FDICl

Federal Deposit Insurance Corporation

550 17th Street NW, Washington, D.C. 20429-9990 Division of Insurance and Research

April 7, 2011

MEMORANDUM TO: The Board of Directors

FROM: Arhur J. Murton

Director

Division of Insurance and Research

SUBJECT: Proposed Assessment Rate Adjustment Guidelines for Large and

Highly Complex Institutions

Staff recommends that the Board of Directors (FDIC or Board) authorize publication of

proposed assessment rate adjustment guidelines for large and highly complex institutions with

request for comment.

i. Background

On Februar 7, 2011, the FDIC Board adopted a new methodology for determining

assessment rates for large institutions. The new methodology combines CAMELS ratings and

forward-looking financial measures into one of two scorecards, one for highly-complex

institutions and another for all other large institutions. Each of the two scorecards produces two

scores-a performance score and a loss severity score-that are combined into a total score,

which canot be greater than 90 or less than 30. The score is then converted to an initial base

assessment rate. The rule allows the FDIC, after consultation with an institution's primar

federal regulator, to make a limited adjustment to an institution's total score based upon risks

that are not adequately captured in the scorecard. The rule provides that no adjustments be made

under the new methodology until new guidelines governing the adjustment process have been

approved by the FDIC's Board of Directors.

The proposed guidelines describe the process staff would follow to determine whether to

make an adjustment, to determine the size of any adjustment and how staff would notify an institution of an adjustment. .

The proposed guidelines would supersede the large ban pricing adjustment guidelines

published on May 15, 2007 (the 2007 Guidelines). The 2007 Guidelines outline the adjustment

process for the large bank assessment system then in effect. The scorecards explicitly

incorporate some of the risks that were previously captured primarily through large ban

adjustments. Accordingly, staff is proposing new guidelines that take these changes into

Concur:
account; however, the processes for communicating with affected institutions and implementing

adjustments once determined remain largely unchanged from the 2007 Guidelines, except that

staff is now proposing to explicitly allow institutions to request an adjustment.

The proposed guidelines request comment on the guidelines and the procedures for

making an adjustment to an institution's score. i

A summary of the guidelines and process follows.

II. Overview of Proposed Guidelines on Large Bank Adjustment

The proposed large ban adjustment process would be based on a set of guidelines to

ensure that the adjustment process is fair and transparent and that any decision to adjust a score

is well supported. The following general guidelines would govern the adjustment process. The

attached proposed guidelines describe the adjustment process in greater detail and set out several

examples.

Analytical Guidelines

. The FDIC would focus on identifying institutions for which a combination of risk

measures and other information suggests either materially higher or lower risk than

their total scores indicate. The FDIC would consider all available material

information relating to the likelihood of failure or loss severity in the event of failure.

. The FDIC would primarily consider two types of information in determining whether

to make a large bank adjustment: (a) a scorecard ratio or measure that exceeds the

maximum cutoff value for a ratio or measure or is less than the minimum cutoff value

for a ratio or measure along with the degree to which the ratio or measure differs from

the cutoff value (scorecard measure outliers); or (b) information not directly captured

in the scorecard, including complementary quantitative risk measures and qualitative

risk considerations.

. If an institution has one or more scorecard measure outliers, the FDIC would conduct

further analysis to determine whether underlying scorecard ratios are materially

higher or lower than the established cutoffs for a given scorecard measure and

whether other mitigating or supporting information exists.

. The FDIC would use complementary quantitative risk measures to determine whether

a given scorecard measure is an appropriate measure for a paricular institution.

. When qualitative risk considerations materially affect the FDIC's view of an

institution's probability of failure or loss given failure, these considerations could be

the primary factor supporting the adjustment. Qualitative risk considerations include,

i Notice and comment are not required, however, and need not be employed to make future changes to the

guidelines.

2
but are not limited to, underwiting practices related to material concentrations, risk

management practices, strategic risk, the use and management of governent support

programs, and factors affecting loss severity.

. Specific risk measures would var in importance for different types of institutions. In

some cases, a single risk factor or indicator may support an adjustment if the factor

suggests a significantly higher or lower likelihood of failure, or loss given failure,

than the total score reflects.

. To the extent possible in comparing risk measures, the FDIC would consider the

performance of similar institutions, taking into account that variations in risk

measures exist among institutions with substantially different business models.

. Adjustments would be made only if the comprehensive analysis of an institution's

risk, generally based on the two types of information listed above, and the

institution's relative risk raning warant a meaningful adjustment ofthe institution's

total score (generally, an adjustment of five points or more).

Procedural Guidelines

The processes for communicating with affected institutions and implementing

adjustments once determined would remain largely unchanged by this proposal, except that the

FDIC would now explicitly allow institutions to request an adjustment.

. The FDIC would consult with an institution's primary federal regulator and

appropriate state banking supervisor before making any decision to adjust an

institution's total score (and before removing a previously implemented adjustment).

. The FDIC would give institutions advance notice of any decision to make an upward

adjustment to a total score, or to remove a previously implemented downward

adjustment. The notice would include the reasons for the proposed adjustment or

removal, the size of the proposed adjustment or removal, specify when the adjustment

or removal would take effect, and provide institutions with up to 60 days to respond.

. The FDIC would re-evaluate the need for total score adjustments on a quarterly basis.

. Institutions could make written request to the FDIC for an adjustment that is

supported by evidence of a material risk or risk-mitigating factor that is not

adequately accounted for in the scorecard.

. An institution could request review of or appeal an upward adjustment, the magnitude

of an upward adjustment, removal of a previously implemented downward

adjustment or an increase in a previously implemented upward adjustment pursuant to

12 C.F.R. 327.4(c). An institution could similarly request review of or appeal a

3
decision not to apply an adjustment following a request by the institution for an

adjustment.

The Division of Insurance and Research will seek the advice and concurrence of the

Offce of Complex Financial Institutions (OCFI) for any adjustment it wishes to initiate and will

also pursue adjustments based on OCFI recommendations.

Staff contacts:

DIR

Munsell St. Clair, (202) 898-8967

Lisa Ryu, (202) 898-3538

Legal Division

Christopher Bellotto, (202) 898-3801

4