61560 Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules 

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. 

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

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

6Section 7(b)(3)(E)(iii) of the Federal Deposit 

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

7The 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). 

8Section 7(b)(1)(D) of the Federal Deposit 

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

9Section 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)). 

10 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. 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Part 327 

RIN 3064–AD35 

Assessments 

AGENCY: Federal Deposit Insurance 

Corporation (FDIC). 

ACTION: Notice of proposed rulemaking 

and request for comment. 

SUMMARY: The FDIC is proposing to 

amend 12 CFR part 327 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: Comments must be received on 

or before November 17, 2008. 

ADDRESSES: You may submit comments, 

identified by RIN number, by any of the 

following methods: 

• Agency Web Site: http:// 

www.fdic.gov/regulations/laws/federal/

propose.html. Follow instructions for 

submitting comments on the Agency 

Web Site. 

• E-mail: Comments@FDIC.gov. 

Include the RIN number in the subject 

line of the message. 

• Mail: Robert E. Feldman, Executive 

Secretary, Attention: Comments, Federal 

Deposit Insurance Corporation, 550 17th 

Street, NW., Washington, DC 20429. 

• Hand Delivery/Courier: Guard 

station at the rear of the 550 17th Street 

Building (located on F Street) on 

business days between 7 a.m. and 5 p.m. 

Instructions: All submissions received 

must include the agency name and RIN 

for this rulemaking. All comments 

received will be posted without change 

to http://www.fdic.gov/regulations/laws/ 

federal/propose.html including any 

personal information provided. 

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 

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

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 FDIC may restrict the use of 

assessment credits during any period 

that a restoration plan is in effect. By 

statute, however, institutions may apply 

credits towards any assessment 

imposed, for any assessment period, in 

an amount equal to the lesser of (1) the 

amount of the assessment, or (2) the 

amount equal to three basis points of the 

institution’s assessment base.6

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.7

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.’’ 8 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.’’ 9

The 2006 Assessments Rule 

Overview 

On November 30, 2006, the FDIC 

published in the Federal Register a final 

rule on the risk-based assessment 

system (the 2006 assessments rule).10

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 

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11The 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)). 

12The capital groups and the supervisory groups 

have been in effect since 1993. In practice, the 

supervisory group evaluations are generally based 

on an institution’s composite CAMELS rating, a 

rating assigned by the institution’s supervisor at the 

end of a bank examination, with 1 being the best 

rating and 5 being the lowest. 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 speaking, institutions 

with a CAMELS rating of 1 or 2 are put in 

supervisory group A, those with a CAMELS rating 

of 3 are put in group B, and those with a CAMELS 

rating of 4 or 5 are put in group C. 

13The Board cannot adjust rates more than 2 basis 

points below the base rate schedule because rates 

cannot be less than zero. 

regulator and other information the 

FDIC deems relevant.11 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.12 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 

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

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, provided that no 

single change from one quarter to the 

next can exceed three basis points.13

Base assessment rates within Risk 

Category I vary from 2 to 4 basis points, 

as set forth in Table 2 below. 

TABLE 2—CURRENT 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—CURRENT 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. 

These rates remain in effect. Any 

increase in rates above the actual rates 

in effect requires a new notice-andcomment rulemaking. 

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 

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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). 

15ROCA 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. 

16The 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). 

17 71 FR 69325 (Nov. 30, 2006) and 72 FR 65576 

(Nov. 21, 2007). 

18Beginning in 2007, assessment rates ranged 

between 5 and 43 cents per $100 in assessable 

deposits. When setting the rate schedule, the FDIC 

projects future changes to the fund balance from 

losses, operating expenses, assessment and 

investment revenue, as well as the outlook for 

insured deposit growth. Since the final rule was 

issued, the Board has opted to leave rates 

unchanged. 

19On October 7, 2008, the FDIC established and 

implemented the Restoration Plan, which is being 

published in the Federal Register as a companion 

to this NPR. To determine whether the reserve ratio 

has returned to the statutory range within five 

years, the FDIC will rely on the December 31, 2013 

• 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. 

The debt issuer rating 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 

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. 

Assessment rates for insured branches 

of foreign banks in Risk Category I are 

determined using ROCA components.15

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).16

With certain exceptions, beginning in 

2010, the 2006 assessments rule charges 

new institutions (those established for 

less than five years) in Risk Category I, 

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 rulemaking in 

November 2006, the FDIC also set the 

DRR at 1.25 percent, effective January 1, 

2007. In November 2007, the Board 

voted to maintain the DRR at 1.25 

percent for 2008.17 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 2009.18 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 existing 

assessment rate schedule. 

Recent failures, as well as 

deterioration in banking and economic 

conditions, however, have significantly 

increased the fund’s loss provisions, 

resulting in a decline in the reserve 

ratio. As of June 30, 2008, the reserve 

ratio stood at 1.01 percent, 18 basis 

points below the reserve ratio as of 

March 31, 2008. The FDIC expects a 

higher rate of insured institution 

failures in the next few years compared 

to recent years; thus, the reserve ratio 

may continue to decline. Because the 

reserve ratio has fallen below 1.15 

percent and is expected to remain below 

1.15 percent, the FDIC must establish 

and implement a restoration plan to 

restore the reserve ratio to 1.15 percent. 

Absent extraordinary circumstances, the 

reserve ratio must be restored to 1.15 

percent within five years. The FDIC has 

adopted a restoration plan (the 

Restoration Plan), the critical 

component of which is this notice of 

proposed rulemaking (NPR).19 To fulfill 

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Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules 61563 

reserve ratio, which is the first date after October 

7, 2013 for which the reserve ratio will be known. 

20Long-term unsecured debt includes senior 

unsecured and subordinated debt. 

21Subject to exceptions, a new insured 

depository institution is a bank or thrift that has not 

been chartered for at least five years as of the last 

day of any quarter for which it is being assessed. 

12 CFR 327.8(l) 

the requirements of the Restoration 

Plan, the FDIC must increase the 

assessment rates it currently charges. 

Since the current rates are already 3 

basis points uniformly above the base 

rate schedule established in the 2006 

assessments rule, a new rulemaking is 

required. The FDIC is also proposing 

other changes to the assessment system, 

primarily to ensure that riskier 

institutions will bear a greater share of 

the proposed increase in assessments. 

II. Overview of the Proposal 

In this notice of proposed rulemaking, 

the FDIC proposes 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 

proposal will make the assessment 

system more sensitive to risk. The 

proposal should also make the riskbased assessment system fairer, by 

limiting the subsidization of riskier 

institutions by safer ones. In addition, 

the FDIC proposes to change assessment 

rates, including base assessment rates, 

to raise assessment revenue required 

under the Restoration Plan. 

The FDIC’s proposals are set out in 

detail in ensuing sections, but are 

briefly summarized here. These 

changes, except for the proposed rate 

increase for the first quarter of 2009, 

which is discussed below, would take 

effect April 1, 2009. 

Risk Category I 

The FDIC proposes to introduce a new 

financial ratio into the financial ratios 

method. This new ratio would capture 

brokered deposits (in excess of 10 

percent of domestic deposits) that are 

used to fund rapid asset growth. In 

addition, the FDIC proposes to update 

the uniform amount and the pricing 

multipliers for the weighted average 

CAMELS rating and financial ratios. 

The FDIC proposes that the 

assessment rate for a large institution 

with a long-term debt issuer rating be 

determined using a combination of the 

institution’s weighted average CAMELS 

component rating, its long-term debt 

issuer ratings (converted to numbers 

and averaged) and the financial ratios 

method assessment rate, each equally 

weighted. The new method would be 

known as the large bank method. 

Under the proposal, the financial 

ratios method or the large bank method, 

whichever is applicable, would 

determine a Risk Category I institution’s 

initial base assessment rate. The FDIC 

proposes to broaden the spread between 

minimum and maximum initial base 

assessment rates in Risk Category I from 

the current 2 basis points to an initial 

range of 4 basis points and to adjust the 

percentage of institutions subject to 

these initial minimum and maximum 

rates. 

Adjustments 

Under the proposal, an institution’s 

total base assessment rate could vary 

from the initial base rate as the result of 

possible adjustments. The FDIC 

proposes to increase the maximum 

possible Risk Category I large bank 

adjustment from one-half basis point to 

one basis point. Any such adjustment 

up or down would be made before any 

other adjustment and would be subject 

to certain limits, which are described in 

detail below. 

The FDIC proposes to lower an 

institution’s base assessment rate based 

upon its ratio of long-term unsecured 

debt and, for small institutions, certain 

amounts of Tier 1 capital to domestic 

deposits (the unsecured debt 

adjustment).20 Any decrease in base 

assessment rates would be limited to 

two basis points. 

The FDIC proposes to raise an 

institution’s base assessment rate based 

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 15 percent), would 

increase its assessment rate, but the 

resulting base assessment rate after any 

such increase could be no more than 

50 percent greater than it was before the 

adjustment. The secured liability 

adjustment would be made after any 

large bank adjustment or unsecured debt 

adjustment. 

An institution in Risk Category II, III 

or IV would be subject to the unsecured 

debt adjustment and secured liability 

adjustment. In addition, the FDIC 

proposes a final adjustment for brokered 

deposits (the brokered deposit 

adjustment) for institutions in these risk 

categories. An institution’s ratio of 

brokered deposits to domestic deposits 

(if greater than 10 percent) would 

increase its assessment rate, but any 

increase would be limited to no more 

than 10 basis points. 

Insured Branches of Foreign Banks 

The FDIC proposes to make 

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 would be subject to any large bank 

adjustment, but not to the unsecured 

debt adjustment or secured liability 

adjustment. 

New Institutions 

The FDIC also proposes to make 

conforming changes in the treatment of 

new insured depository institutions.21

For assessment periods beginning on or 

after January 1, 2010, any new 

institutions in Risk Category I would be 

assessed at the maximum initial base 

assessment rate applicable to Risk 

Category I institutions, as under the 

current rule. 

Effective for assessment periods 

beginning before January 1, 2010, until 

a Risk Category I new institution 

received CAMELS component ratings, it 

would have an initial base assessment 

rate that was 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 

current rule. All other new institutions 

in Risk Category I would be treated as 

are established institutions, except as 

provided in the next paragraph. 

Either before or after January 1, 2010: 

No new institution, regardless of risk 

category, would be subject to the 

unsecured debt adjustment; any new 

institution, regardless of risk category, 

would be subject to the secured liability 

adjustment; and a new institution in 

Risk Categories II, III or IV would be 

subject to the brokered deposit 

adjustment. After January 1, 2010, no 

new institution in Risk Category I would 

be subject to the large bank adjustment. 

Assessment Rates 

To implement the proposed changes 

to risk-based assessments described 

above and to raise sufficient revenue to 

ensure that the goals of the Restoration 

Plan are accomplished within 5 years as 

required by statute, initial base 

assessment rates would be as set forth 

in Table 4 below. 

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22 71 FR 69,282, 69,290. 

TABLE 4—PROPOSED INITIAL BASE ASSESSMENT RATES

Risk category 

I* 

II III IV 

Minimum Maximum 

Annual Rates (in basis points) ............................................................................. 10 14 20 30 45 

* Initial base rates that were not the minimum or maximum rate would vary between these rates. 

After applying all possible 

adjustments, minimum and maximum 

total base assessment rates for each risk 

category would 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 ................................................................ 10–14 ............... 20 ..................... 30 ..................... 45 

Unsecured debt adjustment ................................................................. ¥2–0 ................ ¥2–0 ................ ¥2–0 ................ ¥2–0 

Secured liability adjustment ................................................................. 0–7 ................... 0–10 ................. 0–15 ................. 0–22.5 

Brokered deposit adjustment ............................................................... ...................... 0–10 ................. 0–10 ................. 0–10 

Total base assessment rate ......................................................... 8–21.0 .............. 18–40.0 ............ 28–55.0 ............ 43–77.5 

* All amounts for all risk categories are in basis points annually. Total base rates that were not the minimum or maximum rate would vary between these rates. 

The FDIC proposes that these rates 

and other revisions to the assessment 

rules take effect for the quarter 

beginning April 1, 2009, and be 

reflected in the fund balance as of June 

30, 2009, and assessments due 

September 30, 2009. However, at 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. 

The proposed rule would continue to 

allow the FDIC Board to adopt actual 

rates that were higher or lower than 

total base assessment rates without the 

necessity of further notice and comment 

rulemaking, provided that: (1) The 

Board could not increase or decrease 

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 could not be 

more than three basis points higher or 

lower than the total base rates without 

further notice-and-comment 

rulemaking. 

The FDIC also proposes to raise the 

current rates uniformly by seven basis 

points for the assessment for the quarter 

beginning January 1, 2009, which would 

be reflected in the fund balance as of 

March 31, 2009, and assessments due 

June 30, 2009. Rates for the first quarter 

of 2009 only would be as follows: 

TABLE 6—PROPOSED ASSESSMENT RATES FOR THE FIRST QUARTER OF 2009 

Risk category 

I*

II III IV 

Minimum Maximum 

Annual Rates (in basis points) ............................................................................. 12 14 17 35 50 

*

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

The proposed rates for the first quarter 

of 2009 would raise almost as much 

assessment revenue as under the rates 

proposed beginning April 1, 2009. Data 

and system requirements do not make it 

feasible to adopt the proposed changes 

to the risk-based assessment system 

discussed in previous paragraphs until 

the second quarter of 2009. 

Technical and Other Changes 

The FDIC also proposes to make 

technical changes and one minor nontechnical change to existing assessment 

rules. These changes, which would be 

effective April 1, 2009, are detailed 

below. 

III. Risk Category I: Financial Ratios 

Method 

Brokered Deposits and Asset Growth 

The FDIC stated in the 2006 

assessments rule that it: 

[M]ay conclude that additional or 

alternative financial measures, ratios or other 

risk factors should be used to determine riskbased assessments or that a new method of 

differentiating for risk should be used. In any 

of these events, changes would be made 

through notice-and-comment rulemaking.22

The FDIC has reached such a 

conclusion and proposes to add a new 

financial measure to the financial ratios 

method. This new financial measure, 

the adjusted brokered deposit ratio, 

would measure the extent to which 

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23 Generally, an established institution is a bank 

or thrift that has been chartered for at least five 

years as of the last day of any quarter for which it 

is being assessed. 12 CFR 327.8(m). 24An 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. 25The 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. 

brokered deposits are funding rapid 

asset growth. The adjusted brokered 

deposit ratio would affect only those 

established Risk Category I institutions 

whose total assets were more than 20 

percent greater than they had been four 

years previously, after adjusting for 

mergers and acquisitions, and whose 

brokered deposits made up more than 

10 percent of domestic deposits.23 24

Generally speaking, the greater an 

institution’s asset growth and the greater 

its percentage of brokered deposits, the 

greater would be the increase in its 

initial base assessment rate. 

If an institution’s ratio of brokered 

deposits to domestic deposits were 10 

percent or less or if the institution’s 

asset growth over the previous four 

years were less than 20 percent, the 

adjusted brokered deposit ratio would 

be zero and would have no effect on the 

institution’s assessment rate. If an 

institution’s ratio of brokered deposits 

to domestic deposits exceeded 10 

percent and its asset growth over the 

previous four years were more than 40 

percent, the adjusted brokered deposit 

ratio would 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 exceeded 

10 percent but its asset growth over the 

previous four years were between 20 

percent and 40 percent, the adjusted 

brokered deposit ratio would be equal to 

a gradually increasing fraction of the 

ratio of brokered deposits to domestic 

deposits (minus the 10 percent 

threshold), so that small increases in 

asset growth rates would lead to only 

small increases in assessment rates. 

Overall asset growth rates of 20 to 40 

percent would be transformed into a 

fraction between 0 and 1 by multiplying 

an amount equal to the overall rate of 

growth minus 20 percent by 5 and 

expressing the result as a number rather 

than as a percentage (so that, for 

example, 5 times 10 percent would 

equal 0.500).25 The adjusted brokered 

deposit ratio would never be less than 

zero. Appendix A contains a detailed 

mathematical definition of the ratio. 

Table 7 gives examples of how the 

adjusted brokered deposit ratio would 

be determined. 

TABLE 7—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% 25.0% 0.250 0.0% 

4 ............................... 35.0% 25.0% 30.0% 0.500 12.5% 

5 ............................... 25.0% 15.0% 50.0% 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 20 

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 30 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 5 · (30 percent¥20 

percent, with the result expressed as a 

number 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 40 percent greater 

than they were four years previously 

(Column D). Therefore, its adjusted 

brokered deposit ratio is equal to its 

brokered deposit to domestic deposit 

ratio of 25 percent minus the 10 percent 

threshold (Column F). 

The FDIC is proposing this new risk 

measure for a couple of reasons. A 

number of costly institution failures, 

including some recent failures, have 

experienced rapid asset growth before 

failure and have funded this growth 

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 proposed rule would adopt the 

definition of brokered deposit in Section 

29 of the Federal Deposit Insurance Act 

(12 U.S.C. 1831f), which is the 

definition used in banks’ quarterly 

Reports of Condition and Income (Call 

Reports) and thrifts’ quarterly Thrift 

Financial Reports (TFRs). The FDIC is 

proposing that all brokered deposits 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. At present, it 

would be impossible to exclude these 

deposits, since institutions do not 

separately report them in the Call 

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26For example, a swept deposit may not be a 

brokered deposit if: (1) Balances are swept for the 

primary purposes of facilitating customers’ 

purchase and sale of securities, rather than the 

placement of funds with depository institutions; (2) 

swept amounts do not exceed 10 percent of the 

brokerage’s cash management account and 

retirement account assets; and (3) fees are paid on 

a per customer or account basis, rather than size of 

account basis, and are for administrative services, 

rather than for placement of deposits. Are Funds 

Held in ‘‘Cash Management Accounts’’ Viewed as 

Brokered Deposits by the FDIC? (FDIC Advisory 

Opinion 05–02 Feb. 3, 2005). 

27 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. 

28For the adjusted brokered deposit ratio, assets 

at the end of each year are compared to assets at 

the end of the year four years earlier, so assets at 

the end of 1988, for example, are compared to assets 

at the end of 1984. 

29Appendix 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. 

30The 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). 

31The 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. 

32These are the initial base rates for Risk Category 

I proposed below. 

Report or TFR. Moreover, sweep 

programs may be structured so that 

swept balances are not brokered 

deposits.26 Nevertheless, the FDIC is 

particularly interested in comments on 

whether brokered deposits that consist 

of swept balances should be excluded 

from the ratio and, if so, how they 

should be excluded. 

The proposed definition of brokered 

deposits would also include amounts an 

institution receives through a network 

that divides large deposits and places 

them at more than one institution to 

ensure that the deposit is fully insured, 

even where the institution accepts these 

deposits only on a reciprocal basis, such 

that, for any deposit received, the 

institution places the same amount (but 

held by a different depositor) with 

another institution through the network. 

At present, it would again be impossible 

to exclude these deposits, since 

institutions do not separately report 

them in the Call Report or TFR. The 

FDIC is also particularly interested in 

comments on whether these deposits 

should be excluded from the ratio and, 

if so, how they should be excluded. 

The proposed definition would 

exclude amounts not defined as a 

brokered deposit by statute. Thus, many 

high cost deposits would be excluded 

from the definition, potentially 

including those received through listing 

services or the Internet. At present, it 

would be impossible to include these 

deposits, since institutions do not 

separately report them in the Call 

Report or TFR. Nevertheless, the FDIC is 

particularly interested in comments on 

whether these deposits should be 

included in the definition of brokered 

deposits for purposes of the adjusted 

brokered deposit ratio and, if so, how 

they should be included. 

Pricing Multipliers and the Uniform 

Amount 

The FDIC also proposes to recalculate 

the uniform amount and the pricing 

multipliers for the weighted average 

CAMELS component rating and 

financial ratios. The existing uniform 

amount and pricing multipliers 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 2004.27 These 

probabilities were then converted to 

pricing multipliers for each risk 

measure. The proposed new pricing 

multipliers were derived using 

essentially the same statistical 

techniques, but based upon data from 

the end of the years 1988 to 2006.28 The 

proposed new pricing multipliers are set 

out in Table 8 below. 

TABLE 8—PROPOSED NEW PRICING

MULTIPLIERS

Risk measures* Pricing 

multipliers** 

Tier 1 Leverage Ratio ............. (0 .056) 

Loans Past Due 30—89 Days/ 

Gross Assets ....................... 0 .576 

Nonperforming Assets/Gross 

Assets ................................. 1 .073 

Net Loan Charge-Offs/Gross 

Assets ................................. 1 .213 

Net Income before Taxes/ 

Risk-Weighted Assets ......... (0 .762) 

Adjusted Brokered Deposit 

Ratio .................................... 0 .055 

Weighted Average CAMELS 

Component Rating .............. 1 .088 

* 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) 

would continue to be multiplied by the 

corresponding pricing multipliers. The 

sum of these products would be added 

to (or subtracted from) a new uniform 

amount, 9.872.29 The new uniform 

amount is also derived from the same 

statistical analysis.30 As at present, no 

initial base assessment rate within Risk 

Category I would 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 

proposed rule would set the initial 

minimum base assessment rate for Risk 

Category I at 10 basis points and the 

maximum initial base assessment rate 

for Risk Category I at 14 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.31 These cutoff 

values would be used in future periods, 

which could lead to different 

percentages of institutions being 

charged the minimum and maximum 

rates. 

In comparison, under the current 

system: (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. 

Table 9 gives initial base assessment 

rates for three institutions with varying 

characteristics, assuming the proposed 

new pricing multipliers given above, 

using initial base assessment rates for 

institutions in Risk Category I of 10 

basis points to 14 basis points.32

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33Under the proposed rule, pricing multipliers, 

the uniform amount, and financial ratios would 

continue to be rounded to three digits after the 

decimal point. Resulting assessment rates would be 

rounded to the nearest one-hundredth (1/100th) of 

a basis point. 

34Reports of condition include Reports of Income 

and Condition and Thrift Financial Reports. 

35Pursuant 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. 

36The assessment rate computed using the 

financial ratios method would be converted to a 

financial ratios score by first subtracting 8 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 

11, 8 would be subtracted from 11 and the result 

would be multiplied by one-half to produce a 

financial ratios score of 1.5. 

TABLE 9—INITIAL BASE ASSESSMENT RATES FOR THREE INSTITUTIONS * 

Pricing 

multiplier 

Institution 1 Institution 2 Institution 3 

Risk measure value 

Contribution 

to assessment rate 

Risk measure value 

Contribution 

to assessment rate 

Risk measure value 

Contribution 

to assessment rate 

A B C D E F G H 

Uniform Amount ....................................... 9.872 .................... 9.872 .................... 9.872 .................... 9.872 

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 (%) ................................................ 0.576 0.400 0.230 0.600 0.345 1.000 0.576 

Nonperforming Loans/Gross Assets (%) 1.073 0.200 0.215 0.400 0.429 1.500 1.610 

Net Loan Charge-Offs/Gross Assets(%) 1.213 0.147 0.178 0.079 0.096 0.300 0.364 

Net Income Before Taxes/Risk-Weighted 

Assets (%) ............................................ (0.762) 2.500 (1.905) 1.951 (1.487) 0.518 (0.395) 

Adjusted Brokered Deposit Ratio (%) ...... 0.055 0.000 0.000 12.827 0.705 24.355 1.340 

Weighted Average CAMELS Component 

Ratings ................................................. 1.088 1.200 1.306 1.450 1.578 2.100 2.285 

Sum of contributions ................................ .................... .................... 9.36 .................... 11.06 .................... 15.23 

Initial Base Assessment Rate .................. .................... .................... 10.00 .................... 11.06 .................... 14.00 

* Figures may not multiply or add to totals due to rounding.33

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 9.36 

basis points, but the table reflects the 

proposed initial base minimum 

assessment rate of 10 basis points. For 

Institution 3 in the table, the sum 

actually equals 15.23 basis points, but 

the table reflects the proposed initial 

base maximum assessment rate of 14 

basis points. 

Under the proposed rule, the FDIC 

would 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 

would 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 

would 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 the proposed 

rule, 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 would continue to be calculated 

from the report of condition filed by 

each institution as of the last day of the 

quarter.34 CAMELS component rating 

changes would 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.35

IV. Risk Category I: Large Bank Method 

For large Risk Category I institutions 

now subject to the debt issuer rating 

method, the FDIC proposes to derive 

assessment rates from the financial 

ratios method as well as long-term debt 

issuer ratings and CAMELS component 

ratings. The new method would be 

known as the large bank method. The 

rate using the financial ratios method 

would first be converted from the range 

of initial base rates (10 to 14 basis 

points) to a scale from 1 to 3 (financial 

ratios score).36 The financial ratios score 

would be given a 331⁄3 percent weight in 

determining the large bank method 

assessment rate, as would both the 

weighted average CAMELS component 

rating and debt-agency ratings. 

The weights of the CAMELS 

components would remain the same as 

in the current rule. The values assigned 

to the debt issuer ratings would also 

remain the same. The weighted 

CAMELS components and debt issuer 

ratings would continue to be converted 

to a scale from 1 to 3, as they are 

currently. 

The initial base assessment rate under 

the large bank method would be derived 

as follows: (1) An assessment rate 

computed using the financial ratios 

method would be converted to a 

financial ratios score; (2) the weighted 

average CAMELS rating, converted longterm debt issuer ratings, and the 

financial ratios score would each be 

multiplied by a pricing multiplier and 

the products summed; and (3) a uniform 

amount would be added to the result. 

The resulting initial base assessment 

rate would 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 would be 1.764, 

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61568 Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules 

37Appendix 1 provides the derivation of the 

pricing multipliers and the uniform amount. 

38The cutoff value for the minimum assessment 

rate is an average score of approximately 1.578. The 

cutoff value for the maximum assessment rate is 

approximately 2.334. 

39A ‘‘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, 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. 

40The 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). 

41 In the six quarters since the 2006 assessment 

rule went into effect, the total number of 

adjustments in any one quarter has ranged from 2 

to 13. For the second quarter of 2008, the FDIC 

continued or implemented assessment rate 

adjustments for 13 large Risk Category I institutions, 

12 to increase an institution’s assessment rate, and 

1 to decrease an institution’s assessment rate. 

Additionally, the FDIC sent four institutions 

advance notification of a potential upward 

adjustment in their assessment rate. 

and the uniform amount would be 

1.651.37

In recent periods, assessment rates for 

some large institutions have not 

responded in a timely manner to rapid 

changes in these institutions’ financial 

conditions. Based on June 30, 2008 data 

and ignoring large bank adjustments, 

under the current system: (1) 45 percent 

of large institutions in Risk Category I 

(other than institutions less than 5 years 

old) would have been charged the 

existing minimum assessment rate, 

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) 

would have been charged the existing 

maximum assessment rate, compared 

with 19 percent of small institutions. 

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).38 39 These cutoff values 

would be used in future periods, which 

could lead to different percentages of 

institutions being charged the minimum 

and maximum rates. 

Large institutions that lack a longterm debt issuer rating are currently 

assessed using the financial ratios 

method by itself. This will continue 

under the proposed rule. 

Under the proposed 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 11.50 basis points would be 

computed as follows: 

• The financial ratios method 

assessment rate less 8 basis points 

would be multiplied by one-half 

(calculated as (11.5 basis points ¥ 8 

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 would each be multiplied 

by 1.764 and summed (calculated as 

1.70 · 1.764 + 1.65 · 1.764 + 1.75 · 1.764) 

to produce 8.996. 

• A uniform amount of 1.651 would 

be added, resulting in an initial base 

assessment rate of 10.65 basis points. 

The FDIC anticipates that 

incorporating the financial ratios score 

into the large bank method assessment 

rate would 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. A more 

accurate distribution of initial 

assessment rates should require fewer 

large bank adjustments to rates based 

upon reviews of additional relevant 

information.40

V. Adjustment for Large Institutions 

and Insured Branches of Foreign Banks 

in Risk Category I 

Under current rules, 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 FDIC proposes to increase the 

maximum possible large bank 

adjustment to one basis point and to 

make the adjustment to an institution’s 

base assessment rate before any other 

adjustments are made. The adjustment 

could not: (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 makes this proposal for two 

primary reasons. First, at present, the 

difference between the minimum and 

maximum base assessment rates in Risk 

Category I is two basis points. The 

maximum one-half basis point large 

bank adjustment represents 25 percent 

of the difference between the minimum 

and maximum rates. While an 

adjustment of this size is generally 

sufficient to preserve consistency in the 

orderings of risk indicated by 

assessment rates and to ensure fairness, 

there have been circumstances where 

more than a half a basis point 

adjustment would have been warranted. 

The difference between the minimum 

and maximum base assessment rates 

would increase from two basis points 

under the current system to four basis 

points under the proposal. 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 proposed increase in the maximum 

possible large bank adjustment would 

continue to represent 25 percent of the 

difference between the minimum and 

maximum rates. 

The FDIC expects that, under the 

proposed rule, large bank adjustments 

would be made infrequently and for a 

limited number of institutions.41 The 

FDIC’s view is that the use of 

supervisory ratings, financial ratios and 

agency ratings (when available) would 

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 revise its large 

bank guidelines. Until then, the 

guidelines would be applied taking into 

account the changes resulting from this 

rulemaking. 

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42For 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). 

43Adjusted average assets would be used for Call 

Report filers; adjusted total assets would be used for 

TFR filers. 

44The 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. 

45Adjusted average assets would be used for Call 

Report filers; adjusted total assets would be used for 

TFR filers. 

46Other 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. 

47The 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 proposed 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. 

VI. Adjustment for Unsecured Debt for 

all Risk Categories 

The FDIC proposes to lower an 

institution’s initial base assessment rate 

(after making any large bank 

adjustment) using its ratio of long-term 

unsecured debt (and, for small 

institutions, certain amounts of Tier 1 

capital) to domestic deposits.42 Any 

decrease in base assessment rates as a 

result of this unsecured debt adjustment 

would be limited to two basis points. 

For a large institution, the unsecured 

debt adjustment would be determined 

by multiplying the institution’s longterm unsecured debt as a percentage of 

domestic deposits by 20 basis points. 

For example, a large institution with a 

long-term unsecured debt to domestic 

deposits ratio of 3.0 percent would see 

its initial base assessment rate reduced 

by 0.60 basis points (calculated as 20 

basis points · 0.03). An institution with 

a long-term unsecured debt ratio to 

domestic deposits of 11.0 percent would 

have its assessment rate reduced by two 

basis points, since the maximum 

possible reduction would be two basis 

points. (20 basis points · 0.11 = 2.20 

basis points, which exceeds the 

maximum possible reduction.) 

For a small institution, the unsecured 

debt adjustment would factor in a 

certain amount of Tier 1 capital 

(qualified Tier 1 capital) in addition to 

long-term unsecured debt. The amount 

of qualified Tier 1 capital would be the 

sum of one-half of the amount between 

10 percent and 15 percent of adjusted 

average assets (between 2 and 3 times 

the minimum Tier 1 leverage ratio 

requirement to be a well-capitalized 

institution) and the full amount of Tier 

1 capital exceeding 15 percent of 

adjusted average assets (above 3 times 

the minimum Tier 1 leverage ratio 

requirement to be a well-capitalized 

institution).43 The sum of qualified Tier 

1 capital and long-term unsecured debt 

as a percentage of domestic deposits 

would be multiplied by 20 basis points 

to produce the unsecured debt 

adjustment.44

For example, consider a small 

institution with no long-term unsecured 

debt and a Tier 1 leverage ratio of 17 

percent. Assume that each percentage 

point of the Tier 1 capital ratio equated 

to a ratio of Tier 1 capital to domestic 

deposits of 1.1 percent. The unsecured 

debt adjustment for the portion of 

capital between 10 percent and 15 

percent of adjusted average assets would 

be 0.55 basis points (calculated as 20 

basis points · (1.1 · 0.5 · (0.15—0.10)).45

The unsecured debt adjustment for the 

portion of capital above 15 percent of 

adjusted gross assets would be 0.44 

basis points (calculated as 20 basis 

points · (1.1 · (0.17–0.15)). The sum of 

the two portions of the adjustment 

equals 0.99 basis points. 

Ratios for any given quarter would be 

calculated from the report of condition 

filed by each institution as of the last 

day of the quarter. 

As noted above, unsecured debt 

would include senior unsecured and 

subordinated debt. A senior unsecured 

liability would be defined as the 

unsecured portion of other borrowed 

money.46 Subordinated debt would be 

as defined in the report of condition for 

the reporting period.47 Long-term 

unsecured debt would be defined as 

unsecured debt with at least one year 

remaining until maturity. However, 

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 

notice of proposed rulemaking that 

would adopt similar reporting 

requirements. 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. 

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. 

The FDIC’s proposed definition of a 

long-term senior unsecured liability, 

however, ignores features that may 

affect whether the liability would, in 

fact, reduce the FDIC’s loss in the event 

of failure. The definition would include 

liabilities with put options or other 

provisions that would allow the holder 

to accelerate payment (for example, if 

capital fell below a certain level). Any 

kind of put or acceleration feature could 

undermine the long-term nature of the 

liability. The FDIC is particularly 

interested in comment on whether longterm senior unsecured liabilities should 

exclude those liabilities with put or 

other acceleration provisions. 

The FDIC is proposing that for small 

institutions (but not large ones) the 

unsecured debt adjustment include a 

portion of Tier 1 capital. The FDIC has 

two primary reasons for this proposal. 

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 

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48Under the proposed rule, the ratio of secured 

deposits to domestic deposits would be rounded to 

three digits after the decimal point. The resulting 

amount and adjusted assessment rate would be 

rounded to the nearest one-hundredth (1/100th) of 

a basis point. 

49Overall, 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. 

50Under the proposed rule, the ratio of brokered 

deposits to domestic deposits would be rounded to 

three digits after the decimal point. The resulting 

brokered deposit charge would be rounded to the 

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

and receive subordinated debt. The 

FDIC is greatly interested in comments 

on this part of its proposal, including 

comments on whether the portion of a 

small institution’s Tier 1 capital to be 

included in the unsecured debt 

adjustment should include more capital. 

The FDIC is also particularly 

interested in comments on the size of 

the unsecured debt adjustment and 

whether it should be larger or smaller. 

The FDIC believes that the proposed 

two basis points is sufficient to 

encourage a significant number of 

institutions to issue additional 

subordinated debt or senior unsecured 

debt, but is interested in the views of 

commenters. 

VII. Adjustment for Secured Liabilities 

for All Risk Categories 

The FDIC proposes to raise an 

institution’s base assessment rates based 

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 15 percent) would 

increase its assessment rate, but the 

resulting base assessment rate after any 

such increase could be no more than 50 

percent greater than it was before the 

adjustment. The secured liability 

adjustment would be made after any 

large bank adjustment or unsecured debt 

adjustment. 

Specifically, for an institution that 

had a ratio of secured liabilities to 

domestic deposits of greater than 15 

percent, the secured liability adjustment 

would 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 

0.15. However, the resulting adjustment 

could not 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 25 

percent, and a base assessment rate 

before the secured liability adjustment 

of 12 basis points, the secured liability 

adjustment would be the base rate 

multiplied by 0.10 (calculated as 0.25— 

0.15), resulting in an adjustment of 1.2 

basis points. However, if the institution 

had a ratio of secured liabilities to 

domestic deposits of 70 percent, its base 

rate before the secured liability 

adjustment of 12 basis points would be 

multiplied by 0.50 rather than 0.55 

(calculated as 0.70—0.15), since the 

resulting adjustment could be only 50 

percent of the base assessment rate 

before the secured liability 

adjustment.48

Ratios of secured liabilities to 

domestic deposits for any given quarter 

would be calculated from the report of 

condition filed by each institution as of 

the last day of the quarter. For banks, 

secured liabilities would 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 also 

published a notice of proposed 

rulemaking to revise the TFR so that 

thrifts will separately report these items. 

Until the TFR is revised, any of these 

secured amounts not reported separately 

from unsecured or other liabilities by a 

thrift in its TFR would 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. 

At present, 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 currently figure into an 

institution’s assessment, 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 current rules, 

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.49

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 FDIC is proposing that 

an institution in Risk Category II, III, or 

IV also be subject to an assessment rate 

adjustment for brokered deposits (the 

brokered deposit adjustment). This 

adjustment would be limited to those 

institutions whose ratio of brokered 

deposits to domestic deposits was 

greater than 10 percent; asset growth 

rates would not affect the adjustment. 

The adjustment would be determined by 

multiplying 25 basis points times the 

difference between an institution’s ratio 

of brokered deposits to domestic 

deposits and 0.10.50 However, the 

adjustment would never be more than 

10 basis points. The adjustment would 

be added to the base assessment rate 

after all other adjustments had been 

made. Ratios for any given quarter 

would be calculated from the Call 

Reports or TFRs filed by each institution 

as of the last day of the quarter. 

A brokered deposit would again be as 

defined in Section 29 of the Federal 

Deposit Insurance Act (12 U.S.C. 1831f), 

which is the definition used in banks’ 

quarterly Call Reports and thrifts 

quarterly TFRs. However, the FDIC is 

again particularly interested in 

comments on whether the definition of 

a brokered deposit for purposes of the 

brokered deposit ratio should exclude 

sweep accounts or deposits received 

through a network on a reciprocal basis 

that meet the statutory definition of a 

brokered deposit or should include high 

cost deposits, including those received 

through a listing service and the 

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51An 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). 

52An insured branch of a foreign bank’s weighted 

average ROCA component rating would 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. 

53Subject to exceptions, a new insured 

depository institution is a bank or thrift that has not 

been chartered for at least five years as of the last 

day of any quarter for which it is being assessed. 

12 CFR 327.8(l) 

54Certain 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. 

Internet, that do not meet the statutory 

definition. 

Significant reliance on brokered 

deposits tends to increase an 

institution’s risk profile, particularly as 

the institution’s financial condition 

weakens. Insured institutionsparticularly 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.51

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. 

To illustrate the brokered deposit 

adjustment with a simple example, take 

a Risk Category II institution with an 

initial base assessment rate of 20 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 would 

be as calculated, 7.5 basis points. 

Assuming that the secured liabilities 

adjustment for this institution is 2 basis 

points and that the institution has no 

other assessment rate adjustments, the 

total base assessment rate would be 29.5 

basis points (calculated as (20 basis 

points + 2 basis points + 7.5 basis 

points). 

IX. Insured Branches of Foreign Banks 

Because the base assessment rates 

would be higher and the difference 

between the minimum and maximum 

initial base assessment rates would 

increase from two to four basis points 

under the proposal, the FDIC proposes 

to make a conforming change for 

insured branches of foreign banks in 

Risk Category I. Under the proposal, an 

insured branch of a foreign bank’s 

weighted average of ROCA component 

ratings would be multiplied by 5.291 

(which would be the pricing multiplier) 

and 1.651 (which would be a uniform 

amount for all insured branches of 

foreign banks) would be added to the 

product.52 The resulting sum would 

equal a Risk Category I insured branch 

of a foreign bank’s initial base 

assessment rate, provided that the 

amount could not be less than the 

minimum initial base assessment rate 

nor greater than the maximum initial 

assessment rate. A Risk Category I 

insured branch of a foreign bank’s initial 

base assessment rate would be subject to 

any large bank adjustment. Total base 

assessment rates could not 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 are 

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 would 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 would 

appear 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 proposes to make 

conforming changes in the treatment of 

new insured depository institutions.53

For assessment periods beginning on or 

after January 1, 2010, any new 

institutions in Risk Category I would be 

assessed at the maximum initial base 

assessment rate applicable to Risk 

Category I institutions, as under the 

current rule. 

Effective for assessment periods 

beginning before January 1, 2010, until 

a Risk Category I new institution 

received CAMELS component ratings, it 

would have an initial base assessment 

rate that was 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 

current rule.54 All other new 

institutions in Risk Category I would be 

treated as are established institutions, 

except as provided in the next 

paragraph. 

Either before or after January 1, 2010: 

no new institution, regardless of risk 

category, would be subject to the 

unsecured debt adjustment; any new 

institution, regardless of risk category, 

would be subject to the secured liability 

adjustment; and a new institution in 

Risk Categories II, III or IV would be 

subject to the brokered deposit 

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55 Data on estimated insured deposits and the 

reserve ratio are available only for each quarter-end; 

therefore, the reserve ratio for the end of the fourth 

quarter of 2013 will be the first reserve ratio 

available after October 7 to measure compliance 

with the Restoration Plan’s requirements. Deposit 

data needed to compute the reserve ratio will be 

available in February of the following year. 

56Changes in the projected average rates under 

the proposed schedule over time reflect projected 

changes in the migration of institutions within and 

across risk categories. 

adjustment. After January 1, 2010, no 

new institution in Risk Category I would 

be subject to the large bank adjustment. 

XI. Assessment Rate Schedule 

Recent failures have significantly 

increased the fund’s loss provisions, 

resulting in a decline in the reserve 

ratio. As of June 30, 2008, the reserve 

ratio stood at 1.01 percent, 18 basis 

points below the reserve ratio as of 

March 31, 2008. This is the lowest 

reserve ratio for a combined bank and 

thrift insurance fund since March 31, 

1995. The FDIC expects a higher rate of 

insured institution failures in the next 

few years compared to recent years; 

thus, the reserve ratio may continue to 

decline. Because the reserve ratio has 

fallen below 1.15 percent and is 

expected to remain below 1.15 percent, 

the FDIC is required to establish and 

implement a Restoration Plan to restore 

the reserve ratio to 1.15 percent within 

five years, that is, by October 7, 2013.55

To fulfill the requirements of the 

Restoration Plan that the FDIC is 

adopting simultaneously with the 

proposed rule, the FDIC must increase 

the average assessment rates it currently 

charges. Since the current rates are 

already 3 basis points uniformly above 

the base rate schedule established in the 

2006 assessments rule, a new 

rulemaking is required. The other 

proposed changes to the assessment 

system described above also require 

new rulemaking. 

Base Rate Schedule 

Effective April 1, 2009, the FDIC 

proposes to set initial base assessment 

rates as described in Table 10 below. 

TABLE 10—PROPOSED INITIAL BASE ASSESSMENT RATES

Risk category 

I * 

II III IV 

Minimum Maximum 

Annual Rates (in basis points) ............................................. 10 14 20 30 45 

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

After making all possible adjustments 

under the proposed rule, total base 

assessment rates for each risk category 

would be within the ranges set forth in 

Table 11 below. 

TABLE 11—TOTAL BASE ASSESSMENT RATES AFTER ADJUSTMENTS * 

Risk category 

I 

Risk category 

II 

Risk category 

III 

Risk category 

IV 

Initial base assessment rate ................................................................ 10–14 ............... 20 ..................... 30 ..................... 45 

Unsecured debt adjustment ................................................................. ¥2–0 ................ ¥2–0 ................ ¥2–0 ................ ¥2–0 

Secured liability adjustment ................................................................. 0–7 ................... 0–10 ................. 0–15 ................. 0–22.5 

Brokered deposit adjustment ............................................................... ........................... 0–10 ................. 0–10 ................. 0–10 

Total base assessment rate ......................................................... 8–21.0 .............. 18–40.0 ............ 28–55.0 ............ 43–77.5 

* All amounts for all risk categories are in basis points annually. Rates for institutions that did not pay the minimum or maximum rate would 

vary between these rates. Adjustments would be applied in the order listed in the table. The large bank adjustment would be made before any 

other adjustment. 

The proposed base rates are 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 in order to 

raise the reserve ratio to the minimum 

threshold of 1.15 percent within 5 years 

of the Plan’s implementation. As 

explained in the next Section, given the 

FDIC’s projections (described below), 

the proposed rate schedule would raise 

the reserve ratio to 1.26 percent by the 

end of 2013. 

Actual Rate Schedule, Ability To Adjust 

Rates and Effective Date 

Based on the information currently 

available, the FDIC proposes setting 

actual rates at the proposed total base 

assessment rate schedule effective April 

1, 2009. The FDIC projects that this 

schedule would raise the overall average 

assessment rate to 13.5 basis points 

beginning in April 2009 and 12.6 basis 

points in 2010 and thereafter, from a 6.3 

basis point average assessment rate 

(before accounting for credit use) as of 

June 30, 2008. For institutions in Risk 

Category I, the projected average rate 

would be 11.6 basis points beginning in 

April 2009 and 11.9 basis points in 2010 

and thereafter, up from 5.5 basis points 

as of June 30, 2008.56

However, at 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 

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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). The base 

rate schedule in the final rule could 

possibly be lower than the proposed 

base rate schedule. The FDIC seeks 

particular comment on possible 

alternative base rate schedules. 

The rate schedule and the other 

revisions to the assessment rules would 

take effect for the quarter beginning 

April 1, 2009, which would be reflected 

in the June 30, 2009 fund balance and 

the invoices for assessments due 

September 30, 2009. 

The proposed rule would continue to 

allow the FDIC Board to adopt actual 

rates that were higher or lower than 

total base assessment rates without the 

necessity of further notice-and-comment 

rulemaking, provided that: (1) The 

Board could not increase or decrease 

rates from one quarter to the next by 

more than three basis points; and (2) 

cumulative increases and decreases 

could not be more than three basis 

points higher or lower than the adjusted 

base rates. Continued retention of this 

flexibility would 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. 

Assessment Rates for the First Quarter 

of 2009 

The FDIC also proposes to raise the 

current rates uniformly by seven basis 

points for the assessment for the quarter 

beginning January 1, 2009, which would 

be reflected in the fund balance as of 

March 31, 2009, and assessments due 

June 30, 2009. Rates for the first quarter 

of 2009 only would be as set forth in 

Table 12: 

TABLE 12—PROPOSED ASSESSMENT RATES FOR THE FIRST QUARTER OF 2009 

Risk category 

I * 

II III IV 

Minimum Maximum 

Annual Rates (in basis points) ............................................. 12 14 17 35 50 

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

The proposed rates for the first 

quarter of 2009 would raise almost as 

much assessment revenue as under the 

rates proposed beginning April 1, 2009. 

Data and system requirements do not 

make it feasible to adopt the proposed 

changes to the risk-based assessment 

system discussed above until the second 

quarter of 2009. 

XII. Assessment Revenue Needs Under 

the Restoration Plan 

Summary 

Table 13 shows projected minimum 

initial base assessment rates needed to 

raise the reserve ratio to 1.15 percent 

(the lower bound under the 

requirements for the Restoration Plan) 

in 2013 for alternative average annual 

insured deposit growth rates and total 

costs of bank failures from 2008 through 

2013. 

TABLE 13—MINIMUM INITIAL BASE ASSESSMENT RATES (IN BASIS POINTS) NEEDED TO RAISE THE RESERVE RATIO TO

1.15 PERCENT IN 2013 

Insured deposit growth rate 

If institution failures from 2008 to 2013 cost in total: * 

$20 Billion $30 Billion $40 Billion $50 Billion $60 Billion $70 Billion 

3% ............................................................ 5 5 8 11 13 16 

4% ............................................................ 5 6 9 11 14 16 

5% ............................................................ 5 7 9 11 14 16 

6% ............................................................ 5 7 9 12 14 17 

7% ............................................................ 5 8 10 12 15 17 

* Costs include $12.8 billion for actual and projected failures in 2008. 

Under the FDIC’s proposed rate 

schedule, the average rate is projected to 

be 13.5 basis points in 2009 (once the 

rates become effective in April) and 12.6 

basis points in 2010 and beyond. For 

institutions in Risk Category I, the 

average rate is projected to be 11.6 basis 

points beginning in April 2009, rising to 

11.9 basis points in 2010 and beyond. 

Given the FDIC’s projections, the 

proposed rates would increase the 

reserve ratio to 1.26 percent by year-end 

2013. 

Current and emerging economic 

difficulties, particularly in the housing 

and construction sector, financial 

markets and commercial real estate, 

contribute to the FDIC’s expectation of 

higher losses for the insurance fund. 

The insurance fund balance and reserve 

ratio are likely to experience further 

declines before recovering as the current 

problems confronting the banking 

industry abate. The FDIC projects that 

the reserve ratio will continue to fall for 

the remainder of this year and early 

2009 to a low of 0.65 to 0.70 percent, as 

the fund’s loss reserves for anticipated 

failures increase. Higher assessment 

revenue should begin to increase the 

reserve ratio gradually in the latter part 

of 2009. As described in more detail 

below, the FDIC’s best estimate is that 

institution failures could cost the 

insurance fund approximately $40 

billion from 2008 to 2013, of which 

approximately $13 billion represent 

actual and projected costs incurred this 

year (including almost $9 billion for the 

failure in July of one institution with 

over $30 billion in assets). 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 housing price 

declines and an economic slowdown in 

specific geographic areas on loan losses 

and bank capital; and recent and 

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61574 Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules 

57 If the minimum initial rate was 8 basis points 

or less, the reserve ratio is projected to fall short of 

the 1.15 percent threshold. 

58Section 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)). 

historic supervisory rating downgrade 

and failure rates. 

The FDIC also assumes that insured 

deposits would increase on average 5 

percent per year from 2008 to 2013. This 

assumption is in line with the most 

recent 12-month growth rate and 

average annual growth rates over the 

past 5 and 10 years. 

Table 13 shows that an initial 

minimum rate of 9 basis points is 

necessary for the reserve ratio to reach 

1.15 percent by 2013 assuming that 

failures between 2008 and 2013 cost $40 

billion and that insured deposits 

increase on average by 5 percent 

annually. With an initial minimum rate 

of 9 basis points, the FDIC projects that 

the reserve ratio would equal 1.18 

percent by the end of 2013.57 The 

FDIC’s proposed rates, with an initial 

minimum rate of 10 basis points, would 

raise the reserve ratio to 1.26 percent by 

2013. The FDIC believes that it would 

be prudent to provide this margin for 

error in the event that losses exceed the 

FDIC’s best estimate or insured deposit 

growth is more rapid than expected. 

The FDIC had previously expected 

that the reserve ratio would reach the 

1.25 percent DRR by 2009, consistent 

with the Board’s objectives for the 

insurance fund. The recent decline in 

the reserve ratio and projected higher 

rate of bank failures over the next few 

years make the possibility of reaching 

the DRR next year remote absent very 

high assessment rates, which the FDIC 

believes would be inappropriate under 

current conditions. Nonetheless, the 

goal of reaching the 1.25 percent DRR 

remains in effect. Under the proposed 

rates, the reserve ratio is projected to 

reach 1.26 percent by the end of 2013. 

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 the FDIC’s best estimate or 

insured deposit growth is more 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. 1817(b)(1)(A)) 

to maintain a risk-based system. 

(v) Other factors the Board of 

Directors has determined to be 

appropriate.58

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 tend to reduce the 

fund balance and reserve ratio. 

The FDIC expects that housing price 

declines, financial market turmoil, and 

generally weaker economic conditions 

will continue to exert stress on banking 

industry earnings and credit quality in 

the near term, most notably in 

residential real estate and construction 

and development lending. Significant 

uncertainty remains about the outlook 

for a recovery in mortgage securitization 

markets and the return of confidence to 

financial markets overall. Economic 

activity in the industrial Midwest has 

especially suffered from higher energy 

and commodity prices. Housing market 

downturns in Arizona, California, 

Nevada, Florida, and other coastal areas 

are contributing to declines in 

construction and consumer spending 

and economic downturns in those areas. 

Regional disparities in housing market 

and economic conditions, as well as 

financial market difficulties, have led in 

turn to variation in prospects among 

banks. Institutions most at risk include: 

(1) Those with large volumes of 

subprime and nontraditional mortgages, 

particularly those heavily reliant on 

securitization; and (2) those with heavy 

concentrations of residential real estate 

and construction and development 

loans in markets with the greatest 

housing price declines. Within each of 

these groups, those heavily reliant on 

non-core funding incur additional risks 

should the availability of these funds 

decline as conditions deteriorate. 

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 

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 stress 

analysis designed to evaluate the effect 

of a large and widespread decline in 

housing prices and related deterioration 

in overall economic conditions on the 

capital positions and earnings of 

insured institutions. The stress test 

simulated the effects of high and rising 

loan loss rates directly resulting from 

falling housing prices and rising 

unemployment rates in various 

geographic areas to identify institutions 

most vulnerable to these types of stress. 

Under the stress test, institutions 

operating in those areas with the worst 

housing and economic conditions 

experience the largest increase in loss 

rates. 

The FDIC categorized well-capitalized 

institutions into various groups based 

on stress test results and supervisory 

analysis. Based on recent and historical 

downgrade and failure experience, the 

FDIC then applied downgrade and 

failure assumptions for each group to 

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59For those institutions that were well rated one 

year ago but performed poorly under the stress 

simulations when applied to their balance sheets 

from last year, the FDIC identified the extent to 

which these institutions received supervisory 

ratings downgrades over the following year. To look 

beyond what may happen over one year, the FDIC 

supplemented this information with data from the 

late 1980s and early 1990s (a period of many bank 

failures) on ratings downgrades over a five-year 

horizon for institutions with financial 

characteristics similar to those performing poorly 

under the stress analysis. With this information, the 

FDIC developed projections of the volume of wellrated institutions likely to be downgraded over the 

next few years. The FDIC then considered data on 

failure rates from the late 1980s and early 1990s to 

project failure rates for those institutions that may 

be downgraded over the next few years, as well as 

those that are currently not well rated. 

60Future 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.) 

61Section 7(b)(3)(E)(iv) of the Federal Deposit 

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

62For 2008, 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)). 

63The assessment base is almost equal to total 

domestic deposits. 

project the cost of failure to the fund 

over the next few years.59

Based on the various sources of 

information described above, the FDIC 

projects that the costs of institution 

failures from 2008 through 2013 may be 

approximately $40 billion. This figure 

includes almost $13 billion for the costs 

of actual and projected failures in 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 2008 will be $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) this year 

will total $3.7 billion, or 7 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 as of June 

30, 2008 bolsters this figure. Projected 

increases in interest rates, which will 

reduce the value of these securities, will 

partly offset this gain next year.60 In 

addition, the FDIC expects that it will 

invest new funds in short-term 

securities (primarily overnight 

investments) to accommodate increased 

bank failure activity. The FDIC generally 

expects that these investments will earn 

lower rates than the longer-term 

securities that they are replacing and 

will therefore result in less interest 

income to the fund. Accounting for all 

of these factors, the FDIC projects 

investments to contribute an amount 

equal to 2.0 percent of the starting fund 

balance in 2009, rising gradually to 3.5 

percent by 2011 and thereafter. 

Assessment Revenue, Credit Use, and 

the Distribution of Assessments 

The FDIC expects that assessment 

revenue in 2008 will total $3.0 billion: 

$4.4 billion in gross assessments 

charged less $1.4 billion in credits used. 

By the end of 2008, the projections 

indicate that only 4 percent of the 

original $4.7 billion in credits awarded 

will be remaining. 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.61 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 

proposed new rates go into effect will be 

very small and that their continued use 

will have very little effect on the 

assessment rates necessary to meet the 

requirements of the plan.62

Accounting for the use of remaining 

credits, proposed uniform increase to 

current rates for the first quarter of 2009 

and the proposed assessment rates 

effective April 1, 2009, and assuming 5 

percent annual growth in the 

assessment base (which is 

approximately domestic deposits), the 

FDIC projects that the fund will earn 

assessment revenue of $10.3 billion for 

all of 2009. 

For the quarter beginning April 1, 

2009, the FDIC has derived gross 

assessment revenue (i.e., before 

applying any remaining credits) by 

assigning each insured institution to an 

assessment rate based on the proposed 

rate schedule and factors described 

above. Table 14 shows the distribution 

of institutions and domestic deposits by 

risk category (divided into four parts for 

Risk Category I) under the proposed 

initial base rate schedule (effective April 

1, 2009) based on data as of June 30, 

2008; Table 15 shows the distribution of 

institutions and domestic deposits by 

bands of proposed total base assessment 

rates.63 For purposes of assessment 

revenue projections beginning next 

April, the FDIC relied on the proposed 

assessment rates based on data as of 

June 30, 2008, but also accounted for 

projected migration of institutions 

across risk categories as supervisory 

ratings change. 

TABLE 14—DISTRIBUTION OF INITIAL BASE ASSESSMENT RATES AND DOMESTIC DEPOSITS* 

[Data as of June 30, 2008] 

Risk category 

Initial 

assessment 

rate 

Number of 

institutions 

Percent of 

institutions 

Domestic 

deposits 

(in billions of 

$) 

Percent of 

domestic 

deposits 

I ............................................................................................ 10 1,775 21 823.0 12 

10.01–12.00 2,976 35 2,945.7 42 

12.01–13.99 1,758 21 1,714.4 24 

14 1,219 14 593.3 8 

II ........................................................................................... 20 588 7 896.5 13 

III .......................................................................................... 30 121 1 27.1 0 

IV .......................................................................................... 45 14 0 29.1 0 

* This table and the following two tables exclude insured branches of foreign banks. 

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61576 Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules 

TABLE 15—DISTRIBUTION OF TOTAL BASE ASSESSMENT RATES AND DOMESTIC DEPOSITS * 

[Data as of June 30, 2008] 

Risk category 

Total base 

assessment 

rate 

Number of 

institutions 

Percent of 

institutions 

Domestic 

deposits 

(in billions 

of $) 

Percent of 

domestic 

deposits 

I ........................................................................................ 8.00–10.00 1,834 22 806 .6 11 

10.01–12.00 2,674 32 3,047 .6 43 

12.01–14.00 2,588 31 1,632 .5 23 

14.01–21.00 632 7 589 .7 8 

II ....................................................................................... 18.00–20.00 346 4 204 .7 3 

20.01–40.00 242 3 691 .8 10 

III ...................................................................................... 28.00–30.00 72 1 8 .0 0 

30.01–55.00 49 1 19 .1 0 

IV ...................................................................................... 43.00–45.00 9 0 5 .8 0 

45.01–77.5 5 0 23 .3 0 

* Because of data limitations, secured liability adjustments for TFR filers are calculated using imputed values based on simple averages of Call 

Report filers as of June 30, 2008 (discussed below). Unsecured debt adjustments are calculated using ‘‘Qualifying subordinated debt and redeemable preferred stock’’ included in Tier 2 capital. 

As noted earlier, the proposed 

changes to risk-based assessments are 

intended to better capture differences in 

risk and impose a greater share of the 

necessary increase in overall 

assessments on riskier institutions. 

Table 16 shows how institutions would 

have fared if the FDIC had proposed 

leaving the current risk-based 

assessment system unchanged except 

for a uniform increase in rates that 

would have produced the same revenue 

as under the proposed schedule. To 

produce the same revenue, the FDIC 

would have had to increase the current 

rates uniformly by 7.6 basis points, 

based upon data as of June 30, 2008. As 

the table shows, 85 percent of 

institutions, with 74 percent of domestic 

deposits, would pay a lower rate under 

the proposed assessment rate schedule 

than under a uniform increase of 7.6 

basis points to the current rate schedule. 

TABLE 16—DIFFERENCE BETWEEN PROPOSED ASSESSMENT RATES AND A UNIFORM INCREASE IN CURRENT RATES TO

RAISE THE SAME REVENUE

[Data as of June 30, 2008] 

Compared to a uniform increase in current rates, proposed rates are: Number of 

institutions 

Percent of 

institutions 

Domestic 

deposits 

(in billions 

of $) 

Percentage of 

total domestic 

deposits 

Over 4 bp lower ............................................................................................... 339 4 64 1 

2–4 bp lower .................................................................................................... 3,070 36 1,551 22 

0–2 bp lower .................................................................................................... 3,819 45 3,551 51 

0–2 bp higher ................................................................................................... 463 5 785 11 

2–4 bp higher ................................................................................................... 541 6 321 5 

4–6 bp higher ................................................................................................... 110 1 121 2 

6–8 bp higher ................................................................................................... 49 1 244 3 

8–10 bp higher ................................................................................................. 18 0 245 3 

Over 10 bp higher ............................................................................................ 42 0 146 2 

Estimated Insured Deposits 

The FDIC believes that it is reasonable 

to plan for annual insured deposit 

growth of 5 percent. Over the 12 months 

ending June 30, 2008, estimated insured 

deposits increased by 5.4 percent. The 

most recent five and ten year average 

growth rates are also approximately 5 

percent. Chart 1 depicts insured deposit 

growth since 1990. 

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Projections of insured deposits are 

subject to considerable uncertainty. 

Insured deposit growth over the near 

term could 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. As Table 

13 shows, 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 3 contains an analysis of 

the effect of proposed rates on the 

capital and earnings of insured 

institutions. Given the assumptions in 

the analysis, for the industry as a whole, 

projected total assessments in 2009 

would result in capital that would be 

0.3 percent lower than if the FDIC did 

not charge assessments and 0.1 percent 

lower than if current assessment rates 

remained in effect. The proposed 

assessments would cause 6 institutions 

whose equity-to-assets ratio would have 

exceeded 4 percent in the absence of 

assessments to fall below that 

percentage and 5 institutions to fall 

below 2 percent. The proposed increase 

in assessments would cause 3 

institutions whose equity-to-assets ratio 

would have exceeded 4 percent under 

current assessments to fall below that 

threshold and 1 institution to fall below 

2 percent. 

For the industry as a whole, 

assessments in 2009 would result in 

pre-tax income that would be 11 percent 

lower than if the FDIC did not charge 

assessments and 5.6 percent lower than 

if current assessment rates remained in 

effect. Appendix 3 also provides an 

analysis of the range of effects on capital 

and earnings. 

Other Factors That the Board May 

Consider 

In its consideration of proposed rates, 

the FDIC Board has considered other 

factors that it deems appropriate, as 

permitted by law. 

Flexibility to accommodate economic 

and industry conditions. The Reform 

Act generally provides up to 5 years for 

the FDIC to raise the fund’s reserve ratio 

to at least 1.15 percent under the 

Restoration Plan. The FDIC Board had 

previously set rates with an objective of 

raising the reserve ratio to the 1.25 

percent DRR by next year. The recent 

decline in the reserve ratio and an 

anticipated higher rate of bank failures 

over the next few years make the 

possibility of reaching the 1.25 percent 

DRR—or even 1.15 percent—next year 

remote absent very high assessment 

rates. The FDIC believes that such high 

rates would be inappropriate under 

current and projected economic and 

financial conditions. The FDIC’s 

proposed rates take advantage of the 

flexibility to raise rates more gradually. 

Reaching the DRR. The FDIC had 

previously expected that the reserve 

ratio would reach the 1.25 percent DRR 

by 2009, consistent with the Board’s 

objectives for the insurance fund. The 

recent decline in the reserve ratio and 

an anticipated increase in bank failures 

make the possibility of reaching the 

DRR next year remote absent very high 

assessment rates, which the FDIC 

believes would be inappropriate under 

current conditions. Nonetheless, the 

goal of reaching the 1.25 percent DRR 

remains in effect. Under the proposed 

rates, the reserve ratio is projected to 

reach 1.26 by the end of 2013. 

Updating projections regularly. The 

FDIC recognizes that there is 


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61578 Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules 

64 12 CFR 327.9(d)(5). 

65 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. 

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 its 

proposed rates, the reserve ratio will 

increase to 1.26 percent by year-end 

2013, providing a margin for error in the 

event that losses exceed the FDIC’s best 

estimate or insured deposit growth is 

more rapid than expected. 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. Technical and Other Changes 

The FDIC is proposing to 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. 

At present, 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 for 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.64

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.65

The FDIC proposes 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 would be determined as for 

any other institution in Risk Category I 

subject to the same pricing method, 

except that the rate would 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 FDIC’s proposal 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 proposing to amend 

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. 

A technical correction is proposed 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 FDIC 

proposes to amend section 327.3(a) to 

eliminate the reference to paragraph (b). 

12 CFR 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 FDIC 

proposes to amend 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. 

12 CFR 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 § 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 § 327.8(i) requires the 

FDIC to disregard a long-term debt 

issuer rating that is still in effect—that 

is, it has not been withdrawn and 

replaced by another rating—if it is 

greater than 12 months old when the 

FDIC calculates an institution’s 

assessment rate. To remedy this, the 

FDIC proposes to amend § 327.8(i) to 

read as follows: 

(i) Long-Term Debt Issuer Rating. A longterm 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 

FDIC proposes to amend 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 proposal is to amend 

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). 

12 CFR 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 

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five years as of the last day of any 

quarter for which it is being assigned.’’ 

In the FDIC’s view, this regulatory 

language allows a previously uninsured 

institution to be treated as an 

established institution based on charter 

date. To remedy this, the FDIC proposes 

to amend 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 been federally 

insured for at least five years as of the last 

day of any quarter for which it is being 

assessed. 

12 CFR 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 FDIC proposes 

to delete it. 

XIV. Effective Date 

The FDIC proposes that a final rule 

following this proposed rule would 

become effective on April 1, 2009, 

except for the proposed uniform 

increase of seven basis points to current 

assessment rates, which would take 

effect January 1, 2009, for the 

assessment for the first quarter of 2009 

only. 

XV. Request for Comments 

The FDIC seeks comment on every 

aspect of this proposed rulemaking. In 

particular, the FDIC seeks comment on 

the issues set out below. The FDIC asks 

that commenters include reasons for 

their positions. 

Brokered Deposits 

1. Under the proposal, the definition 

of brokered deposits for purposes of 

both the adjusted brokered deposit ratio 

and the brokered deposit adjustment 

would include sweep accounts and 

deposits received through a network on 

a reciprocal basis that meet the statutory 

definition of a brokered deposit, but 

would exclude high cost deposits, 

including those received through a 

listing service and the Internet, that do 

not meet the statutory definition of a 

brokered deposit. 

a. Should sweep accounts that meet 

the statutory definition of brokered 

deposits be excluded from the definition 

of brokered deposits for purposes of the 

adjusted brokered deposit ratio or the 

brokered deposit adjustment? If so, 

how? 

b. Should deposits received through a 

network on a reciprocal basis that meet 

the statutory definition of brokered 

deposits be excluded from the definition 

of brokered deposits for purposes of the 

adjusted brokered deposit ratio or the 

brokered deposit adjustment? If so, 

how? 

c. Should high cost deposits, 

including those received through a 

listing service and the Internet, that do 

not meet the statutory definition of a 

brokered deposit be included in the 

definition of brokered deposits for 

purposes of the adjusted brokered 

deposit ratio or the brokered deposit 

adjustment? If so, how? 

The Adjusted Brokered Deposit Ratio 

2. Should the proposed new adjusted 

brokered deposit ratio be included in 

the financial ratios method? 

3. Under the proposal, only brokered 

deposits in excess of 10 percent of 

domestic deposits would be considered. 

Is this the proper amount or should the 

percentage be higher or lower? 

4. Under the proposal, asset growth 

over the previous 4 years would have to 

be greater than 20 percent to potentially 

trigger the adjusted brokered deposit 

ratio. 

a. Should this amount be higher or 

lower? Should a different time period be 

used? 

b. Under the proposal, asset growth 

rates would be determined using data 

adjusted for mergers and acquisitions. 

An institution that acquires a new 

institution (one less than five years old) 

or that acquires branches from another 

institution would, in effect, be treated as 

if its assets had grown from internal 

growth (since its assets four years 

previously would not increase, but its 

current assets would). 

i. Should asset growth rates be 

determined using data adjusted for 

mergers and acquisitions? An argument 

can be made that growth from mergers 

and acquisitions is still growth. 

ii. Should growth arising from merger 

with or the acquisition of or by an 

institution with no assets four years 

previously be excluded from the asset 

growth determination? 

iii. Should growth arising from the 

acquisition of branches from another 

institution be excluded from the asset 

growth determination? If so, how could 

this be done, given that institutions do 

not report branch acquisitions in the 

Call Report or TFR? 

The Large Bank Method 

5. Under the proposal, the assessment 

rate for a large institution with a longterm debt issuer rating would be 

determined using a combination of the 

institution’s weighted average CAMELS 

component rating, its long-term debt 

issuer ratings (converted to numbers 

and averaged) and the financial ratios 

method assessment rate, each equally 

weighted. 

a. Should the financial ratios method 

be incorporated in this manner? 

b. Should the weight assigned to each 

of the three measures be equal, as 

proposed, or should different weights be 

assigned? 

The Large Bank Adjustment 

6. Under the proposal, the maximum 

large bank adjustment would be 

increased to one basis point. Should it 

be increased? Should it be increased 

further? 

The Unsecured Debt Adjustment— 

7. Under the proposal, an institution’s 

base assessment rate could be lowered 

for the unsecured debt adjustment. 

a. Should there be an unsecured debt 

adjustment? 

b. For a large institution, the 

unsecured debt adjustment would be 

determined by multiplying the 

institution’s long-term unsecured debts 

as a percentage of domestic deposits by 

20 basis points. 

i. Is this the proper way to calculate 

an unsecured debt adjustment for a large 

institution? 

ii. Should other amounts be included 

in the unsecured debt adjustment? 

iii. Should any amounts be excluded 

from the adjustment? 

c. Are the proposed definitions of 

long-term unsecured debts the right 

definitions or should they be changed? 

i. Should a long-term senior 

unsecured or subordinated debt that has 

put options or other provisions that 

would allow the holder to accelerate 

payment (for example, if capital fell 

below a certain level) be excluded from 

the definition? (Under the proposal, it 

would not be.) 

d. Under the proposal, for senior 

unsecured or subordinated debt to be 

considered ‘‘long-term,’’ it must have a 

remaining maturity of at least one year. 

Should this period be longer? If so, how 

long should it be? 

e. For a small institution, the 

unsecured debt adjustment would factor 

in qualified amounts of Tier 1 capital in 

addition to long-term unsecured debt. 

The amount of qualified Tier 1 capital 

would be the sum of one-half of the Tier 

1 capital amount between 10 percent 

and 15 percent of adjusted average 

assets (for Call Report filers) or adjusted 

total assets (for TFR filers) and the full 

amount of Tier 1 capital amount 

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exceeding 15 percent of adjusted 

average assets (for Call Report filers) or 

adjusted total assets (for TFR filers). 

i. Should Tier 1 capital be included in 

the unsecured debt adjustment for a 

small institution? 

ii. Some may be concerned that this 

proposal might, in effect, establish new 

capital standards. An alternative would 

be to count some portion of all Tier 1 

capital above 5 percent (the minimum 

amount needed for an institution to be 

well capitalized) in the unsecured debt 

adjustment for small institutions. Is this 

alternative preferable to the proposal? If 

so, what portion of Tier 1 capital above 

5 percent should be included in the 

unsecured debt adjustment? 

iii. Should the definition of qualified 

Tier 1 capital be otherwise expanded to 

include larger amounts of capital or 

reduced to exclude more capital? 

iv. Should other amounts be included 

in the unsecured debt adjustment? 

8. Under the proposal, any decrease in 

base assessment rates resulting from an 

unsecured debt adjustment would be 

limited to two basis points. Is this 

amount sufficient to encourage a 

significant number of institutions to 

issue additional subordinated debt or 

senior unsecured debt? Should the 

maximum possible adjustment be larger 

or smaller? 

9. Under the proposal, the unsecured 

debt adjustment could lower an 

institution’s rate below the minimum 

initial base assessment rate for its risk 

category. Should this be allowed? 

The Secured Liability Adjustment 

10. Under the proposal, an 

institution’s base assessment rates could 

be increased by the secured liability 

adjustment. 

a. Should there be a secured liabilities 

adjustment? 

b. Should the 15 percent ratio of 

secured liabilities to domestic deposits 

be increased or decreased? 

c. Should any increase in assessment 

rates resulting from the secured liability 

adjustment be limited to 50 percent or 

should another limit or no limit apply? 

Brokered Deposit Adjustment 

11. Under the proposal, an institution 

in Risk Category II, III or IV would also 

be subject to an adjustment for brokered 

deposits. 

a. Should a brokered deposit 

adjustment be made? 

b. Is the manner of calculating the 

adjustment appropriate or should it be 

changed? 

i. Should the threshold ratio of 

brokered deposits to domestic deposits 

be 10 percent or some higher or lower 

amount? 

ii. Should the multiplication factor be 

25 basis points or some higher or lower 

amount? 

c. Should the adjustment be limited to 

10 basis points? 

Assessment Rates 

12. Under the proposal, effective 

April 1, 2009, the spread between 

minimum and maximum initial base 

assessment rates in Risk Category I 

would increase from the current 2 basis 

points to an initial range of 4 basis 

points. Is this the appropriate spread or 

should it be greater or less? 

13. Under the proposal, effective 

April 1, 2009, based upon June 30, 2008 

data, the percentage of both large and 

small established Risk Category I 

institutions subject to: (a) The minimum 

initial base assessment rate would be set 

at 25 percent; and (b) the maximum 

initial base assessment rate would be set 

at 15 percent. (These percentages would 

change over time as institution’s risk 

measures change.) Are these the proper 

percentages or should they be higher or 

lower? 

14. Under the proposal, effective 

April 1, 2009, initial base assessment 

rates would be as set forth in Table 17 

below. 

TABLE 17—PROPOSED INITIAL BASE ASSESSMENT RATES

Risk category 

I * 

II III IV 

Minimum Maximum 

Annual Rates (in basis points) ............................................. 10 14 20 30 45 

* Initial base rates that were not the minimum or maximum rate would vary between these rates. 

Should these be the initial base 

assessment rates or should they be 

decreased or increased? 

15. Under the proposal, effective 

April 1, 2009, after applying all possible 

adjustments, total base assessment rates 

for each risk category would be as set 

out in Table 18 below. 

TABLE 18—RANGE OF TOTAL BASE ASSESSMENT RATES* 

Risk category 

I 

Risk category 

II 

Risk category 

III 

Risk category 

IV 

Initial base assessment rate ................................................................ 10—14 .............. 20 ..................... 30 ..................... 45 

Unsecured debt adjustment ................................................................. ¥2–0 ................ ¥2–0 ................ ¥2–0 ................ ¥2–0 

Secured liability adjustment ................................................................. 0–7 ................... 0–10 ................. 0–15 ................. 0–22.5 

Brokered deposit adjustment ............................................................... ........................... 0–10 ................. 0–10 ................. 0–10 

Total base assessment rate ......................................................... 8–21.0 .............. 18–40.0 ............ 28–55.0 ............ 43–77.5 

* All amounts for all risk categories are in basis points annually. Initial base rates that were not the minimum or maximum rate would vary between these rates. 

a. Are these the appropriate rates or 

should they be decreased or increased? 

b. Is the maximum assessment rates 

applicable to Risk Categories III and IV 

so high that they might cause the failure 

of an institution that might not 

otherwise fail? Should rates for Risk 

Categories III or IV be capped at lower 

amounts? If so, what should the cap(s) 

be? 

c. Under the proposal, an institution’s 

initial base assessment rate would be 

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66See 5 U.S.C. 603, 604 and 605. 67 5 U.S.C. 601. 68Throughout this regulatory flexibility analysis 

(unlike the rest of the notice of proposed 

rulemaking), a ‘‘small institution’’ refers to an 

institution with assets of $165 million or less. 

69An 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. 

70The proposed rates for the first of 2009 would 

not alter the present distribution of rates, but would 

uniformly raise the rates for all institutions, 

including all small institutions for RFA purposes. 

calculated and adjustments made in the 

following order: First, any large bank 

adjustment; second, any unsecured debt 

adjustment; third, any secured liability 

adjustment; and, finally, any brokered 

deposit adjustment. Is this the 

appropriate order or should it be 

changed? 

16. The proposed rule would continue 

to allow the FDIC Board to adopt actual 

rates that were higher or lower than 

total base assessment rates without the 

necessity of further notice-and-comment 

rulemaking, provided that: (1) The 

Board could not thereafter increase or 

decrease rates from one quarter to the 

next by more than three basis points; 

and (2) cumulative increases and 

decreases could not be more than three 

basis points higher or lower than the 

adjusted base rates without further 

notice-and-comment rulemaking. 

Should the Board the FDIC should 

retain this authority to make changes 

within prescribed limits to assessment 

rates, as proposed, without the necessity 

of additional notice-and-comment 

rulemaking? 

Assessment Rates for the First Quarter 

of 2009 

17. Should the FDIC uniformly 

increase current assessment rates by 

seven basis points for the first quarter of 

2009 as proposed? Should the increase 

be greater or less? Should any rate 

increase be postponed until the second 

quarter of 2009 when the proposed 

changes to the assessment system would 

take effect? 

Definition of well capitalized for 

assessment purposes 

18. Recently, some institutions have 

had to write down or write off the value 

of stock in Fannie Mae and Freddie 

Mac. If an institution is adequately or 

undercapitalized for assessment 

purposes, but would be well capitalized 

absent such a write-down or write-off, 

should it be treated as well capitalized 

for assessment purposes? If an 

institution is undercapitalized for 

assessment purposes, but would be 

adequately capitalized absent such a 

write-down or write-off, should it be 

treated as adequately capitalized for 

assessment purposes? If so, how would 

the institution receive such different 

capital treatment? Should it have to file 

a request for review with the FDIC? 

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 invites your comments 

on how to make this proposal easier to 

understand. For example: 

• Has the FDIC organized the material 

to suit your needs? If not, how could 

this material be better organized? 

• Are the requirements in the 

proposed regulation clearly stated? If 

not, how could the regulation be more 

clearly stated? 

• Does the proposed regulation 

contain language or jargon that is not 

clear? If so, which language requires 

clarification? 

• Would a different format (grouping 

and order of sections, use of headings, 

paragraphing) make the regulation 

easier to understand? If so, what 

changes to the format would make the 

regulation easier to understand? 

• What else could the FDIC do to 

make the regulation easier to 

understand? 

B. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires that each federal agency either 

certify that a proposed rule would not, 

if adopted in final form, have a 

significant economic impact on a 

substantial number of small entities or 

prepare an initial regulatory flexibility 

analysis of the proposal and publish the 

analysis for comment.66 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.67 The proposed 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 proposed 

technical and other changes to the 

FDIC’s assessment regulations. 

Nonetheless, the FDIC is voluntarily 

undertaking an initial regulatory 

flexibility analysis of the proposal and 

seeking comment on it. 

As of June 30, 2008, of the 8,451 

insured commercial banks and savings 

institutions, there were 4,758 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 proposed 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 that provides 

that the fund reserve ratio reach at least 

1.15 percent within five years (absent 

extraordinary circumstances) and by the 

FDIC’s aggregate insurance losses, 

expenses, investment income, and 

insured deposit growth, among other 

factors. In this analysis, each 

institution’s existing rate is increased 

uniformly so that total FDIC assessment 

revenue would equal that provided 

under the proposed rates. Therefore, 

beginning April 1, 2009, the proposed 

rule would merely alter the distribution 

of assessments among insured 

institutions compared to the adjusted 

existing rates. Using the data as of June 

30, 2008, the FDIC calculated the total 

assessments that would be collected 

under the base rate schedule in the 

proposed rule. 

The economic impact of the proposal 

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 proposed 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.68 69 70

Based on the June 2008 data, of the 

total of 4,758 small institutions, five 

percent would have experienced an 

increase in assessments equal to five 

percent or more of their total revenue. 

These figures do not reflect a significant 

economic impact on revenues for a 

substantial number of small insured 

institutions. Table 19 below sets forth 

the results of the analysis in more detail. 

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TABLE 19—PROPOSED ASSESSMENTS COMPARED TO A UNIFORM INCREASE IN ASSESSMENTS AS A PERCENTAGE OF

INSTITUTION TOTAL REVENUE

Change Number of 

institutions 

Percent of 

institutions 

More than 10 percent lower .................................................................................................................... 142 2.98 

5 to 10 percent lower ............................................................................................................................... 1,150 24.17 

0 to 5 percent lower ................................................................................................................................. 2,975 62.53 

0 to 5 percent higher ............................................................................................................................... 253 5.32 

5 to 10 percent higher ............................................................................................................................. 167 3.51 

More than 10 percent higher ................................................................................................................... 71 1.49 

Total .................................................................................................................................................. 4,758 100.00 

The FDIC performed a similar 

analysis to determine the impact on 

profits for small institutions. Based on 

June 2008 data, of those small 

institutions with reported profits, about 

6 percent would have an increase in 

assessments equal to 10 percent or more 

of their profits. Again, these figures do 

not reflect a significant economic 

impact on profits for a substantial 

number of small insured institutions. 

Table 20 sets forth the results of the 

analysis in more detail. 

TABLE 20—PROPOSED ASSESSMENTS COMPARED TO A UNIFORM INCREASE IN ASSESSMENTS AS A PERCENTAGE OF

INSTITUTION PROFITS* 

Change Number of 

institutions 

Percent of 

institutions 

More than 30 percent lower .................................................................................................................... 496 13.17 

20 to 30 percent lower ............................................................................................................................. 471 12.51 

10 to 20 percent lower ............................................................................................................................. 1,666 44.25 

5 to 10 percent lower ............................................................................................................................... 624 16.57 

0 to 5 percent lower ................................................................................................................................. 227 6.03 

0 to 10 percent more ............................................................................................................................... 63 1.67 

Greater than 10 percent .......................................................................................................................... 218 5.79 

Total .................................................................................................................................................. 3,765 100.00 

* Institutions with negative or no profit were excluded. These institutions are shown separately in Table 21. 

Table 20 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 proposal on these institutions by 

determining the annual assessment 

change (either an increase or a decrease) 

that would result. Table 21 below shows 

that just over 6 percent (61) of the 991 

small insured institutions with negative 

or no reported profits would have an 

increase of $20,000 or more in their 

annual assessments. 

TABLE 21—PROPOSED ASSESSMENTS COMPARED TO A UNIFORM INCREASE IN ASSESSMENTS FOR INSTITUTIONS WITH

NEGATIVE OR NO REPORTED PROFIT

Change in assessments Number of 

institutions 

Percent of 

institutions 

$20,000 decrease or more ...................................................................................................................... 62 6.26 

$10,000–$20,000 decrease ..................................................................................................................... 100 10.09 

$5,000–$10,000 decrease ....................................................................................................................... 213 21.49 

$1,000–$5,000 decrease ......................................................................................................................... 349 35.22 

$0–$1,000 decrease ................................................................................................................................ 63 6.36 

$0–$10,000 increase ............................................................................................................................... 89 8.98 

$10,000–$20,000 increase ...................................................................................................................... 54 5.45 

$20,000 increase or more ....................................................................................................................... 61 6.16 

Total .................................................................................................................................................. 991 100.0 

The proposed rule does not directly 

impose any ‘‘reporting’’ or 

‘‘recordkeeping’’ requirements within 

the meaning of the Paperwork 

Reduction Act. The compliance 

requirements for the proposed 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, if adopted in final form, the 

proposed rule would not have a 

significant economic impact on a 

substantial number of small institutions 

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71 5 U.S.C. 605. 

within the meaning of those terms as 

used in the RFA.71

Commenters are invited to provide 

the FDIC with any information they may 

have about the likely quantitative effects 

of the proposal on small insured 

depository institutions (those with $165 

million or less in assets). 

XVII. 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. 

A. 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 proposes to amend 

chapter III of title 12 of the Code of 

Federal Regulations as follows: 

PART 327—ASSESSMENTS 

1. The authority citation for part 327 

continues to read as follows: 

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

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

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

109–173, 119 Stat. 3605. 

2. Revise § 327.3(a)(1) to read as 

follows: 

§ 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 report of 

condition for that quarter. 

* * * * * 

4. Revise § 327.8(g), (h), (i), (l), and 

(m), and add paragraphs (o), (p), (q) and 

(r) 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 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. 

(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 

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 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 

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), (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 into 

a new institution, 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 section. 

(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 

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61584 Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules 

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 reported on reports of 

condition (Call Reports and Thrift 

Financial Reports). 

(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 report of 

condition for the reporting period; 

however, subordinated debt shall also 

include limited-life preferred stock as 

defined in the 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. 

5. Revise §§ 327.9 and 327.10 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)(i), (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)(i), (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 

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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; 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. 

The six financial ratios are: Tier 1 

Leverage Ratio; Loans past due 30—89 

days/gross assets; Nonperforming 

assets/gross assets; Net loan charge-offs/ 

gross assets; 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%. Appendix A to this 

subpart contains the initial values of the 

pricing multipliers and uniform 

amount, describes their derivation, and 

explains how they will be periodically 

updated. 

(i) Publication 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 

whose initial base assessment rate is 

determined using the financial ratios 

method moving from Risk Category II, 

III or IV to Risk Category I, 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 financial ratios method, 

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. 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. 

(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. An 

institution’s initial base assessment rate 

using the financial ratios method will be 

converted from the range of initial base 

assessment rates to a scale of from 1 to 

3 by subtracting 8 from its initial base 

assessment rate (expressed in basis 

points) and dividing the result by 2. The 

quotient 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 1.764 (which shall be 

the pricing multiplier), and the products 

will be summed. To this result will be 

added 1.651 (which shall be a uniform 

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; 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 

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maximum total base assessment rate in 

effect for Risk Category I institutions for 

that quarter. 

(i) Implementation of Large Bank 

Method Changes between Risk 

Categories. If, during a quarter, a 

CAMELS 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, and adjusted for 

the actual assessment rates set by the 

Board under § 327.10(c). If, during a 

quarter, a CAMELS 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. 

(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) , (5), and (6)) 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 5.291 (which shall be the pricing 

multiplier). To this result will be added 

1.651 (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 and adjusted for 

assessment rates set by the FDIC 

pursuant to § 327.10(c), 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 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 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 in effect for 

the quarter. 

(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, 

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 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 

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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 their 

initial base assessment rates for 

unsecured debt, based on the ratio of 

long-term unsecured debt (and, for 

small institutions as defined in 

paragraph (d)(5)(ii) of this section, 

specified amounts of Tier 1 capital) to 

domestic deposits. Any such 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 

20 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 one-half of the amount 

between 10 percent and 15 percent of 

adjusted average assets (for institutions 

that file Call Reports) or adjusted total 

assets (for institutions that file Thrift 

Financial Reports) and the full amount 

of Tier 1 capital exceeding 15 percent of 

adjusted average assets (for institutions 

that file Call Reports) or adjusted total 

assets (for institutions that file Thrift 

Financial Reports). The ratio of the sum 

of qualified Tier 1 capital and long-term 

unsecured debt to domestic deposits 

will be multiplied by 20 basis points to 

produce the unsecured debt adjustment 

for small institutions. 

(iii) Limitation—No unsecured debt 

adjustment for any institution shall 

exceed two basis points. 

(iv) Applicable reports of condition— 

Ratios for any given quarter shall be 

calculated from 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 longterm subordinated debt in their 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 liabilities 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 initial base 

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 thrifts— 

Secured liabilities for thrifts include 

Federal Home Loan Bank advances as 

reported in quarterly thrift financial 

reports. Secured liabilities for thrifts 

also include securities sold under 

repurchase agreements, secured Federal 

funds purchased or other borrowings 

that are secured when those items are 

separately reported in thrift financial 

reports. Until that time, 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 15 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 15 percent, the institution’s initial 

base assessment rate (after taking into 

account any adjustment under 

paragraphs (d)(5) or (6) of this section) 

will be multiplied by one plus the ratio 

of its secured liabilities to domestic 

deposits minus 0.15. Ratios of secured 

liabilities to domestic deposits shall be 

calculated from the report of condition 

filed by each institution as of the last 

day of the quarter. 

(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 initial base assessment rate 

adjustment for brokered deposits. Any 

such brokered deposit adjustment shall 

be made after any adjustment under 

paragraph (d)(5) or (6). A brokered 

deposit is as defined in Section 29 of the 

Federal Deposit Insurance Act (12 

U.S.C. 1831f). 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 the difference between an 

institution’s ratio of brokered deposits 

to domestic deposits and 0.10 by 25 

basis points. The maximum brokered 

deposit adjustment will be 10 basis 

points. Brokered deposit ratios for any 

given quarter are calculated from the 

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 

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61588 Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules 

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 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 (d)(9)(ii) and (iii) of this 

section. 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 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 reports of condition 

that have been filed, until the institution 

files four reports of condition. 

(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. The 

assessment rate will be determined by 

annualizing, where appropriate, 

financial ratios obtained from all reports 

of condition that have been filed, until 

it receives a long-term debt issuer rating. 

(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. 

§ 327.10 Assessment rate schedules. 

(a) Assessment Rate Schedule for First 

Quarter of 2009 and Initial Base 

Assessment Rate Schedule Beginning 

April 1, 2009. The annual assessment 

rate for an insured depository 

institution for the quarter beginning 

January 1, 2009 shall be the rate 

prescribed in the following schedule: 

TABLE 1 TO PARAGRAPH (A)—ASSESSMENT RATE SCHEDULE FOR FIRST QUARTER OF 2009 

Risk category 

I * 

II III IV 

Minimum Maximum 

Annual Rates (in basis points) ............................................. 12 14 17 35 50 

The annual initial base assessment rate 

for an insured depository institution 

beginning April 1, 2009, shall be the 

rate prescribed in the following 

schedule: 

TABLE 2 TO PARAGRAPH (A)—INITIAL BASE ASSESSMENT RATE SCHEDULE BEGINNING APRIL 1, 2009 

Risk category 

I * 

II III IV 

Minimum Maximum 

Annual Rates (in basis points) ............................................. 10 14 20 30 45 

* 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 10 to 14 basis points. 

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

Base Assessment Rate Schedule. The 

annual initial base assessment rates for 

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Risk Categories II, III, and IV shall be 20, 

30, 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. For 

assessment periods beginning on or after 

April 1, 2009, the total base assessment 

rates after adjustments for an insured 

depository institution shall be the rate 

prescribed in the following schedule. 

TABLE 1 TO PARAGRAPH (b)—TOTAL BASE ASSESSMENT RATE SCHEDULE (AFTER ADJUSTMENTS) * 

Risk category 

I 

Risk category 

II 

Risk category 

III 

Risk category 

IV 

Initial base assessment rate ................................................................ 10–14 ............... 20 ..................... 30 ..................... 45 

Unsecured debt adjustment ................................................................. ¥2–0 ................ ¥2–0 ................ ¥2–0 ................ ¥2–0 

Secured liability adjustment ................................................................. 0–7 ................... 0–10 ................. 0–15 ................. 0–22.5 

Brokered deposit adjustment ............................................................... ........................... 0–10 ................. 0–10 ................. 0–10 

Total base assessment rate ......................................................... 8–21.0 .............. 18–40.0 ............ 28–55.0 ............ 43–77.5 

* 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 8 to 21 basis points. 

(2) Risk Category II Total Base 

Assessment Rate Schedule. The annual 

total base assessment rates for Risk 

Category II shall range from 18 to 40 

basis points. 

(3) Risk Category III Total Base 

Assessment Rate Schedule. The annual 

total base assessment rates for Risk 

Category III shall range from 28 to 55 

basis points. 

(4) Risk Category IV Total Base 

Assessment Rate Schedule. The annual 

total base assessment rates for Risk 

Category IV shall range from 43 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. 

6. Revise Appendices A, B, and C 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 10 basis 

points, and 

• 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. 

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Equation 1

Downgrade(0,1) Tier 1 Leverage Ratio i,t T = + β β 0 1 ( ) +

 Loans past due 3 β2 0 to 89 days ratio

 

( ) i,t +

 Nonperforming asset ratio

 

β3 i,t ( ) +

 Net loan charge-off ratio

 

β4 i,t ( ) +

 Net income before taxe β5 s ratio

 Adju

i,t

6

( ) +

β sted brokered deposit ratio

 

( ) i,t +

 Weighted average CAMELS component rating β7 ( ) i,t

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

variable—the event being explained) is the 

incidence of downgrade from a composite 

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

during an on-site examination for an 

institution i between 3 and 12 months after 

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

multi-year period over which the model was 

estimated (as explained below). The 

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 assets growth rate factor that 

ranges from 0 to 1 as shown in Equation 2 

below. The assets growth rate factor (Ai,T) is 

calculated by subtracting 0.2 from the fouryear cumulative asset growth rate (expressed 

as a number rather than as a percentage), 

adjusted for mergers and acquisitions, and 

multiplying the remainder by 5. 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

Assets Assets

Assets

i,T

i,T

i,T i,T 4

i,T

where 

4

− A B i,T i,T















∗ 















02 5 1 0 ., . subject to 0 and ≤≤ ≥

The component rating for sensitivity to 

market risk (the ‘‘S’’ rating) is not available 

for years prior to 1997. As a result, and as 

described in Table A.1, the Statistical Model 

is estimated using a weighted average of five 

component ratings excluding the ‘‘S’’ 

component. In addition, delinquency and 

non-accrual data on government guaranteed 

loans are not available before 1993 for Call 

Report filers and before the third quarter of 

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

described in Table A.1, the Statistical Model 

is estimated without deducting delinquent or 

past-due government guaranteed loans from 

either the loans past due 30–89 days to gross 

assets ratio or the nonperforming assets to 

gross assets ratio. 

TABLE A.1—DEFINITIONS OF REGRESSORS

Regressor Description 

Tier 1 Leverage Ratio (%) .............. Tier 1 capital for Prompt Corrective Action (PCA) divided by adjusted average assets based on the definition for prompt corrective action. 

Loans Past Due 30–89 Days/Gross 

Assets (%).

Total loans and lease financing receivables past due 30 through 89 days and still accruing interest divided 

by gross assets (gross assets equal total assets plus allowance for loan and lease financing receivable 

losses and allocated transfer risk). 

Nonperforming Assets/Gross 

Assets (%).

Sum of total loans and lease financing receivables past due 90 or more days and still accruing interest, 

total nonaccrual loans and lease financing receivables, and other real estate owned divided by gross assets. 

Net Loan Charge-Offs/Gross 

Assets (%).

Total charged-off loans and lease financing receivables debited to the allowance for loan and lease losses 

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

months divided by gross assets. 

Net Income before Taxes/RiskWeighted Assets (%).Income before income taxes and extraordinary items and other adjustments for the most recent twelve 

months divided by risk-weighted assets. 


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72As used in this context, a ‘‘new institution’’ 

means an institution that has been chartered as a 

bank or thrift for less than five years. 

73For 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. 

TABLE A.1—DEFINITIONS OF REGRESSORS—Continued 

Regressor Description 

Adjusted Brokered Deposits/Domestic Deposits (%).Brokered deposits divided by domestic deposits less 0.10 multiplied by the asset growth rate factor (four 

year cumulative asset growth rate (expressed as a number rather than as a percentage) divided by 5 

less one). 

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 

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 the loans 

past due 30 to 89 days ratio and the 

nonperforming asset ratio are adjusted to 

exclude the maximum amount recoverable 

from the U.S. Government, its agencies or 

government-sponsored agencies, under 

guarantee or insurance provisions. Also, the 

weighted sum of six CAMELS component 

ratings is used, with weights of 25 percent 

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

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

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

components. 

Equation 3

Downgrade(0,1) Tier 1 Leverage Ratio iT iT = + β β 0 1 ( ) +

 Loans past due 3 β2 0 to 89 days ratio

 

( ) iT +

 Nonperforming asset ratio

 

β3 iT ( ) +

 Net loan charge-off ratio

 

β4 iT ( ) +

 Net income before taxes r β5 atio

 Adjusted

iT

6

( ) +

β brokered deposit ratio

 

( ) iT +

 Weighted average CAMELS component rating β7 ( ) iT

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, 2008.72 73 The 

minimum downgrade probability cutoff value 

is approximately 2 percent. 

• 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 

approximately 15 percent. 

IV. Derivation of Uniform Amount and 

Pricing Multipliers 

The uniform amount and pricing 

multipliers used to compute the annual base 

assessment rate in basis points, PiT, for any 

such institution i at a given time T will be 

determined from the Statistical Model, the 

minimum and maximum downgrade 

probability cutoff values, and minimum and 

maximum initial base assessment rates in 

Risk Category I as follows: 

Equation 4

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


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61592 Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules 

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 * 0.0181 and Min + 4 = a0 + 

a1 * 0.1505 

where 0.0181 is the minimum downgrade 

probability cutoff value and 0.1505 is the 

maximum downgrade probability cutoff 

value, results in values for the constant 

amount, a0, and the scale factor, a1: 

Equation 5

Min Min

Equa

α0

4 0 0181

0 1505 0 0181 = − 0 547 ∗− = − .(. . ) .

and tion 6

α1 = − = 4

0 1505 0 0181

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 0 547 30 211 30 211 + ∗ 0 1 .. . β β Tier 1 Leverage Ratio

 

( ) T 

  +

30 2. 11∗  ( )  

 β2 T Loans past due 30 to 89 days ratio +

 Nonperforming asset ratio 3 30 211 . ∗ β T

4 Net loa

 ( )  

 +

30 211 . ∗ β n charge-off ratio

 

( ) T 

  +

 Net income before taxes ratio

 

5 T 30 211 . ∗  ( )  

 β +

 Weighted average CAMELS 6 30 211 . ∗ β component rating

 

( ) T 

  +

30 211 . ∗ β7 ( ) Brokered Deposit-AssetGrowth Interaction TermT 

 

again subject to Min P ≤≤ + iT Min 4

where (Min¥0.547) + 30.211* b0 equals the 

uniform amount, 30.211* b 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. 


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Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules 61593 

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 

NUMERICAL CONVERSION OF LONGTERM DEBT ISSUER RATINGS—Continued 

Current long-term debt issuer 

rating 

Converted 

value 

Moody’s: 

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

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

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

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

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

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

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

Baa 1 .................................. 2.70 

Baa 2 or worse ................... 3.00 

Fitch’s: 

NUMERICAL CONVERSION OF LONGTERM DEBT ISSUER RATINGS—Continued 

Current long-term debt issuer 

rating 

Converted 

value 

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

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

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

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

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

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

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

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

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

Appendix C to Subpart A 

ADDITIONAL RISK CONSIDERATIONS FOR LARGE RISK CATEGORY I INSTITUTIONS

Information Source Examples of associated risk indicators or 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. 

Financial Performance and Condition Information.Asset Quality Measures (Level and Trend). 

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

lending). 

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

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

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

default. 

• Loan loss reserve trends. 

• Loan growth and underwriting trends. 

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

counterparty derivatives exposures) and hedging activities. 

Liquidity and Funding Measures (Level and Trend). 

• Composition of deposit and non-deposit funding sources. 

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

Interest Rate Risk and Market Risk (Level and Trend). 

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

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

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

• Credit default swap spreads. 

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

• Market-based measures of default probabilities. 

• Rating agency watch lists. 

• Market analyst reports. 

Information Source Examples of associated risk indicators or information 

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. 

Stress Considerations ..................... Loss Severity Indicators. 

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61594 Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules 

74As used in this context, a ‘‘new institution’’ 

means an institution that has been chartered as a 

bank or thrift for less than five years. 

ADDITIONAL RISK CONSIDERATIONS FOR LARGE RISK CATEGORY I INSTITUTIONS—Continued 

Information Source Examples of associated risk indicators or information 

• 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. 

Dated at Washington, DC, this 7th day of 

October, 2008. 

Federal Deposit Insurance Corporation. 

By order of the Board of Directors. 

Federal Deposit Insurance Corporation. 

Valerie Best, 

Assistant 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

S A f f = − ( ) 8 05 ∗ .

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

SS S S i w,i d,i f,i = ∗ + ∗+ ∗ (/ ) (/ ) (/ ) 13 13 13

The pricing multipliers were determined 

by minimum and maximum score cutoff 

values, which were computed as follows: 

• The minimum score cutoff value is the 

maximum score among the twenty-five 

percent of all large insured institutions in 

Risk Category I (excluding new institutions) 

with the lowest scores, computed as of June 

30, 2008.74 The minimum score cut-off value 

is 1.578. 

• The maximum score cutoff value is the 

minimum score among the fifteen percent of 

all large insured institutions in Risk Category 

I (excluding new institutions) with the 

highest scores, computed as of June 30, 2008. 

The maximum score cut-off value is 2.334. 

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

P S Min P Min subject to i,T i,T i,T = +∗ ≤ ≤ + α α 0 1 4

where a0 and a1 are, respectively, a constant 

term and a scale factor used to convert i,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 proposal, the minimum initial 

base assessment rate is 10 basis points, so 

Min equals 10.) 

Substituting minimum and maximum 

score cutoff values (1.578 and 2.334, 

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 = +∗ α α 0 1 1 578 .

Equation 5

Min += + ∗ 4 2 334 α α 0 1 .

Solving both equations simultaneously 

results in: 

Equation 6

α= − 0

∗

− Min Min = − 4 1 5782 334 1 578

8 349 .

(. . ) .

Equation 7

α =1 − = 4

2 334 1 578

5 291

(. . ) .


EP16OC08.027</MATH> EP16OC08.028</MATH> EP16OC08.029</MATH> EP16OC08.030</MATH> EP16OC08.031</MATH> EP16OC08.032</MATH> EP16OC08.033</MATH>mstockstill on PROD1PC66 with PROPOSALS2
Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules 61595 

75Beginning April 1, 2009, initial minimum base 

assessment rates would range from 10 to 45 basis 

points under the proposal. After adjustments to the 

base rates, total base rates would range from 8 to 

77.5 basis points. For the first quarter of 2009, 

assessment rates would range from 12 to 50 basis 

points. 

76For purposes of this analysis, the assessment 

base (like income) is not assumed to increase, but 

is assumed to remain at June 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. 

77The analysis does not incorporate any tax 

effects from an operating loss carry forward or carry 

back. 

Substituting equations 6 and 7 into 

equation 2 produces the following equation 

for PiT

Equation 8

P Min S S i,T w,iT d,iT = − + ∗ ∗ + ∗+ ( . ) . (/ ) (/ ) ( 8 349 5 291 1 3 1 3 1 3

8 349 1 764 1 764 1

/ )

( . ). .

 ∗  



= − + ∗ + ∗+

S

Min S S

f,iT

w,iT d,iT .764∗ S f,iT

where Min ¥8.349 is the uniform amount 

and 1.764 is a pricing multiplier. Since Min 

equals 10 under the proposal, the uniform 

amount equals 1.651. 

Appendix 2 

Unsecured Debt Adjustment for a Small 

Institution 

The unsecured debt adjustment for a small 

institution would be calculated based on the 

sum of the institution’s long-term senior 

unsecured debt, long-term subordinated debt 

and qualified Tier 1 capital as a percentage 

of total domestic deposits. 

Qualified Tier 1 capital depends on the 

institution’s Tier 1 capital and adjusted 

average or total assets and would be 

calculated in one of two ways. If the 

institution’s Tier 1 leverage ratio were greater 

than 15 percent, qualified Tier 1 capital 

would be calculated as: 

Equation 1

QC G Q ii i i =− ∗ ( ) 0 125 . , subject to > 0 

where Q is qualified Tier 1 capital, C is total 

Tier 1 capital and G is the adjusted average 

or total assets for an institution i. If the 

institution’s Tier 1 leverage ratio were greater 

than 10 percent but less than 15 percent, then 

qualified Tier 1 capital would be calculated 

as: 

Equation 2

Q CG Q i ii i =∗ − ∗  ( )  

 0 5 0 10 . . , subject to > 0 

The unsecured debt adjustment would 

then be calculated as: 

Equation 3

Adj USQ

D basis points, i

ii i

i

=  + +



 



∗ 20 subject to 2 Adj basis points i ≤

where Adj is the unsecured debt adjustment, 

U is long-term unsecured senior debt, S is 

long-term subordinated debt and D is 

domestic deposits for institution i. 

Appendix 3 

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 proposed deposit insurance assessments 

on the equity capital and profitability of all 

insured institutions, assuming that the Board 

adopts the proposed rule.75 The analysis 

assumes that each institution’s pre-tax, preassessment income in 2009 is equivalent to 

the amount reported over the four quarters 

ending in June 2008. Each institution’s rate 

under the proposed rate schedule is based on 

data as of June 30, 2008.76 In addition, 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.77

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 

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 


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61596 Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules 

78This excludes equity for those mentioned in the 

note to Tables A.1 and A.2. 

rate (that is, dividends as a fraction of net 

income) unchanged from the weighted 

average rate reported over the four quarters 

ending June 30, 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 June 30, 2008 was $1.35 trillion.78

Based on the assumptions for earnings 

described above, year-end 2009 equity capital 

is projected to equal $1.373 trillion if the 

recommended assessment rates are adopted. 

In the absence of an assessment, total equity 

would be an estimated $5 billion higher. 

Alternatively, total equity would be an 

estimated $2 billion higher if current rates 

remained in effect. 

Table A.1 shows the distribution of the 

effects of assessments (net of credits) on 2009 

equity capital levels across the banking 

industry compared to no assessments. On an 

industry weighted average basis, projected 

total assessments in 2009 would result in 

capital that is 0.3 percent less than in the 

absence of assessments. Table A.2 shows the 

distribution of the effects of the proposed 

increase in assessments on 2009 equity 

capital levels across the banking industry. On 

an industry weighted average basis, the 

projected increases in assessments in 2009 

would result in capital that is 0.1 percent less 

than if current assessment rates remained in 

effect. 

The analysis indicates that assessments 

would cause 6 institutions whose equity-toassets ratio would have exceeded 4 percent 

in the absence of assessments to fall below 

that percentage and 5 institutions to have 

below 2 percent equity-to-assets that 

otherwise would not have. Alternatively, 

compared to current assessments, the 

proposed increase in assessments would 

cause 3 institutions whose equity-to-assets 

ratio would otherwise have exceeded 4 

percent to fall below that threshold and 1 

institution to fall below 2 percent equity-toassets. 

TABLE A.1—PERCENTAGE REDUCTION IN EQUITY CAPTAL DUE TO ASSESSMENTS

[$ in billions] 

Reduction in capital (percent) Number of institutions 

Percent of institutions (percent) Total assets Percent of assets 

0.0–0.1 ..................................................................................................... 785 9 2,527 19 

0.1–0.2 ..................................................................................................... 835 10 1,191 9 

0.2–0.3 ..................................................................................................... 914 11 1,253 9 

0.3–0.4 ..................................................................................................... 928 11 4,617 35 

0.4–0.5 ..................................................................................................... 896 11 620 5 

0.5–1.0 ..................................................................................................... 2,770 33 1,573 12 

>1.0 .......................................................................................................... 1,210 15 1,515 11

Total .................................................................................................. 8,338 100 13,296 100 

TABLE A.2—PERCENTAGE REDUCTION IN EQUITY CAPITAL DUE TO PROPOSED INCREASES IN ASSESSMENTS

[$ in billions] 

Reduction in capital (percent) Number of institutions 

Percent of institutions (percent) Total assets Percent of assets (percent) 

0.0–0.1 ..................................................................................................... 1,893 23 4,348 33 

0.1–0.2 ..................................................................................................... 2,427 29 5,662 43 

0.2–0.3 ..................................................................................................... 1,940 23 995 7 

0.3–0.4 ..................................................................................................... 956 11 954 7 

0.4–0.5 ..................................................................................................... 444 5 580 4 

0.5–1.0 ..................................................................................................... 547 7 436 3 

> 1.0 ......................................................................................................... 131 2 322 2 

Total .................................................................................................. 8,338 100 13,296 100 

11 insured branches of foreign banks and 113 institutions having less than 4 quarters of reported earnings were excluded from this analysis. 

Equity capital referred to in this analysis is the same as defined under Generally Accepted Accounting Principles. 

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. Table A.3 shows that, under the 

proposed rate schedule, approximately 56 

percent of profitable institutions are 

projected to owe assessments that are less 

than 8 percent of income in 2009. The 

median projected reduction in income for 

profitable institutions under the 

recommended rates is 7.3 percent, while the 

weighted average reduction for the same 

institutions is 4.4 percent. For the industry 

as a whole (including profitable and 

unprofitable institutions), assessments in 

2009 would reduce income by 11 percent. 

Table A.4 shows that the proposed increase 

in assessments from current levels exceeds 5 

percent of income in 2009 for approximately 

33 percent of profitable institutions. The 

median projected reduction in income for 

profitable institutions from the proposed 

increase in rates under the proposal is 3.6 

percent, while the weighted average 

reduction for the same institutions is 2.2 

percent. For the industry as a whole 

(including profitable and unprofitable 

institutions), the increase in assessments in 

2009 would reduce income by 5.6 percent 

compared to current rates. 

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Federal Register / Vol. 73, No. 201 / Thursday, October 16, 2008 / Proposed Rules 61597 

TABLE A.3—ASSESSMENTS AS A PERCENT OF INCOME FOR PROFITABLE INSTITUTIONS

[$ in billions] 

Assessments as pct. of income 

Number of 

profitable 

institutions 

Percent of 

institutions 

(percent) 

Assets of 

profitable 

institutions 

Percent of 

assets 

(percent) 

0.0–4.0 ..................................................................................................... 1,036 15 4,021 42 

4.0–6.0 ..................................................................................................... 1,618 23 1,293 13 

6.0–8.0 ..................................................................................................... 1,303 18 2,367 25 

8.0–10.0 ................................................................................................... 768 11 336 3 

10.0–12.0 ................................................................................................. 475 7 396 4 

12.0–15.0 ................................................................................................. 497 7 311 3 

15.0–20.0 ................................................................................................. 428 6 274 3 

> 20.0 ....................................................................................................... 1,001 14 621 6 

Total .................................................................................................. 7,126 100 9,618 100 

TABLE A.4—PROPOSED INCREASES IN ASSESSMENTS AS A PERCENT OF INCOME FOR PROFITABLE INSTITUTIONS

[$ in billions] 

Assessments as pct. of income 

Number of 

profitable 

institutions 

Percent of 

institutions 

(percent) 

Assets of 

profitable 

institutions 

Percent of 

assets 

(percent) 

0.0–0.5 ..................................................................................................... 126 2 723 8 

0.5–1.0 ..................................................................................................... 87 1 573 6 

1.0–2.0 ..................................................................................................... 768 11 2,529 26 

2.0–3.0 ..................................................................................................... 1,702 24 1,185 12 

3.0–4.0 ..................................................................................................... 1,345 19 2,616 27 

4.0–5.0 ..................................................................................................... 754 11 437 5 

5.0–10.0 ................................................................................................... 1,382 19 919 10 

> 10.0 ....................................................................................................... 962 13 636 7 

Total .................................................................................................. 7,126 100 9,618 100 

Income is defined as income before taxes, extraordinary items, and deposit insurance assessments. Assessments are adjusted for the use of 

one-time credits. Unprofitable institutions are defined as those having negative merger-adjusted income (as defined above) over the 4 quarters 

ending June 30, 2008, and, by assumption, in 2009. There were 1212 unprofitable institutions excluded from Tables A.3 and A.4. 11 insured 

branches of foreign banks and 113 institutions having less than 4 quarters of reported earnings were excluded from this analysis. Figures may 

not sum to totals due to rounding. 

Dated at Washington DC, this 7th day of 

October, 2008. 

By order of the Board of Directors. Federal Deposit Insurance Corporation. 

Valerie J. Best, 

Assistant Executive Secretary. 

[FR Doc. E8–24186 Filed 10–8–08; 4:15 pm] 

BILLING CODE 6714–01–P 

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