FDIC Issues Proposed Rule on Assessments for Small Depository Institutions
Assessments
A Proposed Rule by the
Publication Date:
Agency:
Dates: Comments must be received by the
Comments Close:
Entry Type: Proposed Rule
Action: Notice of proposed rulemaking (NPR) and request for comment.
Document Citation: 80 FR 40837
Page: 40837 -40894 (58 pages)
CFR: 12 CFR 327
RIN: 3064-AE37
Document Number: 2015-16514
Shorter URL: https://federalregister.gov/a/2015-16514
Action
Notice Of Proposed Rulemaking (Npr) And Request For Comment.
Summary
The
The
DATES:
Comments must be received by the
ADDRESSES:
You may submit comments on the notice of proposed rulemaking using any of the following methods:
Agency Web site: http://www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments on the agency Web site.
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Mail:
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SUPPLEMENTARY INFORMATION: I. Policy Objectives
The Federal Deposit Insurance Act (FDI Act) requires that the FDIC Board of Directors (Board) establish a risk-based deposit insurance assessment system.1 Pursuant to this requirement, the
II. Background Risk-Based Deposit Insurance Assessments for Small Banks
Since 2007, assessment rates for small banks have been determined by placing each bank into one of four risk categories, Risk Categories I, II, III, and IV. These four risk categories are based on two criteria: capital levels and supervisory ratings. The three capital groups--well capitalized, adequately capitalized, and undercapitalized--are based on the leverage ratio and three risk-based capital ratios used for regulatory capital purposes.4 The three supervisory groups, termed A, B, and C, are based upon supervisory evaluations by the small bank's primary federal regulator, state regulator or the FDIC.5 Group A consists of financially sound institutions with only a few minor weaknesses (generally, banks with CAMELS6 composite ratings of 1 or 2); Group B consists of institutions that demonstrate weaknesses that, if not corrected could result in significant deterioration of the institution and increased risk of loss to the DIF (generally, banks with CAMELS composite ratings of 3); and Group C consists of institutions that pose a substantial probability of loss to the DIF unless effective corrective action is taken (generally, banks with CAMELS composite ratings of 4 or 5). An institution's capital and supervisory group determine its risk category as set out in Table 1 below.
Table 1--Determination of Risk Category
Capital group ..... Supervisory group
A CAMELS 1 or 2 ..... B CAMELS 3 ..... C CAMELS 4 or 5
Well Capitalized ..... Risk Category I ..... .....
Adequately Capitalized ..... Risk Category II ..... Risk Category III.
Under Capitalized ..... Risk Category III ..... Risk Category IV
To further differentiate risk within Risk Category I (which includes most small banks), the
Within Risk Category I, those institutions that pose the least risk are charged a minimum initial assessment rate and those that pose the greatest risk are charged an initial assessment rate that is four basis points higher than the minimum. All other banks within Risk Category I are charged a rate that varies between these rates. In contrast, all banks in Risk Category II are charged the same initial assessment rate, which is higher than the maximum initial rate for Risk Category I. A single, higher, initial assessment rate applies to each bank in Risk Category III and another, higher, rate to each bank in Risk Category IV. [8]
The financial ratios method determines the assessment rates in Risk Category I using a combination of weighted CAMELS component ratings and the following financial ratios:
Tier 1 Leverage Ratio;
Net Income before Taxes/Risk-Weighted Assets;
Nonperforming Assets/Gross Assets;
Net Loan Charge-Offs/Gross Assets;
Loans Past Due 30-89 days/Gross Assets;
Adjusted Brokered Deposit Ratio; and
Weighted Average CAMELS Composite Rating. [9]
To determine a Risk Category I bank's initial assessment rate, the weighted CAMELS components and financial ratios are multiplied by statistically derived pricing multipliers, the products are summed, and the sum is added to a uniform amount that applies to all Risk Category I banks. If, however, the rate is below the minimum initial assessment rate for Risk Category I, the bank will pay the minimum initial assessment rate; if the rate derived is above the maximum initial assessment rate for Risk Category I, then the bank will pay the maximum initial rate for the risk category.
The financial ratios used to determine rates come from a statistical model that predicts the probability that a Risk Category I institution will be downgraded from a composite CAMELS rating of 1 or 2 to a rating of 3 or worse within one year. The probability of a CAMELS downgrade is intended as a proxy for the bank's probability of failure. When the model was developed in 2006, the
The financial ratios method does not apply to new small banks or to insured branches of foreign banks (insured branches). [11] The manner in which assessment rates for these institutions is determined is described further below.
Assessment Rates Under Current Rules
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), enacted in
Among other things, the Dodd-Frank Act: (1) raised the minimum designated reserve ratio (DRR), which the
In 2011, the
The current initial assessment rates for small and large banks are set forth in Table 2 below.
Editor's note: A table appears at this point in the document. To view the table, click this link or copy it into your browser: https://www.federalregister.gov/articles/2015/07/13/2015-16514/assessments.
An institution's total assessment rate may vary from the initial assessment rate as the result of possible adjustments. [17] After applying all possible adjustments, minimum and maximum total assessment rates for each risk category are set forth in Table 3 below.
Table 3--Total Base Assessment Rates*
..... Risk category I ..... Risk category II ..... Risk category III ..... Risk category IV ..... Large &highly complex institutions **
[In basis points per annum]
* Total base assessment rates do not include the DIDA.
** See section 327.8(f) and (g) for the definition of large and highly complex institutions.
*** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured depository institution's initial base assessment rate. The unsecured debt adjustment does not apply to new banks or insured branches.
Initial Assessment Rate ..... 5-9 ..... 14 ..... 23 ..... 35 ..... 5-35
Unsecured Debt Adjustment *** ..... -4.5 to 0 ..... -5 to 0 ..... -5 to 0 ..... -5 to 0 ..... -5 to 0
Brokered Deposit Adjustment ..... N/A ..... 0 to 10 ..... 0 to 10 ..... 0 to 10 ..... 0 to 10
Total Assessment Rate ..... 2.5 to 9 ..... 9 to 24 ..... 18 to 33 ..... 30 to 45 ..... 2.5 to 45
Before adopting the current assessment rate schedules, the
In 2011, consistent with the
Table 4--Initial and Total Base Assessment Rates *
..... Risk category I ..... Risk category II ..... Risk category III ..... Risk category IV ..... Large &highly complex institutions **
[In basis points per annum]
[Once the reserve ratio reaches 1.15 percent]21
* Total base assessment rates do not include the DIDA.
** See section 327.8(f) and (g) for the definition of large and highly complex institutions.
** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured depository institution's initial base assessment rate; thus, for example, an insured depository institution with an initial base assessment rate of 3 basis points will have a maximum unsecured debt adjustment of 1.5 basis points and cannot have a total base assessment rate lower than 1.5 basis points. The unsecured debt adjustment does not apply to new banks or insured branches.
Initial Base Assessment Rate ..... 3-7 ..... 12 ..... 19 ..... 30 ..... 3-30
Unsecured Debt Adjustment *** ..... -3.5 to 0 ..... -5 to 0 ..... -5 to 0 ..... -5 to 0 ..... -5 to 0
Brokered Deposit Adjustment ..... N/A ..... 0 to 10 ..... 0 to 10 ..... 0 to 10 ..... 0 to 10
Total Base Assessment Rate ..... 1.5 to 7 ..... 7 to 22 ..... 14 to 29 ..... 25 to 40 ..... 1.5 to 40
In lieu of dividends, and pursuant to the
Table 5--Initial and Total Base Assessment Rates*
..... Risk category I ..... Risk category II ..... Risk category III ..... Risk category IV ..... Large &highly complex institutions **
[In basis points per annum]
[If the reserve ratio for the prior assessment period is equal to or greater than 2 percent and less than 2.5 percent]
* Total base assessment rates do not include the DIDA.
** See section 327.8(f) and (g) for the definition of large and highly complex institutions.
*** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured depository institution's initial base assessment rate; thus, for example, an insured depository institution with an initial base assessment rate of 2 basis points will have a maximum unsecured debt adjustment of 1 basis point and cannot have a total base assessment rate lower than 1 basis point. The unsecured debt adjustment does not apply to insured branches.
Initial Base Assessment Rate ..... 2-6 ..... 10 ..... 17 ..... 28 ..... 2-28
Unsecured Debt Adjustment *** ..... -3 to 0 ..... -5 to 0 ..... -5 to 0 ..... -5 to 0 ..... -5 to 0
Brokered Deposit Adjustment ..... N/A ..... 0 to 10 ..... 0 to 10 ..... 0 to 10 ..... 0 to 10
Total Base Assessment Rate ..... 1 to 6 ..... 5 to 20 ..... 12 to 27 ..... 23 to 38 ..... 1 to 38
The initial base and total base assessment rates set forth in Table 6 below will come into effect, again, without further action by the Board when the fund reserve ratio at the end of the prior assessment period meets or exceeds 2.5 percent.
Table 6--Initial and Total Base Assessment Rates*
..... Risk category I ..... Risk category II ..... Risk category III ..... Risk category IV ..... Large &highly complex institutions **
[In basis points per annum]
[If the reserve ratio for the prior assessment period is equal to or greater than 2.5 percent]
* Total base assessment rates do not include the DIDA.
** See section 327.8(f) and (g) for the definition of large and highly complex institutions.
*** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured depository institution's initial base assessment rate; thus, for example, an insured depository institution with an initial base assessment rate of 1 basis point will have a maximum unsecured debt adjustment of 0.5 basis points and cannot have a total base assessment rate lower than 0.5 basis points. The unsecured debt adjustment does not apply to insured branches.
Initial Base Assessment Rate ..... 1--5 ..... 9 ..... 15 ..... 25 ..... 1-25
Unsecured Debt Adjustment *** ..... -2.5 to 0 ..... -4.5 to 0 ..... -5 to 0 ..... -5 to 0 ..... -5 to 0
Brokered Deposit Adjustment ..... N/A ..... 0 to 10 ..... 0 to 10 ..... 0 to 10 ..... 0 to 10
Total Base Assessment Rate ..... 0.5 to 5 ..... 4.5 to 19 ..... 10 to 25 ..... 20 to 35 ..... 0.5 to 35
With respect to each of the four assessment rate schedules (Tables 3, 4, 5 and 6), the Board has the authority to adopt rates without further notice and comment rulemaking that are higher or lower than the total assessment rates (also known as the total base assessment rates) shown in the tables, provided that: (1) The Board cannot increase or decrease rates from one quarter to the next by more than two basis points; and (2) cumulative increases and decreases cannot be more than two basis points higher or lower than the total base assessment rates. [23]
III. Justification for Proposal
While the current deposit insurance assessment system effectively reflects the risk posed by small banks, it can be improved by incorporating newer data from the recent financial crisis and revising the methodology to directly estimate the probability of failure three years ahead. These improvements will allow the
IV. Description of the Proposed Rule Summary of the Proposed Rule
The
Over 500 banks have failed since the end of 2007. These failures, together with the hundreds of failures during the banking crisis of the late 1980s and early 1990s, have generated a robust set of data on bank failures. The
In addition to estimating probability of failure directly, the proposal improves the small bank deposit insurance assessment system in other ways. First, it allows the assessment system to better capture risk when the risk is assumed, rather than when the risk has already resulted in losses. The statistical model on which the proposed deposit insurance assessment system for small banks is based estimates the probability of failure within three years, balancing the need to capture risk when it is assumed with the need for accurate failure predictions. (The longer the prediction period, the less accurate a model's predictions will tend to be; so, for example, the
Second, because the model allows the
Third, because the model predicts the probability of failure three years ahead using data on hundreds of failures (including failures during the recent crisis), it better reflects banks' actual risks and provides incentives to banks to monitor and reduce risks that increase potential losses to the DIF. Because it measures risk more accurately, the model reduces the subsidization of riskier banks by less risky banks.
The
The
To avoid unnecessary burden, the
Implementation of the Proposed Rule
The
Detailed Description of the Proposed Rule
Risk Differentiation
As mentioned above, the
The financial ratios method as revised would use the measures described in the right-hand column of Table 7 below. For comparison's sake, the measures currently used in the financial ratios method are set out on the left-hand column of the table.
Table 7--Comparison of Current and Proposed Measures in the Financial Ratios Method
Current risk category I financial ratios method ..... Proposed financial ratios method
Weighted Average CAMELS Component Rating ..... Weighted Average CAMELS Component Rating.
All of the proposed measures are derived from a statistical analysis that estimates a bank's probability of failure within three years. Each of the measures was statistically significant in predicting a bank's probability of failure over that period. The statistical analysis used bank financial data and CAMELS ratings from 1985 through 2011, failure data from 1986 through 2014, and loan charge-off data from 2001 through 2014. [26] Appendix 1 to the Supplementary Information section of this notice and the proposed Appendix E describe the statistical analysis and the derivation of these proposed measures in detail.
Two of the proposed measures--the weighted average CAMELS component rating and the tier 1 leverage ratio--are identical to the measures currently used in the financial ratios method. [27] The proposed net income before taxes/total assets measure is also identical to the current measure, except that the denominator is total assets rather than risk-weighted assets. The current measure nonperforming assets/gross assets includes other real estate owned. In the proposal, other real estate owned/gross assets is a separate measure from nonperforming loans and leases/gross assets.
The remaining three proposed measures--core deposits/total assets, one-year asset growth, and the loan mix index--are new. [28]
Under the proposal, the core deposits/total assets and the one-year asset growth measures would replace the adjusted brokered deposit ratio currently used in the financial ratios method. The adjusted brokered deposit ratio increases a Risk Category I small bank's assessment rate only if the bank has both large amounts of brokered deposits and high asset growth. [29] Few banks have both, so the ratio affects few banks. [30] One of the proposed replacement measures--core deposits/total assets--will tend to lower assessment rates for most small banks. The other proposed replacement measure--one-year asset growth--will tend to raise assessment rates for small banks that grow significantly over a year (other than through merger or by acquiring failed banks).
The loan mix index is a measure of the extent to which a bank's total assets include higher-risk categories of loans. Each category of loan in a bank's loan portfolio is divided by the bank's total assets to determine the percentage of the bank's assets represented by that category of loan. Each percentage is then multiplied by that category of loan's historical weighted average industry-wide charge-off rate. The products are then summed to determine the loan mix index value for that bank.
The loan categories in the loan mix index were selected based on the availability of category-specific charge-off rates over a sufficiently lengthy period (2001 through 2014) to be representative. The loan categories exclude credit card loans. [31] For each loan category, the weighted average charge-off rate weights each industry-wide charge-off rate for each year by the number of bank failures in that year. Thus, charge-off rates from 2009 through 2014, during the recent banking crisis, have a much greater influence on the weighted average charge-off rate than charge-off rates from the years before the crisis, when few failures occurred. The weighted averages assure that types of loans that have high charge-off rates during downturns have an appropriate influence on assessment rates.
Tier 1 Leverage Ratio ..... Tier 1 Leverage Ratio.
Net Income before Taxes/Risk-Weighted Assets ..... Net Income before Taxes/Total Assets.
Nonperforming Assets/Gross Assets ..... Nonperforming Loans and Leases/Gross Assets.
..... Other Real Estate Owned/Gross Assets.
Adjusted Brokered Deposit Ratio ..... Core Deposits/Total Assets.
..... One Year Asset Growth.
Net Loan Charge-Offs/Gross Assets .....
Loans Past Due 30-89 Days/Gross Assets .....
..... Loan Mix Index.
All of the proposed measures are derived from a statistical analysis that estimates a bank's probability of failure within three years. Each of the measures was statistically significant in predicting a bank's probability of failure over that period. The statistical analysis used bank financial data and CAMELS ratings from 1985 through 2011, failure data from 1986 through 2014, and loan charge-off data from 2001 through 2014. [26] Appendix 1 to the Supplementary Information section of this notice and the proposed Appendix E describe the statistical analysis and the derivation of these proposed measures in detail.
Two of the proposed measures--the weighted average CAMELS component rating and the tier 1 leverage ratio--are identical to the measures currently used in the financial ratios method. [27] The proposed net income before taxes/total assets measure is also identical to the current measure, except that the denominator is total assets rather than risk-weighted assets. The current measure nonperforming assets/gross assets includes other real estate owned. In the proposal, other real estate owned/gross assets is a separate measure from nonperforming loans and leases/gross assets.
The remaining three proposed measures--core deposits/total assets, one-year asset growth, and the loan mix index--are new. [28]
Under the proposal, the core deposits/total assets and the one-year asset growth measures would replace the adjusted brokered deposit ratio currently used in the financial ratios method. The adjusted brokered deposit ratio increases a Risk Category I small bank's assessment rate only if the bank has both large amounts of brokered deposits and high asset growth. [29] Few banks have both, so the ratio affects few banks. [30] One of the proposed replacement measures--core deposits/total assets--will tend to lower assessment rates for most small banks. The other proposed replacement measure--one-year asset growth--will tend to raise assessment rates for small banks that grow significantly over a year (other than through merger or by acquiring failed banks).
The loan mix index is a measure of the extent to which a bank's total assets include higher-risk categories of loans. Each category of loan in a bank's loan portfolio is divided by the bank's total assets to determine the percentage of the bank's assets represented by that category of loan. Each percentage is then multiplied by that category of loan's historical weighted average industry-wide charge-off rate. The products are then summed to determine the loan mix index value for that bank.
The loan categories in the loan mix index were selected based on the availability of category-specific charge-off rates over a sufficiently lengthy period (2001 through 2014) to be representative. The loan categories exclude credit card loans. [31] For each loan category, the weighted average charge-off rate weights each industry-wide charge-off rate for each year by the number of bank failures in that year. Thus, charge-off rates from 2009 through 2014, during the recent banking crisis, have a much greater influence on the weighted average charge-off rate than charge-off rates from the years before the crisis, when few failures occurred. The weighted averages assure that types of loans that have high charge-off rates during downturns have an appropriate influence on assessment rates.
Table 8 below illustrates how the loan mix index is calculated for a hypothetical bank.
Table 8--Loan Mix Index for a
..... Weighted charge-off rate percent ..... Loan category as a percent of hypothetical bank's total assets ..... Product of two columns to the left
Construction & Development ..... 4.50 ..... 1.40 ..... 6.29
Commercial & Industrial ..... 1.60 ..... 24.24 ..... 38.75
Leases ..... 1.50 ..... 0.64 ..... 0.96
Other Consumer ..... 1.46 ..... 14.93 ..... 21.74
Loans to Foreign Government ..... 1.34 ..... 0.24 ..... 0.32
Real Estate Loans Residual ..... 1.02 ..... 0.11 ..... 0.11
Multifamily Residential ..... 0.88 ..... 2.42 ..... 2.14
Nonfarm Nonresidential ..... 0.73 ..... 13.71 ..... 9.99
1-4 Family Residential ..... 0.70 ..... 2.27 ..... 1.58
Loans to Depository banks ..... 0.58 ..... 1.15 ..... 0.66
Agriculture ..... 0.24 ..... 5.91 ..... 1.44
SUM (Loan Mix Index) ..... ..... 70.45 ..... 84.79
The weighted charge-off rates in the table are the same for all small banks. The remaining two columns vary from bank to bank, depending on the bank's loan portfolio. For each loan type, the value in the rightmost column is calculated by multiplying the weighted charge-off rate by the bank's loans of that type as a percent of its total assets. In this illustration, the sum of the right-hand column (84.79) is the loan mix index for this bank.
As in the current methodology for Risk Category I small banks, under the proposal the weighted CAMELS components and financial ratios would be multiplied by statistically derived pricing multipliers, the products would be summed, and the sum would be added to a uniform amount that would be: (a) Derived from the statistical analysis, (b) adjusted for assessment rates set by the
Adjustments to Initial Base Assessment Rates
As under current rules: (1) The DIDA would continue to apply to all banks; (2) the unsecured debt adjustment would continue to apply to all banks except new banks and insured branches; and (3) the brokered deposit adjustment would continue to apply to all small banks except those that are well capitalized and have a CAMELS composite rating of 1 or 2. [33] As under current rules, if, during a quarter, a bank's supervisory rating changes from a CAMELS composite 1 or 2 rating to a CAMELS composite 3, 4 or 5 rating or vice versa, the bank would be subject to the brokered deposit adjustment for the portion of the quarter that it did not have a CAMELS composite 1 or 2 rating. [34]
Proposed Assessment Rates
As described above and as set out in the rate schedule in Table 9 below, for established small banks, the
Table 9--Initial and Total Base Assessment Rates *
..... Established small banks ..... Large & highly complex institutions **
CAMELS Composite
1 or 2 ..... 3 ..... 4.or 5
[In basis points per annum]
[Once the reserve ratio reaches 1.15 percent]36
* Total base assessment rates in the table do not include the DIDA.
** See section 327.8(f) and (g) for the definition of large and highly complex institutions.
*** The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured depository institution's initial base assessment rate; thus, for example, an insured depository institution with an initial base assessment rate of 3 basis points will have a maximum unsecured debt adjustment of 1.5 basis points and cannot have a total base assessment rate lower than 1.5 basis points.
**** The brokered deposit adjustment applies to established small banks with CAMELS composite ratings of 1 or 2 only if they are less than well capitalized.
Initial Base Assessment Rate ..... 3 to 16 ..... 6 to 30 ..... 16 to 30 ..... 3 to 30
Unsecured Debt Adjustment *** ..... -5 to 0 ..... -5 to 0 ..... -5 to 0 ..... -5 to 0
Brokered Deposit Adjustment ..... 0 to10 **** ..... 0 to10 ..... 0 to10 ..... 0 to 10
Total Base Assessment Rate ..... 1.5 to 26 ..... 3 to 40 ..... 11 to 40 ..... 1.5 to 40
As discussed above, the
The
By order of the Board of Directors.
Dated at
Executive Secretary.
Editor's note: For the full-text of this document, click this link or copy it into your browser: https://www.federalregister.gov/articles/2015/07/13/2015-16514/assessments.
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