Assessments, Amendments To Address the Temporary Deposit Insurance Assessment Effects of the Optional Regulatory Capital Transitions for Implementing the Current Expected Credit Losses Methodology
Notice of proposed rulemaking.
CFR Part: "12 CFR Part 327"
RIN Number: "RIN 3064-AF65"
Citation: "85 FR 78794"
Page Number: "78794"
"Proposed Rules"
Agency: "
SUMMARY: The
DATES: Comments must be received no later than
ADDRESSES: You may submit comments on the proposed rule using any of the following methods:
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FOR FURTHER INFORMATION CONTACT:
SUPPLEMENTARY INFORMATION:
I. Policy Objectives The Federal Deposit Insurance Act (FDI Act) requires that the
FOOTNOTE 1 12 U.S.C. 1817(b). END FOOTNOTE
FOOTNOTE 2 57 FR 45263 (
FOOTNOTE 3 As used in this proposed rule, the term "insured depository institution" has the same meaning as it is used in section 3(c)(2) of the FDI Act, 12 U.S.C. 1813(c)(2). END FOOTNOTE
In 2006, the
FOOTNOTE 4 See 71 FR 69282 (
FOOTNOTE 5 See 76 FR 10672 (
The
This proposal would amend the deposit insurance system applicable to large and highly complex banks only, and it would not affect regulatory capital or the regulatory capital relief provided in the form of transition provisions that allow banking organizations to phase in the effects of CECL on their regulatory capital ratios. /6/ Specifically, in calculating another measure used to determine assessment rates for all IDIs, the Tier 1 leverage ratio, the
FOOTNOTE 6 Banking organizations subject to the capital rule include national banks, state member banks, state nonmember banks, savings associations, and top-tier bank holding companies and savings and loan holding companies domiciled in
FOOTNOTE 7 See 84 FR 4225 (
The proposed amendments to the deposit insurance assessment system and any changes to reporting requirements pursuant to this proposal would be required only while the regulatory capital relief described above is reflected in the regulatory reports of banks.
II. Background
A. Deposit Insurance Assessments
The
FOOTNOTE 8 See 12 CFR 327.3(b)(1). END FOOTNOTE
FOOTNOTE 9 See 12 CFR 327.5. END FOOTNOTE
An IDI's assessment rate is calculated using different methods based on whether the IDI is a small, large, or highly complex bank. /10/ Large and highly complex banks are assessed using a scorecard approach that combines CAMELS ratings and certain forward-looking financial measures to assess the risk that a large or highly complex bank poses to the DIF. /11/ The score that each large or highly complex bank receives is used to determine its deposit insurance assessment rate. One scorecard applies to most large IDIs and another applies to highly complex banks. Both scorecards use quantitative financial measures that are useful in predicting a large or highly complex bank's long-term performance. /12/
FOOTNOTE 10 For assessment purposes, a large bank is generally defined as an institution with
FOOTNOTE 11 See 12 CFR 327.16(b); see also 76 FR 10672 (
FOOTNOTE 12 See 76 FR 10688. The
As described in more detail below, the
B. The Current Expected Credit Losses Methodology
In 2016, the
FOOTNOTE 13 ASU 2016-13 covers measurement of credit losses on financial instruments and includes three subtopics within Topic 326: (i) Subtopic 326-10 Financial Instruments--Credit Losses--Overall; (ii) Subtopic 326-20: Financial Instruments--Credit Losses--Measured at Amortized Cost; and (iii) Subtopic 326-30: Financial Instruments--Credit Losses--
CECL allowances cover a broader range of financial assets than the allowance for loan and lease losses (ALLL) under the incurred loss methodology. Under the incurred loss methodology, the ALLL generally covers credit losses on loans held for investment and lease financing receivables, with additional allowances for certain other extensions of credit and allowances for credit losses on certain off-balance sheet credit exposures (with the latter allowances presented as liabilities). /14/ These exposures will be within the scope of CECL. In addition, CECL applies to credit losses on held-to-maturity (HTM) debt securities. ASU 2016-13 also introduces new requirements for available-for-sale (AFS) debt securities. The new accounting standard requires that a banking organization recognize credit losses on individual AFS debt securities through credit loss allowances, rather than through direct write-downs, as is currently required under
FOOTNOTE 14 "Other extensions of credit" includes trade and reinsurance receivables, and receivables that relate to repurchase agreements and securities lending agreements. "Off-balance sheet credit exposures" includes off-balance sheet credit exposures not accounted for as insurance, such as loan commitments, standby letters of credit, and financial guarantees. The
C. The 2019 CECL Rule
Upon adoption of CECL, a banking organization will record a one-time adjustment to its credit loss allowances as of the beginning of its fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances required under the incurred loss methodology and the amount of credit loss allowances required under CECL. A banking organization's implementation of CECL will affect its retained earnings, deferred tax assets (DTAs), allowances, and, as a result, its regulatory capital ratios.
In recognition of the potential for the implementation of CECL to affect regulatory capital ratios, on
FOOTNOTE 15 12 CFR part 3 (OCC); 12 CFR part 217 (Board); 12 CFR part 324 (FDIC). END FOOTNOTE
FOOTNOTE 16 84 FR 4222 (
D. The 2020 CECL Rule
As part of the efforts to address the disruption of economic activity in
FOOTNOTE 17 85 FR 17723 (
FOOTNOTE 18 See 85 FR 61577 (
FOOTNOTE 19 A banking organization that is required to adopt CECL under GAAP in the 2020 calendar year, but chooses to delay use of CECL for regulatory reporting in accordance with section 4014 of the Coronavirus Aid Relief, and Economic Security Act (CARES Act), is also eligible for the 2020 CECL transition provision. The CARES Act (Pub. L. 116-136, 4014, 134 Stat. 281 (
FOOTNOTE 20 See 85 FR 61578 (
E. Double Counting of a Portion of the CECL Transitional Amounts in Certain Financial Measures Used To Determine Assessments for Large and Highly Complex Banks
An increase in a banking organization's allowances, including those estimated under CECL, generally will reduce the banking organization's earnings or retained earnings, and therefore, its Tier 1 capital. For banks electing the 2019 CECL rule, the CECL transitional amount is the difference between the closing balance sheet amount of retained earnings for the fiscal year-end immediately prior to the bank's adoption of CECL (pre-CECL amount) and the bank's balance sheet amount of retained earnings as of the beginning of the fiscal year in which it adopts CECL (post-CECL amount). For banks electing the 2020 CECL rule transition provision, retained earnings are increased for regulatory capital calculation purposes by a modified CECL transitional amount that is adjusted to reflect changes in retained earnings due to CECL that occur during the first two years of the five-year transition period. Under the 2020 CECL rule, the change in retained earnings due to CECL is calculated by taking the change in reported adjusted allowances for credit losses (AACL) /21/ relative to the first day of the fiscal year in which CECL was adopted and applying a scaling multiplier of 25 percent during the first two years of the transition period. The resulting amount is added to the CECL transitional amount described above. Hence, the modified CECL transitional amount for banks electing the 2020 CECL rule is calculated on a quarterly basis during the first two years of the transition period. The bank reflects that modified CECL transitional amount, which includes 100 percent of the day-one impact of CECL on retained earnings plus a portion of the difference between AACL reported in the most recent regulatory report and AACL as of the beginning of the fiscal year that the banking organization adopts CECL, in the transitional amount applied to retained earnings in regulatory capital calculations. /22/
FOOTNOTE 21 The 2019 CECL rule defined a new term for regulatory capital purposes, adjusted allowances for credit losses (AACL). The meaning of the term AACL for regulatory capital purposes is different from the meaning of the term allowances of credit losses (ACL) used in applicable accounting standards. The term allowance for credit losses as used by the FASB in ASU 2016-13 applies to both financial assets measured at amortized cost and AFS debt securities. In contrast, the AACL definition includes only those allowances that have been established through a charge against earnings or retained earnings. Under the 2019 CECL rule, the term AACL, rather than ALLL, applies to a banking organization that has adopted CECL. END FOOTNOTE
FOOTNOTE 22 See 85 FR 61580 (
For banks electing the 2020 CECL rule transition provision that enter the third year of their transition period and for banks electing the three-year 2019 CECL rule transition provision, banks must calculate the transitional amount to phase into their retained earnings for purposes of their regulatory capital calculations over a three-year period. For banks electing the 2019 CECL rule, the CECL transitional amount of is the difference between the pre-CECL amount of retained earnings and the post-CECL amount of retained earnings. For banks electing the 2020 CECL rule that enter the third year of their transition, the modified CECL transitional amount is the difference between the bank's AACL at the end of the second year of the transition period and its AACL as of the beginning of the fiscal year of CECL adoption multiplied by 25 percent plus the CECL transitional amount described above. The CECL transitional amount or, at the end of the second year of the transition period for banks electing the 2020 CECL rule, the modified CECL transitional amount, is fixed and must be phased in over the three-year transition period or the last three years of the transition period, respectively, on a straight-line basis, 25 percent in the first year (or third year for banks electing the 2020 CECL rule), and an additional 25 percent of the transitional amount over each of the next two years. /23/ At the beginning of the sixth year for banks electing the 2020 CECL rule, or the beginning of the fourth year for banks electing the 2019 CECL rule, the electing bank would have completely reflected in regulatory capital the day-one effects of CECL (plus, for banks electing the 2020 CECL rule, an estimate of CECL's effect on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, during the first two years of CECL adoption). /24/
FOOTNOTE 23 Thus, when calculating regulatory capital, a bank electing the 2019 CECL rule transition provision would increase the retained earnings reported on its balance sheet by the applicable portion of its CECL transitional amount, i.e., 75 percent of its CECL transitional amount during the first year of the transition period, 50 percent of its CECL transitional amount during the second year of the transition period, and 25 percent of its CECL transitional amount during the third year of the transition period. A bank electing the 2020 CECL rule transition provision would increase the retained earnings reported on its balance sheet by the applicable portion of its modified CECL transitional amount, i.e., 100 percent of its modified CECL transitional amount during the first and second years of the transition period, 75 percent of its CECL modified transitional amount during the third year of the transition period, 50 percent of its modified CECL transitional amount during the fourth year of the transition period, and 25 percent of its CECL transitional amount during the fifth year of the transition period. END FOOTNOTE
FOOTNOTE 24 See 84 FR 4228 (
Certain financial measures that are used in the scorecard to determine assessment rates for large and highly complex banks are calculated using both Tier 1 capital and reserves. Tier 1 capital is reported in Call Report Schedule RC-R, Part I, item 26, and for banks that elect either the three-year transition provision contained in the 2019 CECL rule or the five-year transition provision contained in the 2020 CECL rule, Tier 1 capital includes (due to adjustments to the amount of retained earnings reported on the balance sheet) the applicable portion of the CECL transitional amount (or modified CECL transitional amount). For deposit insurance assessment purposes, reserves are calculated using the amount reported in Call Report Schedule RC, item 4.c, "Allowance for loan and lease losses." For all banks that have adopted CECL, this Schedule RC line item reflects the allowance for credit losses on loans and leases. /25/ The issue of double counting arises in certain financial measures used to determine assessment rates for large and highly complex banks that are calculated using both Tier 1 capital and reserves because the allowance for credit losses on loans and leases is included during the transition period in both reserves and, as a portion of the CECL or modified CECL transitional amount, Tier 1 capital. For banks that elect either the three-year transition provision contained in the 2019 CECL rule or the five-year transition provision contained in the 2020 CECL rule, the CECL transitional amounts, as defined in section 301 of the regulatory capital rules, additionally include the effect on retained earnings, net of tax effect, of establishing allowances for credit losses in accordance with the CECL methodology on HTM debt securities, other financial assets measured at amortized cost, and off-balance sheet credit exposures as of the beginning of the fiscal year of adoption (plus, for banks electing the 2020 CECL rule, the change during the first two years of the transition period in reported AACLs for HTM debt securities, other financial assets measured at amortized cost, and off-balance sheet credit exposures relative to the balances of these AACLs as of the beginning of the fiscal year of CECL adoption multiplied by 25 percent). The applicable portions of the CECL transitional amounts attributable to allowances for credit losses on HTM debt securities, other financial assets measured at amortized cost, and off-balance sheet credit exposures are included in Tier 1 capital only and are not double counted with reserves for deposit insurance assessment purposes.
FOOTNOTE 25 The allowance for credit losses on loans and leases held for investment also is reported in item 7, column A, of Call Report Schedule RI-B, Part II, Changes in Allowances for Credit Losses. END FOOTNOTE
The CECL effective dates assigned by ASU 2016-13 as most recently amended by ASU No. 2019-10, the optional temporary relief from complying with CECL afforded by the CARES Act, and the transitions provided for under the 2019 CECL rule and 2020 CECL rule, provide that all banks will have completely reflected in regulatory capital the day-one effects of CECL (plus, if applicable, an estimate of CECL's effect on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, during the first two years of CECL adoption) by
III. The Proposed Rule
A. Summary
In calculating certain measures used in the scorecard for determining deposit insurance assessment rates for large and highly complex banks, the
Absent adjustments to the calculation of certain financial measures in the large and highly complex bank scorecards, the inclusion of the applicable portions of the CECL transitional amounts added to retained earnings for regulatory capital purposes and attributable to the allowance for credit losses on loans and leases held for investment in regulatory capital and the implementation of CECL in calculating reserves will result in temporary double counting of a portion of the CECL transitional amounts in select financial measures used to determine assessment rates for large and highly complex banks. For example, in the denominator of the higher-risk assets to Tier 1 capital and reserves ratio, the applicable portions of the CECL transitional amounts added to retained earnings for regulatory capital purposes and attributable to the allowance for credit losses on loans and leases held for investment would be included in Tier 1 capital, and these portions also would be reflected in the calculation of reserves using the allowance amount reported in Call Report Schedule RC, item 4.c. If left uncorrected, this temporary double counting could result in a deposit insurance assessment rate for a large or highly complex bank that does not accurately reflect the bank's risk to the DIF, all else equal.
In the following simplified, stylized example, illustrated in Table 1 below, consider a hypothetical large bank that has a CECL effective date of
FOOTNOTE 26 This stylized example is included to illustrate the effect of the proposed rule and omits the effects of deferred tax assets on regulatory capital calculations, which are addressed in the agencies' capital rule, the 2019 CECL rule, and the 2020 CECL rule. The example reflects the first-quarter 2020 application by a hypothetical large bank (with no purchased credit-deteriorated assets) that has adopted the five-year CECL transition under the 2020 CECL rule and assumes that the full amount of the CECL transitional amount is attributable to the allowance for credit losses on loans and leases. The example does not reflect any changes over the course of the first quarterly reporting period in year 1 (i.e., no changes in the amounts reported on the bank's balance sheet
FOOTNOTE 27 While the CECL transitional amount is calculated using the difference between the closing balance sheet amount of retained earnings for the fiscal year-end immediately prior to a bank's adoption of CECL and the balance sheet amount of retained earnings as of the beginning of the fiscal year in which the bank adopts CECL, the
FOOTNOTE 28 Under the 2019 CECL rule, when calculating regulatory capital ratios during the first year of an electing bank's CECL adoption date, the bank must phase in 25 percent of the transitional amounts. The bank would phase in an additional 25 percent of the transitional amounts over each of the next two years so that the bank would have phased in 75 percent of the day-one adverse effects of adopting CECL during year three. At the beginning of the fourth year, the bank would have completely reflected in regulatory capital the day-one effects of CECL. Under the 2020 CECL rule, the modified CECL transitional amount is calculated on a quarterly basis during the first two years of the transition period. See 12 CFR part 3 (OCC); 12 CFR part 217 (Board); 12 CFR part 324 (FDIC). See also 84 FR 4222 (
In this example, in determining the hypothetical large bank's deposit insurance assessment rate, the bank's Tier 1 capital of
FOOTNOTE 29 In this stylized example, the entirety of the CECL transitional amount is attributable to the allowance for credit losses on loans and leases and it equals the modified CECL transitional amount during the first quarter of the transition period. The applicable portion of the CECL transitional amounts is the amount that is double counted in certain financial measures used to determine deposit insurance assessment rates and that the
Under the proposal, for purposes of calculating assessments for large and highly complex banks, the
Table 1-Stylized Example fn1 of First-Quarter Application of a Five-Year CECL Transition in Calculating Tier 1 Capital and Reserves for Deposit Insurance Assessment Purposes In thousands Dec. 31, 2019 Jan. 1, 2020 Reserves$ 1,000 (ALLL)$ 1,200 (AACL). Tier 1 Capital 10,000 10,000. Tier 1 Capital and Reserves (current) 11,000 11,200. Applicable Portion of the CECL Transitional Amount 200. Tier 1 Capital and Reserves (proposed) 11,000. fn1 This stylized example reflects the first-quarter application of a hypothetical bank that has adopted a five-year CECL transition under the 2020 CECL rule and assumes that the full amount of the CECL transitional amount is attributable to the allowance for credit losses on loans and leases. The example does not reflect any changes over the course of the first quarter of 2020 (i.e., no changes in the amounts reported on the bank's balance sheetbetween January 1 and March 31, 2020 , the end of the reporting period for the first quarter). As a consequence, the bank's modified CECL transitional amount as ofMarch 31, 2020 , equals its CECL transitional amount. This stylized example omits the effects of deferred tax assets, which are addressed in the agencies' capital rule, the 2019 CECL rule, and the 2020 CECL rule.
This proposal would amend the deposit insurance system applicable to large and highly complex banks only, and would not affect regulatory capital or the regulatory capital relief provided under the 2019 CECL rule or 2020 CECL rule. /30/ The
FOOTNOTE 30 See 12 CFR part 3 (OCC); 12 CFR part 217 (Board); 12 CFR part 324 (FDIC). See also 84 FR 4222 (
Temporary changes to the Call Report forms and instructions would be required to implement the proposed amendments to the assessment system to remove the double counting. These changes would be effectuated in coordination with the other member entities of the
FOOTNOTE 31 As discussed in the section on the Paperwork Reduction Act below, the
B. Adjustments to Certain Measures Used in the Scorecard Approach for Determining Assessments for Large and Highly Complex Banks
The
This amount, which would be reported in a new line item in Schedule RC-O only on the
While the
1. Credit Quality Measure
The score for the credit quality measure, applicable to large and highly complex banks, is the greater of (1) the ratio of criticized and classified items to Tier 1 capital and reserves score or (2) the ratio of underperforming assets to Tier 1 capital and reserves score. /32/ The double counting results in lower ratios and a credit quality measure that reflects less risk than a bank actually poses to the DIF. The
FOOTNOTE 32 See 12 CFR 327.16(b)(ii)(A)(2)(iv). END FOOTNOTE
2. Concentration Measure
For large banks, the concentration measure is the higher of (1) the ratio of higher-risk assets to Tier 1 capital and reserves or (2) the growth-adjusted portfolio concentration measure. The growth-adjusted portfolio concentration measure includes the ratio of concentration levels for several loan portfolios to Tier 1 capital and reserves.
For highly complex banks, the concentration measure is the highest of three measures: (1) The ratio of higher-risk assets to Tier 1 capital and reserves, (2) the ratio of top 20 counterparty exposures to Tier 1 capital and reserves, or (3) the ratio of the largest counterparty exposure to Tier 1 capital and reserves. /33/
FOOTNOTE 33 See Appendix A to subpart A of 23 CFR 327. END FOOTNOTE
The double counting results in lower ratios and a concentration measure that reflects less risk than a bank actually poses to the DIF. The
3. Loss Severity Measure
The loss severity measure estimates the relative magnitude of potential losses to the DIF in the event of an IDI's failure. /34/ In calculating this measure, the
FOOTNOTE 34 Appendix D to subpart A of 12 CFR 327 describes the calculation of the loss severity measure. END FOOTNOTE
FOOTNOTE 35 The loss severity measure is an average loss severity ratio for the three most recent quarters of data available. It is anticipated that any temporary reporting changes effectuated pursuant to this proposal would be implemented no earlier than the first applicable reporting period following the anticipated effective date of any final rule promulgated by this proposal. As such, the
Question 1: The
C. Other Conforming Amendments to the Assessment Regulations
The
D. Proposed Regulatory Reporting Changes
A bank electing a transition under either the 2019 CECL rule or the 2020 CECL rule must indicate its election to use the 3-year 2019 or the 5-year 2020 CECL transition provision in Call Report Schedule RC-R, Part I, item 2.a. In addition, such an electing bank must report the applicable portions of the transitional amounts under the 2019 CECL rule or the 2020 CECL rule in the affected Call Report items during the transition period. For example, an electing bank would add the applicable portion of the CECL transitional amount (or the modified CECL transitional amount) when calculating the amount of retained earnings it would report in Schedule RC-R, Part I, item 2, of the Call Report. /36/
FOOTNOTE 36 See 84 FR 4227 and 85 FR 17726. END FOOTNOTE
In calculating certain measures used in the scorecard approach for determining deposit insurance assessments for large and highly complex banks, the
However, large and highly complex banks that have elected a CECL transition provision do not currently report these specific portions of the CECL transitional amounts in the Call Report. Thus, implementing the proposed amendments to the risk-based deposit insurance assessment system applicable to large and highly complex banks would require temporary changes to the reporting requirements applicable to the Call Report and its related instructions. These reporting changes would be proposed and effectuated in coordination with the other member entities of the
E. Expected Effects
The proposed rule would remove the applicable portions of the CECL transitional amounts added to retained earnings for regulatory capital purposes and attributable to the allowance for credit losses on loans and leases held for investment from certain financial measures used in the scorecards that determine deposit insurance assessment rates for large and highly complex banks. Absent the proposed rule, this amount would be temporarily double counted and could result in a deposit insurance assessment rate for a large or highly complex bank that does not accurately reflect the bank's risk to the DIF, all else equal. Furthermore, the double counting inherent in the regulation could result in inequitable deposit insurance assessments, as a large or highly complex bank that has not yet implemented CECL or that does not utilize a transition provision could pay a higher or lower assessment rate than a bank that has implemented CECL and utilizes a transition provision, even if both banks pose equal risk to the DIF. The
Based on
The proposed rule could pose some additional regulatory costs for large and highly complex banks that elect a transition under either the 2019 CECL rule or the 2020 CECL rule associated with changes to internal systems or processes, or changes to reporting requirements. It is the
F. Alternatives Considered
The
One alternative would be to leave in place the current assessment regulations. Under this alternative, the applicable portions of the CECL transitional amounts would be automatically and fully included in both retained earnings as reported for regulatory capital purposes (affecting Tier 1 capital) and reserves, resulting in double counting of the applicable portions of these transitional amounts attributable to allowances for credit losses on loans and leases held for investment in certain financial measures that are used to determine deposit insurance assessment rates for large and highly complex banks. As a result, a large or highly complex bank could pay a deposit insurance assessment rate that does not accurately reflect the bank's risk to the DIF, all else equal. Furthermore, this double counting could result in inequitable deposit insurance assessments, as a large or highly complex bank that has not yet implemented CECL or that does not utilize a transition provision could pay a higher or lower assessment rate than a bank that has implemented CECL and utilizes a transition provision, even if both banks pose equal risk to the DIF. Based on data as of
The
Furthermore, as described above, it is the
Question 2: The
G. Comment Period, Effective Date, and Application Date
The
IV. Request for Comment
The
V. Administrative Law Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C.
FOOTNOTE 37 5 U.S.C.
FOOTNOTE 38 The SBA defines a small banking organization as having
FOOTNOTE 39 5 U.S.C. 601. END FOOTNOTE
Based on Call Report data as of
FOOTNOTE 40 FDIC Call Report data,
B.
Section 302(a) of the
FOOTNOTE 41 5 U.S.C. 553(b)(B).
5 U.S.C. 553(d).
5 U.S.C.
5 U.S.C.
5 U.S.C. 801(a)(3).
5 U.S.C. 804(2).
5 U.S.C. 808(2).
12 U.S.C. 4802(a).
12 U.S.C. 4802(b). END FOOTNOTE
C. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) states that no agency may conduct or sponsor, nor is the respondent required to respond to, an information collection unless it displays a currently valid
FOOTNOTE 42 4 U.S.C. 3501-3521. END FOOTNOTE
D. Plain Language
Section 722 of the Gramm-Leach-Bliley Act /43/ requires the Federal banking agencies to use plain language in all proposed and final rulemakings published in the
FOOTNOTE 43 12 U.S.C. 4809. END FOOTNOTE
* Has the
* Are the requirements in the proposed regulation clearly stated? If not, how could the regulation be stated more clearly?
* Does the proposed regulation contain language or jargon that is unclear? If so, which language requires clarification?
* Would a different format (grouping and order of sections, use of headings, paragraphing) make the regulation easier to understand?
List of Subjects in 12 CFR Part 327 Bank deposit insurance, Banks, Banking, Savings associations.
Authority and Issuance
For the reasons stated in the preamble, the
PART 327--ASSESSMENTS
1. The authority citation for part 327 is revised to read as follows:
Authority:12 U.S.C. 1813, 1815, 1817-19, 1821.
2. In Appendix A to Subpart A, amend the table under section heading, "VI. Description of Scorecard Measures," by:
a. Redesignating footnotes 2 as 3, 3 as 4, 4 as 5, and 5 as 7;
b. Adding a new footnote 2 after various measures described in the table; and
c. Adding a new footnote 6 after "Potential Losses/Total Domestic Deposits (Loss Severity Measure).
The revisions and additions read as follows:
Appendix A to Subpart A of Part 327--Method To Derive Pricing Multipliers and Uniform Amount
*****
VI. Description of Scorecard Measures Scorecard measures fn1 Description * * * * * * * Concentration Measure for Large Insured depository institutions (excludingHighly Complex The concentration score for large institutions is the higher of the following two scores: Institutions) (1) Higher-Risk Assets/Tier 1 Capital and Reserves fn2 Sum of construction and land development (C&D) loans (funded and unfunded), higher-risk C&I loans (funded and unfunded), nontraditional mortgages, higher-risk consumer loans, and higher-risk securitizations divided by Tier 1 capital and reserves. See Appendix C for the detailed description of the ratio. (2) Growth-Adjusted Portfolio Concentrations fn2 The measure is calculated in the following steps: * * * * * * * Concentration Measure for Highly Complex Institutions Concentration score for highly complex institutions is the highest of the following three scores: (1) Higher-Risk Assets/Tier 1 Capital and Reserves fn2 Sum of C&D loans (funded and unfunded), higher-risk C&I loans (funded and unfunded), nontraditional mortgages, higher-risk consumer loans, and higher-risk securitizations divided by Tier 1 capital and reserves. See Appendix C for the detailed description of the measure. (2) Top 20 Counterparty Exposure/Tier 1 Capital and Reserves fn2 Sum of the 20 largest total exposure amounts to counterparties divided by Tier 1 capital and reserves. The total exposure amount is equal to the sum of the institution's exposure amounts to one counterparty (or borrower) for derivatives, securities financing transactions (SFTs), and cleared transactions, and its gross lending exposure (including all unfunded commitments) to that counterparty (or borrower). A counterparty includes an entity's own affiliates. Exposures to entities that are affiliates of each other are treated as exposures to one counterparty (or borrower). Counterparty exposure excludes all counterparty exposure to theU.S. Government and departments or agencies of theU.S. Government that is unconditionally guaranteed by the full faith and credit ofthe United States . The exposure amount for derivatives, including OTC derivatives, cleared transactions that are derivative contracts, and netting sets of derivative contracts, must be calculated using the methodology set forth in 12 CFR 324.34(b), but without any reduction for collateral other than cash collateral that is all or part of variation margin and that satisfies the requirements of 12 CFR 324.10(c)(4)(ii)(C)(1)(ii) and (iii) and 324.10(c)(4)(ii)(C)(3) through (7). The exposure amount associated with SFTs, including cleared transactions that are SFTs, must be calculated using the standardized approach set forth in 12 CFR 324.37(b) or (c). For both derivatives and SFT exposures, the exposure amount to central counterparties must also include the default fund contribution. fn3 (3) Largest Counterparty Exposure/Tier 1 Capital and Reserves fn2 The largest total exposure amount to one counterparty divided by Tier 1 capital and reserves. The total exposure amount is equal to the sum of the institution's exposure amounts to one counterparty (or borrower) for derivatives, SFTs, and cleared transactions, and its gross lending exposure (including all unfunded commitments) to that counterparty (or borrower). A counterparty includes an entity's own affiliates. Exposures to entities that are affiliates of each other are treated as exposures to one counterparty (or borrower). Counterparty exposure excludes all counterparty exposure to theU.S. Government and departments or agencies of theU.S. Government that is unconditionally guaranteed by the full faith and credit ofthe United States . The exposure amount for derivatives, including OTC derivatives, cleared transactions that are derivative contracts, and netting sets of derivative contracts, must be calculated using the methodology set forth in 12 CFR 324.34(b), but without any reduction for collateral other than cash collateral that is all or part of variation margin and that satisfies the requirements of 12 CFR 324.10(c)(4)(ii)(C)(1)(ii) and (iii) and 324.10(c)(4)(ii)(C)(3) through (7). The exposure amount associated with SFTs, including cleared transactions that are SFTs, must be calculated using the standardized approach set forth in 12 CFR 324.37(b) or (c). For both derivatives and SFT exposures, the exposure amount to central counterparties must also include the default fund contribution. fn3 * * * * * * * Credit Quality Measure The credit quality score is the higher of the following two scores: (1) Criticized and Classified Items/Tier 1 Capital and Reserves fn2 Sum of criticized and classified items divided by the sum of Tier 1 capital and reserves. Criticized and classified items include items an institution or its primary federal regulator have graded "Special Mention" or worse and include retail items under Uniform Retail Classification Guidelines, securities, funded and unfunded loans, other real estate owned (ORE), other assets, and marked-to-market counterparty positions, less credit valuation adjustments. fn4 Criticized and classified items exclude loans and securities in trading books, and the amount recoverable from theU.S. government, its agencies, or government-sponsored enterprises, under guarantee or insurance provisions. (2) Underperforming Assets/Tier 1 Capital and Reserves fn2 Sum of loans that are 30 days or more past due and still accruing interest, nonaccrual loans, restructured loans (including restructured 1-4 family loans), and ORE, excluding the maximum amount recoverable from theU.S. government, its agencies, or government-sponsored enterprises, under guarantee or insurance provisions, divided by a sum of Tier 1 capital and reserves. * * * * * * * Balance Sheet Liquidity Ratio Sum of cash and balances due from depository institutions, federal funds sold and securities purchased under agreements to resell, and the market value of available for sale and held to maturity agency securities (excludes agency mortgage-backed securities but includes all other agency securities issued by theU.S. Treasury ,U.S. government agencies, andU.S. government-sponsored enterprises) divided by the sum of federal funds purchased and repurchase agreements, other borrowings (including FHLB) with a remaining maturity of one year or less, 5 percent of insured domestic deposits, and 10 percent of uninsured domestic and foreign deposits. fn5 Potential Losses/Total Domestic Deposits (Loss Severity Measure) fn6 Potential losses to the DIF in the event of failure divided by total domestic deposits. Appendix D describes the calculation of the loss severity measure in detail. Market Risk Measure for Highly Complex Institutions The market risk score is a weighted average of the following three scores: * * * * * * * (2)Market Risk Capital /Tier 1 Capital Market risk capital divided by Tier 1 capital. fn7 * * * * * * * fn1 TheFDIC retains the flexibility, as part of the risk-based assessment system, without the necessity of additional notice-and-comment rulemaking, to update the minimum and maximum cutoff values for all measures used in the scorecard. TheFDIC may update the minimum and maximum cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio in order to maintain an approximately similar distribution of higher-risk assets to Tier 1 capital and reserves ratio scores as reported prior toApril 1, 2013 , or to avoid changing the overall amount of assessment revenue collected. 76 FR 10672, 10700 (February 25, 2011 ). TheFDIC will review changes in the distribution of the higher-risk assets to Tier 1 capital and reserves ratio scores and the resulting effect on total assessments and risk differentiation between banks when determining changes to the cutoffs. TheFDIC may update the cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio more frequently than annually. TheFDIC will provide banks with a minimum one quarter advance notice of changes in the cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio with their quarterly deposit insurance invoice. fn2 The applicable portions of the current expected credit loss methodology (CECL) transitional amounts attributable to the allowance for credit losses on loans and leases held for investment and added to retained earnings for regulatory capital purposes pursuant to the regulatory capital regulations, as they may be amended from time to time (12 CFR part 3, 12 CFR part 217, 12 CFR part 324, 85 FR 61577 (Sept. 30, 2020 ), and 84 FR 4222 (Feb. 14, 2019 )), will be removed from the sum of Tier 1 capital and reserves. fn3 SFTs include repurchase agreements, reverse repurchase agreements, security lending and borrowing, and margin lending transactions, where the value of the transactions depends on market valuations and the transactions are often subject to margin agreements. The default fund contribution is the funds contributed or commitments made by a clearing member to a central counterparty's mutualized loss sharing arrangement. The other terms used in this description are as defined in 12 CFR part 324, subparts A and D, unless defined otherwise in 12 CFR part 327. fn4 A marked-to-market counterparty position is equal to the sum of the net marked-to-market derivative exposures for each counterparty. The net marked-to-market derivative exposure equals the sum of all positive marked-to-market exposures net of legally enforceable netting provisions and net of all collateral held under a legally enforceable CSA plus any exposure where excess collateral has been posted to the counterparty. For purposes of the Criticized and Classified Items/Tier 1 Capital and Reserves definition a marked-to-market counterparty position less any credit valuation adjustment can never be less than zero. fn5 Deposit runoff rates for the balance sheet liquidity ratio reflect changes issued by theBasel Committee on Banking Supervision in itsDecember 2010 document, "Basel III: International Framework for liquidity risk measurement, standards, and monitoring," http://www.bis.org/publ/bcbs188.pdf. fn6 The applicable portions of the CECL transitional amounts attributable to the allowance for credit losses on loans and leases held for investment and added to retained earnings for regulatory capital purposes will be removed from the calculation of the loss severity measure. fn7 Market risk is defined in 12 CFR 324.202.
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3. In Appendix C to Subpart A, revise the text under section heading, "I. Concentration Measures," to read as follows:
Appendix C to Subpart A of Part 327--Description of Concentration Measures
I. Concentration Measures
The concentration score for large banks is the higher of the higher-risk assets to Tier 1 capital and reserves score or the growth-adjusted portfolio concentrations score. /1/ The concentration score for highly complex institutions is the highest of the higher-risk assets to Tier 1 capital and reserves score, the Top 20 counterparty exposure to Tier 1 capital and reserves score, or the largest counterparty to Tier 1 capital and reserves score. /2/ The higher-risk assets to Tier 1 capital and reserves ratio and the growth-adjusted portfolio concentration measure are described herein.
FOOTNOTE 1 For the purposes of this Appendix, the term "bank" means insured depository institution. END FOOTNOTE
FOOTNOTE 2 As described in Appendix A to this subpart, the applicable portions of the current expected credit loss methodology (CECL) transitional amounts attributable to the allowance for credit losses on loans and leases held for investment and added to retained earnings for regulatory capital purposes pursuant to the regulatory capital regulations, as they may be amended from time to time (12 CFR part 3, 12 CFR part 217, 12 CFR part 324, 85 FR 61577 (
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4. In Appendix D to Subpart A, revise the text under section heading, "Appendix D to Subpart A of Part 327--Description of the Loss Severity Measure," to add a new footnote 3. The revision and addition read as follows:
Appendix D to Subpart A of Part 327--Description of the Loss Severity Measure
The loss severity measure applies a standardized set of assumptions to an institution's balance sheet to measure possible losses to the
FOOTNOTE ***** END FOOTNOTE
FOOTNOTE 3 The applicable portions of the current expected credit loss methodology (CECL) transitional amounts attributable to the allowance for credit losses on loans and leases held for investment and added to retained earnings for regulatory capital purposes pursuant to the regulatory capital regulations, as they may be amended from time to time (12 CFR part 3, 12 CFR part 217, 12 CFR part 324, 85 FR 61577 (
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5. In Appendix E to subpart A, amend Table E.2 by:
a. Redesignating footnote 1 after "Credit Quality Measure" as 2;
b. Adding a new footnote 1; and
c. Adding footnote 2 after "Market Risk Measure for Highly Complex Institutions".
The revisions and additions read as follows:
Table E.2-Exclusions From Certain Risk Measures Used To Calculate the Assessment Rate for Large or Highly Complex Institutions Scorecard measures fn1 Description Exclusions * * * * * * * Credit Quality Measure fn2 The credit quality score is the higher of the following two scores: * * * * * * * Market Risk Measure for Highly Complex Institutions fn2 The market risk score is a weighted average of the following three scores: * * * * * * * fn1 The applicable portions of the current expected credit loss methodology (CECL) transitional amounts attributable to the allowance for credit losses on loans and leases held for investment and added to retained earnings for regulatory capital purposes pursuant to the regulatory capital regulations, as they may be amended from time to time (12 CFR part 3, 12 CFR part 217, 12 CFR part 324, 85 FR 61577 (Sept. 30, 2020 ), and 84 FR 4222 (Feb. 14, 2019 )), will be removed from the sum of Tier 1 capital and reserves throughout the large and highly complex bank scorecards, including in the ratio of Higher-Risk Assets to Tier 1 Capital and Reserves, the Growth-Adjusted Portfolio Concentrations Measure, the ratio of Top 20 Counterparty Exposure to Tier 1 Capital and Reserves, the Ratio of Largest Counterparty Exposure to Tier 1 Capital and Reserves, the ratio of Criticized and Classified Items to Tier 1 Capital and Reserves, and the ratio of Underperforming Assets to Tier 1 Capital and Reserves. All of these ratios are described in appendix A of this subpart. fn2 The credit quality score is the greater of the criticized and classified items to Tier 1 capital and reserves score or the underperforming assets to Tier 1 capital and reserves score. The market risk score is the weighted average of three scores-the trading revenue volatility to Tier 1 capital score, the market risk capital to Tier 1 capital score, and the level 3 trading assets to Tier 1 capital score. All of these ratios are described in appendix A of this subpart and the method of calculating the scores is described in appendix B of this subpart. Each score is multiplied by its respective weight, and the resulting weighted score is summed to compute the score for the market risk measure. An overall weight of 35 percent is allocated between the scores for the credit quality measure and market risk measure. The allocation depends on the ratio of average trading assets to the sum of average securities, loans and trading assets (trading asset ratio) as follows: (1) Weight for credit quality score = 35 percent * (1-trading asset ratio); and, (2) Weight for market risk score = 35 percent * trading asset ratio. In calculating the trading asset ratio, exclude from the balance of loans the outstanding balance of loans provided under the Paycheck Protection Program. (a) Description of the loss severity measure. The loss severity measure applies a standardized set of assumptions to an institution's balance sheet to measure possible losses to theFDIC in the event of an institution's failure. To determine an institution's loss severity rate, theFDIC first applies assumptions about uninsured deposit and other liability runoff, and growth in insured deposits, to adjust the size and composition of the institution's liabilities. Exclude total outstanding borrowings from Federal Reserve Banks under the Paycheck Protection Program Liquidity Facility from short-and long-term secured borrowings, as appropriate. Assets are then reduced to match any reduction in liabilities. Exclude from an institution's balance of commercial and industrial loans the outstanding balance of loans provided under the Paycheck Protection Program. In the event that the outstanding balance of loans provided under the Paycheck Protection Program exceeds the balance of commercial and industrial loans, exclude any remaining balance of loans provided under the Paycheck Protection Program first from the balance of all other loans, up to the total amount of all other loans, followed by the balance of agricultural loans, up to the total amount of agricultural loans. Increase cash balances by outstanding loans provided under the Paycheck Protection Program that exceed total outstanding borrowings from Federal Reserve Banks under the Paycheck Protection Program Liquidity Facility, if any. The institution's asset values are then further reduced so that the Leverage Ratio reaches 2 percent. In both cases, assets are adjusted pro rata to preserve the institution's asset composition. Assumptions regarding loss rates at failure for a given asset category and the extent of secured liabilities are then applied to estimated assets and liabilities at failure to determine whether the institution has enough unencumbered assets to cover domestic deposits. Any projected shortfall is divided by current domestic deposits to obtain an end-of-period loss severity ratio. The loss severity measure is an average loss severity ratio for the three most recent quarters of data available. The applicable portions of the current expected credit loss methodology (CECL) transitional amounts attributable to the allowance for credit losses on loans and leases held for investment and added to retained earnings for regulatory capital purposes pursuant to the regulatory capital regulations, as they may be amended from time to time (12 CFR part 3, 12 CFR part 217, 12 CFR part 324, 85 FR 61577 (Sept. 30, 2020 ), and 84 FR 4222 (Feb. 14, 2019 )), will be removed from the calculation of the loss severity measure.
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By order of the Board of Directors.
Dated at
Assistant Executive Secretary.
[FR Doc. 2020-25830 Filed 12-4-20;
BILLING CODE 6714-01-P
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