[Federal Register Volume 85, Number 235 (Monday, December 7, 2020)]
[Proposed Rules]
[Pages 78794-78805]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25830]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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  Federal Register / Vol. 85, No. 235 / Monday, December 7, 2020 / 
Proposed Rules  

[[Page 78794]]



FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AF65


Assessments, Amendments To Address the Temporary Deposit 
Insurance Assessment Effects of the Optional Regulatory Capital 
Transitions for Implementing the Current Expected Credit Losses 
Methodology

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Deposit Insurance Corporation is seeking comment 
on a proposed rule that would amend the risk-based deposit insurance 
assessment system applicable to all large insured depository 
institutions (IDIs), including highly complex IDIs, to address the 
temporary deposit insurance assessment effects resulting from certain 
optional regulatory capital transition provisions relating to the 
implementation of the current expected credit losses (CECL) 
methodology. The proposal would amend the assessment regulations to 
remove the double counting of a specified portion of the CECL 
transitional amount or the modified CECL transition amount, as 
applicable (collectively, the CECL transitional amounts), in certain 
financial measures that are calculated using the sum of Tier 1 capital 
and reserves and that are used to determine assessment rates for large 
and highly complex IDIs. The proposal also would adjust the calculation 
of the loss severity measure to remove the double counting of a 
specified portion of the CECL transitional amounts for a large or 
highly complex IDI. This proposal would not affect regulatory capital 
or the regulatory capital relief provided in the form of transition 
provisions that allow banking organizations to phase in the effects of 
CECL on their regulatory capital ratios.

DATES: Comments must be received no later than January 6, 2021.

ADDRESSES: You may submit comments on the proposed rule using 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-AF65 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 https://www.fdic.gov/regulations/laws/federal.

FOR FURTHER INFORMATION CONTACT: Scott Ciardi, Chief, Large Bank 
Pricing, (202) 898-7079 or [email protected]; Ashley Mihalik, Chief, 
Banking and Regulatory Policy, (202) 898-3793 or [email protected]; 
Nefretete Smith, Counsel, (202) 898-6851 or [email protected]; Sydney 
Mayer, Senior Attorney, (202) 898-3669 or [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 
IDIs.\2\ The FDIC implemented this 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\
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    \1\ 12 U.S.C. 1817(b).
    \2\ 57 FR 45263 (Oct. 1, 1992).
    \3\ As used in this proposed rule, the term ``insured depository 
institution'' has the same meaning as it is used in section 3(c)(2) 
of the FDI Act, 12 U.S.C. 1813(c)(2).
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    In 2006, the FDIC adopted a final rule that created different risk-
based assessment systems for large and small IDIs that combined 
supervisory ratings with other risk measures to differentiate risk and 
determine assessment rates.\4\ In 2011, the FDIC amended the risk-based 
assessment system applicable to large IDIs to, among other things, 
better capture risk at the time the institution assumes the risk, to 
better differentiate risk among large IDIs during periods of good 
economic and banking conditions based on how they would fare during 
periods of stress or economic downturns, and to better take into 
account the losses that the FDIC may incur if a large IDI fails.\5\
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    \4\ See 71 FR 69282 (Nov. 30, 2006). Generally, large IDIs have 
$10 billion or more in total assets and small IDIs have less than 
$10 billion in total assets. See 12 CFR 327.8(e) and (f). As used in 
this proposed rule, the term ``small bank'' is synonymous with 
``small institution,'' the term ``large bank'' is synonymous with 
``large institution,'' and the term ``highly complex bank'' is 
synonymous with ``highly complex institution,'' as the terms are 
defined in 12 CFR 327.8.
    \5\ See 76 FR 10672 (Feb. 25, 2011).
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    The FDIC is required by statute to set deposit insurance 
assessments based on risk, and the FDIC's objective in setting forth 
this proposal is to ensure that banks are assessed in a manner that is 
fair and accurate. The primary objective of this proposal is to remove 
a double counting issue in several financial measures used to determine 
deposit insurance assessments for large and highly complex banks, which 
could result in a deposit insurance assessment rate for a large or 
highly complex bank that does not accurately reflect the bank's risk to 
the deposit insurance fund (DIF), all else equal. Specifically, the 
proposal would amend the assessment regulations to remove the double 
counting of a portion of the CECL transitional amounts, in certain 
financial measures used to determine deposit insurance assessments for 
large and highly complex banks. In particular, certain financial 
measures are calculated by summing Tier 1 capital, which includes the 
CECL transitional amounts, and reserves, which already reflects the 
implementation of CECL. As a result, a portion of the CECL transitional 
amounts is being double counted in these measures, which in turn 
affects assessment rates for large and highly complex banks. The 
proposal also would adjust the calculation of the loss severity measure 
to remove the double counting of a

[[Page 78795]]

portion of the CECL transitional amounts for a large or highly complex 
bank.
    This proposal would amend the deposit insurance system applicable 
to large and highly complex banks only, and it would not affect 
regulatory capital or the regulatory capital relief provided in the 
form of transition provisions that allow banking organizations to phase 
in the effects of CECL on their regulatory capital ratios.\6\ 
Specifically, in calculating another measure used to determine 
assessment rates for all IDIs, the Tier 1 leverage ratio, the FDIC 
would continue to apply the CECL regulatory capital transition 
provisions, consistent with the regulatory capital relief provided to 
address concerns that despite adequate capital planning, unexpected 
economic conditions at the time of CECL adoption could result in 
higher-than-anticipated increases in allowances.\7\
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    \6\ Banking organizations subject to the capital rule include 
national banks, state member banks, state nonmember banks, savings 
associations, and top-tier bank holding companies and savings and 
loan holding companies domiciled in the United States not subject to 
the Federal Reserve Board's Small Bank Holding Company Policy 
Statement (12 CFR part 225, appendix C), but exclude certain savings 
and loan holding companies that are substantially engaged in 
insurance underwriting or commercial activities or that are estate 
trusts, and bank holding companies and savings and loan holding 
companies that are employee stock ownership plans. See 12 CFR part 3 
(Office of the Comptroller of the Currency)); 12 CFR part 217 
(Board); 12 CFR part 324 (FDIC). See also 84 FR 4222 (February 14, 
2019) and 85 FR 61577 (September 30, 2020).
    \7\ See 84 FR 4225 (February 14, 2019).
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    The proposed amendments to the deposit insurance assessment system 
and any changes to reporting requirements pursuant to this proposal 
would be required only while the regulatory capital relief described 
above is reflected in the regulatory reports of banks.

II. Background

A. Deposit Insurance Assessments

    The FDIC charges all IDIs an assessment amount for deposit 
insurance equal to the IDI's deposit insurance assessment base 
multiplied by its risk-based assessment rate.\8\ An IDI's assessment 
base and assessment rate are determined each quarter based on 
supervisory ratings and information collected in the Consolidated 
Reports of Condition and Income (Call Report) or the Report of Assets 
and Liabilities of U.S. Branches and Agencies of Foreign Banks (FFIEC 
002), as appropriate. Generally, an IDI's assessment base equals its 
average consolidated total assets minus its average tangible equity.\9\
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    \8\ See 12 CFR 327.3(b)(1).
    \9\ See 12 CFR 327.5.
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    An IDI's assessment rate is calculated using different methods 
based on whether the IDI is a small, large, or highly complex bank.\10\ 
Large and highly complex banks are assessed using a scorecard approach 
that combines CAMELS ratings and certain forward-looking financial 
measures to assess the risk that a large or highly complex bank poses 
to the DIF.\11\ The score that each large or highly complex bank 
receives is used to determine its deposit insurance assessment rate. 
One scorecard applies to most large IDIs and another applies to highly 
complex banks. Both scorecards use quantitative financial measures that 
are useful in predicting a large or highly complex bank's long-term 
performance.\12\
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    \10\ For assessment purposes, a large bank is generally defined 
as an institution with $10 billion or more in total assets, a small 
bank is generally defined as an institution with less than $10 
billion in total assets, and a highly complex bank is generally 
defined as an institution that has $50 billion or more in total 
assets and is controlled by a parent holding company that has $500 
billion or more in total assets, or is a processing bank or trust 
company. See 12 CFR 327.16(a) and (b).
    \11\ See 12 CFR 327.16(b); see also 76 FR 10672 (Feb. 25, 2011) 
and 77 FR 66000 (Oct. 31, 2012).
    \12\ See 76 FR 10688. The FDIC uses a different scorecard for 
highly complex IDIs because those institutions are structurally and 
operationally complex, or pose unique challenges and risks in case 
of failure. 76 FR 10695.
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    As described in more detail below, the FDIC is proposing to amend 
the assessment regulations to remove the double counting of a portion 
of the CECL transitional amounts in the calculation of the loss 
severity measure and certain other financial measures that are 
calculated by summing Tier 1 capital and reserves, which are used to 
determine assessment rates for large and highly complex banks.

B. The Current Expected Credit Losses Methodology

    In 2016, the Financial Accounting Standards Board (FASB) issued 
Accounting Standards Update (ASU) No. 2016-13, Financial Instruments--
Credit Losses, Topic 326, Measurement of Credit Losses on Financial 
Instruments.\13\ The ASU resulted in significant changes to credit loss 
accounting under U.S. generally accepted accounting principles (GAAP). 
The revisions to credit loss accounting under GAAP included the 
introduction of CECL, which replaces the incurred loss methodology for 
financial assets measured at amortized cost. For these assets, CECL 
requires banking organizations to recognize lifetime expected credit 
losses and to incorporate reasonable and supportable forecasts in 
developing the estimate of lifetime expected credit losses, while also 
maintaining the current requirement that banking organizations consider 
past events and current conditions.
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    \13\ ASU 2016-13 covers measurement of credit losses on 
financial instruments and includes three subtopics within Topic 326: 
(i) Subtopic 326-10 Financial Instruments--Credit Losses--Overall; 
(ii) Subtopic 326-20: Financial Instruments--Credit Losses--Measured 
at Amortized Cost; and (iii) Subtopic 326-30: Financial 
Instruments--Credit Losses--Available-for-Sale Debt Securities.
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    CECL allowances cover a broader range of financial assets than the 
allowance for loan and lease losses (ALLL) under the incurred loss 
methodology. Under the incurred loss methodology, the ALLL generally 
covers credit losses on loans held for investment and lease financing 
receivables, with additional allowances for certain other extensions of 
credit and allowances for credit losses on certain off-balance sheet 
credit exposures (with the latter allowances presented as 
liabilities).\14\ These exposures will be within the scope of CECL. In 
addition, CECL applies to credit losses on held-to-maturity (HTM) debt 
securities. ASU 2016-13 also introduces new requirements for available-
for-sale (AFS) debt securities. The new accounting standard requires 
that a banking organization recognize credit losses on individual AFS 
debt securities through credit loss allowances, rather than through 
direct write-downs, as is currently required under U.S. GAAP. The 
credit loss allowances attributable to debt securities are separate 
from the credit loss allowances attributable to loans and leases.
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    \14\ ``Other extensions of credit'' includes trade and 
reinsurance receivables, and receivables that relate to repurchase 
agreements and securities lending agreements. ``Off-balance sheet 
credit exposures'' includes off-balance sheet credit exposures not 
accounted for as insurance, such as loan commitments, standby 
letters of credit, and financial guarantees. The FDIC notes that 
credit losses for off-balance sheet credit exposures that are 
unconditionally cancellable by the issuer are not recognized under 
CECL.
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C. The 2019 CECL Rule

    Upon adoption of CECL, a banking organization will record a one-
time adjustment to its credit loss allowances as of the beginning of 
its fiscal year of adoption equal to the difference, if any, between 
the amount of credit loss allowances required under the incurred loss 
methodology and the amount of credit loss allowances required under 
CECL. A banking organization's implementation of CECL will affect its 
retained earnings, deferred tax assets

[[Page 78796]]

(DTAs), allowances, and, as a result, its regulatory capital ratios.
    In recognition of the potential for the implementation of CECL to 
affect regulatory capital ratios, on February 14, 2019, the FDIC, the 
Office of the Comptroller of the Currency (OCC), and the Board of 
Governors of the Federal Reserve System (Board) (collectively, the 
agencies) issued a final rule that revised certain regulations, 
including the agencies' regulatory capital regulations (capital 
rule),\15\ to account for the aforementioned changes to credit loss 
accounting under GAAP, including CECL (2019 CECL rule).\16\ The 2019 
CECL rule includes a transition provision that allows banking 
organizations to phase in over a three-year period the day-one adverse 
effects of CECL on their regulatory capital ratios.
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    \15\ 12 CFR part 3 (OCC); 12 CFR part 217 (Board); 12 CFR part 
324 (FDIC).
    \16\ 84 FR 4222 (Feb. 14, 2019).
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D. The 2020 CECL Rule

    As part of the efforts to address the disruption of economic 
activity in the United States caused by the spread of coronavirus 
disease 2019 (COVID-19), on March 31, 2020, the agencies adopted a 
second CECL transition provision through an interim final rule.\17\ The 
agencies subsequently adopted a final rule (2020 CECL rule) on 
September 30, 2020, that is consistent with the interim final rule, 
with some clarifications and adjustments related to the calculation of 
the transition and the eligibility criteria for using the 2020 CECL 
transition provision.\18\ The 2020 CECL rule provides banking 
organizations that adopt CECL for purposes of GAAP (as in effect 
January 1, 2020), for a fiscal year that begins during the 2020 
calendar year, the option to delay for up to two years an estimate of 
CECL's effect on regulatory capital, followed by a three-year 
transition period (i.e., a five-year transition period in total).\19\ 
The 2020 CECL rule does not replace the three-year transition provision 
in the 2019 CECL rule, which remains available to any banking 
organization at the time that it adopts CECL.\20\
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    \17\ 85 FR 17723 (Mar. 31, 2020).
    \18\ See 85 FR 61577 (Sept. 30, 2020).
    \19\ A banking organization that is required to adopt CECL under 
GAAP in the 2020 calendar year, but chooses to delay use of CECL for 
regulatory reporting in accordance with section 4014 of the 
Coronavirus Aid Relief, and Economic Security Act (CARES Act), is 
also eligible for the 2020 CECL transition provision. The CARES Act 
(Pub. L. 116-136, 4014, 134 Stat. 281 (March 27, 2020)) provides 
banking organizations optional temporary relief from complying with 
CECL ending on the earlier of (1) the termination date of the 
current national emergency, declared by the President on March 13, 
2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.) 
concerning COVID-19, or (2) December 31, 2020. If a banking 
organization chooses to revert to the incurred loss methodology 
pursuant to the CARES Act in any quarter in 2020, the banking 
organization would not apply any transitional amounts in that 
quarter but would be allowed to apply the transitional amounts in 
subsequent quarters when the banking organization resumes use of 
CECL.
    \20\ See 85 FR 61578 (Sept. 30, 2020).
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E. Double Counting of a Portion of the CECL Transitional Amounts in 
Certain Financial Measures Used To Determine Assessments for Large and 
Highly Complex Banks

    An increase in a banking organization's allowances, including those 
estimated under CECL, generally will reduce the banking organization's 
earnings or retained earnings, and therefore, its Tier 1 capital. For 
banks electing the 2019 CECL rule, the CECL transitional amount is the 
difference between the closing balance sheet amount of retained 
earnings for the fiscal year-end immediately prior to the bank's 
adoption of CECL (pre-CECL amount) and the bank's balance sheet amount 
of retained earnings as of the beginning of the fiscal year in which it 
adopts CECL (post-CECL amount). For banks electing the 2020 CECL rule 
transition provision, retained earnings are increased for regulatory 
capital calculation purposes by a modified CECL transitional amount 
that is adjusted to reflect changes in retained earnings due to CECL 
that occur during the first two years of the five-year transition 
period. Under the 2020 CECL rule, the change in retained earnings due 
to CECL is calculated by taking the change in reported adjusted 
allowances for credit losses (AACL) \21\ relative to the first day of 
the fiscal year in which CECL was adopted and applying a scaling 
multiplier of 25 percent during the first two years of the transition 
period. The resulting amount is added to the CECL transitional amount 
described above. Hence, the modified CECL transitional amount for banks 
electing the 2020 CECL rule is calculated on a quarterly basis during 
the first two years of the transition period. The bank reflects that 
modified CECL transitional amount, which includes 100 percent of the 
day-one impact of CECL on retained earnings plus a portion of the 
difference between AACL reported in the most recent regulatory report 
and AACL as of the beginning of the fiscal year that the banking 
organization adopts CECL, in the transitional amount applied to 
retained earnings in regulatory capital calculations.\22\
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    \21\ The 2019 CECL rule defined a new term for regulatory 
capital purposes, adjusted allowances for credit losses (AACL). The 
meaning of the term AACL for regulatory capital purposes is 
different from the meaning of the term allowances of credit losses 
(ACL) used in applicable accounting standards. The term allowance 
for credit losses as used by the FASB in ASU 2016-13 applies to both 
financial assets measured at amortized cost and AFS debt securities. 
In contrast, the AACL definition includes only those allowances that 
have been established through a charge against earnings or retained 
earnings. Under the 2019 CECL rule, the term AACL, rather than ALLL, 
applies to a banking organization that has adopted CECL.
    \22\ See 85 FR 61580 (Sept. 30, 2020).
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    For banks electing the 2020 CECL rule transition provision that 
enter the third year of their transition period and for banks electing 
the three-year 2019 CECL rule transition provision, banks must 
calculate the transitional amount to phase into their retained earnings 
for purposes of their regulatory capital calculations over a three-year 
period. For banks electing the 2019 CECL rule, the CECL transitional 
amount of is the difference between the pre-CECL amount of retained 
earnings and the post-CECL amount of retained earnings. For banks 
electing the 2020 CECL rule that enter the third year of their 
transition, the modified CECL transitional amount is the difference 
between the bank's AACL at the end of the second year of the transition 
period and its AACL as of the beginning of the fiscal year of CECL 
adoption multiplied by 25 percent plus the CECL transitional amount 
described above. The CECL transitional amount or, at the end of the 
second year of the transition period for banks electing the 2020 CECL 
rule, the modified CECL transitional amount, is fixed and must be 
phased in over the three-year transition period or the last three years 
of the transition period, respectively, on a straight-line basis, 25 
percent in the first year (or third year for banks electing the 2020 
CECL rule), and an additional 25 percent of the transitional amount 
over each of the next two years.\23\ At the beginning of the

[[Page 78797]]

sixth year for banks electing the 2020 CECL rule, or the beginning of 
the fourth year for banks electing the 2019 CECL rule, the electing 
bank would have completely reflected in regulatory capital the day-one 
effects of CECL (plus, for banks electing the 2020 CECL rule, an 
estimate of CECL's effect on regulatory capital, relative to the 
incurred loss methodology's effect on regulatory capital, during the 
first two years of CECL adoption).\24\
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    \23\ Thus, when calculating regulatory capital, a bank electing 
the 2019 CECL rule transition provision would increase the retained 
earnings reported on its balance sheet by the applicable portion of 
its CECL transitional amount, i.e., 75 percent of its CECL 
transitional amount during the first year of the transition period, 
50 percent of its CECL transitional amount during the second year of 
the transition period, and 25 percent of its CECL transitional 
amount during the third year of the transition period. A bank 
electing the 2020 CECL rule transition provision would increase the 
retained earnings reported on its balance sheet by the applicable 
portion of its modified CECL transitional amount, i.e., 100 percent 
of its modified CECL transitional amount during the first and second 
years of the transition period, 75 percent of its CECL modified 
transitional amount during the third year of the transition period, 
50 percent of its modified CECL transitional amount during the 
fourth year of the transition period, and 25 percent of its CECL 
transitional amount during the fifth year of the transition period.
    \24\ See 84 FR 4228 (Feb. 14, 2019) and 85 FR 61580 (Sept. 30, 
2020).
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    Certain financial measures that are used in the scorecard to 
determine assessment rates for large and highly complex banks are 
calculated using both Tier 1 capital and reserves. Tier 1 capital is 
reported in Call Report Schedule RC-R, Part I, item 26, and for banks 
that elect either the three-year transition provision contained in the 
2019 CECL rule or the five-year transition provision contained in the 
2020 CECL rule, Tier 1 capital includes (due to adjustments to the 
amount of retained earnings reported on the balance sheet) the 
applicable portion of the CECL transitional amount (or modified CECL 
transitional amount). For deposit insurance assessment purposes, 
reserves are calculated using the amount reported in Call Report 
Schedule RC, item 4.c, ``Allowance for loan and lease losses.'' For all 
banks that have adopted CECL, this Schedule RC line item reflects the 
allowance for credit losses on loans and leases.\25\ The issue of 
double counting arises in certain financial measures used to determine 
assessment rates for large and highly complex banks that are calculated 
using both Tier 1 capital and reserves because the allowance for credit 
losses on loans and leases is included during the transition period in 
both reserves and, as a portion of the CECL or modified CECL 
transitional amount, Tier 1 capital. For banks that elect either the 
three-year transition provision contained in the 2019 CECL rule or the 
five-year transition provision contained in the 2020 CECL rule, the 
CECL transitional amounts, as defined in section 301 of the regulatory 
capital rules, additionally include the effect on retained earnings, 
net of tax effect, of establishing allowances for credit losses in 
accordance with the CECL methodology on HTM debt securities, other 
financial assets measured at amortized cost, and off-balance sheet 
credit exposures as of the beginning of the fiscal year of adoption 
(plus, for banks electing the 2020 CECL rule, the change during the 
first two years of the transition period in reported AACLs for HTM debt 
securities, other financial assets measured at amortized cost, and off-
balance sheet credit exposures relative to the balances of these AACLs 
as of the beginning of the fiscal year of CECL adoption multiplied by 
25 percent). The applicable portions of the CECL transitional amounts 
attributable to allowances for credit losses on HTM debt securities, 
other financial assets measured at amortized cost, and off-balance 
sheet credit exposures are included in Tier 1 capital only and are not 
double counted with reserves for deposit insurance assessment purposes.
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    \25\ The allowance for credit losses on loans and leases held 
for investment also is reported in item 7, column A, of Call Report 
Schedule RI-B, Part II, Changes in Allowances for Credit Losses.
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    The CECL effective dates assigned by ASU 2016-13 as most recently 
amended by ASU No. 2019-10, the optional temporary relief from 
complying with CECL afforded by the CARES Act, and the transitions 
provided for under the 2019 CECL rule and 2020 CECL rule, provide that 
all banks will have completely reflected in regulatory capital the day-
one effects of CECL (plus, if applicable, an estimate of CECL's effect 
on regulatory capital, relative to the incurred loss methodology's 
effect on regulatory capital, during the first two years of CECL 
adoption) by December 31, 2026. As a result, and as discussed below, 
the proposed amendments to the deposit insurance assessment system and 
any changes to reporting requirements pursuant to this proposal would 
be required only while the temporary regulatory capital relief is 
reflected in the regulatory reports of banks.

III. The Proposed Rule

A. Summary

    In calculating certain measures used in the scorecard for 
determining deposit insurance assessment rates for large and highly 
complex banks, the FDIC is proposing to remove the applicable portions 
of the CECL transitional amounts added to retained earnings for 
regulatory capital purposes and attributable to the allowance for 
credit losses on loans and leases held for investment under the 
transitions provided for under the 2019 and 2020 CECL rules. 
Specifically, in certain scorecard measures which are calculated using 
the sum of Tier 1 capital and reserves, the FDIC would remove a 
specified portion of the CECL transitional amount (or modified CECL 
transitional amount) that is added to retained earnings for regulatory 
capital purposes when determining deposit insurance assessment rates. 
The FDIC is also proposing to adjust the calculation of the loss 
severity measure to remove the double counting of a specified portion 
of the CECL transitional amounts for a large or highly complex bank.
    Absent adjustments to the calculation of certain financial measures 
in the large and highly complex bank scorecards, the inclusion of the 
applicable portions of the CECL transitional amounts added to retained 
earnings for regulatory capital purposes and attributable to the 
allowance for credit losses on loans and leases held for investment in 
regulatory capital and the implementation of CECL in calculating 
reserves will result in temporary double counting of a portion of the 
CECL transitional amounts in select financial measures used to 
determine assessment rates for large and highly complex banks. For 
example, in the denominator of the higher-risk assets to Tier 1 capital 
and reserves ratio, the applicable portions of the CECL transitional 
amounts added to retained earnings for regulatory capital purposes and 
attributable to the allowance for credit losses on loans and leases 
held for investment would be included in Tier 1 capital, and these 
portions also would be reflected in the calculation of reserves using 
the allowance amount reported in Call Report Schedule RC, item 4.c. If 
left uncorrected, this temporary double counting could result in a 
deposit insurance assessment rate for a large or highly complex bank 
that does not accurately reflect the bank's risk to the DIF, all else 
equal.
    In the following simplified, stylized example, illustrated in Table 
1 below, consider a hypothetical large bank that has a CECL effective 
date of January 1, 2020, and elects a five-year transition.\26\ On the 
closing balance sheet date immediately prior to adopting CECL

[[Page 78798]]

(i.e., December 31, 2019), the electing bank has $1 million of ALLL and 
$10 million of Tier 1 capital. On the opening balance sheet date 
immediately after adopting CECL (i.e., January 1, 2020), the electing 
bank has $1.2 million of allowances for credit losses, of which the 
entire $1.2 million qualifies as AACL for regulatory capital purposes 
and is attributable to the allowance for credit losses on loans and 
leases held for investment.\27\ The bank would recognize the adoption 
of CECL as of January 1, 2020, by recording an increase in its 
allowances for credit losses, and in its AACL for regulatory capital 
purposes, of $200,000, with a reduction in beginning retained earnings 
of $200,000, which flows through and results in Tier 1 capital of $9.8 
million. For each of the quarterly reporting periods in year 1 of the 
five-year transition period (i.e., 2020), the electing bank would 
increase the retained earnings reported on its balance sheet by 
$200,000 for purposes of calculating its regulatory capital ratios, 
resulting in an increase in its Tier 1 capital of $200,000 to $10 
million, all else equal.\28\
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    \26\ This stylized example is included to illustrate the effect 
of the proposed rule and omits the effects of deferred tax assets on 
regulatory capital calculations, which are addressed in the 
agencies' capital rule, the 2019 CECL rule, and the 2020 CECL rule. 
The example reflects the first-quarter 2020 application by a 
hypothetical large bank (with no purchased credit-deteriorated 
assets) that has adopted the five-year CECL transition under the 
2020 CECL rule and assumes that the full amount of the CECL 
transitional amount is attributable to the allowance for credit 
losses on loans and leases. The example does not reflect any changes 
over the course of the first quarterly reporting period in year 1 
(i.e., no changes in the amounts reported on the bank's balance 
sheet between January 1 and March 31, 2020, the end of the reporting 
period for the first quarter). As a consequence, the bank's modified 
CECL transitional amount as of March 31, 2020 equals its CECL 
transitional amount. See 12 CFR part 3 (OCC); 12 CFR part 217 
(Board); 12 CFR part 324 (FDIC). See also 84 FR 4222 (February 14, 
2019) and 85 FR 61577 (September 30, 2020).
    \27\ While the CECL transitional amount is calculated using the 
difference between the closing balance sheet amount of retained 
earnings for the fiscal year-end immediately prior to a bank's 
adoption of CECL and the balance sheet amount of retained earnings 
as of the beginning of the fiscal year in which the bank adopts 
CECL, the FDIC calculates financial measures used to determine 
deposit insurance assessments using data reported as of each quarter 
end.
    \28\ Under the 2019 CECL rule, when calculating regulatory 
capital ratios during the first year of an electing bank's CECL 
adoption date, the bank must phase in 25 percent of the transitional 
amounts. The bank would phase in an additional 25 percent of the 
transitional amounts over each of the next two years so that the 
bank would have phased in 75 percent of the day-one adverse effects 
of adopting CECL during year three. At the beginning of the fourth 
year, the bank would have completely reflected in regulatory capital 
the day-one effects of CECL. Under the 2020 CECL rule, the modified 
CECL transitional amount is calculated on a quarterly basis during 
the first two years of the transition period. See 12 CFR part 3 
(OCC); 12 CFR part 217 (Board); 12 CFR part 324 (FDIC). See also 84 
FR 4222 (February 14, 2019) and 85 FR 61577 (September 30, 2020).
---------------------------------------------------------------------------

    In this example, in determining the hypothetical large bank's 
deposit insurance assessment rate, the bank's Tier 1 capital of $10 
million would include the $200,000 addition to the bank's reported 
retained earnings due to the CECL transition (entirely attributable to 
the allowance for credit losses on loans and leases), and its reserves 
would equal $1.2 million, the entire amount of which is attributable to 
the allowance for credit losses on loans and leases held for 
investment. Its combined Tier 1 capital and reserves would equal $11.2 
million ($10 million plus $1.2 million), reflecting double counting of 
the $200,000 applicable portion of the bank's CECL transitional amount 
attributable to the allowance for credit losses on loans and 
leases.\29\
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    \29\ In this stylized example, the entirety of the CECL 
transitional amount is attributable to the allowance for credit 
losses on loans and leases and it equals the modified CECL 
transitional amount during the first quarter of the transition 
period. The applicable portion of the CECL transitional amounts is 
the amount that is double counted in certain financial measures used 
to determine deposit insurance assessment rates and that the FDIC is 
proposing to remove from those financial measures. However, CECL 
transitional amounts may also include amounts attributable to 
allowances for credit losses under CECL on HTM debt securities, 
other financial assets measured at amortized cost, and off-balance 
sheet credit exposures. Under the proposal, in determining a large 
or highly complex bank's deposit insurance assessment rate, the FDIC 
would continue to include in Tier 1 capital the applicable portion 
of any CECL transitional amounts attributable to allowances for 
credit losses on items other than loans and leases held for 
investment.
---------------------------------------------------------------------------

    Under the proposal, for purposes of calculating assessments for 
large and highly complex banks, the FDIC would subtract $200,000 from 
the denominator of financial measures that sum Tier 1 capital and 
reserves, since the amount of $200,000 is incorporated in both Tier 1 
capital (as the applicable portion of the CECL transitional amount in 
year one of the five-year transition period) and reserves in the 
denominator. The bank's adjusted Tier 1 capital and reserves would 
equal $11 million. The FDIC also would adjust the calculation of the 
loss severity measure by $200,000, as described below.

 Table 1--Stylized Example \1\ of First-Quarter Application of a Five-Year CECL Transition in Calculating Tier 1
                         Capital and Reserves for Deposit Insurance Assessment Purposes
----------------------------------------------------------------------------------------------------------------
              In thousands                          Dec. 31, 2019                        Jan. 1, 2020
----------------------------------------------------------------------------------------------------------------
Reserves...............................  $1,000 (ALLL)......................  $1,200 (AACL).
Tier 1 Capital.........................  10,000.............................  10,000.
Tier 1 Capital and Reserves (current)..  11,000.............................  11,200.
Applicable Portion of the CECL           ...................................  200.
 Transitional Amount.
Tier 1 Capital and Reserves (proposed).  ...................................  11,000.
----------------------------------------------------------------------------------------------------------------
\1\ This stylized example reflects the first-quarter application of a hypothetical bank that has adopted a five-
  year CECL transition under the 2020 CECL rule and assumes that the full amount of the CECL transitional amount
  is attributable to the allowance for credit losses on loans and leases. The example does not reflect any
  changes over the course of the first quarter of 2020 (i.e., no changes in the amounts reported on the bank's
  balance sheet between January 1 and March 31, 2020, the end of the reporting period for the first quarter). As
  a consequence, the bank's modified CECL transitional amount as of March 31, 2020, equals its CECL transitional
  amount. This stylized example omits the effects of deferred tax assets, which are addressed in the agencies'
  capital rule, the 2019 CECL rule, and the 2020 CECL rule.

    This proposal would amend the deposit insurance system applicable 
to large and highly complex banks only, and would not affect regulatory 
capital or the regulatory capital relief provided under the 2019 CECL 
rule or 2020 CECL rule.\30\ The FDIC would continue the application of 
the transition provisions provided for under the 2019 and 2020 CECL 
rules to the Tier 1 leverage ratio used in determining deposit 
insurance assessment rates for all IDIs.
---------------------------------------------------------------------------

    \30\ See 12 CFR part 3 (OCC); 12 CFR part 217 (Board); 12 CFR 
part 324 (FDIC). See also 84 FR 4222 (Feb. 14, 2019) and 85 FR 61577 
(Sept. 30, 2020).
---------------------------------------------------------------------------

    Temporary changes to the Call Report forms and instructions would 
be required to implement the proposed amendments to the assessment 
system to remove the double counting. These changes would be 
effectuated in coordination with the other member entities of the 
Federal Financial Institutions Examination Council (FFIEC).\31\ Any 
changes to regulatory reporting requirements pursuant to this proposal 
would be required only while the regulatory capital relief is reflected 
in the regulatory reports of banks.
---------------------------------------------------------------------------

    \31\ As discussed in the section on the Paperwork Reduction Act 
below, the FDIC will submit a request for one additional temporary 
item on the Call Report (FFIEC 031 and FFIEC 041 only) to make the 
proposed adjustments described below.

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[[Page 78799]]

B. Adjustments to Certain Measures Used in the Scorecard Approach for 
Determining Assessments for Large and Highly Complex Banks

    The FDIC is proposing to adjust the calculations of certain 
financial measures used to determine deposit insurance assessment rates 
for large and highly complex banks to remove the applicable portions of 
the CECL transitional amounts added to retained earnings that is 
attributable to the allowance for credit losses on loans and leases 
held for investment. The FDIC is proposing to remove this part of the 
CECL transitional amounts because, for large and highly complex banks 
that have adopted CECL, the measure of reserves used in the scorecard 
is the allowance for credit losses on loans and leases reported in Call 
Report Schedule RC, item 4.c.
    This amount, which would be reported in a new line item in Schedule 
RC-O only on the FFIEC 031 and FFIEC 041 versions of the Call Report, 
would be removed from scorecard measures that are calculated using the 
sum of Tier 1 capital and reserves, as described in more detail below. 
The proposal also would adjust the calculation of the loss severity 
measure to remove the double counting by removing the applicable 
portions of the CECL transitional amounts added to retained earnings 
for regulatory capital purposes and attributable to the allowance for 
credit losses on loans and leases held for investment for large and 
highly complex banks.
    While the FDIC recognizes that by the anticipated effective date of 
any final rule promulgated by this proposal, numerous large and highly 
complex banks will have implemented CECL and many will have elected the 
transition provided under either the 2019 CECL rule or 2020 CECL rule, 
the FDIC would not make retroactive adjustments to prior quarterly 
assessments.
1. Credit Quality Measure
    The score for the credit quality measure, applicable to large and 
highly complex banks, is the greater of (1) the ratio of criticized and 
classified items to Tier 1 capital and reserves score or (2) the ratio 
of underperforming assets to Tier 1 capital and reserves score.\32\ The 
double counting results in lower ratios and a credit quality measure 
that reflects less risk than a bank actually poses to the DIF. The FDIC 
is proposing to adjust the denominator, Tier 1 capital and reserves, 
used in both ratios by removing the applicable portions of the CECL 
transitional amounts added to retained earnings for regulatory capital 
purposes and attributable to the allowance for credit losses on loans 
and leases held for investment.
---------------------------------------------------------------------------

    \32\ See 12 CFR 327.16(b)(ii)(A)(2)(iv).
---------------------------------------------------------------------------

2. Concentration Measure
    For large banks, the concentration measure is the higher of (1) the 
ratio of higher-risk assets to Tier 1 capital and reserves or (2) the 
growth-adjusted portfolio concentration measure. The growth-adjusted 
portfolio concentration measure includes the ratio of concentration 
levels for several loan portfolios to Tier 1 capital and reserves.
    For highly complex banks, the concentration measure is the highest 
of three measures: (1) The ratio of higher-risk assets to Tier 1 
capital and reserves, (2) the ratio of top 20 counterparty exposures to 
Tier 1 capital and reserves, or (3) the ratio of the largest 
counterparty exposure to Tier 1 capital and reserves.\33\
---------------------------------------------------------------------------

    \33\ See Appendix A to subpart A of 23 CFR 327.
---------------------------------------------------------------------------

    The double counting results in lower ratios and a concentration 
measure that reflects less risk than a bank actually poses to the DIF. 
The FDIC is proposing to adjust the denominator, Tier 1 capital and 
reserves, used in each of these ratios by removing the applicable 
portions of the CECL transitional amounts added to retained earnings 
for regulatory capital purposes and attributable to the allowance for 
credit losses on loans and leases held for investment.
3. Loss Severity Measure
    The loss severity measure estimates the relative magnitude of 
potential losses to the DIF in the event of an IDI's failure.\34\ In 
calculating this measure, the FDIC applies a standardized set of 
assumptions based on historical failures regarding liability runoffs 
and the recovery value of asset categories to simulate possible losses 
to the FDIC, reducing capital and assets until the Tier 1 leverage 
ratio declines to 2 percent. The double counting results in a greater 
reduction of assets during the capital reduction phase and therefore a 
lower resolution value of assets at the time of failure, which in turn 
results in a higher loss severity measure that reflects more risk than 
a bank actually poses to the DIF. The FDIC is proposing to adjust the 
calculation of the capital adjustment in the loss severity measure to 
remove the double counting of the applicable portion of the CECL 
transitional amounts added to retained earnings for regulatory capital 
purposes and attributable to the allowance for credit losses on loans 
and leases held for investment for both large and highly complex 
banks.\35\
---------------------------------------------------------------------------

    \34\ Appendix D to subpart A of 12 CFR 327 describes the 
calculation of the loss severity measure.
    \35\ The loss severity measure is an average loss severity ratio 
for the three most recent quarters of data available. It is 
anticipated that any temporary reporting changes effectuated 
pursuant to this proposal would be implemented no earlier than the 
first applicable reporting period following the anticipated 
effective date of any final rule promulgated by this proposal. As 
such, the FDIC would adjust the calculation of the loss severity 
measure to remove the double counting of the specified portion of 
the CECL transitional amounts for one of the three quarters averaged 
in the first reporting period following the effective date, for two 
of the three quarters averaged in the second reporting period 
following the effective date, and for all three quarters averaged in 
all subsequent reporting periods, as applicable.
---------------------------------------------------------------------------

    Question 1: The FDIC invites comment on its proposal to amend the 
assessment regulations to remove the double counting of a part of the 
CECL transitional amounts due to the inclusion of this amount in 
certain financial measures used to determine deposit insurance 
assessments for large and highly complex banks, which could arise when 
banks elect the transition provision contained in either the 2019 CECL 
rule or the 2020 CECL rule.

C. Other Conforming Amendments to the Assessment Regulations

    The FDIC is proposing to make conforming amendments to the FDIC's 
assessment regulations to effectuate the adjustments described above. 
These conforming amendments would ensure that the proposed adjustments 
to the financial measures used to calculate a large or highly complex 
bank's assessment rate are properly incorporated into the assessment 
regulations.

D. Proposed Regulatory Reporting Changes

    A bank electing a transition under either the 2019 CECL rule or the 
2020 CECL rule must indicate its election to use the 3-year 2019 or the 
5-year 2020 CECL transition provision in Call Report Schedule RC-R, 
Part I, item 2.a. In addition, such an electing bank must report the 
applicable portions of the transitional amounts under the 2019 CECL 
rule or the 2020 CECL rule in the affected Call Report items during the 
transition period. For example, an electing bank would add the 
applicable portion of the CECL transitional amount (or the modified 
CECL transitional amount) when calculating the amount of retained 
earnings it would report in Schedule RC-R, Part I, item 2, of the Call 
Report.\36\
---------------------------------------------------------------------------

    \36\ See 84 FR 4227 and 85 FR 17726.

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

[[Page 78800]]

    In calculating certain measures used in the scorecard approach for 
determining deposit insurance assessments for large and highly complex 
banks, the FDIC is proposing to remove a specified portion of the CECL 
transitional amounts added to retained earnings under the transitions 
provided for under the 2020 and 2019 CECL rules. Specifically, in 
certain measures used in the scorecard approach for determining 
assessments for large and highly complex banks, the FDIC would remove 
the applicable portion of the CECL transitional amount (or modified 
CECL transitional amount) added to retained earnings for regulatory 
capital purposes (Call Report Schedule RC-R, Part I, Item 2), 
attributable to the allowance for credits losses on loans and leases 
held for investment and included in the amount reported on the Call 
Report balance sheet in Schedule RC, item 4.c.
    However, large and highly complex banks that have elected a CECL 
transition provision do not currently report these specific portions of 
the CECL transitional amounts in the Call Report. Thus, implementing 
the proposed amendments to the risk-based deposit insurance assessment 
system applicable to large and highly complex banks would require 
temporary changes to the reporting requirements applicable to the Call 
Report and its related instructions. These reporting changes would be 
proposed and effectuated in coordination with the other member entities 
of the FFIEC. As previously described, any changes to reporting 
requirements for large and highly complex banks pursuant to this 
proposal would be required only while the temporary relief is reflected 
in banks' regulatory reports.

E. Expected Effects

    The proposed rule would remove the applicable portions of the CECL 
transitional amounts added to retained earnings for regulatory capital 
purposes and attributable to the allowance for credit losses on loans 
and leases held for investment from certain financial measures used in 
the scorecards that determine deposit insurance assessment rates for 
large and highly complex banks. Absent the proposed rule, this amount 
would be temporarily double counted and could result in a deposit 
insurance assessment rate for a large or highly complex bank that does 
not accurately reflect the bank's risk to the DIF, all else equal. 
Furthermore, the double counting inherent in the regulation could 
result in inequitable deposit insurance assessments, as a large or 
highly complex bank that has not yet implemented CECL or that does not 
utilize a transition provision could pay a higher or lower assessment 
rate than a bank that has implemented CECL and utilizes a transition 
provision, even if both banks pose equal risk to the DIF. The FDIC 
estimates that the majority of large and highly complex banks are 
currently paying a lower rate as a direct result of the double 
counting. However, the FDIC also estimates that a few banks are 
currently paying a higher rate than they otherwise would pay if the 
issue of double counting is corrected. The FDIC estimates that the rate 
these latter banks are paying is higher by only a de minimis amount, 
and occurs where the double counting on the loss severity measure more 
than offsets the effect of double counting on the other scorecard 
measures that are calculated using the sum of Tier 1 capital and 
reserves.
    Based on FDIC data as of June 30, 2020, the FDIC estimates that 
this double counting could be resulting in approximately $55 million in 
annual foregone assessment revenue, or 0.048 percent of the DIF balance 
as of that date. This estimate includes the majority of large and 
highly complex banks that are paying a lower rate due to the double 
counting and the banks paying a higher rate, compared to if the issue 
of double counting is corrected. The FDIC expects this estimated amount 
of foregone assessment revenue to increase in the near-term as 
additional large and highly complex banks adopt CECL, to the extent 
those large and highly complex banks elect to apply a transition. This 
amount also may increase in the near term as large and highly complex 
banks electing the 2020 CECL rule include in their modified CECL 
transitional amounts an estimate of CECL's effect on regulatory 
capital, relative to the incurred loss methodology's effect on 
regulatory capital, during the first two years of CECL adoption. As of 
June 30, 2020, the FDIC estimates that 101 of 138 large and highly 
complex banks had implemented CECL, and that 94 had elected a 
transition provided under either the 2019 CECL rule or the 2020 CECL 
rule. As banks phase out the transitional amounts over time, the 
assessment effect also would decline. As described previously, the 
optional temporary relief from CECL afforded by the CARES Act, and the 
transitions provided for under the 2019 CECL rule and 2020 CECL rule, 
provide that all banks will have completely reflected in regulatory 
capital the day-one effects of CECL (plus, if applicable, an estimate 
of CECL's effect on regulatory capital, relative to the incurred loss 
methodology's effect on regulatory capital, during the first two years 
of CECL adoption) by December 31, 2026, thereby eliminating the double 
counting effects from the scorecard for large and highly complex banks. 
These above estimates are subject to uncertainty given differing CECL 
implementation dates and the option for large and highly complex banks 
to choose between the transitions offered under the 2019 CECL rule or 
the 2020 CECL rule, or to recognize the full impact of CECL on 
regulatory capital upon implementation.
    The proposed rule could pose some additional regulatory costs for 
large and highly complex banks that elect a transition under either the 
2019 CECL rule or the 2020 CECL rule associated with changes to 
internal systems or processes, or changes to reporting requirements. It 
is the FDIC's understanding that banks already calculate the portion of 
the CECL transitional amount (or modified CECL transitional amount) 
added to retained earnings for regulatory capital purposes that is 
attributable to the allowance for credit losses on loans and leases 
held for investment, for internal purposes. As such, the FDIC 
anticipates that the proposed addition of this temporary item to the 
Call Report would not impose significant additional burden and any 
additional costs are likely to be de minimis.

F. Alternatives Considered

    The FDIC considered the reasonable and possible alternatives 
described below. The FDIC is required by statute to set deposit 
insurance assessments based on risk, and the FDIC's objective in 
setting forth the current proposal is to ensure that banks are assessed 
in a manner that is fair and accurate. On balance, the FDIC believes 
the current proposal would adjust for double counting of the applicable 
portion of the CECL transitional amounts attributable to allowances for 
credit losses on loans and leases held for investment in certain 
financial measures used to determine deposit insurance assessment rates 
for large and highly complex banks in the most appropriate, accurate, 
and straightforward manner.
    One alternative would be to leave in place the current assessment 
regulations. Under this alternative, the applicable portions of the 
CECL transitional amounts would be automatically and fully included in 
both retained earnings as reported for regulatory capital purposes 
(affecting Tier 1 capital) and reserves, resulting in double counting 
of the applicable portions of these transitional amounts attributable 
to allowances for credit losses on loans and leases held for

[[Page 78801]]

investment in certain financial measures that are used to determine 
deposit insurance assessment rates for large and highly complex banks. 
As a result, a large or highly complex bank could pay a deposit 
insurance assessment rate that does not accurately reflect the bank's 
risk to the DIF, all else equal. Furthermore, this double counting 
could result in inequitable deposit insurance assessments, as a large 
or highly complex bank that has not yet implemented CECL or that does 
not utilize a transition provision could pay a higher or lower 
assessment rate than a bank that has implemented CECL and utilizes a 
transition provision, even if both banks pose equal risk to the DIF. 
Based on data as of June 30, 2020, the DIF would receive approximately 
$55 million less annual income than it would have received but for the 
double counting of parts of the CECL transitional amounts in the 
scorecard.
    The FDIC also considered a second alternative, using a proxy 
measure based on existing data items on the Call Report to remove the 
effect of double counting on a large or highly complex bank's deposit 
insurance assessments. Specifically, the FDIC could use the difference 
between retained earnings reported on Schedule RC (item 26.a.) and 
Schedule RC-R (Part I, item 2.) to approximate the amount double 
counted. This proxy, however, would provide an estimate of the 
applicable portion of the full CECL transitional amount (or modified 
CECL transitional amount) rather than the applicable portion of the 
CECL transitional amount (or modified CECL transitional amount) added 
retained earnings for regulatory capital purposes and attributable to 
the allowance for credit losses on loans and leases held for 
investment, which is the amount the current proposal would remove from 
certain financial measures used to determine deposit insurance 
assessment rates for large and highly complex banks. This proxy would 
include the CECL transitional amounts attributable to establishing 
allowances for credit losses under CECL on loans and leases held for 
investment through a charge against retained earnings as of the 
adoption date of CECL as well as the amounts attributable to 
establishing, in the same manner as of the same date, allowances for 
credit losses under CECL on HTM debt securities, other financial assets 
measured at amortized cost, and off-balance sheet credit exposures. 
Since the proxy could result in the FDIC reducing Tier 1 capital and 
reserves by an amount that is greater than the amount double counted, 
it could harm banks with large reserves for HTM debt securities, other 
financial assets measured at amortized cost, and off-balance sheet 
credit exposures by inflating such a bank's credit quality and 
concentration measures in the scorecards for large and highly complex 
banks. As a result, the proxy could result in the FDIC applying an 
adjustment amount that is different from the actual applicable portion 
of a bank's CECL transitional amount (or modified CECL transitional 
amount) that was added to retained earnings for regulatory capital 
purposes and is attributable to the allowance for credit losses on 
loans and leases held for investment. Thus, applying such an adjustment 
amount could result in a deposit insurance assessment rate that does 
not accurately reflect a large or highly complex bank's risk to the 
DIF, all else equal. The amount by which the proxy measure might differ 
from the applicable portion of a bank's CECL transitional amount (or 
modified CECL transitional amount) added to retained earnings for 
regulatory capital purposes that is attributable to the allowance for 
credit losses on loans and leases held for investment would vary by 
bank. While this amount may not be significant in most cases, the FDIC 
expects that using the proxy would generally result in higher 
assessments for most banks.
    Furthermore, as described above, it is the FDIC's understanding 
that banks already calculate the applicable portion of the CECL 
transitional amount (or modified CECL transitional amount) added to 
retained earnings for regulatory capital purposes and attributable to 
the allowance for credit losses on loans and leases held for 
investment, for internal purposes, and as such, the FDIC anticipates 
that the proposed addition of this temporary item to the Call Report 
would not impose significant additional burden. The FDIC believes that 
temporarily collecting this item on the Call Report and using this item 
to adjust for double counting of a portion of the CECL transitional 
amounts in certain financial measures used to determine deposit 
insurance assessments for large and highly complex banks would ensure 
that banks are assessed in a manner that is fair and accurate, all else 
equal.
    Question 2: The FDIC invites comment on the reasonable and possible 
alternatives described in this proposed rule. What are other reasonable 
and possible alternatives that the FDIC should consider?

G. Comment Period, Effective Date, and Application Date

    The FDIC is issuing this proposal with a 30-day comment period. 
Following the comment period, the FDIC expects to issue a final rule 
with an effective date of April 1, 2021, and applicable to the second 
quarterly assessment period of 2021 (i.e., April 1-June 30, 2021). The 
30-day comment period, along with the expected effective date and the 
proposed application date, would ensure that the temporary effects of 
the double counting of the applicable portions of the CECL transitional 
amounts in select financial measures used in the scorecard approach for 
determining assessments for large and highly complex banks are 
corrected, beginning with the second quarterly assessment period of 
2021.

IV. Request for Comment

    The FDIC is requesting comment on all aspects of the notice of 
proposed rulemaking, in addition to the specific requests for comment 
above.

V. Administrative Law Matters

A. 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.\37\ 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 U.S. Small Business Administration (SBA) has defined ``small 
entities'' to include banking organizations with total assets of less 
than or equal to $600 million.\38\ 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

[[Page 78802]]

the RFA.\39\ 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.
---------------------------------------------------------------------------

    \37\ 5 U.S.C. 601 et seq.
    \38\ The SBA defines a small banking organization as having $600 
million or less in assets, where an organization'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 August 19, 2019). In its determination, the 
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.'' 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.
    \39\ 5 U.S.C. 601.
---------------------------------------------------------------------------

    Based on Call Report data as of June 30, 2020, the FDIC insures 
5,075 depository institutions, of which 3,665 are defined as small 
entities by the terms of the RFA.\40\ The proposed rule, however, would 
apply only to institutions with $10 billion or greater in total assets. 
Consequently, small entities for purposes of the RFA will experience no 
significant economic impact should the FDIC implement the proposal in a 
final rule.
---------------------------------------------------------------------------

    \40\ FDIC Call Report data, June 30, 2020.
---------------------------------------------------------------------------

B. Riegle Community Development and Regulatory Improvement Act

    Section 302(a) of the Riegle Community Development and Regulatory 
Improvement Act (RCDRIA) requires that the Federal banking agencies, 
including the FDIC, in determining the effective date and 
administrative compliance requirements of new regulations that impose 
additional reporting, disclosure, or other requirements on IDIs, 
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. In addition, section 302(b) of RCDRIA 
requires new regulations and amendments to regulations that impose 
additional reporting, disclosures, or other new requirements on IDIs 
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, with certain exceptions, including for good cause.\41\ The 
requirements of RCDRIA will be considered as part of the overall 
rulemaking process, and the FDIC invites comments that will further 
inform its consideration of RCDRIA.
---------------------------------------------------------------------------

    \41\ 5 U.S.C. 553(b)(B).
    5 U.S.C. 553(d).
    5 U.S.C. 601 et seq.
    5 U.S.C. 801 et seq.
    5 U.S.C. 801(a)(3).
    5 U.S.C. 804(2).
    5 U.S.C. 808(2).
    12 U.S.C. 4802(a).
    12 U.S.C. 4802(b).
---------------------------------------------------------------------------

C. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) states that no agency may 
conduct or sponsor, nor is the respondent required to respond to, an 
information collection unless it displays a currently valid Office of 
Management and Budget (OMB) control number.\42\ 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 
affects the agencies' current information collections for the Call 
Report (FFIEC 031 and FFIEC 041, but not FFIEC 051). The agencies' OMB 
control numbers for the Call Reports are: OCC OMB No. 1557-0081; Board 
OMB No. 7100-0036; and FDIC OMB No. 3064-0052. Proposed changes to the 
Call Report forms and instructions will be addressed in a separate 
Federal Register notice.
---------------------------------------------------------------------------

    \42\ 4 U.S.C. 3501-3521.
---------------------------------------------------------------------------

D. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \43\ requires the Federal 
banking agencies to use plain language in all proposed and final 
rulemakings published in the Federal Register after January 1, 2000. 
The FDIC invites your comments on how to make this proposed rule easier 
to understand. For example:
---------------------------------------------------------------------------

    \43\ 12 U.S.C. 4809.
---------------------------------------------------------------------------

     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?

List of Subjects in 12 CFR Part 327

    Bank deposit insurance, Banks, Banking, Savings associations.

Authority and Issuance

    For the reasons stated in the preamble, the Federal Deposit 
Insurance Corporation proposes to amend 12 CFR part 327 as follows:

PART 327--ASSESSMENTS

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

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

0
2. In Appendix A to Subpart A, amend the table under section heading, 
``VI. Description of Scorecard Measures,'' by:
0
a. Redesignating footnotes 2 as 3, 3 as 4, 4 as 5, and 5 as 7;
0
b. Adding a new footnote 2 after various measures described in the 
table; and
0
c. Adding a new footnote 6 after ``Potential Losses/Total Domestic 
Deposits (Loss Severity Measure).
    The revisions and additions read as follows:

Appendix A to Subpart A of Part 327--Method To Derive Pricing 
Multipliers and Uniform Amount

* * * * *

                                      VI. Description of Scorecard Measures
----------------------------------------------------------------------------------------------------------------
         Scorecard measures \1\                                        Description
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
Concentration Measure for Large Insured  The concentration score for large institutions is the higher of the
 depository institutions (excluding       following two scores:
 Highly Complex Institutions).

[[Page 78803]]

 
    (1) Higher-Risk Assets/Tier 1        Sum of construction and land development (C&D) loans (funded and
     Capital and Reserves \2\.            unfunded), higher-risk C&I loans (funded and unfunded), nontraditional
                                          mortgages, higher-risk consumer loans, and higher-risk securitizations
                                          divided by Tier 1 capital and reserves. See Appendix C for the
                                          detailed description of the ratio.
    (2) Growth-Adjusted Portfolio        The measure is calculated in the following steps:
     Concentrations \2\.
 
                                                  * * * * * * *
Concentration Measure for Highly         Concentration score for highly complex institutions is the highest of
 Complex Institutions.                    the following three scores:
    (1) Higher-Risk Assets/Tier 1        Sum of C&D loans (funded and unfunded), higher-risk C&I loans (funded
     Capital and Reserves \2\.            and unfunded), nontraditional mortgages, higher-risk consumer loans,
                                          and higher-risk securitizations divided by Tier 1 capital and
                                          reserves. See Appendix C for the detailed description of the measure.
    (2) Top 20 Counterparty Exposure/    Sum of the 20 largest total exposure amounts to counterparties divided
     Tier 1 Capital and Reserves \2\.     by Tier 1 capital and reserves. The total exposure amount is equal to
                                          the sum of the institution's exposure amounts to one counterparty (or
                                          borrower) for derivatives, securities financing transactions (SFTs),
                                          and cleared transactions, and its gross lending exposure (including
                                          all unfunded commitments) to that counterparty (or borrower). A
                                          counterparty includes an entity's own affiliates. Exposures to
                                          entities that are affiliates of each other are treated as exposures to
                                          one counterparty (or borrower). Counterparty exposure excludes all
                                          counterparty exposure to the U.S. Government and departments or
                                          agencies of the U.S. Government that is unconditionally guaranteed by
                                          the full faith and credit of the United States. The exposure amount
                                          for derivatives, including OTC derivatives, cleared transactions that
                                          are derivative contracts, and netting sets of derivative contracts,
                                          must be calculated using the methodology set forth in 12 CFR
                                          324.34(b), but without any reduction for collateral other than cash
                                          collateral that is all or part of variation margin and that satisfies
                                          the requirements of 12 CFR 324.10(c)(4)(ii)(C)(1)(ii) and (iii) and
                                          324.10(c)(4)(ii)(C)(3) through (7). The exposure amount associated
                                          with SFTs, including cleared transactions that are SFTs, must be
                                          calculated using the standardized approach set forth in 12 CFR
                                          324.37(b) or (c). For both derivatives and SFT exposures, the exposure
                                          amount to central counterparties must also include the default fund
                                          contribution.\3\
    (3) Largest Counterparty Exposure/   The largest total exposure amount to one counterparty divided by Tier 1
     Tier 1 Capital and Reserves \2\.     capital and reserves. The total exposure amount is equal to the sum of
                                          the institution's exposure amounts to one counterparty (or borrower)
                                          for derivatives, SFTs, and cleared transactions, and its gross lending
                                          exposure (including all unfunded commitments) to that counterparty (or
                                          borrower). A counterparty includes an entity's own affiliates.
                                          Exposures to entities that are affiliates of each other are treated as
                                          exposures to one counterparty (or borrower). Counterparty exposure
                                          excludes all counterparty exposure to the U.S. Government and
                                          departments or agencies of the U.S. Government that is unconditionally
                                          guaranteed by the full faith and credit of the United States. The
                                          exposure amount for derivatives, including OTC derivatives, cleared
                                          transactions that are derivative contracts, and netting sets of
                                          derivative contracts, must be calculated using the methodology set
                                          forth in 12 CFR 324.34(b), but without any reduction for collateral
                                          other than cash collateral that is all or part of variation margin and
                                          that satisfies the requirements of 12 CFR 324.10(c)(4)(ii)(C)(1)(ii)
                                          and (iii) and 324.10(c)(4)(ii)(C)(3) through (7). The exposure amount
                                          associated with SFTs, including cleared transactions that are SFTs,
                                          must be calculated using the standardized approach set forth in 12 CFR
                                          324.37(b) or (c). For both derivatives and SFT exposures, the exposure
                                          amount to central counterparties must also include the default fund
                                          contribution.\3\
 
                                                  * * * * * * *
Credit Quality Measure.................  The credit quality score is the higher of the following two scores:
    (1) Criticized and Classified Items/ Sum of criticized and classified items divided by the sum of Tier 1
     Tier 1 Capital and Reserves \2\.     capital and reserves. Criticized and classified items include items an
                                          institution or its primary federal regulator have graded ``Special
                                          Mention'' or worse and include retail items under Uniform Retail
                                          Classification Guidelines, securities, funded and unfunded loans,
                                          other real estate owned (ORE), other assets, and marked-to-market
                                          counterparty positions, less credit valuation adjustments.\4\
                                          Criticized and classified items exclude loans and securities in
                                          trading books, and the amount recoverable from the U.S. government,
                                          its agencies, or government-sponsored enterprises, under guarantee or
                                          insurance provisions.
    (2) Underperforming Assets/Tier 1    Sum of loans that are 30 days or more past due and still accruing
     Capital and Reserves \2\.            interest, nonaccrual loans, restructured loans (including restructured
                                          1-4 family loans), and ORE, excluding the maximum amount recoverable
                                          from the U.S. government, its agencies, or government-sponsored
                                          enterprises, under guarantee or insurance provisions, divided by a sum
                                          of Tier 1 capital and reserves.
 
                                                  * * * * * * *
Balance Sheet Liquidity Ratio..........  Sum of cash and balances due from depository institutions, federal
                                          funds sold and securities purchased under agreements to resell, and
                                          the market value of available for sale and held to maturity agency
                                          securities (excludes agency mortgage-backed securities but includes
                                          all other agency securities issued by the U.S. Treasury, U.S.
                                          government agencies, and U.S. government-sponsored enterprises)
                                          divided by the sum of federal funds purchased and repurchase
                                          agreements, other borrowings (including FHLB) with a remaining
                                          maturity of one year or less, 5 percent of insured domestic deposits,
                                          and 10 percent of uninsured domestic and foreign deposits.\5\
Potential Losses/Total Domestic          Potential losses to the DIF in the event of failure divided by total
 Deposits (Loss Severity Measure) \6\.    domestic deposits. Appendix D describes the calculation of the loss
                                          severity measure in detail.

[[Page 78804]]

 
Market Risk Measure for Highly Complex   The market risk score is a weighted average of the following three
 Institutions.                            scores:
 
                                                  * * * * * * *
    (2) Market Risk Capital/Tier 1       Market risk capital divided by Tier 1 capital.\7\
     Capital.
 
                                                  * * * * * * *
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\1\ The FDIC retains the flexibility, as part of the risk-based assessment system, without the necessity of
  additional notice-and-comment rulemaking, to update the minimum and maximum cutoff values for all measures
  used in the scorecard. The FDIC may update the minimum and maximum cutoff values for the higher-risk assets to
  Tier 1 capital and reserves ratio in order to maintain an approximately similar distribution of higher-risk
  assets to Tier 1 capital and reserves ratio scores as reported prior to April 1, 2013, or to avoid changing
  the overall amount of assessment revenue collected. 76 FR 10672, 10700 (February 25, 2011). The FDIC will
  review changes in the distribution of the higher-risk assets to Tier 1 capital and reserves ratio scores and
  the resulting effect on total assessments and risk differentiation between banks when determining changes to
  the cutoffs. The FDIC may update the cutoff values for the higher-risk assets to Tier 1 capital and reserves
  ratio more frequently than annually. The FDIC will provide banks with a minimum one quarter advance notice of
  changes in the cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio with their
  quarterly deposit insurance invoice.
\2\ The applicable portions of the current expected credit loss methodology (CECL) transitional amounts
  attributable to the allowance for credit losses on loans and leases held for investment and added to retained
  earnings for regulatory capital purposes pursuant to the regulatory capital regulations, as they may be
  amended from time to time (12 CFR part 3, 12 CFR part 217, 12 CFR part 324, 85 FR 61577 (Sept. 30, 2020), and
  84 FR 4222 (Feb. 14, 2019)), will be removed from the sum of Tier 1 capital and reserves.
\3\ SFTs include repurchase agreements, reverse repurchase agreements, security lending and borrowing, and
  margin lending transactions, where the value of the transactions depends on market valuations and the
  transactions are often subject to margin agreements. The default fund contribution is the funds contributed or
  commitments made by a clearing member to a central counterparty's mutualized loss sharing arrangement. The
  other terms used in this description are as defined in 12 CFR part 324, subparts A and D, unless defined
  otherwise in 12 CFR part 327.
\4\ A marked-to-market counterparty position is equal to the sum of the net marked-to-market derivative
  exposures for each counterparty. The net marked-to-market derivative exposure equals the sum of all positive
  marked-to-market exposures net of legally enforceable netting provisions and net of all collateral held under
  a legally enforceable CSA plus any exposure where excess collateral has been posted to the counterparty. For
  purposes of the Criticized and Classified Items/Tier 1 Capital and Reserves definition a marked-to-market
  counterparty position less any credit valuation adjustment can never be less than zero.
\5\ Deposit runoff rates for the balance sheet liquidity ratio reflect changes issued by the Basel Committee on
  Banking Supervision in its December 2010 document, ``Basel III: International Framework for liquidity risk
  measurement, standards, and monitoring,'' http://www.bis.org/publ/bcbs188.pdf.
\6\ The applicable portions of the CECL transitional amounts attributable to the allowance for credit losses on
  loans and leases held for investment and added to retained earnings for regulatory capital purposes will be
  removed from the calculation of the loss severity measure.
\7\ Market risk is defined in 12 CFR 324.202.

* * * * *
0
3. In Appendix C to Subpart A, revise the text under section heading, 
``I. Concentration Measures,'' to read as follows:

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

I. Concentration Measures

    The concentration score for large banks is the higher of the 
higher-risk assets to Tier 1 capital and reserves score or the 
growth-adjusted portfolio concentrations score.\1\ The concentration 
score for highly complex institutions is the highest of the higher-
risk assets to Tier 1 capital and reserves score, the Top 20 
counterparty exposure to Tier 1 capital and reserves score, or the 
largest counterparty to Tier 1 capital and reserves score.\2\ The 
higher-risk assets to Tier 1 capital and reserves ratio and the 
growth-adjusted portfolio concentration measure are described 
herein.
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    \1\ For the purposes of this Appendix, the term ``bank'' means 
insured depository institution.
    \2\ As described in Appendix A to this subpart, the applicable 
portions of the current expected credit loss methodology (CECL) 
transitional amounts attributable to the allowance for credit losses 
on loans and leases held for investment and added to retained 
earnings for regulatory capital purposes pursuant to the regulatory 
capital regulations, as they may be amended from time to time (12 
CFR part 3, 12 CFR part 217, 12 CFR part 324, 85 FR 61577 (Sept. 30, 
2020), and 84 FR 4222 (Feb. 14, 2019)), will be removed from the sum 
of Tier 1 capital and reserves throughout the large and highly 
complex bank scorecards, including in the ratio of Higher-Risk 
Assets to Tier 1 Capital and Reserves, the Growth-Adjusted Portfolio 
Concentrations Measure, the ratio of Top 20 Counterparty Exposure to 
Tier 1 Capital and Reserves, and the Ratio of Largest Counterparty 
Exposure to Tier 1 Capital and Reserves.
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* * * * *
0
4. In Appendix D to Subpart A, revise the text under section heading, 
``Appendix D to Subpart A of Part 327--Description of the Loss Severity 
Measure,'' to add a new footnote 3. The revision and addition read as 
follows:

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

    The loss severity measure applies a standardized set of 
assumptions to an institution's balance sheet to measure possible 
losses to the FDIC in the event of an institution's failure. To 
determine an institution's loss severity rate, the FDIC first 
applies assumptions about uninsured deposit and other unsecured 
liability runoff, and growth in insured deposits, to adjust the size 
and composition of the institution's liabilities. Assets are then 
reduced to match any reduction in liabilities.\1\ The institution's 
asset values are then further reduced so that the Leverage ratio 
reaches 2 percent.2 3 In both cases, assets are adjusted 
pro rata to preserve the institution's asset composition. 
Assumptions regarding loss rates at failure for a given asset 
category and the extent of secured liabilities are then applied to 
estimated assets and liabilities at failure to determine whether the 
institution has enough unencumbered assets to cover domestic 
deposits. Any projected shortfall is divided by current domestic 
deposits to obtain an end-of-period loss severity ratio. The loss 
severity measure is an average loss severity ratio for the three 
most recent quarters of data available.
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    * * * * *
    \3\ The applicable portions of the current expected credit loss 
methodology (CECL) transitional amounts attributable to the 
allowance for credit losses on loans and leases held for investment 
and added to retained earnings for regulatory capital purposes 
pursuant to the regulatory capital regulations, as they may be 
amended from time to time (12 CFR part 3, 12 CFR part 217, 12 CFR 
part 324, 85 FR 61577 (Sept. 30, 2020), and 84 FR 4222 (Feb. 14, 
2019)), will be removed from the calculation of the loss severity 
measure.
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* * * * *
0
5. In Appendix E to subpart A, amend Table E.2 by:
0
a. Redesignating footnote 1 after ``Credit Quality Measure'' as 2;
0
b. Adding a new footnote 1; and

[[Page 78805]]

0
c. Adding footnote 2 after ``Market Risk Measure for Highly Complex 
Institutions''.
    The revisions and additions read as follows:

   Table E.2--Exclusions From Certain Risk Measures Used To Calculate the Assessment Rate for Large or Highly
                                              Complex Institutions
----------------------------------------------------------------------------------------------------------------
         Scorecard measures \1\                           Description                          Exclusions
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
Credit Quality Measure \2\.............  The credit quality score is the higher of     .........................
                                          the following two scores:
 
                                                  * * * * * * *
Market Risk Measure for Highly Complex   The market risk score is a weighted average   .........................
 Institutions \2\.                        of the following three scores:
 
                                                  * * * * * * *
----------------------------------------------------------------------------------------------------------------
\1\ The applicable portions of the current expected credit loss methodology (CECL) transitional amounts
  attributable to the allowance for credit losses on loans and leases held for investment and added to retained
  earnings for regulatory capital purposes pursuant to the regulatory capital regulations, as they may be
  amended from time to time (12 CFR part 3, 12 CFR part 217, 12 CFR part 324, 85 FR 61577 (Sept. 30, 2020), and
  84 FR 4222 (Feb. 14, 2019)), will be removed from the sum of Tier 1 capital and reserves throughout the large
  and highly complex bank scorecards, including in the ratio of Higher-Risk Assets to Tier 1 Capital and
  Reserves, the Growth-Adjusted Portfolio Concentrations Measure, the ratio of Top 20 Counterparty Exposure to
  Tier 1 Capital and Reserves, the Ratio of Largest Counterparty Exposure to Tier 1 Capital and Reserves, the
  ratio of Criticized and Classified Items to Tier 1 Capital and Reserves, and the ratio of Underperforming
  Assets to Tier 1 Capital and Reserves. All of these ratios are described in appendix A of this subpart.
\2\ 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 of this subpart. Each score is multiplied by its respective weight, and the resulting weighted score is
  summed to compute the score for the market risk measure. An overall weight of 35 percent is allocated between
  the scores for the credit quality measure and market risk measure. The allocation depends on the ratio of
  average trading assets to the sum of average securities, loans and trading assets (trading asset ratio) as
  follows: (1) Weight for credit quality score = 35 percent * (1--trading asset ratio); and, (2) Weight for
  market risk score = 35 percent * trading asset ratio. In calculating the trading asset ratio, exclude from the
  balance of loans the outstanding balance of loans provided under the Paycheck Protection Program.
(a) Description of the loss severity measure. The loss severity measure applies a standardized set of
  assumptions to an institution's balance sheet to measure possible losses to the FDIC in the event of an
  institution's failure. To determine an institution's loss severity rate, the FDIC first applies assumptions
  about uninsured deposit and other liability runoff, and growth in insured deposits, to adjust the size and
  composition of the institution's liabilities. Exclude total outstanding borrowings from Federal Reserve Banks
  under the Paycheck Protection Program Liquidity Facility from short-and long-term secured borrowings, as
  appropriate. Assets are then reduced to match any reduction in liabilities. Exclude from an institution's
  balance of commercial and industrial loans the outstanding balance of loans provided under the Paycheck
  Protection Program. In the event that the outstanding balance of loans provided under the Paycheck Protection
  Program exceeds the balance of commercial and industrial loans, exclude any remaining balance of loans
  provided under the Paycheck Protection Program first from the balance of all other loans, up to the total
  amount of all other loans, followed by the balance of agricultural loans, up to the total amount of
  agricultural loans. Increase cash balances by outstanding loans provided under the Paycheck Protection Program
  that exceed total outstanding borrowings from Federal Reserve Banks under the Paycheck Protection Program
  Liquidity Facility, if any. The institution's asset values are then further reduced so that the Leverage Ratio
  reaches 2 percent. In both cases, assets are adjusted pro rata to preserve the institution's asset
  composition. Assumptions regarding loss rates at failure for a given asset category and the extent of secured
  liabilities are then applied to estimated assets and liabilities at failure to determine whether the
  institution has enough unencumbered assets to cover domestic deposits. Any projected shortfall is divided by
  current domestic deposits to obtain an end-of-period loss severity ratio. The loss severity measure is an
  average loss severity ratio for the three most recent quarters of data available. The applicable portions of
  the current expected credit loss methodology (CECL) transitional amounts attributable to the allowance for
  credit losses on loans and leases held for investment and added to retained earnings for regulatory capital
  purposes pursuant to the regulatory capital regulations, as they may be amended from time to time (12 CFR part
  3, 12 CFR part 217, 12 CFR part 324, 85 FR 61577 (Sept. 30, 2020), and 84 FR 4222 (Feb. 14, 2019)), will be
  removed from the calculation of the loss severity measure.

* * * * *

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on November 17, 2020.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2020-25830 Filed 12-4-20; 8:45 am]
BILLING CODE 6714-01-P