69282 Federal Register / Vol. 71, No. 230 / Thursday, November 30, 2006 / Rules and Regulations 

1Federal Deposit Insurance Reform Act of 2005, 

Public Law 109–171, 120 Stat. 9; Federal Deposit 

Insurance Conforming Amendments Act of 2005, 

Public Law 109–173, 119 Stat. 3601. 

2Section 2109(a)(5) of the Reform Act. Pursuant 

to the Section 2109 of the Reform Act, current 

assessment regulations remain in effect until the 

effective date of new regulations. Section 2109(a)(5) 

of the Reform Act requires the FDIC, within 270 

days of enactment, to prescribe final regulations, 

after notice and opportunity for comment, 

providing for assessments under section 7(b) of the 

Federal Deposit Insurance Act. Section 2109 also 

requires the FDIC to prescribe, within 270 days, 

rules on the designated reserve ratio, changes to 

deposit insurance coverage, the one-time 

assessment credit, and dividends. A final rule on 

deposit insurance coverage was published on 

September 12, 2006. 71 FR 53547. Final rules on 

the one-time assessment credit and dividends were 

published on October 18, 2006. 71 FR 61374; 71 FR 

61385. The FDIC is publishing final rulemakings on 

the designated reserve ratio and on operational 

changes to part 327 elsewhere in this issue of the 

Federal Register. 

3The comment period expired on September 22, 

2006. The FDIC also received many comments 

relevant to this rulemaking in response to the other 

rulemakings discussed in footnote 2. All comments 

have been considered and are available on the 

FDIC’s Web site, http://www.fdic.gov/regulations/ 

laws/federal/propose.html. 4The trade associations included the American 

Bankers Association, the Independent Community 

Bankers of America, America’s Community 

Bankers, the Clearing House, the Financial Services 

Roundtable, the New York Bankers Association, the 

New Jersey League of Community Bankers, the 

Massachusetts Bankers Association, the Kansas 

Bankers Association, and the Association for 

Financial Professionals. 5The FDIC’s regulations refer to these risk 

categories as ‘‘assessment risk classifications.’’ 6The term ‘‘primary federal regulator’’ is 

synonymous with the statutory term ‘‘appropriate 

federal banking agency.’’ 12 U.S.C. 1813(q). 

consecutive quarters, the FDIC will 

reclassify the institution as small 

beginning the following quarter. 

(h) Large Institution. An insured 

depository institution with assets of $10 

billion or more as of December 31, 2006 

(other than an insured branch of a 

foreign bank) shall be classified as a 

large institution. If, after December 31, 

2006, an institution classified as small 

under paragraph (g) of this section 

reports assets of $10 billion or more in 

its reports of condition for four 

consecutive quarters, the FDIC will 

reclassify the institution as large 

beginning the following quarter. 

(i) Long-Term Debt Issuer Rating. A 

long-term debt issuer rating shall mean 

a current rating of an insured depository 

institution’s long-term debt obligations 

by Moody’s Investor Services, Standard 

& Poor’s, or Fitch Ratings. A long-term 

debt issuer rating does not include a 

rating of a company that controls an 

insured depository institution, or an 

affiliate or subsidiary of the institution. 

A current rating shall mean one that has 

been confirmed or assigned within 12 

months before the end of the quarter for 

which an assessment rate is being 

determined. If no current rating is 

available, the institution will be deemed 

to have no long-term debt issuer rating. 

(j) CAMELS composite and CAMELS 

component ratings. The terms CAMELS 

composite ratings and CAMELS 

component ratings shall have the same 

meaning as in the Uniform Financial 

Institutions Rating System as published 

by the Federal Financial Institutions 

Examination Council. 

(k) ROCA supervisory ratings. ROCA 

supervisory ratings rate risk 

management, operational controls, 

compliance, and asset quality. 

(l) New depository institution. A new 

insured depository institution is a bank 

or thrift that has not been chartered for 

at least five years as of the last day of 

any quarter for which it is being 

assessed. 

(m) Established depository institution. 

An established institution is a bank or 

thrift that has been chartered for at least 

five years as of the last day of any 

quarter for which it is being assessed. 

(n) Risk assignment. An institution’s 

risk assignment includes assignment to 

Risk Category I, II, III, or IV, and, within 

Risk Category I, assignment to an 

assessment rate or rates. 

By order of the Board of Directors. 

Dated at Washington, DC, this 2nd day of 

November, 2006. 

Federal Deposit Insurance Corporation. 

Robert E. Feldman, 

Executive Secretary. 

[FR Doc. 06–9267 Filed 11–29–06; 8:45 am] 

BILLING CODE 6714–01–P 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Part 327 

RIN 3064–AD09 

Assessments 

AGENCY: Federal Deposit Insurance 

Corporation (FDIC). 

ACTION: Final rule. 

SUMMARY: The Federal Deposit 

Insurance Reform Act of 2005 requires 

that the Federal Deposit Insurance 

Corporation (the FDIC) prescribe final 

regulations, after notice and opportunity 

for comment, to provide for deposit 

insurance assessments under section 

7(b) of the Federal Deposit Insurance 

Act (the FDI Act). In this rulemaking, 

the FDIC is amending its regulations to 

create a new risk differentiation system, 

to establish a new base assessment rate 

schedule, and to set assessment rates 

effective January 1, 2007. 

DATES: Effective Date: January 1, 2007. 

FOR FURTHER INFORMATION CONTACT: 

Munsell W. St. Clair, Senior Policy 

Analyst, Division of Insurance and 

Research, (202) 898–8967; or 

Christopher Bellotto, Counsel, Legal 

Division, (202) 898–3801. 

SUPPLEMENTARY INFORMATION: 

I. Background 

On February 8, 2006, the President 

signed the Federal Deposit Insurance 

Reform Act of 2005 into law; on 

February 15, 2006, he signed the Federal 

Deposit Insurance Reform Conforming 

Amendments Act of 2005 (collectively, 

the Reform Act).1 The Reform Act 

enacts the bulk of the recommendations 

made by the FDIC in 2001. The Reform 

Act, among other things, requires that 

the FDIC, within 270 days, ‘‘prescribe 

final regulations, after notice and 

opportunity for comment * * * 

providing for assessments under section 

7(b) of the Federal Deposit Insurance 

Act, as amended * * * ,’’ thus giving 

the FDIC, through its rulemaking 

authority, the opportunity to better price 

deposit insurance for risk.2

On July 24, 2006, the FDIC published 

in the Federal Register, for a 60-day 

comment period, a notice of proposed 

rulemaking providing for deposit 

insurance assessments (the NPR). 71 FR 

41910. The FDIC sought public 

comment on its proposal and received 

707 comment letters, including 

numerous comments from trade 

organizations.3 4 The comments and the 

final rule providing for assessments are 

discussed in later sections. 

A. The Current Risk-Differentiation 

Framework 

The Federal Deposit Insurance 

Corporation Improvement Act of 1991 

(FDICIA) required that the FDIC 

establish a risk-based assessment 

system. To implement this requirement, 

the FDIC adopted by regulation a system 

that places institutions into risk 

categories 5 based on two criteria: 

capital levels and supervisory ratings. 

Three capital groups—well capitalized, 

adequately capitalized, and 

undercapitalized, which are numbered 

1, 2 and 3, respectively—are based on 

leverage ratios and risk-based capital 

ratios for regulatory capital purposes. 

Three supervisory subgroups, termed A, 

B, and C, are based upon the FDIC’s 

consideration of evaluations provided 

by the institution’s primary federal 

regulator and other information the 

FDIC deems relevant.6 Subgroup A 


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7CAMELS is an acronym for component ratings 

assigned in a bank examination: Capital adequacy, 

Asset quality, Management, Earnings, Liquidity, 

and Sensitivity to market risk. A composite 

CAMELS rating combines these component ratings, 

which also range from 1 (best) to 5 (worst). 

8 12 U.S.C. 1817(b)(1)(A) and (C). The Bank 

Insurance Fund and Savings Association Insurance 

Fund were merged into the newly created Deposit 

Insurance Fund on March 31, 2006. 

9The Reform Act eliminates the prohibition 

against charging well-managed and well-capitalized 

institutions when the deposit insurnace fund is at 

or above, and is expected to remain at or above, the 

designated reserve ratio (DRR). This prohibition 

was inclulded as part of the Deposit Insurance 

Funds Act of 1996. Public Law 104–208, 110 Stat. 

3009, 3009–479. However, while the Reform Act 

allows the DRR to be set between 1.15 percent and 

1.50 percent, it also generally requires dividends of 

one-half of any amount in the fund in excess of the 

amount required to maintain the reserve ratio at 

1.35 percent when the insurance fund reserve ratio 

exceeds 1.35 percent at the end of any year. The 

Board can suspend these dividends under certain 

circumstances. 12 U.S.C. 1817(e)(2). 

10 12 U.S.C. 1817(b)(1)(D). 

11Section 2104(a)(2) of the Reform Act (to be 

codified at 12 U.S.C. 1817(b)(2)(D)). 

consists of financially sound 

institutions with only a few minor 

weaknesses; subgroup B consists of 

institutions that demonstrate 

weaknesses that, if not corrected, could 

result in significant deterioration of the 

institution and increased risk of loss to 

the insurance fund; and subgroup C 

consists of institutions that pose a 

substantial probability of loss to the 

insurance fund unless effective 

corrective action is taken. In practice, 

the subgroup evaluations are generally 

based on an institution’s composite 

CAMELS rating, a rating assigned by the 

institution’s supervisor at the end of a 

bank examination, with 1 being the best 

rating and 5 being the lowest.7

Generally speaking, institutions with a 

CAMELS rating of 1 or 2 are put in 

supervisory subgroup A, those with a 

CAMELS rating of 3 are put in subgroup 

B, and those with a CAMELS rating of 

4 or 5 are put in subgroup C. Thus, in 

the current assessment system, the 

highest-rated (least risky) institutions 

are assigned to category 1A and the 

lowest-rated (riskiest) institutions to 

category 3C. The three capital groups 

and three supervisory subgroups form a 

nine-cell matrix for risk-based 

assessments: 

B. Reform Act Provisions 

The Federal Deposit Insurance Act, as 

amended by the Reform Act, continues 

to require that the assessment system be 

risk-based and allows the FDIC to define 

risk broadly. It defines a risk-based 

system as one based on an institution’s 

probability of causing a loss to the 

deposit insurance fund due to the 

composition and concentration of the 

institution’s assets and liabilities, the 

amount of loss given failure, and 

revenue needs of the Deposit Insurance 

Fund (the fund).8

At the same time, the Reform Act also 

restores to the FDIC’s Board of Directors 

the discretion to price deposit insurance 

according to risk for all insured 

institutions regardless of the level of the 

fund reserve ratio.9

The Reform Act leaves in place the 

existing statutory provision allowing the 

FDIC to ‘‘establish separate risk-based 

assessment systems for large and small 

members of the Deposit Insurance 

Fund.’’ 10 Under the Reform Act, 

however, separate systems are subject to 

a new requirement that ‘‘[n]o insured 

depository institution shall be barred 

from the lowest-risk category solely 

because of size.’’ 11

II. Summary of the Final Rule 

The final rule is set out in detail in 

ensuing sections, but is briefly 

summarized here. 

The final rule consolidates the 

existing nine risk categories into four 

and names them Risk Categories I, II, III 

and IV. Risk Category I replaces the 1A 

risk category. 

Within Risk Category I, the final rule 

combines supervisory ratings with other 

risk measures to differentiate risk. For 

most institutions, the final rule 

combines CAMELS component ratings 

with financial ratios to determine an 

institution’s assessment rate. For large 

institutions that have long-term debt 

issuer ratings, the final rule 

differentiates risk by combining 

CAMELS component ratings with these 

ratings. For large institutions within 

Risk Category I, initial assessment rate 

determinations may be modified within 

limits upon review of additional 

relevant information. 

The final rule defines a large 

institution as an institution that has $10 

billion or more in assets. With certain 

exceptions, beginning in 2010, the final 

rule treats new institutions (those 

established for less than five years) in 

Risk Category I the same, regardless of 

size, and assesses them at the maximum 

rate applicable to Risk Category I 

institutions. 

The final rule sets actual rates 

beginning January 1, 2007, as follows: 

Risk Category 

I * 

II III IV 

Minimum Maximum 

Annual Rates (in basis points) ........................................................................................................... 5 7 10 28 43 

* Rates for institutions that do not pay the minimum or maximum rate vary between these rates. 


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12Under current regulations, bridge banks and 

institutions for which the FDIC has been appointed 

or serves as conservator are charged the assessment 

rate applicable to the 2A category. 12 CFR 327.4(c). 

The final rule places these institutions in Risk 

Categoryd I and charges them the minimum rate 

applicable to that category. 13For clarity, the final rule uses the phrase 

‘‘Supervisory Group’’ to replace ‘‘Supervisory 

Subground.’’ The final rule also designates the 

capital categories as ‘‘Well Capitalized,’’

‘‘Adequately Capitalized’’ and ‘‘Undercapitalilzed,’’

rather than Capital Groups 1, 2 and 3. However, the 

definitions of the Supervisory Groups and Capital 

Group have not changed in substance. 

These rates are three basis points 

above the base rate schedule adopted in 

the final rule: 

Risk Category 

I * 

II III IV 

Minimum Maximum 

Annual Rates (in basis points) ........................................................................................................... 2 4 7 25 40 

* Rates for institutions that do not pay the minimum or maximum rate vary between these rates. 

The final rule continues to allow the 

FDIC Board to adjust rates uniformly 

from one quarter to the next, except that 

no single adjustment can exceed three 

basis points. In addition, cumulative 

adjustments cannot exceed a maximum 

of three basis points higher or lower 

than the base rates without further 

notice-and-comment rulemaking. 

III. General Risk Differentiation 

Framework 

The final rule consolidates the 

number of assessment risk categories 

from nine to four. The four new 

categories will continue to be defined 

based upon supervisory and capital 

evaluations, which are both established 

measures of risk. The consolidation 

creates four new Risk Categories as 

shown in Table 1: 

Risk Category I contains all wellcapitalized institutions in Supervisory 

Group A (generally those with CAMELS 

composite ratings of 1 or 2); i.e., those 

institutions that would be placed in the 

former 1A category. Risk Category II 

contains all institutions in Supervisory 

Groups A and B (generally those with 

CAMELS composite ratings of 1, 2 or 3), 

except those in Risk Category I and 

undercapitalized institutions.12 Risk 

Category III contains all 

undercapitalized institutions in 

Supervisory Groups A and B, and 

institutions in Supervisory Group C 

(generally those with CAMELS 

composite ratings of 4 or 5) that are not 

undercapitalized. Risk Category IV 

contains all undercapitalized 

institutions in Supervisory Group C; i.e., 

those institutions that would be placed 

in the former 3C category.13

Comments 

No comments disagreed with the 

proposed reduction in the number of 

risk categories from nine to four. 

However, one comment recommended 

adding subcategories to Risk Category I 

to provide a warning to institutions that 

are moving toward Risk Category II if 

corrective action is not taken and giving 

an institution that slips from Risk 

Category I to Risk Category II an 

opportunity to show quick 

improvement. The FDIC does not 

believe that these subcategories are 

necessary. For an institution in Risk 

Category I, its assessment rate will 

provide the same information. The FDIC 

also does not believe that special 

treatment should be accorded an 

institution that slips from Risk Category 

I, as opposed to other institutions 

already in Risk Category II. 

Some comments argued that, for 

CAMELS 3, 4 and 5-rated institutions in 

Risk Categories II and III, some 

provision for lower premiums should be 

made for institutions that augment and 

maintain strong capital, maintain 

adequate reserves for loan losses and 

have a plan for recovery approved by 

the FDIC. The FDIC does not see a need 

for special provisions for these 

institutions, as they have other 

incentives to improve capital and 

business operations. 

IV. Risk Differentiation Within Risk 

Category I 

A. Overview 

Risk Category I, as of June 30, 2006, 

would include approximately 95 

percent of all insured institutions. The 

final rule will further differentiate risk 

within this category using one of two 

methods. Both methods share a common 

feature, namely, the use of CAMELS 

component ratings. However, each 

method combines these measures with 

different sources of information on risk. 

For small institutions within Risk 

Category I and for large institutions 

within Risk Category I that do not have 

long-term debt issuer ratings, the final 

rule combines CAMELS component 

ratings with current financial ratios to 

determine an institution’s assessment 

rate. For large institutions within Risk 

Category I that have long-term debt 


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issuer ratings, the final rule combines 

CAMELS component ratings with these 

debt ratings. For all large institutions, 

initial assessment rates may be modified 

within limits upon review of additional 

relevant information. 

The risk differentiation methods for 

institutions in Risk Category I measure 

levels of risk and result in rank 

orderings of risk within the category. 

Within Risk Category I, the final rule 

assesses those institutions that pose the 

least risk a minimum assessment rate 

and those that pose the greatest risk a 

maximum assessment rate that is two 

basis points higher than the minimum 

rate. An institution that poses an 

intermediate risk within Risk Category I 

will be charged a rate between the 

minimum and maximum that will vary 

by institution. Under the final rule, 

small changes in an institution’s 

financial ratios, long-term debt issuer 

ratings or CAMELS component ratings 

should produce only small changes in 

assessment rates. 

The final rule defines a large 

institution as an institution that has $10 

billion or more in assets and a small 

institution as an institution that has less 

than $10 billion in assets. Also, as 

described below in Section VII, 

beginning in 2010, with certain 

exceptions, the final rule treats new 

institutions in Risk Category I the same, 

regardless of size, and assesses them at 

the maximum rate applicable to Risk 

Category I institutions. 

B. Distribution of Assessment Rates 

As stated above, within Risk Category 

I, the final rule results in assessing those 

institutions that pose the least risk a 

minimum assessment rate and those 

that pose the greatest risk a maximum 

assessment rate that is two basis points 

higher. An institution that poses an 

intermediate risk within Risk Category I 

will be charged a rate between the 

minimum and maximum that will vary 

incrementally by institution. 

In this regard, the final rule differs 

from the NPR in its application to large 

institutions. The NPR had proposed 

assessing large institutions that posed 

an intermediate risk within Risk 

Category I one of four rates between the 

minimum and maximum based on 

subcategory assignments. A number of 

comments expressed concern over the 

proposed use of assessment rate 

subcategories and the possibility that 

large increases (and decreases) in 

assessment rates could result from 

relatively small changes in risk. Some of 

these comments recommended using as 

few as three assessment rate 

subcategories, and some comments 

recommended using incremental 

pricing, as proposed in the NPR for 

small institutions. The FDIC has 

decided to adopt an incremental pricing 

framework for all institutions so that a 

small change in risk will produce a 

small change in assessment rates. 

Under the final rule, as of June 30, 

2006: (1) Approximately 45 percent of 

all institutions that would have been in 

Risk Category I (other than institutions 

less than 5 years old) would have been 

charged the minimum assessment rate; 

and (2) approximately 5 percent of all 

institutions that would have been in 

Risk Category I (other than institutions 

less than 5 years old) would have been 

charged the maximum assessment rate. 

In future periods, different percentages 

of institutions may be charged the 

minimum and maximum rates. 

Chart 1 shows the cumulative 

distribution of assessment rates based 

on June 30, 2006 data, using base 

assessment rates for institutions in Risk 

Category I. The chart excludes Risk 

Category I institutions less than 5 years 

old. 


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14See Table 1.6 in Appendix 1 to the NPR, 71 FR 

41910. 

15The FDIC and other bank supervisors do not 

use a weighting system to determine CAMELS 

composite ratings. The weights in the table reflect 

the view of the FDIC regarding the relative 

importance of each of the CAMELS components for 

differentiating risk among institutions in Risk 

Category I for deposit insurance purposes. Different 

weights might apply if this measure were being 

used to evaluate risk for deposit insurance purposes 

for all institutions, including those outside Risk 

Category I. 

Comments 

Percentages of institutions paying the 

minimum rate. A comment agreed that 

charging 45 percent of institutions the 

minimum rate makes sense given the 

current health of the banking industry. 

Several comments (including comments 

from some trade groups), however, 

suggested that initially charging 45 

percent of institutions the minimum 

rate was arbitrary or inappropriate. 

These comments suggested initially 

charging a larger percentage of 

institutions the minimum rate, at least 

in part, because risk in the banking 

industry is very low at present. 

Two comments expressed the view 

that the decision to place roughly 45 

percent of large institutions in the 

minimum assessment rate subcategory 

and 5 percent in the maximum 

assessment rate subcategory was 

subjective and arbitrary. In one of these 

comments, it was suggested that large 

institutions might be restricted from the 

lowest premium rate by this decision. 

Several other comments also urged the 

FDIC to expand the availability of the 

minimum assessment rate to a larger 

proportion of large institutions. Some 

comments argued for the elimination of 

premiums altogether for the highestrated large institutions. 

The FDIC has found that small 

institutions with a probability of 

downgrade to a CAMELS 3 or worse that 

is equal to or less than the probability 

of downgrade for the 40th to 50th 

percentile as of June 30, 2006, had 

minimal risk of a CAMELS downgrade 

over time. The remainder of small 

institutions in the industry had 

increasing and distinguishable risk of 

CAMELS downgrades. The FDIC 

believes it is appropriate to initially 

assign roughly similar proportions of 

large and small institutions to the 

minimum assessment rate to achieve 

parity. While the initial proportions of 

large and small institutions being 

charged the minimum and maximum 

rates will be similar, the final rule does 

not fix the proportions for the future. 

Thus, in future periods, more or less 

than 45 percent of large (or small) 

institutions may pay the minimum rate 

and more or less than 5 percent may pay 

the maximum rate. 

Risk Category I assessment rate 

spread. Several comments (including 

comments from trade groups) 

recommended that the FDIC eliminate 

or narrow the spread between the 

minimum and maximum base rates for 

Risk Category I. Arguments in favor of 

eliminating or narrowing the spread 

included: 

• The new risk differentiation system 

is untested and could lead to 

unintended consequences. 

• Improvements in bank riskmanagement systems, improvements in 

supervisory evaluations and off-site 

monitoring, and enhanced supervisory 

powers enjoyed by the regulators have 

reduced risk. 

• A narrower spread would reduce 

the adverse effect of changes in 

subcategories on large banks and the 

adverse effect of paying the maximum 

rate on new banks. 

Other comments (including comments 

from some trade groups) recommended 

increasing the spread between 

minimum and maximum assessment 

rates for Risk Category I to 3 basis 

points. According to these comments, a 

wider spread would improve risk 

differentiation and could subject more 

institutions to incremental rates 

between the minimum and maximum 

rates. 

The final rule strikes a balance 

between the arguments for a narrower 

spread and those for a wider spread. 

The two basis point spread adopted in 

the final rule is narrower than the 

historical loss data would suggest.14

However, as the comments have noted, 

the new system is, as yet, untested. 

C. CAMELS Ratings 

For all institutions in Risk Category I, 

supervisory ratings will be taken into 

account in setting assessment rates 

using a weighted average of an 

institution’s CAMELS components. This 

weighted average will be created by 

combining the components as 

follows: 15

Comments 

Almost every comment that discussed 

the use of CAMELS ratings to 

differentiate risk within Risk Category I 

supported their use. One comment 

questioned their use and a few 

comments opposed any differentiation 

within Risk Category I. 

One trade group asserted that the 

FDIC should use a simple, rather than 

weighted, average of CAMELS 

components on the grounds that using 

financial ratios related to these 

components effectively weights the 

components. The trade group noted that 

capital, for example, is already reflected 

in an institution’s risk category and as 

a CAMELS component. The trade group 

also asserted that asset quality is given 

extra emphasis in the proposed 

weighting scheme by including several 

asset quality financial ratios as well as 

the A rating in the CAMELS component 

average. With regards to the M 

component, the trade group asserted 

that: 

Management—the most subjective of all 

the CAMELS components—must by necessity 

be involved in all the financial ratios and 

other examination components. In practice, 


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16The NPR used the phrase ‘‘nonperforming 

loans’’ rather than ‘‘nonperforming assets.’’ Because 

this ratio includes repossessed real estate in the 

numerator, the FDIC has concluded that the phrase 

‘‘nonperforming assets’’ would be more accurate. 

No change in the definition of the ratio is intended 

by this name change (although, as discussed later, 

a slight revision to the definition is being made for 

other reasons). 

17The largest item in volatile liabilities for the 

great majority of institutions is time-and-savings 

deposits greater than $100,000. Institutions that file 

Call Reports report this figure, but institutions that 

file TFRs do not report this item separately. Instead, 

they report all deposits greater than $100,000, 

including demand deposits. Time-and-savings 

deposits greater than $100,000 cannot be 

determined from TFRs. 

18One comment suggested excluding total loans 

and lease financing receivables past due 30 to 59 

days in the ratio. Call Reports and TFRs currently 

do not collect separate data on loans and lease 

financing receivables past due 30 to 59 days; thus, 

it is not feasible to exclude these past due 

receivables from the ratio. 

therefore, it is unlikely that examiners would 

rate management higher than the other 

components. Thus, there is always a bias 

against a high management rating. 

Several comments proposed different 

weighting schemes for large institutions, 

such as heavier weights for Liquidity, 

Capital, and Asset quality. 

The final rule retains the weights 

proposed in the NPR to determine the 

weighted average CAMELS component 

rating. These weights reflect the view of 

the FDIC on the relative importance of 

each of the CAMELS components in 

differentiating risk among institutions in 

Risk Category I for deposit insurance 

purposes. 

D. Financial Ratios 

For small institutions and for large 

institutions without a long-term debt 

issuer rating, the final rule uses certain 

financial ratios, in addition to 

supervisory ratings, to differentiate risk. 

The final rule differs slightly from the 

proposal in the NPR with respect to the 

financial ratios being used and their 

definitions. 

The financial ratios that will be used 

are: 

• The Tier 1 Leverage Ratio; 

• Loans past due 30–89 days/gross 

assets; 

• Nonperforming assets/gross 

assets; 16

• Net loan charge-offs/gross assets; 

and 

• Net income before taxes/riskweighted assets. 

The Tier 1 Leverage Ratio has the 

definition used for regulatory capital 

purposes. Appendix A defines each of 

the ratios. 

Many comments (including comments 

from several industry trade groups) 

opposed including time deposits greater 

than $100,000 in the definition of 

volatile liabilities for a variety of 

reasons, including: (1) These deposits 

are core deposits or should be so 

considered; and (2) including them 

would have an effect on attracting 

municipal deposits. One comment 

opposed including brokered deposits in 

the definition of volatile liabilities on 

the grounds that they are less volatile 

than many core deposits. One trade 

group argued that deposits in excess of 

$100,000 that are insured by excess 

deposit insurance should not be 

included in the definition of volatile 

liabilities. 

The final rule eliminates the basis for 

these concerns by excluding one of the 

financial ratios proposed in the NPR, 

the ratio of volatile liabilities to gross 

assets. The financial data used to 

compute volatile liabilities reported by 

thrifts in the Thrift Financial Reports 

(TFRs) and reported by banks in their 

Reports of Condition and Income (Call 

Reports) were not compatible and could 

not be made compatible without 

changes in reporting requirements.17

The final rule also excludes the 

portion of loans and leases that is 

guaranteed by the U.S. Government, 

including government agencies and 

government-sponsored agencies, from 

the computation of loans past due 30–

89 days and from the computation of 

non-performing assets. These types of 

guaranteed loans are treated as less risky 

than other loans for risk-based capital 

purposes. Moreover, the use of past due 

and nonaccrual loan measures that do 

not adjust for these guaranteed loans 

might overstate credit risk and result in 

assessment rates that are too high for 

some institutions. 

Comments 

Almost all comments (including 

comments from a trade group) on using 

financial ratios (in addition to CAMELS 

ratings) to determine assessment rates 

supported their use. However, some 

suggested that different financial ratios 

be used. 

In the NPR, the definition of volatile 

liabilities did not include Federal Home 

Loan Bank advances, but the FDIC asked 

for comment on whether it should. The 

FDIC received 569 comments on this 

issue. All but one argued that the 

definition of volatile liabilities should 

not include Federal Home Loan Bank 

advances; one argued that the definition 

should include these advances. The 

final rule does not include the volatile 

liability ratio. 

A trade group suggested excluding the 

loans past due 30–89 days to gross 

assets ratio on the grounds that loan 

delinquencies are already considered in 

two CAMELS components, A (Assets) 

and M (Management). The final rule 

retains the loans past due 30–89 days to 

gross assets ratio. Independent of the 

CAMELS components, this ratio is 

statistically significant and highly 

predictive of CAMELS downgrades and 

institution failures even when it is 

considered together with the 

nonperforming ratio.18

A trade group commented that the 

risk weighting formula used to establish 

risk weighted assets is biased against 

residential mortgage lenders. It argued 

that, since they are secured by property 

liens, all 1–4 family, owner occupied 

residential mortgage loans with a loanto-value ratio under 80 percent should 

be given a risk weighting of zero. 

In the final rule, pre-tax earnings are 

divided by risk-weighted assets rather 

than by gross assets to avoid penalizing 

certain types of institutions, including 

those that hold low-risk and lowyielding assets. The FDIC’s analysis 

shows that institutions specializing in 

mortgage lending are not charged a 

higher average assessment rate than 

other institutions under the final rule. 

Moreover, Call Reports and TFRs 

currently do not collect separate data on 

the loan-to-value ratio for 1–4 family, 

owner occupied residential mortgage 

loans; thus, it is not feasible to treat 

loans with a low loan-to-value ratio 

differently. 

This trade group also requested that 

the FDIC study how mutual institutions 

are affected by including earnings in the 

financial ratios. The FDIC found that, 

while mutual institutions typically have 

a lower ratio of pre-tax earnings to riskweighted assets, they typically have a 

higher Tier 1 leverage ratio and lower 

non-performing loan and charge-off 

ratios than other small institutions in 

Risk Category I. As a result, mutual 

institutions are not charged a higher 

average assessment rate than other 

institutions under the final rule. 

Another trade group advocated 

averaging financial ratios over a period 

not less than four quarters, arguing that 

taking ‘‘a one-quarter snap shot’’ can be 

a misleading indicator of risk, since 

many financial institutions can 

experience seasonal variations. By 

averaging, these seasonalities would be 

removed. 

The final rule uses a four-quarter sum 

for two of the five financial ratios—the 

pre-tax earnings and net charge-offs 

ratios—to reduce volatility related to 

seasonality. The final rule uses the 

values of the three other financial ratios 

as of each quarter-end for several 

reasons. First, the seasonality of these 


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69288 Federal Register / Vol. 71, No. 230 / Thursday, November 30, 2006 / Rules and Regulations 

19That is, Moody’s, Standard & Poor’s, and Fitch. 

20The FDIC is aware of the enactment of the 

Credit Rating Agency Reform Act of 2006, Public 

Law 109–291. However, this legislation has not yet 

been implemented. The Act requires the Securities 

and Exchange Commission to issue final 

implementing regulations within 270 days of 

enactment. The FDIC expects to revisit how best to 

incorporate the ratings of other agencies in the 

future. Any future revisions would involve noticeand-comment rulemaking. 

21There are, at present, only a few cases where 

holding company debt issuer ratings are available 

and insured entity debt issuer ratings are not. Of 

these, two cases involve entities owned by nonbank parents. Where both holding company ratings 

and insured entity debt issuer ratings exist, most 

insured entity ratings are better (indicating lower 

risk) than those of the parent company. 

financial ratios is more modest. Second, 

with a quarterly computation of 

assessment rates, the average assessment 

rate an institution would be charged 

throughout the year would roughly 

equate to the assessment rate calculated 

with average ratios. Third, averaging 

financial ratios over time has the 

disadvantage of blunting the effect of 

changes in an institution’s financial 

condition that are not related to 

seasonality; thus, averaging ratios would 

prevent assessments from fully 

adjusting to changes in risk. 

One trade group supported the FDIC’s 

use of a Tier 1 leverage ratio and 

suggested that it should be weighted 

heaviest among the financial ratios 

considered. However, several comments 

(including comments from other trade 

groups) stated that capital should be 

measured by a risk-adjusted capital ratio 

rather than the Tier 1 leverage ratio 

because a risk-adjusted capital ratio is a 

better measure of capital adequacy. 

Several comments stated that the 

FDIC should not use a Tier 1 leverage 

ratio to determine assessment rates for 

large institutions, in particular. One of 

these comments argued that this ratio is 

not an accurate measure of risk, 

effectively penalizes institutions that 

invest in high quality short-term assets, 

such as U.S. government securities, and 

places U.S. banks at a competitive 

disadvantage with foreign banks. 

Another comment suggested that larger 

institutions might tend to be penalized 

by inclusion of a leverage ratio. 

The final rule uses the Tier 1 leverage 

ratio. The Tier 1 leverage ratio is highly 

significant in predicting CAMELS 

downgrades and failures. Using a riskbased capital measure in place of the 

Tier 1 leverage ratio does not improve 

predictive accuracy. For the relatively 

few large Risk Category I institutions 

that do not have long-term debt issuer 

ratings, the FDIC’s ability to adjust 

assessment rates based on consideration 

of other risk information, as discussed 

below, should ensure that these 

institutions are treated equitably. 

Several comments (including 

comments from several trade groups) 

stated that the capital measure should 

include subordinated debt and stated or 

implied that subordinated debt should 

reduce assessment rates because it 

would reduce loss given failure. Several 

comments (including comments from 

some trade groups) argued that the 

statutes governing the risk-based pricing 

system require that the FDIC take loss 

given failure into account when 

determining assessments and that the 

proposed system does not do so. 

Because it does not do so, they argue, 

the assessment system is actuarially 

unfair. These issues are discussed in a 

subsequent section (Section IX). 

One commenter explicitly argued 

that, for large institutions in Risk 

Category I, only CAMELS components 

should be used to differentiate risk. 

However, the comment also implied 

that only CAMELS components should 

be used for all Risk Category I 

institutions, including small 

institutions. The method adopted in the 

final rule, which combines financial 

ratios and supervisory ratings, predicts 

downgrades better than one without 

financial ratios. For this reason, the final 

rule does not adopt the method 

suggested in the comment. 

E. Long-Term Debt Issuer Ratings 

For large institutions with long-term 

debt issuer ratings, the final rule uses 

these ratings, in addition to supervisory 

ratings, to differentiate risk. The final 

rule uses the current long-term debt 

issuer rating or ratings assigned by the 

major U.S. rating agencies.19 Debt issuer 

ratings of holding companies and other 

third party debt ratings will not be used 

in the calculation of an assessment rate, 

but may be considered along with other 

information in determining whether 

adjustments to the resulting assessment 

rate are appropriate. Possible 

adjustments to assessment rates are 

discussed in a subsequent section. 

Comments 

A number of comments (including 

comments from some trade groups) 

supported the use of debt issuer ratings 

as an objective measure of risk in large 

institutions and as complementary to 

supervisory ratings. One trade group 

urged the FDIC to use ratings issued by 

any nationally recognized credit rating 

agency; a rating agency requested that 

its ratings be used. The rating agency 

also urged the FDIC to consider agency 

ratings for both small and large 

institutions when available. 

While there is merit in considering 

ratings provided by other rating 

agencies, long-term debt issuer ratings 

issued by the three major U.S. rating 

agencies are widely accepted and used 

by market participants to gauge the 

relative risk of large financial 

institutions for many purposes, 

including the determination of required 

rates of return on institution-issued 

debt. They provide market-based views 

of risk that are complementary to 

supervisory views.20 The final rule does 

not incorporate debt issuer rating 

information into the pricing 

methodology used for smaller 

institutions; however, as described in a 

subsequent section, institutions with 

assets between $5 billion and $10 

billion may request to be treated as a 

large institution for pricing purposes. 

Other comments (including comments 

from other trade groups) either urged 

caution in the use of agency ratings on 

the grounds of bias in favor of large 

institutions or argued they should not 

be used. The FDIC’s ability to adjust 

assessment rates for large institutions, 

discussed below, should alleviate these 

concerns. 

Several comments urged the FDIC to 

use holding company debt issuer ratings 

to determine assessment rates. These 

comments noted that debt is often 

issued at the parent level, that holding 

companies are required to serve as a 

source of strength to their subsidiary 

institutions, and that holding company 

considerations apply to insured 

subsidiaries due to the cross guarantee 

liabilities of affiliated institutions. 

The long-term debt issuer rating of an 

insured entity relates directly to the risk 

in that particular entity. As noted in the 

NPR, the risk profiles of affiliated 

institutions within a holding company 

can differ. Additionally, the value of a 

cross-guarantee in the future is 

uncertain because the financial 

condition of affiliated institutions may, 

in certain circumstances, weigh against 

the FDIC’s invoking such crossguarantee provisions. 

Nevertheless, it is prudent to consider 

all available risk information in setting 

assessment rates. As discussed below, 

the FDIC will consider additional 

information, including any holding 

company debt issuer ratings, in 

determining whether the assessment 

rate for any large institution is 

appropriate.21

F. Combining Supervisory Ratings and 

Financial Ratios 

For small institutions within Risk 

Category I and for large institutions 

within Risk Category I that do not have 

long-term debt issuer ratings, the final 

rule combines supervisory ratings and 


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22The ‘‘S’’ component rating was first assigned in 

1997. Because the statistical analysis relies on data 

from before 1997, the ‘‘S’’ component rating was 

excluded from the analysis. Appendix A describes 

the statistical analysis. 

23 2005 data had to be excluded because the 

analysis is based upon supervisory downgrades 

within one year and 2006 downgrades have yet to 

be determined. 

24Appendix A provides the derivation of the 

pricing multipliers and the uniform amount to be 

added to compute an assessment rate. The rate 

derived will be an annual rate, but will be 

determined every quarter. 

25The uniform amount will be the same for all 

institutions in Risk Category I (other than large 

institutions that have long-term debt issuer ratings, 

insured branches of foreign banks and, beginning in 

2010, new institutions). In the NPR, the FDIC had 

proposed that the uniform amount would be 

adjusted for assessment rates set by the FDIC. The 

final rule is mathematically equivalent. Rather than 

adjusting the uniform amount, the final rule simply 

calculates rates for Risk Category I institutions with 

respect to the base assessment rates, and adjusts all 

rates by the same amount to conform to actual rates. 

26The cutoff value for the minimum assessment 

rate is a predicted probability of downgrade of 

approximately 2 percent. The cutoff value for the 

maximum assessment rate is approximately 14 

percent. 

27These are the base rates for Risk Category I 

adopted in Section VIII. Under the final rule, actual 

rates for any year could be as much as 3 basis points 

higher or lower than the base rates without the 

necessity of notice-and-comment rulemaking. 

Beginning in 2007, actual rates will be 3 basis 

points higher than the base rates. 

financial ratios to determine assessment 

rates. The financial ratios and the 

weighted average CAMELS component 

rating are used to estimate the 

probability that an institution will be 

downgraded to CAMELS 3, 4 or 5 at its 

next examination using data from the 

end of the years 1984 to 2004.22 This 

period covers both periods of stress and 

strength in the banking industry.23 The 

final rule converts the probabilities of 

downgrade to specific base assessment 

rates. The analysis and conversion 

produced the following multipliers for 

each risk measure: 

Risk measures * Pricing 

multipliers * * 

Tier 1 Leverage Ratio ....... (0.042) 

Loans Past Due 30–89 

Days/Gross Assets ....... 0.372 

Nonperforming Assets/ 

Gross Assets ................. 0.719 

Net Loan Charge-Offs/ 

Gross Assets ................. 0.841 

Net Income before Taxes/ 

Risk-Weighted Assets ... (0.420) 

Weighted Average CAMELS Component Rating 0.534 

* Ratios are expressed as percentages. 

* * Multipliers are rounded to three decimal 

places. 

To determine an institution’s 

insurance assessment rate under the 

base assessment rate schedule, each of 

these risk measures (that is, each 

institution’s financial ratios and 

weighted average CAMELS component 

rating) will be multiplied by the 

corresponding pricing multipliers. The 

sum of these products will be added to 

(or subtracted from) a uniform amount, 

1.954.24 The uniform amount is derived 

from a statistical analysis.25 However, 

no rate within Risk Category I will be 

less than the minimum assessment rate 

applicable to the category or higher than 

the maximum assessment rate 

applicable to the category. The final rule 

sets the minimum base assessment rate 

for Risk Category I at two basis points 

and the maximum base assessment rate 

for Risk Category I two basis points 

higher. 

To compute the values of the uniform 

amount and pricing multipliers shown 

above, the FDIC chose cutoff values for 

the predicted probabilities of 

downgrade such that, as of June 30, 

2006: (1) 45 percent of smaller 

institutions that would have been in 

Risk Category I (other than institutions 

less than 5 years old) would have been 

charged the minimum assessment rate; 

and (2) 5 percent of smaller institutions 

that would have been in Risk Category 

I (other than institutions less than 5 

years old) would have been charged the 

maximum assessment rate.26 These 

cutoff values will be used in future 

periods, which could lead to different 

percentages of institutions being 

charged the minimum and maximum 

rates. 

Table 2 gives assessment rates for 

three institutions with varying 

characteristics, assuming the pricing 

multipliers given above, using the base 

assessment rates for institutions in Risk 

Category I (which range between a 

minimum of 2 basis points to a 

maximum of 4 basis points).27


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28The final rule provides that pricing multipliers, 

the uniform amount, and financial ratios will be 

rounded to three digits after the decimal point. 

Resulting assessment rates will be rounded to the 

nearest one-hundredth (1/100th) of a basis point. 

29Reports of condition include Reports of 

Condition and Income and Thrift Financial Reports. 

30See final rule on Operational Changes to 

Assessments, published elsewhere in this issue of 

the Federal Register. However, if the FDIC 

disagrees with the CAMELS composite rating 

assigned by an institution’s primary federal 

regulator, and assigns a different composite rating, 

the supervisory change will be effective for 

assessment purposes as of the date that the FDIC 

assigned the new rating. Disagreements of this type 

have been rare. 

31Pursuant to existing supervisory practice, the 

FDIC does not assign a different component rating 

from that assigned by an institution’s primary 

federal regulator, even if the FDIC disagrees with a 

CAMELS component rating assigned by an 

institution’s primary federal regulator, unless: (1) 

the disagreement over the component rating also 

involves a disagreement over a CAMELS composite 

rating; and (2) the disagreement over the CAMELS 

composite rating is not a disagreement over whether 

the CAMELS composite rating should be a 1 or a 

2. The FDIC has no plans to alter this practice. 

32A rating change that is transmitted before this 

final rule becomes effective (i.e., before January 1, 

2007) will be deemed to have been transmitted 

prior to January 1, 2007. 

33See final rule on Operational Changes to 

Assessments, published elsewhere in this issue of 

the Federal Register. 

The assessment rate for an institution 

in the table is calculated by multiplying 

the pricing multipliers (Column B) by 

the risk measure values (Column C, E or 

G) to produce each measure’s 

contribution to the assessment rate. The 

sum of the products (Column D, F or H) 

plus the uniform amount (the first item 

in Column D, F and H) yields the total 

assessment rate. For Institution 1 in the 

table, this sum actually equals 1.56, but 

the table reflects the assumed minimum 

assessment rate of 2 basis points. For 

Institution 3 in the table, the sum 

actually equals 4.25, but the table 

reflects the assumed maximum 

assessment rate of 4 basis points. 

Under the final rule, the FDIC will 

have the flexibility to update the pricing 

multipliers and the uniform amount 

annually, without further notice-andcomment rulemaking. In particular, the 

FDIC will be able to add data from each 

new year to its analysis and may, from 

time to time, exclude some earlier years 

from its analysis. For example, some 

time during 2007 the FDIC may include 

data in the statistical analysis covering 

the period 1984 to 2005, rather than 

1984 to 2004. Because the analysis will 

continue to use many earlier years’ data 

as well, pricing multiplier changes from 

year to year should usually be relatively 

small. 

On the other hand, as a result of the 

annual review and analysis, the FDIC 

may conclude that additional or 

alternative financial measures, ratios or 

other risk factors should be used to 

determine risk-based assessments or 

that a new method of differentiating for 

risk should be used. In any of these 

events, changes would be made through 

notice-and-comment rulemaking. 

Under the final rule, the financial 

ratios for any given quarter will be 

calculated from the report of condition 

filed by each institution as of the last 

day of the quarter.29 In a separate rule, 

the FDIC has determined that, for 

purposes of assigning an institution to 

one of the four risk categories, changes 

to an institution’s supervisory rating 

will be reflected as of the date that the 

rating change is transmitted to the 

institution.30 This final rule adopts the 

same rule with respect to CAMELS 

component rating changes for purposes 

of determining assessment rates for all 

institutions in Risk Category I.31 32

Using the transmittal date of a ratings 

change for assessment purposes 

represents a change from the method 

proposed in the NPR. Under the NPR, 

transmittal dates would only have been 

used in the absence of an examination 

start date (for example, for a large 

institution with continuous on-site 

supervision). Otherwise, in almost all 

instances, the examination start date 

would have been used. 

The final rule adopts a suggestion 

contained in a banking trade group 

comment and alters the proposed rule 

for several reasons discussed in more 

detail in the final rule on operational 

changes to the assessment system.33

The final rule also differs from the 

NPR for large institutions without longterm debt issuer ratings. The NPR 

proposed determining assessment rates 

for these institutions from insurance 

scores using a weighted average 

CAMELS rating and a financial ratio 

factor, with each weighted 50 percent. 

While the supervisory ratings and 

financial ratios in the final rule are 


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Federal Register / Vol. 71, No. 230 / Thursday, November 30, 2006 / Rules and Regulations 69291 

34The ratio of volatile liabilities to gross assets 

was included in the proposed rule, but is not 

included in the final rule. Other minor changes to 

the ratios have been made. The changes are 

discussed earlier in the text. 

35As of June 30, 2006: (1) the contribution of 

CAMELS component ratings would have exceeded 

50 percent of the assessment rate; and (2) 

assessment rates would have exceeded the 

minimum rate for less than 1.3 percent of small 

institutions in Risk Category I (other than 

institutions less than 5 years old). Most of these 

institutions, however, would have been charged a 

rate only slightly above the minimum rate. For a 

Risk Category I institution being charged the 

minimum rate, the contribution of the weighted 

average CAMELS component rating does not 

increase the institution’s assessment rate. 

36Each component rating will typically, if not 

always, range from ‘‘1’’ to ‘‘3’’ for institutions in 

Risk Category I. 

37Where more than one long-term debt issuer 

rating is available, the converted values will be 

averaged. 

38As of June 30, 2006, approximately 46 percent 

of all large institutions that would have been in 

Risk Category I (other than institutions less than 5 

years old) would have been charged the minimum 

assessment rate and approximately 5 percent of all 

large institutions that would have been in Risk 

Category I (other than institutions less than 5 years 

old) would have been charged the maximum 

assessment rate. 

nearly the same as those proposed in the 

NPR, they are combined differently.34

The approach in the final rule is 

simpler because it uses one consistent 

method for all institutions other than 

those with at least $10 billion in assets 

that have long-term debt issuer ratings. 

Comments 

Supervisory ratings. Several 

comments supported the use of 

supervisory ratings. One comment 

asserted that supervisory ratings are the 

only reliable method to differentiate risk 

among financial institutions. One trade 

group supported using supervisory 

ratings as one of the variables used to 

determine assessment rates as proposed 

in the NPR and opposed either allowing 

supervisory ratings to ‘‘be greater than 

50 percent of the overall risk score’’ or 

automatically giving supervisory ratings 

a 50 percent weight for small 

institutions, which was suggested in the 

NPR as an alternative method of 

determining assessment rates. Another 

trade group urged that ‘‘supervisory 

ratings should never be weighted more 

than half of the total weight of both the 

supervisory ratings and financial 

ratios.’’ Both trade groups urged these 

limitations because of the perceived 

subjectivity of supervisory ratings. 

The FDIC has decided not to impose 

a cap on the contribution that 

supervisory ratings can make to an 

institution’s assessment rate for two 

reasons. First, the final rule combining 

supervisory ratings and financial ratios 

does not use a weighting scheme or a 

risk score. The final rule uses pricing 

multipliers, which can be either positive 

or negative, based on a statistical model 

that relates financial ratios and 

component ratings to CAMELS 

downgrades. The pricing multipliers—

including the multiplier for the 

weighted average CAMELS component 

rating—are based on the actual 

historical experience of how well 

financial ratios and weighted average 

CAMELS component ratings predict 

whether an institution will be 

downgraded to a CAMELS composite 

rating of 3 or worse at its next 

examination. Second, a cap on the 

contribution that supervisory ratings 

can make to an institution’s assessment 

rate would affect only a small 

percentage of institutions and the effect 

would be very small.35

Updating pricing multipliers. One 

trade group agreed that the FDIC should 

have the flexibility to update the pricing 

multipliers and the uniform amount 

annually, without further notice-andcomment rulemaking and that adding 

additional or alternative financial 

measures, ratios or other risk factors to 

determine risk-based assessments or 

adopting a new method of 

differentiating for risk should be done 

through notice-and-comment 

rulemaking. The final rule is consistent 

with this comment. No comments 

disagreed. 

Additional comments. One trade 

group urged that the FDIC avoid having 

low-risk multi-family loans lead to 

higher assessment rates to avoid chilling 

this type of lending. The final rule does 

not target this kind of lending. 

G. Combining Supervisory Ratings With 

Long-Term Debt Issuer Ratings 

For large institutions that have longterm debt issuer ratings, a combination 

of these ratings and supervisory ratings 

will determine assessment rates, using 

equal weighting for each. The base 

assessment rate will be derived as 

follows: (1) CAMELS component ratings 

will be weighted to derive a weighted 

average CAMELS rating; 36 (2) long-term 

debt issuer ratings will be converted to 

numerical values between 1 and 3 using 

the conversion values in Appendix B; 37

(3) the weighted average CAMELS rating 

and converted long-term debt issuer 

rating will be multiplied by a pricing 

multiplier and the products will be 

summed; and (4) a uniform amount, 

which will always be negative, will be 

added to the result. The resulting base 

assessment rate will be subject to a 

minimum and a maximum assessment 

rate. The pricing multiplier for both the 

weighted average CAMELS ratings and 

converted long-term debt issuer rating 

will be 1.176, and the uniform amount 

will be ¥1.882. 

The conversion of long-term debt 

issuer ratings into numerical values in 

the final rule differs slightly from the 

conversion proposed in the NPR. 

Specifically, the final rule assigns the 

lowest conversion value of ‘‘1’’ to the 

best possible long-term debt issuer 

rating rather than to double A ratings or 

better (Aa2 or better for Moody’s 

ratings), and the highest conversion 

value of ‘‘3’’ to triple B or worse ratings 

(Baa2 or worse for Moody’s ratings), 

rather than to double B plus or worse 

ratings (Ba1 or worse for Moody’s 

ratings). This revised conversion 

methodology takes better advantage of 

the possible range of ratings for large 

Risk Category I institutions, which are 

concentrated primarily in the triple B 

rating range and higher. 

Pricing multipliers and the uniform 

amount for large institutions with debt 

ratings were derived using cutoff values 

of the combination of weighted average 

CAMELS ratings and converted longterm debt issuer ratings (weighted 50 

percent each) such that, as of June 30, 

2006: (1) Approximately 44 percent of 

large institutions with long-term debt 

issuer ratings that would have been in 

Risk Category I (other than institutions 

less than 5 years old) would have been 

charged the minimum assessment rate; 

and (2) approximately 6 percent of the 

large institutions with long-term debt 

issuer ratings that would have been in 

Risk Category I (other than institutions 

less than 5 years old) would have been 

charged the maximum assessment 

rate.38 The derivation of pricing 

multipliers and the uniform amount is 

described in Appendix 1. 

Under the final rule, the base 

assessment rate for an institution with 

CAMELS component ratings of 

‘‘222111,’’ a Moody’s long-term debt 

issuer rating of ‘‘A1,’’ and a Standard 

and Poor’s long-term debt issuer rating 

of ‘‘A’’ would be 2.06 basis points. This 

rate is calculated as follows: 

• The weighted average CAMELS 

rating is computed by multiplying each 

component rating by its associated 

weight to produce values of 0.50, 0.40, 

0.50, 0.10, 0.10, and 0.10, respectively. 

The sum of these values, the weighted 

average CAMELS rating, is 1.70. 

• The Moody’s and Standard and 

Poor’s long-term debt issuer ratings are 

converted to numerical values and 

averaged. The average of the two longterm debt issuer ratings, converted to 

numerical values of 1.50 and 1.80, 

respectively, is 1.65. 

• The weighted average CAMELS 

rating and converted long-term debt 


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39Under the final rule, the pricing multipliers 

will be rounded to three digits after the decimal 

point. 

40Under the final rule, the assessment rates 

resulting from these calculations will be rounded to 

the nearest one-hundredth (1/100th) of a basis 

point. 

41This rule addresses only adjustments to 

assessment rates. It does not address the FDIC’s role 

as back-up supervisor involving possible 

disagreements between the FDIC and the primary 

federal regulator over CAMELS ratings. Notification 

and resolution of such disagreements are covered 

by existing supervisory processes. See also footnote 

34. 

issuer ratings are multiplied by the 

pricing multiplier and summed 

(1.700*1.176 + 1.650*1.176) 39 to 

produce a value of 3.940. A uniform 

amount of 1.882 is subtracted from this 

result to produce a base assessment rate 

of 2.06 basis points.40

The final rule also differs from the 

NPR in that it does not use financial 

ratios to determine assessment rates for 

any large institution that has long-term 

debt issuer ratings, and does not use 

varying weights for long-term debt 

issuer ratings for institutions with 

between $10 billion and $30 billion in 

assets. The final rule simplifies the 

derivation of assessment rates by 

applying the same weight to weighted 

average CAMELS component ratings 

and long-term debt issuer ratings (when 

they exist) regardless of an institution’s 

size. 

Several trade groups commented that 

the proposed risk differentiation 

methodology for large banks was too 

complex, in part because of the varying 

weights given risk factors for 

institutions between $10 billion and $30 

billion in assets. These comments noted 

that an institution’s assessment rate 

could change simply because of an 

increase or decrease in assets even when 

the institution’s risk profile remained 

unchanged. After considering 

comments, the FDIC concluded that this 

simpler approach for all large 

institutions with debt issuer ratings 

achieves the objective of differentiating 

risk in these large institutions without 

the need to introduce further 

complexity in the form of varying 

weights for large institutions in different 

size categories. 

Additional Comments 

One trade group expressed concern 

that dissimilar methods for 

differentiating risk in large and small 

institutions could lead to possible 

inequity among institutions due solely 

to size. This comment expressed the 

view that agency and supervisory 

ratings tend to favor larger institutions, 

possibly because of diversification 

considerations. 

The FDIC notes that the distribution 

of current supervisory ratings for large 

and small institutions does not support 

this view. Agency debt issuer ratings do 

take diversification into account, and 

the FDIC believes that it is appropriate 

to reflect these considerations in 

assessment rates. The final rule ensures, 

as required by statute, that no 

institution is precluded from the lowest 

assessment rate solely because of size. 

This statutory requirement underlies, in 

part, the FDIC’s decision to initially 

include roughly similar proportions of 

large and small institutions in Risk 

Category I that would be charged 

minimum and maximum assessment 

rates. As discussed later, the FDIC will 

have the ability to adjust an institution’s 

assessment rate when this rate is 

inconsistent with assessment rates of 

other large institutions with similar risk 

profiles. 

This comment further noted that 

financial ratios also could be applied to 

all large institutions. Another trade 

group argued that the financial ratios 

should not be phased out in importance 

as institutions increase in size and 

should be used for all large institutions. 

This comment argued that 

measurements other than the financial 

ratios that are combined with 

supervisory ratings might be necessary 

to assess the off-balance sheet, 

securitization, trading, and securities 

processing activities engaged in by large 

institutions and to serve as a quality 

control check on long-term debt issuer 

ratings. 

The FDIC believes that consideration 

of additional risk information (including 

financial performance and condition 

measures), discussed below, will be 

sufficient to ensure that the range of 

activities engaged in by banking 

organizations are fully considered and 

that debt issuer ratings are appropriately 

considered in assessment rates. 

One comment suggested that business 

diversification should be more 

explicitly taken into account in 

determining deposit insurance 

premiums. This comment also 

recommended that the FDIC consider 

lowering or even eliminating premium 

rates for institutions that adopt the 

advanced approaches under the Basel II 

framework or whose actual capital 

sufficiently exceeds their Basel II 

required capital, since these institutions 

will have demonstrated capital levels 

and risk management practices that 

virtually eliminate risk to the deposit 

insurance fund. The FDIC believes that, 

in most cases, diversification, capital 

adequacy, and risk management 

considerations are reflected in 

supervisory or agency ratings or in 

financial ratios and the consideration of 

additional factors (in Appendix C) 

ensures that they are taken into account 

in all cases. 

One comment argued that the large 

institution methodology proposed in the 

NPR was overly subjective because 

cutoff values to determine the 

percentage of institutions that would be 

charged the minimum and maximum 

rates would be set quarterly by the 

FDIC. In fact, under the final rule, 

minimum and maximum assessment 

rate cutoff values will be established 

using data as of June 30, 2006. No 

change will be made to these cutoff 

values without further notice and 

opportunity for comment. 

H. Additional Provisions Relating to 

Large Institutions’ Assessment Rates in 

Risk Category I 

1. Adjustments to a Large Institution’s 

Assessment Rate 

To ensure consistency, fairness, and 

consideration of all available 

information, the FDIC will determine, in 

consultation with the primary federal 

regulator, whether or not to adjust the 

assessment rates for large institutions 

derived from either a combination of 

long-term debt issuer ratings and 

supervisory ratings or financial ratios 

and supervisory ratings (when no longterm debt issuer rating is available). The 

FDIC will make these determinations by 

evaluating additional risk information 

including current financial performance 

and condition information and trends, 

current market information, information 

pertaining to an institution’s ability to 

withstand financial adversity, and 

information pertaining to severity of 

losses in the event of failure. 

Any adjustments to assessment rates 

will be limited to 0.50 basis points 

(higher or lower). Upward adjustments 

will not take effect without notification 

to and consideration of responses from 

both the primary federal regulator and 

the institution. Downward adjustments 

will not take effect without notification 

to and consideration of responses from 

the primary federal regulator. No rate 

will be adjusted below the minimum 

rate for Risk Category I institutions in 

effect for an assessment period or above 

the maximum rate for Risk Category I 

institutions in effect for the period. Rate 

adjustments in Risk Category I are not 

meant to (and will not) override 

supervisory evaluations.41

Examples of additional risk factors 

that will be considered are enumerated 

in Appendix C. Evaluating this 

additional risk information on an 

ongoing basis will help the FDIC ensure 

that relative levels of risk posed by large 


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Risk Category I institutions are 

consistently represented by resulting 

assessment rates. Additional 

information will be evaluated in the 

following way: 

• Current financial performance 

indicators such as capital levels, 

profitability measures, and asset quality 

measures of each large institution will 

be compared to those of institutions that 

are ranked similarly in terms of their 

assessment rates. 

• Current market indicators such as 

subordinated debt spreads and holding 

company market indicators of each 

institution will be compared to market 

indicators of institutions that are ranked 

similarly in terms of their assessment 

rates. 

• Recent information pertaining to an 

institution’s ability to withstand 

financial stress will be evaluated by 

comparing this information to that of 

institutions ranked similarly in terms of 

their assessment rates. This information 

includes the internal risk characteristics 

of an institution’s credit portfolios and 

other business lines as well as 

information from internal stress-test 

models. 

• Current loss severity indicators of 

institutions will be evaluated by 

comparing this information to that of 

institutions ranked similarly in terms of 

their assessment rates. This information 

includes funding structure 

considerations such as the extent of 

priority and subordinated claims, as 

well as the availability of sufficient 

information (e.g., information pertaining 

to the level of insured deposits and 

qualified financial contracts) to resolve 

an institution in an orderly and costefficient manner. 

• Evaluations of financial 

performance, market information, 

information pertaining to an 

institution’s ability to withstand 

financial stress, and loss severity 

indicators will focus on: first, 

identifying those institutions that 

exhibit significantly different risk 

profiles, as indicated by risk indicators 

such as those enumerated above, than 

institutions with similar assessment 

rates; and second, where inconsistencies 

between assessment rates and these risk 

indicators are identified, determining 

the assessment rate adjustment that 

would be necessary to bring an 

institution’s assessment rate into better 

alignment with those of other 

institutions that pose similar levels or 

risk. 

Some comments (including comments 

from trade groups) indicated that the 

FDIC should consider certain 

information pertaining to losses that 

might be sustained by the insurance 

fund in the event of failure. For 

example, some comments indicated the 

FDIC should explicitly incorporate 

information about the relative level of 

subordinated claims into the 

determination of assessment rates for 

large institutions. The FDIC believes the 

final rule does consider loss given 

failure by explicitly incorporating 

consideration of this information into 

decisions of whether or not to adjust an 

institution’s assessment rate. 

In addition to ongoing consultations 

with the primary federal regulator on 

whether or not to make assessment rate 

adjustments, the FDIC will formally 

notify an institution’s primary federal 

regulator when it decides to recommend 

an adjustment in assessment rates and 

will consider the primary federal 

regulator’s response to this notification. 

The FDIC will also notify an institution 

in advance when the FDIC intends to 

increase its assessment rate because of 

the FDIC’s consideration of additional 

risk information. This notice will 

include the reasons for the adjustment 

and when the adjustment will take 

effect, and provide the institution an 

opportunity to respond. An institution 

will, of course, have the right to request 

a review of any assessment rate that is 

adjusted in this manner. 

After considering an institution’s 

response to the notice, the FDIC will 

determine whether an adjustment to an 

institution’s assessment rate is 

warranted, taking into account any 

revisions to weighted average CAMELS 

component ratings, long-term debt 

issuer ratings, and financial ratios, as 

well as any actions taken by the 

institution to respond to the FDIC’s 

concerns described in the notice. The 

FDIC will evaluate the need for the 

adjustment each subsequent assessment 

period, until it determines that an 

adjustment is no longer warranted. The 

amount of adjustment will in no event 

be larger than that contained in the 

initial notice without further notice to, 

and consideration of responses from, 

both the primary federal regulator and 

the institution. 

Any downward adjustment in 

assessment rates will remain in effect 

for subsequent assessment periods until 

the FDIC determines that an adjustment 

is no longer warranted. However, the 

FDIC will provide advance notice to an 

institution and its primary federal 

regulator and give them an opportunity 

to respond before removing a downward 

adjustment. Of course, the FDIC may 

raise an institution’s assessment rate 

without notice if the institution’s 

supervisory or agency ratings or 

financial ratios (for an institution 

without long-term debt issuer ratings) 

deteriorate. 

The FDIC acknowledges the need to 

clarify its processes for making any 

adjustments to ensure fair treatment and 

accountability and plans to propose and 

seek comment on additional guidelines 

for evaluating whether assessment rate 

adjustments are warranted and the size 

of the adjustments. The FDIC will not 

adjust assessment rates until the 

guidelines are approved by the FDIC’s 

Board. 

2. Timing of Evaluations 

Under the final rule, a large 

institution’s risk category will change as 

of the date the institution is notified of 

its rating change by its primary federal 

regulator (or state authority). If the 

supervisory rating change results in a 

large institution moving from Risk 

Category I to Risk Category II, III, or IV, 

the institution’s assessment rate for the 

portion of the quarter it was in Risk 

Category I will be based on its 

assessment rate for the prior quarter. 

The assessment rate for that portion of 

the quarter it was in Risk Category II, III, 

or IV will be based on the assessment 

rate for these risk categories. 

When a large institution is moved 

from Risk Category II, III, or IV to Risk 

Category I during a quarter because of a 

supervisory rating change, the FDIC will 

determine the associated assessment 

rate (subject to adjustment as described 

above) for that portion of the quarter 

that the institution was in Risk Category 

I. The assessment rate for that portion of 

the quarter it was in Risk Category II, III, 

or IV will be based on the assessment 

rate for these risk categories. 

When an institution remains in Risk 

Category I during a quarter, but a 

CAMELS component or long-term debt 

issuer rating change during the quarter 

would affect its assessment rate, the 

FDIC will determine an assessment rate 

for each portion of the quarter before 

and after the change. A long-term debt 

issuer rating change will be effective as 

of the date the change is announced by 

the rating agency. Changes in 

supervisory ratings will be effective as 

of the date the institution is notified by 

its primary federal regulator (or state 

authority). 

The timing of changes in assessment 

rates due to changes in supervisory or 

long-term debt issuer ratings described 

above differs only slightly from the 

proposal in that it uses, in all cases, the 

date of transmittal of a supervisory 

rating change by the primary federal 

regulator to the institution. The reasons 


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69294 Federal Register / Vol. 71, No. 230 / Thursday, November 30, 2006 / Rules and Regulations 

42See final rule on Operational Changes to 

Assessments, published elsewhere in this issue of 

the Federal Register. If the FDIC disagrees with the 

CAMELS composite rating assigned by an 

institution’s primary federal regulator, and assigns 

a different composite rating, the supervisory change 

will be effective for assessment purposes as of the 

date that the FDIC assigned the new rating. 

Disagreements of this type have been rare. See also 

footnote 34. 

43 In the event that the FDIC grants an 

institution’s request to be treated as a large 

institution and the institution subsequently reports 

assets of less than $5 billion for four consecutive 

quarters, the institution will be assessed as a small 

institution thereafter. 

for this change are discussed in a 

separate rule.42

One trade group expressed concern 

about the possibility of retroactive 

changes in assessment rates and the 

prospects for accounting restatements. 

This comment pointed out that 

CAMELS rating changes often occur one 

and even two quarters after the start 

date of an examination. The use of the 

transmittal date of examination findings 

rather than start date of an examination 

to effect changes in assessment rates 

should alleviate this concern about 

retroactive accounting adjustments. 

Another comment expressed a similar 

concern that institutions would not be 

able to plan for the financial impact of 

assessment rate changes if they were 

applied retroactively, either because of 

a change in supervisory or long-term 

debt issuer ratings, or because of a 

decision by the FDIC to adjust an 

institution’s assessment rate. The FDIC 

believes that the final rule sufficiently 

addresses this concern since: (1) the 

transmittal of revised CAMELS ratings 

or the announcement of revised longterm debt issuer ratings will provide 

sufficient notice to the institution that a 

change in assessment rates will occur; 

and (2) assessment rate changes caused 

by a decision by the FDIC to adjust an 

institution’s assessment rate will not 

become effective before the institution is 

duly notified and has had an 

opportunity to respond to the proposed 

change. 

Additional Comments 

Adjustments to an institution’s 

assessment rates. A number of 

comments (including several comments 

from trade groups) questioned the need 

for the FDIC to incorporate additional 

information into its pricing decisions for 

large institutions. Some of the main 

objections were that: 

• Adjustments would override the 

evaluations of the primary federal 

regulator; 

• The FDIC should not be allowed to 

unilaterally override CAMELS ratings 

assigned by the primary federal 

regulator since they are viewed to have 

better information than the FDIC about 

the risks posed by these institutions; 

• The need for more timely 

information is not necessary since many 

large institutions are supervised on a 

continuous basis; 

• Supervisory ratings incorporate all 

relevant risk information and therefore 

consideration of additional information 

is not necessary; 

• The application of the FDIC’s 

discretion over pricing decisions has not 

been sufficiently described; and 

• Many of the additional risk 

indicators identified in Appendix C of 

the proposal are vaguely defined and 

not necessarily aligned with risk. 

Several comments specifically 

criticized the proposal’s use of 

additional stress consideration factors. 

For example, some comments stated 

that these factors were not well 

developed and expressed concern about 

the possibly conflicting role such 

information would play in evaluations 

by the primary federal regulators and 

the FDIC. 

One trade group supported the FDIC’s 

consideration of additional risk 

information to ensure that assessment 

rates were consistently assigned, that 

risk information was incorporated into 

the assessment rate in a timely manner, 

and that assessment rates reflected 

consideration of all relevant risk 

information. 

For the reasons described earlier, the 

FDIC has decided to retain its ability to 

adjust assessment rates based upon 

consideration of additional risk factors. 

A number of comments supported 

providing institutions with prior 

notification relating to any possible 

increase in assessment rates. However, 

many of these comments were made in 

the context of the proposed risk 

‘‘bucket’’ or subcategory pricing 

approach. Given the adoption of an 

incremental pricing approach for 

institutions in the incremental pricing 

range, the FDIC believes advance notice 

is only needed in two cases based on 

consideration of additional risk 

information: (1) Where the FDIC intends 

to make an upward adjustment to a large 

institution’s assessment rate above that 

derived from supervisory and long-term 

debt issuer ratings (or from supervisory 

ratings and financial ratios); and (2) 

where it intends to remove a previously 

made downward adjustment to an 

institution’s assessment rate. 

V. Definitions of Large and Small 

Institutions and Exceptions 

Under a companion final rule making 

operational changes to the FDIC’s 

assessment regulations, a Risk Category 

I institution will be defined as large if 

it has $10 billion or more in assets and 

small if it has assets of less than $10 

billion. This determination will initially 

be made as of December 31, 2006. 

Thereafter, a small Risk Category I 

institution will be reclassified as a large 

institution when it reports assets of $10 

billion or more for four consecutive 

quarters. Similarly, a large Risk Category 

I institution will be reclassified as a 

small institution when it reports assets 

under $10 billion for four consecutive 

quarters. Any reclassification will 

remain effective for subsequent quarters, 

unless an institution reports assets that 

would change its size category (from 

large to small or vice versa) for four 

consecutive quarters. 

The definition of large and small 

institutions for Risk Category I 

institutions in the final rule is the same 

as that contained in the proposal. One 

trade group commented that the $10 

billion cutoff point for categorizing 

institutions as either large or small was 

appropriate given the tendency of larger 

institutions to have more available risk 

information. This same comment 

indicated that large institutions should 

be evaluated using more information 

than current financial ratios and 

CAMELS component ratings given the 

types of complex activities engaged in 

by the largest institutions, such as 

securitization, derivatives, and trading. 

As described in the NPR, the final 

rule makes an exception to the $10 

billion size threshold for Risk Category 

I institutions with between $5 billion 

and $10 billion in assets that request 

treatment as a large institution. The 

FDIC will grant such requests if it 

determines that it has sufficient 

information to evaluate the institution’s 

risk profile adequately under the risk 

differentiation methods used for large 

institutions. The absence of long-term 

debt issuer ratings alone will not 

preclude the FDIC from granting a 

request. The assessment rate for an 

institution without a long-term debt 

issuer rating would still be derived from 

supervisory ratings and financial ratios, 

but would be subject to adjustment. 

Once a request has been granted, an 

institution could again request 

treatment under a different approach 

after three years, subject to FDIC 

approval.43

As discussed in the NPR, small 

institutions that are affiliated with large 

institutions will be evaluated separately 

under the final rule. Specifically, 

assessment rates for small institutions 

will be determined using supervisory 

ratings and financial ratios, whether or 


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44ROCA stands for Risk Management, 

Operational Controls, Compliance, and Asset 

Quality. 

45The pricing multiplier and uniform amount for 

insured branches are computed in the same manner 

as those used for large Risk Category I institutions 

with long-term debt issuer ratings. The uniform 

amount is the same as described under that 

approach, and the pricing multiplier for weighted 

average ROCA ratings is simply two times the 

pricing multiplier used for either weighted average 

CAMELS ratings or converted long-term debt issuer 

ratings (i.e., the weighted average ROCA rating is 

weighted 100 percent). 

46Empirical studies show that new institutions 

exhibit a ‘‘life cycle’’ pattern and it takes close to 

a decade after its establishment for a new 

institution to mature. Despite low profitability and 

rapid growth, institutions that are three years or 

newer have, on average, a very low probability of 

failure—lower than established institutions, 

perhaps owing to large capital cushions and close 

supervisory attention. However, after three years, 

new institutions’ failure probability, on average, 

surpasses that of established institutions. New 

institutions typically grow more rapidly than 

established institutions and tend to engage in more 

high-risk lending activities funded by large 

deposits. Studies based on data from the 1980s 

showed that asset quality deteriorated rapidly for 

many new institutions as a result, and failure 

probability (conditional upon survival in prior 

years) reached a peak by the ninth year. Many 

financial ratios of new institutions generally begin 

to resemble those of established institutions by 

about the seventh or eighth year of their operation. 

See Chiwon Yom, ‘‘Recently Chartered Banks’’

Vulnerability to Real Estate Crisis,’’ FDIC Banking 

Review 17 (2005): 1–15 and Robert DeYoung, ‘‘For 

How Long Are Newly Chartered Banks Financially 

Fragile?’’ Federal Reserve Bank of Chicago Working 

Paper Series 2000–09. 

47A surviving or resulting Risk Category I 

institution that qualifies as an established 

institution under this exception will have its 

assessment rate determined using the CAMELS 

component ratings of the established institution 

involved in the merger or consolidation until the 

surviving or resulting institution receives a new 

supervisory rating. 

48The resulting institution in a consolidation (as 

well as the surviving institution in a merger) 

involving only established institutions will, of 

course, be deemed to be an established institution. 

not these institutions are affiliated with 

large institutions. 

An institution that disagrees with the 

FDIC’s determination that it is small or 

large may request review of the 

determination pursuant to 12 CFR 

327.4(c). 

Comments 

One comment supported the proposal 

to allow institutions with between $5 

billion and $10 billion in assets to 

request treatment as a large institution. 

This comment noted that the proposal 

will allow flexibility for small 

institutions that are transitioning to 

large institutions and want to be 

evaluated using long-term debt issuer 

ratings. 

Some comments supported: (1) 

Assigning the same assessment rate to 

all affiliated institutions, possibly by 

strengthening cross guarantees; (2) 

assigning the assessment rate of the 

largest institution in a holding company 

to all institutions in the holding 

company; or (3) applying the same 

method of calculating assessment rates 

to all institutions in a holding company 

regardless of size to avoid different 

assessment rate approaches for 

institutions within the same holding 

company. The FDIC acknowledges that 

often each institution in a holding 

company derives managerial, 

operational, and financial support from 

the parent holding company. However, 

financial condition and operating 

performance can and does vary among 

banks within a holding company. 

Consequently, the FDIC believes it is 

necessary to evaluate risk at each 

insured institution individually. Any 

modifications to current cross guarantee 

provisions are outside the scope of this 

proposal. 

VI. Risk Differentiation Among Insured 

Foreign Branches 

The final rule for insured foreign 

branches (insured branches) is 

substantially similar to the proposed 

rule. The main difference is the use of 

incremental pricing for insured 

branches whose assigned assessment 

rates fall between the minimum and 

maximum assessment rates. 

Insured branches that are assigned to 

Risk Category II, III or IV, based on their 

asset pledge and asset maintenance 

ratios and supervisory ratings, will be 

treated in the same manner as other 

insured institutions in these risk 

categories. For insured branches that are 

assigned to Risk Category I, assessment 

rates will be determined from the 

supervisory ROCA component ratings 

assigned to the insured branch.44 Each 

of these component ratings will be 

weighted to produce a weighted average 

ROCA rating. The weights applied to 

individual ROCA component ratings 

will be the same as those contained in 

the NPR: 35 percent, 25 percent, 25 

percent, and 15 percent, respectively. 

An assessment rate for insured branches 

will be determined by multiplying the 

average ROCA rating by a pricing 

multiplier of 2.353 and adding a 

uniform amount of ¥1.882 from this 

product.45 The derivation of the pricing 

multipliers and uniform amount for 

insured branches is described in 

Appendix 2. 

As with the large institution risk 

differentiation approach, the FDIC may 

adjust these assessment rates up or 

down by 0.50 basis points after 

consideration of the additional risk 

factors described in Appendix C. The 

same process for making adjustments 

described to large institution rates, 

including advance notification and 

consultation with the primary federal 

regulator, will apply to insured foreign 

branches. 

The FDIC received no comments on 

the proposed treatment of insured 

foreign branches. 

VII. New Institutions in Risk Category 

I 

Under the final rule, beginning in 

2010, new institutions in Risk Category 

I generally will be assessed at the same 

rate, which will be the highest rate 

charged any other institution in this 

Risk Category. For this purpose, the 

final rule on operational changes 

defines a new institution as one that is 

not an established institution.46 With 

three exceptions, beginning in 2010, an 

established institution, as defined in the 

final rule on operational changes, will 

be one that has been chartered as a bank 

or thrift for at least five years as of the 

last day of any quarter for which it is 

being assessed. Before 2010, all Risk 

Category I institutions will be assessed 

using either the supervisory ratings and 

financial ratios method or the 

supervisory and debt ratings method. 

Where an established institution 

merges or consolidates with a new 

institution, the surviving or resulting 

institution will be new unless: 

1. The assets of the established 

institution, as reported in its report of 

condition for the quarter ending 

immediately before the merger, 

exceeded the assets of the new 

institution, as reported in its report of 

condition for the quarter ending 

immediately before the merger; and 

2. Substantially all of the management 

of the established institution continued 

as management of the resulting or 

surviving institution.47 48

However, where a new institution 

merges into an established institution 

and the merger agreement was entered 

into on or before July 11, 2006, the final 

rule contains a grandfather clause under 

which the surviving institution will be 

deemed to be an established institution. 

This exception to the definition of a 

new institution represents a change 

from the proposed rule. The NPR 

proposed that, when an established 

institution merged into or consolidated 

with a new institution, the surviving or 

resulting institution would be new, but 

would be allowed to request that the 

FDIC determine that it was established. 

The NPR also proposed that, when a 

new institution merged into an 

established institution or when an 

established institution acquired a 


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69296 Federal Register / Vol. 71, No. 230 / Thursday, November 30, 2006 / Rules and Regulations 

49 71 FR 41910. 

50A Risk Category I institution that has no 

CAMELS component ratings shall be assessed at 

one basis point above the minimum rate applicable 

to Risk Category I institutions until it receives 

CAMELS component ratings. If an institution has 

less than $10 billion in assets or has at least $10 

billion in assets and no long-term debt issuer rating, 

once it receives CAMELS component ratings, its 

assessment rate will be determined under the 

supervisory ratings and financial ratios method. 

The assessment rate will be determined by 

annualizing, where appropriate, financial ratios 

obtained from the reports of condition that have 

been filed, until the earlier of the following two 

events occurs: (1) the institution files four reports 

of condition; or (2) if it has at least $10 billion in 

assets, it receives a long-term debt issuer rating. 

51 12 CFR. 303.2(r) defines an eligible depository 

institution as one that: 

(1) Received an FDIC-assigned composite rating 

of 1 or 2 under the Uniform Financial Institutions 

Rating System (UFIRS) as a result of its most recent 

federal or state examination; 

(2) Received a satisfactory or better Community 

Reinvestment Act (CRA) rating from its primary 

federal regulator at its most recent examination, if 

the depository institution is subject to examination 

under part 345 of this chapter; 

(3) Received a compliance rating of 1 or 2 from 

its primary federal regulator at its most recent 

examination; 

(4) Is well-capitalized as defined in the 

appropriate capital regulation and guidance of the 

institution’s primary federal regulator; and 

(5) Is not subject to a cease and desist order, 

consent order, prompt corrective action directive, 

written agreement, memorandum of understanding, 

or other administrative agreement with its primary 

federal regulator or chartering authority. 

52For bank holding companies, RFI ratings 

replaced BOPEC ratings as of December 2004. For 

a bank holding company that does not yet have an 

RFI composite rating, BOPEC ratings will be used. 

53 71 FR 41910. 

54Again, a Risk Category I institution that has no 

CAMELS component ratings shall be assessed at 

one basis point above the minimum rate applicable 

to Risk Category I institutions until it receives 

CAMELS component ratings. If an institution has 

less than $10 billion in assets or has at least $10 

billion in assets and no long-term debt issuer rating, 

once it receives CAMELS component ratings, its 

assessment rate will be determined under the 

supervisory ratings and financial ratios method. 

The assessment rate will be determined by 

annualizing, where appropriate, financial ratios 

obtained from the reports of condition that have 

been filed, until the earlier of the following two 

events occurs: (1) The institution files four reports 

of condition; or (2) if it has at least $10 billion in 

assets, it receives a long-term debt issuer rating. 

substantial portion of a new institution’s 

assets or liabilities, and the merger or 

acquisition agreement was entered into 

after July 11, 2006 (the date that the 

FDIC’s Board approved the NPR), the 

FDIC would conduct a review to 

determine whether the surviving or 

acquiring institution remained an 

established institution. The NPR 

proposed that the FDIC would make 

determinations based upon factors that 

included factors similar to the two listed 

above. 

The final rule differs from the NPR in 

this regard. By specifying the particular 

circumstances that will allow an 

institution to be considered established, 

the final rule will give institutions 

greater certainty regarding the effects of 

mergers and consolidations and should 

reduce the necessity of filing requests 

for review. The final rule should not 

result in denying an exception to any 

institution that would have been 

considered established under the 

proposed rule, while still achieving the 

purpose of the proposed rule. 

The second exception was raised in 

comment letters in response to the 

FDIC’s specific request for comment on 

its proposed definition of a new 

institution.49 This exception will apply 

to a new institution that is a subsidiary 

of a holding company with an 

established institution or that is a 

subsidiary of an established institution, 

provided certain criteria are met. Under 

these circumstances, the institution will 

be considered established for 

assessment purposes.50 Specifically, an 

institution that would otherwise be new 

will be considered established if it is a 

wholly owned subsidiary of: 

1. A company that is a ‘‘bank holding 

company’’ under the Bank Holding 

Company Act of 1956 or a ‘‘savings and 

loan holding company’’ under the Home 

Owners’’ Loan Act, and: 

a. At least one ‘‘eligible’’ depository 

institution (as defined in 12 CFR 

303.2(r)) that is owned by the holding 

company has been chartered as a bank 

or thrift for at least five years as of the 

date that the otherwise new institution 

was established; and 

b. The holding company has a 

composite rating of at least ‘‘2’’ for bank 

holding companies or an above average 

or ‘‘A’’ rating for thrift holding 

companies and at least 75 percent of its 

depository institution assets are assets 

of ‘‘eligible’’ depository institutions, as 

defined in 12 CFR 303.2(r);51 52 or 

2. An ‘‘eligible’’ insured depository 

institution, as defined in 12 CFR 

303.2(r), that has been chartered as a 

bank or thrift for at least five years as 

of the date that the otherwise new 

institution was established. 

Several comments (including 

comments from trade groups) argued 

that, at a minimum, new institutions in 

a bank holding company should be 

charged at the same rate as other 

institutions in the holding company. 

Arguments for this position included: 

• Assessing new institutions at a 

higher rate will affect a holding 

company’s decision to charter a new 

institution or to branch; in the context 

of mergers and acquisitions, the deal 

structure could be influenced to retain 

the seasoned banks post-consolidation 

solely for the purpose of avoiding high 

assessments, even though a different 

structure would otherwise be more 

appropriate. 

• The articles referenced by the FDIC 

in support of assessing all ‘‘new’’

institutions at a higher rate did not take 

into account holding company support 

or enhancements in supervision. 

• Holding companies often have 

considerable banking experience, so that 

the institution is not really new. 

Institutions in a holding company 

typically share management. 

The FDIC is persuaded that a new 

institution within an established 

holding company structure does not 

necessarily pose a higher risk than 

established institutions, in part because 

of the banking experience within the 

holding company, and has created an 

exception from the new bank definition 

for these institutions. However, the 

assessment rate for a new institution 

subsidiary of an insured depository 

institution or holding company that 

qualifies for the exception will not 

necessarily be the same rate charged an 

affiliate. As with any established 

institution in Risk Category I, its 

assessment rate will be determined 

based upon the risk it poses. 

The third exception was also raised in 

comment letters in response to the 

FDIC’s specific request for comment on 

its proposed definition of a new bank.53

For a credit union that converts to a 

bank or thrift charter, some comments 

(including comments from trade groups) 

urged the FDIC to take into account the 

period that a credit union has had 

federal deposit insurance in 

determining whether it is new or 

established. As one trade group pointed 

out: 

These institutions have a seasoned loan 

portfolio, experienced leaders, and an 

established business history. They have been 

carefully screened by their new banking 

regulator. 

The final rule takes into account the 

period that a credit union has been 

federally insured as a credit union in 

determining whether it is new or 

established.54

The final rule also differs from the 

NPR in its definition of a new 

institution. Under the NPR, a new 

institution would have been defined as 

an institution that had not been 

chartered as a bank or thrift for at least 

seven years as of the last day of any 

quarter for which it was being assessed 

(subject to the exceptions above). 

Several comments (including 

comments from trade groups) suggested 

that charging the maximum Risk 

Category I assessment rate to new 

institutions for 7 years was too long and 


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Federal Register / Vol. 71, No. 230 / Thursday, November 30, 2006 / Rules and Regulations 69297 

favored a shorter period, such as 3 or 5 

years (assuming new institutions were 

assessed separately). One trade group 

argued that, after three years, an 

institution’s loan portfolio and its 

operations should be seasoned enough 

so that the FDIC can assess the risks of 

the institution based on financial ratios 

and CAMELS ratings as it does for other 

institutions. Other arguments for 

shortening the period that an institution 

is considered new included: 

• Higher failure rates for new 

institutions occurred in earlier periods, 

but not in recent periods, partly because 

supervision has been enhanced. 

• The banking industry uses three 

years as an estimate of banking 

maturity; banking supervisors use the 

same period when reviewing new bank 

applications. 

The FDIC’s decision to assess new 

institutions separately from established 

institutions is based on the difficulty of 

assessing new institutions’ risk with the 

same risk measures used to assess the 

risk of established institutions. New 

institutions undergo rapid changes in 

the scale and scope of operations for a 

period of time after being chartered and 

these changes can make new 

institutions’ financial condition and 

performance measures volatile. 

Moreover, new institutions’ loan 

portfolios are unseasoned, and their 

management is often untested, making it 

difficult to assess loan quality through 

standard financial performance 

measures. 

These differences between new and 

established institutions’ financial 

characteristics could lead to mismeasurement of risk when new 

institutions are evaluated by the same 

financial risk measurement model used 

to evaluate established institutions’ risk. 

More specifically, the FDIC finds that 

new institution risk is, in general, 

underestimated by the manner in which 

supervisory ratings are combined with 

financial ratios; however, the degree of 

underestimation of risk declines with 

bank age. 

Under the final rule, all new 

institutions in Risk Category I will be 

assessed at the same rate and this rate 

will be the highest rate charged any 

other institution in Risk Category I. The 

FDIC finds that the failure rates of 

institutions that have been in existence 

for less than 5 years are greater than 

those of established institutions that 

would have historically paid the highest 

assessment rate in Risk Category I (the 

riskiest Risk Category I established 

institutions). Historical failure rates 

among institutions that have been in 

existence between 5 and 7 years, 

however, are somewhat lower than 

those of the riskiest Risk Category I 

established institutions. For this reason, 

for purposes of setting assessment rates, 

the final rule defines new institutions as 

those institutions that have been in 

existence less than 5 years. 

Some comments expressed concern 

that a combination of factors could 

result in inequitable treatment for new 

institutions. These factors included the 

need to initially charge more than the 

base rates, the lack of credits for most 

new institutions, and charging the 

maximum rate to these institutions. The 

FDIC recognizes that during the 

transition from the existing system to 

the new system, this combination of 

factors could significantly increase 

assessment rates for new institutions. 

Consequently, the final rule delays the 

effective date of the provisions 

subjecting new Risk Category I 

institutions to the maximum Risk 

Category I rate until January 1, 2010. 

Before 2010, a Risk Category I 

institution that has no CAMELS 

component ratings shall be assessed at 

one basis point above the minimum rate 

applicable to Risk Category I institutions 

until it receives CAMELS component 

ratings. If an institution has less than 

$10 billion in assets or has at least $10 

billion in assets and no long-term debt 

issuer rating, once it receives CAMELS 

component ratings, its assessment rate 

will be determined under the 

supervisory ratings and financial ratios 

method. The assessment rate will be 

determined by annualizing, where 

appropriate, financial ratios obtained 

from the reports of condition that have 

been filed, until the earlier of the 

following two events occurs: (1) The 

institution files four reports of 

condition; or (2) if it has at least $10 

billion in assets, it receives a long-term 

debt issuer rating. 

Additional Comments 

No rule for new institutions. Several 

comments (including comments from 

trade groups) argued that the FDIC 

should assess new institutions as other 

institutions are assessed. Arguments for 

assessing new institutions as other 

institutions are assessed included: 

• New institutions are scrutinized by 

examiners more intently and more 

frequently. 

• There is an inherent bias against 

new institutions in CAMELS ratings. 

• Capital is usually higher in new 

institutions. 

• Many new institutions are started 

by experienced bankers or are spin-offs 

of established institutions. 

• A separate rule for new institutions 

will undermine public confidence in 

these institutions. 

• A single rate for new institutions 

does not adequately differentiate risk. 

• A new institution has no incentive 

to reduce its risk because it will not 

reduce its assessment rate. 

The final rule changes the new 

institution period from seven to five 

years, but assesses new institutions 

separately for the reasons described. 

However, the final rule does delay the 

effective date of the provisions 

governing new institutions for three 

years. 

An institution that disagrees with the 

FDIC’s determination that it is new or 

established may request review of the 

determination pursuant to 12 CFR 

327.4(c). 

Mergers. One trade group opposed 

treating established institutions that 

merge into or consolidate with new 

institutions as new on the grounds that 

such treatment is unreasonable and 

prejudicial to shareholders. Other 

comments also took issue, at least 

implicitly, with the proposed rule 

regarding mergers and consolidations. A 

comment from a trade group, however, 

stated that the FDIC should judge an 

individual institution based on the 

specific risk profile that it presents to 

the deposit insurance fund: 

Generally, a new institution that merges 

with, acquires or is acquired by an existing 

depository institution will immediately 

exhibit certain risk characteristics, such as 

market penetration, strength of management, 

amount of capital and experience of the 

officers and employees of the resulting 

institution, that will allow the primary 

federal supervisor of the resulting institution 

to make a determination whether it most 

appropriately should be characterized in 

accordance with the risk profile of the new 

institution or the established one. 

The FDIC has simplified the final rule 

in response to comments. The final rule 

allows the FDIC to review the surviving 

or resulting institution in a merger or 

consolidation involving both a new and 

an established institution to determine 

whether the surviving or resulting 

institution is new or established based 

on the criteria previously discussed 

without, in general, requiring that the 

institution file a request for review. 

VIII. Assessment Rates 

A. Rate Schedules 

Beginning on January 1, 2007, 

assessment rates will be as shown in the 

following table: 


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55With respect to the base schedule of rates, the 

NPR contains the FDIC’s analysis of the statutory 

factors that must be considered whenever the 

FDIC’s Board of Directors sets rates. These factors 

include: (1) estimated fund operating expenses; (2) 

estimated fund case resolution expenses and 

income; (3) the projected effects of assessments on 

institution capital and earnings; (4) the risk factors 

and other factors taken into account pursuant to 12 

U.S.C § 1817(b)(1) under the risk-based assessment 

system, including the requirement under 12 U.S.C 

§ 1817(b)(1)(A) to maintain a risk-based system; and 

(5) any other factors the Board of Directors may 

determine to be appropriate. 12 U.S.C. 

1817(b)(1)(C). 

56 In addition, no assessment rate may be 

negative. See 12 CFR 327.9. 

57And provided, again, that no assessment rate 

may be negative. 

58The FDIC is contemporaneously adopting a 

DRR of 1.25 percent. See final rule on the 

Designated Reserve Ratio, to be published 

elsewhere in this issue of the Federal Register. 

Risk Category 

I * 

II III IV 

Minimum Maximum 

Annual Rates (in basis points) ........................................................................................................... 5 7 10 28 43 

* Rates for institutions that do not pay the minimum or maximum rate will vary between these rates. 

All institutions in any one risk 

category, other than Risk Category I, will 

be charged the same assessment rate. 

For all institutions in Risk Category I, 

annual assessment rates will range 

between 5 and 7 basis points. 

The final rule also adopts the base 

schedule of rates proposed in the 

NPR: 55

Risk Category 

I * 

II III IV 

Minimum Maximum 

Annual Rates (in basis points) ........................................................................................................... 2 4 7 25 40 

* Rates for institutions that do not pay the minimum or maximum rate will vary between these rates. 

The assessment rates that take effect 

January 1, 2007, will be uniformly 3 

basis points higher than the base rate 

schedule. Under the present assessment 

system, the Board has adopted a base 

assessment schedule where it can 

uniformly adjust rates up to a maximum 

of five basis points higher or lower than 

the base rate schedule without the 

necessity of further notice-and-comment 

rulemaking, provided that any single 

adjustment cannot move rates more than 

five basis points.56 In the NPR, the 

Board indicated its intention to retain 

the ability to adjust rates up to five basis 

points without seeking further public 

comment. Upon considering the 

comments received on this issue 

(discussed below), the Board has 

decided to retain this feature, but limit 

its ability to adjust rates without seeking 

further public comment to three basis 

points. Hence, the final rule allows the 

Board to adjust rates uniformly up to a 

maximum of three basis points higher or 

lower than the base rates without the 

necessity of further notice-and-comment 

rulemaking, provided that any single 

adjustment from one quarter to the next 

cannot move rates more than three basis 

points.57 In the event that the Board 

uniformly adjusts rates, rates calculated 

for institutions in Risk Category I in 

reference to the base assessment rates 

will be uniformly adjusted by the same 

amount. Once set by the Board, 

assessment rates will remain in effect 

until changed. 

Table 3 shows projected reserve ratios 

assuming different average annual 

growth rates for insured deposits if the 

actual rate schedule (as opposed to base 

rate schedule) adopted in this rule 

remains in effect through the year in 

which the reserve ratio first reaches or 

exceeds the designated reserve ratio 

(DRR) of 1.25 percent.58


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59Section 2104 of the Reform Act (to be codified 

at 12 U.S.C. 1817(b)(2)(B)). The risk factors referred 

to in factor (iv) include: 

(i) the probability that the Deposit Insurance 

Fund will incur a loss with respect to the 

institution, taking into consideration the risks 

attributable to—

(I) different categories and concentrations of 

assets; 

(II) different categories and concentrations of 

liabilities, both insured and uninsured, contingent 

and noncontingent; and 

(III) any other factors the Corporation determines 

are relevant to assessing such probability; 

(ii) the likely amount of any such loss; and 

(iii) the revenue needs of the Deposit Insurance 

Fund. 12 U.S.C. 1817(b)(1)(C). 

In summary, the Board bases its 

decision to adopt this rate schedule on 

the following: 

• The Reform Act gives the Board 

flexibility to achieve the DRR within a 

time frame that it believes appropriate, 

rather than treat the DRR as a ‘‘hard’’

annual target. In the Board’s view, 

reaching the DRR within the third year 

of the new assessment system would be 

a reasonable goal, which this rate 

schedule would facilitate, given the 

FDIC’s assumptions regarding insured 

deposit growth. 

• An objective of the Reform Act is to 

allow the fund to increase under 

favorable conditions so that it can 

decline under adverse conditions 

without sharp increases in assessments. 

The outlook for economic conditions 

affecting banks remains generally 

favorable, industry conditions remain 

strong, and projected reserve ratios 

under the rate schedule assume very 

low insurance losses. 

• During the next few years, the rate 

schedule is likely to prevent the reserve 

ratio from declining below the 1.15 

percent statutory lower bound for the 

DRR and unlikely to raise the reserve 

ratio above the 1.35 percent threshold 

that could trigger the payment of 

dividends. 

• It is reasonable to plan for future 

annual insured deposit growth in the 4- 

to-6 percent range, down from higher 

rates observed last year and estimated 

for this year. Reaching the DRR within 

three years under this rate schedule 

assumes that insured deposit growth 

will be in this range. 

• Assessment credits authorized 

under the Reform Act will limit 

assessment revenue in the near term. 

• Implementation of the rate schedule 

is unlikely to have a materially adverse 

effect on the earnings and capital of 

insured institutions. 

B. Factors Supporting the Rate Schedule 

As required by statute, the FDIC’s 

Board of Directors considered the 

following factors in setting rates: 

(i) The estimated operating expenses 

of the Deposit Insurance Fund. 

(ii) The estimated case resolution 

expenses and income of the Deposit 

Insurance Fund. 

(iii) The projected effects of the 

payment of assessments on the capital 

and earnings of insured depository 

institutions. 

(iv) The risk factors and other factors 

taken into account pursuant to 12 U.S.C 

section 1817(b)(1) under the risk-based 

assessment system, including the 

requirement under 12 U.S.C section 

1817(b)(1)(A) to maintain a risk-based 

system. 

(v) Other factors that the Board of 

Directors determined to be 

appropriate.59

These factors, including those 

determined by the Board to be 

appropriate, are discussed in more 

detail below. 

1. Projected Changes to the Fund 

Balance From Case Resolution 

Expenses, Operating Expenses, 

Investment Contributions, and RiskBased Assessments 

Table 4 shows projected changes to 

the fund balance over the next two years 

under the rate schedule adopted in this 

rule. Future changes to the fund balance 

depend, in turn, on projections and 

assumptions for insurance losses (case 

resolution expenses), operating 

expenses, assessment revenue, and 

investment contributions. These 

components of fund balance changes are 

discussed below. 


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60The projection for 2007 is very close to the 

result obtained from the statistical method that has 

been used to develop estimates of losses to support 

past semiannual assessment rate schedules. This 

method estimates likely ranges of insurance losses 

based on projected changes in the estimated 

liability for anticipated failures (contingent loss 

reserve) through December 31, 2007. 

61Two-year stress event simulations were run 

based on data through June 30, 2006, affecting 

institutions specializing in residential mortgages, 

subprime loans, commercial real estate mortgages, 

commercial and industrial loans, and consumer 

loans. The results of each simulation, which were 

derived from historical stress events, demonstrate 

that banks are well positioned to withstand a 

significant degree of financial adversity. In no case 

did the stress simulation results raise significant 

concerns for the insurance fund. However, the 

effects were not evaluated beyond a two-year 

horizon. Also, the historical experiences underlying 

the stress scenarios may be less applicable in the 

future, so conclusions drawn from the stress 

analyses should be treated with some degree of 

caution. 

62Alternatively, if operating expenses increased 

by 5 percent per year after 2007, the reserve ratio 

would still be projected to reach the 1.25 percent 

DRR during, or by year-end, 2009, assuming that 

insured deposit growth averages between 4 and 6 

percent annually. 

a. Insurance losses and operating 

expenses. The rate schedule adopted 

assumes a continuing trend of very few 

bank failures and very low insurance 

losses. Reserve ratio projections based 

on the rate schedule assume that annual 

insurance loss provisions beginning in 

2007 equal one thousandth of one 

percent of industry aggregate domestic 

deposits. This is less than one quarter of 

the average annual rate over the last 10 

years—also a time of few failures and 

modest insurance losses. Loss 

provisions in 2007 are projected at $71 

million, and rise slightly in proportion 

to domestic deposit growth.60

Banks in general appear to be well 

positioned to withstand considerable 

financial stress from unlikely economic 

shocks.61 Nonetheless, the possibility 

remains that insurance losses may be 

higher than anticipated. Higher losses, 

in turn, would reduce the likelihood of 

raising the reserve ratio to the DRR 

within three years under the rate 

schedule adopted in this rule. Future 

assessment rate setting under such 

conditions would have to weigh several 

factors, including the desirability of 

avoiding sharp increases in assessments 

at a time of industry stress and the need 

to maintain the fund within the range 

authorized by the Reform Act. 

In Table 3, the reserve ratio 

projections based on the rate schedule 

adopted also assume that annual 

operating expenses remain flat over the 

next few years, at approximately $1 

billion.62

b. Investment contributions. As 

shown in Table 4 above, projections of 

fund balances assume that annual 

investment contributions beginning in 

2007 amount to slightly over 4.5 percent 

of the fund balance. Investment 

contributions equal interest income plus 

(minus) unrealized gains (losses) on 

available-for-sale securities. The 

investment yield used in the projections 

assumes a continuation of recent 

investment return experience. 

The use of expert forecasts for interest 

rates next year, as detailed in the Blue 

Chip Financial Forecasts, would yield 

similar projections for 2007 investment 

contributions. Since May of this year, 

short-term Treasury yields have 

increased slightly as the Federal Reserve 

raised the target for the federal funds 

rate to 5.25 percent. Long-term Treasury 

yields declined by over 35 basis points 

over the same period, resulting in a 

modestly inverted yield curve since late 

July. Low longer-term interest rates 

reflect historically low and stable longterm inflationary expectations, 

heightened global demand for low-risk, 

long-term assets and, potentially, 

expectations of slower economic growth 

ahead. The economy is forecast to grow 

below its long-run average level for the 

remainder of 2006, and the futures 

market places little chance of any 

further federal funds rate increases. 

Many economic forecasters expect longterm interest rates and the yield curve 

to remain steady through 2007. 

c. Risk-based assessment revenue and 

assessment credits. Table 5 below 

shows projected gross assessment 

revenue, assessment credit use, and net 

assessment revenue for 2007–2008 

under the rate schedule adopted in this 

rule. 


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63The table actually reflects domestic deposits 

rather than assessment bases. However, pursuant to 

a final rule adopted simultaneously with this final 

rule, beginning in 2007 the assessment base will 

equal domestic deposits with minor adjustments. 

The final rule eliminates the standard amounts 

deducted from domestic deposits for float. See Final 

Rule on Operational Changes to Assessments, to be 

published elsewhere in this issue of the Federal 

Register. 

64 71 FR 61374 (October 18, 2006). 

65 In 2008, 2009 and 2010, credit use will be 

capped at 90 percent of an institution’s assessment, 

as required by the Reform Act and implementing 

regulations. 

Projected gross assessment revenue is 

derived by assigning each insured 

institution to a Risk Category, and 

assigning each institution in Risk 

Category I to the minimum rate, 

maximum rate, or rate in between, using 

the most recently available supervisory 

and debt issuer ratings, and June 30, 

2006, financial data. Table 6 shows the 

distribution of institutions and 

assessment bases among the Risk 

Categories using the most recently 

available data.63 For purposes of 

assessment revenue projections, the 

distribution of assessable deposits 

among Risk Categories (and within Risk 

Category I) is assumed to remain 

constant. 

Assessment revenue projections 

reflect the use of assessment credits 

authorized under the Reform Act and 

distributed in accordance with the 

recent final rule adopted for assessment 

credits.64 In 2007, most institutions that 

have credits will apply them to offset 

either their entire assessment or an 

amount equal to their total credit, 

whichever is less. Therefore, as 

indicated in Table 5 above, the effective 

rate applicable to the industry next year 

under this rate schedule is projected to 

be only 0.9 basis points. The effective 

rate is projected to rise to 3.4 basis 

points in 2008 as some institutions 

exhaust their credits.65

2. Projected Insured Deposits 

Chart 2 shows levels of insured 

deposits and corresponding four-quarter 

growth rates since 1990, including 

forecasts through 2007. Over the 1990–

2005 period, annual growth rates in 

insured deposits ranged between ¥2.8 

percent and 7.4 percent. After three 

consecutive annual declines in insured 


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deposits—from year-end 1991 to yearend 1994—annual growth in insured 

deposits picked up in the mid-1990s 

and reached 6.5 percent in 2000. 

Improved stock market conditions and 

historically low short-term interest rates 

helped reduce growth to 2.0 percent in 

2003. However, insured deposit growth 

then climbed to 4.9 percent in 2004 and 

7.4 percent in 2005. The high growth in 

insured deposits may have resulted 

partly from an increase in short-term 

interest rates, triggered by a tightening 

in monetary policy by the Federal 

Reserve. An increase in short-term 

interest rates relative to long-term rates 

makes short-term investment 

instruments, such as bank deposits, 

more attractive to investors. 


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66Specifically, the statistical forecast model 

explains growth in insured deposits as dependent 

on current and last quarter growth in domestic 

deposits (both insured and uninsured) as well as on 

last quarter’s growth in insured deposits. The 95 

percent confidence interval for the 2006 growth rate 

is +/¥2.6 percent. The range of uncertainty grows 

beyond 2006 as the forecast horizon lengthens. An 

alternative forecasting model, which also uses 

lagged growth in the federal funds rate to explain 

domestic deposits, resulted in a slightly lower 2007 

insured deposit growth rate (4.7 percent). 

67The forecast does not explicitly account for the 

effect of the Reform Act provision raising the 

insurance coverage limit on retirement accounts 

from $100,000 to $250,000. The increase in 

coverage became effective on April 1, 2006. There 

is considerable uncertainty about the provision’s 

effect on aggregate estimated insured deposits and 

the reserve ratio. Regulatory reporting changes that 

will help capture the magnitude of any increase in 

estimated insured deposits took effect in the second 

quarter of 2006 for Call Report filers and are 

scheduled to take effect in the fourth quarter of 

2006 for TFR filers. Based on the very limited 

information currently available, staff anticipates 

that the retirement account coverage limit increase 

may reduce the reserve ratio by between one-half 

and one basis point. 

68Rolling 12-quarter growth rates in insured 

deposits were calculated beginning with the March 

1995 to March 1998 period and ending with the 

June 2003 to June 2006 period. The mean 12-quarter 

growth rate over this period was 3.8 percent 

(annualized), and the largest reported 12-quarter 

growth rate was 5.7 percent. 

69These projections also assume that domestic 

deposits (the assessment base) increase by 5.6 

percent in 2007, 5.3 percent in 2008, and 5.2 

percent in 2009. 

70The Reform Act requires the FDIC to establish 

the DRR within a range of 1.15 percent to 1.50 

percent of estimated insured deposits. The Board 

must establish a restoration plan when the reserve 

ratio falls below 1.15 percent. The FDIC must also 

pay dividends when the reserve ratio exceeds 1.35 

percent, unless the Board elects to suspend them. 

Based on the results of a statistical 

forecast model, insured deposits are 

predicted to increase by 6.6 percent in 

2006 and 5.0 percent in 2007.66 The 

projected growth rate in 2007 is 

approximately the same as the average 

annual growth rate for the five years 

ending in 2005.67

Beyond 2007, while not relying on a 

statistical forecast model, the FDIC 

believes that it is reasonable to plan for 

average annual insured deposit growth 

in the 4 percent-to-6 percent range. 

Table 3 shows that, with an average 

annual growth rate between 4 percent 

and 6 percent beginning next year, 

implementation of a rate schedule 3 

basis points above the base rate 

schedule has a reasonable chance of 

raising the reserve ratio to the 1.25 

percent DRR in the third year (2009) of 

the new assessment system. That table 

also indicates that average annual 

growth of 7 percent or higher would 

make it unlikely to achieve a reserve 

ratio of 1.25 percent within three years. 

Yet, while insured deposits rose by 

more than 7 percent in 2005, the 

historical data suggest that it is very 

unlikely that insured deposits will 

increase at an average annual rate as 

high as 7 percent for three consecutive 

years.68

3. Projected Reserve Ratios 

Assuming insured deposit growth of 5 

percent per year beginning in 2007, 

projections for year-end 2006 and the 

first three years under the new rate 

schedule are as follows: 69

The table indicates that the reserve 

ratio is expected to decline slightly next 

year as the use of assessment credits 

prevents the fund balance from rising in 

pace with insured deposits. However, 

with two-thirds of credits drawn down 

by the end of 2007, assessment revenue 

should accelerate in 2008 and help the 

fund meet the DRR during 2009. 

4. Effect of the Rate Schedule on Capital 

and Earnings of Insured Institutions 

Appendix 3 contains an analysis of 

the projected effects of the payment of 

assessments under the actual (as 

opposed to base) rate schedule adopted 

in this rule on the capital and earnings 

of insured depository institutions. In 

sum, the actual rate schedule is not 

expected to impair the capital or 

earnings of insured institutions 

materially. 

5. Other Factors Supporting the Rate 

Schedule 

As permitted by law, the FDIC Board 

considered other factors in establishing 

the rate schedule adopted in this rule: 

a. Flexibility to manage the reserve 

ratio within a range. While the Reform 

Act requires the FDIC Board to set a 

DRR annually, there is no longer a 

requirement for the reserve ratio to meet 

the DRR within a particular time frame. 

The DRR is no longer a statutory ‘‘hard’’

target. The Board may choose a time 

period that it believes appropriate to 

bring the reserve ratio in line with the 

DRR and, subject to the range 

established in the Reform Act, decide 

how much variation from the DRR 

would be acceptable.70

As of June 30, 2006, the reserve ratio 

stood at 1.23 percent, and is expected to 

decline to 1.21 percent by year-end. 

Returning the fund to the DRR within a 

12-month period, as had been required 

when the DRR was treated as a ‘‘hard’’

target, would require charging a 

minimum rate of 10.5 basis points 

(assuming insured deposit growth of 5 

percent next year, as well as low losses 

and flat operating expenses). The FDIC 

does not believe that this steep an 

increase is advisable or consistent with 

the Reform Act’s objective of providing 

for greater premium stability. Therefore, 


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71See Table 1.6 in Appendix 1 to the NPR. 71 FR 

41910. 

72The base rate for institutions in the 2B risk 

classification was 14 basis points, compared with 

a base rate for institutions in Risk Category II of 7 

basis points. 

the FDIC is using the flexibility 

provided in the Reform Act to raise the 

reserve ratio more gradually and permit 

a less steep increase in assessment rates. 

b. Increasing the fund when 

conditions are favorable. An objective of 

the Reform Act is to allow the fund to 

increase under favorable conditions so 

that it can decline under adverse 

conditions without sharp increases in 

assessments. The outlook for economic 

conditions affecting banks remains 

favorable. There have been no failures 

in over two years. Banking industry 

profits have continued to set records 

and capital remains strong. Loan 

performance has been solid and chargeoffs are at, or near, 15-year lows. There 

is little evidence of material adverse 

conditions currently impairing industry 

performance. 

Nonetheless, it is difficult to predict 

how long such favorable conditions will 

last. Areas of concern already visible 

include the compression in net interest 

margins, weakening housing markets, 

and the uncertainty over energy prices, 

among other risks. In the FDIC’s view, 

it would be prudent not to stretch out 

too long the time to raise the fund to the 

1.25 percent DRR and risk encountering 

a worsening of industry conditions 

before the fund is at the desired level. 

c. Ensuring that the fund stays within 

the range established by Congress. As 

Table 3 shows, the rate schedule 

adopted in this rule is unlikely to cause 

the reserve ratio to decline below the 

1.15 percent lower bound for the range, 

even in the unlikely event that insured 

deposit growth averages as much as 8 

percent over the next few years. 

Furthermore, the FDIC Board can act to 

adjust rates when the reserve ratio 

achieves the DRR to prevent the fund 

from growing too large and triggering 

the requirement to pay dividends. 

On the other hand, if the FDIC Board 

sets rates equal to the base rate 

schedule, Table 8 below shows that it 

would be highly unlikely for the fund to 

reach the 1.25 percent DRR within five 

years. Furthermore, there would be a 

significantly greater chance that insured 

deposit growth would push the fund 

below the 1.15 percent lower bound. 

Comments 

Overall base rates: Some comments 

(including a comment from a trade 

group) noted that the base rates for Risk 

Categories II, III and IV were not 

sufficiently high multiples of the 

average Risk Category I base rate, given 

the historical costs to the FDIC from 

failures of institutions in these 

categories. Thus, ‘‘under the Proposal, a 

substantial subsidization will remain of 

the riskier institutions by the safer 

ones.’’

The NPR itself notes that, at least with 

respect to Risk Category IV, the base rate 

is substantially lower than the historical 

analysis would suggest is needed to 

recover costs from failures. The lower 

rate is intended to decrease the chance 

of assessments being so large that they 

cause these institutions to fail. 

When losses due to fraud are taken 

into account by prorating among all risk 

categories, the base rates for Categories 

II and III and for the riskier institutions 

in Risk Category I are slightly lower 

than the historical analysis would 

suggest and the base rates for the less 

risky institutions in Risk Category I are 

slightly higher than the historical 

analysis would suggest.71 However, the 

historical analysis can only be a guide 

to rates. The base rates also take into 

account the FDIC’s estimate of its longterm revenue needs, including the 

requirement to manage the reserve ratio 

within a range. In addition, the base 

rates for institutions in Risk Category I 

are equal to or lower than the base rate 

being replaced (four basis points) and 

the base rates for Risk Categories II, III 

and IV are, with a single exception, 

higher than the base rates being 

replaced.72 Thus, the new base rates 

substantially reduce the subsidization of 

non-Risk Category I institutions by Risk 

Category I institutions and also 

substantially reduce the subsidization of 

higher risk institutions in Risk Category 

I by lower risk institutions in that 

category. For these reasons, the FDIC is 

adopting the proposed base rate 

schedule unchanged. 

Minimum rate. Several comments 

argued in favor of a lower minimum 

base rate for institutions in Risk 

Category I. Suggestions for the 

minimum base rate included 0, 1 basis 

point or less, 1 basis point, and 1.25 

basis points. Arguments in favor of a 

lower minimum base rate included: 

• The FDIC is not likely to set actual 

rates below the base rates. 

• Institutions in Risk Category I do 

not present much, if any, risk. 

• The FDIC’s data does not support 

charging the least risky institutions 2 

basis points. 


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73The FDIC chose to use an OLS model for two 

primary reasons. The two models, logit and OLS, 

produced very similar risk rankings and the OLS 

model allowed institutions to easily calculate their 

potential base assessment rate for given changes in 

their financial ratios and CAMELS component 

ratings. 

• Over certain periods in the past, 

average rates for Risk Category I 

required to maintain a given reserve 

ratio have been lower than 2 basis 

points. 

• 2 basis points would unfairly 

penalize those institutions that could 

qualify for an assessment of less than 2 

basis points under the proposed small 

institution method. 

• The base rates do not take into 

account loss given default. 

As discussed earlier, the historical 

analysis of costs attributable to each risk 

category can only be a guide to rates. 

The base rates take into account the 

FDIC’s estimate of its long-term revenue 

needs. Moreover, the base rates do not 

in any sense represent a floor below 

which rates cannot be set. If these rates 

prove to generate too much revenue 

over time, the FDIC’s Board can reduce 

actual rates. 

That some institutions appear to 

qualify for an assessment of less than 2 

basis points using the method that 

combines supervisory ratings with 

financial ratios is largely an artifact of 

the statistical method used to estimate 

an institution’s probability of 

downgrade. Had the FDIC employed the 

more commonly used logit model rather 

than an ordinary least squares (OLS) 

model, this artifact would have nearly 

disappeared.73

The issue of loss given default is 

discussed in a subsequent section 

(XI(C)). 

Rate adjustments. Several comments 

(including comments from trade groups) 

opposed allowing the FDIC to adjust 

rates from the base rate schedule 

without further notice-and-comment 

rulemaking; one suggested that the FDIC 

be allowed to increase rates above the 

base rate schedule a maximum of 2 basis 

points without further notice-andcomment rulemaking. Arguments in 

support of requiring further notice-andcomment rulemaking included: 

• The FDIC is no longer required to 

raise rates when the reserve ratio falls 

below the designated reserve ratio; 

therefore, the FDIC no longer needs to 

be able to raise rates quickly and 

drastically. 

• If the FDIC must raise rates quickly, 

it can do so on an expedited basis or on 

an emergency basis, subject to 

subsequent notice and comment. 

• Notice-and-comment rulemaking 

will allow banks time to plan for higher 

rates. 

Arguments in support of allowing the 

FDIC to increase rates above the base 

rate schedule a maximum of 2 basis 

points without further notice-andcomment rulemaking included: 

• Given historical longer-term 

insured deposit growth rates, an 

increase above the base rates of more 

than 2 basis points is unnecessary. 

• An increase above the base rates of 

more than 2 basis points would affect 

institutions’ earnings and their ability to 

lend in ways that cannot be justified 

given the present size of the DIF. 

• Limiting the increase in this way 

should make assessment rates more 

stable from quarter to quarter. 

Congress has granted the FDIC broad 

authority to establish a risk-based 

assessment system. 12 U.S.C. 1817(b)(1). 

Maintaining the ability to adjust rates 

within limits without notice and 

comment rulemaking is consistent with 

our well established practice and will 

allow the FDIC to act expeditiously to 

adjust rates in the face of constantly 

changing conditions, subject to the 

statutory factors we are required to 

consider. The NPR gave institutions 

notice that rates may be significantly 

higher than the base rates temporarily, 

partly because of the ongoing trend of 

high insured deposit growth and partly 

because the use of one-time credits will 

limit assessment revenue. For this 

reason, the final rule continues to allow 

the FDIC to adjust rates within limits 

without further notice-and-comment 

rulemaking. However, in light of the 

comments, the FDIC has decided to 

limit its ability to adjust rates without 

further notice-and-comment rulemaking 

to three basis points, as discussed 

above. 

One comment opposed making 

uniform increases from the base rate 

schedule in determining actual rates 

and argued that any increase above the 

base rate schedule that was uniform 

would not reflect actual risk: 

Any basis point ‘‘surcharge’’ should be 

risk-weighted, so that an institution with a 

lower risk profile would be charged a lower 

‘‘surcharge’’ (e.g., 1 basis point or lower), and 

an institution with a higher risk profile 

would be charged a higher ‘‘surcharge’’ (e.g., 

5 basis points). 

The FDIC believes that this comment 

contains a valid point. In the event that 

revenue needs increase or decrease 

greatly and variations in risk among 

institutions suggest non-uniform rate 

changes, the FDIC will consider whether 

to increase or decrease the range of 

assessment rates between risk categories 

and within Risk Category I. Any such 

change would only be made pursuant to 

further rulemaking. 

Fraud costs. Two comments argued 

that the FDIC had failed to take fraud 

costs into account in the NPR. This is 

incorrect. Fraud was not excluded from 

the data used to develop the risk 

differentiation methods. The risk 

differentiation methodology was 

applied to analyze historical costs 

attributable to the risk categories (and to 

subsets of Risk Category I). The FDIC 

conducted this analysis in two steps. In 

the first step, the FDIC excluded fraud 

costs because, until fraud is uncovered, 

an institution engaged in fraud is 

usually not assigned to the correct risk 

category. After this step was concluded, 

the FDIC then distributed these fraud 

costs pro rata among all risk categories 

to determine historical costs attributable 

to the risk categories (and to subsets of 

Risk Category I). The FDIC used these 

historical costs to determine and 

validate base assessment rates. 

Currently, fraud cannot be predicted. 

When it does appear, it can cause the 

failure of very large institutions. 

Keystone Bank, which was a relatively 

large bank, failed as the result of 

massive fraud. The Bank of Credit and 

Commerce International and Barings 

Brothers, Inc., were both very large 

banks that failed as a result of fraud. 

Outside of the banking industry, many 

failures have resulted as the result of 

fraud. 

Actual rates. Many comments dealt 

with the actual assessment rates to be 

charged, either explicitly or by 

implication. Many comments (including 

comments from trade groups) suggested 

or implied that the FDIC keep 

assessment rates low, particularly for 

institutions in Risk Category I, and build 

the reserve ratio gradually over a period 

of years. The reasons cited for keeping 

assessment rates low included many of 

the reasons for lowering the base rate 

schedule for Risk Category I. In 

addition, other arguments included: 

• The Reform Act eliminates the 

requirement that the reserve ratio reach 

any particular level within any 

particular time period. 

• There should be a period of 

transition to allow banks to gradually 

use up their one-time assessment credits 

and adjust to paying premiums again 

under the new risk-based assessment 

system. 

• High rates would be a burden on all 

institutions and would particularly and 

unnecessarily burden institutions 

without one-time credits, harming their 

competitive position and discouraging 

the formation of new banks. 

• Insured deposit growth rates are not 

likely to be high over the long term; in 


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74Of course, only growth in insured deposits can 

dilute the reserve ratio. 

the past 15 years, there has been no 5- 

year period where annual growth rates 

much exceeded 5 percent. Given 

realistic growth rates of 4 to 5 percent, 

charging high rates will quickly increase 

the reserve ratio to unnecessarily high 

levels. 

• The banking industry is extremely 

healthy because of improved risk 

management policies and procedures in 

the banking industry, and legislation 

that has equipped the federal bank 

regulatory agencies with additional 

supervisory and enforcement tools and 

the increased sophistication of the 

supervisory process. 

• The risk of failure for Category I 

institutions is extremely low, and the 

risk of loss to the FDIC is even lower. 

• Bank customers, particularly 

corporate customers, actually bear the 

burden of assessments. 

The FDIC has decided on actual rates 

based upon the analysis described 

earlier. In sum, the FDIC is using the 

flexibility afforded under the Reform 

Act to raise the reserve ratio more 

gradually than if the 1.25 percent DRR 

remained a ‘‘hard’’ annual target. 

Nonetheless, consistent with the 

legislation’s objectives, the FDIC 

believes that rates should currently be 

set to build up the fund while economic 

conditions are generally favorable and 

the industry remains strong. Absent 

persistent high insured deposit growth, 

the FDIC expects that future assessment 

rates should be able to decline toward 

the base rate schedule once the reserve 

ratio reaches the DRR. Rates could be set 

below the base rate schedule if insured 

deposit growth slows considerably. 

Finally, the rates adopted in this rule 

(including rates charged new 

institutions when the provisions 

regarding new institutions become 

effective) remain well below rates that 

were charged during periods of both 

economic and industry stress and are 

not expected to have material adverse 

effects on established or new 

institutions. 

IX. Comments on Additional Issues 

Rapid Growth Premium 

Some trade groups proposed imposing 

an additional premium for institutions 

(or new institutions) that have rapid 

deposit growth to offset dilution of the 

reserve ratio. Other trade groups 

proposed such a premium for large 

institutions that have rapid deposit 

growth. 

The FDIC has decided against 

imposing a specific growth premium, 

primarily for two reasons. First, 

Congress has already considered and 

resolved the issue of rapid growth 

during the past 10 years, when most 

institutions have paid nothing for 

deposit insurance, by awarding a onetime credit to those institutions that 

helped build the deposit insurance 

funds before 1996. Second, assessments 

under the final rule take future growth 

into account. An institution’s 

assessment equals the product of its 

assessment rate times its assessment 

base (which, under a final rule adopted 

simultaneously with this final rule, will 

be identical or nearly identical with its 

domestic deposits). Thus, any growth in 

domestic deposits will proportionally 

increase an institution’s assessment.74

In addition, in the FDIC’s view, it is 

not practicable to define or impose such 

a premium. One difficult issue with 

defining an appropriate level of growth 

as a trigger is that a relatively small 

dollar increase in deposits at a small 

institution could represent a significant 

percentage of growth while a very large 

increase in deposits at a large institution 

might result in a small increase in the 

institution’s percentage of growth. 

Additionally, rapid growth alone may or 

may not warrant an additional 

premium. Finally, it would be very 

difficult—and probably impossible—to 

specify a rule for triggering a specific 

growth premium that could not be 

circumvented by some institutions. 

Risk Differentiation 

Several comments (including 

comments from trade groups) asserted 

that the FDIC cannot accurately 

differentiate risk amongst Category I 

institutions (or at least accurately 

enough for incremental pricing in small 

banks and/or six sub-categories for large 

banks) and, therefore, all institutions in 

Risk Category I should be charged the 

same assessment rate. These comments 

argued that subcategories and 

incremental pricing introduce 

unnecessary complexities. These 

comments claim that this additional 

complexity creates confusion and 

undermines confidence in the 

assessment system. One comment added 

that looking beyond three years when 

analyzing Category I institutions’ risk is 

unnecessary, since failing institutions 

would still be placed in a higher risk 

category well before failure. 

The FDIC has found significant 

differences in risk among institutions in 

Risk Category I. To illustrate these 

differences in risk, consider differences 

in failure rates between CAMELS 1- 

rated and CAMELS 2-rated institutions 

that make up Risk Category I. The 

historical failure rate for CAMELS 2- 

rated institutions is 2.5 times that of 

CAMELS 1-rated institutions for both 

three-and five-year horizons. Moreover, 

for a two-year horizon, CAMELS 2-rated 

institutions fail three times more often 

than do CAMELS 1-rated institutions. 

In the FDIC’s view, while the analysis 

that produced the risk differentiation 

and pricing methodology underlying the 

final rule is complex, its application is 

not. Moreover, in general, the simpler a 

system is, the less able it is to capture 

differences in risk. The statistical 

analysis used may be complex, but it 

produces meaningful distinctions in 

risk. 

One commenter also stated that the 

proposal makes assessment rates most 

risk sensitive for those banks that are 

least likely to fail. The FDIC recognizes 

that institutions in Risk Category I are 

less likely to fail than institutions in 

Risk Categories II, III and IV. These 

differences are reflected in assessment 

rates. Base assessment rates for Category 

IV institutions are 10 to 20 times higher 

than rates for the riskiest Category I 

institutions. 

Calibration 

One trade group argued that the 

FDIC’s model is not well calibrated to 

economic cycles because ‘‘the 

percentage of institutions that would 

qualify for the floor rate is greater than 

the 45 percent for every year since 1992, 

except one.’’ The inference apparently 

intended to be drawn from this 

argument is that, because the industry is 

healthier now than it has been for 

almost all years since 1992, the 

percentage of institutions that would 

qualify for the floor rate should be 

greater now than in the past. However, 

this argument overlooks two important 

points. First, the profitability of the 

banking industry in this decade 

compared to the 1990s has resulted, in 

part, from increased risk. From the mid1990s to the present, earnings did not 

grow as fast as risk-weighted assets. As 

shown in Chart 3 below, the median 

ratio of earnings before taxes to riskweighted assets has declined steadily 

since the early 1990s. The risk 

differentiation methods adopted in the 

final rule are designed to capture this 

increased risk. Second, not all 

institutions are prospering as much as 

they were in the past. In 2005, the pretax return on assets for institutions with 

under $100 million in assets was 1.29 

percent, which was less than in any year 

between 1992 and 1999. 


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75Another comment illustrated the loss given 

failure problem by noting that the FDIC would 

suffer lower losses, all else equal, at an institution 

that relied more on non-deposit borrowing relative 

to one that relied on deposits. However, the FDIC 

would collect lower assessment revenue from an 

institution that used non-deposit borrowing, 

because only deposits are included in the 

assessment base. In addition, the comment assumes 

that, between the time the FDIC assesses an 

institution and the time it fails, the institution’s 

liability structure will not change. As discussed 

later in the text, this is usually not the case. As an 

institution approaches failure, insured deposit 

liabilities and secured liabilities tend to become a 

larger percentage of an institution’s liabilities. 

76Rosalind L. Bennett, ‘‘Evaluating the Adequacy 

of the Deposit Insurance Fund: A Credit-Risk 

Modeling Approach,’’ FDIC Working Paper Series 

2001–02. 

Loss Given Failure 

Several comments (including 

comments from trade groups) stated that 

the capital measure should include 

subordinated debt and stated or implied 

that subordinated debt should reduce 

assessment rates. For example, one 

comment recommended that 

institutions with subordinated liabilities 

and equity in excess of 25 percent of 

assets be placed in the minimum 

assessment rate subcategory. Several 

comments (including comments from 

trade groups) argued that the statutes 

governing the risk-based pricing system 

require that the FDIC take loss given 

default into account when determining 

assessments and that the proposed 

system fails to do so. This failure, they 

argue, makes the system actuarially 

unfair. 

The FDIC recognizes that the Federal 

Deposit Insurance Act requires that the 

FDIC take the likely amount of any loss 

from failure into account in the 

assessment system. The final rule takes 

loss given failure (and expected loss 

pricing in general) into account in 

several ways. For a large institution, the 

FDIC will consider loss given failure 

(through the loss severity indicators 

enumerated in Appendix C) in 

determining whether to make an 

adjustment to an institution’s 

assessment rate. The final rule also takes 

loss given failure into account in the 

historical analysis that informed the 

base rate schedule and in each 

institution’s assessment base. However, 

the FDIC’s ability to take loss given 

failure into account in determining the 

assessment rate for some institutions, 

particularly small institutions, is 

somewhat limited for several reasons.75

First, Call Reports and TFRs do not 

provide complete disclosure of several 

important determinants of loss given 

failure, such as secured liabilities, loan 

collateral requirements and the maturity 

structure of assets and liabilities. 

Second, as the FDIC explained in the 

NPR, at present it is not always clear 

which assumptions regarding loss given 

failure are most appropriate.76

Thus, as the NPR noted, the FDIC is 

using an alternative to expected loss 

pricing to differentiate risk and set 

assessment rates. The FDIC hopes to 

refine its treatment of loss given failure 

(and expected loss pricing) in the future. 

As part of any refinement, the FDIC 

plans to consider whether, for example, 

to factor the composition of liabilities 

into loss given failure. 

One comment also argued that the 

proposed risk differentiation and 

pricing system is unfair because 

institutions are assessed on deposits 

that are not insured, which ‘‘results in 

institutions with larger-than-average 

uninsured deposits (as a fraction of total 

deposits) subsidizing other 

institutions.’’ This argument is 

inconsistent with studies that show that, 

as an institution approaches failure, 

uninsured deposits tend to be replaced 

by insured deposits and secured 

liabilities, which increases the FDIC’s 


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77See, e.g., Lawrence G. Goldberg and Sylvia 

Hudgins, ‘‘Response of Uninsured Depositors to 

Impending S&L Failures: Evidence of Depositor 

Discipline,’’ Quarterly Review of Economics and 

Finance 36, no. 3 (1996), 311–325; Andrew 

Davenport and Kathleen McDill, ‘‘The Depositor 

behind the Discipline: A Micro-Level Case Study of 

Hamilton Bank,’’ Journal of Financial Services 

Research 30: 93–109 (2006). 

78For about half of the small institutions 

analyzed, the change reflected an assessment 

decrease and a revenue increase. 

79–81For about half of the small institutions 

analyzed, the change reflected an assessment 

decrease and a profit increase. 

loss given failure.77 Restricting the 

assessment base in this manner would 

reduce the assessment system’s ability 

to take into account loss given failure. 

Guidance on Disclosure 

Some comments expressed concern 

over potential disclosure of an 

institution’s assessment rate or amount, 

and changes to that rate or amount, 

through which third parties could 

determine an institution’s confidential 

CAMELS component ratings. Concern 

also was expressed that disclosure of an 

institution’s assessment rate or amount 

could create funding problems for an 

institution. Finally, the question was 

raised whether an institution can 

disclose its assessment rate because an 

element of that rate is examination 

ratings. 

Assessment rates remain confidential 

and cannot be disclosed directly, except 

to the extent required by law. However, 

the proposed assessment system, similar 

to the current system, is based in part 

on publicly available information. Even 

under the current system, it is possible 

to estimate an institution’s composite 

CAMELS rating using publicly available 

information. Under the proposed system 

it may be possible to estimate 

component or composite ratings or 

assessment rates. The additional 

information that could be determined 

under the new assessment system 

should not materially affect an 

institution’s funding costs compared to 

the current system. 

X. Regulatory Analysis and Procedure 

A. Solicitation of Comments on Use of 

Plain Language 

Section 722 of the Gramm-LeachBliley Act, Public Law 106–102, 113 

Stat. 1338, 1471 (Nov. 12, 1999), 

requires the federal banking agencies to 

use plain language in all proposed and 

final rules published after January 1, 

2000. The FDIC invited comments on 

how to make this proposal easier to 

understand, but received none. 

B. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires that each federal agency either 

certify that a proposed rule would not, 

if adopted in final form, have a 

significant economic impact on a 

substantial number of small entities or 

prepare an initial regulatory flexibility 

analysis of the proposal and publish the 

analysis for comment. See 5 U.S.C. 603, 

604, 605. Certain types of rules, such as 

rules of particular applicability relating 

to rates or corporate or financial 

structures, or practices relating to such 

rates or structures, are expressly 

excluded from the definition of ‘‘rule’’

for purposes of the RFA. 5 U.S.C. 601. 

The final rule governs assessments and 

sets the rates imposed on insured 

depository institutions for deposit 

insurance. Consequently, no regulatory 

flexibility analysis is required. 

Nonetheless, the FDIC voluntarily 

undertook a regulatory flexibility 

analysis to aid the public in 

commenting upon the small business 

impact of its proposed rule. The initial 

regulatory flexibility analysis was 

published in the Federal Register (71 

FR 60674) on October 16, 2006. Public 

comment was invited and the comment 

period closed on October 26, 2006. The 

FDIC received no comments on the 

Initial Regulatory Flexibility Act 

analysis. 

In its analysis, the FDIC used data as 

of December 31, 2005, and calculated 

the total assessments that would be 

collected under the base rate schedule 

in the final rule. The economic impact 

on each small institution for RFA 

purposes (i.e., institutions with assets of 

$165 million or less) was then 

calculated as the difference in annual 

assessments under the base rate 

schedule compared to the prior rule as 

a percentage of the institution’s annual 

revenue and annual profits, assuming 

the same total assessments collected by 

the FDIC from the banking industry. 

Based on the December 2005 data, 

under the final base rate schedule, for 

more than 99 percent of small 

institutions (as defined for RFA 

purposes), the change in the assessment 

system would result in assessment 

changes (up or down) totaling one 

percent or less of annual revenue.78 Of 

the total of 5,362 small institutions for 

RFA purposes, just 10 would have 

experienced an increase or decrease 

equal to 2 percent or greater of their 

total revenue. These figures do not 

reflect a significant economic impact on 

revenues for a substantial number of 

small insured institutions. 

The FDIC performed a similar 

analysis to determine the impact on 

profits for small (again, as defined for 

RFA purposes) institutions. Based on 

December 2005 data, under the final 

base rate schedule, 85 percent of the 

small institutions (as defined for RFA 

purposes) with reported profits would 

have experienced an increase or 

decrease in their annual profits of one 

percent or less.79–81 The data indicate 

that, out of those small institutions, as 

defined for RFA purposes, with reported 

profits, just 4 percent would have 

experienced an increase or decrease in 

their total profits of 3 percent or greater. 

Again, these figures do not reflect a 

significant economic impact on profits 

for a substantial number of small (as 

defined for RFA purposes) insured 

institutions. 

The FDIC analyzed the effect of the 

proposal on these institutions that 

showed no profit or loss by determining 

the annual assessment change (either an 

increase or a decrease) that would 

result. The analysis showed that 56 

percent (224) of the 399 small insured 

institutions in this category would have 

experienced a change (increase or 

decrease) in annual assessments of 

$5,000 or less. Of the remainder, 3 

percent (12) would have experienced 

assessment changes (increases or 

decreases) of $20,000 or more. 

The final rule makes only minor 

modifications to the way assessment 

rates are calculated for small 

institutions (although the final rule does 

set assessment rates higher than the base 

rates). Again assuming that the same 

assessment revenue would be collected 

under the old system as under the final 

rule, these modifications have a 

minimal effect on almost all small 

institutions. The effect of the final rule 

on a small institution’s annualized 

profit and revenue as of June 30, 2006 

is nearly identical to the effect shown 

under the proposal. 

The final rule does not directly 

impose any ‘‘reporting’’ or 

‘‘recordkeeping’’ requirements within 

the meaning of the Paperwork 

Reduction Act. The compliance 

requirements for the final rule do not 

exceed existing compliance 

requirements for the present system of 

FDIC deposit insurance assessments, 

which, in any event, are governed by 

separate regulations. The FDIC is 

unaware of any duplicative, overlapping 

or conflicting Federal rules. 

Accordingly, the FDIC certifies that the 

final rule will not have a significant 

economic impact on a substantial 

number of small institutions for 

purposes of the RFA. 


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C. Paperwork Reduction Act 

No collections of information 

pursuant to the Paperwork Reduction 

Act (44 U.S.C. 3501 et seq.) are 

contained in the final rule. 

D. The Treasury and General 

Government Appropriations Act, 1999—

Assessment of Federal Regulations and 

Policies on Families 

The FDIC has determined that the 

final rule will not affect family wellbeing within the meaning of section 654 

of the Treasury and General 

Government Appropriations Act, 

enacted as part of the Omnibus 

Consolidated and Emergency 

Supplemental Appropriations Act of 

1999 (Public Law 105–277, 112 Stat. 

2681). 

E. Small Business Regulatory 

Enforcement Fairness Act 

The Office of Management and Budget 

has determined that the final rule is not 

a ‘‘major rule’’ within the meaning of 

the relevant sections of the Small 

Business Regulatory Enforcement 

Fairness Act of 1996 (SBREFA) (5 U.S.C. 

801 et seq.). As required by SBREFA, 

the FDIC will file the appropriate 

reports with Congress and the 

Government Accountability Office so 

that the final rule may be reviewed. 

List of Subjects in 12 CFR Part 327 

Bank deposit insurance, Banks, 

banking, Savings associations. 

■ For the reasons set forth in the 

preamble, the FDIC hereby amends 

chapter III of title 12 of the Code of 

Federal Regulations as follows: 

PART 327—ASSESSMENTS 

■ 1. The authority citation for part 327 

continues to read as follows: 

Authority: 12 U.S.C. 1441, 1813, 1815, 

1817–1819, 1821; Sec. 2101–2109, Pub. L. 

109–171, 120 Stat. 9–21, and Sec. 3, Pub. L. 

109–173, 119 Stat. 3605. 

■ 2. Revise §§ 327.9 and 327.10 of 

Subpart A to read as follows: 

§ 327.9 Assessment risk categories and 

pricing methods. 

(a) Risk Categories. Each insured 

depository institution shall be assigned 

to one of the following four Risk 

Categories based upon the institution’s 

capital evaluation and supervisory 

evaluation as defined in this section. 

(1) Risk Category I. All institutions in 

Supervisory Group A that are Well 

Capitalized; 

(2) Risk Category II. All institutions in 

Supervisory Group A that are 

Adequately Capitalized, and all 

institutions in Supervisory Group B that 

are either Well Capitalized or 

Adequately Capitalized; 

(3) Risk Category III. All institutions 

in Supervisory Groups A and B that are 

Undercapitalized, and all institutions in 

Supervisory Group C that are Well 

Capitalized or Adequately Capitalized; 

and 

(4) Risk Category IV. All institutions 

in Supervisory Group C that are 

Undercapitalized. 

(b) Capital evaluations. An institution 

will receive one of the following three 

capital evaluations on the basis of data 

reported in the institution’s 

Consolidated Reports of Condition and 

Income, Report of Assets and Liabilities 

of U.S. Branches and Agencies of 

Foreign Banks, or Thrift Financial 

Report dated as of March 31 for the 

assessment period beginning the 

preceding January 1; dated as of June 30 

for the assessment period beginning the 

preceding April 1; dated as of 

September 30 for the assessment period 

beginning the preceding July 1; and 

dated as of December 31 for the 

assessment period beginning the 

preceding October 1. 

(1) Well Capitalized. (i) Except as 

provided in paragraph (b)(1)(ii) of this 

section, a Well Capitalized institution is 

one that satisfies each of the following 

capital ratio standards: Total risk-based 

ratio, 10.0 percent or greater; Tier 1 riskbased ratio, 6.0 percent or greater; and 

Tier 1 leverage ratio, 5.0 percent or 

greater. 

(ii) For purposes of this section, an 

insured branch of a foreign bank will be 

deemed to be Well Capitalized if the 

insured branch: 

(A) Maintains the pledge of assets 

required under § 347.209 of this chapter; 

and 

(B) Maintains the eligible assets 

prescribed under § 347.210 of this 

chapter at 108 percent or more of the 

average book value of the insured 

branch’s third-party liabilities for the 

quarter ending on the report date 

specified in paragraph (b) of this 

section. 

(2) Adequately Capitalized. (i) Except 

as provided in paragraph (b)(2)(ii) of 

this section, an Adequately Capitalized 

institution is one that does not satisfy 

the standards of Well Capitalized under 

this paragraph but satisfies each of the 

following capital ratio standards: Total 

risk-based ratio, 8.0 percent or greater; 

Tier 1 risk-based ratio, 4.0 percent or 

greater; and Tier 1 leverage ratio, 4.0 

percent or greater. 

(ii) For purposes of this section, an 

insured branch of a foreign bank will be 

deemed to be Adequately Capitalized if 

the insured branch: 

(A) Maintains the pledge of assets 

required under § 347.209 of this chapter; 

and 

(B) Maintains the eligible assets 

prescribed under § 347.210 of this 

chapter at 106 percent or more of the 

average book value of the insured 

branch’s third-party liabilities for the 

quarter ending on the report date 

specified in paragraph (b) of this 

section; and 

(C) Does not meet the definition of a 

Well Capitalized insured branch of a 

foreign bank. 

(3) Undercapitalized. An 

undercapitalized institution is one that 

does not qualify as either Well 

Capitalized or Adequately Capitalized 

under paragraphs (b)(1) and (b)(2) of this 

section. 

(c) Supervisory evaluations. Each 

institution will be assigned to one of 

three Supervisory Groups based on the 

Corporation’s consideration of 

supervisory evaluations provided by the 

institution’s primary federal regulator. 

The supervisory evaluations include the 

results of examination findings by the 

primary federal regulator, as well as 

other information that the primary 

federal regulator determines to be 

relevant. In addition, the Corporation 

will take into consideration such other 

information (such as state examination 

findings, if appropriate) as it determines 

to be relevant to the institution’s 

financial condition and the risk posed to 

the Deposit Insurance Fund. The three 

Supervisory Groups are: 

(1) Supervisory Group ‘‘A.’’ This 

Supervisory Group consists of 

financially sound institutions with only 

a few minor weaknesses; 

(2) Supervisory Group ‘‘B.’’ This 

Supervisory Group consists of 

institutions that demonstrate 

weaknesses which, if not corrected, 

could result in significant deterioration 

of the institution and increased risk of 

loss to the Deposit Insurance Fund; and 

(3) Supervisory Group ‘‘C.’’ This 

Supervisory Group consists of 

institutions that pose a substantial 

probability of loss to the Deposit 

Insurance Fund unless effective 

corrective action is taken. 

(d) Determining Assessment Rates for 

Risk Category I Institutions. Subject to 

paragraphs (d)(4), (6), (7) and (8) of this 

section, an insured depository 

institution in Risk Category I, except for 

a large institution that has at least one 

long-term debt issuer rating, as defined 

in § 327.8(i), shall have its assessment 

rate determined using the supervisory 

ratings and financial ratios method set 

forth in paragraph (d)(1) of this section. 

A large insured depository institution in 

Risk Category I that has at least one 


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long-term debt issuer rating shall have 

its assessment rate determined using the 

supervisory and debt ratings method set 

forth in paragraph (d)(2) of this section 

(subject to paragraphs (d)(4), (6), (7) and 

(8) of this section). The assessment rate 

for a large institution whose assessment 

rate in the prior quarter was determined 

using the supervisory and debt ratings 

method, but which no longer has a longterm debt issuer rating, shall be 

determined using the supervisory 

ratings and financial ratios method. 

(1) Supervisory ratings and financial 

ratios method. Under the supervisory 

ratings and financial ratios method for 

Risk Category I institutions, each of five 

financial ratios and a weighted average 

of CAMELS component ratings will be 

multiplied by a corresponding pricing 

multiplier. The sum of these products 

will be added to or subtracted from a 

uniform amount. The resulting sum, 

subject to adjustment pursuant to 

paragraph (d)(4) of this section, if 

appropriate, and adjusted for the actual 

assessment rates set by the Board under 

§ 327.10, will equal an institution’s 

assessment rate; provided, however, that 

no institution’s assessment rate will be 

less than the minimum rate in effect for 

Risk Category I institutions for that 

quarter nor greater than the maximum 

rate in effect for Risk Category I 

institutions for that quarter. The five 

financial ratios are: Tier 1 Leverage 

Ratio; Loans past due 30–89 days/gross 

assets; Nonperforming assets/gross 

assets; Net loan charge-offs/gross assets; 

and Net income before taxes/riskweighted assets. The ratios are defined 

in Table A.1 of Appendix A to this 

subpart. The ratios will be determined 

for an assessment period based upon 

information contained in an 

institution’s report of condition filed as 

of the last day of the assessment period 

as set out in § 327.9(b). The weighted 

average of CAMELS component ratings 

is created by multiplying each 

component by the following percentages 

and adding the products: Capital 

adequacy—25%, Asset quality—20%, 

Management—25%, Earnings—10%, 

Liquidity—10%, and Sensitivity to 

market risk—10%. Appendix A to this 

subpart contains the initial values of the 

pricing multipliers and uniform 

amount, describes their derivation, and 

explains how they will be periodically 

updated. 

(i) Publication of uniform amount and 

pricing multipliers. The FDIC will 

publish notice in the Federal Register 

whenever a change is made to the 

uniform amount or the pricing 

multipliers for the supervisory ratings 

and financial ratios method. 

(ii) Implementation of CAMELS rating 

changes—(A) Changes between risk 

categories. If, during a quarter, a 

CAMELS rating change occurs that 

results in an institution whose Risk 

Category I assessment rate is determined 

using the supervisory ratings and 

financial ratios method moving from 

Risk Category I to Risk Category II, III or 

IV, the institution’s assessment rate for 

the portion of the quarter that it was in 

Risk Category I shall be determined 

using the CAMELS rating in effect 

before the change, subject to adjustment 

pursuant to paragraph (d)(4) of this 

section, if appropriate, and adjusted for 

the actual assessment rates set by the 

Board under § 327.10. For the portion of 

the quarter that the institution was not 

in Risk Category I, the institution’s 

assessment rate shall be determined 

under the assessment schedule for the 

appropriate Risk Category. If, during a 

quarter, a CAMELS rating change occurs 

that results in an institution (other than 

a large institution that has at least one 

long-term debt issuer rating) moving 

from Risk Category II, III or IV to Risk 

Category I, the institution’s assessment 

rate for the portion of the quarter that 

it was in Risk Category I shall be 

determined using the supervisory 

ratings and financial ratios method, 

subject to adjustment pursuant to 

paragraph (d)(4) of this section, if 

appropriate, and adjusted for the actual 

assessment rates set by the Board under 

§ 327.10. For the portion of the quarter 

that the institution was not in Risk 

Category I, the institution’s assessment 

rate shall be determined under the 

assessment schedule for the appropriate 

Risk Category. 

(B) Changes within Risk Category I. If, 

during a quarter, an institution’s 

CAMELS component ratings change in a 

way that would change the institution’s 

assessment rate within Risk Category I, 

the assessment rate for the period before 

the change shall be determined under 

the supervisory ratings and financial 

ratios method using the CAMELS 

component ratings in effect before the 

change. Beginning on the date of the 

CAMELS component ratings change, the 

assessment rate for the remainder of the 

quarter shall be determined using the 

CAMELS component ratings in effect 

after the change. 

(2) Supervisory and debt ratings 

method. A large insured depository 

institution in Risk Category I that has at 

least one long-term debt issuer rating 

shall have its assessment rate 

determined using the supervisory and 

debt ratings method (subject to 

paragraphs (d)(4) through (8) of this 

section). Its CAMELS component ratings 

will be weighted to derive a weighted 

average CAMELS rating using the same 

weights applied in the supervisory 

ratings and financial ratios method as 

set forth under paragraph (d)(1) of this 

section. Long-term debt issuer ratings 

will be converted to numerical values 

between 1 and 3 as provided in 

Appendix B to this subpart and the 

converted values will be averaged. The 

weighted average CAMELS rating and 

the average of converted long-term debt 

issuer ratings each will be multiplied by 

1.176 (which shall be the pricing 

multiplier), and the products will be 

summed. To this result will be added 

¥1.882 (which shall be a uniform 

amount for all institutions subject to the 

supervisory and debt ratings method). 

The resulting sum, subject to adjustment 

pursuant to paragraph (d)(4) of this 

section, if appropriate, and adjusted for 

the actual assessment rates set by the 

Board pursuant to § 327.10, will equal 

an institution’s assessment rate; 

provided, however, that no institution’s 

assessment rate will be less than the 

minimum rate in effect for Risk Category 

I institutions for that quarter nor greater 

than the maximum rate in effect for Risk 

Category I institutions for that quarter. 

(3) Assessment rate for insured 

branches of foreign banks—(i) Insured 

branches of foreign banks in Risk 

Category I. Insured branches of foreign 

banks in Risk Category I shall be 

assessed using the weighted average 

ROCA component rating, as determined 

under paragraph (d)(3)(ii) of this 

section. 

(ii) Weighted average ROCA 

component rating. The weighted 

average ROCA component rating shall 

equal the sum of the products that result 

from multiplying ROCA component 

ratings by the following percentages: 

Risk Management—35%, Operational 

Controls—25%, Compliance—25%, and 

Asset Quality—15%. The weighted 

average ROCA rating will be multiplied 

by 2.353 (which shall be the pricing 

multiplier). To this result will be added 

¥1.882 (which shall be a uniform 

amount for all insured branches of 

foreign banks). The resulting sum, 

subject to adjustment pursuant to 

paragraph (d)(4) of this section and 

adjusted for assessment rates set by the 

FDIC pursuant to § 327.10(b), will equal 

an institution’s assessment rate; 

provided, however, that no institution’s 

assessment rate will be less than the 

minimum rate in effect for Risk Category 

I institutions for that quarter nor greater 

than the maximum rate in effect for Risk 

Category I institutions for that quarter. 

(4) Adjustments to the initial risk 

assignment for large banks or insured 

branches of foreign banks—(i) Basis for 

and size of adjustment. Within Risk 


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Category I, large institutions and 

insured branches of foreign banks are 

subject to risk assignment adjustment. 

In determining whether to make an 

adjustment for a large institution or an 

insured branch of a foreign bank, the 

FDIC may consider other relevant 

information in addition to the factors 

used to derive the risk assignment under 

paragraphs (d)(1), (2), or (3) of this 

section. Relevant information includes 

financial performance and condition 

information, other market information, 

and stress considerations, as described 

in Appendix C to this subpart. Any such 

adjustment shall be limited to a change 

in assessment rate of up to 0.5 basis 

points higher or lower than the rate 

determined using the supervisory 

ratings and financial ratios method, the 

supervisory and debt ratings method, or 

the weighted average ROCA component 

rating method, whichever is applicable. 

(ii) Adjustment subject to maximum 

and minimum rates. No rate will be 

adjusted below the minimum rate or 

above the maximum rate for Risk 

Category I institutions in effect for the 

quarter. 

(iii) Prior notice of adjustments—(A) 

Prior notice of upward adjustment. Prior 

to making any upward adjustment to an 

institution’s rate because of 

considerations of additional risk 

information, the FDIC will formally 

notify the institution and its primary 

federal regulator and provide an 

opportunity to respond. This 

notification will include the reasons for 

the adjustment and when the 

adjustment will take effect. 

(B) Prior notice of downward 

adjustment. Prior to making any 

downward adjustment to an 

institution’s rate because of 

considerations of additional risk 

information, the FDIC will formally 

notify the institution’s primary federal 

regulator and provide an opportunity to 

respond. 

(iv) Determination whether to adjust 

upward; effective period of adjustment. 

After considering an institution’s and 

the primary federal regulator’s 

responses to the notice, the FDIC will 

determine whether the adjustment to an 

institution’s assessment rate is 

warranted, taking into account any 

revisions to weighted average CAMELS 

component ratings, long-term debt 

issuer ratings, and financial ratios, as 

well as any actions taken by the 

institution to address the FDIC’s 

concerns described in the notice. The 

FDIC will evaluate the need for the 

adjustment each subsequent assessment 

period, until it determines that an 

adjustment is no longer warranted. The 

amount of adjustment will in no event 

be larger than that contained in the 

initial notice without further notice to, 

and consideration of, responses from the 

primary federal regulator and the 

institution. 

(v) Determination whether to adjust 

downward; effective period of 

adjustment. After considering the 

primary federal regulator’s responses to 

the notice, the FDIC will determine 

whether the adjustment to an 

institution’s assessment rate is 

warranted, taking into account any 

revisions to weighted average CAMELS 

component ratings, long-term debt 

issuer ratings, and financial ratios, as 

well as any actions taken by the 

institution to address the FDIC’s 

concerns described in the notice. Any 

downward adjustment in an 

institution’s assessment rate will remain 

in effect for subsequent assessment 

periods until the FDIC determines that 

an adjustment is no longer warranted. 

Downward adjustments will be made 

without notification to the institution. 

However, the FDIC will provide 

advance notice to an institution and its 

primary federal regulator and give them 

an opportunity to respond before 

removing a downward adjustment. 

(vi) Adjustment without notice. 

Notwithstanding the notice provisions 

set forth above, the FDIC may change an 

institution’s assessment rate without 

advance notice under this paragraph, if 

the institution’s supervisory or agency 

ratings or the financial ratios set forth in 

Appendix A to this subpart (for an 

institution without long-term debt 

issuer ratings) deteriorate. 

(5) Implementation of Supervisory 

and Long-Term Debt Issuer Rating 

Changes—(i) Changes between risk 

categories. If, during a quarter, a 

CAMELS rating change occurs that 

results in an institution whose Risk 

Category I assessment rate is determined 

using the supervisory and debt ratings 

method or an insured branch of a 

foreign bank moving from Risk Category 

I to Risk Category II, III or IV, the 

institution’s assessment rate for the 

portion of the quarter that it was in Risk 

Category I shall be based upon its 

assessment rate for the prior quarter; no 

new Risk Category I assessment rate will 

be developed for the quarter in which 

the institution moved to Risk Category 

II, III or IV. If, during a quarter, a 

CAMELS rating change occurs that 

results in a large institution with a longterm debt issuer rating or an insured 

branch of a foreign bank moving from 

Risk Category II, III or IV to Risk 

Category I, the institution’s assessment 

rate for the portion of the quarter that 

it was in Risk Category I shall equal the 

rate determined under paragraphs (d)(2) 

and (4) or (d)(3) and (4) of this section, 

as appropriate. 

(ii) Changes within Risk Category I. If, 

during a quarter, an institution whose 

Risk Category I assessment rate is 

determined using the supervisory and 

debt ratings method remains in Risk 

Category I, but a CAMELS component or 

a long-term debt issuer rating changes 

that would affect the institution’s 

assessment rate, or if, during a quarter, 

an insured branch of a foreign bank 

remains in Risk Category I, but a ROCA 

component rating changes that would 

affect the institution’s assessment rate, 

separate assessment rates for the 

portion(s) of the quarter before and after 

the change(s) shall be determined under 

paragraphs (d)(2) and (4) or (d)(3) and 

(4) of this section, as appropriate. 

(6) Request to be treated as a large 

institution—(i) Procedure. Any 

institution in Risk Category I with assets 

of between $5 billion and $10 billion 

may request that the FDIC determine its 

assessment rate as a large institution. 

The FDIC will grant such a request if it 

determines that it has sufficient 

information to do so. The absence of 

long-term debt issuer ratings alone will 

not preclude the FDIC from granting a 

request. The assessment rate for an 

institution without a long-term debt 

issuer rating will be derived using the 

supervisory ratings and financial ratios 

method, but will be subject to 

adjustment. Any such request must be 

made to the FDIC’s Division of 

Insurance and Research. Any approved 

change will become effective within one 

year from the date of the request. If an 

institution whose request has been 

granted subsequently reports assets of 

less than $5 billion in its report of 

condition for four consecutive quarters, 

the FDIC will consider such institution 

to be a small institution subject to the 

supervisory ratings and financial ratios 

method. An institution that disagrees 

with the FDIC’s determination that it is 

a large or small institution may request 

review of that determination pursuant to 

§ 327.4(c). 

(ii) Time limit on subsequent request 

for alternate method. An institution 

whose request to be assessed as a large 

institution is granted by the FDIC shall 

not be eligible to request that it be 

assessed as a small institution for a 

period of three years from the first 

quarter in which its approved request to 

be assessed as a large bank became 

effective. Any request to be assessed as 

a small institution must be made to the 

FDIC’s Division of Insurance and 

Research. 

(7) New and established institutions 

and exceptions—(i) New Risk Category 

I institutions—(A) Rule as of January 1, 


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2010. Effective for assessment periods 

beginning on or after January 1, 2010, a 

new institution shall be assessed the 

Risk Category I maximum rate for the 

relevant assessment period, except as 

provided in paragraphs (d)(7)(ii)–(viii) 

of this section. 

(B) Rule prior to January 1, 2010. 

Prior to January 1, 2010, a new 

institution’s risk assignment shall be 

determined under paragraph (d)(1) or (2) 

of this section, as appropriate. Prior to 

January 1, 2010, a Risk Category I 

institution that has no CAMELS 

component ratings shall be assessed at 

one basis point above the minimum rate 

applicable to Risk Category I institutions 

until it receives CAMELS component 

ratings. If an institution has less than 

$10 billion in assets or has at least $10 

billion in assets and no long-term debt 

issuer rating, its assessment rate will be 

determined under the supervisory 

ratings and financial ratios method once 

it receives CAMELS component ratings. 

The assessment rate will be determined 

by annualizing, where appropriate, 

financial ratios obtained from the 

reports of condition that have been 

filed, until the earlier of the following 

two events occurs: the institution files 

four reports of condition, or, if it has at 

least $10 billion in assets, it receives a 

long-term debt issuer rating. 

(ii) Merger or consolidation involving 

new and established institution(s). 

Subject to paragraphs (d)(7)(iii)–(viii) of 

this section, when an established 

institution merges into or consolidates 

with a new institution, the resulting 

institution is a new institution unless: 

(A) The assets of the established 

institution, as reported in its report of 

condition for the quarter ending 

immediately before the merger, 

exceeded the assets of the new 

institution, as reported in its report of 

condition for the quarter ending 

immediately before the merger; and 

(B) Substantially all of the 

management of the established 

institution continued as management of 

the resulting or surviving institution. 

(iii) Consolidation involving 

established institutions. When 

established institutions consolidate into 

a new institution, the resulting 

institution is an established institution. 

(iv) Grandfather exception. If a new 

institution merges into an established 

institution, and the merger agreement 

was entered into on or before July 11, 

2006, the resulting institution shall be 

deemed to be an established institution 

for purposes of this section. 

(v) Subsidiary exception. Subject to 

paragraph (d)(7)(vi) of this section, a 

new institution will be considered 

established if it is a wholly owned 

subsidiary of: 

(A) A company that is a bank holding 

company under the Bank Holding 

Company Act of 1956 or a savings and 

loan holding company under the Home 

Owners’ Loan Act, and: 

(1) At least one eligible depository 

institution (as defined in 12 CFR 

303.2(r)) that is owned by the holding 

company has been chartered as a bank 

or savings association for at least five 

years as of the date that the otherwise 

new institution was established; and 

(2) The holding company has a 

composite rating of at least ‘‘2’’ for bank 

holding companies or an above average 

or ‘‘A’’ rating for savings association 

holding companies and at least 75 

percent of its insured depository 

institution assets are assets of eligible 

depository institutions, as defined in 12 

CFR 303.2(r); or 

(B) An eligible depository institution, 

as defined in 12 CFR 303.2(r), that has 

been chartered as a bank or savings 

association for at least five years as of 

the date that the otherwise new 

institution was established. 

(vi) Effect of credit union conversion. 

In determining whether an insured 

depository institution is new or 

established, as those terms are defined 

in § 327.8, the FDIC will include any 

period of time that the institution was 

a federally insured credit union. 

(vii) CAMELS ratings for the surviving 

institution in a merger or consolidation. 

When an established institution merges 

with or consolidates into a new 

institution, if the FDIC determines the 

resulting institution to be an established 

institution under paragraph (d)(ii) of 

this section, its CAMELS ratings will be 

based upon the established institution’s 

ratings prior to the merger or 

consolidation until new ratings become 

available. 

(viii) Rate applicable to institutions 

subject to subsidiary or credit union 

exception. On or after January 1, 2010, 

if an institution is considered 

established under paragraph (d)(7)(v) or 

(vi) of this section, but does not have 

CAMELS component ratings, it shall be 

assessed at one basis point above the 

minimum rate applicable to Risk 

Category I institutions until it receives 

CAMELS component ratings. If an 

institution has less than 

$10 billion in assets or has at least $10 

billion in assets and no long-term debt 

issuer rating, its assessment rate will be 

determined under the supervisory 

ratings and financial ratios method once 

it receives CAMELS component ratings. 

The assessment rate will be determined 

by annualizing, where appropriate, 

financial ratios obtained from all reports 

of condition that have been filed, until 

the earlier of the following two events 

occurs: the institution files four reports 

of condition, or, if it has at least $10 

billion in assets, it receives a long-term 

debt issuer rating. 

(ix) Request for review. An institution 

that disagrees with the FDIC’s 

determination that it is a new institution 

may request review of that 

determination pursuant to § 327.4(c). 

(8) Assessment rates for bridge banks 

and conservatorships. Institutions that 

are bridge banks under 12 U.S.C. 

1821(n) and institutions for which the 

Corporation has been appointed or 

serves as conservator shall, in all cases, 

be assessed at the Risk Category I 

minimum rate. 

§ 327.10 Assessment rate schedules. 

(a) Base Assessment Schedule. The 

base annual assessment rate for an 

insured depository institution shall be 

the rate prescribed in the following 

schedule: 

TABLE 1 TO PARAGRAPH (a) 

Risk Category 

I* 

II III IV 

Minimum Maximum 

Annual Rates (in basis points) ........................................................................................................... 2 4 7 25 40 

* Rates for institutions that do not pay the minimum or maximum rate vary between these rates. 

(1) Risk Category I Base Rate 

Schedule. The base annual assessment 

rates for all institutions in Risk Category 

I shall range from 2 to 4 basis points. 

(2) Risk Category II, III, and IV Base 

Rate Schedule. The base annual 


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assessment rates for Risk Categories II, 

III, and IV shall be 7, 25, and 40 basis 

points respectively. 

(3) All institutions in any one risk 

category, other than Risk Category I, will 

be charged the same assessment rate. 

(b) Adjusted Rate Schedule. 

Beginning on January 1, 2007, the 

adjusted annual assessment rate for an 

insured depository institution shall be 

the rate prescribed in the following 

schedule: 

TABLE 1 TO PARAGRAPH (b) 

Risk Category 

I* 

II III IV 

Minimum Maximum 

Annual Rates (in basis points) ........................................................................................................... 5 7 10 28 43 

*Rates for institutions that do not pay the minimum or maximum rate vary between these rates. 

(1) Risk Category I Adjusted Rate 

Schedule. The adjusted annual 

assessment rates for all institutions in 

Risk Category I shall range from 5 to 7 

basis points. 

(2) Risk Category II, III, and IV 

Adjusted Rate Schedule. The adjusted 

annual assessment rates for Risk 

Categories II, III, and IV shall be 10, 28, 

and 43 basis points respectively. 

(3) All institutions in any one risk 

category, other than Risk Category I, will 

be charged the same assessment rate. 

(c) Rate schedule adjustments and 

procedures—(1) Adjustments. The 

Board may increase or decrease the base 

assessment schedule up to a maximum 

increase of 3 basis points or a fraction 

thereof or a maximum decrease of 3 

basis points or a fraction thereof (after 

aggregating increases and decreases), as 

the Board deems necessary. Any such 

adjustment shall apply uniformly to 

each rate in the base assessment 

schedule. In no case may such 

adjustments result in an assessment rate 

that is mathematically less than zero or 

in a rate schedule that, at any time, is 

more than 3 basis points above or below 

the base assessment schedule for the 

Deposit Insurance Fund, nor may any 

one such adjustment constitute an 

increase or decrease of more than 3 

basis points. 

(2) Amount of revenue. In setting 

assessment rates, the Board shall take 

into consideration the following: 

(i) Estimated operating expenses of 

the Deposit Insurance Fund; 

(ii) Case resolution expenditures and 

income of the Deposit Insurance Fund; 

(iii) The projected effects of 

assessments on the capital and earnings 

of the institutions paying assessments to 

the Deposit Insurance Fund; 

(iv) The risk factors and other factors 

taken into account pursuant to 12 U.S.C. 

1817(b)(1); and 

(v) Any other factors the Board may 

deem appropriate. 

(3) Adjustment procedure. Any 

adjustment adopted by the Board 

pursuant to this paragraph will be 

adopted by rulemaking, except that the 

Corporation may set assessment rates as 

necessary to manage the reserve ratio, 

within set parameters not exceeding 

cumulatively 3 basis points, pursuant to 

paragraph (c)(1) of this section, without 

further rulemaking. 

(4) Announcement. The Board shall 

announce the assessment schedule and 

the amount and basis for any adjustment 

thereto not later than 30 days before the 

quarterly certified statement invoice 

date specified in § 327.3(b) of this part 

for the first assessment period for which 

the adjustment shall be effective. Once 

set, rates will remain in effect until 

changed by the Board. 

■ 3–4. Add Appendices A through C to 

subpart A to read as follows: 

Appendix A to Subpart A 

Method to Derive Pricing Multipliers and 

Uniform Amount 

I. Introduction 

The uniform amount and pricing 

multipliers are derived from: 

• A model (the Statistical Model) that 

estimates the probability that a Risk Category 

I institution will be downgraded to a 

composite CAMELS rating of 3 or worse 

within one year; 

• Minimum and maximum downgrade 

probability cutoff values, based on data from 

June 2006, that will determine which small 

institutions will be charged the minimum 

and maximum assessment rates in Risk 

Category I; 

• The minimum base assessment rate for 

Risk Category I, equal to two basis points, 

and 

• The maximum base assessment rate for 

Risk Category I, which is two basis points 

higher than the minimum rate. 

II. The Statistical Model 

The Statistical Model is defined in 

equation 1a below. 

Equation 1a

Downgrade 0 1 1 0 1 , , ( ) = + ( )

+

i t β β Tier leverage ratioit

β2 30 89

3

Loans past due to days ratio

Nonperfor g asset rati

( ) it

+ β min o

Net loan ch e off ratio

Net income before taxes

it

it

( )

+ − ( )

+

β

β

4

5

arg

ratio

Weighted average of the C A M E and L component ratin

( ) it

+ β6 ,, , gs ( ) it

where Downgrade(0,1)i,t (the dependent 

variable—the event being explained) is the 

incidence of downgrade from a composite 

rating of 1 or 2 to a rating of 3 or worse 

during an on-site examination for an 

institution i between 3 and 12 months after 

time t. Time t is the end of a year within the 

multi-year period over which the model was 

estimated (as explained below). The 


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dependent variable takes a value of 1 if a 

downgrade occurs and 0 if it does not. 

The explanatory variables (regressors) in 

the model are five financial ratios and a 

weighted average of the ‘‘C,’’ ‘‘A,’’ ‘‘M,’’ ‘‘E’’

and ‘‘L’’ component ratings. The five 

financial ratios included in the model are: 

• Tier 1 leverage ratio 

• Loans past due 30–89 days/Gross assets 

• Nonperforming assets/Gross assets 

• Net loan charge-offs/Gross assets 

• Net income before taxes/Risk-weighted 

assets. 

The financial ratios and the weighted 

average of the ‘‘C,’’ ‘‘A,’’ ‘‘M,’’ ‘‘E’’ and ‘‘L’’

component ratings (collectively, the 

regressors) are defined in Table A.1. The 

component rating for sensitivity to market 

risk (the ‘‘S’’ rating) is not available for years 

prior to 1997. As a result, and as described 

in Table A.1, the Statistical Model is 

estimated using a weighted average of five 

component ratings excluding the ‘‘S’’

component. In addition, delinquency and 

non-accrual data on government guaranteed 

loans are not available before 1993 for Call 

Report filers and before the third quarter of 

2005 for TFR filers. As a result, and as also 

described in Table A.1, the Statistical Model 

is estimated without deducting delinquent or 

past-due government guaranteed loans from 

either the loans past due 30–89 days to gross 

assets ratio or the nonperforming assets to 

gross assets ratio. 

TABLE A.1.—DEFINITIONS OF REGRESSORS

Regressor Description 

Tier 1 Leverage Ratio (%) Tier 1 capital for Prompt Corrective Action (PCA) divided by adjusted average assets based 

on the definition for prompt corrective action 

Loans Past Due 30–89 Days/Gross Assets (%) Total loans and lease financing receivables past due 30 through 89 days and still accruing interest divided by gross assets (gross assets equal total assets plus allowance for loan and 

lease financing receivable losses and allocated transfer risk) 

Nonperforming Assets/Gross Assets (%) Sum of total loans and lease financing receivables past due 90 or more days and still accruing 

interest, total nonaccrual loans and lease financing receivables, and other real estate owned 

divided by gross assets 

Net Loan Charge-Offs/Gross Assets (%) Total charged-off loans and lease financing receivables debited to the allowance for loan and 

lease losses less total recoveries credited to the allowance to loan and lease losses for the 

most recent twelve months divided by gross assets 

Net Income before Taxes/Risk-Weighted Assets 

(%) 

Income before income taxes and extraordinary items and other adjustments for the most recent twelve months divided by risk-weighted assets 

Weighted Average of C, A, M, E and L Component Ratings The weighted sum of the ‘‘C,’’ ‘‘A,’’ ‘‘M,’’ ‘‘E’’ and ‘‘L’’ CAMELS components, with weights of 28 

percent each for the ‘‘C’’ and ‘‘M’’ components, 22 percent for the ‘‘A’’ component, and 11 

percent each for the ‘‘E’’ and ‘‘L’’ components. (For the regression, the ‘‘S’’ component is 

omitted.) 

The financial ratio regressors used to 

estimate the downgrade probabilities are 

obtained from quarterly reports of condition 

(Reports of Condition and Income and Thrift 

Financial Reports). The weighted average of 

the ‘‘C,’’ ‘‘A,’’ ‘‘M,’’ ‘‘E’’ and ‘‘L’’ component 

ratings regressor is based on component 

ratings obtained from the most recent bank 

examination conducted within 24 months 

before the date of the report of condition. 

The Statistical Model uses ordinary least 

squares (OLS) regression to estimate 

downgrade probabilities. The model is 

estimated with data from a multi-year period 

(as explained below) for all institutions in 

Risk Category I, except for institutions 

established within five years before the date 

of the report of condition. 

The OLS regression estimates coefficients, 

bj, for a given regressor j and a constant 

amount, b0, as specified in equation 1a. As 

shown in equation 1b below, these 

coefficients are multiplied by values of risk 

measures at time T, which is the date of the 

report of condition corresponding to the end 

of the quarter for which the assessment rate 

is computed. The sum of the products is then 

added to the constant amount to produce an 

estimated probability, di,T, that an institution 

will be downgraded to 3 or worse within 3 

to 12 months from time T. 

The risk measures are financial ratios as 

defined in Table A.1, except that the loans 

past due 30 to 89 days ratio and the 

nonperforming asset ratio are adjusted to 

exclude the maximum amount recoverable 

from the U.S. Government, its agencies or 

government-sponsored agencies, under 

guarantee or insurance provisions. Also, the 

weighted sum of six CAMELS component 

ratings is used, with weights of 25 percent 

each for the ‘‘C’’ and ‘‘M’’ components, 20 

percent for the ‘‘A’’ component, and 10 

percent each for the ‘‘E,’’ ‘‘L,’’ and ‘‘S’’

components. 

Equation 1b

diT = + ( )

+

β β

β

0 1

2

1

30

Tier leverage ratio

Loans past due

iT

to days ratio

Nonperfor g asset ratio

Net loan

iT

iT

89

3

4

( )

+ ( )

+

β

β

min

ch e off ratio

Net income before taxes ratio

Wei

iT

iT

( ) arg −

+ ( )

+

β

β

5

6 ghted average of CAMELS component ratings ( ) iT


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1As used in this context, a ‘‘new institution’’

means an institution that has been chartered as a 

bank or thrift for less than five years. 

2As used in this context, a ‘‘new institution’’

means an institution that has been chartered as a 

bank or thrift for less than five years. 

III. Minimum and maximum downgrade 

probability cutoff values 

The pricing multipliers are also 

determined by minimum and maximum 

downgrade probability cutoff values, which 

will be computed as follows: 

• The minimum downgrade probability 

cutoff value will be the maximum downgrade 

probability among the forty-five percent of all 

small insured institutions in Risk Category I 

(excluding new institutions) with the lowest 

estimated downgrade probabilities, 

computed using values of the risk measures 

as of June 30, 2006.1 The minimum 

downgrade probability cutoff value is 

approximately 2 percent. 

• The maximum downgrade probability 

cutoff value will be the minimum downgrade 

probability among the five percent of all 

small insured institutions in Risk Category I 

(excluding new institutions) with the highest 

estimated downgrade probabilities, 

computed using values of the risk measures 

as of June 30, 2006.2 The maximum 

downgrade probability cutoff value is 

approximately 14 percent. 

IV. Derivation of uniform amount and pricing 

multipliers 

The uniform amount and pricing 

multipliers used to compute the annual base 

assessment rate in basis points, PiT, for any 

such institution i at a given time T will be 

determined from the Statistical Model, the 

minimum and maximum downgrade 

probability cutoff values, and minimum and 

maximum base assessment rates in Risk 

Category I as follows: 

Equation 2

P d subject to P iT iT iT = +∗ ≤ ≤ α α 0 1 , 2 4

where a0 and a1 are a constant term and a 

scale factor used to convert diT (the estimated 

downgrade probability for institution i at a 

given time T from the Statistical Model) to 

an assessment rate, respectively. The 

numbers 2 and 4 in the restriction to 

equation 2 are the minimum base assessment 

rate and maximum base assessment rate, 

respectively, and they are expressed in basis 

points. 

( exp , P is ressed as an annual rate but the actual rate applied in any iT quarter will be PiT

4 .)

Solving equation 2 for minimum and 

maximum base assessment rates 

simultaneously, (2 = a0 + a1 * 0.02 and 4 = a0

+ a1 * 0.14), where 0.02 is the minimum 

downgrade probability cutoff value and 0.14 

is the maximum downgrade probability 

cutoff value, results in values for the constant 

amount, a0, and the scale factor, a1: 

Equation 3

α0 = − ∗

( ) − 2 = 2 0 02

0 14 0 02

1 67 .

. . . and

Equation 4

αi =

( ) − = 2

0 14 0 02

16 67 . . .

Substituting equations 1b, 3 and 4 into 

equation 2 produces an annual base 

assessment rate for institution i at time T, PiT, 

in terms of the uniform amount, the pricing 

multipliers and the ratios and weighted 

average CAMELS component rating referred 

to in 12 CFR 327.9(d)(2)(i): 

Equation 5

P Tier 1 Leverage Ratio iT 0 1 T =+∗ [ ] 1 67 16 67 16 67 . . .[ β β + ∗ ( ) +

∗ ( ) + ∗

]

16 67 16 67 .[ ].[ β β 2 T3 Loans past due 30 to 89 days ratio Nonperforming asset ratio ( ) T +

∗ − (

]

16 67 . [ arg β4 Net loan ch e off ratioT ) + ∗ ( ) +

∗

].[ ]

. [

16 67

16 67

β5

β

Net income before taxes ratioT

7 Weighted average CAMELS component rating ( ) T

≤ ≤

]

again subject to PiT 2 4

where 1.67+16.67*b0 equals the uniform 

amount, 16.67*bj is a pricing multiplier for 

the associated risk measure j, and T is the 

date of the report of condition corresponding 

to the end of the quarter for which the 

assessment rate is computed. 

V. Updating the Statistical Model, uniform 

amount, and pricing multipliers 

The initial Statistical Model is estimated 

using year-end financial ratios and the 

weighted average of the ‘‘C,’’ ‘‘A,’’ ‘‘M,’’ ‘‘E’’

and ‘‘L’’ component ratings over the 1984 to 

2004 period and downgrade data from the 

1985 to 2005 period. The FDIC may, from 

time to time, but no more frequently than 

annually, re-estimate the Statistical Model 

with updated data and publish a new 

formula for determining assessment rates—

equation 5—based on updated uniform 

amounts and pricing multipliers. However, 

the minimum and maximum downgrade 

probability cutoff values will not change 

without additional notice-and-comment 

rulemaking. The period covered by the 

analysis will be lengthened by one year each 

year; however, from time to time, the FDIC 

may drop some earlier years from its 

analysis. 

Appendix B to Subpart A 

NUMERICAL CONVERSION OF LONGTERM DEBT ISSUER RATINGS

Current long-term 

debt issuer rating * 

Converted 

value 

Standard & Poor’s 


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NUMERICAL CONVERSION OF LONGTERM DEBT ISSUER RATINGS—Continued 

Current long-term 

debt issuer rating * 

Converted 

value 

AAA ......................................... 1.00 

AA+ ......................................... 1.05 

AA ........................................... 1.15 

AA¥ ........................................ 1.30 

A+ ............................................ 1.50 

A .............................................. 1.80 

A¥ .......................................... 2.20 

BBB+ ....................................... 2.70 

BBB or worse .......................... 3.00 

Moody’s 

Aaa .......................................... 1.00 

Aa1 .......................................... 1.05 

NUMERICAL CONVERSION OF LONGTERM DEBT ISSUER RATINGS—Continued 

Current long-term 

debt issuer rating * 

Converted 

value 

Aa2 .......................................... 1.15 

Aa3 .......................................... 1.30 

A1 ............................................ 1.50 

A2 ............................................ 1.80 

A3 ............................................ 2.20 

Baa1 ........................................ 2.70 

Baa2 or worse ......................... 3.00 

Fitch’s 

AAA ......................................... 1.00 

AA+ ......................................... 1.05 

AA ........................................... 1.15 

AA¥ ........................................ 1.30 

NUMERICAL CONVERSION OF LONGTERM DEBT ISSUER RATINGS—Continued 

Current long-term 

debt issuer rating * 

Converted 

value 

A+ ............................................ 1.50 

A .............................................. 1.80 

A¥ .......................................... 2.20 

BBB+ ....................................... 2.70 

BBB or worse .......................... 3.00 

* A current rating is defined as one that has 

been assigned or reviewed in the last 12 

months. Stale ratings are not considered. 

Appendix C to Subpart A 


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ADDITIONAL RISK CONSIDERATIONS FOR LARGE RISK CATEGORY I INSTITUTIONS

Information source Examples of Associated Risk Indicators or Information 

Financial Performance and 

Condition Information 

Capital Measures (Level and Trend) 

• Regulatory capital ratios 

• Capital composition 

• Dividend payout ratios 

• Internal capital growth rates relative to asset growth 

Profitability Measures (Level and Trend) 

• Return on assets and return on risk-adjusted assets 

• Net interest margins, funding costs and volumes, earning asset yields and volumes 

• Noninterest revenue sources 

• Operating expenses 

• Loan loss provisions relative to problem loans 

• Historical volatility of various earnings sources 

Asset Quality Measures (Level and Trend) 

• Loan and securities portfolio composition and volume of higher risk lending activities (e.g., sub-prime lending) 

• Loan performance measures (past due, nonaccrual, classified and criticized, and renegotiated loans) and 

portfolio characteristics such as internal loan rating and credit score distributions, internal estimates of default, internal estimates of loss given default, and internal estimates of exposures in the event of default 

• Loan loss reserve trends 

• Loan growth and underwriting trends 

• Off-balance sheet credit exposure measures (unfunded loan commitments, securitization activities, 

counterparty derivatives exposures) and hedging activities 

Liquidity and Funding Measures (Level and Trend) 

• Composition of deposit and non-deposit funding sources 

• Liquid resources relative to short-term obligations, undisbursed credit lines, and contingent liabilities 

Interest Rate Risk and Market Risk (Level and Trend) 

• Maturity and repricing information on assets and liabilities, interest rate risk analyses 

• Trading book composition and Value-at-Risk information 

Market Information • Subordinated debt spreads 

• Credit default swap spreads 

• Parent’s debt issuer ratings and equity price volatility 

• Market-based measures of default probabilities 

• Rating agency watch lists 

• Market analyst reports 

Stress Considerations Ability to Withstand Stress Conditions 

• Internal analyses of portfolio composition and risk concentrations, and vulnerabilities to changing economic 

and financial conditions 

• Stress scenario development and analyses 

• Results of stress tests or scenario analyses that show the degree of vulnerability to adverse economic, industry, market, and liquidity events. Examples include: 

i. an evaluation of credit portfolio performance under varying stress scenarios 

ii. an evaluation of non-credit business performance under varying stress scenarios. 

iii. an analysis of the ability of earnings and capital to absorb losses stemming from unanticipated adverse events 

• Contingency or emergency funding strategies and analyses 

• Capital adequacy assessments 

Loss Severity Indicators 

• Nature of and breadth of an institution’s primary business lines and the degree of variability in valuations 

for firms with similar business lines or similar portfolios 

• Ability to identify and describe discrete business units within the banking legal entity 

• Funding structure considerations relating to the order of claims in the event of liquidation (including the extent of subordinated claims and priority claims) 

• Extent of insured institutions assets held in foreign units 

• Degree of reliance on affiliates and outsourcing for material mission-critical services, such as management 

information systems or loan servicing, and products 

• Availability of sufficient information, such as information on insured deposits and qualified financial contracts, to resolve an institution in an orderly and cost-efficient manner 

By order of the Board of Directors. 

Dated at Washington, D.C., this 2nd day of 

November, 2006. 

Federal Deposit Insurance Corporation. 

Robert E. Feldman, 

Executive Secretary. 

BILLING CODE 6714–01–P 


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1Section 2104 of the Reform Act, Public Law 

109–171, 120 Stat. 9. 

2To be codified at 12 U.S.C. 1817(b)(3)(A)(i), (B). 

3Thereafter, any change to the DRR must be made 

by regulation after notice and opportunity for 

comment. Section 2105 of the Reform Act, to be 

codified at 12 U.S.C. 1817(b)(3)(A) (ii). 

4To be codified at 12 U.S.C. 1817(b)(3)(C). The 

Reform Act provides: 

(C) FACTORS—In designating a reserve ratio for 

any year, the Board of Directors shall—

(i) take into account the risk of losses to the 

Deposit Insurance Fund in such year and future 

years, including historic experience and potential 

and estimated losses from insured depository 

institutions; 

(ii) take into account economic conditions 

generally affecting insured depository institutions 

so as to allow the designated reserve ratio to 

increase during more favorable economic 

conditions and to decrease during less favorable 

Continued 

[FR Doc. 06–9204 Filed 11–29–06; 8:45 am] 

BILLING CODE 6714–01–C 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Part 327 

RIN 3064–AD02 

Deposit Insurance Assessments—

Designated Reserve Ratio 

AGENCY: Federal Deposit Insurance 

Corporation. 

ACTION: Final rule. 

SUMMARY: Under the Federal Deposit 

Insurance Reform Act of 2005, the 

Federal Deposit Insurance Corporation 

(FDIC) must by regulation set the 

Designated Reserve Ratio (DRR) for the 

Deposit Insurance Fund (DIF) within a 

range of 1.15 percent to 1.50 percent. In 

this rulemaking, the FDIC establishes 

the DRR for the DIF at 1.25 percent. 

DATES: Effective Date: January 1, 2007. 

FOR FURTHER INFORMATION CONTACT: 

Munsell St. Clair, Senior Policy Analyst, 

Division of Insurance and Research, 

(202) 898–8967; or Christopher Bellotto, 

Counsel, Legal Division, (202) 898–

3801, Federal Deposit Insurance 

Corporation, 550 17th Street, NW., 

Washington, DC 20429. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The Federal Deposit Insurance Reform 

Act of 2005 (the Reform Act) amends 

section 7(b)(3) of the Federal Deposit 

Insurance Act (the FDI Act) to eliminate 

the current fixed designated reserve 

ratio (DRR) of 1.25 percent.1 Section 

2105 of the Reform Act directs the FDIC 

Board of Directors (Board) to set and 

publish annually a DRR for the Deposit 

Insurance Fund (DIF) within a range of 

1.15 percent to 1.50 percent.2 12 U.S.C. 

1817(b)(3)(A), (B). Under section 

2109(a)(1) of the Reform Act, the Board 

must prescribe final regulations setting 

the DRR after notice and opportunity for 

comment not later than 270 days after 

enactment of the Reform Act.3

In setting the DRR for any year, 

section 2105(a) of the Reform Act, 

amending section 7(b)(3) of the FDI Act, 

directs the Board to consider the 

following factors: 

(1) The risk of losses to the DIF in the 

current and future years, including 

historic experience and potential and 

estimated losses from insured 

depository institutions. 

(2) Economic conditions generally 

affecting insured depository 

institutions. (In general, the Board 

should consider allowing the DRR to 

increase during more favorable 

economic conditions and decrease 

during less favorable conditions.) 

(3) That sharp swings in assessment 

rates for insured depository institutions 

should be prevented. 

(4) Other factors as the Board may 

deem appropriate, consistent with the 

requirements of the Reform Act.4 The 


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