[Federal Register Volume 73, Number 201 (Thursday, October 16, 2008)]
[Proposed Rules]
[Pages 61560-61597]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-24186]



[[Page 61559]]

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Part V





Federal Deposit Insurance Corporation





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12 CFR Part 327



Assessments; Proposed Rule; Establishment of FDIC Restoration Plan; 
Notice

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

[[Page 61560]]


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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.

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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:
    <bullet> Agency Web Site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on 
the Agency Web Site.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#0e4d6163636b607a7d4e484a474d20696178"><span class="__cf_email__" data-cfemail="f6b5999b9b93988285b6b0b2bfb5d8919980">[email protected]</span></a>. Include the RIN number in the 
subject line of the message.
    <bullet> Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
    <bullet> 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\
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    \1\ Federal Deposit Insurance Reform Act of 2005, Public Law 
109-171, 120 Stat. 9; Federal Deposit Insurance Conforming 
Amendments Act of 2005, Public Law 109-173, 119 Stat. 3601.
    \2\ After a year long review of the deposit insurance system, 
the FDIC made several recommendations to Congress to reform the 
deposit insurance system. See http://www.fdic.gov/deposit/insurance/initiative/direcommendations.html for details.
    \3\ Section 2109(a)(5) of the Reform Act. Section 7(b) of the 
Federal Deposit Insurance Act (12 U.S.C. 1817(b)).
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    The Federal Deposit Insurance Act, as amended by the Reform Act, 
continues to require that the assessment system be risk-based and 
allows the FDIC to define risk broadly. It defines a risk-based system 
as one based on an institution's probability of causing a loss to the 
deposit insurance fund due to the composition and concentration of the 
institution's assets and liabilities, the amount of loss given failure, 
and revenue needs of the Deposit Insurance Fund (the fund or DIF).\4\
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    \4\ 12 Section 7(b)(1)(C) of the Federal Deposit Insurance Act 
(12 U.S.C. 1817(b)(1)(C)). The Reform Act merged the former Bank 
Insurance Fund and Savings Association Insurance Fund into the 
Deposit Insurance Fund.
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    Before passage of the Reform Act, the deposit insurance funds' 
target reserve ratio--the designated reserve ratio (DRR)--was generally 
set at 1.25 percent. Under the Reform Act, however, the FDIC may set 
the DRR within a range of 1.15 percent to 1.50 percent of estimated 
insured deposits. If the reserve ratio drops below 1.15 percent--or if 
the FDIC expects it to do so within six months--the FDIC must, within 
90 days, establish and implement a plan to restore the DIF to 1.15 
percent within five years (absent extraordinary circumstances).\5\
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    \5\ Section 7(b)(3)(E) of the Federal Deposit Insurance Act (12 
U.S.C. 1817(b)(3)(E)).
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    The 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\
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    \6\ Section 7(b)(3)(E)(iii) of the Federal Deposit Insurance Act 
(12 U.S.C. 1817(b)(E)(iii)).
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    The Reform Act also restored to the FDIC's Board of Directors the 
discretion to price deposit insurance according to risk for all insured 
institutions regardless of the level of the fund reserve ratio.\7\
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    \7\ The Reform Act eliminated the prohibition against charging 
well-managed and well-capitalized institutions when the deposit 
insurance fund is at or above, and is expected to remain at or 
above, the designated reserve ratio (DRR). This prohibition was 
included as part of the Deposit Insurance Funds Act of 1996. Public 
Law 104-208, 110 Stat. 3009, 3009-479. However, while the Reform Act 
allows the DRR to be set between 1.15 percent and 1.50 percent, it 
also generally requires dividends of one-half of any amount in the 
fund in excess of the amount required to maintain the reserve ratio 
at 1.35 percent when the insurance fund reserve ratio exceeds 1.35 
percent at the end of any year. The Board can suspend these 
dividends under certain circumstances. The Reform Act also requires 
dividends of all of the amount in excess of the amount needed to 
maintain the reserve ratio at 1.50 when the insurance fund reserve 
ratio exceeds 1.50 percent at the end of any year. 12 U.S.C. 
1817(e)(2).
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    The Reform Act left in place the existing statutory provision 
allowing the FDIC to ``establish separate risk-based assessment systems 
for large and small members of the Deposit Insurance Fund.'' \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\
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    \8\ Section 7(b)(1)(D) of the Federal Deposit Insurance Act (12 
U.S.C. 1817(b)(1)(D)).
    \9\ Section 2104(a)(2) of the Reform Act amending Section 
7(b)(2)(D) of the Federal Deposit Insurance Act (12 U.S.C. 
1817(b)(2)(D)).
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The 2006 Assessments Rule

Overview
    On November 30, 2006, 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.
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    \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.
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    The 2006 assessments rule created four risk categories and named 
them Risk Categories I, II, III and IV. These four categories are based 
on two criteria: capital levels and supervisory ratings. Three capital 
groups--well capitalized, adequately capitalized, and 
undercapitalized--are based on the leverage ratio and risk-based 
capital ratios for regulatory capital purposes. Three supervisory 
groups, termed A, B, and C, are based upon the FDIC's consideration of 
evaluations provided by the institution's primary federal

[[Page 61561]]

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.)
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    \11\ The term ``primary federal regulator'' is synonymous with 
the statutory term ``appropriate federal banking agency.'' Section 
3(q) of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)).
    \12\ The 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.

                                     Table 1--Determination of Risk Category
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                                                                  Supervisory group
         Capital category          -----------------------------------------------------------------------------
                                                A                         B                         C
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Well Capitalized..................                        I
Adequately Capitalized............                          II                                              III
Undercapitalized..................                          III                                              IV
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    The 2006 assessments rule established the following base rate 
schedule and allowed the FDIC Board to adjust rates uniformly from one 
quarter to the next up to three basis points above or below the base 
schedule, 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.
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    \13\ The Board cannot adjust rates more than 2 basis points 
below the base rate schedule because rates cannot be less than zero.

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

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

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

These rates remain in effect. Any increase in rates above the actual 
rates in effect requires a new notice-and-comment 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:
    <bullet> The Tier 1 Leverage Ratio;
    <bullet> Loans past due 30-89 days/gross assets;
    <bullet> Nonperforming assets/gross assets;
    <bullet> Net loan charge-offs/gross assets; and

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    <bullet> Net income before taxes/risk-weighted assets.

The weighted CAMELS components and financial ratios are multiplied by 
statistically derived pricing multipliers and the products, along with 
a uniform amount applicable to all institutions subject to the 
financial ratios method, are summed to derive the assessment rate under 
the base rate schedule. If the rate derived is below the minimum for 
Risk Category I, however, the institution will pay the minimum 
assessment rate for the risk category; if the rate derived is above the 
maximum rate for Risk Category I, then the institution will pay the 
maximum rate for the risk category.
    The multipliers and uniform amount were derived in such a way to 
ensure that, as of June 30, 2006, 45 percent of small Risk Category I 
institutions (other than institutions less than 5 years old) would have 
been charged the minimum rate and approximately 5 percent would have 
been charged the maximum rate. While the FDIC has not changed the 
multipliers and uniform amount since adoption of the 2006 assessments 
rule, the percentages of institutions that have been charged the 
minimum and maximum rates have changed over time as institutions' 
CAMELS component ratings and financial ratios have changed. Based upon 
June 30, 2008 data, approximately 28 percent of small Risk Category I 
institutions (other than institutions less than 5 years old) were 
charged the minimum rate and approximately 19 percent were charged the 
maximum rate.
    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.
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    \14\ The final rule defined a large institution as an 
institution (other than an insured branch of a foreign bank) that 
has $10 billion or more in assets as of December 31, 2006 (although 
an institution with at least $5 billion in assets may also request 
treatment as a large institution). If, after December 31, 2006, an 
institution classified as small reports assets of $10 billion or 
more in its reports of condition for four consecutive quarters, the 
FDIC will reclassify the institution as large beginning the 
following quarter. If, after December 31, 2006, an institution 
classified as large reports assets of less than $10 billion in its 
reports of condition for four consecutive quarters, the FDIC will 
reclassify the institution as small beginning the following quarter. 
12 CFR 327.8(g) and (h) and 327.9(d)(6).
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    The multipliers and uniform amount were derived in such a way to 
ensure that, as of June 30, 2006, about 45 percent of Risk Category I 
large institutions (other than institutions less than 5 years old) 
would have been charged the minimum rate and approximately 5 percent 
would have been charged the maximum rate. These percentages have 
changed little from quarter to quarter thereafter even though industry 
conditions have changed. Based upon June 30, 2008, data, and ignoring 
the large bank adjustment (described below), approximately 45 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\
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    \15\ ROCA stands for Risk Management, Operational Controls, 
Compliance, and Asset Quality. Like CAMELS components, ROCA 
component ratings range from 1 (best rating) to a 5 rating (worst 
rating). Risk Category 1 insured branches of foreign banks generally 
have a ROCA composite rating of 1 or 2 and component ratings ranging 
from 1 to 3.
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    For any Risk Category I large institution or insured branch of a 
foreign bank, initial assessment rate determinations may be modified up 
to half a basis point upon review of additional relevant information 
(the large bank adjustment).\16\
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    \16\ The FDIC has issued additional Guidelines for Large 
Institutions and Insured Foreign Branches in Risk Category I (the 
large bank guidelines) governing the large bank adjustment. 72 FR 
27122 (May 14, 2007).
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    With certain exceptions, beginning in 2010, the 2006 assessments 
rule charges new institutions (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.
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    \17\ 71 FR 69325 (Nov. 30, 2006) and 72 FR 65576 (Nov. 21, 
2007).
    \18\ Beginning 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.
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    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

[[Page 61563]]

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.
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    \19\ On 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 reserve ratio, which is 
the first date after October 7, 2013 for which the reserve ratio 
will be known.
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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 risk-based 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.
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    \20\ Long-term unsecured debt includes senior unsecured and 
subordinated debt.
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    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.
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    \21\ Subject 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)
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    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.

[[Page 61564]]



                                 Table 4--Proposed Initial Base Assessment Rates
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                                                                           Risk category
                                                 ---------------------------------------------------------------
                                                              I*
                                                 ----------------------------     II          III         IV
                                                     Minimum       Maximum
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Annual Rates (in basis points)..................           10            14          20          30          45
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* 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
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                                           Risk  category  I            Risk  category  II          Risk  category  III           Risk  category  IV
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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
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* 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
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                                                                           Risk category
                                                 ---------------------------------------------------------------
                                                             I\*\
                                                 ----------------------------     II          III         IV
                                                     Minimum       Maximum
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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 non-
technical 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 
risk-based assessments or that a new method of differentiating for 
risk should be used. In any of these events, changes would be made 
through notice-and-comment rulemaking.\22\
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    \22\ 71 FR 69,282, 69,290.

    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

[[Page 61565]]

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.<SUP>23 24</SUP> 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.
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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).
    \24\ An institution that four years previously had filed no 
report of condition or had reported no assets would be treated as 
having no growth unless it was a participant in a merger or 
acquisition (either as the acquiring or acquired institution) with 
an institution that had reported assets four years previously.
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    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.
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    \25\ The ratio of brokered deposits to domestic deposits and 
four-year asset growth rate would remain unrounded (to the extent of 
computer capabilities) when calculating the adjusted brokered 
deposit ratio. The adjusted brokered deposit ratio itself (expressed 
as a percentage) would be rounded to three digits after the decimal 
point prior to being used to calculate the assessment rate.

                                                        Table 7--Adjusted Brokered Deposit Ratio
--------------------------------------------------------------------------------------------------------------------------------------------------------
                     A                                B                     C                     D                     E                     F
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Ratio of brokered
                                                                  deposits to domestic                                                Adjusted brokered
                                              Ratio of brokered     deposits minus 10     Cumulative asset      Asset growth rate       deposit ratio
                  Example                        deposits to        percent threshold     growth rate over           factor            (Column C times
                                              domestic deposits    (Column B minus  10       four years                                   column E)
                                                                        percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
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 four-year 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 [middot] (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

[[Page 61566]]

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.
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    \26\ For 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).
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    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.
---------------------------------------------------------------------------

    \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.
    \28\ For the adjusted brokered deposit ratio, assets at the end 
of each year are compared to assets at the end of the year four 
years earlier, so assets at the end of 1988, for example, are 
compared to assets at the end of 1984.

                Table 8--Proposed New Pricing Multipliers
------------------------------------------------------------------------
                                                              Pricing
                      Risk measures*                       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.
---------------------------------------------------------------------------

    \29\ Appendix A provides the derivation of the pricing 
multipliers and the uniform amount to be added to compute an 
assessment rate. The rate derived will be an annual rate, but will 
be determined every quarter.
    \30\ The uniform amount would be the same for all institutions 
in Risk Category I (other than large institutions that have long-
term debt issuer ratings, insured branches of foreign banks and, 
beginning in 2010, new institutions).
---------------------------------------------------------------------------

    To compute the values of the uniform amount and pricing multipliers 
shown above, the FDIC chose cutoff values for the predicted 
probabilities of downgrade such that, using June 30, 2008 Call Report 
and TFR data: (1) 25 percent of small institutions in Risk Category I 
(other than institutions less than 5 years old) would have been charged 
the minimum initial assessment rate; and (2) 15 percent of small 
institutions in Risk Category I (other than institutions less than 5 
years old) would have been charged the maximum initial assessment 
rate.\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.
---------------------------------------------------------------------------

    \31\ The cutoff value for the minimum assessment rate is a 
predicted probability of downgrade of approximately 2 percent. The 
cutoff value for the maximum assessment rate is approximately 15 
percent.
---------------------------------------------------------------------------

    In comparison, under the 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\
---------------------------------------------------------------------------

    \32\ These are the initial base rates for Risk Category I 
proposed below.

[[Page 61567]]



                                             Table 9--Initial Base Assessment Rates for Three Institutions *
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               Institution 1              Institution 2              Institution 3
                                                                        --------------------------------------------------------------------------------
                                                              Pricing                 Contribution               Contribution               Contribution
                                                             multiplier      Risk          to           Risk          to           Risk          to
                                                                           measure     assessment     measure     assessment     measure     assessment
                                                                            value         rate         value         rate         value         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.
---------------------------------------------------------------------------

    \33\ Under 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \34\ Reports of condition include Reports of Income and 
Condition and Thrift Financial Reports.
    \35\ Pursuant to existing supervisory practice, the FDIC does 
not assign a different component rating from that assigned by an 
institution's primary federal regulator, even if the FDIC disagrees 
with a CAMELS component rating assigned by an institution's primary 
federal regulator, unless: (1) the disagreement over the component 
rating also involves a disagreement over a CAMELS composite rating; 
and (2) the disagreement over the CAMELS composite rating is not a 
disagreement over whether the CAMELS composite rating should be a 1 
or a 2. The FDIC has no plans to alter this practice.
---------------------------------------------------------------------------

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 33\1/3\ percent weight in 
determining the large bank method assessment rate, as would both the 
weighted average CAMELS component rating and debt-agency ratings.
---------------------------------------------------------------------------

    \36\ The 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.
---------------------------------------------------------------------------

    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 long-term 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,

[[Page 61568]]

and the uniform amount would be 1.651.\37\
---------------------------------------------------------------------------

    \37\ Appendix 1 provides the derivation of the pricing 
multipliers and the uniform amount.
---------------------------------------------------------------------------

    In recent periods, assessment rates for some large institutions 
have not responded in a timely manner to rapid changes in these 
institutions' financial conditions. 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).<SUP>38 39</SUP> These cutoff values would be used in 
future periods, which could lead to different percentages of 
institutions being charged the minimum and maximum rates.
---------------------------------------------------------------------------

    \38\ The 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.
    \39\ A ``new'' institution, as defined in 12 CFR 327.8(l) is 
generally one that is less than 5 years old, but there are several 
exceptions, including, for example, 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.
---------------------------------------------------------------------------

    Large institutions that lack a long-term 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:
    <bullet> 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) [middot] 0.5) to produce a financial ratios 
score of 1.75.
    <bullet> 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 [middot] 1.764 + 1.65 [middot] 1.764 + 1.75 
[middot] 1.764) to produce 8.996.
    <bullet> 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\
---------------------------------------------------------------------------

    \40\ The FDIC has issued additional Guidelines for Large 
Institutions and Insured Foreign Branches in Risk Category I (the 
large bank guidelines) governing these large bank adjustments. 72 FR 
27122 (May 14, 2007).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.

[[Page 61569]]

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.
---------------------------------------------------------------------------

    \42\ For this purpose, an institution would be ``small'' if it 
met the definition of a small institution in 12 CFR 327.8(g)--
generally, an institution with less than $10 billion in assets--
except that it would not include an institution that would otherwise 
meet the definition for which the FDIC had granted a request to be 
treated as a large institution pursuant to 12 CFR 327.9(d)(6).
---------------------------------------------------------------------------

    For a large institution, the unsecured debt adjustment would be 
determined by multiplying the institution's long-term 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 [middot] 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 [middot] 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\
---------------------------------------------------------------------------

    \43\ Adjusted average assets would be used for Call Report 
filers; adjusted total assets would be used for TFR filers.
    \44\ The percentage of qualified Tier 1 capital and long-term 
unsecured debt to domestic deposits will remain unrounded (to the 
extent of computer capabilities). The unsecured debt adjustment will 
be rounded to two digits after the decimal point prior to being 
applied to the base assessment rate. Appendix 2 describes the 
unsecured debt adjustment for a small institution mathematically.
---------------------------------------------------------------------------

    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 [middot] (1.1 [middot] 0.5 [middot] (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 [middot] (1.1 [middot] (0.17-0.15)). The sum of the two 
portions of the adjustment equals 0.99 basis points.
---------------------------------------------------------------------------

    \45\ Adjusted average assets would be used for Call Report 
filers; adjusted total assets would be used for TFR filers.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \46\ Other borrowed money is reported on the Call Report in 
Schedule RC, item 16 and on the Thrift Financial Report as the sum 
of items SC720, SC740, and SC760.
    \47\ The definition of ``subordinated debt'' in the Call Report 
is contained in the Glossary under ``Subordinated Notes and 
Debentures.'' For the June 30, 2008 Call Report, the definition 
read, in pertinent part, as follows:
    Subordinated Notes and Debentures: A subordinated note or 
debenture is a form of debt issued by a bank or a consolidated 
subsidiary. When issued by a bank, a subordinated note or debenture 
is not insured by a federal agency, is subordinated to the claims of 
depositors, and has an original weighted average maturity of five 
years or more. Such debt shall be issued by a bank with the approval 
of, or under the rules and regulations of, the appropriate federal 
bank supervisory agency * * *
    When issued by a subsidiary, a note or debenture may or may not 
be explicitly subordinated to the deposits of the parent bank * * *
    For purposes of the 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.
---------------------------------------------------------------------------

    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 
long-term 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

[[Page 61570]]

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\
---------------------------------------------------------------------------

    \48\ Under 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \49\ Overall, whether substituting secured liabilities for 
deposits increases, decreases, or leaves unchanged the FDIC's loss 
given failure also depends on how the substitution affects the 
proportion of insured and uninsured deposits, but FDIC's assessment 
revenue will always decline with a substitution.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \50\ Under 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.
---------------------------------------------------------------------------

    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

[[Page 61571]]

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 institutions-particularly weaker ones-
typically pay higher rates of interest on brokered deposits. When an 
institution becomes noticeably weaker or its capital declines, the 
market or statutory restrictions may limit its ability to attract, 
renew or roll over these deposits, which can create significant 
liquidity challenges.\51\
---------------------------------------------------------------------------

    \51\ An adequately capitalized institution can accept, renew and 
rollover brokered deposits only by obtaining a waiver from the FDIC. 
Even then, interest rate restrictions apply. An undercapitalized 
institution may not accept, renew or rollover brokered deposits at 
all. Section 29 of the Federal Deposit Insurance Act (12 U.S.C. 
1831f).
---------------------------------------------------------------------------

    Also, significant reliance on brokered deposits tends to decrease 
greatly the franchise value of a failed institution. In a typical 
failure, the FDIC seeks to find a buyer for a failed institution's 
branches among the institutions located in or around the service area 
of the failed institution. A potential buyer usually seeks to increase 
its market share in the service area of the failed institution through 
the acquisition of the failed institution and its assets and deposits, 
but most brokered deposits originate from outside an institution's 
market area. The more core deposits that the buyer can obtain through 
the acquisition of the failed institution, the greater the market share 
of deposits (and the loans and other products that typically follow the 
core deposits) it can capture. Furthermore, brokered deposits may not 
be part of many potential buyers' business plans, limiting the field of 
buyers. Thus, the lower franchise value of the failed institution 
created by its reliance on brokered deposits leads to a lower price for 
the failed institution, which increases the FDIC's losses upon failure.
    In addition, as noted earlier, several institutions that have 
recently failed have experienced rapid asset growth before failure and 
have funded this growth through brokered deposits. The FDIC believes 
that these reasons warrant the additional charge for significant levels 
of brokered deposits.
    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 [middot] (0.4-0.1)). Because this amount is less than 
the maximum possible brokered deposit adjustment of 10 basis points, 
the brokered deposit adjustment 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.
---------------------------------------------------------------------------

    \52\ An 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \53\ Subject 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)
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \54\ Certain credit unions that convert to a bank or thrift 
charter and certain otherwise new insured institutions in a holding 
company structure may be considered established institutions. Both 
before and after January 1, 2010, any such institution that is well 
capitalized but has not yet received CAMELS component ratings will 
be assessed at two basis points above the minimum initial base 
assessment rate applicable to Risk Category I institutions.
---------------------------------------------------------------------------

    Either before or after January 1, 2010: no new institution, 
regardless of risk category, 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

[[Page 61572]]

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \56\ Changes in the projected average rates under the proposed 
schedule over time reflect projected changes in the migration of 
institutions within and across risk categories.
---------------------------------------------------------------------------

    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

[[Page 61573]]

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
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         If institution failures from 2008 to 2013 cost in total: *
            Insured deposit growth rate            -----------------------------------------------------------------------------------------------------
                                                      $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

[[Page 61574]]

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \58\ Section 2104 of the Reform Act (amending section 7(b)(2) of 
the Federal Deposit Insurance Act, 12 U.S.C. 1817(b)(2)(B)). The 
risk factors referred to in factor (iv) include:
    (i) The probability that the Deposit Insurance Fund will incur a 
loss with respect to the institution, taking into consideration the 
risks attributable to--
    (I) Different categories and concentrations of assets;
    (II) different categories and concentrations of liabilities, 
both insured and uninsured, contingent and noncontingent; and
    (III) any other factors the Corporation determines are relevant 
to assessing such probability;
    (ii) the likely amount of any such loss; and
    (iii) the revenue needs of the Deposit Insurance Fund.
    Section 7(b)(1)(C) of the Federal Deposit Insurance Act (12 
U.S.C. 1817(b)(1)(C)).
---------------------------------------------------------------------------

    The factors considered in setting assessment rates are discussed in 
more detail below.
Case Resolution Expenses (Insurance Fund Losses)
    Insurance fund losses from recent insured institution failures and 
an expected higher rate of failures over the next few years will 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

[[Page 61575]]

project the cost of failure to the fund over the next few years.\59\
---------------------------------------------------------------------------

    \59\ For 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 well-rated 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \60\ Future interest rate assumptions are based on consideration 
of recent Blue Chip Financial Forecasts as well as recent forward 
rate curves. Forward rates are expected yields on securities of 
varying maturities for specific future points in time that are 
derived from the term structure of interest rates. (The term 
structure of interest rates refers to the relationship between 
current yields on comparable securities with different maturities.)
---------------------------------------------------------------------------

Assessment Revenue, Credit Use, and the Distribution of Assessments
    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\
---------------------------------------------------------------------------

    \61\ Section 7(b)(3)(E)(iv) of the Federal Deposit Insurance Act 
(12 U.S.C. 1817(b)(3)(E)(iv)).
    \62\ For 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)).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \63\ The assessment base is almost equal to total domestic 
deposits.

                 Table 14--Distribution of Initial Base Assessment Rates and Domestic Deposits*
                                           [Data as of June 30, 2008]
----------------------------------------------------------------------------------------------------------------
                                      Initial                                        Domestic       Percent of
          Risk category             assessment       Number of      Percent of     deposits  (in     domestic
                                       rate        institutions    institutions   billions of $)     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.


[[Page 61576]]


                  Table 15--Distribution of Total Base Assessment Rates and Domestic Deposits *
                                           [Data as of June 30, 2008]
----------------------------------------------------------------------------------------------------------------
                                  Total base                                         Domestic       Percent of
         Risk category            assessment       Number of       Percent of     deposits  (in      domestic
                                     rate        institutions     institutions   billions  of $)     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]
----------------------------------------------------------------------------------------------------------------
                                                                                     Domestic      Percentage of
Compared to a uniform increase in current rates,     Number of      Percent of     deposits (in   total domestic
               proposed rates are:                 institutions    institutions   billions of $)     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.

[[Page 61577]]

[GRAPHIC] [TIFF OMITTED] TP16OC08.020

    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

[[Page 61578]]

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\
---------------------------------------------------------------------------

    \64\ 12 CFR 327.9(d)(5).
---------------------------------------------------------------------------

    The opposite holds true for a small institution or a large 
institution subject to the financial ratios method when it moves from 
Risk Category I to Risk Category II, III or IV during a quarter. A new 
Risk Category I assessment rate is developed for the quarter in which 
the institution moves to Risk Category II, III or IV.\65\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 long-term debt 
obligations by one of the named ratings companies. ``Current rating'' 
is defined in Sec.  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 Sec.  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 Sec.  327.8(i) to read as follows:

    (i) Long-Term Debt Issuer Rating. A long-term debt issuer rating 
shall mean a rating of an insured depository institution's long-term 
debt obligations by Moody's Investor Services, Standard & Poor's, or 
Fitch Ratings that has not been withdrawn before the end of the 
quarter being assessed. A withdrawn rating shall mean one that has 
been withdrawn by the rating agency and not replaced with another 
rating by the same agency. A long-term debt issuer rating does not 
include a rating of a company that controls an insured depository 
institution, or an affiliate or subsidiary of the institution.

    Consistent with this amendment, the FDIC proposes to amend two 
references to long-term debt issuer rating, as defined in Sec.  
327.8(i), ``in effect at the end of the quarter being assessed'' that 
appear in 12 CFR 327.9(d) and 12 CFR 327.9(d)(2). The 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 Sec.  
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

[[Page 61579]]

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 long-term 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

[[Page 61580]]

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

[[Page 61581]]

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-Leach-Bliley Act, Public Law 106-102, 113 
Stat. 1338, 1471 (Nov. 12, 1999), requires the federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The FDIC invites your comments on how to make this 
proposal easier to understand. For example:
    <bullet> Has the FDIC organized the material to suit your needs? If 
not, how could this material be better organized?
    <bullet> Are the requirements in the proposed regulation clearly 
stated? If not, how could the regulation be more clearly stated?
    <bullet> Does the proposed regulation contain language or jargon 
that is not clear? If so, which language requires clarification?
    <bullet> 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?
    <bullet> 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.
---------------------------------------------------------------------------

    \66\ See 5 U.S.C. 603, 604 and 605.
    \67\ 5 U.S.C. 601.
---------------------------------------------------------------------------

    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.<SUP>68 69 70</SUP>
---------------------------------------------------------------------------

    \68\ Throughout 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.
    \69\ An institution's total revenue is defined as the sum of its 
annual net interest income and non-interest income. An institution's 
profit is defined as income before taxes and extraordinary items, 
gross of loan loss provisions.
    \70\ The 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.
---------------------------------------------------------------------------

    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.

[[Page 61582]]



    Table 19--Proposed Assessments Compared to a Uniform Increase in
        Assessments as a Percentage of Institution Total Revenue
------------------------------------------------------------------------
                                       Number of          Percent of
             Change                  institutions        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*
------------------------------------------------------------------------
                                       Number of          Percent of
             Change                  institutions        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
------------------------------------------------------------------------
                                       Number of          Percent of
      Change in assessments          institutions        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

[[Page 61583]]

within the meaning of those terms as used in the RFA.\71\
---------------------------------------------------------------------------

    \71\ 5 U.S.C. 605.
---------------------------------------------------------------------------

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


Sec.  327.3  Payment of assessments.

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


Sec.  327.6   Terminating transfers; other terminations of insurance.

* * * * *
    (b) Assessment for quarter in which the terminating transfer 
occurs--(1) Acquirer using Average Daily Balances. If an acquiring 
institution's assessment base is computed using average daily balances 
pursuant to Sec.  327.5, the terminating institution's assessment for 
the quarter in which the terminating transfer occurs shall be reduced 
by the percentage of the quarter remaining after the terminating 
transfer and calculated at the acquiring institution's rate and using 
the assessment base reported in the terminating institution's report of 
condition for that quarter.
* * * * *
    4. Revise Sec.  327.8(g), (h), (i), (l), and (m), and add 
paragraphs (o), (p), (q) and (r) to read as follows:


Sec.  327.8  Definitions.

* * * * *
    (g) Small Institution. An insured depository institution with 
assets of less than $10 billion as of December 31, 2006 (other than an 
insured branch of a foreign bank or an institution classified as large 
for purposes of Sec.  327.9(d)(8)) shall be classified as a small 
institution. If, after December 31, 2006, an institution classified as 
large under paragraph (h) of this section 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 Sec.  327.9(d)(8) or an insured depository institution with 
assets of $10 billion or more as of December 31, 2006 (other than an 
insured branch of a foreign bank) shall be classified as a large 
institution. If, after December 31, 2006, an institution classified as 
small under paragraph (g) of this section reports assets of $10 billion 
or more in its 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 Sec.  327.9(d)(10)(ii), (iii), when an established 
institution merges into or consolidates with a new institution, the 
resulting institution is a new institution unless:
    (i) The assets of the established institution, as reported in its 
report of condition for the quarter ending immediately before the 
merger, exceeded the assets of the new institution, as reported in its 
report of condition for the quarter ending immediately before the 
merger; and
    (ii) Substantially all of the management of the established 
institution continued as management of the resulting or surviving 
institution.
    (2) Consolidation involving established institutions. When 
established institutions consolidate 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

[[Page 61584]]

the date that the otherwise new institution was established.
    (5) Effect of credit union conversion. In determining whether an 
insured depository institution is new or established, the FDIC will 
include any period of time that the institution was a federally insured 
credit union.
* * * * *
    (o) Unsecured debt--For purposes of the unsecured debt adjustment 
as set forth in Sec.  327.9(d)(5), unsecured debt shall include senior 
unsecured liabilities and subordinated debt.
    (p) Senior unsecured liability--For purposes of the unsecured debt 
adjustment as set forth in Sec.  327.9(d)(5), senior unsecured 
liabilities shall be the unsecured portion of other borrowed money as 
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 Sec.  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 Sec.  327.9(d)(5), long-term unsecured debt 
shall be unsecured debt with at least one year remaining until 
maturity.
    5. Revise Sec. Sec.  327.9 and 327.10 to read as follows:


Sec.  327.9  Assessment risk categories and pricing methods.

    (a) Risk Categories.--Each insured depository institution shall be 
assigned to one of the following four Risk Categories based upon the 
institution's capital evaluation and supervisory evaluation as defined 
in this section.
    (1) Risk Category I. All institutions in Supervisory Group A that 
are Well Capitalized;
    (2) Risk Category II. All institutions in Supervisory Group A that 
are Adequately Capitalized, and all institutions in Supervisory Group B 
that are either Well Capitalized or Adequately Capitalized;
    (3) Risk Category III. All institutions in Supervisory Groups A and 
B that are Undercapitalized, and all institutions in Supervisory Group 
C that are Well Capitalized or Adequately Capitalized; and
    (4) Risk Category IV. All institutions in Supervisory Group C that 
are Undercapitalized.
    (b) Capital evaluations. An institution will receive one of the 
following three capital evaluations on the basis of data reported in 
the institution's Consolidated Reports of Condition and Income, Report 
of Assets and Liabilities of U.S. Branches and Agencies of Foreign 
Banks, or Thrift Financial Report dated as of March 31 for the 
assessment period beginning the preceding January 1; dated as of June 
30 for the assessment period beginning the preceding April 1; dated as 
of September 30 for the assessment period beginning the preceding July 
1; and dated as of December 31 for the assessment period beginning the 
preceding October 1.
    (1) Well Capitalized. (i) Except as provided in paragraph 
(b)(1)(ii) of this section, a Well Capitalized institution is one that 
satisfies each of the following capital ratio standards: Total risk-
based ratio, 10.0 percent or greater; Tier 1 risk-based ratio, 6.0 
percent or greater; and Tier 1 leverage ratio, 5.0 percent or greater.
    (ii) For purposes of this section, an insured branch of a foreign 
bank will be deemed to be Well Capitalized if the insured branch:
    (A) Maintains the pledge of assets required under Sec.  347.209 of 
this chapter; and
    (B) Maintains the eligible assets prescribed under Sec.  347.210 of 
this chapter at 108 percent or more of the average book value of the 
insured branch's third-party liabilities for the quarter ending on the 
report date specified in paragraph (b) of this section.
    (2) Adequately Capitalized. (i) Except as provided in paragraph 
(b)(2)(ii) of this section, an Adequately Capitalized institution is 
one that does not satisfy the standards of Well Capitalized under this 
paragraph but satisfies each of the following capital ratio standards: 
Total risk-based ratio, 8.0 percent or greater; Tier 1 risk-based 
ratio, 4.0 percent or greater; and Tier 1 leverage ratio, 4.0 percent 
or greater.
    (ii) For purposes of this section, an insured branch of a foreign 
bank will be deemed to be Adequately Capitalized if the insured branch:
    (A) Maintains the pledge of assets required under Sec.  347.209 of 
this chapter; and
    (B) Maintains the eligible assets prescribed under Sec.  347.210 of 
this chapter at 106 percent or more of the average book value of the 
insured branch's third-party liabilities for the quarter ending on the 
report date specified in paragraph (b) of this section; and
    (C) Does not meet the definition of a Well Capitalized insured 
branch of a foreign bank.
    (3) Undercapitalized. An undercapitalized institution is one that 
does not qualify as either Well Capitalized or Adequately Capitalized 
under paragraphs (b)(1) and (b)(2) of this section.
    (c) Supervisory evaluations. Each institution will be assigned to 
one of three Supervisory Groups based on the Corporation's 
consideration of supervisory evaluations provided by the institution's 
primary federal regulator. The supervisory evaluations include the 
results of examination findings by the primary federal regulator, as 
well as other information that the primary federal regulator determines 
to be relevant. In addition, the Corporation will take into 
consideration such other information (such as state examination 
findings, as appropriate) as it determines to be relevant to the 
institution's financial condition and the risk posed to the Deposit 
Insurance Fund. The three Supervisory Groups are:
    (1) Supervisory Group ``A.'' This Supervisory Group consists of 
financially sound institutions with only a few minor weaknesses;
    (2) Supervisory Group ``B.'' This Supervisory Group consists of 
institutions that demonstrate weaknesses which, if not corrected, could 
result in significant deterioration of the institution and increased 
risk of loss to the Deposit Insurance Fund; and
    (3) Supervisory Group ``C.'' This Supervisory Group consists of 
institutions that pose a substantial probability of loss to the Deposit 
Insurance Fund unless effective corrective action is taken.
    (d) Determining Initial Base Assessment Rates for Risk Category I 
Institutions. Subject to paragraphs (d)(2)(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 Sec.  327.8(i), shall have its 
initial base assessment rate determined using the financial ratios 
method set forth in paragraph (d)(1) of this section. A large insured 
depository institution in Risk Category I that has at least one long-
term debt issuer rating shall have its initial base assessment rate 
determined using the large bank method set forth in paragraph (d)(2) of 
this section (subject to paragraphs (d)(2)(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

[[Page 61585]]

be determined using the financial ratios method.
    (1) Financial ratios method. Under the financial ratios method for 
Risk Category I institutions, each of six financial ratios and a 
weighted average of CAMELS component ratings will be multiplied by a 
corresponding pricing multiplier. The sum of these products will be 
added to or subtracted from a uniform amount. The resulting sum shall 
equal the institution's initial base assessment rate; provided, 
however, that no institution's initial base assessment rate shall be 
less than the minimum initial base assessment rate in effect for Risk 
Category I institutions for that quarter nor greater than the maximum 
initial base assessment rate in effect for Risk Category I institutions 
for that quarter. An institution's initial base assessment rate, 
subject to adjustment pursuant to paragraphs (d)(4), (5) and (6) of 
this section, as appropriate (which will produce the total base 
assessment rate), and adjusted for the actual assessment rates set by 
the Board under Sec.  327.10(c), will equal an institution's assessment 
rate; 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 Sec.  
327.9(b). The weighted average of CAMELS component ratings is created 
by multiplying each component by the following percentages and adding 
the products: Capital adequacy--25%, Asset quality--20%, Management--
25%, Earnings--10%, Liquidity--10%, and Sensitivity to market risk--
10%. 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 Sec.  327.10(c). For the 
portion of the quarter that the institution was not in Risk Category I, 
the institution's initial base assessment rate, which shall be subject 
to adjustment pursuant to paragraphs (d)(5), (6) and (7), shall be 
determined under the assessment schedule for the appropriate Risk 
Category. If, during a quarter, a CAMELS composite rating change occurs 
that results in an institution 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 Sec.  327.10(c). For the portion of the 
quarter that the institution was not in Risk Category I, the 
institution's initial base assessment rate, which shall be subject to 
adjustment pursuant to paragraphs (d)(5), (6) and (7), shall be 
determined under the assessment schedule for the appropriate Risk 
Category.
    (B) Changes within Risk Category I. If, during a quarter, an 
institution's CAMELS component ratings change in a way that would 
change the institution's initial base assessment rate within Risk 
Category I, the initial base assessment rate for the period before the 
change shall be determined under the financial ratios method using the 
CAMELS component ratings in effect before the change. 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 Sec.  327.8(i), shall have its initial base assessment rate 
determined using the large bank method. The initial base assessment 
rate under the large bank method shall be derived from three 
components, each given a 33\1/3\ percent weight: A component derived 
using the financial ratios method, a component derived using long-term 
debt issuer ratings, and a component derived using CAMELS component 
ratings. 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 Sec.  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

[[Page 61586]]

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 Sec.  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 Sec.  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

[[Page 61587]]

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 long-term 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

[[Page 61588]]

not be eligible to request that it be assessed as a small institution 
for a period of three years from the first quarter in which its 
approved request to be assessed as a large bank became effective. Any 
request to be assessed as a small institution must be made to the 
FDIC's Division of Insurance and Research.
    (iii) An institution that disagrees with the FDIC's determination 
that it is a large or small institution may request review of that 
determination pursuant to Sec.  327.4(c).
    (9) New and established institutions and exceptions--(i) New Risk 
Category I institutions--(A) Rule as of January 1, 2010. Effective for 
assessment periods beginning on or after January 1, 2010, a new 
institution shall be assessed the Risk Category I maximum initial base 
assessment rate for the relevant assessment period, except as provided 
in Sec.  327.8(m)(1), (2), (3), (4), (5) and paragraphs (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 Sec.  
327.8(m)(1), its CAMELS ratings for assessment purposes will be based 
upon the established institution's ratings prior to the merger or 
consolidation until new ratings become available.
    (iii) Rate applicable to institutions subject to subsidiary or 
credit union exception. If an institution is considered established 
under Sec.  327.8(m)(4) and (5), but does not have CAMELS component 
ratings, it shall be assessed at two basis points above the minimum 
initial base assessment rate applicable to Risk Category I institutions 
until it receives CAMELS component ratings. 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 Sec.  327.4(c).
    (10) Assessment rates for bridge depository institutions and 
conservatorships. Institutions that are bridge depository institutions 
under 12 U.S.C. 1821(n) and institutions for which the Corporation has 
been appointed or serves as conservator shall, in all cases, be 
assessed at the Risk Category I minimum initial base assessment rate, 
which shall not be subject to adjustment under paragraphs (d)(4), (5), 
(6) or (7) of this section.


Sec.  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

[[Page 61589]]

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 
Sec.  327.3(b) of this part for the first assessment period for which 
the adjustment shall be effective. Once set, rates will remain in 
effect until changed by the Board.
    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:
    <bullet> A model (the Statistical Model) that estimates the 
probability that a Risk Category I institution will be downgraded to 
a composite CAMELS rating of 3 or worse within one year;
    <bullet> Minimum and maximum downgrade probability cutoff 
values, based on data from June 30, 2008, that will determine which 
small institutions will be charged the minimum and maximum initial 
base assessment rates applicable to Risk Category I;
    <bullet> The minimum initial base assessment rate for Risk 
Category I, equal to 10 basis points, and
    <bullet> The maximum initial base assessment rate for Risk 
Category I, which is four basis points higher than the minimum rate.

II. The Statistical Model

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

[[Page 61590]]

[GRAPHIC] [TIFF OMITTED] TP16OC08.021

where Downgrade(0,1)<INF>i,t</INF> (the dependent variable--the 
event being explained) is the incidence of downgrade from a 
composite rating of 1 or 2 to a rating of 3 or worse during an on-
site examination for an institution i between 3 and 12 months after 
time t. Time t is the end of a year within the multi-year period 
over which the model was estimated (as explained below). The 
dependent variable takes a value of 1 if a downgrade occurs and 0 if 
it does not.
    The explanatory variables (regressors) in the model are six 
financial ratios and a weighted average of the ``C,'' ``A,'' ``M,'' 
``E'' and ``L'' component ratings. The six financial ratios included 
in the model are:
    <bullet> Tier 1 leverage ratio
    <bullet> Loans past due 30-89 days/Gross assets
    <bullet> Nonperforming assets/Gross assets
    <bullet> Net loan charge-offs/Gross assets
    <bullet> Net income before taxes/Risk-weighted assets
    <bullet> Brokered deposits/domestic deposits above the 10 
percent threshold, adjusted for the asset growth rate factor
    Table A.1 defines these six ratios along with the weighted 
average of CAMELS component ratings. The adjusted brokered deposit 
ratio (B<INF>i,T</INF>) is calculated by multiplying the ratio of 
brokered deposits to domestic deposits above the 10 percent 
threshold by an assets growth rate factor that ranges from 0 to 1 as 
shown in Equation 2 below. The assets growth rate factor 
(A<INF>i,T</INF>) is calculated by subtracting 0.2 from the four-
year 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.
[GRAPHIC] [TIFF OMITTED] TP16OC08.022

    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     Total loans and lease financing
 Assets (%).                         receivables past due 30 through 89
                                     days and still accruing interest
                                     divided by gross assets (gross
                                     assets equal total assets plus
                                     allowance for loan and lease
                                     financing receivable losses and
                                     allocated transfer risk).
Nonperforming Assets/Gross Assets   Sum of total loans and lease
 (%).                                financing receivables past due 90
                                     or more days and still accruing
                                     interest, total nonaccrual loans
                                     and lease financing receivables,
                                     and other real estate owned divided
                                     by gross assets.
Net Loan Charge-Offs/Gross Assets   Total charged-off loans and lease
 (%).                                financing receivables debited to
                                     the allowance for loan and lease
                                     losses less total recoveries
                                     credited to the allowance to loan
                                     and lease losses for the most
                                     recent twelve months divided by
                                     gross assets.
Net Income before Taxes/Risk-       Income before income taxes and
 Weighted Assets (%).                extraordinary items and other
                                     adjustments for the most recent
                                     twelve months divided by risk-
                                     weighted assets.

[[Page 61591]]

 
Adjusted Brokered Deposits/         Brokered deposits divided by
 Domestic Deposits (%).              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  The weighted sum of the ``C,''
 L Component Ratings.                ``A,'' ``M,'' ``E'' and ``L''
                                     CAMELS components, with weights of
                                     28 percent each for the ``C'' and
                                     ``M'' components, 22 percent for
                                     the ``A'' component, and 11 percent
                                     each for the ``E'' and ``L''
                                     components. (For the regression,
                                     the ``S'' component is omitted.)
------------------------------------------------------------------------

    The financial variable regressors used to estimate the downgrade 
probabilities are obtained from quarterly reports of condition 
(Reports of Condition and Income and Thrift Financial Reports). The 
weighted average of the ``C,'' ``A,'' ``M,'' ``E'' and ``L'' 
component ratings regressor is based on component ratings obtained 
from the most recent bank examination conducted within 24 months 
before the date of the report of condition.
    The Statistical Model uses ordinary least squares (OLS) 
regression to estimate downgrade probabilities. The model is 
estimated with data from a multi-year period (as explained below) 
for all institutions in Risk Category I, except for institutions 
established within five years before the date of the report of 
condition.
    The OLS regression estimates coefficients, [beta]<INF>j</INF> 
for a given regressor j and a constant amount, [beta]<INF>0</INF>, 
as specified in equation 1. As shown in equation 3 below, these 
coefficients are multiplied by values of risk measures at time T, 
which is the date of the report of condition corresponding to the 
end of the quarter for which the assessment rate is computed. The 
sum of the products is then added to the constant amount to produce 
an estimated probability, d<INF>iT</INF>, that an institution will 
be downgraded to 3 or worse within 3 to 12 months from time T.
    The risk measures are financial ratios as defined in Table A.1, 
except that 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.
[GRAPHIC] [TIFF OMITTED] TP16OC08.023

III. Minimum and Maximum Downgrade Probability Cutoff Values

    The pricing multipliers are also determined by minimum and 
maximum downgrade probability cutoff values, which will be computed 
as follows:
    <bullet> The minimum downgrade probability cutoff value will be 
the maximum downgrade probability among the twenty-five percent of 
all small insured institutions in Risk Category I (excluding new 
institutions) with the lowest estimated downgrade probabilities, 
computed using values of the risk measures as of June 30, 
2008.<SUP>72 73</SUP> The minimum downgrade probability cutoff value 
is approximately 2 percent.
---------------------------------------------------------------------------

    \72\ As used in this context, a ``new institution'' means an 
institution that has been chartered as a bank or thrift for less 
than five years.
    \73\ For purposes of calculating the minimum and maximum 
downgrade probability cutoff values, institutions that have less 
than $100,000 in domestic deposits are assumed to have no brokered 
deposits.
---------------------------------------------------------------------------

    <bullet> The maximum downgrade probability cutoff value will be 
the minimum downgrade probability among the fifteen percent of all 
small insured institutions in Risk Category I (excluding new 
institutions) with the highest estimated downgrade probabilities, 
computed using values of the risk measures as of June 30, 2008. The 
maximum downgrade probability cutoff value is 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, P<INF>iT</INF>, for any 
such institution i at a given time T will be determined from the 
Statistical Model, the minimum and maximum downgrade probability 
cutoff values, and minimum and maximum initial base assessment rates 
in Risk Category I as follows:
[GRAPHIC] [TIFF OMITTED] TP16OC08.024


[[Page 61592]]


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

Min = [alpha]<INF>0</INF> + [alpha]<INF>1</INF> * 0.0181 and Min + 4 
= [alpha]<INF>0</INF> + [alpha]<INF>1</INF> * 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, [alpha]<INF>0</INF>, and the scale 
factor, [alpha]<INF>1</INF>:
[GRAPHIC] [TIFF OMITTED] TP16OC08.025

    Substituting equations 3, 5 and 6 into equation 4 produces an 
annual initial base assessment rate for institution i at time T, 
P<INF>iT</INF>, in terms of the uniform amount, the pricing 
multipliers and the ratios and weighted average CAMELS component 
rating referred to in 12 CFR 327.9(d)(2)(i):
[GRAPHIC] [TIFF OMITTED] TP16OC08.026

where (Min-0.547) + 30.211* [beta]<INF>0</INF> equals the uniform 
amount, 30.211* [beta] 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.

[[Page 61593]]

Appendix B to Subpart A

          Numerical Conversion of Long-Term Debt Issuer Ratings
------------------------------------------------------------------------
                                                              Converted
           Current long-term debt issuer rating                 value
------------------------------------------------------------------------
Standard & Poor's:
    AAA...................................................         1.00
    AA+...................................................         1.05
    AA....................................................         1.15
    AA-...................................................         1.30
    A+....................................................         1.50
    A.....................................................         1.80
    A-....................................................         2.20
    BBB+..................................................         2.70
    BBB or worse..........................................         3.00
Moody's:
    Aaa...................................................         1.00
    Aa\1\.................................................         1.05
    Aa\2\.................................................         1.15
    Aa\3\.................................................         1.30
    A1....................................................         1.50
    A2....................................................         1.80
    A3....................................................         2.20
    Baa \1\...............................................         2.70
    Baa \2\ or worse......................................         3.00
Fitch'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
------------------------------------------------------------------------

Appendix C to Subpart A

  Additional Risk Considerations for Large Risk Category I Institutions
------------------------------------------------------------------------
                                         Examples of associated risk
        Information Source                indicators or information
------------------------------------------------------------------------
                                    Capital Measures (Level and Trend).
                                    <bullet> Regulatory capital ratios.
                                    <bullet> Capital composition.
                                    <bullet> Dividend payout ratios.
                                    <bullet> Internal capital growth
                                     rates relative to asset growth.
                                    Profitability Measures (Level and
                                     Trend).
                                    <bullet> Return on assets and return
                                     on risk-adjusted assets.
                                    <bullet> Net interest margins,
                                     funding costs and volumes, earning
                                     asset yields and volumes.
                                    <bullet> Noninterest revenue
                                     sources.
                                    <bullet> Operating expenses.
                                    <bullet> Loan loss provisions
                                     relative to problem loans.
                                    <bullet> Historical volatility of
                                     various earnings sources.
Financial Performance and           Asset Quality Measures (Level and
 Condition Information.              Trend).
                                    <bullet> Loan and securities
                                     portfolio composition and volume of
                                     higher risk lending activities
                                     (e.g., sub-prime lending).
                                    <bullet> Loan performance measures
                                     (past due, nonaccrual, classified
                                     and criticized, and renegotiated
                                     loans) and portfolio
                                     characteristics such as internal
                                     loan rating and credit score
                                     distributions, internal estimates
                                     of default, internal estimates of
                                     loss given default, and internal
                                     estimates of exposures in the event
                                     of default.
                                    <bullet> Loan loss reserve trends.
                                    <bullet> Loan growth and
                                     underwriting trends.
                                    <bullet> Off-balance sheet credit
                                     exposure measures (unfunded loan
                                     commitments, securitization
                                     activities, counterparty
                                     derivatives exposures) and hedging
                                     activities.
                                    Liquidity and Funding Measures
                                     (Level and Trend).
                                    <bullet> Composition of deposit and
                                     non-deposit funding sources.
                                    <bullet> Liquid resources relative
                                     to short-term obligations,
                                     undisbursed credit lines, and
                                     contingent liabilities.
                                    Interest Rate Risk and Market Risk
                                     (Level and Trend).
                                    <bullet> Maturity and repricing
                                     information on assets and
                                     liabilities, interest rate risk
                                     analyses.
                                    <bullet> Trading book composition
                                     and Value-at-Risk information.
Market Information................  <bullet> Subordinated debt spreads.
                                    <bullet> Credit default swap
                                     spreads.
                                    <bullet> Parent's debt issuer
                                     ratings and equity price
                                     volatility.
                                    <bullet> Market-based measures of
                                     default probabilities.
                                    <bullet> Rating agency watch lists.
                                    <bullet> Market analyst reports.
------------------------------------------------------------------------
        Information Source               Examples of associated risk
                                          indicators or information
------------------------------------------------------------------------
                                    Ability to Withstand Stress
                                     Conditions.
                                    <bullet> Internal analyses of
                                     portfolio composition and risk
                                     concentrations, and vulnerabilities
                                     to changing economic and financial
                                     conditions.
                                    <bullet> Stress scenario development
                                     and analyses.
                                    <bullet> Results of stress tests or
                                     scenario analyses that show the
                                     degree of vulnerability to adverse
                                     economic, industry, market, and
                                     liquidity events. Examples include:
                                      i. An evaluation of credit
                                       portfolio performance under
                                       varying stress scenarios.
                                      ii. An evaluation of non-credit
                                       business performance under
                                       varying stress scenarios.
                                      iii. An analysis of the ability of
                                       earnings and capital to absorb
                                       losses stemming from
                                       unanticipated adverse events.
                                    <bullet> Contingency or emergency
                                     funding strategies and analyses.
                                    <bullet> Capital adequacy
                                     assessments.
Stress Considerations.............  Loss Severity Indicators.

[[Page 61594]]

 
                                    <bullet> Nature of and breadth of an
                                     institution's primary business
                                     lines and the degree of variability
                                     in valuations for firms with
                                     similar business lines or similar
                                     portfolios.
                                    <bullet> Ability to identify and
                                     describe discreet business units
                                     within the banking legal entity.
                                    <bullet> Funding structure
                                     considerations relating to the
                                     order of claims in the event of
                                     liquidation (including the extent
                                     of subordinated claims and priority
                                     claims).
                                    <bullet> Extent of insured
                                     institutions assets held in foreign
                                     units.
                                    <bullet> Degree of reliance on
                                     affiliates and outsourcing for
                                     material mission-critical services,
                                     such as management information
                                     systems or loan servicing, and
                                     products.
                                    <bullet> Availability of sufficient
                                     information, such as information on
                                     insured deposits and qualified
                                     financial contracts, to resolve an
                                     institution in an orderly and cost-
                                     efficient manner.
------------------------------------------------------------------------


    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:
    <bullet> The average long-term debt issuer rating, converted 
into a numeric value (the long-term debt score) ranging from 1 to 3;
    <bullet> The weighted average CAMELS rating, as defined in 
Appendix A;
    <bullet> The assessment rate calculated using the financial 
ratios method described in Appendix A, converted to a value ranging 
from 1 to 3 (the financial ratios score);
    <bullet> Minimum and maximum cutoff values for an institution's 
score (the average of the long-term debt score, weighted average 
CAMELS rating and financial ratios score), based on data from June 
30, 2008, which was used to determine the proportion of large banks 
charged the minimum and maximum initial base assessment rates 
applicable to Risk Category I; and
    <bullet> Minimum and maximum initial base assessment rates for 
Risk Category I
    The financial ratios assessment rate (A<INF>f</INF>) calculated 
using the pricing multipliers and uniform amount described in 
Appendix A was converted to a financial ratios score 
(S<INF>f</INF>), with a value ranging from 1 to 3 as shown in 
Equation 1:
[GRAPHIC] [TIFF OMITTED] TP16OC08.027

    Each institution's score (S<INF>i</INF>) was calculated by 
dividing its weighted average CAMELS rating (S<INF>w</INF>), long-
term issuer score (S<INF>d</INF>) and financial ratios score 
(S<INF>f</INF>) by 1/3 each, and summing the resulting values as 
shown in Equation 2:
[GRAPHIC] [TIFF OMITTED] TP16OC08.028

    The pricing multipliers were determined by minimum and maximum 
score cutoff values, which were computed as follows:
    <bullet> 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.
---------------------------------------------------------------------------

    \74\ As used in this context, a ``new institution'' means an 
institution that has been chartered as a bank or thrift for less 
than five years.
---------------------------------------------------------------------------

    <bullet> 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:
[GRAPHIC] [TIFF OMITTED] TP16OC08.029

where [alpha]<INF>0</INF> and [alpha]<INF>1</INF> are, respectively, 
a constant term and a scale factor used to convert <INF>i,T</INF> 
(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 S<INF>i,T</INF> and minimum and maximum 
initial base assessment rates (Min and Min + 4, respectively) for 
P<INF>i,T</INF> in equation 3 produces equations 4 and 5 below.
[GRAPHIC] [TIFF OMITTED] TP16OC08.030

[GRAPHIC] [TIFF OMITTED] TP16OC08.031

    Solving both equations simultaneously results in:
    [GRAPHIC] [TIFF OMITTED] TP16OC08.032
    
    [GRAPHIC] [TIFF OMITTED] TP16OC08.033
    

[[Page 61595]]


    Substituting equations 6 and 7 into equation 2 produces the 
following equation for P<INF>iT</INF>
[GRAPHIC] [TIFF OMITTED] TP16OC08.034

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:
[GRAPHIC] [TIFF OMITTED] TP16OC08.035

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:
[GRAPHIC] [TIFF OMITTED] TP16OC08.036

    The unsecured debt adjustment would then be calculated as:
    [GRAPHIC] [TIFF OMITTED] TP16OC08.037
    
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, pre-
assessment 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.
---------------------------------------------------------------------------

    \75\ Beginning 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.
    \76\ For 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \77\ The analysis does not incorporate any tax effects from an 
operating loss carry forward or carry back.
---------------------------------------------------------------------------

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

[[Page 61596]]

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.
---------------------------------------------------------------------------

    \78\ This excludes equity for those mentioned in the note to 
Tables A.1 and A.2.
---------------------------------------------------------------------------

    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-to-assets 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-to-assets.

                       Table A.1--Percentage Reduction in Equity Captal Due to Assessments
                                                 [$ in billions]
----------------------------------------------------------------------------------------------------------------
                                                                  Percent of
       Reduction in capital (percent)            Number of       institutions     Total assets      Percent of
                                                institutions      (percent)                           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]
----------------------------------------------------------------------------------------------------------------
                                                                  Percent of                        Percent of
       Reduction in capital (percent)            Number of       institutions     Total assets        assets
                                                institutions      (percent)                         (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.

[[Page 61597]]



                    Table A.3--Assessments as a Percent of Income for Profitable Institutions
                                                 [$ in billions]
----------------------------------------------------------------------------------------------------------------
                                                 Number of        Percent of       Assets of        Percent of
        Assessments as pct. of income            profitable      institutions      profitable         assets
                                                institutions      (percent)       institutions      (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]
----------------------------------------------------------------------------------------------------------------
                                                 Number of        Percent of       Assets of        Percent of
        Assessments as pct. of income            profitable      institutions      profitable         assets
                                                institutions      (percent)       institutions      (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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