[Federal Register Volume 74, Number 41 (Wednesday, March 4, 2009)]
[Rules and Regulations]
[Pages 9525-9563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-4584]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 327

RIN 3064-AD35


Assessments

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: The FDIC is amending our regulation to alter the way in which 
it differentiates for risk in the risk-based assessment system; revise 
deposit insurance assessment rates, including base assessment rates; 
and make technical and other changes to the rules governing the risk-
based assessment system.

DATES: Effective Date: April 1, 2009.

FOR FURTHER INFORMATION CONTACT: Munsell W. St. Clair, Chief, Banking 
and Regulatory Policy Section, Division of Insurance and Research, 
(202) 898-8967; and Christopher Bellotto, Counsel, Legal Division, 
(202) 898-3801.

SUPPLEMENTARY INFORMATION:

I. Background

The Reform Act

    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 enacted the bulk of 
the reform recommendations made by the FDIC in 2001.\2\ The Reform Act, 
among other things, required that the FDIC, ``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.\3\
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    \1\ Federal 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.
    \2\ After a year long review of the deposit insurance system, 
the FDIC made several recommendations to Congress to reform the 
deposit insurance system. See http://www.fdic.gov/deposit/insurance/initiative/direcommendations.html for details.
    \3\ Section 2109(a)(5) of the Reform Act. Section 7(b) of the 
Federal Deposit Insurance Act (12 U.S.C. 1817(b)).
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    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 or DIF).\4\
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    \4\ 12 Section 7(b)(1)(C) of the Federal Deposit Insurance Act 
(12 U.S.C. 1817(b)(1)(C)). The Reform Act merged the former Bank 
Insurance Fund and Savings Association Insurance Fund into the 
Deposit Insurance Fund.

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[[Page 9526]]

    Before passage of the Reform Act, the deposit insurance funds' 
target reserve ratio--the designated reserve ratio (DRR)--was generally 
set at 1.25 percent. Under the Reform Act, however, the FDIC may set 
the DRR within a range of 1.15 percent to 1.50 percent of estimated 
insured deposits. If the reserve ratio drops below 1.15 percent--or if 
the FDIC expects it to do so within six months--the FDIC must, within 
90 days, establish and implement a plan to restore the DIF to 1.15 
percent within five years (absent extraordinary circumstances).\5\
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    \5\ Section 7(b)(3)(E) of the Federal Deposit Insurance Act (12 
U.S.C. 1817(b)(3)(E)).
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    The Reform Act also restored 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.\6\
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    \6\ The Reform Act eliminated the prohibition against charging 
well-managed and well-capitalized institutions when the deposit 
insurance fund is at or above, and is expected to remain at or 
above, the designated reserve ratio (DRR). This prohibition was 
included 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. The Reform Act also requires 
dividends of all of the amount in excess of the amount needed to 
maintain the reserve ratio at 1.50 when the insurance fund reserve 
ratio exceeds 1.50 percent at the end of any year. 12 U.S.C. 
1817(e)(2).
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    The Reform Act left 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.'' \7\ 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.'' \8\
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    \7\ Section 7(b)(1)(D) of the Federal Deposit Insurance Act (12 
U.S.C. 1817(b)(1)(D)).
    \8\ Section 2104(a)(2) of the Reform Act amending Section 
7(b)(2)(D) of the Federal Deposit Insurance Act (12 U.S.C. 
1817(b)(2)(D)).
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The 2006 Assessments Rule

Overview
    On November 30, 2006, pursuant to the requirements of the Reform 
Act, the FDIC published in the Federal Register a final rule on the 
risk-based assessment system (the 2006 assessments rule).\9\ The rule 
became effective on January 1, 2007.
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    \9\ 71 FR 69282. The FDIC also adopted several other final rules 
implementing the Reform Act, including a final rule on operational 
changes to part 327. 71 FR 69270.
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    The 2006 assessments rule created four risk categories and named 
them Risk Categories I, II, III and IV. These four categories are based 
on two criteria: capital levels and supervisory ratings. Three capital 
groups--well capitalized, adequately capitalized, and 
undercapitalized--are based on the leverage ratio and risk-based 
capital ratios for regulatory capital purposes. Three supervisory 
groups, 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.\10\ Group A consists of 
financially sound institutions with only a few minor weaknesses; Group 
B 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 insurance fund; and Group C consists 
of institutions that pose a substantial probability of loss to the 
insurance fund unless effective corrective action is taken.\11\ Under 
the 2006 assessments rule, an institution's capital and supervisory 
groups determine its risk category as set forth in Table 1 below. (Risk 
categories appear in Roman numerals.)
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    \10\ The term ``primary federal regulator'' is synonymous with 
the statutory term ``appropriate federal banking agency.'' Section 
3(q) of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)).
    \11\ The capital groups and the supervisory groups have been in 
effect since 1993. In practice, the supervisory group evaluations 
are 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. 
CAMELS 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). Generally, institutions with a CAMELS rating of 1 or 2 
are assigned to supervisory group A, those with a CAMELS rating of 3 
to group B, and those with a CAMELS rating of 4 or 5 to group C.

                                     Table 1--Determination of Risk Category
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                                                                               Supervisory group
                       Capital category                       --------------------------------------------------
                                                                      A                B                C
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Well Capitalized.............................................               I
                                                                                                            III
Adequately Capitalized.......................................                 II
Undercapitalized.............................................                 III                            IV
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    The 2006 assessments rule established the following base rate 
schedule and allowed the FDIC Board to adjust rates uniformly from one 
quarter to the next up to three basis points above or below the base 
schedule without further notice-and-comment rulemaking, provided that 
no single change from one quarter to the next can exceed three basis 
points.\12\ Base assessment rates within Risk Category I varied from 2 
to 4 basis points, as set forth in Table 2 below.
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    \12\ The Board cannot adjust rates more than 2 basis points 
below the base rate schedule because rates cannot be less than zero.

[[Page 9527]]



                                                         Table 2--2007-08 Base Assessment Rates
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                                                                                                        Risk category
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                                                                                    I*
                                                                    ----------------------------------        II              III               IV
                                                                         Minimum          Maximum
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Annual Rates (in basis points).....................................               2                4                7               25               40
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* Rates for institutions that do not pay the minimum or maximum rate vary between these rates.

    The 2006 assessments rule set actual rates beginning January 1, 
2007, as set out in Table 3 below.

                                                        Table 3--2007-08 Actual Assessment Rates
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                                                                                                        Risk category
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                                                                                    I*
                                                                    ----------------------------------        II              III               IV
                                                                         Minimum          Maximum
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Annual Rates (in basis points).....................................               5                7               10               28               43
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* Rates for institutions that do not pay the minimum or maximum rate vary between these rates.

Risk Category I
    Within Risk Category I, the 2006 assessments rule charges those 
institutions that pose the least risk a minimum assessment rate and 
those that pose the greatest risk a maximum assessment rate two basis 
points higher than the minimum rate. The rule charges other 
institutions within Risk Category I a rate that varies incrementally by 
institution between the minimum and maximum.
    Within Risk Category I, the 2006 assessments rule combines 
supervisory ratings with other risk measures to further differentiate 
risk and determine assessment rates. The financial ratios method 
determines the assessment rates for most institutions in Risk Category 
I using a combination of weighted CAMELS component ratings and the 
following financial ratios:
    <bullet> The Tier 1 Leverage Ratio;
    <bullet> Loans past due 30-89 days/gross assets;
    <bullet> Nonperforming assets/gross assets;
    <bullet> Net loan charge-offs/gross assets; and
    <bullet> Net income before taxes/risk-weighted assets.

The weighted CAMELS components and financial ratios are multiplied by 
statistically derived pricing multipliers and the products, along with 
a uniform amount applicable to all institutions subject to the 
financial ratios method, are summed to derive the assessment rate under 
the base rate schedule. If the rate derived is below the minimum for 
Risk Category I, however, the institution will pay the minimum 
assessment rate for the risk category; if the rate derived is above the 
maximum rate for Risk Category I, then the institution will pay the 
maximum rate for the risk category.
    The multipliers and uniform amount were derived in such a way to 
ensure that, as of June 30, 2006, 45 percent of small Risk Category I 
institutions (other than institutions less than 5 years old) would have 
been charged the minimum rate and approximately 5 percent would have 
been charged the maximum rate. While the FDIC has not changed the 
multipliers and uniform amount since adoption of the 2006 assessments 
rule, the percentages of institutions that have been charged the 
minimum and maximum rates have changed over time as institutions' 
CAMELS component ratings and financial ratios have changed. Based upon 
June 30, 2008 data, approximately 28 percent of small Risk Category I 
institutions (other than institutions less than 5 years old) were 
charged the minimum rate and approximately 19 percent were charged the 
maximum rate.\13\
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    \13\ Based upon September 30, 2008 data, approximately 26 
percent of small Risk Category I institutions (other than 
institutions less than 5 years old) were charged the minimum rate 
and approximately 23 percent were charged the maximum rate.
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    The supervisory and debt ratings method (or debt ratings method) 
determines the assessment rate for large institutions that have a long-
term debt issuer rating.\14\ Long-term debt issuer ratings are 
converted to numerical values between 1 and 3 and averaged. The 
weighted average of an institution's CAMELS components and the average 
converted value of its long-term debt issuer ratings are multiplied by 
a common multiplier and added to a uniform amount applicable to all 
institutions subject to the supervisory and debt ratings method to 
derive the assessment rate under the base rate schedule. Again, if the 
rate derived is below the minimum for Risk Category I, the institution 
will pay the minimum assessment rate for the risk category; if the rate 
derived is above the maximum for Risk Category I, then the institution 
will pay the maximum rate for the risk category.
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    \14\ The final rule defined a large institution as an 
institution (other than an insured branch of a foreign bank) that 
has $10 billion or more in assets as of December 31, 2006 (although 
an institution with at least $5 billion in assets may also request 
treatment as a large institution). If, after December 31, 2006, an 
institution classified as small 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. If, after December 31, 2006, an institution 
classified as large reports assets of less than $10 billion in its 
reports of condition for four consecutive quarters, the FDIC will 
reclassify the institution as small beginning the following quarter. 
12 CFR 327.8(g) and (h) and 327.9(d)(6).
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    The multipliers and uniform amount were derived in such a way to 
ensure that, as of June 30, 2006, about 45 percent of Risk Category I 
large institutions (other than institutions less than 5 years old) 
would have been charged the minimum rate and approximately 5 percent 
would have been charged the maximum rate. These percentages have 
changed little from quarter to quarter thereafter even though industry 
conditions have changed. Based upon June 30, 2008, data, and ignoring 
the large bank adjustment (described below), approximately 45

[[Page 9528]]

percent of Risk Category I large institutions (other than institutions 
less than 5 years old) were charged the minimum rate and approximately 
11 percent were charged the maximum rate.\15\
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    \15\ Based upon September 30, 2008, data, and ignoring the large 
bank adjustment (described below), approximately 41 percent of Risk 
Category I large institutions (other than institutions less than 5 
years old) were charged the minimum rate and approximately 11 
percent were charged the maximum rate.
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    Assessment rates for insured branches of foreign banks in Risk 
Category I are determined using ROCA components.\16\
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    \16\ ROCA stands for Risk Management, Operational Controls, 
Compliance, and Asset Quality. Like CAMELS components, ROCA 
component ratings range from 1 (best rating) to a 5 rating (worst 
rating). Risk Category 1 insured branches of foreign banks generally 
have a ROCA composite rating of 1 or 2 and component ratings ranging 
from 1 to 3.
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    For any Risk Category I large institution or insured branch of a 
foreign bank, initial assessment rate determinations may be modified up 
to half a basis point upon review of additional relevant information 
(the large bank adjustment).\17\
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    \17\ The FDIC has issued additional Guidelines for Large 
Institutions and Insured Foreign Branches in Risk Category I (the 
large bank guidelines) governing the large bank adjustment. 72 FR 
27122 (May 14, 2007).
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    With certain exceptions, beginning in 2010, the 2006 assessments 
rule charges new institutions in Risk Category I (those established for 
less than five years), regardless of size, the maximum rate applicable 
to Risk Category I institutions. Until then, new institutions are 
treated like all others, except that a well-capitalized institution 
that has not yet received CAMELS component ratings is assessed at one 
basis point above the minimum rate applicable to Risk Category I 
institutions until it receives CAMELS component ratings.

The Need for a Restoration Plan

    As part of a separate rule making in November 2006, the FDIC also 
set the DRR at 1.25 percent, effective January 1, 2007.\18\ In November 
2006, the FDIC projected that the assessment rate schedule established 
by the 2006 assessments rule would raise the reserve ratio from 1.23 
percent at the end of the second quarter of 2006 to 1.25 percent by 
2009. At the time, insured institution failures were at historic lows 
(no insured institution had failed in almost two-and-a-half years prior 
to the rulemaking, the longest period in the FDIC's history without a 
failure) and industry returns on assets (ROAs) were near all time 
highs. The FDIC's projection assumed the continued strength of the 
industry. By March 2008, the condition of the industry had 
deteriorated, and FDIC projected higher insurance losses compared to 
recent years. However, even with this increase in projected failures 
and losses, the reserve ratio was still estimated to reach the Board's 
target of 1.25 percent in 2009. Therefore, the Board voted in March 
2008 to maintain the then existing assessment rate schedule.
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    \18\ In November 2007 and October 2008, the Board again voted to 
maintain the DRR at 1.25 percent for 2008 and 2009, respectively. 71 
FR 69325 (Nov. 30, 2006) and 72 FR 65576 (Nov. 21, 2007).
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    Recent failures of FDIC-insured institutions caused the reserve 
ratio of the Deposit Insurance Fund (DIF) to decline from 1.19 percent 
as of March 30, 2008, to 1.01 percent as of June 30, 0.76 percent as of 
September 30, and 0.40 percent (preliminary) as of December 31. Twenty-
five institutions failed in 2008, and the FDIC expects a substantially 
higher rate of institution failures in the next few years, leading to a 
further decline in the reserve ratio. Already, 14 institutions have 
failed in 2009. Because the fund reserve ratio fell below 1.15 percent 
as of June 30, 2008, and was expected to remain below 1.15 percent, the 
Reform Act required the FDIC to establish and implement a Restoration 
Plan to restore the reserve ratio to at least 1.15 percent within five 
years.

The Proposed Rule

    On October 7, 2008, the FDIC established a Restoration Plan for the 
DIF.\19\ In the FDIC's view, restoring the reserve ratio to at least 
1.15 percent within five years required an increase in assessment 
rates. Since rates were already three basis points above the base rate 
schedule, a new rulemaking was required. Consequently, on October 7, 
2008, the FDIC Board of Directors also adopted a notice of proposed 
rulemaking with request for comments on revisions to the FDIC's 
assessment regulations (the proposed rule or NPR).\20\ The NPR proposed 
that, effective January 1, 2009, assessment rates would increase 
uniformly by seven basis points for the first quarter 2009 assessment 
period. Effective April 1, 2009, the NPR proposed to alter the way in 
which the FDIC's risk-based assessment system differentiates for risk 
and set new deposit insurance assessment rates. Also effective on April 
1, 2009, the NPR proposed to make technical and other changes to the 
rules governing the risk-based assessment system. The proposed rule was 
published concurrently with the Restoration Plan on October 16, 2008, 
with a comment period scheduled to end on November 17, 2008.\21\
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    \19\ 73 FR 61,598 (Oct. 16, 2008).
    \20\ 12 CFR 327.
    \21\ See 73 FR 61,560 (Oct. 16, 2008).
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    On November 7, 2008, the FDIC Board approved an extension of the 
comment period until December 17, 2008, on the parts of the proposed 
rulemaking that would become effective on April 1, 2009. The comment 
period for the proposed 7 basis point rate increase for the first 
quarter of 2009, with its separate proposed effective date of January 
1, 2009, was not extended and expired on November 17, 2008. The final 
rule on the rate increase for the first quarter of 2009 was approved as 
proposed by the FDIC Board on December 16, 2008.\22\
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    \22\ 73 FR 78,155 (Dec. 22, 2008).
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    The FDIC received almost 5,000 comments on the parts of the 
proposed rule that would become effective on April 1, 2009, including 
proposed changes in how the FDIC's risk-based assessment system 
differentiates for risk and corresponding new assessment rates. This 
final rule implements the remaining changes that the FDIC proposed in 
the October notice of proposed rulemaking, with some alteration.

II. Overview of the Final Rule

    In this rulemaking, the FDIC seeks to improve the way the 
assessment system differentiates risk among insured institutions by 
drawing upon measures of risk that were not included when the FDIC 
first revised its assessment system pursuant to the Reform Act. The 
FDIC believes that the rulemaking will make the assessment system more 
sensitive to risk. The rulemaking should also make the risk-based 
assessment system fairer, by limiting the subsidization of riskier 
institutions by safer ones. The assessment rate schedule established in 
this rule should provide sufficient revenue to cover losses resulting 
from a large volume of institution failures and raise the insurance 
fund's reserve ratio over time. However, as explained below, the FDIC 
is simultaneously issuing an interim rule to impose a 20 basis point 
special assessment (and possible additional special assessments of up 
to 10 basis points thereafter). The final rule, which differs in 
several ways from the proposed rule, is set out in detail in ensuing 
sections, but is briefly summarized here. The final rule will take 
effect April 1, 2009, and will apply to assessments for the second 
quarter of 2009 (which will be collected in September 2009) and 
thereafter.

[[Page 9529]]

Risk Category I

    The final rule introduces a new financial ratio into the financial 
ratios method. This new ratio will capture certain brokered deposits 
(in excess of 10 percent of domestic deposits) that are used to fund 
rapid asset growth. The new financial ratio in the final rule differs 
from the one proposed in the NPR in two ways. It excludes deposits that 
an insured depository institution receives through a deposit placement 
network on a reciprocal basis, such that: (1) For any deposit received, 
the institution (as agent for depositors) places the same amount with 
other insured depository institutions through the network; and (2) each 
member of the network sets the interest rate to be paid on the entire 
amount of funds it places with other network members (henceforth 
referred to as reciprocal deposits). It also raises the asset growth 
threshold from that proposed in the NPR. The final rule also updates 
the uniform amount and the pricing multipliers for the weighted average 
CAMELS component ratings and financial ratios.
    The final rule provides that the assessment rate for a large 
institution with a long-term debt issuer rating will be determined 
using a combination of the institution's weighted average CAMELS 
component ratings, its long-term debt issuer ratings (converted to 
numbers and averaged) and the financial ratios method assessment rate, 
each equally weighted. The new method will be known as the large bank 
method.
    Under the final rule, the financial ratios method or the large bank 
method, whichever is applicable, will determine a Risk Category I 
institution's initial base assessment rate. The final rule will broaden 
the spread between minimum and maximum initial base assessment rates in 
Risk Category I from 2 basis points to an initial range of 4 basis 
points and adjust the percentage of institutions subject to these 
initial minimum and maximum rates.

Adjustments

    Under the final rule, an institution's total base assessment rate 
can vary from the initial base rate as the result of possible 
adjustments. The final rule also increases the maximum possible Risk 
Category I large bank adjustment from one-half basis point to one basis 
point. Any such adjustment up or down will be made before any other 
adjustment and will be subject to certain limits, which are described 
in detail below.
    Under the final rule, an institution's unsecured debt adjustment--
the institution's ratio of long-term unsecured debt (and, for small 
institutions, certain amounts of its Tier 1 capital) to domestic 
deposits--will lower the institution's base assessment rate.\23\ Any 
decrease in base assessment rates will be limited to five basis points. 
The unsecured debt adjustment differs from the adjustment proposed in 
the NPR in several ways. The adjustment is larger for a given amount of 
unsecured debt (and, for small institutions, Tier 1 capital) and the 
maximum adjustment of five basis points is larger than the proposed 
maximum of two basis points in the NPR. The adjustment excludes senior 
unsecured debt that the FDIC has guaranteed under its Temporary 
Liquidity Guarantee Program. Finally, the adjustment lowers the 
threshold for inclusion of a small institution's Tier 1 capital.
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    \23\ Long-term unsecured debt includes senior unsecured and 
subordinated debt.
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    Also, under the final rule, an institution's secured liability 
adjustment--which is based on the institution's ratio of secured 
liabilities to domestic deposits--will raise its base assessment rate. 
An institution's ratio of secured liabilities to domestic deposits (if 
greater than 25 percent), will increase its assessment rate, but the 
resulting base assessment rate after any such increase can be no more 
than 50 percent greater than it was before the adjustment. The secured 
liability adjustment will be made after any large bank adjustment or 
unsecured debt adjustment. This adjustment also differs from the 
adjustment proposed in the NPR in that an institution's ratio of 
secured liabilities to domestic deposits must be greater than 25 
percent for an adjustment to exist, rather than 15 percent as proposed 
in the NPR.
    Institutions in all risk categories will be subject to the 
unsecured debt adjustment and secured liability adjustment. In 
addition, the final rule makes a final adjustment for brokered deposits 
(the brokered deposit adjustment) for institutions in Risk Category II, 
III or IV. An institution's ratio of brokered deposits to domestic 
deposits (if greater than 10 percent) will increase its assessment 
rate, but any increase will be limited to no more than 10 basis points. 
The brokered deposit adjustment is as proposed in the NPR and will 
include reciprocal deposits.

Insured Branches of Foreign Banks

    The final rule makes conforming changes to the pricing multipliers 
and uniform amount for insured branches of foreign banks in Risk 
Category I. The insured branch of a foreign bank's initial base 
assessment rate will be subject to any large bank adjustment, but not 
to the unsecured debt adjustment or secured liability adjustment. In 
fact, no insured branch of a foreign bank in any risk category will be 
subject to the unsecured debt adjustment, secured liability adjustment 
or brokered deposit adjustment.

New Institutions

    The final rule makes conforming changes in the treatment of new 
insured depository institutions.\24\ For assessment periods beginning 
on or after January 1, 2010, any new institutions in Risk Category I 
will be assessed at the maximum initial base assessment rate applicable 
to Risk Category I institutions.
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    \24\ As discussed below, subject to exceptions, the final rule 
defines a new insured depository institution as a bank or thirft 
that has not been federally insured for at least five years as of 
the last day of any quarter for which it is being assessed.
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    For assessments for the last three quarters of 2009, until a Risk 
Category I new institution received CAMELS component ratings, it will 
have an initial base assessment rate that is two basis points above the 
minimum initial base assessment rate applicable to Risk Category I 
institutions, rather than one basis point above the minimum rate, as 
under the final rule adopted in 2006. For these three quarters, all 
other new institutions in Risk Category I will be treated as 
established institutions, except as provided in the next paragraph.
    Either before or after January 1, 2010: no new institution, 
regardless of risk category, will be subject to the unsecured debt 
adjustment; any new institution, regardless of risk category, will be 
subject to the secured liability adjustment; and a new institution in 
Risk Categories II, III or IV will be subject to the brokered deposit 
adjustment. After January 1, 2010, no new institution in Risk Category 
I will be subject to the large bank adjustment.

Assessment Rates

    As explained below, estimated losses from projected institution 
failures have risen considerably since the NPR was published last fall. 
Consequently, initial base assessment rates as of April 1, 2009, which 
are set forth in Table 4 below, are slightly higher than proposed in 
the NPR.

[[Page 9530]]



                                               Table 4--Initial Base Assessment Rates as of April 1, 2009
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                                                                                                        Risk category
                                                                    ------------------------------------------------------------------------------------
                                                                                    I*
                                                                    ----------------------------------        II              III               IV
                                                                         Minimum          Maximum
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Annual Rates (in basis points).....................................              12               16               22               32               45
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* Initial base rates that were not the minimum or maximum rate will vary between these rates.

    After applying all possible adjustments, minimum and maximum total 
base assessment rates for each risk category will be as set out in 
Table 5 below.

                                      Table 5--Total Base Assessment Rates
----------------------------------------------------------------------------------------------------------------
                                                   Risk category   Risk category   Risk category   Risk category
                                                         I              II              III             IV
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate....................           12-16              22              32              45
Unsecured debt adjustment.......................            -5-0            -5-0            -5-0            -5-0
Secured liability adjustment....................             0-8            0-11            0-16          0-22.5
Brokered deposit adjustment.....................  ..............            0-10            0-10            0-10
                                                 ---------------------------------------------------------------
    Total base assessment rate..................          7-24.0         17-43.0         27-58.0         40-77.5
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum or
  maximum rate will vary between these rates.

    These rates and other revisions to the assessment rules take effect 
for the quarter beginning April 1, 2009, and will be reflected in the 
fund balance as of June 30, 2009, and assessments due September 30, 
2009 and thereafter.
    Because the outlook for losses to the insurance fund has 
deteriorated significantly since publication of the NPR last fall, the 
FDIC is simultaneously issuing an interim rule that provides for a 20 
basis point special assessment on June 30, 2009. The interim rule also 
provides that the Board may impose additional special assessments of up 
to 10 basis points thereafter if the reserve ratio of the DIF is 
estimated to fall to a level that that the Board believes would 
adversely affect public confidence or to a level which shall be close 
to zero or negative at the end of a calendar quarter.
    The final rule continues to allow the FDIC Board to adopt actual 
rates that are higher or lower than total base assessment rates without 
the necessity of further notice and comment rulemaking, provided that: 
(1) the Board cannot increase or decrease total rates from one quarter 
to the next by more than three basis points without further notice-and-
comment rulemaking; and (2) cumulative increases and decreases cannot 
be more than three basis points higher or lower than the total base 
rates without further notice-and-comment rulemaking.

Technical and Other Changes

    The final rule also makes technical changes and one minor non-
technical change to the assessments rules. These changes are detailed 
below.

III. Risk Category I: Financial Ratios Method

Brokered Deposits and Asset Growth

    The final rule adds a new financial measure to the financial ratios 
method. This new financial measure, the adjusted brokered deposit 
ratio, will measure the extent to which brokered deposits are funding 
rapid asset growth. The adjusted brokered deposit ratio will affect 
only those established Risk Category I institutions whose total gross 
assets are more than 40 percent greater than they were four years 
previously, after adjusting for mergers and acquisitions, rather than 
20 percent greater as proposed in the NPR, and whose brokered deposits 
(less reciprocal deposits) make up more than 10 percent of domestic 
deposits.<SUP>25 26 27</SUP> Generally speaking, the greater an 
institution's asset growth and the greater its percentage of brokered 
deposits, the greater will be the increase in its initial base 
assessment rate. Small changes in asset growth rate or brokered 
deposits as a percentage of domestic deposits will lead to small 
changes in assessment rates.
---------------------------------------------------------------------------

    \25\ As discussed below, subject to exceptions, the final rule 
defines an established depository institution as a bank or thrift 
that has been federally insured for at least five years as of the 
last day of any quarter for which it is being assessed.
    \26\ An institution that four years previously had filed no 
report of condition or had reported no assets would be treated as 
having no growth unless it was a participant in a merger or 
acquisition (either as the acquiring or acquired institution) with 
an institution that had reported assets four years previously.
    \27\ References hereafter to ``asset growth'' or ``growth in 
assets'' refer to growth in gross assets.
---------------------------------------------------------------------------

    If an institution's ratio of brokered deposits to domestic deposits 
is 10 percent or less or if the institution's asset growth over the 
previous four years is less than 40 percent, the adjusted brokered 
deposit ratio will be zero and will have no effect on the institution's 
assessment rate. If an institution's ratio of brokered deposits to 
domestic deposits exceeds 10 percent and its asset growth over the 
previous four years is more than 70 percent (rather than 40 percent as 
proposed in the NPR), the adjusted brokered deposit ratio will equal 
the institution's ratio of brokered deposits to domestic deposits less 
the 10 percent threshold. If an institution's ratio of brokered 
deposits to domestic deposits exceeds 10 percent but its asset growth 
over the previous four years is between 40 percent and 70 percent, 
overall asset growth rates will be converted into an asset growth rate 
factor ranging between 0 and 1, so that the adjusted brokered deposit 
ratio will equal a gradually increasing fraction of the ratio of 
brokered deposits to domestic deposits (minus the 10 percent 
threshold). The asset growth rate factor is derived by multiplying by 
3\1/3\ an

[[Page 9531]]

amount equal to the overall rate of growth minus 40 percent and 
expressing the result as a decimal fraction rather than as a percentage 
(so that, for example, 3\1/3\ times 10 percent equals 0.33 * * *).\28\ 
The adjusted brokered deposit ratio will never be less than zero. 
Appendix A contains a detailed mathematical definition of the ratio. 
Table 6 gives examples of how the adjusted brokered deposit ratio would 
be determined.
---------------------------------------------------------------------------

    \28\ The ratio of brokered deposits to domestic deposits and 
four-year asset growth rate would remain unrounded (to the extent of 
computer capabilities) when calculating the adjusted brokered 
deposit ratio. The adjusted brokered deposit ratio itself (expressed 
as a percentage) would be rounded to three digits after the decimal 
point prior to being used to calculate the assessment rate.

                                    Table 6--Adjusted Brokered Deposit Ratio
----------------------------------------------------------------------------------------------------------------
                A                        B               C               D               E               F
----------------------------------------------------------------------------------------------------------------
                                                     Ratio of
                                                     brokered
                                                    deposits to                                      Adjusted
                                     Ratio of        domestic       Cumulative                       brokered
                                     brokered     deposits minus   asset growth    Asset growth    deposit ratio
             Example                deposits to     10 percent    rate over four    rate factor      (column C
                                     domestic        threshold         years                       times  column
                                     deposits        (column B                                          E)
                                                     minus 10
                                                     percent)
----------------------------------------------------------------------------------------------------------------
1...............................            5.0%            0.0%            5.0%  ..............            0.0%
2...............................           15.0%            5.0%            5.0%  ..............            0.0%
3...............................            5.0%            0.0%           35.0%  ..............            0.0%
4...............................           35.0%           25.0%           55.0%           0.500           12.5%
5...............................           25.0%           15.0%           80.0%           1.000           15.0%
----------------------------------------------------------------------------------------------------------------

    In Examples 1, 2 and 3, either the institution has a ratio of 
brokered deposits to domestic deposits that is less than 10 percent 
(Column B) or its four-year asset growth rate is less than 40 percent 
(Column D). Consequently, the adjusted brokered deposit ratio is zero 
(Column F). In Example 4, the institution has a ratio of brokered 
deposits to domestic deposits of 35 percent (Column B), which, after 
subtracting the 10 percent threshold, leaves 25 percent (Column C). Its 
assets are 55 percent greater than they were four years previously 
(Column D), so the fraction applied to obtain the adjusted brokered 
deposit ratio is 0.5 (Column E) (calculated as 3\1/3\ (55 percent--40 
percent, with the result expressed as a decimal fraction rather than as 
a percentage)). Its adjusted brokered deposit ratio is, therefore, 12.5 
percent (Column F) (which is 0.5 times 25 percent). In Example 5, the 
institution has a lower ratio of brokered deposits to domestic deposits 
(25 percent in Column B) than in Example 4 (35 percent). However, its 
adjusted brokered deposit ratio (15 percent in Column F) is larger than 
in Example 4 (12.5 percent) because its assets are more than 70 percent 
greater than they were four years previously (Column D). Therefore, its 
adjusted brokered deposit ratio is equal to its ratio of brokered 
deposits to domestic deposits of 25 percent minus the 10 percent 
threshold (Column F).
    The FDIC is adding this new risk measure for a couple of reasons. A 
number of costly institution failures, including some recent failures, 
involved rapid asset growth funded through brokered deposits. Moreover, 
statistical analysis reveals a significant correlation between rapid 
asset growth funded by brokered deposits and the probability of an 
institution's being downgraded from a CAMELS composite 1 or 2 rating to 
a CAMELS composite 3, 4 or 5 rating within a year. A significant 
correlation is the standard the FDIC used when it adopted the financial 
ratios method in the 2006 assessments rule.
    The adjusted brokered deposit ratio generally will include brokered 
deposits as defined in Section 29 of the Federal Deposit Insurance Act 
(12 U.S.C. 1831f), and as implemented in 12 CFR 337.6, which is the 
definition used in banks' quarterly Reports of Condition and Income 
(Call Reports) and thrifts' quarterly Thrift Financial Reports (TFRs). 
However, for assessment purposes in Risk Category I, the ratio will not 
include reciprocal deposits (that is, deposits that an insured 
depository institution receives through a deposit placement network on 
a reciprocal basis, such that: (1) for any deposit received, the 
institution (as agent for depositors) places the same amount with other 
insured depository institutions through the network; and (2) each 
member of the network sets the interest rate to be paid on the entire 
amount of funds it places with other network members. All other 
brokered deposits will be included in an institution's ratio of 
brokered deposits to domestic deposits used to determine its adjusted 
brokered deposit ratio, including brokered deposits that consist of 
balances swept into an insured institution by another institution, such 
as balances swept from a brokerage account.
    Based on data as of September 30, 2008, approximately 8.7 percent 
of institutions in Risk Category I would have exceeded both the 10 
percent brokered deposit threshold and 40 percent minimum 4-year 
cumulative asset growth threshold, so that their adjusted brokered 
deposit ratio would be greater than zero. A smaller percentage of 
institutions would actually have been charged a higher rate solely due 
to the adjusted brokered deposit ratio because the minimum or maximum 
initial rates applicable to Risk Category I would continue to apply to 
some institutions both before and after accounting for the effect of 
this ratio. Only 1.1 percent of Risk Category I institutions would have 
had an initial base assessment rate more than 1 basis point higher as a 
result of the adjusted brokered deposit ratio.\29\
---------------------------------------------------------------------------

    \29\ These estimates do not exclude deposits that an institution 
receives through a deposit placement network on a reciprocal basis 
and, thus, might overstate the effects on assessment rates for some 
institutions.
---------------------------------------------------------------------------

Comments

    The FDIC received many comments arguing that brokered deposits 
should not increase assessment rates for Risk Category I institutions 
and that the brokered deposit provisions in the NPR do not account for 
the use to which institutions put these deposits. The FDIC is not 
persuaded by the arguments. Recent data show that institutions with a 
combination of brokered deposit reliance and robust asset growth tend 
to

[[Page 9532]]

have a greater concentration in higher risk assets. In addition, there 
is a statistically significant correlation between the adjusted 
brokered deposit ratio, on the one hand, and the probability that an 
institution will be downgraded to a CAMELS rating of 3, 4, or 5 within 
a year, on the other, independent of the other measures of asset 
quality contained in the financial ratios method.
    The FDIC received several comments, including comments from several 
industry trade groups, arguing that institutions should be able to have 
a ratio of brokered deposits to domestic deposits greater than 10 
percent without triggering the adjusted brokered deposit ratio and that 
the minimum asset growth rate required to trigger the adjusted brokered 
deposit ratio should be greater than 20 percent. The comments disputed 
the characterization of 20 percent cumulative asset growth over four 
years as ``rapid.'' One trade association noted that the proposed 
minimum growth rate (20 percent) was lower than the nominal GDP growth 
between third quarter 2004 and third quarter 2007.
    The FDIC is persuaded in part. The final rule raises the minimum 4-
year asset growth rate required to trigger the adjusted brokered 
deposit ratio from 20 percent to 40 percent. The final rule also 
increases from 40 percent to 70 percent the asset growth rate required 
to make an institution's adjusted brokered deposit ratio equal to its 
institution's ratio of brokered deposits to domestic deposits less the 
10 percent threshold. Additional analysis has revealed that these 
growth rates are as predictive of downgrade probabilities as those 
originally proposed and are more consistent with the intent of the 
ratio, which was to capture only those institutions with rapid asset 
growth.
    However, in the FDIC's view, a ratio of brokered deposits to 
domestic deposits greater than 10 percent is a significant amount of 
brokered deposits. Still, for institutions in Risk Category I, brokered 
deposits alone will not trigger higher rates, but must be combined with 
significant asset growth.
    The FDIC received over 3,300 comment letters arguing that certain 
reciprocal deposits should not be included in the adjusted brokered 
deposit ratio.\30\ Most of the comments were form letters. Commenters 
argued that these reciprocal deposits are a stable source of funding. 
According to the comments, most customers (83 percent) are not seeking 
the highest rate of interest available and choose to keep their deposit 
at the same institution when it matures. The commenters also argued 
that these deposits are local deposits and not out-of-market funds and 
stated that 80 percent of these deposits are placed with an insured 
institution within 25 miles of a branch location of the relationship 
bank. The commenters further argued that the interest rate on these 
deposits reflects that of local markets since the insured institution 
that originates the deposit sets the interest rate, rather than a 
third-party broker. Commenters also argued that these deposits may have 
franchise value in the event of a bank failure.
---------------------------------------------------------------------------

    \30\ When an institution receives a deposit through a network on 
a reciprocal basis, it must place the same amount (but owed to a 
different depositor) with another institution through the network. 
Many of the comment letters also argued that these reciprocal 
deposits should not be included in the brokered deposit adjustment 
applicable to institutions in Risk Categories II, III and IV. The 
brokered deposit adjustment applicable to these risk categories is 
discussed below.
---------------------------------------------------------------------------

    The FDIC is persuaded that reciprocal deposits like those described 
in the comment letters should not be included in the adjusted brokered 
deposit ratio applicable to institutions in Risk Category I.\31\ 
(However, as discussed below, reciprocal deposits will be included in 
the brokered deposits adjustment applicable to institutions in Risk 
Categories II, III and IV.) The FDIC recognizes that reciprocal 
deposits may be a more stable source of funding for healthy banks than 
other types of brokered deposits and that they may not be as readily 
used to fund rapid asset growth.
---------------------------------------------------------------------------

    \31\ Excluding these deposits from the Call Report and TFR will 
require changes to these forms. The FDIC anticipates that the 
necessary changes will be made beginning with the June 30, 2009 
reports of condition.
---------------------------------------------------------------------------

    The FDIC also received several comments arguing that brokered 
deposits that consist of balances swept into an insured institution by 
a nondepository institution, such as balances swept into an insured 
institution from a brokerage account at a broker-dealer, should be 
excluded from the adjusted brokered deposit ratio.\32\ Commenters 
argued that these sweep accounts are stable, relationship-based 
accounts. Commenters also stated that the aggregate flows in and out of 
the sweep accounts tend to offset one another and are thus predictable. 
Some commenters differentiated between sweeps from affiliated brokerage 
firms and those from non-affiliated firms. These commenters argued that 
broker-dealer affiliated sweeps are not rate-sensitive accounts and are 
not designed to compete with the high rates of interest paid by other 
insured institutions and, therefore, do not raise the same concerns as 
other brokered deposits about the high cost of funding of risky banks. 
The commenters maintained that these accounts are typically used for 
idle investment funds or as a safe investment and are designed to 
better manage excess cash. Some commenters suggested that bankers would 
be willing to separately report sweep balances from an affiliated 
brokerage.
---------------------------------------------------------------------------

    \32\ Many of these comment letters also argued that these swept 
deposits should not be included in the brokered deposit adjustment 
applicable to institutions in Risk Categories II, III and IV. The 
brokered deposit adjustment for these risk categories is discussed 
below.
---------------------------------------------------------------------------

    Some commenters supported excluding brokered deposits swept from 
unaffiliated brokerages through a sweep program, since the deposits 
have the characteristics of core deposits and are not driven by yield. 
According to the commenters, there is no price competition; deposits 
from unaffiliated brokerages are used for the convenience and safety of 
the customer.
    The FDIC is not persuaded by these arguments. In the FDIC's view, 
deposits swept from broker-dealers can and have contributed to high 
rates of insured depository institution asset growth and, thus, fall 
squarely within the type of brokered deposits that the adjusted 
brokered deposit ratio was meant to capture. In addition, as noted in 
the NPR, many sweep programs can be structured so that swept balances 
are not brokered deposits.

Pricing Multipliers, the Uniform Amount, and the Range of Rates

    The final rule contains a recalculated uniform amount and 
recalculated pricing multipliers for the weighted average CAMELS 
component rating and financial ratios. The uniform amount and pricing 
multipliers under the final rule adopted in 2006 were derived from a 
statistical estimate of 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.\33\ These probabilities were then 
converted to pricing multipliers for each risk measure. The new pricing 
multipliers were derived using essentially the same statistical 
techniques, but based upon data from the end of the years 1988 to 
2006.\34\ The new pricing multipliers are set out in Table 7 below.
---------------------------------------------------------------------------

    \33\ Data on downgrades to CAMELS 3, 4 or 5 is from the years 
1985 to 2005. The ``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.
    \34\ For the adjusted brokered deposit ratio, assets at the end 
of each year are compared to assets at the end of the year four 
years earlier, so assets at the end of 1988, for example, are 
compared to assets at the end of 1984. Data on downgrades to CAMELS 
3, 4 or 5 is from the years 1989 to 2007.

[[Page 9533]]



                    Table 7--New Pricing Multipliers
------------------------------------------------------------------------
                                                             Pricing
                    Risk measures *                       multipliers **
------------------------------------------------------------------------
Tier 1 Leverage Ratio..................................          (0.056)
Loans Past Due 30-89 Days/Gross Assets.................           0.575
Nonperforming Assets/Gross Assets......................           1.074
Net Loan Charge-Offs/Gross Assets......................           1.210
Net Income before Taxes/Risk-Weighted Assets...........          (0.764)
Adjusted brokered deposit ratio........................           0.065
Weighted Average CAMELS Component Rating...............           1.095
------------------------------------------------------------------------
* Ratios are expressed as percentages.
** Multipliers are rounded to three decimal places.

    To determine an institution's initial assessment rate under the 
base assessment rate schedule, each of these risk measures (that is, 
each institution's financial measures and weighted average CAMELS 
component rating) will continue to be multiplied by the corresponding 
pricing multipliers. The sum of these products will be added to a new 
uniform amount, 11.861.\35\ The new uniform amount is also derived from 
the same statistical analysis.\36\ As under the final rule adopted in 
2006, no initial base assessment rate within Risk Category I will be 
less than the minimum initial base assessment rate applicable to the 
category or higher than the initial base maximum assessment rate 
applicable to the category. The final rule sets the initial minimum 
base assessment rate for Risk Category I at 12 basis points and the 
maximum initial base assessment rate for Risk Category I at 16 basis 
points.
---------------------------------------------------------------------------

    \35\ Appendix 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.
    \36\ The uniform amount would 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).
---------------------------------------------------------------------------

    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, using June 30, 2008 Call Report 
and TFR data: (1) 25 percent of small institutions in Risk Category I 
(other than institutions less than 5 years old) would have been charged 
the minimum initial assessment rate; and (2) 15 percent of small 
institutions in Risk Category I (other than institutions less than 5 
years old) would have been charged the maximum initial assessment 
rate.\37\ These cutoff values will be used in future periods, which 
could lead to different percentages of institutions being charged the 
minimum and maximum rates.
---------------------------------------------------------------------------

    \37\ The 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 15 
percent.
---------------------------------------------------------------------------

    In comparison, under the system in place on June 30, 2008: (1) 
Approximately 28 percent of small institutions in Risk Category I 
(other than institutions less than 5 years old) were charged the 
existing minimum assessment rate; and (2) approximately 19 percent of 
small institutions in Risk Category I (other than institutions less 
than 5 years old) were charged the existing maximum assessment rate 
based on June 30, 2008 data.\38\
---------------------------------------------------------------------------

    \38\ For the assessment period ending September 30, 2008, 
approximately 26 percent of small Risk Category I institutions 
(other than institutions less than 5 years old) were charged the 
minimum rate and approximately 23 percent were charged the maximum 
rate.
---------------------------------------------------------------------------

    Table 8 gives initial base assessment rates for three institutions 
with varying characteristics, given the new pricing multipliers above, 
using initial base assessment rates for institutions in Risk Category I 
of 12 basis points to 16 basis points.\39\
---------------------------------------------------------------------------

    \39\ These are the initial base rates for Risk Category I 
proposed below.
    \40\ Under the proposed rule, pricing multipliers, the uniform 
amount, and financial ratios will continue to 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.

                                             Table 8--Initial Base Assessment Rates for Three Institutions *
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 C            D            E            F            G            H
                                                                           -----------------------------------------------------------------------------
                              A                                     B                    Institution               Institution               Institution
                                                                                              1                         2                         3
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Pricing         Risk  Contributio         Risk  Contributio         Risk  Contributio
                                                                multiplier      measure         n to      measure         n to      measure         n to
                                                                                  value   assessment        value   assessment        value   assessment
                                                                                                rate                      rate                      rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Uniform Amount...............................................       11.861  ...........       11.861  ...........       11.861  ...........       11.861
Tier 1 Leverage Ratio (%)....................................      (0.056)        9.590      (0.537)        8.570      (0.480)        7.500      (0.420)
Loans Past Due 30-89 Days/Gross Assets (%)...................        0.575        0.400        0.230        0.600        0.345        1.000        0.575
Nonperforming Loans/Gross Assets (%).........................        1.074        0.200        0.215        0.400        0.430        1.500        1.611
Net Loan Charge-Offs/Gross Asset (%).........................        1.210        0.147        0.177        0.079        0.096        0.300        0.363
Net Income before Taxes/Risk-Weighted Assets (%).............      (0.764)        2.500      (1.910)        1.951      (1.491)        0.518      (0.396)
Adjusted Brokered Deposit Ratio (%)..........................        0.065        0.000        0.000       12.827        0.834       24.355        1.583
Weighted Average CAMELS Component Ratings....................        1.095        1.200        1.314        1.450        1.588        2.100        2.300
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Sum of Contributions.....................................  ...........  ...........        11.35  ...........        13.18  ...........        17.48

[[Page 9534]]

 
    Initial Base Assessment Rate.............................  ...........  ...........        12.00  ...........        13.18  ...........        16.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
*Figures may not multiply or add to totals due to rounding.\40\

    The initial base 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 initial base assessment rate. For Institution 1 in the 
table, this sum actually equals 11.35 basis points, but the table 
reflects the initial base minimum assessment rate of 12 basis points. 
For Institution 3 in the table, the sum actually equals 17.48 basis 
points, but the table reflects the initial base maximum assessment rate 
of 16 basis points.
    Under the final rule, the FDIC will continue to have the 
flexibility to update the pricing multipliers and the uniform amount 
annually, without further notice-and-comment rulemaking. In particular, 
the FDIC will be able to add data from each new year to its analysis 
and could, from time to time, exclude some earlier years from its 
analysis. 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, as it has in this rulemaking, 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, the 
FDIC would again make changes through notice-and-comment rulemaking.
    Financial measures for any given quarter will continue to be 
calculated from the report of condition filed by each institution as of 
the last day of the quarter.\41\ CAMELS component rating changes will 
continue to be effective as of the date that the rating change is 
transmitted to the institution for purposes of determining assessment 
rates for all institutions in Risk Category I.\42\
---------------------------------------------------------------------------

    \41\ Reports of condition include Reports of Income and 
Condition and Thrift Financial Reports.
    \42\ Pursuant 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.
---------------------------------------------------------------------------

Comments

    One industry trade group noted that some banks expressed a concern 
that the expanded range of rates for Risk Category I, particularly in 
combination with the proposed adjustment for secured liabilities 
(discussed below), could result in differences in rates among 
institutions that are too large compared to differences in risk. This 
could lead to some institutions bearing disproportionate costs and 
being competitively disadvantaged. However, another trade group 
expressed concerns that the range of rates for Risk Category I is too 
narrow, insufficiently reflecting differences in risk and creating a 
cross subsidy within the risk category.\43\ The FDIC considers the 4-
basis point range for the initial base assessment rate in Risk Category 
I to be appropriate.
---------------------------------------------------------------------------

    \43\ The same trade group argued that rates for Risk Categories 
III and IV should be higher than proposed.
---------------------------------------------------------------------------

IV. Risk Category I: Large Bank Method

    For large Risk Category I institutions now subject to the debt 
ratings method, the final rule derives assessment rates from the 
financial ratios method as well as long-term debt issuer ratings and 
CAMELS component ratings. The new method is known as the large bank 
method. The rate using the financial ratios method is first converted 
from the range of initial base rates (12 to 16 basis points) to a scale 
from 1 to 3 (financial ratios score).\44\ The financial ratios score is 
then given a 33\1/3\ percent weight in determining the large bank 
method assessment rate, as are both the weighted average CAMELS 
component rating and debt-agency ratings.
---------------------------------------------------------------------------

    \44\ The assessment rate computed using the financial ratios 
method would be converted to a financial ratios score by first 
subtracting 10 from the financial ratios method assessment rate and 
then multiplying the result by one-half. For example, if an 
institution had an initial base assessment rate of 13, 10 would be 
subtracted from 13 and the result would be multiplied by one-half to 
produce a financial ratios score of 1.5.
---------------------------------------------------------------------------

    The weights of the CAMELS components remain the same as in the 
final rule adopted in 2006. The values assigned to the debt issuer 
ratings also remain the same. The weighted CAMELS components and debt 
issuer ratings will continue to be converted to a scale from 1 to 3.
    The initial base assessment rate under the large bank method will 
be derived as follows: (1) An assessment rate computed using the 
financial ratios method will be converted to a financial ratios score; 
(2) the weighted average CAMELS rating, converted long-term debt issuer 
ratings, and the financial ratios score will each be multiplied by a 
pricing multiplier and the products summed; and (3) a uniform amount 
will be added to the result. The resulting initial base assessment rate 
will be subject to a minimum and a maximum assessment rate. The pricing 
multiplier for the weighted average CAMELS ratings, converted long-term 
debt issuer rating and financial ratios score is 1.692, and the uniform 
amount is 3.873.\45\
---------------------------------------------------------------------------

    \45\ Appendix 1 provides the derivation of the pricing 
multipliers and the uniform amount.
---------------------------------------------------------------------------

    In recent periods, assessment rates for some large institutions 
have not responded in a timely manner to rapid changes in these 
institutions' financial conditions. For the assessment period ending 
June 30, 2008, under the assessment system then in place: (1) 45 
percent of large institutions in Risk Category I (other than 
institutions less than 5 years old) were charged the minimum assessment 
rate (ignoring large bank adjustments), compared with 28 percent of 
small institutions; and (2) 11 percent of large institutions in Risk 
Category I (other than institutions less than 5 years old) were charged 
the maximum assessment rate (ignoring

[[Page 9535]]

large bank adjustments), compared with 19 percent of small 
institutions.\46\ The FDIC's proposed values for pricing multipliers 
and the uniform amount are such that, using June 30, 2008, data, the 
percentages of large institutions in Risk Category I (other than new 
institutions less than 5 years old) that would have been charged the 
minimum and maximum initial base assessment rates would be the same as 
the percentages of small institutions that would have been charged 
these rates (25 percent at the minimum rate and 15 percent at the 
maximum rate).<SUP>47 48</SUP> These cutoff values would be used in 
future periods, which could lead to different percentages of 
institutions being charged the minimum and maximum rates.
---------------------------------------------------------------------------

    \46\ For the assessment period ending September 30, 2008, under 
the assessment system then in place: (1) 41 percent of large 
institutions in Risk Category I (other than institutions less than 5 
years old) were charged the minimum assessment rate (again ignoring 
large bank adjustments), compared with 26 percent of small 
institutions; and (2) 11 percent of large institutions in Risk 
Category I (other than institutions less than 5 years old) were 
charged the maximum assessment rate (ignoring large bank 
adjustments), compared with 23 percent of small institutions.
    \47\ The cutoff value for the minimum assessment rate is an 
average score of approximately 1.601. The cutoff value for the 
maximum assessment rate is approximately 2.389.
    \48\ A ``new'' institution, as defined in 12 CFR 327.8(l), is 
generally one that is less than 5 years old, but there are several 
exceptions, including, for example, an exception for certain 
otherwise new institutions in certain holding company structures. 12 
CFR 327.9(d)(7). The calculation of percentages of small 
institutions, however, was determined strictly by excluding 
institutions less than 5 years old, rather than by using the 
definition of a ``new'' institution and its regulatory exceptions, 
since determination of whether an institution meets an exception to 
the definition of ``new'' requires a case-by-case investigation.
---------------------------------------------------------------------------

    Under the final rule adopted in 2006, large institutions that lack 
a long-term debt issuer rating are assessed using the financial ratios 
method by itself, subject to the large bank adjustment. This will 
continue under the final rule.
    Under the final rule, the initial base assessment rate for an 
institution with a weighted average CAMELS converted value of 1.70, a 
debt issuer ratings converted value of 1.65 and a financial ratios 
method assessment rate of 13.50 basis points would be computed as 
follows:
    <bullet> The financial ratios method assessment rate less 10 basis 
points would be multiplied by one-half (calculated as (13.5 basis 
points--10 basis points) x 0.5) to produce a financial ratios score of 
1.75.
    <bullet> The weighted average CAMELS score, debt ratings score and 
financial ratios score will each be multiplied by 1.692 and summed 
(calculated as 1.70 x 1.692 + 1.65 x 1.692 + 1.75 x 1.692) to produce 
8.629.
    <bullet> A uniform amount of 3.873 would be added, resulting in an 
initial base assessment rate of 12.50 basis points.
    The FDIC anticipates that incorporating the financial ratios score 
into the large bank method assessment rate will result in a more 
accurate distribution of initial assessment rates and in timelier 
assessment rate responses to changing risk profiles, while retaining 
the market and supervisory perspectives that debt and CAMELS ratings 
provide. While the number of potential discretionary adjustments under 
this revised large bank method cannot be known with certainty, the 
revised method should create a more accurate distribution of initial 
rates and, thus, should minimize the number of necessary discretionary 
adjustments.\49\
---------------------------------------------------------------------------

    \49\ The FDIC has issued additional Guidelines for Large 
Institutions and Insured Foreign Branches in Risk Category I (the 
large bank guidelines) governing these large bank adjustments. 72 FR 
27122 (May 14, 2007).
---------------------------------------------------------------------------

Comments

    One trade group supported the proposal and specifically noted that 
the FDIC should move away from the debt rating method. Other comments, 
including comments from trade groups, argued that the proposed rule 
would make it harder for a large bank to be eligible for the lowest 
assessment rates. A commenting bank argued that:

    Structuring the rules with a goal to maintain parity between 
large and small banks would be in violation of [12 U.S.C. 
1817(b)(2)(D)]. Arbitrarily establishing targets for percentages of 
institutions that fall into a given assessment rate is inconsistent 
with not only the governing statute but the whole concept of risk-
based pricing. * * * The fact that, under objective criteria, large 
banks may have a greater percentage of institutions that qualify for 
the lowest rate is not an indication that the rule is flawed and 
needs to change, but may just be a factual representation of the 
strength of large banks.\50\

    \50\ 12 U.S.C. 1817(b)(2)(D) provides that, ``No insured 
depository institution shall be barred from the lowest-risk category 
solely because of size.''
---------------------------------------------------------------------------

    The FDIC disagrees with the commenting bank. The purpose of the new 
large bank method is to create an assessment system for large Risk 
Category I institutions that will respond more timely to changing risk 
profiles, will improve the accuracy of initial assessment rates, 
relative risk rankings, and will create a greater parity between small 
and large Risk Category I institutions. The recalibration of the 
percentages of large institutions that would have been charged the 
minimum and maximum rates applicable to Risk Category I is intended to 
better reflect the actual risk posed by large institutions. Under the 
debt ratings method, the percentage of large Risk Category I 
institutions that were charged the minimum assessment rate changed 
little over time despite deteriorating financial conditions. If the 
financial ratios method, which is based on a combination of objective 
financial ratios and supervisory ratings, were applied to large Risk 
Category I institutions, only about 19 percent would have been charged 
the minimum assessment rate. While the FDIC continues to believe that 
the financial ratios method alone does not adequately provide the 
appropriate risk ranking for large and complex institutions, the 
deterioration in financial ratios is highly indicative of rapidly 
changing risk profiles, which are not fully reflected in the debt 
ratings method on a timely basis.
    Furthermore, 12 U.S.C. 1817(b)(2)(D) does not prohibit the FDIC 
from calibrating a risk-based assessment system so that, at a given 
point in time, an equal percentage of small and large institutions 
would have been charged the minimum assessment rate, provided that the 
risks posed were equal, as, in the FDIC's view, they were.

V. Adjustment for Large Institutions and Insured Branches of Foreign 
Banks in Risk Category I

    Under the final rule adopted in 2006, within Risk Category I, large 
institutions and insured branches of foreign banks are subject to an 
assessment rate adjustment (the large bank adjustment). In determining 
whether to make such an adjustment for a large institution or an 
insured branch of a foreign bank, the FDIC may consider such 
information as financial performance and condition information, other 
market or supervisory information, potential loss severity, and stress 
considerations. Any large bank adjustment is 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. Adjustments are meant 
to preserve consistency in the orderings of risk indicated by 
assessment rates, to ensure fairness among all large institutions, and 
to ensure that assessment rates take into account all available 
information that is relevant to the FDIC's risk-based assessment 
decision.
    The final rule will increase the maximum possible large bank 
adjustment to one basis point. The adjustment will be made to an 
institution's initial base assessment rate before any other adjustments 
are made.

[[Page 9536]]

The adjustment cannot: (1) Decrease any rate so that the resulting rate 
would be less than the minimum initial base assessment rate; or (2) 
increase any rate above the maximum initial base assessment rate.
    The FDIC is amending the maximum size of the adjustment for two 
primary reasons. First, under the final rule adopted in 2006, the 
difference between the minimum and maximum base assessment rates in 
Risk Category I is two basis points. The maximum one-half basis point 
large bank adjustment represents 25 percent of the difference between 
the minimum and maximum rates. While an adjustment of this size is 
generally sufficient to preserve consistency in the orderings of risk 
indicated by assessment rates and to ensure fairness, there have been 
circumstances where more than a half a basis point adjustment would 
have been warranted. The difference between the minimum and maximum 
base assessment rates will increase from two basis points to four basis 
points under the final rule. A half basis point large bank adjustment 
would represent only 12.5 percent of the difference between the minimum 
and maximum rates and would not be sufficient to preserve consistency 
in the orderings of risk indicated by assessment rates or to ensure 
fairness. The increase in the maximum possible large bank adjustment 
will continue to represent 25 percent of the difference between the 
minimum and maximum rates, minimizing the potential number of instances 
where the large bank adjustment is insufficient to fully and accurately 
reflect the risk that an institution poses.
    The purpose of the large bank adjustment is to improve the relative 
risk ranking of large Risk Category I institutions with respect to 
their initial assessment rates, not total assessment rates. The FDIC 
expects that, under the final rule, large bank adjustments will 
continue to be made infrequently and for a limited number of 
institutions.\51\ The FDIC's view is that the use of supervisory 
ratings, financial ratios and agency ratings (when available) will 
sufficiently reflect the risk profile and rank orderings of risk in 
large Risk Category I institutions in most (but not all) cases.
---------------------------------------------------------------------------

    \51\ In the seven quarters for which institutions have been 
assessed since the 2006 assessment rule went into effect, the total 
number of adjustments in any one quarter has ranged from 2 to 16. 
For the third quarter of 2008, the FDIC continued or implemented 
assessment rate adjustments for 16 large Risk Category I 
institutions, 14 to increase an institution's assessment rate, and 2 
to decrease an institution's assessment rate. Additionally, the FDIC 
sent 2 institutions advance notification of a potential upward 
adjustment in their assessment rate.
---------------------------------------------------------------------------

    The FDIC expects to further clarify its Assessment Rate Adjustment 
Guidelines for Large Institutions and Insured Foreign Branches in Risk 
Category I (the Guidelines).\52\ The Guidelines will discuss in detail 
the quantitative and qualitative factors that the FDIC will rely upon 
when deciding whether to make a large bank adjustment. Until then, the 
Guidelines will be applied taking into account the changes resulting 
from this rulemaking.
---------------------------------------------------------------------------

    \52\ 72 FR 27,122 (May 14, 2007).
---------------------------------------------------------------------------

Comments

    An industry trade group and a bank objected to the increase in the 
large bank adjustment, arguing that the adjustment is arbitrary and 
subjective. The FDIC disagrees. The large bank method appropriately 
recognizes the need for subjective, expert judgment-based risk 
assessments for large banks. Because large institutions are usually 
complex and often have unique operations, an entirely formulaic 
approach, while objective, has yielded a distribution of assessment 
rates that is not sufficiently reflective of the risk. When the FDIC 
decides to increase or decrease a large institution's assessment rate 
based upon the large bank adjustment, it does so after reviewing a 
large set of financial and performance data in addition to making 
qualitative assessments. While the decision to apply an adjustment 
cannot be reduced to a formula, the set of data that the FDIC reviews 
is consistent from one institution to the next and the FDIC strives to 
make its decisions based on the data as consistent as possible and the 
reasons for the decisions as clear as possible for the institutions 
affected. As stated above, the FDIC intends to publish revised 
Guidelines to further clarify the large bank adjustment process.
    Despite the existence of a long-established appeals process for 
assessment rates, one industry trade group stated that ``[B]ankers felt 
that they were not allowed to effectively challenge the adjustments 
through the FDIC's appeals process.'' The FDIC notes, however, that no 
institution has yet appealed an adjustment (or the lack thereof) to the 
Assessment Appeals Committee.\53\
---------------------------------------------------------------------------

    \53\ Only one institution has requested review of its assessment 
rate; it asked for an adjustment when the FDIC had not given one. 
However, this institution did not appeal the denial of its request 
for review to the Assessment Appeals Committee. The FDIC has also 
received 9 responses to the 29 advance notices of intent to increase 
an assessment rate using the large bank adjustment that the FDIC has 
sent out.
---------------------------------------------------------------------------

VI. Adjustment for Unsecured Debt for all Risk Categories

    Under the final rule, an institution's base assessment rate (after 
making any large bank adjustment) will be reduced from the initial rate 
using the institution's ratio of long-term unsecured debt (and, for 
small institutions, certain amounts of Tier 1 capital) to domestic 
deposits.\54\ Any decrease in base assessment rates as a result of this 
unsecured debt adjustment will be limited to five basis points (rather 
than two basis points as proposed in the NPR). Unsecured debt will not 
include any senior unsecured debt that the FDIC has guaranteed under 
the Temporary Liquidity Guarantee Program.
---------------------------------------------------------------------------

    \54\ For this purpose, an institution would be ``small'' if it 
met the definition of a small institution in 12 CFR 327.8(g)--
generally, an institution with less than $10 billion in assets--
except that it would not include an institution that would otherwise 
meet the definition for which the FDIC had granted a request to be 
treated as a large institution pursuant to 12 CFR 327.9(d)(6).
---------------------------------------------------------------------------

    The unsecured debt adjustment will be determined by multiplying an 
institution's long-term unsecured debt (plus, if the institution is a 
small institution, ``qualified'' amounts of Tier 1 capital as explained 
below) as a percentage of domestic deposits by 40 basis points (rather 
than 20 basis points as proposed in the NPR). For example, an 
institution with a ratio of long-term unsecured debt (plus, if the 
institution is small, qualified amounts of Tier 1 capital) to domestic 
deposits of 3.0 percent will see its initial base assessment rate 
reduced by 1.20 basis points (calculated as 40 basis points x 0.03). An 
institution with a ratio of long-term unsecured debt (plus, if the 
institution is small, qualified amounts of Tier 1 capital) to domestic 
deposits of 13.0 percent will have its assessment rate reduced by five 
basis points, since the maximum possible reduction will be five basis 
points. (40 basis points x 0.13 = 5.20 basis points, which exceeds the 
maximum possible reduction.)
    For a small institution, the amount of qualified Tier 1 capital 
that will be added to long-term unsecured debt will be a portion of the 
amount of Tier 1 capital that exceeds a ratio of Tier 1 capital to 
adjusted average assets of 5.0%.\55\ The percentage of Tier 1 capital 
that is qualified increases as the amount of Tier 1 capital held by a 
small institution increases. The qualified amount is set forth in Table 
9.
---------------------------------------------------------------------------

    \55\ Adjusted average assets will be used for Call Report 
filers; adjusted total assets will be used for TFR filers.

[[Page 9537]]



               Table 9--Amount of Qualified Tier 1 Capital
------------------------------------------------------------------------
                                                          Amount of Tier
                                                             1 capital
                                                           within range
   Range of Tier 1 capital to  adjusted average assets       which is
                                                             qualified
                                                             (percent)
------------------------------------------------------------------------
<= 5%...................................................               0
> 5% and <= 6%..........................................              10
> 6% and <= 7%..........................................              20
> 7% and <= 8%..........................................              30
> 8% and <= 9%..........................................              40
> 9% and <= 10%.........................................              50
> 10% and <= 11%........................................              60
> 11% and <= 12%........................................              70
> 12% and <= 13%........................................              80
> 13% and <= 14%........................................              90
> 14%...................................................             100
------------------------------------------------------------------------

    The amount of qualified Tier 1 capital within each of the ranges is 
summed to determine the total amount of qualified Tier 1 capital for 
this institution. The sum of qualified Tier 1 capital and long-term 
unsecured debt as a percentage of domestic deposits will be multiplied 
by 40 basis points to produce the unsecured debt adjustment.\56\
---------------------------------------------------------------------------

    \56\ The percentage of qualified Tier 1 capital and long-term 
unsecured debt to domestic deposits will remain unrounded (to the 
extent of computer capabilities). The unsecured debt adjustment will 
be rounded to two digits after the decimal point prior to being 
applied to the base assessment rate. Appendix 2 describes the 
unsecured debt adjustment for a small institution mathematically.
---------------------------------------------------------------------------

    To illustrate the calculation of qualified Tier 1 capital, consider 
a small institution with a Tier 1 leverage ratio of 20.0 percent and 
Tier 1 capital of $2.0 million. The amount of qualified Tier 1 capital 
is illustrated in Table 10.

                 Table 10--Example of Qualified Tier 1 Capital for the Unsecured Debt Adjustment
----------------------------------------------------------------------------------------------------------------
                                                                            Qualified
                                                   Tier 1 capital         percentage of         Qualified Tier 1
              Leverage ratio band                   within band      x    Tier 1 capital    =   capital  ($000)
                                                       ($000)               (percent)
----------------------------------------------------------------------------------------------------------------
0-5%...........................................                500  ..                  0  ..                  0
5%-6%..........................................                100  ..                 10  ..                 10
6%-7%..........................................                100  ..                 20  ..                 20
7%-8%..........................................                100  ..                 30  ..                 30
8%-9%..........................................                100  ..                 40  ..                 40
9%-10%.........................................                100  ..                 50  ..                 50
10%-11%........................................                100  ..                 60  ..                 60
11%-12%........................................                100  ..                 70  ..                 70
12%-13%........................................                100  ..                 80  ..                 80
13%-14%........................................                100  ..                 90  ..                 90
> 14%..........................................                600  ..                100  ..                600
                                                ----------------------------------------------------------------
    Total......................................              2,000  ..  .................  ..              1,050
----------------------------------------------------------------------------------------------------------------

    As can be seen in Table 10, each band of the Tier 1 leverage ratio 
(up to the last band) contains $100,000 in Tier 1 capital and the 
qualified percentage increases linearly until it reaches 100 percent 
for amounts over 14.0 percent. The total qualified Tier 1 capital for 
this small institution is $1.05 million, which will be added to any 
long-term unsecured debt to calculate the institution's unsecured debt 
adjustment.
    The final rule includes more Tier 1 capital in qualified Tier 1 
capital than proposed in the NPR. The NPR proposed including the sum of 
one-half of the amount of Tier 1 capital between 10 percent and 15 
percent of adjusted average assets and the full amount of Tier 1 
capital exceeding 15 percent of adjusted average assets. The FDIC has 
concluded, based in part on comments, that the proposal did not give 
small institutions sufficient credit for Tier 1 capital.
    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.
    Unsecured debt will consist of senior unsecured liabilities and 
subordinated debt. A senior unsecured liability is defined as the 
unsecured portion of other borrowed money.\57\ Subordinated debt is 
defined in the report of condition for the reporting period.\58\ Long-
term unsecured debt is defined as unsecured debt with at least one year 
remaining until maturity. However, unsecured debt will not include any 
debt that the FDIC has guaranteed pursuant to the Temporary Liquidity 
Guarantee Program, since this kind of debt will not decrease FDIC 
losses in the event an institution fails.
---------------------------------------------------------------------------

    \57\ Other borrowed money is reported on the Call Report in 
Schedule RC, item 16 and on the Thrift Financial Report as the sum 
of items SC720, SC740, and SC760.
    \58\ The definition of ``subordinated debt'' in the Call Report 
is contained in the Glossary under ``Subordinated Notes and 
Debentures.'' For the June 30, 2008 Call Report, the definition 
read, in pertinent part, as follows:
    Subordinated Notes and Debentures: A subordinated note or 
debenture is a form of debt issued by a bank or a consolidated 
subsidiary. When issued by a bank, a subordinated note or debenture 
is not insured by a federal agency, is subordinated to the claims of 
depositors, and has an original weighted average maturity of five 
years or more. Such debt shall be issued by a bank with the approval 
of, or under the rules and regulations of, the appropriate federal 
bank supervisory agency. * * *
    When issued by a subsidiary, a note or debenture may or may not 
be explicitly subordinated to the deposits of the parent bank. * * *
    For purposes of the final rule, subordinated debt would also 
include limited-life preferred stock as defined in the report of 
condition for the reporting period. The definition of ``limited-life 
preferred stock'' in the Call Report is contained in the Glossary 
under ``Preferred Stock.'' For the June 30, 2008 Call Report, the 
definition read, in pertinent part, as follows:
    Limited-life preferred stock is preferred stock that has a 
stated maturity date or that can be redeemed at the option of the 
holder. It excludes those issues of preferred stock that 
automatically convert into perpetual preferred stock or common stock 
at a stated date.
---------------------------------------------------------------------------

    At present, institutions separately report neither long-term senior 
unsecured liabilities nor long-term subordinated debt in the report of 
condition. In a separate notice of proposed rulemaking, the Federal 
Financial Institution Examination Council has proposed revising the 
Call Report to report separately long-term senior unsecured liabilities 
and subordinated debt that meet this definition. The Office of Thrift 
Supervision (OTS) has also published a

[[Page 9538]]

notice of proposed rulemaking that would adopt similar reporting 
requirements. The FDIC anticipates that these revisions will be made 
beginning with the June 30, 2009 Call Report and TFR. However, if they 
are not, until banks separately report these amounts in the Call 
Report, the FDIC will use subordinated debt included in Tier 2 capital 
and will not include any amount of senior unsecured liabilities. These 
adjustments will also be made for TFR filers until thrifts separately 
report these amounts in the TFR.
    At present, institutions also do not report debt that the FDIC has 
guaranteed pursuant to the Temporary Liquidity Guarantee Program.\59\ 
The FDIC is pursuing the necessary changes to the Call Report and TFR 
to ensure that these amounts are excluded from the separate report of 
long-term senior unsecured liabilities and subordinated debt beginning 
with the June 30, 2009 Call Report and TFR.
---------------------------------------------------------------------------

    \59\ Institutions report this debt to the FDIC shortly after 
issuing it and also file monthly reports on the amount of this debt 
outstanding as of the end of each month. However, neither of these 
reports contains all of the information the FDIC needs to deduct 
this debt from the unsecured debt adjustment, since neither uses the 
definition of ``unsecured debt'' contained in the text. In addition, 
the monthly report does not contain maturity information.
---------------------------------------------------------------------------

    When an institution fails, holders of unsecured claims, including 
subordinated debt, receive distributions from the receivership estate 
only if all secured claims, administrative claims and deposit claims 
have been paid in full. Consequently, greater amounts of long-term 
unsecured claims provide a cushion that can reduce the FDIC's loss in 
the event of failure.
    For small institutions (but not large ones), the unsecured debt 
adjustment includes a portion of Tier 1 capital for two primary 
reasons. First, cost concerns and lack of demand generally make it 
difficult for small institutions to issue unsecured debt in the market. 
For reasons of fairness, the FDIC believes that small institutions that 
have large amounts of Tier 1 capital should receive an equivalent 
benefit for that capital. Second, the FDIC does not want to create an 
incentive for small institutions to convert existing Tier 1 capital 
into subordinated debt, for example, by having a shareholder in a 
closely held corporation redeem shares and receive subordinated debt.

Comments

    The FDIC received several comments on the proposed unsecured debt 
adjustment. One commenter found the proposal fair and appropriate.
    Another commenter, however, claimed that the proposal would 
penalize institutions that do not issue long-term unsecured debt. A 
commenter recommended that the FDIC abandon the separate risk 
adjustment for unsecured debt. A commenter argued that the proposal 
uses arbitrary measures when adjusting for risk and ignores the 
probability of default. The FDIC disagrees with these comments. As 
noted earlier, greater amounts of long-term unsecured debt provide a 
cushion that can reduce the FDIC's loss in the event of failure, thus 
reducing the FDIC's risk.
    The FDIC specifically sought comments on the size of the unsecured 
debt adjustment and whether it should be larger or smaller. Several 
commenters argued that the proposed two basis point reduction in base 
assessment rates, which was the maximum reduction possible under the 
proposal, was arbitrary and too low. Some also argued that the proposed 
20 basis point multiplier should be increased. Several noted that the 
maximum proposed unsecured debt adjustment was much smaller than the 
maximum proposed secured liability adjustment.
    The FDIC has concluded that the proposed 20 basis point multiplier 
and two basis point maximum reduction were too small. Spreads on 
depository institution unsecured debt have, on average, approximately 
doubled since the NPR was published. The FDIC has, therefore, doubled 
the size of the multiplier, partly to reflect the recent increase in 
debt spreads and partly to create greater parity between the size of 
the unsecured debt adjustment and the size of the secured liability 
adjustment. The FDIC has more than doubled the maximum possible 
unsecured debt adjustment to ensure that institutions will retain an 
incentive to issue unsecured debt and, again, to create greater parity 
between the unsecured debt adjustment and the secured liability 
adjustment.
    Under the final rule, the FDIC estimates that the reduction in 
industry average assessments arising from the unsecured debt adjustment 
will exceed the industry average increase in assessments arising from 
the secured liability adjustment and (for Risk Categories II, III, and 
IV) the brokered deposit adjustment.
    An industry trade group recommended that the unsecured debt 
adjustment for small institutions include larger amounts of Tier 1 
capital. The trade group argued that small institutions should be 
rewarded for their additional capital and that the proposal did not 
sufficiently reward them. The trade group suggested that the adjustment 
include the sum of one-half of the amount of Tier 1 capital between 8 
percent and 12 percent of adjusted average assets and the full amount 
of Tier 1 capital exceeding 12 percent of adjusted average assets. The 
FDIC agrees that small institutions should receive more credit for Tier 
1 capital and, and discussed above, has so provided in the final rule.
    Another industry trade group suggested that institutions subject to 
the large bank method should also be given credit for capital in the 
unsecured debt adjustment. However, in the FDIC's view, doing so would 
undo the one of the purposes of including a portion of Tier 1 capital 
in the unsecured debt adjustment for small banks, which was to give 
small banks, which generally do not (and generally cannot) issue much 
unsecured debt, a benefit equivalent to that of large banks. If a large 
institution's assessment rate does not appropriately factor its 
capital, the FDIC can use the large bank adjustment to alter the rate 
(although the FDIC anticipates that the need to do so will seldom 
arise).
    Some comments suggested that the FDIC include all unsecured and 
subordinated debt in the unsecured debt adjustment, regardless of 
maturity. One suggested using all unencumbered assets. The FDIC 
disagrees. Short-term debt is likely to be paid prior to failure and, 
thus, is unlikely to provide a cushion against FDIC losses.
    Some commenters argued that it would be more appropriate to use a 
ratio of long-term unsecured debt (or unencumbered debt) to insured 
deposits, since insured deposits are the true proxy for the FDIC's 
risk. The FDIC disagrees. Numerous studies have shown that, as an 
institution approaches failure, uninsured depositors tend to demand 
payment. In effect, these uninsured depositors receive full payment on 
their claims (as if they were insured depositors at failure), leaving 
the failed institution with fewer assets to satisfy the FDIC's claims.

VII. Adjustment for Secured Liabilities for All Risk Categories

    Under the final rule, an institution's base assessment rate may 
increase depending upon its ratio of secured liabilities to domestic 
deposits (the secured liability adjustment). An institution's ratio of 
secured liabilities to domestic deposits, if greater than 25 percent 
(rather than 15 percent as proposed in the NPR), will increase its 
assessment rate, but the resulting base assessment rate after any such 
increase will be no more than 50 percent greater

[[Page 9539]]

than it was before the adjustment. The secured liability adjustment 
will be made after any large bank adjustment or unsecured debt 
adjustment.
    Specifically, for an institution that has a ratio of secured 
liabilities to domestic deposits of greater than 25 percent, the 
secured liability adjustment will be the institution's base assessment 
rate (after taking into account previous adjustments) multiplied by the 
ratio of its secured liabilities to domestic deposits minus 0.25. 
However, the resulting adjustment cannot be more than 50 percent of the 
institution's base assessment rate (after taking into account previous 
adjustments). For example, if an institution had a ratio of secured 
liabilities to domestic deposits of 35 percent, and a base assessment 
rate before the secured liability adjustment of 14 basis points, the 
secured liability adjustment would be the base rate multiplied by 0.10 
(calculated as 0.35 - 0.25), resulting in an adjustment of 1.4 basis 
points. However, if the institution had a ratio of secured liabilities 
to domestic deposits of 80 percent, its base rate before the secured 
liability adjustment of 14 basis points would be multiplied by 0.50 
rather than 0.55 (calculated as 0.80 - 0.25), since the resulting 
adjustment can be no greater than 50 percent of the base assessment 
rate before the secured liability adjustment.\60\
---------------------------------------------------------------------------

    \60\ Under the final rule, the ratio of secured liabilities to 
domestic deposits will be rounded to three digits after the decimal 
point. The resulting amount and adjusted assessment rate will be 
rounded to the nearest one-hundredth (1/100th) of a basis point.
---------------------------------------------------------------------------

    Ratios of secured liabilities to domestic deposits for any given 
quarter will be calculated from the report of condition filed by each 
institution as of the last day of the quarter. For banks, secured 
liabilities include Federal Home Loan Bank advances, securities sold 
under repurchase agreements, secured Federal funds purchased and 
``other secured borrowings,'' as reported in banks' quarterly Call 
Reports. Thrifts also report Federal Home Loan Bank advances in their 
quarterly TFR, but, at present, do not separately report securities 
sold under repurchase agreements, secured Federal funds purchased or 
``other secured borrowings.'' The OTS has published a notice of 
proposed rulemaking to revise the TFR so that thrifts will separately 
report these items and the FDIC anticipates that this revision will be 
effective for the June 30, 2009 TFR. Until the TFR is revised, however, 
any of these secured amounts not reported separately from unsecured or 
other liabilities by a thrift in its TFR will be imputed based on 
simple averages for Call Report filers as of June 30, 2008. As of that 
date, on average, 63.0 percent of the sum of Federal funds purchased 
and securities sold under repurchase agreements reported by Call Report 
filers were secured, and 49.4 percent of other borrowings were secured.
    Under the final rule adopted in 2006, an institution's secured 
liabilities do not directly affect its assessments. The exclusion of 
secured liabilities can lead to inequity. An institution with secured 
liabilities in place of another's deposits pays a smaller deposit 
insurance assessment, even if both pose the same risk of failure and 
would cause the same losses to the FDIC in the event of failure.
    To illustrate with a simple example, assume that Bank A has $100 
million in insured deposits, while Bank B has $50 million in insured 
deposits and $50 million in secured liabilities. Each poses the same 
risk of failure and is charged the same assessment rate. At failure, 
each has assets with a market value of $80 million. The loss to the DIF 
would be identical for Bank A and Bank B ($20 million each). The total 
assessments paid by Bank A and Bank B, however, would not be identical. 
Because secured liabilities do not figure into an institution's 
assessment under the final rule adopted in 2006, the DIF would receive 
twice as much assessment revenue from Bank A as from Bank B over a 
given period (despite identical FDIC losses at failure).
    In general, under the final rule adopted in 2006, substituting 
secured liabilities for unsecured liabilities (including subordinated 
debt) raises the FDIC's loss in the event of failure without providing 
increased assessment revenue. Substituting secured liabilities for 
deposits can also lower an institution's franchise value in the event 
of failure, which increases the FDIC's losses, all else equal.\61\
---------------------------------------------------------------------------

    \61\ Overall, whether substituting secured liabilities for 
deposits increases, decreases, or leaves unchanged the FDIC's loss 
given failure also depends on how the substitution affects the 
proportion of insured and uninsured deposits, but FDIC's assessment 
revenue will always decline with a substitution.
---------------------------------------------------------------------------

Comments

    The vast majority of commenters were opposed to the secured 
liability adjustment. The few commenters that supported the FDIC's 
proposal called the secured liability adjustment fair and appropriate, 
and viewed the logic for the increased charge as clear and compelling. 
One of the supportive commenters stated that core deposits are more 
advantageous to an institution than secured liabilities, as they are 
cheaper and allow cross-selling of products. As a result, prudent 
institutions show a preference for core funding. The commenter found 
the proposed threshold to be reasonable.
    Many of the commenters opposed to the adjustment suggested that the 
NPR gave too much weight to risk adjustments based on arbitrary 
measures, and ignored the probability of default. Commenters argued 
that the true risk of a bank lies in the quality of its assets, rather 
than how the assets are funded. Some noted that the presence of 
unsecured liabilities (as opposed to secured liabilities) is no 
guarantee of the quality of a bank's assets or that the assets would be 
sufficient to cover a bank's deposit liabilities in case of bank 
failure. Commenters believe that the FDIC should abandon the proposed 
approach of targeting certain funding sources.
    Some commenters argued that the proposed secured liability 
adjustment appears to run contrary to established programs that have 
implied government support, including borrowings from the Federal 
Reserve through the Term Auction Facility. Commenters viewed the 
secured liability adjustment as unfair to institutions that have 
limited options for funding.
    Many of the comments (over 1,100) were particularly concerned about 
the effect the FDIC's proposal would have on Federal Home Loan Bank 
(FHLB) advances. Commenters argued that FHLB advances are a stable, 
reliable source of liquidity, and a key tool for asset/liability 
management, interest rate risk and net interest margin maintenance. 
Many commenters suggested that the secured liability adjustment was 
counterproductive since banks benefit from FHLB dividend income. Many 
commenters cautioned that deterring the use of FHLB advances (and other 
secured liabilities) will lead to increased use of riskier funding 
sources, higher funding costs, and decreased lending. Most of the 
commenters viewed the proposal as unfairly penalizing institutions that 
use FHLB advances prudently. Several commenters suggested that FHLB 
advances should be excluded from any secured liability adjustment for 
at least five years since some FHLB advances do not mature before the 
effective date of the proposal.
    Many commenters argued against the proposal because they believe it 
would impair the mission of the FHLB system. The commenters asserted 
that because the proposal discourages the use of FHLB advances, it 
would lead to a decline in FHLB earnings. Commenters representing 
community service groups

[[Page 9540]]

expressed concern that any decline in FHLB earnings would undermine 
FHLB contributions to community down payment and closing cost 
assistance programs, community investment programs, affordable housing 
programs, and foreclosure prevention programs. Commenters also noted 
that FHLBs already regulate the use of their advances.
    Commenters also noted the effect the proposal would have on the use 
of repurchase agreements (repos). Many commenters argued that repos are 
a safe and effective source to manage liquidity. Others remarked that 
repos are an important tool used to attract commercial deposits, which 
can neither be secured nor bear interest. One commenter suggested that 
the definition of secured liabilities used in the proposal, exclude 
repos with state and local governments where the securities sold are 
federal government or agency securities. In addition, the commenter 
expressed concern that the proposal would put banks at a competitive 
disadvantage to non-depository institutions.
    Commenters also expressed concern that the proposed secured 
liability adjustment would harm the covered bond market at a time when 
additional sources of mortgage funding are needed and when bank 
regulatory agencies have supported development of this market.
    Many commenters argued that the 15 percent threshold is arbitrary 
and simplistic. One commenter suggested raising the threshold to 30 
percent. Some comments suggested adjusting the threshold by subtracting 
the balance that is secured by agency bonds or investment grade 
securities or by subtracting long-term advances. Other commenters 
recommended eliminating the secured liability adjustment if the bank 
has capital above a certain amount.
    The FDIC remains generally unpersuaded by these comments, which do 
not respond to the reasons for the secured liability adjustment. The 
FDIC has not argued that secured liability funding makes a bank more 
likely to fail. Rather, as noted above, the primary purpose of the 
secured liability adjustment is to remedy an inequity. An institution 
with secured liabilities in place of another's deposits pays a smaller 
deposit insurance assessment, even if both pose the same risk of 
failure and would cause the same losses to the FDIC in the event of 
failure. This result is not fair to institutions that do not rely 
heavily on secured funding. Substituting secured liabilities for 
deposits can also lower an institution's franchise value in the event 
of failure, which increases the FDIC's losses, all else equal. A risk-
based system should take this likelihood into account. These arguments 
apply equally whether an institution's secured liabilities consist of 
FHLB advances, repurchase agreements or other forms of secured 
borrowing.
    The FDIC intended the secured liability adjustment to apply only to 
those institutions that rely heavily on secured funding. The revenue 
loss to the DIF is relatively small until reliance on secured funding 
becomes significant. To ensure that the adjustment applies only to 
those institutions that rely heavily on secured funding and impose a 
significant revenue loss on the DIF, the final rule raises the ratio of 
secured liabilities to domestic deposits that will trigger the 
adjustment to 25 percent. As Table 11 demonstrates, as of September 30, 
2008, only 10 percent of insured institutions would have had a secured 
liability adjustment and only 5 percent would have had an increase in 
assessment rate of greater than 10 percent. Consequently, the 
adjustment should have no effect on funding choices for the vast 
majority of institutions and is unlikely to have a significant overall 
effect on secured borrowing, the FHLB system, affordable housing or 
foreclosure prevention.

  Table 11--Percentage of Institutions Subject to the Secured Liability
                  Adjustment Using Different Thresholds
                       [As of September 30, 2008]
------------------------------------------------------------------------
                                             Minimum ratio of secured
                                              liabilities to domestic
                                         -------------------------------
                                                15%             25%
------------------------------------------------------------------------
Percentage of all institutions that                  24%             10%
 would have been subject to the secured
 liability adjustment...................
Percentage of all institutions that                  10%              5%
 would have had more than a 10% increase
 in assessment rate due to the secured
 liability adjustment...................
------------------------------------------------------------------------

    Some commenters noted that many states require that banks 
collateralize any public funds they have on deposit; since public funds 
pose no additional risk to the DIF, banks should not be penalized by 
the secured liability adjustment when pledging collateral for the 
public funds. The FDIC agrees. The FDIC did not, and did not intend to, 
include collateralized public funds among secured liabilities for 
purposes of the adjustment. For purposes of the secured liability 
adjustment, deposits, regardless of whether they are collateralized, 
are not considered a secured liability.
    Many comments focused on the timing of the proposal. Most 
commenters noted that discouraging alternate funding sources would hurt 
bank liquidity and tighten credit availability, which is inconsistent 
with market realities in the current economic downturn. Comments on the 
general timing of the proposal suggested that it should be delayed 
until at least the beginning of 2010; others commented that a phase-in 
schedule for the secured liability adjustment should be used. 
Commenters thought that a delay in the proposal would decrease the 
likelihood that the secured liability adjustment would conflict with 
other policy measures currently being used to increase liquidity. 
Additionally, commenters asserted that the proposal does not give 
institutions an opportunity to adjust their funding mix to account for 
the new assessment rate structure.
    In the FDIC's view, the secured liability adjustment will not have 
any material effect on liquidity and will not conflict with other 
measures intended to increase liquidity. As noted above, the secured 
liability adjustment will affect only about 10 percent of the industry 
and will cause more than a 10 percent increase in assessment rates for 
only about 5 percent of the industry. The FDIC also sees no reason to 
delay implementation to allow institutions to adjust their funding mix. 
The NPR was published in October 2008 and the secured liability 
adjustment will be based upon data submitted as of June 30, 2009, which 
allows institutions over eight months to adjust their funding mix.

[[Page 9541]]

    Some commenters were concerned that the proposed secured liability 
adjustment would result in sharp increases in assessments when 
amendments take effect to the Statement of Financial Accounting 
Standards No. 140, Accounting for Transfers and Servicing of Financial 
Assets and Extinguishments of Liabilities (FAS 140) in 2010. FAS 140 
will require banks to report assets in special-purpose vehicles and 
variable-interest entities, which often include securitized assets, on 
their balance sheets. These assets are presently accounted for off-
balance sheet. As a result, commenters argue that the adoption of both 
FAS 140 and the proposed secured liability adjustment would result in 
an unintended increase in assessments to certain insured institutions.
    FAS 140 has not yet been adopted. As proposed, it would not take 
effect until 2010. If and when FAS 140 is adopted in final form, the 
FDIC can then consider whether the secured liability adjustment needs 
to be modified.

VIII. Adjustment for Brokered Deposits for Risk Categories II, III and 
IV

    In addition to the unsecured debt adjustment and the secured 
liability adjustment, the final rule states that an institution in Risk 
Category II, III, or IV will also be subject to an assessment rate 
adjustment for brokered deposits (the brokered deposit adjustment). 
This adjustment will be limited to those institutions whose ratio of 
brokered deposits to domestic deposits is greater than 10 percent; 
asset growth rates will not affect the adjustment. The adjustment will 
be determined by multiplying 25 basis points times the difference 
between an institution's ratio of brokered deposits to domestic 
deposits and 0.10.\62\ However, the adjustment will never be more than 
10 basis points. The adjustment will be added to the base assessment 
rate after all other adjustments had been made. Ratios for any given 
quarter will be calculated from the Call Reports or TFRs filed by each 
institution as of the last day of the quarter.
---------------------------------------------------------------------------

    \62\ Under the final rule, the ratio of brokered deposits to 
domestic deposits will be rounded to three digits after the decimal 
point. The resulting brokered deposit charge will be rounded to the 
nearest one-hundredth (1/100th) of a basis point.
---------------------------------------------------------------------------

    Significant reliance on brokered deposits tends to increase an 
institution's risk profile, particularly as the institution's financial 
condition weakens. Insured institutions--particularly weaker ones--
typically pay higher rates of interest on brokered deposits. When an 
institution becomes noticeably weaker or its capital declines, the 
market or statutory restrictions may limit its ability to attract, 
renew or roll over these deposits, which can create significant 
liquidity challenges.\63\
---------------------------------------------------------------------------

    \63\ An adequately capitalized institution can accept, renew and 
rollover brokered deposits only by obtaining a waiver from the FDIC. 
Even then, interest rate restrictions apply. An undercapitalized 
institution may not accept, renew or rollover brokered deposits at 
all. Section 29 of the Federal Deposit Insurance Act (12 U.S.C. 
1831f).
---------------------------------------------------------------------------

    Also, significant reliance on brokered deposits tends to decrease 
greatly the franchise value of a failed institution. In a typical 
failure, the FDIC seeks to find a buyer for a failed institution's 
branches among the institutions located in or around the service area 
of the failed institution. A potential buyer usually seeks to increase 
its market share in the service area of the failed institution through 
the acquisition of the failed institution and its assets and deposits, 
but most brokered deposits originate from outside an institution's 
market area. The more core deposits that the buyer can obtain through 
the acquisition of the failed institution, the greater the market share 
of deposits (and the loans and other products that typically follow the 
core deposits) it can capture. Furthermore, brokered deposits may not 
be part of many potential buyers' business plans, limiting the field of 
buyers. Thus, the lower franchise value of the failed institution 
created by its reliance on brokered deposits leads to a lower price for 
the failed institution, which increases the FDIC's losses upon failure.
    In addition, as noted earlier, several institutions that have 
recently failed have experienced rapid asset growth before failure and 
have funded this growth through brokered deposits. The FDIC believes 
that these reasons warrant the additional charge for significant levels 
of brokered deposits.
    The brokered deposit adjustment, unlike the adjusted brokered 
deposit ratio applicable to Risk Category I, will include all brokered 
deposits as defined in Section 29 of the Federal Deposit Insurance Act 
(12 U.S.C. 1831f), and implemented by 12 CFR 337.6, which is the 
definition used in banks' quarterly Reports of Condition and Income 
(Call Reports) and thrifts' quarterly Thrift Financial Reports (TFRs), 
above 10 percent of an institution's assets. The adjustment will 
include reciprocal deposits, as well as brokered deposits that consist 
of balances swept into an insured institution by another institution, 
such as balances swept from a brokerage account.
    The statutory restrictions on accepting, renewing or rolling over 
brokered deposits when an institution becomes less than well 
capitalized apply to all brokered deposits, including reciprocal 
deposits. Market restrictions may also apply to these reciprocal 
deposits when an institution's condition declines. For these reasons, 
the final rule includes these reciprocal brokered deposits in the 
brokered deposit adjustment.
    To illustrate the brokered deposit adjustment with a simple 
example, take a Risk Category II institution with an initial base 
assessment rate of 22 basis points and a ratio of brokered deposits to 
domestic deposits of 40 percent. Multiplying 25 basis points times the 
difference between the institution's ratio of brokered deposits to 
domestic deposits and 10 percent yields 7.5 basis points (calculated as 
25 basis points [middot] (0.4 - 0.1)). Because this amount is less than 
the maximum possible brokered deposit adjustment of 10 basis points, 
the brokered deposit adjustment will be as calculated, 7.5 basis 
points. Assuming that the secured liability adjustment for this 
institution is 2 basis points and that the institution has no other 
assessment rate adjustments, the total base assessment rate will be 
31.5 basis points (calculated as (22 basis points + 2 basis points + 
7.5 basis points)).

Comments

    Most of the comments on the proposed adjusted brokered deposit 
ratio (applicable to Risk Category I) also applied to the proposed 
brokered deposit adjustment (applicable to the other risk categories). 
The FDIC's response to these comments is as set out in the discussion 
of the comments on the adjusted brokered deposit ratio, with one major 
exception. The FDIC has decided to include reciprocal deposits in the 
brokered deposit adjustment, unlike the adjusted brokered deposit 
ratio, applicable to Risk Category I, which excludes them. When an 
institution's condition declines and it falls out of Risk Category I, 
the statutory and market restrictions on brokered deposits become much 
more relevant. Even if such an institution remains well capitalized 
(and the statutory restrictions do not apply), the risk that an 
institution will become less than well capitalized has increased. These 
statutory restrictions can cause severe liquidity problems for 
institutions that rely heavily on brokered deposits. For this reason, 
the FDIC has decided to include all brokered deposits above 10 percent 
of an institution's assets in the brokered deposit adjustment.

[[Page 9542]]

IX. Insured Branches of Foreign Banks

    Because base assessment rates will be higher and the difference 
between the minimum and maximum initial base assessment rates will 
increase from two to four basis points under the final rule, the FDIC 
is making a conforming change for insured branches of foreign banks in 
Risk Category I. Under the final rule, an insured branch of a foreign 
bank's weighted average of ROCA component ratings will be multiplied by 
5.076 (which will be the pricing multiplier) and 3.873 (which will be a 
uniform amount for all insured branches of foreign banks) will be added 
to the product.\64\ The resulting sum will equal a Risk Category I 
insured branch of a foreign bank's initial base assessment rate, 
provided that the amount cannot be less than the minimum initial base 
assessment rate or greater than the maximum initial assessment rate. A 
Risk Category I insured branch of a foreign bank's initial base 
assessment rate will be subject to any large bank adjustment, but total 
base assessment rates cannot be less than the minimum initial base 
assessment rate applicable to Risk Category I institutions nor greater 
than the maximum initial base assessment rate applicable to Risk 
Category I institutions. Insured branches of a foreign bank not in Risk 
Category I will be charged the initial base assessment rate for the 
risk category in which they are assigned.
---------------------------------------------------------------------------

    \64\ An insured branch of a foreign bank's weighted average ROCA 
component rating will continue to 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 uniform amount for 
insured branches is identical to the uniform amount under the large 
bank method. The pricing multiplier for insured branches is three 
times the amount of the pricing multiplier under the large bank 
method, since the initial base rate for an insured branch depends 
only on one factor (weighted average ROCA ratings), while the 
initial base rate under the large bank method depends on three 
factors, each equally weighted.
---------------------------------------------------------------------------

    No insured branch of a foreign bank in any risk category will be 
subject to the unsecured debt adjustment, secured liability adjustment 
or brokered deposit adjustment. Insured branches of foreign banks are 
branches, not independent depository institutions. In the event of 
failure, the FDIC would not necessarily have access to the 
institution's capital or be protected by its subordinated debt or 
unsecured liabilities. Consequently, an unsecured debt adjustment 
appears to be inappropriate. At present, these branches do not report 
comprehensively on secured liabilities. In the FDIC's view, the burden 
of increased reporting on secured liabilities would outweigh any 
benefit.

X. New Institutions

    The FDIC also making conforming changes in the treatment of new 
insured depository institutions.\65\ For assessment periods beginning 
on or after January 1, 2010, new institutions in Risk Category I will 
be assessed at the maximum initial base assessment rate applicable to 
Risk Category I institutions, as under the final rule adopted in 2006.
---------------------------------------------------------------------------

    \65\ As discussed below, subject to exceptions, the final rule 
defines a new insured depository institution as a bank or thrift 
that has not been federally insured for at least five years as of 
the last day of any quarter for which it is being assessed.
---------------------------------------------------------------------------

    Effective for assessment periods beginning before January 1, 2010, 
until a Risk Category I new institution receives CAMELS component 
ratings, it will have an initial base assessment rate that is two basis 
points above the minimum initial base assessment rate applicable to 
Risk Category I institutions, rather than one basis point above the 
minimum rate, as under the final rule adopted in 2006.\66\ All other 
new institutions in Risk Category I will be treated as established 
institutions, except as provided in the next paragraph.
---------------------------------------------------------------------------

    \66\ Certain credit unions that convert to a bank or thrift 
charter and certain otherwise new insured institutions in a holding 
company structure may be considered established institutions. Both 
before and after January 1, 2010, any such institution that is well 
capitalized but has not yet received CAMELS component ratings will 
be assessed at two basis points above the minimum initial base 
assessment rate applicable to Risk Category I institutions.
---------------------------------------------------------------------------

    Either before or after January 1, 2010: no new institution, 
regardless of risk category, will be subject to the unsecured debt 
adjustment; any new institution, regardless of risk category, will be 
subject to the secured liability adjustment; and a new institution in 
Risk Categories II, III or IV will be subject to the brokered deposit 
adjustment. After January 1, 2010, no new institution in Risk Category 
I will be subject to the large bank adjustment.

XI. Assessment Rate Schedule

    As explained in the next section, estimated losses from projected 
institution failures have risen considerably since the NPR was 
published last fall. Furthermore, certain changes from the NPR made in 
response to public comments would have the effect of reducing total 
assessment revenue generated under the proposed rates. Consequently, 
initial base assessment rates as of April 1, 2009, which are set forth 
in Table 12 below, are slightly higher than proposed in the NPR.\67\
---------------------------------------------------------------------------

    \67\ In the NPR, the FDIC noted that:
    [A]t the time of the issuance of the final rule, the FDIC may 
need to set a higher base rate schedule based on information 
available at that time, including any intervening institution 
failures and updated failure and loss projections. A higher base 
rate schedule may also be necessary because of changes to the 
proposal in the final rule, if these changes have the overall effect 
of changing revenue for a given rate schedule. In order to fulfill 
the statutory requirement to return the fund reserve ratio to 1.15 
percent, the base rate schedule in the final rule could be 
substantially higher than the proposed base assessment rate schedule 
(for example, if projected or actual losses at the time of the final 
rule greatly exceed the FDIC's current estimates).
     FR 61,560, 61,572-61,573 (Oct. 16, 2008).

                                                         Table 12--Initial Base Assessment Rates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Risk category
                                                                    ------------------------------------------------------------------------------------
                                                                                    I *
                                                                    ----------------------------------        II              III               IV
                                                                         Minimum          Maximum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Rates (in basis points).....................................              12               16               22               32              45
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Rates for institutions that do not pay the minimum or maximum rate will vary between these rates.

    The FDIC projects that the minimum initial assessment rate would 
have to be 20 basis points beginning in the second quarter to increase 
the reserve ratio to 1.15 percent within 5 years (by the end of 2013). 
Under the rates shown in table 12 and adopted in this rule, the year-
end 2013 reserve ratio is projected to be 0.58 percent. After making 
all possible adjustments under the final rule, total base assessment 
rates for each risk

[[Page 9543]]

category will be within the ranges set forth in Table 13 below.\68\
---------------------------------------------------------------------------

    \68\ These rates would be in addition to the approximately 1 to 
1.2 basis point annual rates that institutions are assessed to pay 
the interest on Financing Corporation (FICO) bonds.

                            Table 13--Total Base Assessment Rates after Adjustments*
----------------------------------------------------------------------------------------------------------------
                                                   Risk category   Risk category   Risk category   Risk category
                                                         I              II              III             IV
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate....................           12-16              22              32              45
Unsecured debt adjustment.......................            -5-0            -5-0            -5-0            -5-0
Secured liability adjustment....................             0-8            0-11            0-16          0-22.5
Brokered deposit adjustment.....................  ..............            0-10            0-10            0-10
                                                 ---------------------------------------------------------------
Total base assessment rate......................          7-24.0         17-43.0         27-58.0        40-77.5
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Rates for institutions that do not pay the
  minimum or maximum rate will vary between these rates. Adjustments will be applied in the order listed in the
  table. The large bank adjustment will be made before any other adjustment.

    The new base rate schedule is intended to improve the way the 
assessment system differentiates risk among insured institutions and 
make the risk-based assessment system fairer, by limiting the 
subsidization of riskier institutions by safer ones. They are also 
intended to increase assessment revenue while the Restoration Plan is 
in effect.
    However, given the FDIC's estimated losses from projected 
institution failures, the assessment rates adopted in the final rule 
raise make it likely that the DIF balance and reserve ratio will fall 
to zero or below this year. The FDIC believes that it is important that 
the fund not decline to a level that could undermine public confidence 
in federal deposit insurance. Therefore, the FDIC is simultaneously 
issuing an interim rule to impose a 20 basis point special assessment 
on June 30, 2009.\69\ The interim rule also provides that the Board may 
impose additional special assessments of up to 10 basis points 
thereafter, if the reserve ratio of the Deposit Insurance Fund is 
estimated to fall to a level that that the Board believes would 
adversely affect public confidence or to a level which shall be close 
to zero or negative at the end of a calendar quarter.
---------------------------------------------------------------------------

    \69\ 12 U.S.C. 1817(b)(5) provides:
    Emergency special assessments.--In addition to the other 
assessments imposed on insured depository institutions under this 
subsection, the Corporation may impose 1 or more special assessments 
on insured depository institutions in an amount determined by the 
Corporation if the amount of any such assessment is necessary--
    (A) To provide sufficient assessment income to repay amounts 
borrowed from the Secretary of the Treasury under [12 U.S.C. 
1824(a)] in accordance with the repayment schedule in effect under 
[12 U.S.C. 1824(c)] during the period with respect to which such 
assessment is imposed;
    (B) To provide sufficient assessment income to repay obligations 
issued to and other amounts borrowed from insured depository 
institutions under [12 U.S.C. 1824(d)]; or
    (C) For any other purpose that the Corporation may deem 
necessary.
---------------------------------------------------------------------------

Actual Rate Schedule, Ability To Adjust Rates and Effective Date

    The final rule sets actual rates at the total base assessment rate 
schedule effective April 1, 2009. The FDIC projects an overall average 
assessment rate of 15.4 basis points beginning in April 2009. As of 
September 30, 2008, the average assessment rate (before accounting for 
credit use) was 6.4 basis points for all institutions and 5.5 basis 
points for institutions in Risk Category I.
    The rate schedule and the other revisions to the assessment rules 
will take effect for the quarter beginning April 1, 2009, and will be 
reflected in the June 30, 2009 fund balance and the invoices for 
assessments due September 30, 2009.
    The final rule continues to allow the FDIC Board to adopt actual 
rates that are higher or lower than total base assessment rates without 
the necessity of further notice-and-comment rulemaking, provided that: 
(1) the Board cannot increase or decrease rates from one quarter to the 
next by more than three basis points; and (2) cumulative increases and 
decreases can not be more than three basis points higher or lower than 
the adjusted base rates. Continued retention of this flexibility will 
enable the Board to act in a timely manner to fulfill its mandate to 
raise the reserve ratio to at least 1.15 percent within the 5-year 
timeframe.

Comments

    The FDIC received comments from several industry trade groups and 
many banks regarding the proposed increases in assessment rates. Two 
comments supported the proposal to increase risk-based assessments. 
Many other letters were critical. Several trade groups and other 
commenters argued that the proposed assessment rates are too high. Many 
commenters urged the FDIC to take advantage of the flexibility that 
Congress provided to extend the restoration period beyond five years 
under ``extraordinary circumstances.'' Among other things, commenters 
argued that the FDIC's invocation of its systemic risk authority to 
provide additional guarantees on non-interest bearing transaction 
deposits and senior unsecured debt is evidence of ``extraordinary 
circumstances.'' Commenters argued that rates should be lower on the 
grounds that current economic conditions are severe, that lower rates 
would be consistent with the government's efforts to restore stability 
to the markets and the financial sector and would make more funds 
available to lend in local communities to small businesses and 
consumers. One trade group argued that the FDIC should assume slower 
insured deposit growth, which would support lower rates.
    Several commenters urged the FDIC to withdraw the proposed rule and 
delay increasing assessment rates and overhauling the assessment system 
until the end of 2009. They argued that the delay would allow time for 
a thorough evaluation of the effectiveness of measures recently taken 
by the federal government to restore stability to the banking system.
    The FDIC agrees that significant increases in deposit insurance 
premium rates in times of economic and financial stress are not 
desirable. However, the FDIC believes that it is important that the 
fund not decline to a level that could undermine public confidence in 
federal deposit insurance. The rates that the FDIC has set in this 
final rule, combined with the 20 basis point special assessment that 
the FDIC will impose on June 30, 2009 (and possible additional special 
assessments of up to 10 basis points thereafter), pursuant to

[[Page 9544]]

the interim rule that the FDIC is also adopting, balance these goals.
    A few comments asserted that the Restoration Plan penalizes safe 
and well-run community banks and urged the FDIC to require the largest 
institutions to recapitalize the DIF. In the FDIC's view, the final 
rule equitably balances assessments from small and large institutions.
    One industry trade group called for assessments to be calculated on 
an individual institution basis for Risk Categories II, III, and IV. 
Implementing this suggestion would require considerable further 
investigation, but might be considered in a future rulemaking.
    One trade group argued that rates for Risk Categories III and IV 
should be higher. Under the final rule, the highest possible assessment 
rate (after adjustments) applicable to Risk Category IV is 77.5 basis 
points. The FDIC believes that rates for these risk categories are 
appropriate.

XII. Assessment Revenue Needs Under the Restoration Plan

Summary

    The FDIC projected last fall that adoption of a rate schedule with 
a minimum initial rate of 10 basis points would increase the reserve 
ratio to above 1.25 percent by the end of 2013. However, a deepening 
recession and continued severe problems in the housing and construction 
sectors, financial markets and commercial real estate, contribute to 
the FDIC's expectation of significantly higher losses for the insurance 
fund compared to the projections of last October included in the 
proposed rule. The insurance fund balance and reserve ratio are likely 
to decline significantly in 2009 before beginning a gradual recovery in 
subsequent years from the effects of new revenue and a declining rate 
of bank failures. Even under the rates adopted in the final rule, the 
FDIC projects that the reserve ratio may decline to close to zero--or 
may turn negative--by or before the end of 2009. The 20 basis point 
special assessment to be imposed under the interim rule on June 30, 
2009 (and possible additional special assessments of up to 10 basis 
points thereafter) are intended to ensure that the reserve ratio does 
not decline to a level that could undermine public confidence in 
federal deposit insurance.
    The FDIC's best estimate is that institution failures could cost 
the insurance fund approximately $65 billion from 2009 to 2013, after 
incurring approximately $18 billion in estimated costs for failures in 
2008. The FDIC bases its loss projections on: analysis of specific 
troubled institutions and risk factors that may adversely affect other 
institutions; analysis of recent and expected loss rates given failure; 
stress analyses of the effects of further housing price declines and a 
significant economic downturn in specific geographic areas on loan 
losses and bank capital; and recent and historic supervisory rating 
downgrade and failure rates.
    The FDIC also assumes that insured deposits would increase by 7 
percent in 2009 and by 5 percent thereafter. The annual average growth 
rate in insured deposits was almost 7 percent over the past 5 years and 
just over 5 percent over the past 10 years.
    The FDIC recognizes that there is considerable uncertainty about 
its projections for losses and insured deposit growth, and that changes 
in assumptions about these and other factors could lead to different 
assessment revenue needs and rates. Under the terms of the Restoration 
Plan, the FDIC must update its projections for the insurance fund 
balance and reserve ratio at least semiannually while the Restoration 
Plan is in effect and adjust rates as necessary. In the event that 
losses exceed or fall below the FDIC's best estimate or insured deposit 
growth is more or less rapid than expected, the Board will be able to 
adjust assessment rates.

Factors Considered in Setting the Level of Assessment Rates

    In setting assessment rates, the FDIC's Board of Directors has 
considered the following factors required by statute:
    (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 section 7(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 
Section 1817(b)(1)) under the risk-based assessment system, including 
the requirement under section 7(b)(1)(A) of the Federal Deposit 
Insurance Act (12 U.S.C. Section 1817(b)(1)(A)) to maintain a risk-
based system.
    (v) Other factors the Board of Directors has determined to be 
appropriate.\70\
---------------------------------------------------------------------------

    \70\ Section 2104 of the Reform Act (amending section 7(b)(2) of 
the Federal Deposit Insurance Act, 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.
    Section 7(b)(1)(C) of the Federal Deposit Insurance Act (12 
U.S.C. 1817(b)(1)(C)).
---------------------------------------------------------------------------

    The factors considered in setting assessment rates are discussed in 
more detail below.
Case Resolution Expenses (Insurance Fund Losses)
    Insurance fund losses from recent insured institution failures and 
an expected higher rate of failures over the next few years will 
significantly reduce the fund balance and reserve ratio.
    The financial market disruptions over the past year have increased 
the likelihood that the recession will be severe and prolonged. 
Declining housing and equity prices, financial market turmoil, and 
deteriorating economic conditions will continue to exert significant 
stress on banking industry earnings and credit quality, most notably in 
residential real estate and construction and development portfolios. 
Accelerating job losses and declining household wealth may weaken 
consumer credit performance, while slowing business activity increases 
the risks in commercial loan portfolios. Significant uncertainty 
remains about the outlook for recovery in securitization markets and 
the return of confidence to financial markets. Regional disparities in 
housing markets and economic conditions have led to variation in 
prospects among banks. Institutions most at risk include those with 
large volumes of subprime and nontraditional mortgages, particularly 
those heavily reliant on securitization, and those with heavy 
concentrations of residential real estate and construction and 
development loans in markets with the greatest housing price declines. 
Institutions that are heavily reliant on non-core funding are exposed 
to additional risks.
    In developing its projections of losses to the insurance fund, the 
FDIC drew from several sources. First, the FDIC relied heavily on 
supervisory analysis of troubled institutions. Supervisors also 
identified risk factors present in currently troubled institutions (or 
that were present in institutions that recently failed) to help analyze 
the

[[Page 9545]]

potential for other institutions with those risk factors to cause 
losses to the insurance fund. Second, the FDIC drew on its analysis of 
losses to the fund in the event of failure. Current financial market 
and economic difficulties make simple reliance on the historical 
average or model estimates based on historical data inappropriate for 
projecting loss rates given failure, particularly in the near term.
    The FDIC also relied on an analysis of the expected widespread 
further decline in housing prices and deterioration in overall economic 
conditions on the capital positions and earnings of insured 
institutions. The analysis simulated high and rising loan loss rates 
due to increased non-current loan rates, rising unemployment rates, and 
falling collateral values, especially for loans backed by real estate. 
As the result of recent and expected deterioration in the U.S. economy 
and banking conditions, the projected loss rates have risen 
substantially from those contained in the NPR.
    The FDIC projects that the costs of institution failures from 2009 
through 2013 may total $65 billion. These losses are in addition to the 
$18 billion for the estimated costs of failures for 2008. The FDIC 
recognizes the considerable degree of uncertainty surrounding these 
projections and its analyses reveal that either higher or lower losses 
are plausible. This uncertainty underscores the need to update the 
outlook for insurance fund losses on a regular basis--at least 
semiannually--while the Restoration Plan is in effect and to consider 
adjustments to assessment rates.
Operating Expenses and Investment Income
    The FDIC estimates that its operating expenses in 2009 will be $1.1 
billion. Thereafter, the FDIC projects that operating expenses will 
increase on average by 5 percent annually.
    The FDIC projects that its investment contributions (investment 
income plus or minus unrealized gains or losses on available-for-sale 
securities) in 2008 will total $4.7 billion, or 9 percent of the start-
of-year fund balance. A one-time unrealized gain of $1.6 billion from 
reclassifying the fund's held-to-maturity securities as available for 
sale on June 30, 2008, bolsters this figure. Near-term projections of 
investment income reflect the current outlook of constant to slightly 
rising Treasury yields.\71\ In addition, the FDIC expects that it will 
invest new funds in short-term securities (primarily overnight 
investments) to accommodate increased bank failure activity. These 
investments are expected to earn lower rates than the longer-term 
securities that they are replacing and will therefore result in less 
interest income to the fund. The FDIC projects investments to 
contribute an amount equal to 1.3 percent of the starting fund balance 
in 2009. The FDIC projects that investment contributions as a percent 
of the fund balance will rise gradually in later years.
---------------------------------------------------------------------------

    \71\ Future interest rate assumptions are based on consideration 
of recent Blue Chip Financial Forecasts as well as recent forward 
rate curves. Forward rates are expected yields on securities of 
varying maturities for specific future points in time that are 
derived from the term structure of interest rates. (The term 
structure of interest rates refers to the relationship between 
current yields on comparable securities with different maturities.)
---------------------------------------------------------------------------

Assessment Revenue, Credit Use, and the Distribution of Assessments
    Assessment revenue in 2008 totaled $3.0 billion: $4.4 billion in 
gross assessments charged less $1.4 billion in credits used. At the end 
of 2008, only 4 percent of the original $4.7 billion in credits 
remained. As part of the Restoration Plan, the FDIC has the authority 
to restrict credit use while the plan is in effect, providing that 
institutions may still apply credits against their assessments equal to 
the lesser of their assessment or 3 basis points.\72\ The FDIC has 
decided not to restrict credit use in the Restoration Plan. The FDIC 
projects that the amount of credits remaining at the time that the new 
rates go into effect will be very small and that their continued use 
will have very little effect on the assessment revenue necessary to 
meet the requirements of the plan.\73\
---------------------------------------------------------------------------

    \72\ Section 7(b)(3)(E)(iv) of the Federal Deposit Insurance Act 
(12 U.S.C. 1817(b)(3)(E)(iv)).
    \73\ For 2009 and 2010, credits may not offset more than 90 
percent of an institution's assessment. Section 7(e)(3)(D)(ii) of 
the Federal Deposit Insurance Act (12 U.S.C. 1817(e)(3)(D)(ii)).
---------------------------------------------------------------------------

    Accounting for the use of remaining credits, the uniform increase 
to rates for the first quarter of 2009, and assuming that the 
assessment rates adopted in this rule were to remain in effect for the 
remainder of this year, the FDIC projects that the fund will earn 
assessment revenue of $11.6 billion for all of 2009.\74\
---------------------------------------------------------------------------

    \74\ The projection assumes 7 percent annual growth in the 
assessment base (which is approximately domestic deposits) in 2009.
---------------------------------------------------------------------------

    For the quarter beginning April 1, 2009, the FDIC has derived gross 
assessment revenue (i.e., before applying any remaining credits) by 
assigning each insured institution an assessment rate based on the 
proposed rate schedule and factors described above. Table 16 shows the 
distribution of institutions and domestic deposits by risk category 
(divided into four parts for Risk Category I) under the initial base 
rate schedule (effective April 1, 2009) based on data as of September 
30, 2008; Table 17 shows the distribution of institutions and domestic 
deposits by bands of total base assessment rates.\75\ For purposes of 
assessment revenue projections beginning in April, the FDIC relied on 
the data reflected in Table 17, but also accounted for projected 
migration of institutions across risk categories as supervisory ratings 
change.
---------------------------------------------------------------------------

    \75\ The assessment base is almost equal to total domestic 
deposits.

[[Page 9546]]



  Table 16--Distribution of Initial Base Assessment Rates and Domestic Deposits* Data as of September 30, 2008
----------------------------------------------------------------------------------------------------------------
                                                                                          Domestic
                                                                                          deposits    Percent of
              Risk category                    Initial        Number of    Percent of       (in        domestic
                                           assessment rate  institutions  institutions  billions of    deposits
                                                                                             $)
----------------------------------------------------------------------------------------------------------------
                                                       12          1,577            19        860.1           12
I........................................        12.01-14          2,637            31      2,863.4           40
                                              14.01-15.99          1,815            22      1,765.2           24
                                                       16          1,476            18        812.4           11
II.......................................              22            672             8        818.8           11
III......................................              32            185             2         83.5            1
IV.......................................              45             21             0         18.8            0
----------------------------------------------------------------------------------------------------------------
* This table and the following two tables exclude insured branches of foreign banks.


   Table 17--Distribution of Total Base Assessment Rates and Domestic Deposits* Data as of September 30, 2008
----------------------------------------------------------------------------------------------------------------
                                                                                          Domestic
                                                                                          deposits    Percent of
              Risk category                   Total base      Number of    Percent of       (in        domestic
                                              assessment    institutions  institutions  billions of    deposits
                                                                                             $)
----------------------------------------------------------------------------------------------------------------
                                                     7-12          2,649            32      3,381.4           47
I........................................        12.01-14          2,248            27      1,295.8           18
                                                 14.01-16          2,367            28      1,177.2           16
                                                 16.01-24            241             3        446.7            6
II.......................................           17-22            435             5        519.7            7
                                                 22.01-43            237             3        299.0            4
III......................................           27-32            107             1         44.3            1
                                                 32.01-58             78             1         39.2            1
IV.......................................           40-45              9             0          1.2            0
                                               45.01-77.5             12             0         17.6            0
----------------------------------------------------------------------------------------------------------------
* Because of data limitations, secured liability adjustments for TFR filers are estimated using imputed values
  based on simple averages of Call Report filers as of September 30, 2008 (discussed above). Unsecured debt
  adjustments are estimated using reported subordinated debt and a portion of non-FHLB other borrowings.

Estimated Insured Deposits
    The FDIC believes that it is reasonable to plan for annual insured 
deposit growth of 7 percent in 2009 and 5 percent in subsequent years. 
During 2008, insured deposits increased by about 11 percent, with the 
troubles in the economy and financial markets making the safety of 
federally insured deposits an attractive option. The most recent five 
year average growth rate was 6.7 percent and the ten year average 
growth rate was 5.3 percent. Chart 1 depicts insured deposit growth 
since 1992.

[[Page 9547]]

[GRAPHIC] [TIFF OMITTED] TR04MR09.015

    Projections of insured deposits are subject to considerable 
uncertainty.\76\ Insured deposit growth over the near term could 
continue to rise more rapidly due to a ``flight to quality'' 
attributable to financial and economic uncertainties. On the other 
hand, as the experience of the late 1980s and early 1990s demonstrated, 
lower overall growth in the banking industry and the economy could 
depress rates of growth of total domestic and insured deposits. A one 
percentage point increase or decrease in average annual insured deposit 
growth rates will not have a significant effect on the assessment rates 
necessary to meet the requirements of the Restoration Plan, other 
factors equal.
---------------------------------------------------------------------------

    \76\ The FDIC estimates of insured deposits and projections do 
not consider the effect of the temporary increase in the deposit 
insurance coverage limit to $250,000 or the guarantee of certain 
deposits under the Temporary Liquidity Guarantee Program.
---------------------------------------------------------------------------

Effect on Capital and Earnings
    Appendix 2 contains an analysis of the effect of the rates adopted 
in this rule on the capital and earnings of insured institutions based 
on a range of projected industry earnings. Given the assumptions in the 
analysis, for the industry as a whole, projected total assessments in 
2009 would result in capital that would be 0.4 to 0.5 percent lower 
than if the FDIC did not charge assessments. Based on the range of 
projected industry earnings, the proposed assessments would cause 8 to 
12 institutions whose equity-to-assets ratio would have exceeded 4 
percent in the absence of assessments to fall below that percentage and 
6 to 9 institutions to fall below 2 percent.
    For profitable institutions, assessments in 2009 would result in 
pre-tax income that would be between 6 and 8 percent lower than if the 
FDIC did not charge assessments. For unprofitable institutions, pre-tax 
losses would increase by an average of 3 to 5 percent. Appendix 2 also 
provides an analysis of the range of effects on capital and earnings 
for these groups of institutions.
Other Factors that the Board May Consider
    In its consideration of proposed rates, the FDIC Board has 
considered another factor that it deems appropriate, as permitted by 
law.
    Updating projections regularly. The FDIC recognizes that there is 
considerable uncertainty about its projections for losses and insured 
deposit growth, and that changes in assumptions about these and other 
factors could lead to different assessment revenue needs and rates. The 
FDIC projects that, under these rates, the reserve ratio will increase 
to 0.58 percent by year-end 2013. Nonetheless, the FDIC expects to 
update its projections for the insurance fund balance and reserve ratio 
at least semiannually while the Restoration Plan is in effect and 
adjust rates as necessary.

XIII. Additional Comments

    One large bank recommended that, in setting assessment rates, most 
weight should be given to probability of default, with particular 
emphasis on the liquidity strength of the bank, as reflected in its 
CAMELS. The commenter argued that if a bank has a low probability of 
default, assessments should be low and risk adjustments based on 
potential FDIC losses are not justified. The FDIC was urged to 
reconsider whether risk adjustments beyond the core measures (debt 
ratings, CAMELS, and capital ratios) should be used at all. 
Additionally, the writer criticized the FDIC for using proxies for 
unencumbered assets that are flawed substitutes.
    In the FDIC's view, probability of default is just one element of 
the risk posed by an institution. Loss given default is equally 
important. For the reasons given above, the FDIC is convinced of the 
need for the adjustments contained in the final rule.

[[Page 9548]]

XIV. Technical and Other Changes

    The final rule will change the way assessment rates are determined 
for a large institution that is subject to the large bank method (or an 
insured branch of a foreign bank) when it moves from Risk Category I to 
Risk Category II, III or IV during a quarter.
    Under the final rule adopted in 2006, if, during a quarter, a 
CAMELS (or ROCA) rating change occurs that results in a large 
institution that is subject to 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 is based upon its 
assessment rate at the end of the prior quarter. No new Risk Category I 
assessment rate is developed for the quarter in which the institution 
moves to Risk Category II, III or IV.\77\
---------------------------------------------------------------------------

    \77\ 12 CFR 327.9(d)(5).
---------------------------------------------------------------------------

    The opposite holds true for a small institution or a large 
institution subject to the financial ratios method when it moves from 
Risk Category I to Risk Category II, III or IV during a quarter. A new 
Risk Category I assessment rate is developed for the quarter in which 
the institution moves to Risk Category II, III or IV.\78\
---------------------------------------------------------------------------

    \78\ 12 CFR 327.9(d)(1)(ii). In fact, the FDIC had provided in 
the preamble to the 2006 assessments rule that no new Risk Category 
I assessment rate would be determined for any large institution for 
the quarter in which it moved to Risk Category II, III or IV, but, 
as the result of a drafting inconsistency, this intention was not 
realized in the regulatory text. 71 FR 69,282, 69,293 (Nov. 30, 
2006). The FDIC now believes that a new Risk Category I assessment 
rate should be determined for any large institution for the quarter 
in which it moves to Risk Category II, III or IV.
---------------------------------------------------------------------------

    The final rule states that when a large institution subject to the 
large bank method or an insured branch of a foreign bank moves from 
Risk Category I to Risk Category II, III or IV during a quarter, a new 
Risk Category I assessment rate be developed for that quarter. That 
rate for the portion of the quarter that the institution was in Risk 
Category I will be determined as for any other institution in Risk 
Category I subject to the same pricing method, except that the rate 
will only apply for the portion of the quarter that the institution was 
actually in Risk Category I.
    Since implementation of the 2006 assessments rule in 2007, several 
large institutions that were subject to the supervisory and debt 
ratings method have moved from Risk Category I to a Risk Category II or 
III. More than once, changes occurred in these institutions' debt 
ratings or CAMELS component ratings while the institution was in Risk 
Category I, but the institutions' assessment rates for the quarter did 
not reflect these changes. In one case, an institution received a debt 
rating downgrade early in the quarter, but, because it fell to Risk 
Category II on the 89th day of the quarter, this debt rating downgrade 
did not affect its assessment rate. The final rule is intended to 
correct these outcomes and better ensure that an institution's 
assessment rate reflects the risk that it poses.
    The FDIC is also amending its assessment regulations to correct 
technical errors and make clarifications to the regulatory language in 
several sections of Part 327 for the reasons set forth below.
    The final rule makes a technical correction to the language of 12 
CFR 327.3(a), the regulatory requirement that each depository 
institution pay an assessment to the Corporation. Language creating an 
exception ``as provided in paragraph (b) of this section'' was 
inadvertently retained in the initial clause of section 327.3(a) when 
the assessment regulations were amended in 2006. Formerly, paragraph 
(b) excepted newly insured institutions from payment of assessments for 
the semiannual period in which they became insured institutions; that 
exception was eliminated in 2006. Paragraph (b) now addresses quarterly 
certified statement invoices and payment dates. Accordingly, the final 
rule amends section 327.3(a) to eliminate the reference to paragraph 
(b).
    Section 327.6(b)(1) addresses assessments for the quarter in which 
a terminating transfer occurs when the acquiring institution uses 
average daily balances to calculate its assessment base. In that 
situation, section 327.6(b)(1) provides that the terminating 
institution's assessment for that quarter is reduced by the percentage 
of the quarter remaining after the terminating transfer occurred, and 
calculated at the acquiring institution's assessment rate. Although it 
can be inferred that the terminating institution's assessment base for 
that quarter is to be used in the reduction calculation, the section is 
not explicit. Accordingly, the final rule amends the section to clarify 
that the reduction calculation is accomplished by applying the 
acquirer's rate to the terminating institution's assessment base for 
that quarter.
    Section 327.8(i) defines Long Term Debt Issuer Rating as the 
``current rating'' of an insured institution's long-term debt 
obligations by one of the named ratings companies. ``Current rating'' 
is defined in section 327.8(i) as ``one that has been confirmed or 
assigned within 12 months before the end of the quarter for which the 
assessment rate is being determined.'' The section also provides: ``If 
no current rating is available, the institution will be deemed to have 
no long-term debt issuer rating.'' The language of section 327.8(i) 
requires the FDIC to disregard a long-term debt issuer rating that is 
still in effect--that is, it has not been withdrawn and replaced by 
another rating--if it is greater than 12 months old when the FDIC 
calculates an institution's assessment rate. To remedy this, the FDIC 
is amending section 327.8(i) to read as follows:
    (i) Long-Term Debt Issuer Rating. A long-term debt issuer rating 
shall mean a rating of an insured depository institution's long-term 
debt obligations by Moody's Investor Services, Standard & Poor's, or 
Fitch Ratings that has not been withdrawn before the end of the quarter 
being assessed. A withdrawn rating shall mean one that has been 
withdrawn by the rating agency and not replaced with another rating by 
the same agency. 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.
    Consistent with this amendment, the final rule amends two 
references to long-term debt issuer rating, as defined in Sec.  
327.8(i), ``in effect at the end of the quarter being assessed'' that 
appear in 12 CFR 327.9(d) and 12 CFR 327.9(d)(2). The final rule amends 
these sections by deleting the phrase ``in effect at the end of the 
quarter being assessed'' and to add ``as defined in Sec.  327.8(i)'' to 
section 327.9(d)(2) so that its construction parallels section 
327.9(d).
    Sections 327.8(l) and (m) define ``New depository institution'' and 
``Established depository institution.'' The former 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''; the latter 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 assigned.'' In the 
FDIC's view, this regulatory language could allow a previously 
uninsured institution to be treated as an established institution based 
on charter date. To remedy this, the final rule amends sections 
327.8(l) and (m) to read as follows:
    (l) New depository institution. A new insured depository 
institution is a bank or thrift that has been federally insured for 
less than five years as of the last day of any quarter for which it is 
being assessed.
    (m) Established depository institution. An established insured 
depository institution is a bank or thrift that has

[[Page 9549]]

been federally insured for at least five years as of the last day of 
any quarter for which it is being assessed.
    Section 327.9(d)(7)(viii), which addresses rates applicable to 
institutions subject to the subsidiary or credit union exception, 
contains language making the section applicable ``[o]n or after January 
1, 2010. * * * '' This language is redundant of language in section 
327.9(d)(7)(i)(A) and the final rule deletes it.

XV. Effective Date

    This final rule will become effective on April 1, 2009.

XVI. Regulatory Analysis and Procedure

A. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley 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 and received one response. The comment stated that 
the proposal was too complicated and should have included an executive 
summary in bullet point format. Making the risk-based assessment system 
more responsive to risk entailed some complexity, which we tried to 
minimize.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that each federal 
agency either certify that a final 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 rule and publish the analysis for comment.\79\ 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.\80\ The final rule relates directly to the 
rates imposed on insured depository institutions for deposit insurance, 
and to the risk-based assessment system components that measure risk 
and weigh that risk in determining each institution's assessment rate, 
and includes technical and other changes to the FDIC's assessment 
regulations. Nonetheless, the FDIC is voluntarily undertaking an 
initial regulatory flexibility analysis of the final rule for 
publication.
---------------------------------------------------------------------------

    \79\ See 5 U.S.C. 603, 604 and 605.
    \80\ 5 U.S.C. 601.
---------------------------------------------------------------------------

    As of December 31, 2008, of the 8,305 insured commercial banks and 
savings associations, there were 4,567 small insured depository 
institutions as that term is defined for purposes of the RFA (i.e., 
those with $165 million or less in assets).
    For purposes of this analysis, whether the FDIC were to collect 
needed assessments under the existing rule or under the final rule, the 
total amount of assessments collected would be the same. The FDIC's 
total assessment needs are driven by the statutory requirement that the 
FDIC adopt a restoration plan and by the FDIC's aggregate insurance 
losses, expenses, investment income, and insured deposit growth, among 
other factors. Given the FDIC's total assessment needs, the final rule 
would merely alter the distribution of assessments among insured 
institutions. Using the data as of December 31, 2008, the FDIC 
calculated the total assessments that would be collected under the base 
rate schedule in the final rule.
    The economic impact of the final rule 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 
final rule compared to the existing 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.<SUP>81 82</SUP>
---------------------------------------------------------------------------

    \81\ Throughout this regulatory flexibility analysis (unlike the 
rest of the final rule), a ``small institution'' refers to an 
institution with assets of $165 million or less.
    \82\ An institution's total revenue is defined as the sum of its 
annual net interest income and non-interest income. An institution's 
profit is defined as income before taxes and extraordinary items, 
gross of loan loss provisions.
---------------------------------------------------------------------------

    Based on the December 2008 data, under the final rule, for more 
than 75 percent of small institutions, the change in the assessment 
system would result in assessment changes (up or down) totaling five 
percent or less of annual revenue. Of the total of 4,567 small 
institutions, only eight percent would have experienced an increase 
equal to five percent or greater of their total revenue. These figures 
do not indicate a significant economic impact on revenues for a 
substantial number of small insured institutions. Table 18 below sets 
forth the results of the analysis in more detail.

 Table 18--Change in Assessments Under the Final Rule as a Percentage of
                              Total Revenue
------------------------------------------------------------------------
     Change in assessments as a           Number of        Percent of
     percentage of total revenue        institutions      institutions
------------------------------------------------------------------------
More than 10 percent lower..........               240              5.26
5 to 10 percent lower...............               545             11.93
0 to 5 percent lower................             2.306             50.49
0 to 5 percent higher...............             1,120             24.52
5 to 10 percent higher..............               239              5.23
More than 10 percent higher.........               117              2.56
                                     -----------------------------------
    Total...........................             4,567            100.00
------------------------------------------------------------------------

    The FDIC performed a similar analysis to determine the impact on 
profits for small institutions. Based on December 2008 data, under the 
final rule, 81 percent of the small institutions with reported profits 
would have experienced a change in their annual profits of 5 percent or 
less. Table 19 sets forth the results of the analysis in more detail.

[[Page 9550]]



  Table 19--Change in Assessments Under the Proposal as a Percentage of
                                Profit *
------------------------------------------------------------------------
     Change in assessments as a           Number of        Percent of
        percentage of profit            institutions      institutions
------------------------------------------------------------------------
More than 30 percent lower..........               451             14.77
20 to 30 percent lower..............               266              8.71
10 to 20 percent lower..............               616             20.18
5 to 10 percent lower...............               654             21.42
0 to 5 percent lower................               477             15.62
0 to 10 percent more................               276              9.04
Greater than 10 percent.............               313             10.25
                                     -----------------------------------
      Total.........................             3,053            100.00
------------------------------------------------------------------------
* Institutions with negative or no profit were excluded. These
  institutions are shown separately in Table 20.

    Of those small institutions with reported profits, only 10 percent 
would have experienced a decrease in their total profits of 10 percent 
or greater. 65 percent of these small institutions would have a greater 
than five percent increase in their profits. Again, these figures do 
not indicate a significant economic impact on profits for a substantial 
number of small insured institutions.
    Table 19 excludes small institutions that either show no profit or 
show a loss, because a percentage cannot be calculated. The FDIC 
analyzed the effect of the final rule on these institutions by 
determining the annual assessment change that would result. Table 20 
below shows that only 17 percent (256) of the 1,514 small insured 
institutions in this category would have experienced an increase in 
annual assessments of $10,000 or more. 14% of these institutions would 
have experienced a decrease of $10,000 or more.

  Table 20--Change in Assessments Under the Final Rule For Institutions
                   With Negative or No Reported Profit
------------------------------------------------------------------------
                                          Number of        Percent of
        Change in assessments           institutions      institutions
------------------------------------------------------------------------
$20,000 decrease or more............                97              6.40
$10,000-$20,000 decrease............               108              7.13
$5,000-$10,000 decrease.............               131              8.65
$1,000-$5,000 decrease..............               203             13.41
$0-$1,000 decrease..................                78              5.15
$0-$10,000 increase.................               641             42.43
$10,000-$20,000 increase............               124              8.19
$20,000 increase or more............               132              8.72
                                     -----------------------------------
    Total...........................             1,514             100.0
------------------------------------------------------------------------

    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 would 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.
    The initial regulatory flexibility analysis set forth above 
demonstrates that the final rule would not have a significant economic 
impact on a substantial number of small institutions within the meaning 
of those terms as used in the RFA.\83\
---------------------------------------------------------------------------

    \83\ 5 U.S.C. 605.
---------------------------------------------------------------------------

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 proposed rule.

D. 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 Act of 1996 
(SBREFA) Public Law No. 110-28 (1996). As required by law, the FDIC 
will file the appropriate reports with Congress and the General 
Accounting Office so that the final rule may be reviewed.

E. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The FDIC has determined that the proposed rule will not affect 
family well-being 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 
(Pub. L. 105-277, 112 Stat. 2681).

List of Subjects in 12 CFR Part 327

    Bank deposit insurance, Banks, banking, Savings associations.

0
For the reasons set forth in the preamble, the FDIC amends chapter III 
of title 12 of the Code of Federal Regulations as follows:

PART 327--ASSESSMENTS

0
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, Public Law 109-171, 120 Stat. 9-21, and Sec. 3, Public 
Law 109-173, 119 Stat. 3605.


0
2. Revise Sec.  327.3(a)(1) to read as follows:

[[Page 9551]]

Sec.  327.3  Payment of assessments.

    (a) Required. (1) In general. Each insured depository institution 
shall pay to the Corporation for each assessment period an assessment 
determined in accordance with this part 327.
* * * * *
0
3. Revise Sec.  327.6(b)(1) to read as follows:


Sec.  327.6  Terminating transfers; other terminations of insurance.

* * * * *
    (b) Assessment for quarter in which the terminating transfer 
occurs--(1) Acquirer using Average Daily Balances. If an acquiring 
institution's assessment base is computed using average daily balances 
pursuant to Sec.  327.5, the terminating institution's assessment for 
the quarter in which the terminating transfer occurs shall be reduced 
by the percentage of the quarter remaining after the terminating 
transfer and calculated at the acquiring institution's rate and using 
the assessment base reported in the terminating institution's quarterly 
report of condition for that quarter.
* * * * *

0
4. In Sec.  327.8, revise paragraphs (g), (h), (i), (l) and (m) and add 
paragraphs (o), (p), (q), (r) and (s) to read as follows:


Sec.  327.8  Definitions.

* * * * *
    (g) Small Institution. An insured depository institution with 
assets of less than $10 billion as of December 31, 2006 (other than an 
insured branch of a foreign bank or an institution classified as large 
for purposes of Sec.  327.9(d)(8)) shall be classified as a small 
institution. If, after December 31, 2006, an institution classified as 
large under paragraph (h) of this section (other than an institution 
classified as large for purposes of Sec.  327.9(d)(8)) reports assets 
of less than $10 billion in its quarterly reports of condition for four 
consecutive quarters, the FDIC will reclassify the institution as small 
beginning the following quarter.
    (h) Large Institution. An institution classified as large for 
purposes of Sec.  327.9(d)(8) or 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 quarterly 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 rating of an insured depository institution's long-term 
debt obligations by Moody's Investor Services, Standard & Poor's, or 
Fitch Ratings that has not been withdrawn before the end of the quarter 
being assessed. A withdrawn rating shall mean one that has been 
withdrawn by the rating agency and not replaced with another rating by 
the same agency. 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.
* * * * *
    (l) New depository institution. A new insured depository 
institution is a bank or savings association that has been federally 
insured for less than five years as of the last day of any quarter for 
which it is being assessed.
    (m) Established depository institution. An established insured 
depository institution is a bank or savings association that has been 
federally insured for at least five years as of the last day of any 
quarter for which it is being assessed.
    (1) Merger or consolidation involving new and established 
institution(s). Subject to paragraphs (m)(2), (3), (4), and (5) of this 
section and Sec.  327.9(d)(10)(ii), (iii), when an established 
institution merges into or consolidates with a new institution, the 
resulting institution is a new institution unless:
    (i) 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
    (ii) Substantially all of the management of the established 
institution continued as management of the resulting or surviving 
institution.
    (2) Consolidation involving established institutions. When 
established institutions consolidate, the resulting institution is an 
established institution.
    (3) 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 part.
    (4) Subsidiary exception. Subject to paragraph (m)(5) of this 
section, a new institution will be considered established if it is a 
wholly owned subsidiary of:
    (i) 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 savings association 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 
savings and loan 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
    (ii) 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.
    (5) Effect of credit union conversion. In determining whether an 
insured depository institution is new or established, the FDIC will 
include any period of time that the institution was a federally insured 
credit union.
* * * * *
    (o) Unsecured debt--For purposes of the unsecured debt adjustment 
as set forth in Sec.  327.9(d)(5), unsecured debt shall include senior 
unsecured liabilities and subordinated debt.
    (p) Senior unsecured liability--For purposes of the unsecured debt 
adjustment as set forth in Sec.  327.9(d)(5), senior unsecured 
liabilities shall be the unsecured portion of other borrowed money as 
defined in the quarterly report of condition for the reporting period 
as defined in paragraph (b)), but shall not include any senior 
unsecured debt that the FDIC has guaranteed under the Temporary 
Liquidity Guarantee Program, 12 CFR Part 370.
    (q) Subordinated debt--For purposes of the unsecured debt 
adjustment as set forth in Sec.  327.9(d)(5), subordinated debt shall 
be as defined in the quarterly report of condition for the reporting 
period; however, subordinated debt shall also include limited-life 
preferred stock as defined in the quarterly report of condition for the 
reporting period.
    (r) Long-term unsecured debt--For purposes of the unsecured debt 
adjustment as set forth in Sec.  327.9(d)(5), long-term unsecured debt 
shall be unsecured debt with at least one year remaining until 
maturity.
    (s) Reciprocal deposits--Deposits that an insured depository 
institution receives through a deposit placement network on a 
reciprocal basis, such that:

[[Page 9552]]

(1) for any deposit received, the institution (as agent for depositors) 
places the same amount with other insured depository institutions 
through the network; and (2) each member of the network sets the 
interest rate to be paid on the entire amount of funds it places with 
other network members.

0
7. Revise Sec.  327.9 to read as follows:


Sec.  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 risk-based 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 Sec.  347.209 of 
this chapter; and
    (B) Maintains the eligible assets prescribed under Sec.  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 Sec.  347.209 of 
this chapter; and
    (B) Maintains the eligible assets prescribed under Sec.  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, as 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 Initial Base Assessment Rates for Risk Category I 
Institutions. Subject to paragraphs (d)(2), (4), (5), (6), (8), (9) and 
(10) 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 Sec.  327.8(i), shall have its 
initial base assessment rate determined using the 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 long-
term debt issuer rating shall have its initial base assessment rate 
determined using the large bank method set forth in paragraph (d)(2) of 
this section (subject to paragraphs (d)(2), (4), (5), (6), (8), (9) and 
(10) of this section). The initial base assessment rate for a large 
institution whose assessment rate in the prior quarter was determined 
using the large bank method, but which no longer has a long-term debt 
issuer rating, shall be determined using the financial ratios method.
    (1) Financial ratios method. Under the financial ratios method for 
Risk Category I institutions, each of six 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 shall 
equal the institution's initial base assessment rate; provided, 
however, that no institution's initial base assessment rate shall be 
less than the minimum initial base assessment rate in effect for Risk 
Category I institutions for that quarter nor greater than the maximum 
initial base assessment rate in effect for Risk Category I institutions 
for that quarter. An institution's initial base assessment rate, 
subject to adjustment pursuant to paragraphs (d)(4), (5) and (6) of 
this section, as appropriate (which will produce the total base 
assessment rate), and adjusted for the actual assessment rates set by 
the Board under Sec.  327.10(c), will equal an institution's assessment 
rate. The six financial ratios

[[Page 9553]]

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; and the Adjusted brokered 
deposit ratio. 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 Sec.  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%. The following table sets forth the initial values of 
the pricing multipliers:

------------------------------------------------------------------------
                                                             Pricing
                    Risk measures *                       multipliers **
------------------------------------------------------------------------
Tier 1 Leverage Ratio..................................          (0.056)
Loans Past Due 30-89 Days/Gross Assets.................           0.575
Nonperforming Assets/Gross Assets......................           1.074
Net Loan Charge-Offs/Gross Assets......................           1.210
Net Income before Taxes/Risk-Weighted Assets...........          (0.764)
Adjusted brokered deposit ratio........................           0.065
Weighted Average CAMELS Component Rating...............           1.095
------------------------------------------------------------------------
* Ratios are expressed as percentages.
** Multipliers are rounded to three decimal places.

    The six financial ratios and the weighted average CAMELS component 
rating will be multiplied by the respective pricing multiplier, and the 
products will be summed. To this result will be added the uniform 
amount of 11.861. The resulting sum shall equal the institution's 
initial base assessment rate; provided, however, that no institution's 
initial base assessment rate shall be less than the minimum initial 
base assessment rate in effect for Risk Category I institutions for 
that quarter nor greater than the maximum initial base assessment rate 
in effect for Risk Category I institutions for that quarter. Appendix A 
to this subpart describes the derivation of the pricing multipliers and 
uniform amount and explains how they will be periodically updated.
    (i) Publication and 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 financial 
ratios method.
    (ii) Implementation of CAMELS rating changes--(A) Changes between 
risk categories. If, during a quarter, a CAMELS composite rating change 
occurs that results in an institution whose Risk Category I assessment 
rate is determined using the financial ratios method moving from Risk 
Category I to Risk Category II, III or IV, the institution's initial 
base assessment rate for the portion of the quarter that it was in Risk 
Category I shall be determined using the supervisory ratings in effect 
before the change and the financial ratios as of the end of the 
quarter, subject to adjustment pursuant to paragraphs (d)(4), (5), and 
(6) of this section, as appropriate, and adjusted for the actual 
assessment rates set by the Board under Sec.  327.10(c). For the 
portion of the quarter that the institution was not in Risk Category I, 
the institution's initial base assessment rate, which shall be subject 
to adjustment pursuant to paragraphs (d)(5), (6) and (7), shall be 
determined under the assessment schedule for the appropriate Risk 
Category. If, during a quarter, a CAMELS composite rating change occurs 
that results in an institution moving from Risk Category II, III or IV 
to Risk Category I, and its initial base assessment rate would be 
determined using the financial ratios method, then that method shall 
apply for the portion of the quarter that it was in Risk Category I, 
subject to adjustment pursuant to paragraphs (d)(4), (5), and (6) of 
this section, as appropriate, and adjusted for the actual assessment 
rates set by the Board under Sec.  327.10(c). For the portion of the 
quarter that the institution was not in Risk Category I, the 
institution's initial base assessment rate, which shall be subject to 
adjustment pursuant to paragraphs (d)(5), (6) and (7), 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 initial base assessment rate within Risk 
Category I, the initial base assessment rate for the period before the 
change shall be determined under the financial ratios method using the 
CAMELS component ratings in effect before the change, subject to 
adjustment pursuant to paragraphs (d)(4), (5), and (6) of this section, 
as appropriate. Beginning on the date of the CAMELS component ratings 
change, the initial base assessment rate for the remainder of the 
quarter shall be determined using the CAMELS component ratings in 
effect after the change, again subject to adjustment pursuant to 
paragraphs (d)(4), (5), and (6) of this section, as appropriate.
    (2) Large bank method. A large insured depository institution in 
Risk Category I that has at least one long-term debt issuer rating, as 
defined in Sec.  327.8(i), shall have its initial base assessment rate 
determined using the large bank method. The initial base assessment 
rate under the large bank method shall be derived from three 
components, each given a 33\1/3\ percent weight: a component derived 
using the financial ratios method, a component derived using long-term 
debt issuer ratings, and a component derived using CAMELS component 
ratings. The institution's assessment rate computed using the financial 
ratios method shall be converted to a financial ratios score by first 
subtracting 10 from the financial ratios method assessment rate and 
then multiplying the result by \1/2\. The result will equal an 
institution's financial ratios score. Its CAMELS component ratings will 
be weighted to derive a weighted average CAMELS rating using the same 
weights applied in the 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 
financial ratios score, the weighted average CAMELS rating and the 
average of converted long-term debt issuer ratings each will be 
multiplied by 1.692 (which shall be the pricing multiplier), and the 
products will be summed. To this result will be added 3.873 (which 
shall be a uniform

[[Page 9554]]

amount for all institutions subject to the large bank method). The 
resulting sum shall equal the institution's initial base assessment 
rate; provided, however, that no institution's initial base assessment 
rate shall be less than the minimum initial base assessment rate in 
effect for Risk Category I institutions for that quarter nor greater 
than the maximum initial base assessment rate in effect for Risk 
Category I institutions for that quarter. An institution's initial base 
assessment rate, subject to adjustment pursuant to paragraphs (d)(4), 
(5), and (6) of this section, as appropriate (which will produce the 
total base assessment rate), and adjusted for the actual assessment 
rates set by the Board pursuant to Sec.  327.10(c), will equal an 
institution's assessment rate.
    (i) Implementation of Large Bank Method Changes between Risk 
Categories. If, during a quarter, a CAMELS or ROCA rating change occurs 
that results in an institution whose Risk Category I initial base 
assessment rate is determined using the large bank method or an insured 
branch of a foreign bank moving from Risk Category I to Risk Category 
II, III or IV, the institution's initial base assessment rate for the 
portion of the quarter that it was in Risk Category I shall be 
determined as for any other institution in Risk Category I whose 
initial base assessment rate is determined using the large bank method, 
subject to adjustments pursuant to paragraph (d)(4), (5), and (6) of 
this section, as appropriate or, if the institution is an insured 
branch of a foreign bank, using the weighted average ROCA component 
rating, subject to adjustment pursuant to paragraph (d)(4). For the 
portion of the quarter that the institution was not in Risk Category I, 
the institution's initial base assessment rate, which, unless the 
institution is an insured branch of a foreign bank, shall be subject to 
adjustment pursuant to paragraphs (d)(5), (6) and (7), shall be 
determined under the assessment schedule for the appropriate Risk 
Category. If, during a quarter, a CAMELS or ROCA rating change occurs 
that results in a large institution with a long-term 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 (d)(4), (5), and (6)) or 
(d)(3) (and (d)(4), (5), and (6)) of this section, as appropriate. For 
the portion of the quarter that the institution was not in Risk 
Category I, the institution's initial base assessment rate, which shall 
be subject to adjustment pursuant to paragraphs (d)(5), (6) and (7), 
shall be determined under the assessment schedule for the appropriate 
Risk Category.
    (ii) Implementation of Large Bank Method Changes within Risk 
Category I. If, during a quarter, an institution whose Risk Category I 
initial base assessment rate is determined using the large bank method 
remains in Risk Category I, but the financial ratios score, a CAMELS 
component or a long-term debt issuer rating changes that would affect 
the institution's initial base 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 initial base 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 (d)(4), (5), and (6)) or 
(d)(3) (and (d)(4)) of this section, as appropriate.
    (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 5.076 (which shall be the pricing multiplier). To this result will 
be added 3.873 (which shall be a uniform amount for all insured 
branches of foreign banks). The resulting sum--the initial base 
assessment rate--subject to adjustments pursuant to paragraph (d)(4) of 
this section will equal an institution's total base assessment rate; 
provided, however, that no institution's total base assessment rate 
will be less than the minimum total base assessment rate in effect for 
Risk Category I institutions for that quarter nor greater than the 
maximum total base assessment rate in effect for Risk Category I 
institutions for that quarter.
    (iii) No insured branch of a foreign bank in any risk category 
shall be subject to the unsecured debt adjustment, the secured 
liability adjustment, or the brokered deposit adjustment.
    (4) Adjustment for large banks or insured branches of foreign 
banks--(i) Basis for and size of adjustment. Within Risk Category I, 
large institutions and insured branches of foreign banks except new 
institutions as provided under paragraph (d)(9)(i)(A) of this section, 
are subject to adjustment of their initial base assessment rate. Any 
such large bank adjustment shall be limited to a change in the initial 
base assessment rate of up to one basis point higher or lower than the 
rate determined using the financial ratios method, the large bank 
method, or the weighted average ROCA component rating method, whichever 
is applicable. In determining whether to make this initial base 
assessment rate 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 
or supervisory information, potential loss severity, and stress 
considerations, as described in Appendix C to this subpart.
    (ii) Adjustment subject to maximum and minimum rates. No adjustment 
to the initial base assessment rate for large banks shall decrease any 
rate so that the resulting rate would be less than the minimum initial 
base assessment rate, or increase any rate above the maximum initial 
base assessment rate.
    (iii) Prior notice of adjustments--(A) Prior notice of upward 
adjustment. Prior to making any upward large bank adjustment to an 
institution's initial base assessment 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 large bank adjustment to an institution's initial base 
assessment 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 large bank adjustment to an institution's initial base assessment 
rate is warranted,

[[Page 9555]]

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 large bank 
adjustment to an institution's initial base 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 initial base 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 
initial base 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 deteriorate.
    (5) Unsecured debt adjustment to initial base assessment rate for 
all institutions. All institutions within all risk categories, except 
new institutions as provided under paragraph (d)(9)(i)(C) of this 
section and insured branches of foreign banks as provided under 
paragraph (d)(3)(iii) of this section, are subject to downward 
adjustment of assessment rates for unsecured debt, based on the ratio 
of long-term unsecured debt (and, for small institutions as defined in 
paragraph (ii) below, specified amounts of Tier 1 capital) to domestic 
deposits. Any unsecured debt adjustment shall be made after any 
adjustment under paragraph (d)(4) of this section.
    (i) Large institutions--The unsecured debt adjustment for large 
institutions shall be determined by multiplying the institution's ratio 
of long-term unsecured debt to domestic deposits by 40 basis points.
    (ii) Small institutions--The unsecured debt adjustment for small 
institutions will factor in an amount of Tier 1 capital (qualified Tier 
1 capital) in addition to any long-term unsecured debt; the amount of 
qualified Tier 1 capital will be the sum of the amounts set forth 
below:

------------------------------------------------------------------------
                                                          Amount of Tier
                                                             1 capital
                                                           within range
   Range of Tier 1 capital to  adjusted average assets       which is
                                                             qualified
                                                             (percent)
------------------------------------------------------------------------
<=5%....................................................               0
>5% and <=6%............................................              10
>6% and <=7%............................................              20
>7% and <=8%............................................              30
>8% and <=9%............................................              40
>9% and <=10%...........................................              50
>10% and <=11%..........................................              60
>11% and <=12%..........................................              70
>12% and <=13%..........................................              80
>13% and <=14%..........................................              90
>14%....................................................             100
------------------------------------------------------------------------

    For institutions that file Thrift Financial Reports, adjusted total 
assets will be used in place of adjusted average assets in the 
preceding table. The sum of qualified Tier 1 capital and long-term 
unsecured debt as a percentage of domestic deposits will be multiplied 
by 40 basis points to produce the unsecured debt adjustment for small 
institutions.
    (iii) Limitation--No unsecured debt adjustment for any institution 
shall exceed five basis points.
    (iv) Applicable quarterly reports of condition--Ratios for any 
given quarter shall be calculated from quarterly reports of condition 
(Call Reports and Thrift Financial Reports) filed by each institution 
as of the last day of the quarter. Until institutions separately report 
long-term senior unsecured liabilities and long-term subordinated debt 
in their quarterly reports of condition, the FDIC will use subordinated 
debt included in Tier 2 capital and will not include any amount of 
senior unsecured liabilities in calculating the unsecured debt 
adjustment.
    (6) Secured liability adjustment for all institutions. All 
institutions within all risk categories, except insured branches of 
foreign banks as provided under paragraph (d)(3)(iii) of this section, 
are subject to upward adjustment of their assessment rate based upon 
the ratio of their secured liabilities to domestic deposits. Any such 
adjustment shall be made after any applicable large bank adjustment or 
unsecured debt adjustment.
    (i) Secured liabilities for banks--Secured liabilities for banks 
include Federal Home Loan Bank advances, securities sold under 
repurchase agreements, secured Federal funds purchased and other 
borrowings that are secured as reported in banks' quarterly Call 
Reports.
    (ii) Secured liabilities for savings associations--Secured 
liabilities for savings associations include Federal Home Loan Bank 
advances as reported in quarterly Thrift Financial Reports (``TFRs''). 
Secured liabilities for savings associations also include securities 
sold under repurchase agreements, secured Federal funds purchased or 
other borrowings that are secured. Any of these secured amounts not 
reported separately from unsecured or other liabilities in the TFR will 
be imputed based on simple averages for Call Report filers as of June 
30, 2008. As of that date, on average, 63.0 percent of the sum of 
Federal funds purchased and securities sold under repurchase agreements 
reported by Call Report filers were secured, and 49.4 percent of other 
borrowings were secured.
    (iii) Calculation--An institution's ratio of secured liabilities to 
domestic deposits will, if greater than 25 percent, increase its 
assessment rate, but any such increase shall not exceed 50 percent of 
its assessment rate before the secured liabilities adjustment. For an 
institution that has a ratio of secured liabilities (as defined in 
paragraph (ii) above) to domestic deposits of greater than 25 percent, 
the institution's assessment rate (after taking into account any 
adjustment under paragraphs (d)(5) or (6) of this section) will be 
multiplied by the following amount: The ratio of the institution's 
secured liabilities to domestic deposits minus 0.25. Ratios of secured 
liabilities to domestic deposits shall be calculated from the report of 
condition, or similar report, filed by each institution.
    (7) Brokered Deposit Adjustment for Risk Categories II, III, and 
IV. All institutions in Risk Categories II, III, and IV, except insured 
branches of foreign banks as provided under paragraph (d)(3)(iii) of 
this section, shall be subject to an assessment rate adjustment for 
brokered deposits. Any such brokered deposit adjustment shall be made 
after any adjustment under paragraph (d)(5) or (6). The brokered 
deposit adjustment includes all brokered deposits as defined in Section 
29 of the Federal Deposit Insurance Act (12 U.S.C. 1831f),

[[Page 9556]]

and 12 CFR 337.6, including reciprocal deposits as defined in Sec.  
327.8(r), and brokered deposits that consist of balances swept into an 
insured institution by another institution. The adjustment under this 
paragraph is limited to those institutions whose ratio of brokered 
deposits to domestic deposits is greater than 10 percent; asset growth 
rates do not affect the adjustment. The adjustment is determined by 
multiplying by 25 basis points the difference between an institution's 
ratio of brokered deposits to domestic deposits and 0.10. The maximum 
brokered deposit adjustment will be 10 basis points. Brokered deposit 
ratios for any given quarter are calculated from the quarterly reports 
of condition filed by each institution as of the last day of the 
quarter.
    (8) 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 initial base 
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 initial base assessment rate for 
an institution without a long-term debt issuer rating will be derived 
using the financial ratios method, but will be subject to adjustment as 
a large institution under paragraph (d)(4) of this section. 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 financial ratios 
method.
    (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.
    (iii) 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 Sec.  327.4(c).
    (9) New and established institutions and exceptions--(i) New Risk 
Category I institutions--(A) Rule as of January 1, 2010. Effective for 
assessment periods beginning on or after January 1, 2010, a new 
institution that is well capitalized shall be assessed the Risk 
Category I maximum initial base assessment rate for the relevant 
assessment period, except as provided in Sec.  327.8(m)(1), (2), (3), 
(4), (5) and paragraphs (ii) and (iii) below. No new institution in 
Risk Category I shall be subject to the large bank adjustment as 
determined under paragraph (d)(4) of this section.
    (B) Rule prior to January 1, 2010. Prior to January 1, 2010, a new 
institution's initial base assessment rate 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 is well capitalized 
and has no CAMELS component ratings shall be assessed at two basis 
points above the minimum initial base assessment rate applicable to 
Risk Category I institutions until it receives CAMELS component 
ratings. The initial base assessment rate will be determined by 
annualizing, where appropriate, financial ratios obtained from the 
quarterly reports of condition that have been filed, until the 
institution files four such reports. Prior to January 1, 2010, 
assessment rates for new institutions in Risk Category I shall be 
subject to the large bank adjustment as determined under paragraph 
(d)(4) of this section.
    (C) Applicability of adjustments to new institutions prior to and 
as of January 1, 2010. No new institution in any risk category shall be 
subject to the unsecured debt adjustment as determined under paragraph 
(d)(5) of this section. All new institutions in any Risk Category shall 
be subject to the secured liability adjustment as determined under 
paragraph (d)(6) of this section. All new institutions in Risk 
Categories II, III, and IV shall be subject to the brokered deposit 
adjustment as determined under paragraph (d)(7) of this section.
    (ii) 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 Sec.  
327.8(m)(1), its CAMELS ratings for assessment purposes will be based 
upon the established institution's ratings prior to the merger or 
consolidation until new ratings become available.
    (iii) Rate applicable to institutions subject to subsidiary or 
credit union exception. If an institution is considered established 
under Sec.  327.8(m)(4) and (5), but does not have CAMELS component 
ratings, it shall be assessed at two basis points above the minimum 
initial base assessment rate applicable to Risk Category I institutions 
until it receives CAMELS component ratings. Thereafter, the assessment 
rate will be determined by annualizing, where appropriate, financial 
ratios obtained from all quarterly reports of condition that have been 
filed, until the institution files four quarterly reports of condition 
or it receives a long-term debt issuer rating and it is a large 
institution.
    (iv) 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 Sec.  327.4(c).
    (10) Assessment rates for bridge depository institutions and 
conservatorships. Institutions that are bridge depository institutions 
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 initial base assessment rate, 
which shall not be subject to adjustment under paragraphs (d)(4), (5), 
(6) or (7) of this section.

0
8. Revise Sec.  327.10 to read as follows:


Sec.  327.10  Assessment rate schedules.

    (a) Initial Base Assessment Rate Schedule. The initial base 
assessment rate for an insured depository institution shall be the rate 
prescribed in the following schedule:

[[Page 9557]]



                                                          Initial Base Assessment Rate Schedule
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Risk category
                                                                    ------------------------------------------------------------------------------------
                                                                                    I *
                                                                    ----------------------------------        II              III               IV
                                                                         Minimum          Maximum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual rates (in basis points).....................................              12               16               22               32               45
--------------------------------------------------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Initial base rates that are not the minimum or maximum rate will vary between these
  rates.

    (1) Risk Category I Initial Base Assessment Rate Schedule. The 
annual initial base assessment rates for all institutions in Risk 
Category I shall range from 12 to 16 basis points.
    (2) Risk Category II, III, and IV Initial Base Assessment Rate 
Schedule. The annual initial base assessment rates for Risk Categories 
II, III, and IV shall be 22, 32, and 45 basis points, respectively.
    (3) All institutions in any one risk category, other than Risk 
Category I, will be charged the same initial base assessment rate, 
subject to adjustment as appropriate.
    (b) Total Base Assessment Rate Schedule after Adjustments. The 
total base assessment rates after adjustments for an insured depository 
institution shall be the rate prescribed in the following schedule.

                            Total Base Assessment Rate Schedule (After Adjustments) *
----------------------------------------------------------------------------------------------------------------
                                                   Risk category   Risk category   Risk category   Risk category
                                                         I              II              III             IV
----------------------------------------------------------------------------------------------------------------
Initial base assessment rate....................           12-16              22              32              45
Unsecured debt adjustment.......................            -5-0            -5-0            -5-0            -5-0
Secured liability adjustment....................             0-8            0-11            0-16          0-22.5
Brokered deposit adjustment.....................  ..............            0-10            0-10            0-10
Total base assessment rate......................          7-24.0         17-43.0         27-58.0         40-77.5
----------------------------------------------------------------------------------------------------------------
* All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum or
  maximum rate will vary between these rates.

    (1) Risk Category I Total Base Assessment Rate Schedule. The annual 
total base assessment rates for all institutions in Risk Category I 
shall range from 7 to 24 basis points.
    (2) Risk Category II Total Base Assessment Rate Schedule. The 
annual total base assessment rates for Risk Category II shall range 
from 17 to 43 basis points.
    (3) Risk Category III Total Base Assessment Rate Schedule. The 
annual total base assessment rates for Risk Category III shall range 
from 27 to 58 basis points.
    (4) Risk Category IV Total Base Assessment Rate Schedule. The 
annual total base assessment rates for Risk Category IV shall range 
from 40 to 77.5 basis points.
    (c) Total Base Assessment Rate Schedule adjustments and 
procedures--(1) Board Rate Adjustments. The Board may increase or 
decrease the total base assessment rate 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 total base assessment rate 
schedule. In no case may such Board rate adjustments result in a total 
base assessment rate that is mathematically less than zero or in a 
total base assessment rate schedule that, at any time, is more than 3 
basis points above or below the total base assessment schedule for the 
Deposit Insurance Fund, nor may any one such Board 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 schedules 
and the amount and basis for any adjustment thereto not later than 30 
days before the quarterly certified statement invoice date specified in 
Sec.  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.
0
9. Revise Appendix A to Subpart A of Part 327 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:
    <bullet> 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;
    <bullet> Minimum and maximum downgrade probability cutoff 
values, based on data from June 30, 2008, that will determine which 
small institutions will be charged the minimum and maximum initial 
base assessment rates applicable to Risk Category I;
    <bullet> The minimum initial base assessment rate for Risk 
Category I, equal to 12 basis points, and

[[Page 9558]]

    <bullet> The maximum initial base assessment rate for Risk 
Category I, which is four basis points higher than the minimum rate.

II. The Statistical Model

    The Statistical Model is defined in equations 1 and 3 below.

Equation 1

Downgrade(0,1)<INF>i,t</INF> = [beta]<INF>0</INF> + 
[beta]<INF>1</INF> (Tier 1 Leverage Ratio<INF>T</INF>) + 
[beta]<INF>2</INF> (Loans past due 30 to 89 days 
ratio<INF>i,t</INF>) + [beta]<INF>3</INF> (Nonperforming asset 
ratio<INF>i,t</INF>) + [beta]<INF>4</INF> (Net loan charge-off 
ratio<INF>i,t</INF>) + [beta]<INF>5</INF> (Net income before taxes 
ratio<INF>i,t</INF>) + [beta]<INF>6</INF> (Adjusted brokered deposit 
ratio<INF>i,t</INF>) + [beta]<INF>7</INF> (Weighted average CAMELS 
component rating<INF>i,t</INF>) where Downgrade(01)<INF>i,t</INF> 
(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 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 six 
financial ratios and a weighted average of the ``C,'' ``A,'' ``M,'' 
``E'' and ``L'' component ratings. The six financial ratios included 
in the model are:
    <bullet> Tier 1 leverage ratio
    <bullet> Loans past due 30-89 days/Gross assets
    <bullet> Nonperforming assets/Gross assets
    <bullet> Net loan charge-offs/Gross assets
    <bullet> Net income before taxes/Risk-weighted assets
    <bullet> Brokered deposits/domestic deposits above the 10 
percent threshold, adjusted for the asset growth rate factor
    Table A.1 defines these six ratios along with the weighted 
average of CAMELS component ratings. The adjusted brokered deposit 
ratio (B<INF>i,T</INF>) is calculated by multiplying the ratio of 
brokered deposits to domestic deposits above the 10 percent 
threshold by an asset growth rate factor that ranges from 0 to 1 as 
shown in Equation 2 below. The asset growth rate factor 
(A<INF>i,T</INF>) is calculated by subtracting 0.4 from the four-
year cumulative gross asset growth rate (expressed as a number 
rather than as a percentage), adjusted for mergers and acquisitions, 
and multiplying the remainder by 3\1/3\. The factor cannot be less 
than 0 or greater than 1.

Equation 2
[GRAPHIC] [TIFF OMITTED] TR04MR09.016

    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. 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. Reciprocal deposits 
are not presently reported in the Call Report or TFR. As a result, 
and as also described in Table A.1, the Statistical Model is 
estimated without deducting reciprocal deposits from brokered 
deposits in determining the adjusted brokered deposit 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     Total loans and lease financing
 Assets (%).                         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-       Income before income taxes and
 Weighted Assets (%).                extraordinary items and other
                                     adjustments for the most recent
                                     twelve months divided by risk-
                                     weighted assets.
Adjusted brokered deposit ratio     Brokered deposits divided by
 (%).                                domestic deposits less 0.10
                                     multiplied by the asset growth rate
                                     factor (which is the term Ai,T as
                                     defined in equation 2 above) that
                                     ranges between 0 and 1.
Weighted Average of C, A, M, E and  The weighted sum of the ``C,''
 L Component Ratings.                ``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 variable 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, [beta]<INF>j</INF> 
for a given regressor j and a constant amount, [beta]<INF>0</INF>, 
as specified in equation 1. As shown in equation 3 below, these 
coefficients are multiplied by values of risk measures at time T, 
which is the date of the report of

[[Page 9559]]

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, 
d<INF>iT</INF>, 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: (1) 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; (2) 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; and (3) reciprocal deposits are deducted from 
brokered deposits in determining the adjusted brokered deposit 
ratio.

Equation 3

d<INF>iT</INF> = [beta]<INF>0</INF> + [beta]<INF>1</INF> (Tier 1 
Leverage Ratio<INF>iT</INF>) + [beta]<INF>2</INF> (Loans past due 30 
to 89 days ratio<INF>iT</INF>) + [beta]<INF>3</INF> (Nonperforming 
asset ratio<INF>iT</INF>) + [beta]<INF>4</INF> (Net loan charge-off 
ratio<INF>iT</INF>) + [beta]<INF>5</INF> (Net income before taxes 
ratio<INF>iT</INF>) + [beta]<INF>6</INF> (Adjusted brokered deposit 
ratio<INF>iT</INF>) + [beta]<INF>7</INF> (Weighted average CAMELS 
component rating<INF>iT</INF>)

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:
    <bullet> The minimum downgrade probability cutoff value will be 
the maximum downgrade probability among the twenty-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, 2008.\1\ 
\2\ The minimum downgrade probability cutoff value is 0.0182.
---------------------------------------------------------------------------

    \1\ As used in this context, a ``new institution'' means an 
institution that has been chartered as a bank or thrift for less 
than five years.
    \2\ For purposes of calculating the minimum and maximum 
downgrade probability cutoff values, institutions that have less 
than $100,000 in domestic deposits are assumed to have no brokered 
deposits.
---------------------------------------------------------------------------

    <bullet> The maximum downgrade probability cutoff value will be 
the minimum downgrade probability among the fifteen 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, 2008. The 
maximum downgrade probability cutoff value is 0.1506.

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, P<INF>iT</INF>, 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 initial base assessment rates 
in Risk Category I as follows:

Equation 4

P<INF>iT</INF> = [alpha]<INF>0</INF> + [alpha]<INF>1</INF> * 
d<INF>iT</INF> subject to Min <= P<INF>iT</INF> <= Min + 4

where [alpha]<INF>0</INF> and [alpha]<INF>1</INF> are a constant 
term and a scale factor used to convert d<INF>iT</INF> (the 
estimated downgrade probability for institution i at a given time T 
from the Statistical Model) to an assessment rate, respectively, and 
Min is the minimum initial base assessment rate expressed in basis 
points. (P<INF>iT</INF> is expressed as an annual rate, but the 
actual rate applied in any quarter will be P<INF>iT</INF>/4.) The 
maximum initial base assessment rate is 4 basis points above the 
minimum (Min + 4)
    Solving equation 4 for minimum and maximum initial base 
assessment rates simultaneously,

Min = [alpha]<INF>0</INF> + [alpha]<INF>1</INF> * 0.0182 and Min + 4 
= [alpha]<INF>0</INF> + [alpha]<INF>1</INF> * 0.1506

where 0.0182 is the minimum downgrade probability cutoff value and 
0.1506 is the maximum downgrade probability cutoff value, results in 
values for the constant amount, [alpha]<INF>0</INF> and the scale 
factor, [alpha]<INF>1</INF>:

Equation 5
[GRAPHIC] [TIFF OMITTED] TR04MR09.017

and Equation 6
[GRAPHIC] [TIFF OMITTED] TR04MR09.018

Substituting equations 3, 5 and 6 into equation 4 produces an annual 
initial base assessment rate for institution i at time T, 
P<INF>iT</INF>, 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 7

P<INF>iT</INF> = [(Min - 0.550) + 30.211* [beta]<INF>0</INF>] + 
30.211 * [[beta]<INF>1</INF> (Tier 1 Leverage Ratio<INF>T</INF>)] + 
30.211 * [[beta]<INF>2</INF> (Loans past due 30 to 89 days 
ratio<INF>T</INF>)] + 30.211 * [[beta]<INF>3</INF> (Nonperforming 
asset ratio<INF>T</INF>)] + 30.211 * [[beta]<INF>4</INF> (Net loan 
charge-off ratio<INF>T</INF>)] + 30.211 * [[beta]<INF>5</INF> (Net 
income before taxes ratio<INF>T</INF>)] + 30.211 * 
[[beta]<INF>6</INF> (Adjusted brokered deposit ratio<INF>T</INF>)] + 
30.211 * [[beta]<INF>7</INF> (Weighted average CAMELS component 
rating<INF>T</INF>)]

again subject to Min <= P<INF>iT</INF> <= Min + 4

where (Min - 0.550) + 30.211 * [beta]<INF>0</INF> equals the uniform 
amount, 30.211 * [beta]<INF>j</INF> 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 1988 to 2006 
period and downgrade data from the 1989 to 2007 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 initial base assessment rates--equation 7--
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.

0
10. Revise Appendix B to Subpart A of Part 327 to read as follows:

Appendix B to Subpart A

          Numerical Conversion of Long-Term Debt Issuer Ratings
------------------------------------------------------------------------
                                                              Converted
            Current long-term debt issuer rating                value
------------------------------------------------------------------------
Standard & Poor's:
  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
  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

[[Page 9560]]

 
  AA-......................................................         1.30
  A+.......................................................         1.50
  A........................................................         1.80
  A-.......................................................         2.20
  BBB+.....................................................         2.70
  BBB or worse.............................................         3.00
------------------------------------------------------------------------


0
11. Revise Appendix C to Subpart A of Part 327 to read as follows:

Appendix C to Subpart A

  Additional Risk Considerations for Large Risk Category I Institutions
------------------------------------------------------------------------
                                         Examples of associated risk
        Information source                indicators or information
------------------------------------------------------------------------
Financial Performance and           Capital Measures (Level and Trend)
 Condition Information.             <bullet> Regulatory capital ratios.
                                    <bullet> Capital composition.
                                    <bullet> Dividend payout ratios.
                                    <bullet> Internal capital growth
                                     rates relative to asset growth.
                                    Profitability Measures (Level and
                                     Trend)
                                       <bullet> Return on assets and
                                        return on risk-adjusted assets.
                                       <bullet> Net interest margins,
                                        funding costs and volumes,
                                        earning asset yields and
                                        volumes.
                                       <bullet> Noninterest revenue
                                        sources.
                                       <bullet> Operating expenses.
                                       <bullet> Loan loss provisions
                                        relative to problem loans.
                                       <bullet> Historical volatility of
                                        various earnings sources.
                                    Asset Quality Measures (Level and
                                     Trend)
                                       <bullet> Loan and securities
                                        portfolio composition and volume
                                        of higher risk lending
                                        activities (e.g., sub-prime
                                        lending).
                                       <bullet> 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.
                                       <bullet> Loan loss reserve
                                        trends.
                                       <bullet> Loan growth and
                                        underwriting trends.
                                       <bullet> Off-balance sheet credit
                                        exposure measures (unfunded loan
                                        commitments, securitization
                                        activities, counterparty
                                        derivatives exposures) and
                                        hedging activities.
                                    Liquidity and Funding Measures
                                     (Level and Trend)
                                       <bullet> Composition of deposit
                                        and non-deposit funding sources.
                                       <bullet> Liquid resources
                                        relative to short-term
                                        obligations, undisbursed credit
                                        lines, and contingent
                                        liabilities.
                                    Interest Rate Risk and Market Risk
                                     (Level and Trend)
                                       <bullet> Maturity and repricing
                                        information on assets and
                                        liabilities, interest rate risk
                                        analyses.
                                       <bullet> Trading book composition
                                        and Value-at-Risk information.
Market Information................     <bullet> Subordinated debt
                                        spreads.
                                       <bullet> Credit default swap
                                        spreads.
                                       <bullet> Parent's debt issuer
                                        ratings and equity price
                                        volatility.
                                       <bullet> Market-based measures of
                                        default probabilities.
                                       <bullet> Rating agency watch
                                        lists.
                                       <bullet> Market analyst reports.
Stress Considerations.............  Ability to Withstand Stress
                                     Conditions
                                       <bullet> Internal analyses of
                                        portfolio composition and risk
                                        concentrations, and
                                        vulnerabilities to changing
                                        economic and financial
                                        conditions.
                                       <bullet> Stress scenario
                                        development and analyses.
                                       <bullet> 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.
                                       <bullet> Contingency or emergency
                                        funding strategies and analyses.
                                       <bullet> Capital adequacy
                                        assessments.
                                    Loss Severity Indicators
                                       <bullet> 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.
                                       <bullet> Ability to identify and
                                        describe discreet business units
                                        within the banking legal entity.
                                       <bullet> Funding structure
                                        considerations relating to the
                                        order of claims in the event of
                                        liquidation (including the
                                        extent of subordinated claims
                                        and priority claims).
                                       <bullet> Extent of insured
                                        institutions assets held in
                                        foreign units.
                                       <bullet> Degree of reliance on
                                        affiliates and outsourcing for
                                        material mission-critical
                                        services, such as management
                                        information systems or loan
                                        servicing, and products.
                                       <bullet> 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.
------------------------------------------------------------------------



[[Page 9561]]

    By order of the Board of Directors.

    Dated at Washington, DC, this 27th day of February, 2009.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
* * * * *

Appendix 1

Uniform Amount and Pricing Multipliers for Large Risk Category I 
Institutions Where Long-Term Debt Issuer Ratings are Available

    The uniform amount and pricing multipliers for large Risk 
Category I institutions with long-term debt issuer ratings were 
derived from:
    <bullet> The average long-term debt issuer rating, converted 
into a numeric value (the long-term debt score) ranging from 1 to 3;
    <bullet> The weighted average CAMELS rating, as defined in 
Appendix A;
    <bullet> The assessment rate calculated using the financial 
ratios method described in Appendix A, converted to a value ranging 
from 1 to 3 (the financial ratios score);
    <bullet> Minimum and maximum cutoff values for an institution's 
score (the average of the long-term debt score, weighted average 
CAMELS rating and financial ratios score), based on data from June 
30, 2008, which was used to determine the proportion of large banks 
charged the minimum and maximum initial base assessment rates 
applicable to Risk Category I; and
    <bullet> Minimum and maximum initial base assessment rates for 
Risk Category I
    The financial ratios assessment rate (A<INF>f</INF>) calculated 
using the pricing multipliers and uniform amount described in 
Appendix A was converted to a financial ratios score 
(S<INF>f</INF>), with a value ranging from 1 to 3 as shown in 
equation 1:

Equation 1

Sf = (Af -10) * 0.5

    Each institution's score (S<INF>i</INF>) was calculated by 
dividing its weighted average CAMELS rating (S<INF>w</INF>), long-
term issuer score (S<INF>d</INF>) and financial ratios score 
(S<INF>f</INF>) by 1/3 each, and summing the resulting values as 
shown in equation 2:

Equation 2

Si = (1/3) * Sw,i + (1/3) * Sd,i + (1/3) * Sf,i

    The pricing multipliers were determined by minimum and maximum 
score cutoff values, which were constructed so that fifteen percent 
of all large insured institutions in Risk Category I (excluding new 
institutions) are assessed the maximum base rate, while twenty-five 
percent are assessed the minimum base rate, when computed as of June 
2008. The calculated thresholds are 1.601 for the minimum score cut-
off value, and 2.389 for the maximum score cut-off value.
    The uniform amount and pricing multipliers used to compute the 
annual base assessment rate in basis points, P<INF>iT</INF>, for a 
large institution i (with a long-term debt rating) at a given time T 
were determined based on the minimum and maximum score cut-off 
values, and the minimum and maximum initial base assessment rates in 
Risk Category I as follows:

Equation 3

Pi,T = [alpha]<INF>0</INF> + [alpha]<INF>1</INF> * Si,T subject to 
Min <= Pi,T <= Min + 4

where [alpha]<INF>0</INF> and [alpha]<INF>1</INF> are, respectively, 
a constant term and a scale factor used to convert Si,T (an 
institution's score at time T) to an assessment rate, and Min is the 
minimum initial base assessment rate expressed in basis points. 
(Under the final rule, the minimum initial base assessment rate is 
12 basis points, so Min equals 12.)
    Substituting minimum and maximum score cutoff values (1.601 and 
2.389, respectively) for S<INF>i,T</INF> and minimum and maximum 
initial base assessment rates (Min and Min + 4, respectively) for 
Pi,T in equation 3 produces equations 4 and 5 below.

Equation 4

Min = [alpha]<INF>0</INF> + [alpha]<INF>1</INF> * 1.601

Equation 5

Min + 4 = [alpha]<INF>0</INF> + [alpha]<INF>1</INF> * 2.389

    Solving both equations simultaneously results in:

Equation 6
[GRAPHIC] [TIFF OMITTED] TR04MR09.019

Equation 7
[GRAPHIC] [TIFF OMITTED] TR04MR09.020

Substituting equations 6 and 7 into equation 2 produces the 
following equation for PiT

Equation 8

Pi,T = (Min -8.127) + 5.076 * [lfloor](1/3) * Sw,iT + (1/3) * Sd,iT 
+ (1/3) * Sf,iT[rfloor] = (Min -8.127) + 1.692 * Sw.iT + 1.692 * 
Sd.iT + 1.692 * Sf,iT

where Min -8.127 is the uniform amount and 1.692 is a pricing 
multiplier. Since Min equals 12 under the final rule, the uniform 
amount equals 3.873.

Appendix 2

Analysis of the Projected Effects of the Payment of Assessments

    On the Capital and Earnings of Insured Depository Institutions

I. Introduction

    This analysis estimates the effect in 2009 of deposit insurance 
assessments on the equity capital and profitability of all insured 
institutions, based on the assessment rates adopted in the final 
rule. Current economic, financial market, and banking industry 
conditions lend considerable uncertainty to the outlook for earnings 
in 2009. Therefore, this analysis considers the following two 
scenarios for pre-tax, pre-assessment income in 2009: (1) Income in 
2009 is equal to income for all of 2008, adjusted for mergers; (2) 
Income in 2009 is equal to the annualized income over the second 
half of 2008, also adjusted for mergers. The first scenario would 
result in an industry pre-tax, pre-assessment loss of $7.5 billion. 
The second scenario would result in an industry pre-tax, pre-
assessment loss of $88.2 billion.
    The financial data used in this analysis are the most recent 
available as of December 31, 2008. However, since each bank's risk-
based assessment rate for the fourth quarter has not yet been 
finalized, each institution's rate under the rate schedule adopted 
in the final rule is based on data as of September 30, 2008.\1\ The 
projected use of one-time credits authorized under the Reform Act is 
taken into consideration in determining the effective assessment for 
an institution.
---------------------------------------------------------------------------

    \1\ For purposes of this analysis, the assessment base (like 
income) is not assumed to increase, but is assumed to remain at 
December 2008 levels. All income statement items used in this 
analysis were adjusted for the effect of mergers. Institutions for 
which four quarters of earnings data were unavailable, including 
insured branches of foreign banks, were excluded from this analysis.
---------------------------------------------------------------------------

II. Analysis of the Projected Effects on Capital and Earnings

    While deposit insurance assessment rates generally will result 
in reduced institution profitability and capitalization compared to 
the absence of assessments, the reduction will not necessarily equal 
the full amount of the assessment. Two factors can mitigate the 
effect of assessments on institutions' profits and capital. First, a 
portion of the assessment may be transferred to customers in the 
form of higher borrowing rates, increased service fees and lower 
deposit interest rates. Since information is not readily available 
on the extent to which institutions are able to share assessment 
costs with their customers, however, this analysis assumes that 
institutions bear the full after-tax cost of the assessment. Second, 
deposit insurance assessments are a tax-deductible operating 
expense; therefore, the assessment expense can lower taxable income. 
This analysis considers the effective after-tax cost of assessments 
in calculating the effect on capital.\2\
---------------------------------------------------------------------------

    \2\ The analysis does not incorporate any tax effects from an 
operating loss carry forward or carry back.
---------------------------------------------------------------------------

    An institution's earnings retention and dividend policies also 
influence the extent to which assessments affect equity levels. If 
an institution maintains the same dollar amount of dividends when it 
pays a deposit

[[Page 9562]]

insurance assessment as when it does not, equity (retained earnings) 
will be less by the full amount of the after-tax cost of the 
assessment. This analysis instead assumes that an institution will 
maintain its dividend rate (that is, dividends as a fraction of net 
income) unchanged from the weighted average rate reported over the 
four quarters ending December 31, 2008. In the event that the ratio 
of equity to assets falls below 4 percent, however, this assumption 
is modified such that an institution retains the amount necessary to 
achieve a 4 percent minimum and distributes any remaining funds 
according to the dividend payout rate.
    The equity capital of insured institutions as of December 31, 
2008 was $1.3 trillion.\3\ Based on the assumptions for earnings and 
assessments described above, year-end 2009 equity capital is 
projected to equal between $1.215 trillion and $1.267 trillion. In 
the absence of an assessment, total equity would be an estimated $6 
billion higher.
---------------------------------------------------------------------------

    \3\ This excludes equity for those mentioned in the note to 
Tables A.1 and A.2.
---------------------------------------------------------------------------

    On an industry weighted average basis, projected total 
assessments in 2009 would result in capital that is between 0.44 
percent and 0.47 percent less than in the absence of assessments. 
The analysis indicates that assessments would cause 8 to 12 
institutions whose equity-to-assets ratio would have exceeded 4 
percent in the absence of assessments to fall below that percentage 
and 6 to 9 institutions to have below 2 percent equity-to-assets 
that otherwise would not have.
    The effect of assessments on institution income is measured by 
deposit insurance assessments as a percent of income before 
assessments, taxes, and extraordinary items (hereafter referred to 
as ``income''). This income measure is used in order to eliminate 
the potentially transitory effects of extraordinary items and taxes 
on profitability. In order to facilitate a comparison of the impact 
of assessments under the two scenarios for earnings, institutions 
were assigned to one of three groups: those who were profitable 
under both earnings scenarios, those who were unprofitable under 
both earnings scenarios, and those who were profitable in one 
scenario but unprofitable in the other.
    Table A.1 shows that approximately 55 percent to 59 percent of 
profitable institutions are projected to owe assessments that are 
less than 10 percent of income. Table A.2 shows that profitable 
institutions facing an assessment of under 10 percent of income hold 
between 43 and 80 percent of all profitable institution assets, 
depending on the income scenario. The overall weighted average 
reduction in income for profitable institutions is between 5.8 
percent and 7.7 percent.

                                 Table A.1--Assessments as a Percent of Income *
                                      [Numbers of profitable institutions]
----------------------------------------------------------------------------------------------------------------
                                                                   2009 income based on:
                                         -----------------------------------------------------------------------
                                                Results for all of 2008       Annualized results for 2nd half of
    Assessments as percent of income     ------------------------------------                2008
                                                                             -----------------------------------
                                              Number of        Percent of         Number of        Percent of
                                            institutions      institutions      institutions      institutions
----------------------------------------------------------------------------------------------------------------
0.0-5.0.................................             1,087                19             1,029                18
5.0-10.0................................             2,305                40             2,108                37
10.0-20.0...............................             1,493                26             1,441                25
20.0-40.0...............................               534                 9               629                11
40.0-100.0..............................               200                 4               316                 6
>100.0..................................                75                 1               171                 3
                                         -----------------------------------------------------------------------
    Total...............................             5,694               100             5,694               100
----------------------------------------------------------------------------------------------------------------


                                 Table A.2--Assessments as a Percent of Income *
                                       [Assets of profitable institutions]
                                                 [$ in billions]
----------------------------------------------------------------------------------------------------------------
                                                                   2009 income based on:
                                         -----------------------------------------------------------------------
                                                Results for all of 2008       Annualized results for 2nd half of
    Assessments as percent of income     ------------------------------------                2008
                                                                             -----------------------------------
                                              Assets of        Percent of         Assets of        Percent of
                                            institutions         assets         institutions         assets
----------------------------------------------------------------------------------------------------------------
0.0-5.0.................................             1,783                28             1,479                23
5.0-10.0................................             3,303                52             1,295                20
10.0-20.0...............................               936                15             2,297                36
20.0-40.0...............................               223                 4               886                14
40.0-100.0..............................                45                 1               288                 5
> 100.0.................................                65                 1               110                 2
                                         -----------------------------------------------------------------------
    Total...............................             6,354               100             6,354               100
----------------------------------------------------------------------------------------------------------------
Notes:
(1) Income is defined as income before taxes, extraordinary items, and deposit insurance assessments.
  Assessments are adjusted for the use of one-time credits.
(2) Profitable institutions are defined as those having positive merger-adjusted income (as defined above) for
  all of 2008, the second half of 2008, and, by assumption, in 2009.
(3) 10 insured branches of foreign banks and 59 institutions having less than 4 quarters of reported earnings
  were excluded from this analysis.


[[Page 9563]]

    Tables A.3 and A.4 provide the same analysis for institutions 
that were unprofitable under both scenarios. Note that assessments 
will have a smaller percentage impact on the losses of unprofitable 
institutions as losses rise, so that such institutions are, in 
percentage terms, less adversely affected under the scenario based 
on the results for the second half of 2008. Table A.3 shows that 
approximately 52 percent to 70 percent of unprofitable institutions 
are projected to owe assessments that are less than 10 percent of 
losses. Table A.4 shows the corresponding asset distribution. The 
overall weighted average increase in losses for unprofitable 
institutions is between 2.6 and 4.6 percent.

                                 Table A.3--Assessments as a Percent of Losses *
                                     [Numbers of unprofitable institutions]
----------------------------------------------------------------------------------------------------------------
                                                                   2009 income based on:
                                         -----------------------------------------------------------------------
                                                Results for all of 2008       Annualized results for 2nd half of
    Assessments as percent of losses     ------------------------------------                2008
                                                                             -----------------------------------
                                              Number of        Percent of         Number of        Percent of
                                            institutions      institutions      institutions      institutions
----------------------------------------------------------------------------------------------------------------
0.0-5.0.................................               523                29               801                44
5.0-10.0................................               411                23               479                26
10.0-20.0...............................               401                22               312                17
20.0-40.0...............................               243                13               111                 6
40.0-100.0..............................               147                 8                76                 4
> 100.0.................................                93                 5                39                 2
                                         -----------------------------------------------------------------------
    Total...............................             1,818               100             1,818               100
----------------------------------------------------------------------------------------------------------------


                                 Table A.4--Assessments as a Percent of Losses *
                                      [Assets of unprofitable institutions]
                                                 [$ in billions]
----------------------------------------------------------------------------------------------------------------
                                                                   2009 income based on:
                                         -----------------------------------------------------------------------
                                                Results for all of 2008       Annualized results for 2nd half of
    Assessments as percent of income     ------------------------------------                2008
                                                                             -----------------------------------
                                              Assets of        Percent of         Assets of        Percent of
                                            institutions         assets         institutions         assets
----------------------------------------------------------------------------------------------------------------
0.0-5.0.................................             2,235                48             3,181                68
5.0-10.0................................             1,316                28             1,350                29
10.0-20.0...............................               626                13               115                 2
20.0-40.0...............................               372                 8                32                 1
40.0-100.0..............................                50                 1                14                 0
> 100.0.................................               100                 2                 6                 0
                                         -----------------------------------------------------------------------
    Total...............................             4,698               100             4,698               100
----------------------------------------------------------------------------------------------------------------
Notes:
(1) Income is defined as income before taxes, extraordinary items, and deposit insurance assessments.
  Assessments are adjusted for the use of one-time credits.
(2) Profitable institutions are defined as those having positive merger-adjusted income (as defined above) for
  all of 2008, the second half of 2008, and, by assumption, in 2009.
(3) 10 insured branches of foreign banks and 59 institutions having less than 4 quarters of reported earnings
  were excluded from this analysis.

    In addition to those institutions that remained either 
profitable or unprofitable in both earnings scenarios, there were 
734 institutions with $2.79 trillion in assets that changed 
classification from one scenario to the other. Of these 734 
institutions, 634 were profitable when 2009 income equals the 
results for all 2008 but unprofitable when 2009 income equals the 
annualized results for the second half of 2008, while 100 were 
unprofitable under the former scenario and profitable under the 
latter scenario.

[FR Doc. E9-4584 Filed 2-27-09; 4:15 pm]
BILLING CODE 6714-01-P