(The “Bank”) filed an appeal with the Assessment Appeals Committee
(“Committee”) of the Federal Deposit Insurance Corporation (“FDIC”) by
letter dated October 8, 2004. The Bank is appealing a decision issued by the
FDIC’s Division of Insurance and Research (“DIR”) on September 15, 2004. In
that decision, DIR denied the Bank’s request for an upgrade of the Bank’s
capital group (“CG”) assignment for the July 1, 2004, semiannual assessment
At its meeting held on December 13, 2004, the Committee allowed the Bank,
pursuant to the Guidelines for Appeals of Deposit Insurance Assessment
Determinations1, to appear and make an oral presentation in support of its
case for an assessment risk classification change. The presentation was
highly professional and helpful in resolving this matter, which involves
application of the FDIC’s regulations addressing assessment risk
12 C.F.R. §
327.4(a)(1), the provision
governing determination of an institution’s capital group. After carefully
considering all of the written and oral submissions and facts of this case,
the Committee has determined that the Bank’s appeal must be denied.
On June 2, 2004, the Bank filed with DIR a request for review of the
Bank’s CG assignment for the July 1, 2004, semiannual period as provided for
under 12 C.F.R. § 327.4(d). A CG of “2” (adequately capitalized) had been
assigned to the Bank for that period. The Bank requested an upgrade to “1”
(well capitalized). The Bank’s supervisory subgroup was at all relevant
times “A.” Under the assessment schedule set out in
12 C.F.R. §
the CG “1” rate is zero basis points, while the “2” rate is 3 basis points.
The difference between the two rates resulted in an additional premium of
approximately $31 million for the Bank’s July 2004 semiannual assessment.
The Bank revised its request for review by letter dated July 30, 2004,
effectively withdrawing its request for an upgrade for the entire July 2004
Instead, the Bank requested that DIR limit the insurance assessment based
on the CG “2” rating to the period from April 1, 2004, through May 19, 2004.
According to the Bank, it was during this period that its Total Risk-Based
Capital Ratio failed to satisfy the well capitalized requirement. Pro rated
for this portion of the semiannual period, the Bank estimated its increased
assessment to be $8 million rather than $31 million. The Bank asserted that
assessing the “2A” rate for the entire semiannual period – with the
resulting additional assessment premium – is inconsistent with the intent of
the risk-based assessment system.
DIR denied the Bank’s request by letter dated September 15, 2004. DIR
explained that CGs are assigned in accordance with 12 C.F.R. § 327.4(a)(1).
This regulation states, in part, that insured institutions will be assigned
to one of three CGs based on data reported in an institution’s Report of
Income and Condition (“Call Report”) or Thrift Financial Report (“TFR”) as
of March 31 (for the semiannual assessment period beginning the following
July) and as of September 30 (for the semiannual assessment period beginning
the following January). DIR added that the regulations do not provide for
determination of an institution’s semiannual CG based on a date or
information other than as specified in the regulation, nor does the
regulation permit a CG to be assigned more frequently than semiannually.
In its October 8, 2004, appeal to the Committee, the Bank contends that
the “circumstances surrounding this appeal deserve special consideration.”
The Bank again asks that the CG “2” assessment be levied only for the period
from April 1 to May 19, 2004 (May 19 being the date of its subordinated debt
issuance when, the Bank states, it returned to well capitalized status). The
Bank contends that pro rata assessment during the semiannual period would
impose “a meaningful additional assessment charge that is directly related
to the period during which the Bank failed to satisfy the CG ‘1’ criteria.”
Applying the “2” rating for the entire semiannual period, the Bank suggests,
“is inconsistent with the intent of a risk-based assessment system in that
an unreasonable penalty has been imposed on a bank with a strong risk
The FDI Act defines the Risk-Based Assessment System as a “system for
calculating an institution’s semiannual assessment” and requires the FDIC’s
Board of Directors to promulgate regulations establishing that system.
U.S.C. § 1817(b)(1)(C). Under the implementing regulations adopted by the
Board, institutions are placed into risk classifications based primarily
upon two factors: capital group categories and supervisory subgroups.
See 12 C.F.R. § 327.4(a)(1) (capital group categories); 12 C.F.R. § 327.4(a)(2)
(supervisory subgroup classifications).
The FDIC’s assessment regulations require insured institutions to pay a
semiannual assessment in two quarterly payments. 12 C.F.R. §
institution is assigned a semiannual risk classification. The quarterly
payments for a particular semiannual period are based on the deposits the
institution reported in its quarterly Call Report or TFR during the
preceding quarter, but the assessment risk classification remains constant
throughout the semiannual period. An institution’s capital, as reported in
its March Call Report or TFR, is used to determine its risk classification
for the July-December semiannual period, while the capital reported in its
September Call Report or TFR is used for its January-June semiannual period.
12 C.F.R. § 327.4(a)(1). Application of section 327.4(a)(1) goes to the
heart of this case.
The Bank’s March 31, 2004, Call Report reflected a Total Risk-Based
Capital Ratio of 9.79%. Under 12 C.F.R. § 327.4(a), to be assigned to
Capital Group “1” – well capitalized – an institution must have (1) a total
risk-based capital ratio of 10% or greater, (2) a Tier 1 risk-based capital
ratio of 6% or greater, and (3) a Tier 1 leverage capital ratio of 5% or
greater. To be rated “2” – adequately capitalized – an institution must have
(1) a total risk-based capital ratio of 8% or greater, (2) a Tier 1
risk-based capital ratio of 4% or greater, and (3) a Tier 1 leverage capital
ratio of 4% or greater. Under the regulation, with a Total Risk-Based
Capital Ratio of 9.79%, the Bank was properly assigned a CG of “2” for the
July 2004 semiannual period.
The Bank, however, offers three factors that it suggests mitigate
non-compliance with the capital requirements for a rating of well
capitalized. First, the Bank argues that the decline in its Total Risk-Based
Capital Ratio was not caused by a material economic event that reduced the
capital of the Bank, but rather by inadequate planning for capital needs.
Next, the Bank contends that its Total Capital remained strong, with its
Tier 1 capital ratio of 7.66% and Tier 1 leverage ratio of 5.76% both above
the well capitalized thresholds of 6% and 5% respectively. Finally, the Bank
asserts that it took steps to return to well-capitalized status within 24
hours of learning of the shortfall, issuing sufficient subordinated debt to
bring its Total Risk-Based Capital Ratio, by its own estimate, to 10.77% as
of May 19, 2004.
Based upon the Bank’s March 31, 2004 Call Report, its Total Risk-Based
Capital fell short of well capitalized by approximately $970 million.
Risk-based capital is vitally important to the safety and soundness of the
industry and to the FDIC. Risk-based capital provides a cushion against
unexpected losses, reduces the risk of failure, and mitigates the FDIC’s
losses in the event of failure. Whether the Bank’s risk-based capital
shortfall resulted from inadequate planning or from a material economic
event does not affect the potential consequences either for the Bank or for
the FDIC from the resultant decline in capital. Moreover, the Committee is
reluctant to sanction an exception to the Board’s regulations for, in
effect, a bank’s inadvertent failure to comply.
Nor does the Bank merit relief from the increased assessment because it
fell short on just one capital test. When the regulations were adopted, the
FDIC Board had the option to provide that banks would be considered well
capitalized if two of the three tests were met. Instead, the FDIC’s
regulations require that an institution must meet all three capital tests.
As pointed out above, on the one test for Capital Group “1” that the Bank
did not meet – Total Risk-Based Capital – the Bank fell short of well
capitalized by approximately $970 million. The size of the shortfall and the
clarity of the regulation undercut the Bank’s argument that meeting all
three capital tests should not be required in this situation.
To its credit, the Bank took steps to raise its capital level as soon as
it learned of the shortfall. That is one purpose of the regulation: to give
banks an incentive to maintain strong capital levels. But moving quickly to
restore well-capitalized status does not excuse the Bank’s failure to comply
with the regulatory structure in general or section 327.4(a)(1) in
Finally, the Bank contends that assessing it at the CG “2” rate for the
July semiannual period is an “unreasonable penalty” and “inconsistent with
the intent of a risk-based assessment system.” Assessments are not
penalties; they are premiums charged by the FDIC for deposit insurance. The
imposition of an increased assessment goes to the heart of the risk-based
system: Institutions with lowered capital levels pose a greater risk to the
insurance fund and pay higher premiums. Moreover, the request for proration
of the higher risk classification for the period from April 1 to May 19,
2004 is inconsistent with the system created under the FDIC’s regulations.
In fact, when the FDIC Board modified the Risk Based Assessment System in
1994, it expressly declared “Under the final rule, as under the proposal,
assessment risk classifications will be assigned, and applied,
semiannually.” 59 Fed. Reg. 67153, 67156 (Dec. 29, 1994). In effect, the
Bank would have the Committee change the FDIC’s current regulation to allow proration of semiannual assessments, which the Committee cannot do.
In AAC Case No. 2000-01 (Jan. 11, 2001), the Committee denied relief to
an institution on facts essentially similar to those at issue here. In Case
No. 2000-01, the bank’s risk classification fell from “1A” to “2A” when Call
Report amendments were filed to correct miscalculations, which in turn
caused the bank’s capital ratios to fall below the well-capitalized
thresholds. The bank sought relief from the application of section
327.4(a)(1) but was denied because the circumstances presented for waiver of
the CG regulation were not unique and application of the regulation was not
inequitable. According to the Committee, “consistent application of
reasonable rules is extremely important. It is a general belief that while
exceptions to the rules may, under compelling circumstances, be considered,
such must be both rare and well supported if the system is to maintain
Relief has been granted by this Committee where the institution – having
planned certain future transactions – agreed with the FDIC before the
capital cutoff date that the institution would be treated as well
capitalized (AAC Case No. 2002-01 (Feb. 25, 2002)), and where unique
circumstances prevented the institution, through no fault of its own, from
consummating a previously arranged transaction that would have made the
institution well capitalized on the cutoff date, once by terrorist acts (AAC
Case No. 2002-02 (April 23, 2002)) and once by the primary federal
regulator’s delay in granting a needed approval (AAC Case No.
23, 2004)). In each of these cases, relief was fashioned to preserve the
assignment and application of risk classifications on a semiannual basis.
After considering all of the facts and arguments presented by the Bank in
its written submission and its oral presentation, the Committee finds that
the circumstances presented are not unique nor is application of the capital
group cutoff regulation in this instance inequitable.
The Bank’s capital group assignment for the July 2004 semiannual period
was based on data reported in its March 31, 2004 Call Report, and the Bank
was correctly assigned to capital group “2” for that period. While the
Committee is sympathetic to the Bank’s position and appreciates its efforts
to return quickly to well-capitalized status, no basis for granting relief
from application of the capital group regulation is presented here.
Accordingly, for the reasons set forth in this decision, the Bank’s appeal
By direction of the Assessment Appeals Committee, dated January 13, 2005.