Each depositor insured to at least $250,000 per insured bank



Home > Regulation & Examinations > Laws & Regulations > FDIC Federal Register Citations




FDIC Federal Register Citations
[Federal Register: May 14, 2007 (Volume 72, Number 92)]
[Notices]
[Page 27122-27132]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14my07-38]

=======================================================================

FEDERAL DEPOSIT INSURANCE CORPORATION

Assessment Rate Adjustment Guidelines for Large Institutions and Insured Foreign Branches in Risk Category I

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final guidelines.

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

SUMMARY: The FDIC is publishing the guidelines it will use for determining

how adjustments of up to 0.50 basis points would be made to the quarterly

assessment rates of insured institutions defined as large Risk Category I

institutions, and insured foreign branches in Risk Category I, according to

the Assessments Regulation. These guidelines are intended to further

clarify the analytical processes, and the

[[Page 27123]]

controls applied to these processes, in making assessment rate

adjustment determinations.

DATES: Effective Date: May 8, 2007.

FOR FURTHER INFORMATION CONTACT: Miguel Browne, Associate Director,

Division of Insurance and Research, (202) 898-6789; Steven Burton,

Senior Financial Analyst, Division of Insurance and Research, (202)

898-3539; and Christopher Bellotto, Counsel, Legal Division, (202) 898-3801.

SUPPLEMENTARY INFORMATION:

I. Background

Under the Assessments Regulation (12 CFR 327.9 \1\), assessment

rates of large Risk Category I institutions are first determined using

either supervisory and long-term debt issuer ratings, or supervisory

ratings and financial ratios for large institutions that have no

publicly available long-term debt issuer ratings. While the resulting

assessment rates are largely reflective of the rank ordering of risk,

the Assessments Regulation indicates that FDIC may determine, after

consultation with the primary federal regulator, whether limited

adjustments to these initial assessment rates are warranted based upon

consideration of additional risk information. Any adjustments will be

limited to no more than 0.50 basis points higher or lower than the

initial assessment rate and in no case would the resulting rate exceed

the maximum rate or fall below the minimum rate in effect for an

assessment period. In the Assessments Regulation, the FDIC acknowledged

the need to further clarify its processes for making adjustments to

assessment rates and indicated that no adjustments would be made until

additional guidelines were approved by the FDIC's Board.

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

\1\ 71 FR 69282 (November 30, 2006).

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

On February 21, 2007, the FDIC published in the Federal Register,

for a 30-day comment period, a set of proposed guidelines that would be

used by the FDIC to evaluate when an assessment rate adjustment is

warranted as well as the magnitude of that adjustment. 72 FR 7878 (Feb.

21, 2007). The FDIC sought public comment on the proposed guidelines

and received seven comment letters: three from trade organizations

whose membership is comprised of banks and savings associations (one of

these letters was submitted jointly on behalf of three trade

organizations), three from large banking organizations, and one from a

small community bank.\2\ The comments received and the final guidelines

governing the assessment rate adjustment process are discussed in later

sections.

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

\2\ The trade organizations included the American Bankers

Association, America's Community Bankers, the Financial Services

Roundtable, the Clearing House, and the Committee for Sound Lending.

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

II. Summary

For purposes of making assessment rate adjustment decisions as

transparent as possible, the final guidelines describe in detail the

steps that will be used by the FDIC to identify possible

inconsistencies between the rank orderings of risk suggested by initial

assessment rates and other risk information, the types of risk measures

that will be considered in these comparisons, the relative importance

that the FDIC will attach to various types of risk measures, and the

controls to ensure any decision to make an adjustment is justified and

well-informed.

The first six guidelines describe the analytical processes and

considerations that will determine whether an assessment rate

adjustment is warranted as well as the magnitude of any adjustment. In

brief, the FDIC will compare the risk ranking of an institution's

initial assessment rate, as compared to the assessment rates of other

large Risk Category I institutions, with the risk rankings suggested by

other risk measures. The purpose of these comparisons is to identify

possible material inconsistencies in the rank orderings of risk

suggested by the initial assessment rate and these other risk measures.

Comparisons will encompass risk measures that relate to both the

likelihood of failure and loss severity in the event of failure. The

analytical process will consider all available risk information

pertaining to an institution's risk profile including supervisory,

market, and financial performance information as well as quantitative

loss severity estimates, qualitative indicators that pertain to

potential resolutions costs in the event of failure, and information

pertaining to the ability of an institution to withstand adverse

conditions.

The next four guidelines described the controls that will govern

the analytical process to ensure adjustment decisions are justified,

well supported, and appropriately take into account additional

information and views held by the primary federal regulator, the

appropriate state banking supervisor, and the institution itself. These

guidelines include a requirement to consult with an institution's

primary federal regulator and appropriate state banking supervisor

before making an adjustment, and to provide an institution with advance

notice of, and an opportunity to respond to a pending upward

adjustment.

The timing of an assessment rate adjustment will depend on whether

it is an upward or a downward adjustment. Any upward adjustment would

not be reflected in an institution's assessment rates immediately, but

rather in the first assessment period after the assessment period that

prompted the notification of an upward adjustment. The purpose of this

advance notice is to provide an institution being considered for an

upward adjustment an opportunity to respond with additional information

should the institution disagree with the stated reasons for the upward

adjustment. Downward adjustments will be applied immediately within the

assessment period being considered. Any implemented upward or downward

adjustment will remain in effect until the FDIC determines the

adjustment is no longer warranted. The removal of a downward adjustment

is subject to the same advance notification requirements as an upward

adjustment.

Underlying the FDIC's adjustment authority is the need to preserve

consistency in the orderings of risk indicated by these assessment

rates, the need to ensure fairness among all large institutions, and

the need to ensure that assessment rates take into account all

available information that is relevant to the FDIC's risk-based

assessment decision. As noted in the proposed guidelines, the FDIC

expects that such adjustments will be made relatively infrequently and

for a limited number of institutions. This expectation reflects the

FDIC's view that the use of agency and supervisory ratings, or the use

of supervisory ratings and financial ratios when agency ratings are not

available, will sufficiently reflect the risk profile and rank

orderings of risk in large Risk Category I institutions in most cases.


Comments on the General Intent of the Adjustment Guidelines

A joint letter submitted on behalf of three trade organizations

(referred to hereafter as the ``joint letter'') agrees that it is

critical for the FDIC to identify inconsistencies and anomalies between

initial assessment rates and relative risk levels posed by large Risk

Category I institutions. The joint letter also urges the FDIC to

closely monitor assessment rates produced by the Assessment Rule and to

consider modifying the base methodology for determining initial

assessment rates if a large number of assessment rate adjustments were

deemed necessary. The FDIC agrees

[[Page 27124]]

with these observations and has stated that it would likely reevaluate

the assessment rate methodology applied to large Risk Category I

institutions if assessment rate adjustments were to occur frequently

and for more than a limited number of institutions.

A comment from a small community bank indicates its opposition to

further reductions in the assessment rates of large banks. The

guidelines discussed below allow for both increases and decreases in

assessment rates of large Risk Category I institutions.

III. The Assessment Rate Adjustment Process

The process for determining whether an assessment rate adjustment

is appropriate, and the magnitude of that adjustment, entails a number

of steps. In the first step, an initial risk ranking will be developed

for all large institutions in Risk Category I based on their initial

assessment rates as derived from agency and supervisory ratings, or the

use of supervisory ratings and financial ratios when agency ratings are

not available, in accordance with the Assessment Rule.

In the second step, the FDIC will compare the risk rankings

associated with these initial assessment rates with the risk rankings

associated with broad-based and focused risk measures as well as the

risk rankings associated with other market indicators such as spreads

on subordinated debt. Broad-based risk measures include each of the

inputs to the initial assessment rate considered separately, other

summary risk measures such as alternative publicly available debt

issuer ratings, and loss severity estimates, which are not always

sufficiently reflected in the inputs to the initial assessment rate or

in other debt issuer ratings. Focused risk measures include financial

performance measures, measures of an institution's ability to withstand

financial adversity, and individual factors relating to the severity of

losses to the insurance fund in the event of failure.

In the third step, the FDIC will perform further analysis and

review in those cases where the risk rankings from multiple measures

(such as broad-based risk measures, focused risk measures, and other

market indicators) appear to be inconsistent with the risk rankings

associated with the initial assessment rate. This step will include

consultation with an institution's primary federal regulator and state

banking supervisor. Although information or feedback provided by the

primary federal regulator or state banking supervisor will be

considered in the FDIC's ultimate decision concerning such adjustments,

participation by the primary federal regulator or state banking

supervisory in this consultation process should not be construed as

concurrence with the FDIC's deposit insurance pricing decisions.

In the final step, the FDIC will notify an institution when it

proposes to make an upward adjustment to that institution's assessment

rate. Notifications involving an upward adjustment in an institution's

initial assessment rate will be made in advance of implementing such an

adjustment so that the institution has an opportunity to respond to or

address the FDIC's rationale for proposing an upward adjustment.\3\

Adjustments will be implemented after considering institution responses

to this notification along with any subsequent changes either to the

inputs to the initial assessment rate or any other risk factor that

relates to the decision to make an assessment rate adjustment.

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

\3\ The institution will also be given advance notice when the

FDIC determines to eliminate any downward adjustment to an

institution's assessment rate.

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

IV. Final Guidelines Governing Assessment Rate Adjustment

Determinations

To ensure consistency, fairness, and transparency, the FDIC will

apply the following guidelines to its processes for determining when an

assessment rate adjustment appears warranted, the magnitude of the

adjustment, and controls to ensure adjustments are justified and take

into consideration any additional information or views held by the

primary federal regulator, state banking supervisor, and the

institutions themselves. Guidelines 1 through 6 relate to the

analytical process that will govern assessment rate adjustment

decisions. Guidelines 7 through 10 relate to the operational controls

that will govern assessment rate adjustment decisions.

Analytical Guidelines

Guideline 1: The analytical process will focus on identifying

inconsistencies between the rank orderings of risk associated with

initial assessment rates and the rank orderings of risk indicated by

other risk measures. This process will consider all available

information relating to the likelihood of failure and loss severity in

the event of failure.

The Rank Ordering Analysis

The purpose of the analytical process is to identify institutions

whose risk measures appear to be significantly different than other

institutions with similarly assigned initial assessment rates. The

analytical process will identify possible inconsistencies between the

rank orderings of risk associated with the initial assessment rate and

the risk rankings associated with other risk measures. The intent of

this analysis is not to override supervisory evaluations or to question

the validity of agency ratings or financial ratios when applicable.

Rather, the analysis is meant to ensure that the assessment rates,

produced from the combination of either supervisory ratings and long-

term debt issuer ratings (the debt rating method), or supervisory

ratings and financial ratios (the financial ratio method) result in a

reasonable rank ordering of risk that is consistent with risk profiles

of large Risk Category I institutions with similar assessment rates.

The FDIC will consider adjusting an institution's initial

assessment rate when there is sufficient information from a combination

of broad-based risk measures, focused risk measures, and other market

indicators to support an adjustment. An adjustment will be most likely

when: (1) The rank orderings of risk suggested by multiple broad-based

measures are directionally consistent and materially different from the

rank ordering implied by the initial assessment rate; (2) there is

sufficient corroborating information from focused risk measures and

other market indicators to support differences in risk levels suggested

by broad-based risk measures; (3) information pertaining to loss

severity considerations raise prospects that an institution's

resolution costs, when scaled by size, would be materially higher or

lower than those of other large institutions; or (4) additional

qualitative information from the supervisory process or other feedback

provided by the primary federal regulator or state banking supervisor

is consistent with differences in risk suggested by the combination of

broad-based risk measures, focused risk measures, and other market

indicators.

A detailed listing of the types of broad-based risk measures,

focused risk measures, and other market indicators that will be

considered during the analysis process are described in detail in the

Appendix. The listing of risk measures in the Appendix is not intended

to be exhaustive, but represents the FDIC's view of the most important

focused risk measures to consider in the adjustment process. The

development of risk measurement and monitoring capabilities is an

ongoing and evolving process. As a result, the FDIC may revise the risk

measures considered in its analytical processes over time as a result

of these

[[Page 27125]]

development activities and consistent with the objective to consider

all available risk information pertaining to an institution's risk

profile in its assessment rate decisions. The FDIC will inform the

industry if there are material changes in the types of information it

considers for purposes of making assessment rate adjustment decisions.

General Comments on Analytical Guideline 1

A comment from a large banking organization indicates that the

market and supervisory ratings already encompass many of the risk

measures that will be considered by the FDIC in making assessment rate

adjustment decisions. As a result, the commenter questions why the

FDIC's judgment about the risk inherent in these measures should ever

be substituted in place of the views of the market or supervisors.

Another comment from a large banking organization suggests that the

guidelines are redundant with supervisory evaluations from the primary

federal regulator.

The analytical approach described in these guidelines does not

substitute FDIC views of risk in place of either market or supervisory

ratings. The initial assessment rates of large Risk Category I

institutions are determined from a combination of supervisory ratings

and long-term debt issuer ratings or from a combination of supervisory

ratings and financial ratios when long-term debt issuer ratings are not

available. Combining these risk measures can produce risk rank

orderings of assessment rates that do not align with the risk rank

orderings of supervisory ratings considered in isolation. As a result,

the consideration of additional risk factors is not redundant with

supervisory risk measurement processes and will, in the FDIC's view,

help preserve a reasonable and consistent ordering of risk among large

Risk Category I institutions as indicated by the range of assessment

rates applied to these institutions.

Consideration of Quantitative Loss Severity Factors

The loss severity factors the FDIC will consider include both

quantitative and qualitative information. Quantitative information will

be used to develop estimates of deposit insurance claims and the extent

of coverage of those claims by an institution's assets. These

quantitative estimates can in turn be converted into a relative risk

ranking and compared with the risk rankings produced by the initial

assessment rate. Factors that will be used to produce loss severity

estimates include: estimates for the amount of insured and non-insured

deposit funding at the time of failure; estimates of the extent of an

institution's obligations that would be subordinated to depositor

claims in the event of failure; estimates of the extent of an

institution's obligations that would be secured or would otherwise take

priority over depositor claims in the event of failure; and the

estimated value of assets in the event of failure.

Comments on Quantitative Loss Severity Considerations

One comment letter, the joint letter, objects to the inclusion of

Federal Home Loan Bank (FHLB) borrowings in producing loss severity

estimates and requests that the FDIC not include these funding sources

in the calculation of secured liabilities for purposes of making such

estimates. While acknowledging that such advances reduce the level of

assets available to the FDIC to satisfy depositor claims in the event

of failure, the commenter argues that FHLB borrowings provide a stable

and reliable source of funding that reduces the likelihood of failure.

The final guidelines do not single out FHLB borrowings, either as a

negative or a positive risk factor. The FDIC recognizes that while

larger volumes of such funding could result in a lower level of

recoveries on failed institution assets, the presence of such funding

can also reduce liquidity risks. The FDIC believes it is appropriate to

take both factors into account. Specifically, the FDIC believes it

should include FHLB borrowings in its calculation of secured borrowings

since their exclusion would lead to incomplete and possibly erroneous

loss severity estimates. However, the FDIC agrees with the point raised

in the joint letter that it is also appropriate to consider the

stabilizing influence of such funding while evaluating liquidity risks.

Accordingly, the Appendix to the final guidelines makes such liquidity

risk considerations more explicit (see qualitative and mitigating

liquidity factors under the Liquidity and Market Risk Indicators

section).

Another comment from a large banking organization argues that the

FDIC's Assessment Rule assumes a worst-case scenario that all deposits

will be insured and therefore that any adjustments should result in

lower not higher assessment rates.

The FDIC acknowledges that uninsured deposits would serve to reduce

the level of losses sustained by the insurance funds in the event of

failure. However, the FDIC believes that meaningful loss severity

estimates need to take into account a number of considerations beyond

determining current levels of insured and uninsured deposits. These

considerations include the prospects for ring-fencing of uninsured

foreign deposits (discussed further below) and how the mix of deposit

and non-deposit liabilities might change from current levels in a

failure scenario. To the extent the FDIC uses loss severity estimates

to support an adjustment decision, either up or down, it will document

and support the assumptions and the bases for these estimates.

Consideration of Qualitative Loss Severity Factors

In addition to quantitative loss severity factors, the FDIC will

also consider other qualitative information that would have a bearing

on the resolution costs of a failed institution. These qualitative

factors include, but are not limited to, the following:

The ease with which the FDIC could make quick deposit

insurance determinations and depositor payments as evidenced by the

capabilities of an institution's deposit accounting systems to place

and remove holds on deposit accounts en masse as well as the ability of

an institution to readily identify the owner(s) of each deposit account

(for example, by using a unique identifier) and identify the ownership

category of each deposit account;

The ability of the FDIC to isolate and control the main

assets and critical business functions of a failed institution without

incurring high costs;

The level of an institution's foreign assets relative to

its foreign deposits and prospects of foreign governments using these

assets to satisfy local depositors and creditors in the event of

failure; and

The availability of sufficient information on qualified

financial contracts to allow the FDIC to identify the counterparties

to, and other details about, such contracts in the event of failure.

As with other risk measures, the FDIC will evaluate these

qualitative loss severity considerations by gauging the prospects for

higher resolutions costs posed by a given institution relative to the

same type of risks posed by other large Risk Category I institutions.

Where the FDIC lacks sufficient information to make such comparisons,

assessment rate adjustment decisions will not incorporate these

considerations.

Comments on Qualitative Loss Severity Considerations

Deposit Accounting System Capabilities

Three comment letters (the joint letter, a trade organization, and

a large

[[Page 27126]]

banking organization) object to the inclusion of qualitative loss

severity considerations pertaining to the capabilities of deposit

accounting systems in the assessment rate adjustment analysis process.

Each commenter indicates that it was premature for the FDIC to

incorporate such considerations given the separate proposed rulemaking

process under way--the Large-Bank Deposit Insurance Determination

Modernization Proposal (the modernization proposal).\4\ All three

letters suggest that such considerations in the assessment rate

adjustment process presume the final outcome of this other rulemaking

process. The joint letter also suggests that the consideration of these

factors may encourage some institutions to undertake costly systems

enhancements that may ultimately prove to be inconsistent with

requirements imposed by a final rule stemming from the modernization

proposal. The joint letter further argues that such considerations do

not lend themselves to risk-measurement and would necessarily involve a

high degree of subjectivity.

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

\4\ 71 FR 74857 (December 13, 2006). This modernization proposal

discusses the need to establish requirements relating to deposit

accounting systems capabilities to ensure prompt deposit insurance

determinations and prompt payments to insured depositors in the

event of failure.

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

As noted in the proposed guidelines, the FDIC believes that

institutions that have the deposit accounting capabilities described

above (placing holds en masse and the ability to uniquely identify

depositors) present a lower level of resolutions risk irrespective of

the existence or absence of deposit accounting system requirements

imposed by final rules stemming from the modernization proposal. The

FDIC will compare and contrast these capabilities across large Risk

Category I institutions and will incorporate such information in

adjustment decisions.

Finally, a comment from a trade organization contends that

considerations pertaining to the capabilities of institutions' deposit

accounting systems are not consistent with the objective of achieving

fairness in deposit insurance pricing between large and small

institutions since only large institutions would be subject to these

types of considerations. The FDIC does not agree that such

considerations will necessarily impose a penalty on large institutions

relative to small institutions since the evaluation of such factors

involves comparisons of the capabilities of one institution's deposit

accounting systems relative to those of other large Risk Category I

institutions. On the contrary, consideration of this factor could

possibly result in lower assessment rates for institutions that possess

these capabilities when the systems of other large institutions with

similar assessment rates do not have these capabilities.

Foreign Deposits

One comment, the joint letter, indicated that the level of foreign

deposits should not be a consideration for adjusting premium rates.

While acknowledging the existence of ring-fencing risks, the commenter

indicated that a mere ranking of foreign deposits does not provide

sufficient information with which to evaluate this risk.

The FDIC agrees that the level of foreign deposits by itself offers

limited information as to the prospects for ring-fencing risk in the

event of failure. Rather, the FDIC believes that an evaluation of

foreign assets held relative to foreign deposits is a better measure of

potential ring-fencing risks since such a measure identifies the upper

boundary of assets that could be obtained by foreign governments to

satisfy local deposit claims in the event of failure. If available, the

information about the level of foreign assets to foreign deposits on a

country-by-country basis would be better still in evaluating prospects

for ring-fencing. Although the FDIC believes it is appropriate to

consider such prospects in its loss severity estimates, these estimates

would never be the sole determinant of an assessment rate adjustment

according to Guideline 4 (described below). Moreover, any loss severity

estimates used in support of assessment rate adjustment would need to

fully support this estimate and any assumptions underlying the

estimate, including any assumptions relating to foreign assets and

deposits.

Stress Considerations

To the extent possible, the FDIC will consider information

pertaining to the ability of institutions to withstand adverse events

(stress considerations). Sources of this information are varied but

might include analyses produced by the institution or the primary

federal regulator, such as stress test results and capital adequacy

assessments, as well as detailed information about the risk

characteristics of institution's lending portfolios and other

businesses. Because of the difficulties in comparing this type of

information across institutions, those stress considerations pertaining

to internal stress test results and internal capital adequacy

assessments will not be used to develop quantitative analyses of

relative risk levels. Rather, such information will be used in a more

qualitative sense to help inform judgments pertaining to the relative

importance of other risk measures, especially information that pertains

to the risks inherent in concentrations of credit exposures and other

material non-lending business activities. As an example, in cases where

an institution had a significant concentration of credit risk, results

of internal stress tests and internal capital adequacy assessments

could obviate FDIC concerns about this risk and therefore provide

support for a downward adjustment, or alternatively, provide additional

mitigating information to forestall a pending upward adjustment. In

addition, the FDIC will not use the results of internal stress tests

and internal adequacy assessments to support upward adjustments in

assessment rates. It must be reemphasized that despite the availability

of information pertaining to these stress consideration factors, the

FDIC expects that assessment rate adjustments will be made relatively

infrequently and for a limited number of institutions.

Comments on Stress Considerations

One comment, the joint letter, indicates that difficult-to-quantify

subjective risk factors, such as those pertaining to stress

considerations and loss severity, should never be used to increase

rates, but only to decrease rates. The FDIC agrees that some of the

stress consideration risk factors contained in the proposed guidelines,

those pertaining to measures of an institution's ability to withstand

financial stress, are difficult to incorporate into an analytical

construct that relies on comparisons of ordinal rankings of risk. This

difficulty stems from the range of different approaches and different

methodologies used to assess capital needs and the ability to withstand

financial shocks.

Because of these difficulties, the FDIC agrees with the need to

modify its approach for certain stress consideration risk factors.

Specifically, rate adjustment decisions in the near term will not rely

on quantitative measures involving internal stress test results or

internal capital adequacy assessments. Nevertheless, the FDIC believes

its assessment rate adjustment process would be incomplete if it did

not consider both the extent to which institutions have sufficient

capital, earnings, and liquidity to buffer against adverse financial

conditions; and the types of risk management processes used by

institutions to determine the appropriate level of these buffers. At a

minimum, information from an internal

[[Page 27127]]

stress testing exercise or an internal capital adequacy assessment

would provide useful, albeit nonquanitifiable, insights into

management's perspective on the types and magnitude of the risks faced

by the institution. Specifically, the FDIC believes that this type of

information, considered in a more qualitative than quantitative sense,

will lead to more informed deposit insurance pricing decisions by

enhancing its understanding of the relative importance of other, more

quantifiable risk measures and especially those risk measures relating

to credit, market, and operational risk concentrations.

To illustrate, some institutions may occasionally wish to provide

stress testing results and internal capital adequacy evaluations to the

FDIC to help foster a better understanding of the relative risk levels

inherent in a specific portfolio with concentrated credit risk

exposures. The FDIC would evaluate this information, not for purposes

of initiating an assessment rate adjustment, but to gain further

insights into the nature of the underlying credit concentration. If the

information presented effectively mitigates concerns over the

concentration risk, the FDIC may decide either not to proceed with a

pending upward adjustment being contemplated or to proceed with a

downward adjustment.

Guideline 2: Broad-based indicators and other market information

that represent an overall view of an institution's risk will be

weighted more heavily in adjustment determinations than focused

indicators as will loss severity information that has bearing on the

ability of the FDIC to resolve institutions in a cost effective and

timely manner.

The FDIC will accord more weight to risk-ranking comparisons

involving broad-based or comprehensive risk measures than focused risk

measures. Examples of comprehensive or broad-based risk measures

include, but are not limited to, each of the inputs to the initial

assessment rate (that is, weighted average CAMELS ratings, long-term

debt issuer ratings, and the combination of weighted average CAMELS

ratings and the five financial ratios used to determine assessment

rates for institutions when long-term debt issuer ratings are not

available), and other ratings intended to provide a comprehensive view

of an institution's risk profile.\5\ Likewise, spreads on subordinated

debt will be accorded more weight than other market indicators since

these spreads represent an evaluation of risk from institution

investors whose risks are similar to those faced by the FDIC.\6\ To the

extent that sufficient information exists, the FDIC will also accord

more weight to the qualitative loss severity factors discussed in

Guideline 1 since these have a direct bearing on the resolutions costs

that would be incurred by the FDIC in the event of failure and since

these factors are generally not taken into account by other risk

measures.

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


\5\ The Appendix contains additional descriptions of broad-based

risk measures.

\6\ The FDIC will take into account considerations relating to

the liquidity of a given issue, differing maturities, and other

bond-specific characteristics, when making such comparisons.

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

The FDIC received no specific comments on Guideline 2.

Guideline 3: Focused risk measures and other market indicators will

be used to compare with and supplement the comparative analysis using

broad-based risk measures.

Financial performance and condition risk measures, such as those

listed in the Appendix, will generally not be as heavily relied upon as

the broad-based risk measures previously discussed in making assessment

rate adjustment decisions. Rather, the FDIC will use these focused risk

measures, along with other market indicators, to supplement the risk

comparisons of broad-based risk measures with initial assessment rates

and to provide corroborating evidence of material differences in risk

suggested by such comparisons.

The FDIC received no specific comments on Guideline 3.

Guideline 4: Generally, no single risk factor or indicator will

control the decision on whether to make an adjustment. The absence of

certain types of information shall not be construed as indicating

higher risks relative to other institutions.

In general, no single risk indicator will be used as the basis for

decisions to adjust a large Risk Category I institution's assessment

rates. In certain cases, the FDIC may determine that an assessment rate

adjustment is appropriate when certain qualitative risk factors

pertaining to loss severity suggest materially higher or lower risk

relative to the same types of risks posed by other institutions. As

noted above, the FDIC intends to place greater weight on these factors

since they have a direct bearing on resolution costs and since these

factors are generally not considered in other risk measures.

The FDIC will not interpret the absence of certain types of

information that are not normal and necessary components of risk

management and measurement processes, or financial reporting, to be

indicative of higher risks for a given institution relative to other

institutions. For example, the FDIC will not construe the lack of a

debt issuer rating as being indicative of higher risk.

Comments on Guideline 4

A comment from a large banking organization requests that the FDIC

revise the guidelines to eliminate any negative implications to the

nonexistence of a risk indicator, such as the absence of an agency

rating. The FDIC agrees with this comment. The FDIC will not interpret

the absence of certain types of information for a given risk indicator

(such as agency ratings, where the institution has no ratings) as

evidence of higher risk, and has revised Guideline 4 accordingly.

Guideline 5: Comparisons of risk information will consider normal

variations in performance measures and other risk indicators that exist

among institutions with differing business lines.

The FDIC will consider the effect of business line concentrations

in its risk ranking comparisons. The FDIC's notice of proposed

rulemaking for deposit insurance assessments, issued in July 2006,

referenced a set of business line groupings that included processing

institutions and trust companies, residential mortgage lenders, non-

diversified regional institutions, large diversified institutions, and

diversified regional institutions.\7\ When making assessment rate

adjustment decisions, the FDIC will employ risk ranking comparisons

within these business line groupings to account for normal variations

in risk measures that exist among institutions with differing business

line concentrations.

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

\7\ See 71 FR 41910 (July 24, 2006).

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

The FDIC received no specific comments on Guideline 5.

Guideline 6: Adjustment will be made only if additional analysis

suggests a meaningful risk differential, to include both differences in

risk rankings and differences in the underlying risk measures, between

the institution's initial and adjusted assessment rates.

Where material inconsistencies between initial assessment rates and

other risk indicators are present, additional analysis will determine

the magnitude of adjustment necessary to align the assessment rate

better with the rates of other institutions with similar risk profiles.

The objective of this analysis will be to determine the amount of

assessment rate adjustment that would be necessary to bring an

institution's assessment rate into better alignment with those of other

[[Page 27128]]

institutions that pose similar levels or risk. This process will entail

a number of considerations, including: (1) The number of rank ordering

comparisons that identify the institution as a potential outlier

relative to institutions with similar assessment rates; (2) the

direction and magnitude of differences in rank ordering comparisons;

(3) a qualitative assessment of the relative importance of any apparent

outlier risk indicators to the overall risk profile of the institution,

(4) an identification of any mitigating factors, and (5) the

materiality of actual differences in the underlying risk measures.

Based upon these considerations, the FDIC will determine the

magnitude of adjustment that would be necessary to better align its

assessment rate with institutions that pose similar levels of risk.

When the assessment rate adjustment suggested by these considerations

is not material, or when there are a number of risk comparisons that

offer conflicting or inconclusive evidence of material inconsistencies

in either risk rankings or the underlying risk measures, no assessment

rate adjustment will be made.

Comments on Guideline 6

A comment from a large banking organization indicates that in order

to gauge the significance of an outlier condition, one would need to

know the relative levels of the risk indicator being measured in

addition to the differences in risk rankings along that measure. The

FDIC acknowledges that for a given risk indicator, differences in risk

rankings across institutions could represent either a material or an

immaterial difference in risk. Although, in general, adjustments would

only be considered when a preponderance of risk information indicates

the need for an adjustment, the FDIC agrees that it is important to

consider both the differences in risk rankings and the magnitude of

differences in underlying risk measures, and has revised Guideline 6

accordingly.


Other Comments on Analytical Guidelines 1 Through 6

A comment from a large banking organization supported the

guidelines as well reasoned, comprehensive, and consistent with other

assessment frameworks used by credit rating agencies and credit risk

analyses processes used within many financial institutions. The

commenter suggests that the FDIC consider the inclusion of certain

additional risk factors in the analytical process such as the

diversification and volatility of earnings from major business lines,

and the level of net charge-offs to pre-provision earnings. The FDIC

agrees with these suggestions and has modified the risk factors in the

Appendix accordingly.

A comment from a trade organization objected to the blanket

inclusion of ``commercial real estate'' in the definition of one of the

risk factors included in the Appendix entitled higher risk loans to

tier 1 capital. The FDIC agrees that risks associated with commercial

real estate lending can vary considerably depending on such factors as

property type, collateral, the degree of pre-leasing, etc. As with any

of the measures listed in the Appendix, the FDIC does not consider any

single financial ratio as representative of an institution's risk

profile. Rather, each set of financial performance factors is

accompanied by a description of qualitative and mitigating risk

considerations. More specifically, the qualitative considerations

accompanying the asset quality measures in the Appendix indicate that

the FDIC will consider mitigating factors, including the degree of

collateral coverage and differences in underwriting standards, when

evaluating credit risks related to commercial real estate holdings.

These second-order considerations, coupled with any additional

information obtained pertaining to the specific risk characteristics of

a given portfolio, will help better distinguish the risk contained

within any commercial real estate concentrations.

A comment from a large banking organization recommends that the

FDIC's risk ranking analyses be performed without respect to the

assessment rate floors in effect for large Risk Category I institutions

(i.e., the risk rankings encompassing approximately the 1st through the

46th percentile).\8\ The FDIC agrees that the application of the

assessment rate floor to the ranking of risk factors results in some

loss of information about the magnitude of differences in risk rank

levels between institutions in the peer group. Accordingly, the FDIC

will initially assign risk rankings to risk measures without respect to

how these percentile rankings align with the assessment rate floor.

However, the FDIC will continue to view a rank ordering analysis that

supports an overall assessment rate risk ranking falling approximately

between the lowest 1st and 46th percentiles,\9\ as being indicative of

minimum risk. The FDIC does not believe this modification to risk

ranking comparisons will alter the resulting assessment rate decisions

from the analytical process described in the proposed guidelines.

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

\8\ The proposed guidelines indicated that comparisons of risk

measures will generally treat as indicative of low risk that portion

of the risk rankings falling within the lowest X percentage of

assessment rate rankings, with X being the proportion of large Risk

Category I institutions assigned the minimum assessment rate. As of

June 30, 2006, 46 percent of large Risk Category I institutions

would have been assigned a minimum assessment rate. Therefore, as of

June 30, 2006, risk rankings from the 1st to the 46th percentile for

any given risk measure would generally have been considered

suggestive of low risk, and all risk rankings for risk measures in

this range would be set at the 46th percentile for risk ranking

comparison purposes.

\9\ The 46th percentile corresponds to the proportion of large

Risk Category I institutions that would have paid the minimum

assessment rate if the final assessment rules would have been in

place as of June 30, 2006.

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

Control Guidelines

Guideline 7: Decisions to adjust an institution's assessment rate

must be well supported.

The FDIC will perform internal reviews of pending adjustments to an

institution's assessment rate to ensure the adjustment is justified,

well supported, based on the most current information available, and

results in an adjusted assessment rate that is consistent with rates

paid by other institutions with similar risk profiles.

Comments on Guideline 7

One comment, the joint letter, agreed that adjustment decisions

should be well supported by the preponderance of factors that suggest a

change is required. The FDIC believes the final guidelines establish an

analytical process and controls over that process that are consistent

with this comment.

Guideline 8: The FDIC will consult with an institution's primary

federal regulator and appropriate state banking supervisor prior to

making any decision to adjust an institution's initial assessment rate

(or prior to removing a previously implemented adjustment).

Participation by the primary federal regulator or state banking

supervisor in this consultation process should not be construed as

concurrence with the FDIC's deposit insurance pricing decisions.

Consistent with existing practices, the FDIC will continue to

maintain an ongoing dialogue with primary federal regulator concerning

large institution risks. When assessment rate adjustments are

contemplated, the FDIC will notify the primary federal regulator and

the appropriate state banking supervisor of the pending adjustment in

advance of the first opportunity to implement any adjustment. This

notification will include a discussion of why the adjusted assessment

rate is more consistent with the risk profiles

[[Page 27129]]

represented by institutions with similar assessment rates. The FDIC

will consider any additional information provided by either the primary

federal regulator or state banking supervisor prior to proceeding with

an adjustment of an institution's assessment rate.

Comments on Guideline 8

A comment from a trade organization indicates that the guidelines

do not apply a significant and explicit weight to the views of the

primary federal regulator. The FDIC agrees that its adjustment

decisions should weigh heavily the views of the primary federal

regulator, as well as the views of the appropriate state banking

supervisor. As noted under Guideline 1, the intent of any assessment

rate adjustment is not to override supervisory evaluations. Rather, the

consideration of additional risk information is meant to ensure that

assessment rates, produced from a combination of supervisory ratings

and agency ratings or supervisory ratings and financial ratios (when

applicable), result in a reasonable rank ordering of risk. Guideline 8

also indicates that no adjustment decision will be made until the FDIC

consults with the primary federal regulator and the appropriate state

banking supervisor. If the primary federal regulator or state banking

supervisor choose to express a view on the appropriateness of the

adjustment, the FDIC will accord such views significant weight in its

decision of whether to proceed with an adjustment.

Guideline 9: The FDIC will give institutions advance notice of any

decision to make an upward adjustment to its initial assessment rate,

or to remove a previously implemented downward adjustment.

The FDIC will notify institutions when it intends to make an upward

adjustment to its initial assessment rate (or remove a downward

adjustment). This notification will include the reasons for the

adjustment, when the adjustment would take effect, and provide the

institution up to 60 days to respond. Adjustments would not become

effective until the first assessment period after the assessment period

that prompted the notification of an upward adjustment. During this

subsequent assessment period, the FDIC will determine whether an

adjustment is still warranted based on an institution's response to the

notification. The FDIC will also take into account any subsequent

changes to an institution's weighted average CAMELS, long-term debt

issuer ratings, financial ratios (when applicable), or other risk

measures used to support the adjustment. In other words, both an

adjustment determination and a determination of the amount of the

adjustment will be made with respect to information and risk factors

pertaining to the assessment period being assessed--that is, the first

assessment period after the assessment period that prompted the

notification. The FDIC will also consider any actions taken by the

institution, during the period for which the institution is being

assessed, in response to the FDIC's concerns described in the notice.

Comments on Guideline 9

One comment, the joint letter, supported this advance notification

requirement for upward adjustments, which will give institutions an

opportunity to respond to and address the FDIC's concerns.

Guideline 10: The FDIC will continually re-evaluate the need for an

assessment rate adjustment.

The FDIC will re-evaluate the need for the adjustment during each

subsequent quarterly assessment period. These evaluations will be based

on any new information that becomes available, as well as any changes

to an institution's weighted average CAMELS, long-term debt issuer

ratings, financial ratios (when applicable), or other risk measures

used to support the adjustment. Re-evaluations will also consider the

appropriateness of the magnitude of an implemented adjustment, for

example, in cases where changes to the initial assessment rate inputs

result in a change to the initial assessment rate. Consistent with

Guideline 9, the FDIC will not increase the magnitude of an adjustment

without first notifying the institution of the proposed increase.

The institution can request a review of the FDIC's decision to

adjust its assessment rate.\10\ It would do so by submitting a written

request for review of the assessment rate assignment, as adjusted, in

accordance with 12 CFR 327.4(c). This same section allows an

institution to bring an appeal before the FDIC's Assessment Appeals

Committee if it disagrees with determinations made in response to a

submitted request for review.

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

\10\ The institution can also request a review of the FDIC's

decision to remove a previous downward adjustment.

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

The FDIC received no specific comment on Guideline 10.


Comments on Control Guidelines

One comment, the joint letter, indicated that institutions should

have the opportunity to petition the FDIC for a reduction in assessment

rates. The commenter argues that the guidelines only allow the FDIC to

initiate changes in assessment rates, and that institutions may have

evidence of lower risk that is not captured in either the initial

assessment rate or the risk information considered for purposes of

determining whether an adjustment is appropriate.

The FDIC believes that the final guidelines, coupled with existing

assessment rate rules, give institutions a number of opportunities to

argue for lower assessment rates.\11\ For instance, institutions have

90 days from the date of receiving an assessment rate invoice to

request a review of that rate. This request for review procedure is

available whether or not an adjustment is reflected in the assessment

rate. Additionally, institutions can appeal decisions made in response

to these requests for review to the FDIC's Assessment Appeals

Committee.

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

\11\ Any requests for review or appeals would be subject to the

limitations contained within the Assessment Rule, namely that

assessment rate adjustments would be limited to no more than \1/2\

basis point, and that no adjustment may cause an institution's rate

to fall below the minimum assessment rate or rise above the maximum

assessment rate in effect for a given assessment period.

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

Another comment from a large banking organization argues that the

guidelines should include a greater level of due process for upward

adjustments than is available under the existing Assessment Rule to

include the opportunity to have objections heard by a neutral third

party.

The FDIC agrees that the imposition of an upward assessment rate

adjustment should afford institutions opportunities to present counter

arguments. The FDIC believes the guidelines provide multiple such

opportunities, which are consistent in many respects with the

commenter's recommendation. First, an institution will receive advance

notification of the FDIC's grounds for considering an upward

adjustment. At this point, an institution will have the opportunity to

provide information that challenges the appropriateness of an upward

assessment rate adjustment. Second, once the FDIC has considered an

institution's response to the advance notice of a pending upward

adjustment, the FDIC will provide the institution with a written

response and rationale for any decision to proceed with the upward

adjustment. At this point, the institution will have an opportunity to

request a review of a decision to impose a higher assessment rate and

will be able to present evidence to challenge the decision in

accordance with the Assessment Rule. Third, an institution

[[Page 27130]]

will be able to appeal the outcome of this request for review to the

FDIC's Assessment Appeals Committee. In short, institutions will have

multiple opportunities to dispute an upward adjustment, and the

institution's position will be considered at increasingly higher levels

within the Corporation. The FDIC believes it is neither necessary nor

appropriate for it to provide for third party review of decisions made

by the FDIC under its statutory authority.

Other Comments on the Guidelines

Incorporation of Basel II Information Into Assessment Rate Adjustment

Decisions

One comment, from a large banking organization, recommends that the

FDIC table its guidelines pending finalization of rulemaking for the

new risk-based capital framework (Basel II). The commenter argues that

a risk-differentiation system using Basel II information may produce

different results than a system that does not incorporate this

information.

The underlying objective of the guidelines is to evaluate all

available information for purposes of ensuring a reasonable and

consistent rank ordering of risk. The FDIC does not believe that the

adoption of Basel II will produce information that conflicts with the

risk information being evaluated as part of these guidelines. Rather,

the FDIC believes that risk information obtained from advanced risk

measurement systems should serve to complement the analysis process

described in these final guidelines.

Considerations of Parent Company or Affiliate Support

Two comments (the joint letter and a large banking organization)

recommended that the FDIC consider parent company support in its

assessment rate adjustment determinations. Both comments suggested that

the existence of a financially strong parent should be a consideration

only in reducing rates.

The FDIC believes it is appropriate to take into account all

available information in its assessment rate adjustment decisions.

Accordingly, the FDIC will consider both the willingness and ability of

a parent company to support an insured institution in its adjustment

decisions. The willingness of a company to support an insured

subsidiary can be demonstrated by historical and ongoing financial and

managerial support provided to an institution. The ability of a company

to support an insured subsidiary can be evaluated through a review of a

company's financial strength, supervisory and debt ratings, market-

based views of risk, and a review of the company's operating

environment and affiliate structure. Although the FDIC will take into

account considerations of parent company support, these considerations

will not be accorded any greater or lesser weight than other risk

considerations. Rather, these considerations will be evaluated in

conjunction with the analysis of other risk measures as indicated in

the final guidelines. Because many institutions' initial assessment

rates already reflect considerations of parent company support (when it

is subject to the debt rating method),\12\ the FDIC does not believe it

would be appropriate to automatically lower an institution's assessment

rate when an institution is owned by a financially strong parent.

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

\12\ Moody's and Fitch debt issuer ratings explicitly take into

account parent company support.

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

Considerations of Additional Supervisory Information

The proposed guidelines posed a question about whether the FDIC

should consider certain additional supervisory information when

determining whether a downward adjustment in assessment rates is

appropriate. In response to this question, one comment, the joint

letter, indicated that only risk-related considerations should be

reflected in assessment rate adjustments. More specifically, the

commenter argues that technical violations that the commenter believes

do not relate to the risk of failure should not preclude a downward

assessment rate adjustment.

The FDIC believes that its assessment rate adjustment decisions

should be based on risk-related considerations and will incorporate all

available supervisory information that has a bearing on the risks posed

to the insurance funds into its adjustment decisions.

Disclosure of Assessment Rate Adjustments

One comment, the joint letter, recommends that the FDIC disclose

the number (but not the names) of institutions whose assessment rate

adjustments have been adjusted and the magnitude of these adjustments.

This same comment indicates that it would be appropriate to give the

results of the FDIC's analysis, each time it is performed, to each

large Risk Category I institution in order to enhance the dialogue

between the FDIC and the institution.

The FDIC plans to provide information about the number of and

amount of implemented assessment rate adjustments. The FDIC also

intends to determine the appropriate form and extent of analytical

results pertaining to its adjustment decisions that will be given to

large Risk Category I institutions. At a minimum, the FDIC intends to

provide institutions with a summary of its analyses in cases where an

adjustment is contemplated.

Need for Further Notice and Comment on Future Modifications

One comment, the joint letter, believes that any modification in

the risk factors considered in the adjustment decision should be

subject to further notice and comment.

The FDIC believes it would be impractical and inefficient to

subject every modification in the risk factors considered as part of

the adjustment analysis process to further notice and comment. As noted

in the proposed guidelines, the risk measures listed in the Appendix

are not intended to be either an exhaustive or a static representation

of all risk information that might be considered in adjustment

decisions. Rather, the list identified what the FDIC believes at this

time to be the most important risk elements to consider in its

assessment rate adjustment determinations. These elements are likely to

change and evolve over time due to changes in reported financial

variables (e.g., Call Report changes) and changes in access to new

types of risk information. The FDIC believes it is appropriate to seek

additional notice and comment for material changes in the methodologies

or processes used to make assessment rate adjustment decisions. A

material change would be one that is expected to result in a

significant change to the frequency of assessment rate adjustments.

Relationship Between Adjustment Decisions and Revenues

A comment from a large banking organization suggests that the lack

of transparency in the guidelines give the appearance that the FDIC

intends to extract additional premiums from large institutions. To

avoid this appearance, the commenter recommends that that the FDIC

impose revenue neutrality on its adjustment decisions by implementing

upward adjustments in amounts not greater than the amount of downward

adjustments.

The FDIC has no intent to use its adjustment authority for revenue

generation purposes. The guidelines are intended to provide as much

[[Page 27131]]

transparency as possible on how the FDIC's assessment rate adjustment

decisions will be made. Moreover, the guidelines allow for both upward

and downward assessment rate adjustments. The FDIC believes that the

final guidelines, coupled with the multiple opportunities afforded to

institutions to challenge the FDIC's assessment rate determinations,

ensure a sufficient degree of objectivity and fairness without imposing

additional constraints, such as revenue neutrality, over these

decisions. Such a revenue neutrality constraint would limit the ability

of the FDIC to meet its main objective, which is to ensure a reasonable

and consistent rank ordering of risk in the range of assessment rates.

V. Timing of Notifications and Adjustments

Upward Adjustments

As noted above, institutions will be given advance notice when the

FDIC determines that an upward adjustment in its assessment rate

appears to be warranted. The timing of this advance notification will

correspond approximately to the invoice date for an assessment period.

For example, an institution would be notified of a pending upward

adjustment to its assessment rates covering the period April 1st

through June 30th sometime around June 15th. June 15th is the invoice

date for the January 1st through March 31st assessment period.\13\

Institutions will have up to 60 days to respond to notifications of

pending upward adjustments.

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

\13\ Since the intent of the notification is to provide advance

notice of a pending upward adjustment, the invoice covering the

assessment period January 1st through March 31st in this case would

not reflect the upward adjustment.

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

The FDIC would notify an institution of its decision either to

proceed with or not to proceed with the upward adjustment approximately

90 days following the initial notification of a pending upward

adjustment. If a decision were made to proceed with the adjustment, the

adjustment would be reflected in the institution's next assessment rate

invoice. Extending the example above, if an institution were notified

of a proposed upward adjustment on June 15th, it would have up to 60

days from this date to respond to the notification. If, after

evaluating the institution's response and following an evaluation of

updated information for the quarterly assessment period ending June

30th, the FDIC decides to proceed with the adjustment, it would

communicate this decision to the institution on September 15th, which

is the invoice date for the April 1st through June 30th assessment

period. In this case, the adjusted rate would be reflected in the

September 15th invoice. The adjustment would remain in effect for

subsequent assessment periods until the FDIC determined either that the

adjustment is no longer warranted or that the magnitude of the

adjustment needed to be reduced or increased (subject to the \1/2\

basis point limitation and the requirement for further advance

notification).\14\

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

\14\ The timeframes and example illustrated here would also

apply to a decision by the FDIC to remove a previously implemented

downward adjustment as well as a decision to increase a previously

implemented upward adjustment (the increase could not cause the

total adjustment to exceed the 0.50 basis point limitation).

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

Downward Adjustments

Decisions to lower an institution's assessment rate will not be

communicated to institutions in advance. Rather, they would be

reflected in the invoices for a given assessment period along with the

reasons for the adjustment. Downward adjustments may take effect as

soon as the first insurance collection for the January 1st through

March 31, 2007 assessment period subject to timely approval of the

guidelines by the Board of the FDIC. Downward adjustments will remain

in effect for subsequent assessment periods until the FDIC determines

either that the adjustment is no longer warranted (subject to advance

notification) or that the magnitude of the adjustment needs to be

increased (subject to the \1/2\ basis point limitation) or lowered

(subject to advance notification).\15\

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


\15\ As noted in the Assessments Regulation, the FDIC may raise

an institution's assessment rate without notice if the institution's

supervisory or agency ratings or financial ratios (for institutions

without debt ratings) deteriorate.

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

Appendix--Examples of Risk Measures that Will Be Considered in

Assessment Rate Adjustment Determinations \16\

Broad-based Risk Measures

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

\16\ This listing is not intended to be exhaustive but

represents the FDIC's view of the most important risk measures that

should be considered in the assessment rate determinations of large

Risk Category I institutions. This listing may be revised over time

as improved risk measures are developed through an ongoing effort to

enhance the FDIC's risk measurement and monitoring capabilities.

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

Composite and weighted average CAMELS ratings: The

composite rating assigned to an insured institution under the

Uniform Financial Institutions Rating System and the weighted

average CAMELS rating determined under the Assessments Regulation.

Long-term debt issuer rating: A current, publicly

available, long-term debt issuer rating assigned to an insured

institution by Moody's, Standard & Poor's, or Fitch.

Financial ratio measure: The assessment rate determined

for large Risk Category I institutions without long-term debt issuer

ratings, using a combination of weighted average CAMELS ratings and

five financial ratios as described in the Assessments Regulation.

Offsite ratings: Ratings or numerical risk rankings,

developed by either supervisors or industry analysts, that are based

primarily on off-site data and incorporate multiple measures of

insured institutions' risks.

Other agency ratings: Current and publicly available

ratings, other than long-term debt issuer ratings, assigned by any

rating agency that reflect the ability of an institution to perform

on its obligations. One such rating is Moody's Bank Financial

Strength Rating BFSR, which is intended to provide creditors with a

measure of a bank's intrinsic safety and soundness, excluding

considerations of external support factors that might reduce default

risk, or country risk factors that might increase default risk.

Loss severity measure: An estimate of insurance fund

losses that would be incurred in the event of failure. This measure

takes into account such factors as estimates of insured and non-

insured deposit funding, estimates of obligations that would be

subordinated to depositor claims, estimates of obligations that

would be secured or would otherwise take priority claim over

depositor claims, the estimated value of assets, prospects for

``ring-fencing'' whereby foreign assets are used to satisfy foreign

obligor claims over FDIC claims, and other factors that could affect

resolution costs.

Financial Performance and Condition Measures

Profitability

Return on assets: Net income (pre- and post-tax)

divided by average assets.

Return on risk-weighted assets: Net income (pre- and

post-tax) divided by average risk-weighted assets.

Core earnings volatility: Volatility of quarterly

earnings before tax, extraordinary items, and securities gains

(losses) measured over one, three, and five years.

Net interest margin: Interest income less interest

expense divided by average earning assets.

Earning asset yield: Interest income divided by average

earning assets.

Funding cost: Interest expense divided by interest

bearing obligations.

Provision to net charge-offs: Loan loss provisions

divided by losses applied to the loan loss reserve (net of

recoveries).

Burden ratio: Overhead expenses less non-interest

revenues divided by average assets.

Qualitative and mitigating profitability factors:

Includes considerations such as earnings prospects, diversification

of revenue sources by business line and source, and the volatility

of earnings from principal business lines.

Capitalization
 

Tier 1 leverage ratio: Tier 1 capital for Prompt

Corrective Action (PCA) divided by adjusted average assets as

defined for PCA.

Tier 1 risk-based ratio: PCA tier 1 capital divided by

risk-weighted assets.

[[Page 27132]]

Total risk-based ratio: PCA total capital divided by

risk-weighted assets.

Tier 1 growth to asset growth: Annual growth of PCA

tier 1 capital divided by annual growth of total assets.

Regulatory capital to internally-determined capital

needs: PCA tier 1 and total capital divided by internally-determined

capital needs as determined from economic capital models, internal

capital adequacy assessments processes (ICAAP), or similar

processes.

Qualitative and mitigating capitalization factors:

Includes considerations such as strength of capital planning and

ICAAP processes, and the strength of financial support provided by

the parent.

Asset Quality

Non-performing assets to tier 1 capital: Nonaccrual

loans, loans past due over 90 days, and other real estate owned

divided by PCA tier 1 capital.

ALLL to loans: Allowance for loan and lease losses plus

allocated transfer risk reserves divided by total loans and leases.

Net charge-off rate: Loan and lease losses charged to

the allowance for loan and lease losses (less recoveries) divided by

average total loans and leases.

Earnings coverage of net loan losses: Loan and lease

losses charged to the allowance for loan and lease losses (less

recoveries) divided by pre-tax, pre-loan loss provision earnings.

Higher risk loans to tier 1 capital: Sum of sub-prime

loans, alternative or exotic mortgage products, leveraged lending,

and other high risk lending (e.g., speculative construction or

commercial real estate financing) divided by PCA tier 1 capital.

Criticized and classified assets to tier 1 capital:

Assets assigned to regulatory categories of Special Mention,

Substandard, Doubtful, or Loss (and not charged-off) divided by PCA

tier 1 capital.

EAD-weighted average PD: Weighted average estimate of

the probability of default (PD) for an institution's obligors where

the weights are the estimated exposures-at-default (EAD). PD and EAD

risk metrics can be defined using either the Basel II framework or

internally defined estimates.

EAD-weighted average LGD: Weighted average estimate of

loss given default (LGD) for an institution's credit exposures where

the weights are the estimated EADs for each exposure. LGD and PD

risk metrics can be defined using either the Basel II framework or

internally defined estimates.

Qualitative and mitigating asset quality factors:

Includes considerations such as the extent of credit risk mitigation

in place; underwriting trends; strength of credit risk monitoring;

and the extent of securitization, derivatives, and off-balance sheet

financing activities that could result in additional credit

exposure.

Liquidity and Market Risk Indicators

Core deposits to total funding: The sum of demand,

savings, MMDA, and time deposits under $100 thousand divided by

total funding sources.

Net loans to assets: Loans and leases (net of the

allowance for loan and lease losses) divided by total assets.

Liquid and marketable assets to short-term obligations

and certain off-balance sheet commitments: The sum of cash, balances

due from depository institutions, marketable securities (fair

value), federal funds sold, securities purchased under agreement to

resell, and readily marketable loans (e.g., securitized mortgage

pools) divided by the sum of obligations maturing within one year,

undrawn commercial and industrial loans, and letters of credit.

Qualitative and mitigating liquidity factors: Includes

considerations such as the extent of back-up lines, pledged assets,

the strength of contingency and funds management practices, and the

stability of various categories of funding sources.

Earnings and capital at risk to fluctuating market

prices: Quantified measures of earnings or capital at risk to shifts

in interest rates, changes in foreign exchange values, or changes in

market and commodity prices. This would include measures of value-

at-risk (VaR) on trading book assets.

Qualitative and mitigating market risk factors:

Includes considerations of the strength of interest rate risk and

market risk measurement systems and management practices, and the

extent of risk mitigation (e.g., interest rate hedges) in place.

Other Market Indicators
 

Subordinated debt spreads: Dealer-provided quotes of

interest rate spreads paid on subordinated debt issued by insured

subsidiaries relative to comparable maturity treasury obligations.

Credit default swap spreads: Dealer-provided quotes of

interest rate spreads paid by a credit protection buyer to a credit

protection seller relative to a reference obligation issued by an

insured institution.

Market-based default indicators: Estimates of the

likelihood of default by an insured organization that are based on

either traded equity or debt prices.

Qualitative market indicators or mitigating market

factors: Includes considerations such as agency rating outlooks,

debt and equity analyst opinions and outlooks, the relative level of

liquidity of any debt and equity issues used to develop market

indicators defined above, and market-based indicators of the parent

company.

Risk Measures Pertaining to Stress Conditions

Ability To Withstand Stress Conditions

Concentration risk measures: Measures of the level of

concentrated risk exposures and extent to which an insured

institution's capital and earnings would be adversely affected due

to exposures to common risk factors such as the condition of a

single obligor, poor industry sector conditions, poor local or

regional economic conditions, or poor conditions for groups of

related obligors (e.g., subprime borrowers).

Qualitative and mitigating factors relating to the

ability to withstand stress conditions: Includes results of stress

tests or scenario analyses that measure the extent of capital,

earnings, or liquidity depletion under varying degrees of financial

stress such as adverse economic, industry, market, and liquidity

events as well as the comprehensiveness of risk identification and

stress testing analyses, the plausibility of stress scenarios

considered, and the sensitivity of scenario analyses to changes in

assumptions.

Loss Severity Indicators

Subordinated liabilities to total liabilities: The sum

of obligations, such as subordinated debt, that would have a

subordinated claim to the institution's assets in the event of

failure divided by total liabilities.

Secured (priority) liabilities to total liabilities:

The sum of claims, such as trade payables and secured borrowings,

that would have priority claim to the institution's assets in the

event of failure divided by total liabilities.

Foreign assets relative to foreign deposits: The sum of

assets held in foreign units relative to foreign deposits.

Liquidation value of assets: Estimated value of assets,

based largely on historical loss rates experienced by the FDIC on

various asset classes, in the event of liquidation.

Qualitative and mitigating factors relating to loss

severity: Includes considerations such as the sufficiency of

information and systems capabilities relating to qualified financial

contracts and deposits to facilitate quick and cost efficient

resolution, the extent to which critical functions or staff are

housed outside the insured entity, and prospects for foreign deposit

ring-fencing in the event of failure.

By order of the Board of Directors.

Dated at Washington, DC, this 8th day of May, 2007.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. E7-9196 Filed 5-11-07; 8:45 am]
BILLING CODE 6714-01-P


    

Last Updated 05/14/2007 Regs@fdic.gov