FDIC’s Final Rule Is Flawed

When we discuss the value of RMA membership, one benefit that is less heralded-but very important-is our advocacy role in raising industry issues with the regulators. Several members recently alerted us to potential problems with the FDIC final rule incorporating Dodd-Frank's redefinition of the deposit insurance assessment base and other provisions related to the Deposit Insurance Fund (DIF). In September, we met with the regulators to discuss our concerns.

The final rule, adopted February 7, 2011, revised the risk-based assessment system for all large (more than $10 billion in assets) insured depository institutions, eliminating the use of risk categories and prescribing a scorecard approach incorporating CAMELS ratings and other financial measures to determine a large bank's risk to the DIF.

This final rule is intended to better capture risk at the time it is assumed by the institution. It seeks to better differentiate risk among institutions during good economic times by determining how they would fare during periods of stress. To implement this new large-bank assessment system, the FDIC wanted call reports to better capture information that would help it determine risks posed to the DIF. Two of these changes have proved problematic for affected institutions.

The final rule provides new definitions for leveraged lending and subprime loans that differ from both common industry practice and existing regulatory guidance. Most significantly, the new definition for leveraged commercial loans and securities fails to consider the actual purpose of the loan when making a determination as to whether a credit should be included in this category. The new subprime definition employs criteria not normally used by banks in categorizing borrowers, raises ambiguities regarding which factors must be present to assign a loan to the "subprime" category, and results in loans being included within this category that would otherwise not be considered "subprime" when made.

Several members alerted RMA to the potential problems with these definitional changes. While legitimate concerns have been raised regarding the administrative problems associated with the changes, RMA has chosen to focus its attention on the risk management inadequacies of the new definitions. These new definitions fail to accurately capture the risks presented to the bank (and the DIF) at the time a credit is booked. Including loans as "subprime" that otherwise contain no subprime characteristics fails to provide the FDIC with an accurate picture of risk. Likewise, failing to consider the purpose of a loan leads to erroneous consideration for "leveraged" status.

RMA formally expressed its concerns in a May 13, 2011, comment letter to the FDIC. As a result of the concerns raised by RMA and others, the FDIC agreed to extend, by two quarters, the effective date for reporting under these revised definitions and has sought comment on the matter. Comments were due September 26, 2011, and the changes are scheduled to become effective October 1, 2011.

Facing this looming deadline, RMA representatives met with OCC senior staff on September 2, to express our members' concerns and elicit the OCC's views from a safety and soundness perspective. The OCC, possessing a vote on the FDIC board, agreed with our position and implied that the definition changes in the final rule had not received the appropriate level of scrutiny prior to adoption.

On September 12, RMA staff and others, including a significant contingent of RMA members, met with FDIC officials to express continuing concern over this issue. FDIC officials listened intently to the arguments presented, but offered no hint as to their course of action. Any change to these definitions will require formal rulemaking, since they are contained in the final rule issued by the FDIC board last February.

These definitional matters represent a major issue for those institutions in the over-$10-billion asset class, both in terms of equitable FDIC assessments as well as the administrative burden and attestation risk associated with obtaining and reporting accurate information.

While RMA fully supports the general aim of the FDIC's final rule, we remain concerned that the new large-bank assessment program, if not revised, will fail to apply appropriate risk-based evaluation tools and will inaccurately measure the true risk presented when credits are booked.

We will ensure that RMA members remain informed of the FDIC's actions on this important matter and are certain that this topic will be a major source of discussion during the Regulatory Roundtable session at our annual conference in Washington, D.C. on October 18.

Bill Githens, CRC | President and CEO

bgithens@rmahq.org