assets
                                (numerator and denominator are both
                                based on the definition for prompt
                                corrective action). In the case of a
                                qualifying community banking
                                organization that elects to use the
                                community bank leverage ratio framework
                                under 12 CFR 3.12(a)(3), 12 CFR
                                217.12(a)(3), or 12 CFR 324.12(a)(3),
                                the Leverage Ratio means the higher of:
                                Tier 1 capital divided by adjusted
                                average assets (numerator and
                                denominator are both based on the
                                definition for prompt corrective
                                action); or CBLR tangible equity divided
                                by average total consolidated assets
                                (numerator and denominator are both
                                based on the definition for prompt
                                corrective action, as applicable).

[[Page 5389]]

 
Net Income before Taxes/Total  Income (before applicable income taxes
 Assets (%).                    and discontinued operations) for the
                                most recent twelve months divided by
                                total assets.\1\
Nonperforming Loans and        Sum of total loans and lease financing
 Leases/Gross Assets (%).       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\
Other Real Estate Owned/Gross  Other real estate owned divided by gross
 Assets (%).                    assets.\2\
Brokered Deposit Ratio.......  The ratio of the difference between
                                brokered deposits and 10 percent of
                                total assets to total assets. For
                                institutions that are well capitalized
                                and have a CAMELS composite rating of 1
                                or 2, reciprocal deposits are deducted
                                from brokered deposits. If the ratio is
                                less than zero, the value is set to
                                zero.
Weighted Average of C, A, M,   The weighted sum of the ``C,'' ``A,''
 E, L, and S Component          ``M,'' ``E'', ``L'', and ``S'' CAMELS
 Ratings.                       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.
Loan Mix Index...............  A measure of credit risk described
                                paragraph (a)(1)(ii)(B) of this section.
One-Year Asset Growth (%)....  Growth in assets (adjusted for mergers
                                \3\) over the previous year in excess of
                                10 percent.\4\ If growth is less than 10
                                percent, the value is set to zero.
------------------------------------------------------------------------
\1\ 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\ Gross assets are total assets plus the allowance for loan and lease
  financing receivable losses (ALLL).
\3\ Growth in assets is also adjusted for acquisitions of failed banks.
\4\ The maximum value of the Asset Growth measure is 230 percent; that
  is, asset growth (merger adjusted) over the previous year in excess of
  240 percent (230 percentage points in excess of the 10 percent
  threshold) will not further increase a bank's assessment rate.

* * * * *
0
6. Revise Sec.  327.16, paragraph (e)(2)(i) to read as follows:


Sec.  327.16   Assessment pricing methods--beginning the first 
assessment period after June 30, 2016, where the reserve ratio of the 
DIF as of the end of the prior assessment period has reached or 
exceeded 1.15 percent.

* * * * *
    (e) * * *
    (2) * * *
    (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 or, in the case of a 
qualifying community banking organization that elects to use the 
community bank leverage ratio framework under 12 CFR 3.12(a)(3), 12 CFR 
217.12(a)(3), or 12 CFR 324.12(a)(3), CBLR tangible equity as defined 
in 12 CFR 3.12(b)(2), 12 CFR 217.12(b)(2), or 12 CFR 324.12(b)(2), as 
applicable. 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.
* * * * *

    Dated at Washington, DC, on December 18, 2018.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2019-02761 Filed 2-20-19; 8:45 am]
BILLING CODE 6714-01-P