Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9525 

1Federal Deposit Insurance Reform Act of 2005, 

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

Insurance Conforming Amendments Act of 2005, 

Public Law 109–173, 119 Stat. 3601. 

2After 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. 

3Section 2109(a)(5) of the Reform Act. Section 

7(b) of the Federal Deposit Insurance Act (12 U.S.C. 

1817(b)). 

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. 

Holding Company Act of 1956, as 

amended, the Home Owners’ Loan Act, 

as amended, or the Change in Bank 

Control Act, as amended, have been 

submitted to the applicant’s appropriate 

Federal banking agency in connection 

with the proposed issuance; and 

(F) any other relevant information that 

the FDIC deems appropriate. 

(3) The factors to be considered by the 

FDIC in evaluating applications filed 

pursuant to paragraphs (h)(1)(i) through 

(h)(1)(iii) and (h)(1)(v) of this section 

include: the financial condition and 

supervisory history of the eligible/ 

surviving entity. * * * 

(4) * * * Applications made pursuant 

to paragraph (h)(1)(v) of this section 

must be filed with the FDIC no later 

than June 30, 2009. 

* * * * * 

■ 4. In part 370, amend § 370.5 as 

follows: 

■ a. At the end of paragraph (h)(2), 

remove the last italicized sentence and 

add in its place two new sentences; and 

■ b. Add new paragraph (j) as follows: 

§ 370.5 Participation. 

* * * * * 

(h) * * * 

(2) * * * [If the debt being issued is 

mandatory convertible debt, add: The 

expiration date of the FDIC’s guarantee 

is the earlier of the mandatory 

conversion date or June 30, 2012]. [If the 

debt being issued is any other senior 

unsecured debt, add: The expiration 

date of the FDIC’s guarantee is the 

earlier of the maturity date of the debt 

or June 30, 2012.] 

* * * * * 

(j) No mandatory convertible debt 

may be issued without obtaining the 

FDIC’s prior written approval. 

■ 5. In part 370, amend § 370.6 as 

follows: 

■ a. Revise paragraphs (d)(1). 

■ b. Revise the first sentence of (d)(3). 

■ c. Revise (d)(5) as follows: 

§ 370.6 Assessments under the Debt 

Guarantee Program. 

* * * * * 

(d) * * * 

(1) Calculation of assessment. Except 

as provided in paragraph (d)(3) of this 

section, the amount of assessment will 

be determined by multiplying the 

amount of FDIC-guaranteed debt times 

the term of the debt or, in the case of 

mandatory convertible debt, the time 

period from issuance to the mandatory 

conversion date, times an annualized 

assessment rate determined in 

accordance with the following table. 

For debt with a maturity or 

time period to conversion 

date of— 

The 

annualized 

assessment 

rate (in basis 

points) is— 

180 days or less (excluding 

overnight debt) .................. 50 

181–364 days ....................... 75 

365 days or greater .............. 100 

* * * * * 

(3) The amount of assessment for an 

eligible entity, other than an insured 

depository institution, that controls, 

directly or indirectly, or is otherwise 

affiliated with, at least one insured 

depository institution will be 

determined by multiplying the amount 

of FDIC-guaranteed debt times the term 

of the debt or, in the case of mandatory 

convertible debt, the time period from 

issuance to the mandatory conversion 

date, times an annualized assessment 

rate determined in accordance with the 

rates set forth in the table in paragraph 

(d)(1) of this section, except that each 

such rate shall be increased by 10 basis 

points, if the combined assets of all 

insured depository institutions affiliated 

with such entity constitute less than 50 

percent of consolidated holding 

company assets. * * * 

* * * * * 

(5) No assessment reduction for early 

retirement of guaranteed debt. A 

participating entity’s assessment shall 

not be reduced if guaranteed debt is 

retired prior to its scheduled maturity 

date or conversion date. 

* * * * * 

■ 6. In part 370, amend § 370.12 to add 

a new sentence immediately after the 

first sentence in paragraph (b)(2); as 

follows: 

§ 370.12 Payment on the guarantee. 

* * * * * 

(b) * * * 

(2) * * * For purposes of mandatory 

convertible debt, principal payment 

shall be limited to amounts paid by 

holders under the issuance. * * * 

* * * * * 

[FR Doc. E9–4586 Filed 2–27–09; 4:15 pm] 

BILLING CODE 6714–01–P 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Part 327 

RIN 3064–AD35 

Assessments 

AGENCY: Federal Deposit Insurance 

Corporation (FDIC). 

ACTION: Final rule. 

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

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

9526 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

5Section 7(b)(3)(E) of the Federal Deposit 

Insurance Act (12 U.S.C. 1817(b)(3)(E)). 6The 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). 

7Section 7(b)(1)(D) of the Federal Deposit 

Insurance Act (12 U.S.C. 1817(b)(1)(D)). 

8Section 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)). 

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. 

10The 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)). 

11The 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. 

12The Board cannot adjust rates more than 2 basis 

points below the base rate schedule because rates 

cannot be less than zero. 

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

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

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

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. 

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.) 

TABLE 1—DETERMINATION OF RISK CATEGORY

Capital category 

Supervisory group 

A B C 

Well Capitalized ........................................................................................................................... I III 

Adequately Capitalized ................................................................................................................ II 

Undercapitalized .......................................................................................................................... III IV 

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. 

TABLE 2—2007–08 BASE ASSESSMENT RATES

Risk category 

I* 

II III IV 

Minimum Maximum 

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

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

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9527 

13Based 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. 

14The 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). 

TABLE 2—2007–08 BASE ASSESSMENT RATES

Risk category 

I* 

II III IV 

Minimum Maximum 

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

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

The 2006 assessments rule set actual 

rates beginning January 1, 2007, as set 

out in Table 3 below. 

TABLE 3—2007–08 ACTUAL ASSESSMENT RATES

Risk category 

I* 

II III IV 

Minimum Maximum 

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

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

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: 

• The Tier 1 Leverage Ratio; 

• Loans past due 30–89 days/gross 

assets; 

• Nonperforming assets/gross assets; 

• Net loan charge-offs/gross assets; 

and 

• Net income before taxes/riskweighted assets. 

The 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

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. 

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 

9528 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

15Based 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. 

16ROCA 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. 

17The 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). 

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). 

19 73 FR 61,598 (Oct. 16, 2008). 

20 12 CFR 327. 

21See 73 FR 61,560 (Oct. 16, 2008). 

22 73 FR 78,155 (Dec. 22, 2008). 

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

Assessment rates for insured branches 

of foreign banks in Risk Category I are 

determined using ROCA components.16

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

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. 

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

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

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. 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9529 

23Long-term unsecured debt includes senior 

unsecured and subordinated debt. 

24As 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. 

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 longterm 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. 

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. 

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. 

9530 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

25As 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. 

26An 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. 

27References hereafter to ‘‘asset growth’’ or 

‘‘growth in assets’’ refer to growth in gross assets. 

TABLE 4—INITIAL BASE ASSESSMENT RATES AS OF APRIL 1, 2009 

Risk category 

I* 

II III IV 

Minimum Maximum 

Annual Rates (in basis points) ............................................. 12 16 22 32 45 

* 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 I Risk category 

II 

Risk category 

III 

Risk category 

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.25 26 27 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. 

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 31⁄3 an 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9531 

28The 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. 

29These 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. 

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, 31⁄3 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. 

TABLE 6—ADJUSTED BROKERED DEPOSIT RATIO

A B C D E F 

Example 

Ratio of 

brokered 

deposits to 

domestic 

deposits 

Ratio of brokered deposits 

to domestic 

deposits minus 

10 percent 

threshold (column B minus 

10 percent) 

Cumulative 

asset growth 

rate over four 

years 

Asset growth 

rate factor 

Adjusted 

brokered 

deposit ratio 

(column C 

times 

column E) 

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 fouryear 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 31⁄3 (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

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 

9532 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

30When 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. 

31Excluding 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. 

32Many 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. 

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. 

34For the adjusted brokered deposit ratio, assets 

at the end of each year are compared to assets at 

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 thirdparty broker. Commenters also argued 

that these deposits may have franchise 

value in the event of a bank failure. 

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. 

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, relationshipbased 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 brokerdealer affiliated sweeps are not ratesensitive 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. 

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. 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9533 

35Appendix 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. 

36The 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). 

37The 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. 

38For 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. 

39These are the initial base rates for Risk Category 

I proposed below. 

40Under 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 7—NEW PRICING MULTIPLIERS—Continued 

Risk measures * Pricing multipliers ** 

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. 

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. 

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

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

TABLE 8—INITIAL BASE ASSESSMENT RATES FOR THREE INSTITUTIONS * 

A B 

C D E F G H 

Institution 1 Institution 2 Institution 3 

Pricing 

multiplier 

Risk 

measure 

value 

Contribution 

to assessment rate 

Risk 

measure 

value 

Contribution 

to assessment rate 

Risk 

measure 

value 

Contribution 

to assessment 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 

Initial Base Assessment Rate ........... .................... .................... 12.00 .................... 13.18 .................... 16.00 

*Figures may not multiply or add to totals due to rounding.40

9534 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

41Reports of condition include Reports of Income 

and Condition and Thrift Financial Reports. 

42Pursuant 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. 

43The same trade group argued that rates for Risk 

Categories III and IV should be higher than 

proposed. 

44The 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. 

45Appendix 1 provides the derivation of the 

pricing multipliers and the uniform amount. 

TABLE 8—INITIAL BASE ASSESSMENT RATES FOR THREE INSTITUTIONS *—Continued 

A B 

C D E F G H 

Institution 1 Institution 2 Institution 3 

Pricing 

multiplier 

Risk 

measure 

value 

Contribution 

to assessment rate 

Risk 

measure 

value 

Contribution 

to assessment rate 

Risk measure value Contribution 

to assessment rate 

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

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. 

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 331⁄3 percent weight in 

determining the large bank method 

assessment rate, as are both the 

weighted average CAMELS component 

rating and debt-agency ratings. 

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

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 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9535 

46For 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. 47The 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. 48A ‘‘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. 

49The 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). 

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.’’ 

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).47 48 These cutoff values 

would be used in future periods, which 

could lead to different percentages of 

institutions being charged the minimum 

and maximum rates. 

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: 

• 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) × 0.5) to produce a 

financial ratios score of 1.75. 

• 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 × 

1.692 + 1.65 × 1.692 + 1.75 × 1.692) to 

produce 8.629. 

• 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

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

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. 

9536 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

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. 

52 72 FR 27,122 (May 14, 2007). 53Only 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. 

54For 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). 

55Adjusted average assets will be used for Call 

Report filers; adjusted total assets will be used for 

TFR filers. 

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 onehalf 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. 

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. 

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 judgmentbased 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 longestablished 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

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. 

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 × 

0.03). An institution with a ratio of longterm 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 × 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. 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9537 

56The 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. 

57Other 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. 

58The 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. 

TABLE 9—AMOUNT OF QUALIFIED TIER

1 CAPITAL

Range of Tier 1 capital to 

adjusted average assets 

Amount of Tier 

1 capital within 

range 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 

TABLE 9—AMOUNT OF QUALIFIED TIER

1 CAPITAL—Continued 

Range of Tier 1 capital to 

adjusted average assets 

Amount of Tier 

1 capital within 

range which is 

qualified 

(percent) 

> 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 longterm unsecured debt as a percentage of 

domestic deposits will be multiplied by 

40 basis points to produce the 

unsecured debt adjustment.56

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

Leverage ratio band Tier 1 capital within band ($000) × 

Qualified 

percentage of Tier 

1 capital 

(percent) 

= 

Qualified Tier 1 

capital 

($000) 

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. 

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 

9538 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

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. 

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. 

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 longterm 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 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9539 

60Under 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. 

61Overall, 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. 

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

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

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 

9540 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

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 would have been subject to the secured liability adjustment ............................ 24% 10% 

Percentage of all institutions that would have had more than a 10% increase in assessment rate due to the 

secured liability adjustment .................................................................................................................................. 10% 5% 

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. 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9541 

62Under 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. 

63An 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). 

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. 

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

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 · 

(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. 

9542 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

64An 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. 

65As 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. 66Certain 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. 

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). 

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. 

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. 

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. 

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

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 yearend 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 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9543 

68These 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. 

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. 

category will be within the ranges set 

forth in Table 13 below.68

TABLE 13—TOTAL BASE ASSESSMENT RATES AFTER ADJUSTMENTS* 

Risk category I Risk category 

II 

Risk category 

III 

Risk category 

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. 

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 riskbased 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 

9544 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

70Section 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 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

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 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9545 

71Future 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.) 

72Section 7(b)(3)(E)(iv) of the Federal Deposit 

Insurance Act (12 U.S.C. 1817(b)(3)(E)(iv)). 

73For 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)). 

74The projection assumes 7 percent annual 

growth in the assessment base (which is 

approximately domestic deposits) in 2009. 

75The assessment base is almost equal to total 

domestic deposits. 

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. 

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

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

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. 

9546 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

TABLE 16—DISTRIBUTION OF INITIAL BASE ASSESSMENT RATES AND DOMESTIC DEPOSITS* DATA AS OF SEPTEMBER 30, 

2008 

Risk category 

Initial 

assessment 

rate 

Number of 

institutions 

Percent of 

institutions 

Domestic 

deposits 

(in billions 

of $) 

Percent of 

domestic 

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 

Risk category Total base 

assessment 

Number of 

institutions 

Percent of 

institutions 

Domestic 

deposits 

(in billions 

of $) 

Percent of 

domestic 

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. 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9547 

76The 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. 

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. 

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. 


ER04MR09.015</GPH>
9548 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

77 12 CFR 327.9(d)(5). 

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. 

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

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

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 longterm 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 longterm 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 § 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 § 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 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9549 

79See 5 U.S.C. 603, 604 and 605. 80 5 U.S.C. 601. 81Throughout 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. 

82An institution’s total revenue is defined as the 

sum of its annual net interest income and noninterest income. An institution’s profit is defined as 

income before taxes and extraordinary items, gross 

of loan loss provisions. 

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-LeachBliley Act, Public Law 106–102, 113 

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

requires the federal banking agencies to 

use plain language in all proposed and 

final rules published after January 1, 

2000. The FDIC invited comments on 

how to make this proposal easier to 

understand 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 riskbased 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. 

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.81 82

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 percentage of total revenue Number of 

institutions 

Percent of 

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. 

9550 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

83 5 U.S.C. 605. 

TABLE 19—CHANGE IN ASSESSMENTS UNDER THE PROPOSAL AS A PERCENTAGE OF PROFIT * 

Change in assessments as a percentage of profit Number of 

institutions 

Percent of 

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

Change in assessments Number of 

institutions 

Percent of 

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

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. 

■ 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 

■ 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. 

■ 2. Revise § 327.3(a)(1) to read as 

follows: 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9551 

§ 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. 

* * * * * 

■ 3. Revise § 327.6(b)(1) to read as 

follows: 

§ 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 § 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. 

* * * * * 

■ 4. In § 327.8, revise paragraphs (g), (h), 

(i), (l) and (m) and add paragraphs (o), 

(p), (q), (r) and (s) to read as follows: 

§ 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 § 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 § 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 

§ 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 

§ 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 § 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 § 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 § 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 § 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: 

9552 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

(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. 

■ 7. Revise § 327.9 to read as follows: 

§ 327.9 Assessment risk categories and 

pricing methods. 

(a) Risk Categories.—Each insured 

depository institution shall be assigned 

to one of the following four Risk 

Categories based upon the institution’s 

capital evaluation and supervisory 

evaluation as defined in this section. 

(1) Risk Category I. All institutions in 

Supervisory Group A that are Well 

Capitalized; 

(2) Risk Category II. All institutions in 

Supervisory Group A that are 

Adequately Capitalized, and all 

institutions in Supervisory Group B that 

are either Well Capitalized or 

Adequately Capitalized; 

(3) Risk Category III. All institutions 

in Supervisory Groups A and B that are 

Undercapitalized, and all institutions in 

Supervisory Group C that are Well 

Capitalized or Adequately Capitalized; 

and 

(4) Risk Category IV. All institutions 

in Supervisory Group C that are 

Undercapitalized. 

(b) Capital evaluations. An institution 

will receive one of the following three 

capital evaluations on the basis of data 

reported in the institution’s 

Consolidated Reports of Condition and 

Income, Report of Assets and Liabilities 

of U.S. Branches and Agencies of 

Foreign Banks, or Thrift Financial 

Report dated as of March 31 for the 

assessment period beginning the 

preceding January 1; dated as of June 30 

for the assessment period beginning the 

preceding April 1; dated as of 

September 30 for the assessment period 

beginning the preceding July 1; and 

dated as of December 31 for the 

assessment period beginning the 

preceding October 1. 

(1) Well Capitalized. (i) Except as 

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

section, a Well Capitalized institution is 

one that satisfies each of the following 

capital ratio standards: Total risk-based 

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

Tier 1 leverage ratio, 5.0 percent or 

greater. 

(ii) For purposes of this section, an 

insured branch of a foreign bank will be 

deemed to be Well Capitalized if the 

insured branch: 

(A) Maintains the pledge of assets 

required under § 347.209 of this chapter; 

and 

(B) Maintains the eligible assets 

prescribed under § 347.210 of this 

chapter at 108 percent or more of the 

average book value of the insured 

branch’s third-party liabilities for the 

quarter ending on the report date 

specified in paragraph (b) of this 

section. 

(2) Adequately Capitalized. (i) Except 

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

this section, an Adequately Capitalized 

institution is one that does not satisfy 

the standards of Well Capitalized under 

this paragraph but satisfies each of the 

following capital ratio standards: Total 

risk-based ratio, 8.0 percent or greater; 

Tier 1 risk-based ratio, 4.0 percent or 

greater; and Tier 1 leverage ratio, 4.0 

percent or greater. 

(ii) For purposes of this section, an 

insured branch of a foreign bank will be 

deemed to be Adequately Capitalized if 

the insured branch: 

(A) Maintains the pledge of assets 

required under § 347.209 of this chapter; 

and 

(B) Maintains the eligible assets 

prescribed under § 347.210 of this 

chapter at 106 percent or more of the 

average book value of the insured 

branch’s third-party liabilities for the 

quarter ending on the report date 

specified in paragraph (b) of this 

section; and 

(C) Does not meet the definition of a 

Well Capitalized insured branch of a 

foreign bank. 

(3) Undercapitalized. An 

undercapitalized institution is one that 

does not qualify as either Well 

Capitalized or Adequately Capitalized 

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

section. 

(c) Supervisory evaluations. Each 

institution will be assigned to one of 

three Supervisory Groups based on the 

Corporation’s consideration of 

supervisory evaluations provided by the 

institution’s primary federal regulator. 

The supervisory evaluations include the 

results of examination findings by the 

primary federal regulator, as well as 

other information that the primary 

federal regulator determines to be 

relevant. In addition, the Corporation 

will take into consideration such other 

information (such as state examination 

findings, 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 § 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 

§ 327.10(c), will equal an institution’s 

assessment rate. The six financial ratios 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 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 § 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: 

Risk measures * Pricing 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 § 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 § 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 

§ 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 331⁄3 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 

9554 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

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 § 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, 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 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: 

Range of Tier 1 capital to 

adjusted average assets 

Amount of Tier 

1 capital within 

range 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), 

9556 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

and 12 CFR 337.6, including reciprocal 

deposits as defined in § 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 

§ 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 § 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 § 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 § 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 § 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. 

■ 8. Revise § 327.10 to read as follows: 

§ 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: 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 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 

I 

Risk category 

II 

Risk category 

III 

Risk category 

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 § 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. 

■ 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: 

• A model (the Statistical Model) that 

estimates the probability that a Risk Category 

I institution will be downgraded to a 

composite CAMELS rating of 3 or worse 

within one year; 

• Minimum and maximum downgrade 

probability cutoff values, based on data from 

June 30, 2008, that will determine which 

small institutions will be charged the 

minimum and maximum initial base 

assessment rates applicable to Risk Category 

I; 

• The minimum initial base assessment 

rate for Risk Category I, equal to 12 basis 

points, and 

9558 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

• 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)i,t = b0 + b1 (Tier 1 Leverage 

RatioT) + b2 (Loans past due 30 to 89 

days ratioi,t) + b3 (Nonperforming asset 

ratioi,t) + b4 (Net loan charge-off ratioi,t) 

+ b5 (Net income before taxes ratioi,t) + 

b6 (Adjusted brokered deposit ratioi,t) + 

b7 (Weighted average CAMELS 

component ratingi,t) where 

Downgrade(01)i,t (the dependent 

variable—the event being explained) is 

the incidence of downgrade from a 

composite rating of 1 or 2 to a rating of 

3 or worse during an on-site examination 

for an institution i between 3 and 12 

months after time t. Time t is the end of 

a year within the multi-year period over 

which the model was estimated (as 

explained below). The 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: 

• 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 

• 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 (Bi,T) 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 (Ai,T) is 

calculated by subtracting 0.4 from the fouryear cumulative gross asset growth rate 

(expressed as a number rather than as a 

percentage), adjusted for mergers and 

acquisitions, and multiplying the remainder 

by 31⁄3. The factor cannot be less than 0 or 

greater than 1. 

Equation 2 

B Brokered Deposits

Domestic Deposits i,T

i,T

i,T

= −

⎛

⎝

⎜

⎜

⎞

⎠

⎟

⎟ 0 10 . ∗

= − −

A

A

GrossAssets GrossAssets

GrossAsset

i,T

i,T

i,T i,T 4 where 

s

A B

i,T 4

i,T

−

− ⎛

⎝

⎜

⎜

⎞

⎠

⎟

⎟∗ ⎡

⎣

⎢

⎢

⎤

⎦

⎥

⎥

0 4 ≤ ≤ 10

3 . , subject to 0 and 1 i,T ≥ 0.

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 Assets (%) ............... Total loans and lease financing receivables past due 30 through 89 days and still accruing interest divided by gross assets (gross assets equal total assets plus allowance for loan and lease financing receivable losses and allocated transfer risk). 

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

still accruing interest, total nonaccrual loans and lease financing receivables, and 

other real estate owned divided by gross assets. 

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

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

lease losses for the most recent twelve months divided by gross assets. 

Net Income before Taxes/Risk-Weighted Assets (%) ....... Income before income taxes and extraordinary items and other adjustments for the 

most recent twelve months divided by risk-weighted assets. 

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 L Component Ratings.The weighted sum of the ‘‘C,’’ ‘‘A,’’ ‘‘M,’’ ‘‘E’’ and ‘‘L’’ CAMELS components, with 

weights of 28 percent each for the ‘‘C’’ and ‘‘M’’ components, 22 percent for the 

‘‘A’’ component, and 11 percent each for the ‘‘E’’ and ‘‘L’’ components. (For the regression, the ‘‘S’’ component is omitted.) 

The financial 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, 

bj for a given regressor j and a constant 

amount, b0, 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 


ER04MR09.016</MATH>
Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9559 

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

means an institution that has been chartered as a 

bank or thrift for less than five years. 

2For 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. 

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, diT, 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 

diT = b0 + b1 (Tier 1 Leverage RatioiT) + b2

(Loans past due 30 to 89 days ratioiT) + 

b3 (Nonperforming asset ratioiT) + b4 (Net 

loan charge-off ratioiT) + b5 (Net income 

before taxes ratioiT) + b6 (Adjusted 

brokered deposit ratioiT) + b7 (Weighted 

average CAMELS component ratingiT) 

III. Minimum and Maximum Downgrade 

Probability Cutoff Values 

The pricing multipliers are also 

determined by minimum and maximum 

downgrade probability cutoff values, which 

will be computed as follows: 

• The minimum downgrade probability 

cutoff value will be the maximum downgrade 

probability among the 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. 

• 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, PiT, for any 

such institution i at a given time T will be 

determined from the Statistical Model, the 

minimum and maximum downgrade 

probability cutoff values, and minimum and 

maximum initial base assessment rates in 

Risk Category I as follows: 

Equation 4 

PiT = a0 + a1 * diT subject to Min ≤ PiT ≤ Min 

+ 4 

where a0 and a1 are a constant term and a 

scale factor used to convert diT (the estimated 

downgrade probability for institution i at a 

given time T from the Statistical Model) to 

an assessment rate, respectively, and Min is 

the minimum initial base assessment rate 

expressed in basis points. (PiT is expressed as 

an annual rate, but the actual rate applied in 

any quarter will be PiT/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 = a0 + a1 * 0.0182 and Min + 4 = a0 + 

a1 * 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, a0 and the scale factor, a1: 

Equation 5 

α0

4 0 0182

0 1506 0 0182 = − 0 550 ∗

( ) − Min Min = − .

. . .

and Equation 6 

α1

4

0 1506 0 0182 = 30 211 ( ) − = . . .

Substituting equations 3, 5 and 6 into 

equation 4 produces an annual initial base 

assessment rate for institution i at time T, PiT, 

in terms of the uniform amount, the pricing 

multipliers and the ratios and weighted 

average CAMELS component rating referred 

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

Equation 7 

PiT = [(Min ¥ 0.550) + 30.211* b0] + 30.211 

* [b1 (Tier 1 Leverage RatioT)] + 30.211 

* [b2 (Loans past due 30 to 89 days 

ratioT)] + 30.211 * [b3 (Nonperforming 

asset ratioT)] + 30.211 * [b4 (Net loan 

charge-off ratioT)] + 30.211 * [b5 (Net 

income before taxes ratioT)] + 30.211 * 

[b6 (Adjusted brokered deposit ratioT)] + 

30.211 * [b7 (Weighted average CAMELS 

component ratingT)] 

again subject to Min ≤ PiT ≤ Min + 4 

where (Min ¥ 0.550) + 30.211 * b0 equals the 

uniform amount, 30.211 * bj is a pricing 

multiplier for the associated risk measure j, 

and T is the date of the report of condition 

corresponding to the end of the quarter for 

which the assessment rate is computed. 

V. Updating the Statistical Model, Uniform 

Amount, and Pricing Multipliers 

The initial Statistical Model is estimated 

using year-end financial ratios and the 

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

and ‘‘L’’ component ratings over the 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. 

■ 10. Revise Appendix B to Subpart A 

of Part 327 to read as follows: 

Appendix B to Subpart A 

NUMERICAL CONVERSION OF LONGTERM DEBT ISSUER RATINGS

Current long-term debt issuer 

rating 

Converted 

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 


ER04MR09.017</MATH> ER04MR09.018</MATH>
9560 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

NUMERICAL CONVERSION OF LONGTERM DEBT ISSUER RATINGS—Continued 

Current long-term debt issuer 

rating 

Converted 

value 

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

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

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

NUMERICAL CONVERSION OF LONGTERM DEBT ISSUER RATINGS—Continued 

Current long-term debt issuer 

rating 

Converted 

value 

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

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

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

■ 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

Information source Examples of associated risk indicators or information 

Financial Performance and Condition Information.Capital Measures (Level and Trend) 

• Regulatory capital ratios. 

• Capital composition. 

• Dividend payout ratios. 

• Internal capital growth rates relative to asset growth. 

Profitability Measures (Level and Trend) 

• Return on assets and return on risk-adjusted assets. 

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

• Noninterest revenue sources. 

• Operating expenses. 

• Loan loss provisions relative to problem loans. 

• Historical volatility of various earnings sources. 

Asset Quality Measures (Level and Trend) 

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

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

loans) and portfolio characteristics such as internal loan rating and credit score distributions, internal 

estimates of default, internal estimates of loss given default, and internal estimates of exposures in 

the event of default. 

• Loan loss reserve trends. 

• Loan growth and underwriting trends. 

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

counterparty derivatives exposures) and hedging activities. 

Liquidity and Funding Measures (Level and Trend) 

• Composition of deposit and non-deposit funding sources. 

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

Interest Rate Risk and Market Risk (Level and Trend) 

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

• Trading book composition and Value-at-Risk information. 

Market Information .......................... • Subordinated debt spreads. 

• Credit default swap spreads. 

• Parent’s debt issuer ratings and equity price volatility. 

• Market-based measures of default probabilities. 

• Rating agency watch lists. 

• Market analyst reports. 

Stress Considerations ..................... Ability to Withstand Stress Conditions 

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

economic and financial conditions. 

• Stress scenario development and analyses. 

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

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

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

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

adverse events. 

• Contingency or emergency funding strategies and analyses. 

• Capital adequacy assessments. 

Loss Severity Indicators 

• Nature of and breadth of an institution’s primary business lines and the degree of variability in valuations for firms with similar business lines or similar portfolios. 

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

• Funding structure considerations relating to the order of claims in the event of liquidation (including 

the extent of subordinated claims and priority claims). 

• Extent of insured institutions assets held in foreign units. 

• Degree of reliance on affiliates and outsourcing for material mission-critical services, such as management information systems or loan servicing, and products. 

• Availability of sufficient information, such as information on insured deposits and qualified financial 

contracts, to resolve an institution in an orderly and cost-efficient manner. 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 9561 

1For 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. 

2The analysis does not incorporate any tax effects 

from an operating loss carry forward or carry back. 

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: 

• The average long-term debt issuer rating, 

converted into a numeric value (the longterm debt score) ranging from 1 to 3; 

• The weighted average CAMELS rating, as 

defined in Appendix A; 

• 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); 

• 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 

• Minimum and maximum initial base 

assessment rates for Risk Category I 

The financial ratios assessment rate (Af) 

calculated using the pricing multipliers and 

uniform amount described in Appendix A 

was converted to a financial ratios score (Sf), 

with a value ranging from 1 to 3 as shown 

in equation 1: 

Equation 1 

Sf = (Af ¥10) * 0.5 

Each institution’s score (Si) was calculated 

by dividing its weighted average CAMELS 

rating (Sw), long-term issuer score (Sd) and 

financial ratios score (Sf) 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, PiT, 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 = a0 + a1 * Si,T subject to Min ≤ Pi,T ≤ 

Min + 4 

where a0 and a1 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 Si,T 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 = a0 + a1 * 1.601 

Equation 5 

Min + 4 = a0 + a1 * 2.389 

Solving both equations simultaneously 

results in: 

Equation 6 

α0

4 1 601

2 389 1 601 = − 8 127 ∗

( ) − Min Min = − .

. . .

Equation 7 

α1

4

2 389 1 601 = 5 076 ( ) − = . . .

Substituting equations 6 and 7 into equation 

2 produces the following equation for PiT

Equation 8 

Pi,T = (Min ¥8.127) + 5.076 * ⎣(1/3) * Sw,iT

+ (1/3) * Sd,iT + (1/3) * Sf,iT⎦ = (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, preassessment 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. 

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

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 


ER04MR09.019</MATH> ER04MR09.020</MATH>
9562 Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 

3This excludes equity for those mentioned in the 

note to Tables A.1 and A.2. 

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. 

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] 

Assessments as percent of 

income 

2009 income based on: 

Results for all of 2008 Annualized results for 2nd half of 

2008 

Number of 

institutions 

Percent of 

institutions 

Number of 

institutions 

Percent of 

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] 

Assessments as percent of 

income 

2009 income based on: 

Results for all of 2008 Annualized results for 2nd half of 

2008 

Assets of 

institutions Percent of assets Assets of institutions Percent of 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. 

Federal Register / Vol. 74, No. 41 / Wednesday, March 4, 2009 / Rules and Regulations 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] 

Assessments as percent of losses 

2009 income based on: 

Results for all of 2008 Annualized results for 2nd half of 

2008 

Number of 

institutions 

Percent of 

institutions 

Number of 

institutions 

Percent of 

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] 

Assessments as percent of 

income 

2009 income based on: 

Results for all of 2008 Annualized results for 2nd half of 

2008 

Assets of 

institutions Percent of assets Assets of institutions Percent of 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