Small Bank Pricing

Vol. 81

Thursday,

No. 23

February 4, 2016

Part II

Federal Deposit Insurance Corporation

12 CFR Part 327

Assessments; Proposed Rule

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Federal Register / Vol. 81, No. 23 / Thursday, February 4, 2016 / Proposed Rules

1 Subject to exceptions, an established insured

depository institution is one 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

327.8(k).

2 See 80 FR 40838 (July 13, 2015).

3 A financial institution is assigned a CAMELS

composite rating based on an evaluation and rating

of six essential components of an institution’s

financial condition and operations. These

component factors address the adequacy of capital

(C), the quality of assets (A), the capability of

management (M), the quality and level of earnings

(E), the adequacy of liquidity (L), and the sensitivity

to market risk (S).

4 12 U.S.C. 1817(b). A ‘‘risk-based assessment

system’’ means a system for calculating an insured

depository institution’s assessment based on the

institution’s probability of causing a loss to the DIF

due to the composition and concentration of the

institution’s assets and liabilities, the likely amount

of any such loss, and the revenue needs of the DIF.

See 12 U.S.C. 1817(b)(1)(C).

5 See 80 FR at 40838 and 40842.

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 327

RIN 3064–AE37

Assessments

AGENCY: Federal Deposit Insurance

Corporation (FDIC).

ACTION: Notice of proposed rulemaking

and request for comment.

SUMMARY: On July 13, 2015, the FDIC

published a notice of proposed

rulemaking in the Federal Register

proposing to amend 12 CFR part 327 to

refine the deposit insurance assessment

system for small insured depository

institutions that have been federally

insured for at least 5 years (established

small banks)

rporation (FDIC).

ACTION: Notice of proposed rulemaking

and request for comment.

SUMMARY: On July 13, 2015, the FDIC

published a notice of proposed

rulemaking in the Federal Register

proposing to amend 12 CFR part 327 to

refine the deposit insurance assessment

system for small insured depository

institutions that have been federally

insured for at least 5 years (established

small banks). In response to comments

received regarding the notice, the FDIC

is issuing this revised notice of

proposed rulemaking (revised NPR or

revised proposal) that would: Use a

brokered deposit ratio (that treats

reciprocal deposits the same as under

current regulations) as a measure in the

financial ratios method for calculating

assessment rates for established small

banks instead of the previously

proposed core deposit ratio; remove the

existing brokered deposit adjustment for

established small banks; and revise the

previously proposed one-year asset

growth measure.

The FDIC proposes that a final rule

would take effect the quarter after the

Deposit Insurance Fund (DIF) reserve

ratio has reached 1.15 percent (or the

first quarter after a final rule is adopted

that the rule can take effect, whichever

is later).

DATES: Comments must be received by

the FDIC no later than March 7, 2016.

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.

• Email: comments@fdic.gov. Include

RIN 3064–AE37 on the subject line of

the message.

• Mail: Robert E. Feldman, Executive

Secretary, Attention: Comments, Federal

Deposit Insurance Corporation, 550 17th

Street NW., Washington, DC 20429.

• Hand Delivery: Comments may be

hand delivered to the 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

ov. Include

RIN 3064–AE37 on the subject line of

the message.

• Mail: Robert E. Feldman, Executive

Secretary, Attention: Comments, Federal

Deposit Insurance Corporation, 550 17th

Street NW., Washington, DC 20429.

• Hand Delivery: Comments may be

hand delivered to the 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.

• Public Inspection: All comments

received, including any personal

information provided, will be posted

generally without change to http://

www.fdic.gov/regulations/laws/federal.

FOR FURTHER INFORMATION CONTACT:

Munsell St. Clair, Chief, Banking and

Regulatory Policy, Division of Insurance

and Research, 202–898–8967; Ashley

Mihalik, Senior Financial Economist,

Division of Insurance and Research,

202–898–3793; Nefretete Smith, Senior

Attorney, Legal Division, 202–898–

6851; Thomas Hearn, Counsel, Legal

Division, 202–898–6967.

SUPPLEMENTARY INFORMATION:

I. Background

The 2015 Notice of Proposed

Rulemaking

On June 16, 2015, the FDIC’s Board of

Directors (Board) authorized publication

of a notice of proposed rulemaking (the

2015 NPR) to refine the deposit

insurance assessment system for

established small banks (that is, small

banks other than new small banks and

insured branches of foreign banks).1 The

2015 NPR was published in the Federal

Register on July 13, 2015.2 In the 2015

NPR, the FDIC proposed to improve the

assessment system by: (1) Revising the

financial ratios method so that it would

be based on a statistical model

estimating the probability of failure over

three years; (2) updating the financial

measures used in the financial ratios

method consistent with the statistical

model; and (3) eliminating risk

categories for all established small

banks and using the financial ratios

method to determine assessment rates

for all such banks

ncial ratios method so that it would

be based on a statistical model

estimating the probability of failure over

three years; (2) updating the financial

measures used in the financial ratios

method consistent with the statistical

model; and (3) eliminating risk

categories for all established small

banks and using the financial ratios

method to determine assessment rates

for all such banks. CAMELS composite

ratings,3 however, would be used to

place a maximum on the assessment

rates that CAMELS composite 1- and 2-

rated banks can be charged and

minimums on the assessment rates that

CAMELS composite 3-, 4- and 5-rated

banks can be charged.

The FDIC received a total of 484

comment letters in response to the 2015

NPR. Of these, 45 were from trade

groups and 439 were from individuals

or banks. The majority of commenters

expressed concern regarding the

proposed treatment of reciprocal

deposits in the 2015 NPR.

The FDIC is issuing this revised NPR

in response to comments received

regarding the 2015 NPR. The broad

outline of this revised NPR remains the

same as the 2015 NPR, but this revised

NPR revises the proposal by: (1) Using

a brokered deposit ratio (that treats

reciprocal deposits the same as under

current regulations) as a measure in the

financial ratios method for calculating

assessment rates for established small

banks instead of the previously

proposed core deposit ratio; (2)

removing the existing brokered deposit

adjustment for established small banks;

(3) revising the previously proposed

one-year asset growth measure; (4) re-

estimating the statistical model

underlying the established small bank

deposit insurance assessment system;

method for calculating

assessment rates for established small

banks instead of the previously

proposed core deposit ratio; (2)

removing the existing brokered deposit

adjustment for established small banks;

(3) revising the previously proposed

one-year asset growth measure; (4) re-

estimating the statistical model

underlying the established small bank

deposit insurance assessment system;

(5) revising the uniform amount and

pricing multipliers used in the financial

ratios method; and (6) providing that

any future changes to the statistical

model underlying the established small

bank deposit insurance assessment

system would go through notice-and-

comment rulemaking.

The FDIC also received comments on

parts of the proposal in the 2015 NPR

that have not changed in this revised

NPR. These comments included

suggestions to more heavily weight

CAMELS supervisory ratings over

various financial ratios and to tailor the

loan mix index to individual banks, and

assertions that the proposed minimum

and maximum assessment rates are

inappropriate. The FDIC will consider

all comments submitted in response to

the 2015 NPR, as well as comments

submitted in response to this revised

NPR, in developing a final rule. Thus,

to reduce burden, those who submitted

a comment on the 2015 NPR need not

resubmit the comment for it to be

considered by the FDIC in developing

the final rule. Comments on any aspect

of this revised NPR, however, are

welcome.

Policy Objectives

The primary purpose of the proposed

rule, like the 2015 NPR, is to improve

the risk-based deposit insurance

assessment system applicable to small

banks to more accurately reflect risk.4

Additional discussion of the policy

objectives of the proposed rule can be

found in the 2015 NPR.5

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5 NPR, is to improve

the risk-based deposit insurance

assessment system applicable to small

banks to more accurately reflect risk.4

Additional discussion of the policy

objectives of the proposed rule can be

found in the 2015 NPR.5

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Federal Register / Vol. 81, No. 23 / Thursday, February 4, 2016 / Proposed Rules

6 On January 1, 2007, the FDIC instituted separate

assessment systems for small and large banks. 71 FR

69282 (Nov. 30, 2006). See 12 U.S.C. 1817(b)(1)(D)

(granting the Board the authority to establish

separate risk-based assessment systems for large

and small insured depository institutions).

As used in this revised proposal, the term ‘‘bank’’

is synonymous with the term ‘‘insured depository

institution’’ as it is used in section 3(c)(2) of the FDI

Act, 12 U.S.C 1813(c)(2). As used in this revised

proposal, the term ‘‘small bank’’ is synonymous

with the term ‘‘small institution’’ as it is used in

12 CFR 327.8. In general, a ‘‘small bank’’ is one

with less than $10 billion in total assets.

7 The common equity tier 1 capital ratio, a new

risk-based capital ratio, was incorporated into the

deposit insurance assessment system effective

January 1, 2015. 79 FR 70427 (November 26, 2014).

Beginning January 1, 2018, a supplementary

leverage ratio will also be used to determine

whether an advanced approaches bank is: (a) Well

capitalized, if the bank is subject to the enhanced

supplementary leverage ratio standards under 12

CFR 6.4(c)(1)(iv)(B), 12 CFR 208.43(c)(1)(iv)(B), or

12 CFR 324.403(b)(1)(vi), as each may be amended

from time to time; and (b) adequately capitalized,

if the bank is subject to the advanced approaches

risk-based capital rules under 12 CFR

6.4(c)(2)(iv)(B), 12 CFR 208.43(c)(2)(iv)(B), or 12

CFR 324.403(b)(2)(vi), as each may be amended

from time to time

y leverage ratio standards under 12

CFR 6.4(c)(1)(iv)(B), 12 CFR 208.43(c)(1)(iv)(B), or

12 CFR 324.403(b)(1)(vi), as each may be amended

from time to time; and (b) adequately capitalized,

if the bank is subject to the advanced approaches

risk-based capital rules under 12 CFR

6.4(c)(2)(iv)(B), 12 CFR 208.43(c)(2)(iv)(B), or 12

CFR 324.403(b)(2)(vi), as each may be amended

from time to time. 79 FR 70427, 70437 (November

26, 2014). The supplementary leverage ratio is

expected to affect the capital group assignment of

few, if any, small banks.

8 The term ‘‘primary federal regulator’’ is

synonymous with the term ‘‘appropriate federal

banking agency’’ as it is used in section 3(q) of the

FDI Act, 12 U.S.C. 1813(q).

9 The weights applied to CAMELS components

are as follows: 25 percent each for Capital and

Management; 20 percent for Asset quality; and 10

percent each for Earnings, Liquidity, and Sensitivity

to market risk. These weights reflect the view of the

FDIC regarding the relative importance of each of

the CAMELS components for differentiating risk

among institutions for deposit insurance purposes.

The FDIC and other bank supervisors do not use

such a system to determine CAMELS composite

ratings.

10 New small banks in Risk Category I, however,

are charged the highest initial assessment rate in

effect for that risk category. Subject to exceptions,

a new bank is one that has been federally insured

for less than five years as of the last day of any

quarter for which it is being assessed. 12 CFR

327.8(j).

11 In 2011, the Board revised and approved

regular assessment rate schedules. See 76 FR 10672

(Feb. 25, 2011); 12 CFR 327.10.

12 See 71 FR 41910, 41913 (July 24, 2006).

13 Insured branches are deemed small banks for

purposes of the deposit insurance assessment

system

erally insured

for less than five years as of the last day of any

quarter for which it is being assessed. 12 CFR

327.8(j).

11 In 2011, the Board revised and approved

regular assessment rate schedules. See 76 FR 10672

(Feb. 25, 2011); 12 CFR 327.10.

12 See 71 FR 41910, 41913 (July 24, 2006).

13 Insured branches are deemed small banks for

purposes of the deposit insurance assessment

system.

Risk-Based Deposit Insurance

Assessments for Established Small

Banks

Since 2007, assessment rates for

established small banks have been

determined by placing each bank into

one of four risk categories, Risk

Categories I, II, III, and IV.6 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.7 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.8 Group A

consists of financially sound

institutions with only a few minor

weaknesses (generally, banks with

CAMELS 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 group 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

s effective corrective action is

taken (generally, banks with CAMELS

composite ratings of 4 or 5). An

institution’s capital group 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 FDIC uses the

financial ratios method, which

combines a weighted average of

supervisory CAMELS component

ratings 9 with current financial ratios to

determine a small Risk Category I bank’s

initial assessment rate.10

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.11

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

te applies to each bank in

Risk Category III and another, higher,

rate to each bank in Risk Category IV.11

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 FDIC decided not to

attempt to determine a bank’s

probability of failure because of the lack

of bank failures in the years between the

end of the bank and thrift crisis in the

early 1990s and 2006.12

The financial ratios method does not

apply to new small banks or to insured

branches of foreign banks (insured

branches).13

Assessment Rates Under Current Rules

In 2011, the FDIC adopted a schedule

of assessment rates designed to ensure

that the reserve ratio reaches 1.15

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to new small banks or to insured

branches of foreign banks (insured

branches).13

Assessment Rates Under Current Rules

In 2011, the FDIC adopted a schedule

of assessment rates designed to ensure

that the reserve ratio reaches 1.15

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14 See 76 FR 10672. Among other things, the

Dodd-Frank Wall Street Reform and Consumer

Protection Act (the Dodd-Frank Act), enacted in

July 2010: (1) Raised the minimum designated

reserve ratio (DRR), which the FDIC must set each

year, to 1.35 percent (from the former minimum of

1.15 percent) and removed the upper limit on the

DRR (which was formerly capped at 1.5 percent),

12 U.S.C. 1817(b)(3)(B); (2) required that the fund

reserve ratio reach 1.35 percent by September 30,

2020 (rather than 1.15 percent by the end of 2016,

as formerly required), Public Law 111–203, 334(d),

124 Stat. 1376, 1539 (12 U.S.C. 1817(note)); and (3)

required that, in setting assessments, the FDIC

‘‘offset the effect of [requiring that the reserve ratio

reach 1.35 percent by September 30, 2020 rather

than 1.15 percent by the end of 2016] on insured

depository institutions with total consolidated

assets of less than $10,000,000,000’’, Public Law

111–203, 334(e), 124 Stat. 1376, 1539 (12 U.S.C.

1817(note)). The Dodd-Frank Act also: (1)

Eliminated the requirement that the FDIC provide

dividends from the fund when the reserve ratio is

between 1.35 percent and 1.5 percent, 12 U.S.C.

1817(e), and (2) continued the FDIC’s authority to

declare dividends when the reserve ratio at the end

of a calendar year is at least 1.5 percent, but granted

the FDIC sole discretion in determining whether to

suspend or limit the declaration of payment or

dividends, 12 U.S.C. 1817(e)(2)(A)–(B).

15 See 80 FR 68780

nd when the reserve ratio is

between 1.35 percent and 1.5 percent, 12 U.S.C.

1817(e), and (2) continued the FDIC’s authority to

declare dividends when the reserve ratio at the end

of a calendar year is at least 1.5 percent, but granted

the FDIC sole discretion in determining whether to

suspend or limit the declaration of payment or

dividends, 12 U.S.C. 1817(e)(2)(A)–(B).

15 See 80 FR 68780.

16 Before adopting the assessment rate schedules

currently in effect, the FDIC undertook a historical

analysis to determine how high the reserve ratio

would have to have been to have maintained both

a positive balance and stable assessment rates from

1950 through 2010. The historical analysis and

long-term fund management plan are described at

76 FR at 10675 and 75 FR 66272, 66272–281 (Oct.

27, 2010). The analysis shows that the fund reserve

ratio would have needed to be approximately 2

percent or more before the onset of the 1980s and

2008 crises to maintain both a positive fund balance

and stable assessment rates, assuming, in lieu of

dividends, that the long-term industry average

nominal assessment rate would have been reduced

by 25 percent when the reserve ratio reached 2

percent, and by 50 percent when the reserve ratio

reached 2.5 percent.

17 A bank’s total base assessment rate can vary

from its initial base assessment rate as the result of

three possible adjustments. Two of these

adjustments—the unsecured debt adjustment and

the depository institution debt adjustment (DIDA)—

apply to all banks (except that the unsecured debt

adjustment does not apply to new banks or insured

branches). The unsecured debt adjustment lowers a

bank’s assessment rate based on the bank’s ratio of

long-term unsecured debt to the bank’s assessment

base. The DIDA increases a bank’s assessment rate

when it holds long-term, unsecured debt issued by

another insured depository institution

apply to all banks (except that the unsecured debt

adjustment does not apply to new banks or insured

branches). The unsecured debt adjustment lowers a

bank’s assessment rate based on the bank’s ratio of

long-term unsecured debt to the bank’s assessment

base. The DIDA increases a bank’s assessment rate

when it holds long-term, unsecured debt issued by

another insured depository institution. The third

possible adjustment—the brokered deposit

adjustment—applies only to small banks in Risk

Category II, III and IV (and to large and highly

complex institutions that are not well capitalized or

that are not CAMELS composite 1 or 2-rated). It

does not apply to insured branches. The brokered

deposit adjustment increases a bank’s assessment

when it holds significant amounts of brokered

deposits. 12 CFR 327.9(d).

18 See 76 FR at 10717–720.

19 For new banks, however, the rates will remain

in effect even if the reserve ratio equals or exceeds

2 percent (or 2.5 percent).

percent by September 30, 2020.14 On

October 22, 2015, the FDIC authorized

publication of a notice of proposed

rulemaking to implement the Dodd-

Frank Act requirements that the fund

reserve ratio reach 1.35 percent by

September 30, 2020 and that the effect

of the higher minimum reserve ratio on

small banks be offset.15

The initial assessment rates currently

in effect for small and large banks are

set forth in Table 2 below.16

TABLE 2—INITIAL BASE ASSESSMENT RATES

[In basis points per annum]

Risk Category

I*

II

III

IV

Large & highly

complex

institutions **

Minimum

Maximum

Annual Rates (in basis points) .................

5

9

14

23

35

5–35

* Initial base rates that are not the minimum or maximum will vary between these rates.

** See 12 CFR 327.8(f) and 12 CFR 327.8(g) for the definition of large and highly complex institutions

ESSMENT RATES

[In basis points per annum]

Risk Category

I*

II

III

IV

Large & highly

complex

institutions **

Minimum

Maximum

Annual Rates (in basis points) .................

5

9

14

23

35

5–35

* Initial base rates that are not the minimum or maximum will vary between these rates.

** See 12 CFR 327.8(f) and 12 CFR 327.8(g) for the definition of large and highly complex institutions.

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 *

[In basis points per annum]

Risk Category I

Risk Category II

Risk Category III

Risk Category

IV

Large & highly

complex

institutions **

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.

* Total base assessment rates do not include the DIDA.

** See 12 CFR 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

2.5 to 45.

* Total base assessment rates do not include the DIDA.

** See 12 CFR 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.

In 2011, consistent with the FDIC’s

long-term fund management plan, the

Board adopted lower, moderate

assessment rates that will go into effect

when the DIF reserve ratio reaches 1.15

percent.18 Pursuant to the FDIC’s

authority to set assessments, regulations

currently in effect provide that the

initial base and total base assessment

rates set forth in Table 4 below will take

effect beginning the assessment period

after the fund reserve ratio first meets or

exceeds 1.15 percent, without the

necessity of further action by the Board.

The rates are to remain in effect unless

and until the reserve ratio meets or

exceeds 2 percent.19

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Federal Register / Vol. 81, No. 23 / Thursday, February 4, 2016 / Proposed Rules

20 The reserve ratio for the immediately prior

assessment period must also be less than 2 percent.

21 New small banks will remain subject to the

assessment schedule in Table 4 when the reserve

ratio reaches 2 percent and 2.5 percent.

22 See 12 CFR 327.10(f); 76 FR at 10684.

23 For certain lagged variables, such as one-year

asset growth rates, the statistical analysis also used

bank financial data from 1984

tio for the immediately prior

assessment period must also be less than 2 percent.

21 New small banks will remain subject to the

assessment schedule in Table 4 when the reserve

ratio reaches 2 percent and 2.5 percent.

22 See 12 CFR 327.10(f); 76 FR at 10684.

23 For certain lagged variables, such as one-year

asset growth rates, the statistical analysis also used

bank financial data from 1984.

24 The numerator of the proposed net income

measure definition is income before applicable

income taxes and discontinued operations for the

most recent twelve months, rather than income

before income taxes and extraordinary items and

other adjustments for the most recent twelve

Continued

TABLE 4—INITIAL AND TOTAL BASE ASSESSMENT RATES *

[In basis points per annum]

[Once the reserve ratio reaches 1.15 percent 20]

Risk

Category

I

Risk

Category

II

Risk

Category

III

Risk

Category

IV

Large & highly

complex

institutions **

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.

* Total base assessment rates do not include the DIDA.

** See 12 CFR 327.8(f) and (g) for the definition of large and highly complex institutions

............

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.

* Total base assessment rates do not include the DIDA.

** See 12 CFR 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.

In lieu of dividends, and pursuant to

the FDIC’s authority to set assessments

and consistent with the FDIC’s long-

term fund management plan, the Board

also adopted a lower schedule of

assessment rates that will come into

effect without further action by the

Board when the fund reserve ratio at the

end of the prior assessment period

meets or exceeds 2 percent, but is less

than 2.5 percent, and another, still

lower, schedule of assessment rates that

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.21

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), 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.22

II

nd

comment rulemaking that are higher or

lower than the total assessment rates

(also known as the total base assessment

rates), 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.22

II. The Proposed Rule

Description of the Proposed Rule

The financial ratios method as revised

would use the measures described in

the right-hand column of Table 5 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. To avoid

unnecessary burden, the proposal will

not require established small banks to

report any new data in their Reports of

Condition and Income (Call Reports).

TABLE 5—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.

• 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 .........................................................

• Brokered Deposit Ratio.

• One Year Asset Growth.

• Net Loan Charge-Offs/Gross Assets.

• Loans Past Due 30–89 Days/Gross Assets.

• Loan Mix Index.

All of the measures proposed in this

revised NPR are derived from a

statistical analysis that estimates a

bank’s probability of failure within three

years

Adjusted Brokered Deposit Ratio .........................................................

• Brokered Deposit Ratio.

• One Year Asset Growth.

• Net Loan Charge-Offs/Gross Assets.

• Loans Past Due 30–89 Days/Gross Assets.

• Loan Mix Index.

All of the measures proposed in this

revised NPR are derived from a

statistical analysis that estimates a

bank’s probability of failure within three

years. Each of the measures is

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

2014.23 Appendix 1 to the

Supplementary Information section of

the 2015 NPR, and Appendix 1 to the

Supplementary Information Section and

Appendix E of this proposed rule

describe the statistical analysis and the

derivation of these measures in detail.

Two of the measures proposed in this

revised NPR—the weighted average

CAMELS component rating and the tier

1 leverage ratio—are identical to the

measures currently used in the financial

ratios method and are as proposed in

the 2015 NPR. The net income before

taxes/total assets measure in this revised

NPR is virtually identical to the measure

proposed in the 2015 NPR and is also

almost identical to the current measure.

The denominator in the net income

before taxes/total assets measure in the

revised proposal is total assets rather

than risk-weighted assets as under

current rules. The definition of the

measure in the revised proposal also

differs from the definitions in both the

2015 NPR and current rules in that it no

longer refers to extraordinary items.24

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than risk-weighted assets as under

current rules. The definition of the

measure in the revised proposal also

differs from the definitions in both the

2015 NPR and current rules in that it no

longer refers to extraordinary items.24

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months as in the 2015 NPR and current rules. In

the current Call Report, extraordinary items and

discontinued operations are combined for reporting

purposes. Income for the net income ratio is

currently determined before both extraordinary

items and discontinued operations. In January 2015,

the Financial Accounting Standards Board (FASB)

eliminated from U.S. generally accepted accounting

principles (GAAP) the concept of extraordinary

items, effective for fiscal years and interim periods

within those fiscal years, beginning after December

15, 2015. In September 2015, the Federal banking

agencies published a joint Paperwork Reduction

Act (PRA) notice and request for comment on

proposed changes to the Call Report, including the

elimination of the concept of extraordinary items

and revision of affected data items. See 80 FR 56539

(Sept. 18, 2015). That PRA process is still in

progress and the FDIC expects that, at some future

time, references to extraordinary items will be

removed from the Call Report. Nevertheless, items

that would have met the criteria for classification

as extraordinary before the effective date of the

FASB’s accounting change will no longer be

reported as such in the Call Report income

statement after the effective date of the change.

Discontinued operations, however, will continue to

be reported in the Call Report income statement as

a separate item in the future and, under the revised

proposal, income for the net income ratio would be

determined before discontinued operations

e of the

FASB’s accounting change will no longer be

reported as such in the Call Report income

statement after the effective date of the change.

Discontinued operations, however, will continue to

be reported in the Call Report income statement as

a separate item in the future and, under the revised

proposal, income for the net income ratio would be

determined before discontinued operations. See,

e.g., 80 FR at 56547. Therefore, the FDIC is

proposing to define the net income measure to

reflect the anticipated Call Report changes. The

FDIC recognizes that this revised proposal may be

finalized and become effective before the Federal

banking agencies finalize the proposed Call Report

changes.

Because the numerator of the proposed net

income measure is defined to include income for

the most recent twelve months, there may be a

transition period in which income for the most

recent twelve months may include income from

periods before the elimination from GAAP of the

concept of extraordinary items has taken effect. For

those portions of the most recent twelve months

before this elimination has taken effect, income will

be determined as income before income taxes and

extraordinary items and other adjustments.

25 Two measures in the current financial ratios

method—net loan charge-offs/gross assets and loans

past due 30–89 days/gross assets—are not used in

the statistical analysis and are not among the

measures in the 2015 NPR or this revised proposal.

26 The adjusted brokered deposit ratio can affect

assessment rates only if a bank’s brokered deposits

(excluding reciprocal deposits) exceed 10 percent of

its non-reciprocal brokered deposits and its assets

have grown more than 40 percent in the previous

4 years. 12 CFR 327 Appendix A to Subpart A.

Few Risk Category I banks have both high levels

of non-reciprocal brokered deposits and high asset

growth, so the adjusted brokered deposit ratio

affects relatively few banks

s brokered deposits

(excluding reciprocal deposits) exceed 10 percent of

its non-reciprocal brokered deposits and its assets

have grown more than 40 percent in the previous

4 years. 12 CFR 327 Appendix A to Subpart A.

Few Risk Category I banks have both high levels

of non-reciprocal brokered deposits and high asset

growth, so the adjusted brokered deposit ratio

affects relatively few banks. As of September 30,

2015, the adjusted brokered deposit ratio affected

the assessment rate of 95 banks.

27 12 CFR 327.9(d)(3); 12 U.S.C. 1831f.

28 74 FR 9525, 9541 (Mar. 9, 2009).

29 On the other hand, four commenters asserted

that the FDIC should not charge higher assessment

rates to banks that hold brokered deposits, but

should instead consider how banks used brokered

deposits and whether they remain profitable and

well-capitalized. The FDIC’s statistical analyses

have consistently found, however, that brokered

deposits are correlated with a higher probability of

failure. See FDIC Study on Core Deposits and

Brokered Deposits (2011), 46–47 and 66–68

(Appendix A: Excerpts from Material Loss Reviews

And Summaries of OIG Semiannual Reports to

Congress).

30 12 CFR part 327 Appendix A to Subpart A.

31 12 CFR 327.9(d)(3); 12 U.S.C. 1831f.

The current nonperforming assets/gross

assets measure includes other real estate

owned. In this revised NPR and in the

2015 NPR, other real estate owned/gross

assets is a separate measure from

nonperforming loans and leases/gross

assets.

The remaining three proposed

financial measures, described in detail

below, differ from the measures in the

current established small bank deposit

assessment system.25 The FDIC

proposes to replace the adjusted

brokered deposit ratio currently used in

the financial ratios method with two

separate measures: A brokered deposit

ratio (rather than a core deposit ratio as

proposed in the 2015 NPR) and a one-

year asset growth measure

asures, described in detail

below, differ from the measures in the

current established small bank deposit

assessment system.25 The FDIC

proposes to replace the adjusted

brokered deposit ratio currently used in

the financial ratios method with two

separate measures: A brokered deposit

ratio (rather than a core deposit ratio as

proposed in the 2015 NPR) and a one-

year asset growth measure. As stated

above, these two financial measures—

the brokered deposit ratio and the one

year asset growth measure—differ from

the measures proposed in the 2015 NPR.

The third proposed new measure, the

loan mix index, remains as proposed in

the 2015 NPR.

Brokered Deposit Ratio

Under current assessment rules,

brokered deposits affect a small bank’s

assessment rate based on its Risk

Category. For established small banks

that are assigned to Risk Category I

(those that are well capitalized and have

a CAMELS composite rating of 1 or 2),

the adjusted brokered deposit ratio is

one of the financial ratios used to

determine a bank’s initial assessment

rate. The adjusted brokered deposit ratio

increases a bank’s initial assessment rate

when a bank has brokered deposits that

exceed 10 percent of its domestic

deposits, combined with a high asset

growth rate.26 Reciprocal deposits are

not included with other brokered

deposits in the adjusted brokered

deposit ratio.

Established small banks in Risk

Categories II, III, and IV (those that are

less than well capitalized or that have

a CAMELS composite rating of 3, 4, or

5) are subject to the brokered deposit

adjustment, one of three possible

adjustments that can increase or

decrease a bank’s initial assessment rate.

The brokered deposit adjustment

increases a bank’s assessment rate if it

has brokered deposits in excess of 10

percent of its domestic deposits.27

Unlike the adjusted brokered deposit

ratio, the brokered deposit adjustment

includes all brokered deposits,

including reciprocal deposits, and is not

affected by asset growth rates

hat can increase or

decrease a bank’s initial assessment rate.

The brokered deposit adjustment

increases a bank’s assessment rate if it

has brokered deposits in excess of 10

percent of its domestic deposits.27

Unlike the adjusted brokered deposit

ratio, the brokered deposit adjustment

includes all brokered deposits,

including reciprocal deposits, and is not

affected by asset growth rates. As the

FDIC noted when it adopted the

brokered deposit adjustment and

included reciprocal deposits with other

brokered deposits in the adjustment,

‘‘The statutory restrictions on accepting,

renewing or rolling over brokered

deposits when an institution becomes

less than well capitalized apply to all

brokered deposits, including reciprocal

deposits. Market restrictions may also

apply to these reciprocal deposits

when an institution’s condition

declines.’’ 28

The FDIC proposes to replace the

adjusted brokered deposit ratio

currently used in the financial ratios

method with a brokered deposit ratio,

measured as the ratio of brokered

deposits to total assets. As discussed

below, the FDIC also proposes to

eliminate the existing brokered deposit

adjustment for established small banks.

Under the proposed brokered deposit

ratio, brokered deposits would increase

an assessment rate only for an

established small bank that holds

brokered deposits in excess of 10

percent of total assets. For a bank that

is well capitalized and has a CAMELS

composite rating of 1 or 2, reciprocal

deposits would be deducted from

brokered deposits. For a bank that is less

than well capitalized or has a CAMELS

composite rating of 3, 4 or 5, however,

reciprocal deposits would be included

with other brokered

deposits

ll bank that holds

brokered deposits in excess of 10

percent of total assets. For a bank that

is well capitalized and has a CAMELS

composite rating of 1 or 2, reciprocal

deposits would be deducted from

brokered deposits. For a bank that is less

than well capitalized or has a CAMELS

composite rating of 3, 4 or 5, however,

reciprocal deposits would be included

with other brokered

deposits.

This treatment of reciprocal deposits

is generally consistent with the 442

comment letters on the 2015 NPR

arguing that reciprocal deposits should

not be treated as brokered deposits for

assessment purposes.29 Some

commenters encouraged the FDIC to

revise the proposal in the 2015 NPR so

that it reflects the current treatment of

reciprocal deposits, which this revised

proposal does. As described above, in

the current system, the adjusted

brokered deposit, which applies to well-

capitalized established small banks that

have CAMELS composite ratings of 1 or

2, excludes reciprocal deposits.30 The

brokered deposit adjustment, however,

which applies to all established small

banks that are less than well capitalized

or have CAMELS composite ratings of 3,

4 or 5, includes reciprocal deposits.31

The proposed brokered deposit ratio

makes the same distinction with respect

to reciprocal deposits.

The FDIC also received 40 comment

letters on the 2015 NPR arguing that

reciprocal deposits should be treated as

core deposits or are the functional

equivalent of core deposits. The FDIC

analyzed the characteristics of

reciprocal deposits in its Study on Core

Deposits and Brokered Deposits and

concluded that, ‘‘While the FDIC agrees

that reciprocal deposits do not present

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onal

equivalent of core deposits. The FDIC

analyzed the characteristics of

reciprocal deposits in its Study on Core

Deposits and Brokered Deposits and

concluded that, ‘‘While the FDIC agrees

that reciprocal deposits do not present

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32 FDIC Study on Core Deposits and Brokered

Deposits (2011), 54.

33 From 1985 through 2014, one-year asset growth

rates greater than 10 percent represented

approximately the 70th percentile of small banks.

A 10 percent one-year asset growth rate measure is

generally consistent with the adjusted brokered

deposit ratio in the current Risk Category I financial

ratios method, which raises assessment rates only

when small banks have both four-year asset growth

rates in excess of 40 percent and high levels of

brokered deposits.

34 Credit card loans were excluded from the loan

mix index because they produced anomalously high

assessment rates for banks with significant credit

card loans. Credit card loans have very high charge-

off rates, but they also tend to have very high

interest rates to compensate. In addition, few small

banks have significant concentrations of credit card

loans. Consequently, credit card loans are omitted

from the index.

35 As discussed above, the loan mix index uses

loan charge-off data from 2001 through 2014.

The table shows industry-wide weighted charge-

off percentage rates, the loan category as a

percentage of total assets, and the products to two

decimal places. In fact, the FDIC proposes to use

seven decimal places for industry-wide weighted

charge-off percentage rates, and as many decimal

places as permitted by the FDIC’s computer systems

for the loan category as a percentage of total assets

and the products

stry-wide weighted charge-

off percentage rates, the loan category as a

percentage of total assets, and the products to two

decimal places. In fact, the FDIC proposes to use

seven decimal places for industry-wide weighted

charge-off percentage rates, and as many decimal

places as permitted by the FDIC’s computer systems

for the loan category as a percentage of total assets

and the products. The total (the loan mix index

itself) would use three decimal places.

all of the problems that traditional

brokered deposits present, they pose

sufficient potential problems—

particularly their dependence on a

network and the network’s continued

willingness to allow a bank to

participate, and the potential of

supporting rapid growth if not based

upon a relationship—that they should

not be considered core . . .’’ 32

(Emphasis added.) The proposed

brokered deposit ratio, which deducts

reciprocal deposits for well capitalized,

well rated banks, is consistent with the

Study on Core Deposits and Brokered

Deposits and with the majority of

comments received.

Sixteen commenters, including

banking trade associations, cautioned

against penalizing the use of Federal

Home Loan Bank advances in

determining assessment rates. Some

commenters also argued that lowering

assessments for core deposits, as

proposed in the 2015 NPR, would make

Federal Home Loan Bank advances

relatively more expensive. Replacing the

previously proposed core deposit ratio

with a brokered deposit ratio would not

change the current treatment of Federal

Home Loan Bank advances in the small

bank deposit insurance assessment

system. In contrast, treating reciprocal

deposits as core deposits in the core

deposit ratio would create an incentive

for established small banks to switch

Federal Home Loan Bank advances and

other funding sources (other than core

deposits) to reciprocal deposit funding,

with unpredictable effects on banks’

probability of failure

k advances in the small

bank deposit insurance assessment

system. In contrast, treating reciprocal

deposits as core deposits in the core

deposit ratio would create an incentive

for established small banks to switch

Federal Home Loan Bank advances and

other funding sources (other than core

deposits) to reciprocal deposit funding,

with unpredictable effects on banks’

probability of failure.

One-Year Asset Growth Measure

The FDIC received 18 comments on

the proposed one-year asset growth

measure in the 2015 NPR. Some

commenters argued that the one-year

asset growth rate should not penalize

normal growth. One commenter

suggested that asset growth should not

affect assessments until it exceeds an

industry-based norm, while other

commenters suggested using the ‘‘A’’

(‘‘Asset quality’’) CAMELS component

instead of a one-year asset growth rate

or taking mitigating factors into account

in the growth rate.

In response to comments, the FDIC is

proposing that the one-year asset growth

measure increase the assessment rate

only for an established small bank that

has had one-year asset growth greater

than 10 percent. With this modification,

the measure will raise assessment rates

for established small banks that grow

rapidly (other than through merger or by

acquiring failed banks), but will not

increase assessments for normal asset

growth.33

Loan Mix Index

The proposed loan mix index is

unchanged from the 2015 NPR. As

described in the 2015 NPR, the loan mix

index is a measure of the extent to

which a bank’s total assets include

higher-risk categories of loans. The

index uses historical charge-off rates to

identify loan types with higher risk.

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

s of loans. The

index uses historical charge-off rates to

identify loan types with higher risk.

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.34 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 2008

through 2014, during the recent banking

crisis, have a much greater influence on

the weighted-average charge-off rate

than do 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 (i.e.,

periods marked by significant insurance

fund losses) have an appropriate

influence on assessment rates.

Table 6 below illustrates how the loan

mix index is calculated for a

hypothetical bank.

TABLE 6—LOAN MIX INDEX FOR A HYPOTHETICAL BANK 35

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 .............................................................................................................

te 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

Agricultural Real Estate ...............................................................................................................

0.24

3.43

0.82

Agriculture ...................................................................................................................................

...................................................................................

0.58

1.15

0.66

Agricultural Real Estate ...............................................................................................................

0.24

3.43

0.82

Agriculture ....................................................................................................................................

0.24

5.91

1.44

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36 Current rules provide that: (1) Under specified

conditions, certain subsidiary small banks will be

considered established rather than new, 12 CFR

327.8(k)(4); and (2) the time that a bank has spent

as a federally insured credit union is included in

determining whether a bank is established, 12 CFR

327.8(k)(5). If a Risk Category I small bank is

considered established under these rules, but has

no CAMELS component ratings, its initial

assessment rate is 2 basis points above the

minimum initial assessment rate applicable to Risk

Category I (which is equivalent to 2 basis points

above the minimum initial assessment rate for

established small banks) until it receives CAMELS

component ratings. Thereafter, the assessment rate

is determined by annualizing, where appropriate,

financial ratios obtained from all quarterly Call

Reports that have been filed, until the bank files

four quarterly Call Reports. As proposed in the 2015

NPR, for small banks that are considered

established under these rules, but do not have

CAMELS component ratings, the FDIC proposes the

following:

1. If the bank has no CAMELS composite rating,

its initial assessment rate would be 2 basis points

above the minimum initial assessment rate for

established small banks until it receives a CAMELS

composite rating; and

2

As proposed in the 2015

NPR, for small banks that are considered

established under these rules, but do not have

CAMELS component ratings, the FDIC proposes the

following:

1. If the bank has no CAMELS composite rating,

its initial assessment rate would be 2 basis points

above the minimum initial assessment rate for

established small banks until it receives a CAMELS

composite rating; and

2. If the bank has a CAMELS composite rating but

no CAMELS component ratings, its initial

assessment rate would be determined using the

financial ratios method by substituting its CAMELS

composite rating for its weighted average CAMELS

component rating and, if the bank has not yet filed

four quarterly Call Reports, by annualizing, where

appropriate, financial ratios obtained from all

quarterly Call Reports that have been filed.

37 As under rules currently in effect, the brokered

deposit adjustment would continue to apply to all

new small institutions in Risk Categories II, III, and

IV, and all large and highly complex institutions,

except large and highly complex institutions that

are well capitalized and have a CAMELS composite

rating of 1 or 2. As under rules currently in effect,

the brokered deposit adjustment would not apply

to insured branches.

38 As under rules currently in effect, however, no

adjustments would apply to bridge banks or

conservatorships. These banks would continue to

be charged the minimum assessment rate applicable

to small banks.

39 See 12 CFR 327.10(b); 76 FR at 10718.

TABLE 6—LOAN MIX INDEX FOR A HYPOTHETICAL BANK 35—Continued

Weighted

charge-off

rate percent

Loan category

as a percent

of hypothetical

bank’s total

assets

Product of

two columns

to the left

SUM (Loan Mix Index) .........................................................................................................

........................

70.45

84.79

The weighted charge-off rates in the

table are the same for all established

small banks

d

Weighted

charge-off

rate percent

Loan category

as a percent

of hypothetical

bank’s total

assets

Product of

two columns

to the left

SUM (Loan Mix Index) .........................................................................................................

........................

70.45

84.79

The weighted charge-off rates in the

table are the same for all established

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.

Calculating the Initial Assessment Rate

As in the current methodology for

Risk Category I small banks, and as

proposed in the 2015 NPR, under the

revised 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 FDIC, and (c) applied to

all established small banks.36 The total

would equal the bank’s initial

assessment rate. If, however, the

resulting rate were below the minimum

initial assessment rate for established

small banks, the bank’s initial

assessment rate would be the minimum

initial assessment rate; if the rate were

above the maximum, then the bank’s

initial assessment rate would be the

maximum initial rate for established

small banks

s.36 The total

would equal the bank’s initial

assessment rate. If, however, the

resulting rate were below the minimum

initial assessment rate for established

small banks, the bank’s initial

assessment rate would be the minimum

initial assessment rate; if the rate were

above the maximum, then the bank’s

initial assessment rate would be the

maximum initial rate for established

small banks. In addition, if the resulting

rate for an established small bank were

below the minimum or above the

maximum initial assessment rate

applicable to banks with the bank’s

CAMELS composite rating, the bank’s

initial assessment rate would be the

respective minimum or maximum

assessment rate for an established small

bank with its CAMELS composite

rating. This approach would allow rates

to vary incrementally across a wide

range of rates for all established small

banks. The conversion of the statistical

model to pricing multipliers and the

uniform amount is discussed further

below and in detail in the proposed

Appendix E. Appendix E also discusses

the derivation of the pricing multipliers

and the uniform amount.

Adjustments to Initial Base Assessment

Rates

As discussed above, the FDIC

proposes to eliminate the brokered

deposit adjustment for established small

banks.37 Under current rules, the

brokered deposit adjustment only

applies to small banks if they are in Risk

Category II, III, and IV. The brokered

deposit adjustment increases a bank’s

assessment when it holds significant

amounts of brokered deposits. To avoid

assessing banks twice for holding

brokered deposits (because the brokered

deposit ratio would apply to all

established small banks), the FDIC

proposes eliminating the brokered

deposit adjustment

applies to small banks if they are in Risk

Category II, III, and IV. The brokered

deposit adjustment increases a bank’s

assessment when it holds significant

amounts of brokered deposits. To avoid

assessing banks twice for holding

brokered deposits (because the brokered

deposit ratio would apply to all

established small banks), the FDIC

proposes eliminating the brokered

deposit adjustment.

As under current rules, the DIDA

would continue to apply to all banks,

and the unsecured debt adjustment

would continue to apply to all banks

except new banks and insured

branches.38

Proposed Assessment Rates

Like the 2015 NPR, this revised

proposal preserves the lower range of

initial base assessment rates previously

adopted by the Board. Under current

regulations, once the reserve ratio

reaches 1.15 percent, initial base

assessment rates will fall automatically

from the current 5 basis point to 35

basis point range to a 3 basis point to

30 basis point range, as reflected in

Table 4. The FDIC adopted the range of

initial assessment rates in this rate

schedule pursuant to its long-term fund

management plan as the FDIC’s best

estimate of the assessment rates that

would have been needed from 1950 to

2010 to maintain a positive fund

balance during the past two banking

crises. This assessment rate schedule

remains the FDIC’s best estimate of the

long-term rates needed. Consequently,

and as discussed in greater detail further

below and in detail in Appendix E, the

FDIC proposes to convert its statistical

model to assessment rates within this 3

basis point to 30 basis point assessment

range in a revenue neutral way; that is,

in a manner that does not materially

change the aggregate assessment

revenue collected from established

small banks

m rates needed. Consequently,

and as discussed in greater detail further

below and in detail in Appendix E, the

FDIC proposes to convert its statistical

model to assessment rates within this 3

basis point to 30 basis point assessment

range in a revenue neutral way; that is,

in a manner that does not materially

change the aggregate assessment

revenue collected from established

small banks.

As set out in the rate schedule in

Table 7 below, for established small

banks, the FDIC proposes to eliminate

risk categories but maintain the range of

initial assessment rates that the Board

has previously determined will go into

effect starting the quarter after the

reserve ratio reaches 1.15 percent.39

Unless revised by the Board, these rates

would remain in effect as long as the

reserve ratio is less than 2 percent.

Table 7 also includes a maximum

assessment rate that would apply to

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40 The reserve ratio for the immediately prior

assessment period must also be less than 2 percent.

CAMELS composite 1- and 2-rated

banks and minimum assessment rates

that would apply to CAMELS composite

3-rated banks and CAMELS composite

4- and 5-rated banks.

TABLE 7—INITIAL AND TOTAL BASE ASSESSMENT RATES *

[In basis points per annum]

[Once the reserve ratio reaches 1.15 percent 40]

Established small banks

Large & highly

complex

institutions **

CAMELS composite

1 or 2

3

4 or 5

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

complex

institutions **

CAMELS composite

1 or 2

3

4 or 5

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 .........................................................................

N/A .................

N/A .................

N/A .................

0 to 10.

Total Base Assessment Rate .........................................................................

1.5 to 16 ........

3 to 30 ...........

11 to 30 .........

1.5 to 40.

* Total base assessment rates in the table do not include the DIDA.

** See 12 CFR 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 FDIC proposes to maintain the

range of initial assessment rates, set out

in the rate schedule in Table 8 below,

that the Board previously determined

will go into effect starting the quarter

after the reserve ratio reaches or exceeds

2 percent and is less than 2.5 percent.

Unless revised by the Board, these rates

would remain in effect as long as the

reserve ratio is in this range. Table 8

also includes the maximum assessment

rates that would apply to CAMELS

composite 1- and 2-rated banks and the

minimum assessment rates that would

apply to CAMELS composite 3-rated

banks and CAMELS composite 4- and 5-

rated banks

ds

2 percent and is less than 2.5 percent.

Unless revised by the Board, these rates

would remain in effect as long as the

reserve ratio is in this range. Table 8

also includes the maximum assessment

rates that would apply to CAMELS

composite 1- and 2-rated banks and the

minimum assessment rates that would

apply to CAMELS composite 3-rated

banks and CAMELS composite 4- and 5-

rated banks.

TABLE 8—INITIAL AND TOTAL BASE ASSESSMENT RATES *

[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]

Established small banks

Large & highly

complex

institutions **

CAMELS composite

1 or 2

3

4 or 5

Initial Base Assessment Rate .........................................................................

2 to 14 ...........

5 to 28 ...........

14 to 28 .........

2 to 28.

Unsecured Debt Adjustment *** ......................................................................

¥5 to 0 ..........

¥5 to 0 ..........

¥5 to 0 ..........

¥5 to 0.

Brokered Deposit Adjustment .........................................................................

N/A .................

N/A .................

N/A .................

0 to 10.

Total Base Assessment Rate .........................................................................

1 to 14 ...........

2.5 to 28 ........

9 to 28 ...........

1 to 38.

* Total base assessment rates in the table do not include the DIDA.

** See 12 CFR 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 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 FDIC proposes to maintain the

range of initial assessment rates, set out

in the rate schedule in Table 9 below,

that the Board previously determined

will go 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. Unless changed by the Board,

these rates would remain in effect as

long as the reserve ratio is at or above

this level. Table 9 also includes the

maximum assessment rates that would

apply to CAMELS composite 1- and 2-

rated banks and the minimum

assessment rates that would apply to

CAMELS composite 3-rated banks and

CAMELS composite 4- and 5-rated

banks.

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41 The FDIC proposes to convert a linear version

of the model, which was estimated in a non-linear

manner. (See Appendix E.) The conversion using a

linear version of the model preserves the same rank

ordering as the non-linear model, but using the

linear version of the model allows initial

assessment rates to be expressed as a linear function

of the model variables. The FDIC also used a linear

version of its original non-linear downgrade

probability statistical model when it instituted

variable rates within Risk Category 1 effective

January 1, 2007

of the model preserves the same rank

ordering as the non-linear model, but using the

linear version of the model allows initial

assessment rates to be expressed as a linear function

of the model variables. The FDIC also used a linear

version of its original non-linear downgrade

probability statistical model when it instituted

variable rates within Risk Category 1 effective

January 1, 2007.

42 Initial assessment rates under the rate schedule

actually in effect for the third quarter of 2015

ranged from 5 basis points to 35 basis points, since

the DIF reserve ratio was under 1.15 percent.

43 Also as discussed above, for certain lagged

variables, such as one-year asset growth rates, the

statistical analysis also used bank financial data

from 1984.

TABLE 9—INITIAL AND TOTAL BASE ASSESSMENT RATES *

[In basis points per annum]

[If the reserve ratio for the prior assessment period is equal to or greater than 2.5 percent]

Established small banks

Large & highly

complex

institutions **

CAMELS composite

1 or 2

3

4 or 5

Initial Base Assessment Rate .........................................................................

1 to 13 ...........

4 to 25 ...........

13 to 25 .........

1 to 25.

Unsecured Debt Adjustment *** ......................................................................

¥5 to 0 ..........

¥5 to 0 ..........

¥5 to 0 ..........

¥5 to 0.

Brokered Deposit Adjustment .........................................................................

N/A .................

N/A .................

N/A .................

0 to 10.

Total Base Assessment Rate .........................................................................

0.5 to 13 ........

2 to 25 ...........

8 to 25 ...........

0.5 to 35.

* Total base assessment rates in the table do not include the DIDA.

** See 12 CFR 327.8(f) and (g) for the definition of large and highly complex institutions

..............

N/A .................

N/A .................

0 to 10.

Total Base Assessment Rate .........................................................................

0.5 to 13 ........

2 to 25 ...........

8 to 25 ...........

0.5 to 35.

* Total base assessment rates in the table do not include the DIDA.

** See 12 CFR 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.

As proposed in the 2015 NPR, with

respect to each of the three assessment

rate schedules (Tables 7, 8 and 9), the

FDIC proposes that the Board would

retain its authority to uniformly adjust

assessment rates up or down from the

total base assessment rate schedule

without further rulemaking, as long as

the adjustment does not exceed 2 basis

points. Also, with respect to each of the

three schedules, the FDIC proposes that,

if a bank’s CAMELS composite or

component ratings change during a

quarter in a way that changes the

institution’s initial base assessment rate,

then its assessment rate would be

determined separately for each portion

of the quarter in which it had different

CAMELS composite or component

ratings

ed 2 basis

points. Also, with respect to each of the

three schedules, the FDIC proposes that,

if a bank’s CAMELS composite or

component ratings change during a

quarter in a way that changes the

institution’s initial base assessment rate,

then its assessment rate would be

determined separately for each portion

of the quarter in which it had different

CAMELS composite or component

ratings.

Conversion of Statistical Model to

Pricing Multipliers and Uniform

Amount

As discussed above, and as proposed

in the 2015 NPR, the FDIC proposes to

convert the statistical model to the

assessment rates set out in Table 7 in a

revenue neutral manner.41 Specifically,

and as described in detail in Appendix

E, the FDIC proposes to convert the

statistical model to assessment rates to

ensure that aggregate assessments for an

assessment period shortly before

adoption of a final rule would have been

approximately the same under a final

rule as they would have been under the

assessment rate schedule set forth in

Table 4 (the rates that, under current

rules, will automatically go into effect

when the reserve ratio reaches 1.15

percent).

To illustrate the conversion, Table 10

below sets out the pricing multipliers

and uniform amounts that would have

resulted if the FDIC had converted the

statistical model to the assessment rate

schedule set out in Table 7 (with a range

of assessment rates from 3 basis points

to 30 basis points)

urrent

rules, will automatically go into effect

when the reserve ratio reaches 1.15

percent).

To illustrate the conversion, Table 10

below sets out the pricing multipliers

and uniform amounts that would have

resulted if the FDIC had converted the

statistical model to the assessment rate

schedule set out in Table 7 (with a range

of assessment rates from 3 basis points

to 30 basis points). The pricing

multipliers and uniform amount have

been set so that, for the third quarter of

2015, aggregate assessments for all

established small banks under the

revised proposal would have equaled, as

closely as reasonably possible, aggregate

assessments for all established small

banks had the assessment rate schedule

in Table 4 been in effect for that

assessment period.42

The pricing multipliers and uniform

amount in Table 10 differ from those in

the 2015 NPR because the FDIC has re-

estimated the statistical model for this

revised proposal using a revised

definition of the one-year asset growth

measure and a brokered deposit ratio in

place of a core deposit ratio.

Partly because the actual conversion

will be based upon a later quarter, the

pricing multipliers and the uniform

amount shown in Table 10 are likely to

differ somewhat from those in a final

rule.

TABLE 10—PRICING MULTIPLIERS AND

THE UNIFORM AMOUNT UNDER

A

HYPOTHETICAL CONVERSION OF THE

STATISTICAL

MODEL

TO

ASSESS-

MENT RATES BASED ON THE THIRD

QUARTER OF 2015

Model measures

Pricing

multiplier

Weighted Average CAMELS

Component Rating.

1.443

Tier 1 Leverage Ratio .................

¥1.201

Net Income Before Taxes/Total

Assets.

¥0.684

Nonperforming Loans and

Leases/Gross Assets.

0.895

Other Real Estate Owned/Gross

Assets.

0.506

Brokered Deposit Ratio ..............

0.251

One Year Asset Growth .............

0.058

Loan Mix Index ...........................

0.077

Uniform Amount .........................

S

Component Rating.

1.443

Tier 1 Leverage Ratio .................

¥1.201

Net Income Before Taxes/Total

Assets.

¥0.684

Nonperforming Loans and

Leases/Gross Assets.

0.895

Other Real Estate Owned/Gross

Assets.

0.506

Brokered Deposit Ratio ..............

0.251

One Year Asset Growth .............

0.058

Loan Mix Index ...........................

0.077

Uniform Amount ..........................

7.398

Updating the Statistical Model, Pricing

Multipliers and Uniform Amount

As discussed above, 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 2014.43 In response to

comments on the 2015 NPR, the FDIC

proposes that any changes to the small

bank deposit insurance pricing model

would go through notice-and-comment

rulemaking. The FDIC does not

anticipate a need for annual updates,

since variables and coefficients in the

underlying model are not likely to

change much absent a significant

number of failures.

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44 The revised proposal assumes a range of initial

assessment rates from 3 basis points to 30 basis

points. For purposes of determining assessment

rates for the illustration, the FDIC converted the

statistical model to a range of assessment rates from

3 basis points to 30 basis points so that, for the third

quarter of 2015, aggregate assessments for all

established small banks under the revised proposal

would have equaled, as closely as reasonably

possible, aggregate assessments for all established

small banks under the rate schedule in Table 4 (the

rates that, under current rules, will automatically go

into effect when the reserve ratio reaches 1.15

percent)

sis points so that, for the third

quarter of 2015, aggregate assessments for all

established small banks under the revised proposal

would have equaled, as closely as reasonably

possible, aggregate assessments for all established

small banks under the rate schedule in Table 4 (the

rates that, under current rules, will automatically go

into effect when the reserve ratio reaches 1.15

percent). Initial assessment rates under the rate

schedule actually in effect for the fourth quarter of

2014 ranged from 5 basis points to 35 basis points,

since the DIF reserve ratio was under 1.15 percent.

Insured Branches of Foreign Banks and

New Small Banks

As discussed in the 2015 NPR, this

revised proposal makes no changes to

the current rules governing the

assessment rate schedules applicable to

insured branches or to the assessment

rate schedule applicable to new small

banks. The revised proposal also makes

no changes to the way in which

assessment rates for insured branches

and new small banks are determined.

Implementation of the Proposed Rule

The FDIC is proposing that a final rule

would take effect the quarter after the

Deposit Insurance Fund (DIF) reserve

ratio has reached 1.15 percent (or the

first quarter after a final rule is adopted

that the rule can take effect, whichever

is later).

III. Expected Effects of the Revised

Proposal

Effect on Assessment Rates

To illustrate the effects of the revised

proposal on established small bank

assessment rates, the FDIC compared

actual assessment rates under the

current system for established small

banks for the third quarter of 2015,

using a range of initial assessment rates

of 5 basis points to 35 basis points, with

the proposed assessment rates in Table

7 of this revised NPR, which has an

overall range of initial assessment rates

of 3 basis points to 30 basis points; the

assessment rates in Table 7 would take

effect the quarter after the DIF reserve

ratio reaches 1.15 percent.44 The

proportion (and number) of established

small ban

initial assessment rates

of 5 basis points to 35 basis points, with

the proposed assessment rates in Table

7 of this revised NPR, which has an

overall range of initial assessment rates

of 3 basis points to 30 basis points; the

assessment rates in Table 7 would take

effect the quarter after the DIF reserve

ratio reaches 1.15 percent.44 The

proportion (and number) of established

small banks paying the minimum initial

assessment rate would have increased

significantly, from 26 percent (1,611

small banks) to 56 percent under the

revised proposal (3,475 small banks).

The proportion (and number) of

established small banks paying the

maximum initial assessment rate would

have decreased from 0.5 percent of

established small banks (31 small banks)

to 0.1 percent of established small banks

under the revised proposal (5 small

banks). Chart 1 below graphically

compares the distribution of established

small bank initial assessment rates

under this illustration. The horizontal

axis in the chart represents established

small banks ranked by risk, from the

least risky on the left to the most risky

on the right. Because actual risk

rankings under the current system differ

from risk rankings under the revised

proposal, a particular point on the

horizontal axis is not likely to represent

the same bank for the current system

and the proposed rule. Thus, the chart

does not show how an individual bank’s

assessment would change under the

revised proposal; it simply compares the

distribution of assessment rates under

the current system to the distribution

under the revised proposal.

Chart 1—Illustrative, Hypothetical

Comparison of Distribution of

Assessment Rates for Established Small

Banks (Comparing Actual Third Quarter

of 2015 Initial Assessment Rates for the

Current System to the Revised Proposal)

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Chart 1—Illustrative, Hypothetical

Comparison of Distribution of

Assessment Rates for Established Small

Banks (Comparing Actual Third Quarter

of 2015 Initial Assessment Rates for the

Current System to the Revised Proposal)

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Federal Register / Vol. 81, No. 23 / Thursday, February 4, 2016 / Proposed Rules

45 As discussed above, a bank’s total assessment

rate may vary from the initial assessment rate as the

result of possible adjustments. Under the current

system, there are three possible adjustments: The

unsecured debt adjustment, the DIDA, and the

brokered deposit adjustment. Under the revised

proposal, the brokered deposit adjustment would be

eliminated for established small banks, but the

unsecured debt adjustment and the DIDA would

remain.

Due in large part to the overall decline

in rates once the reserve ratio reaches

1.15 percent, most established small

banks (5,729 or 93 percent) would have

had lower total assessment rates.45

Among Risk Category I established

small banks, 92 percent would have had

rate decreases; the average decrease for

these banks would have been 2.6 basis

points. Of the Risk Category II, III, and

IV established small banks, 99 percent

would have had rate decreases; the

average decrease would have been 7.0

basis points. A total of 428 established

small banks (7 percent of established

small banks) would have had rate

increases. Of the Risk Category I

established small banks, 8 percent

would have had rate increases; the

average increase would have been 1.6

basis points. Of the Risk Category II, III,

and IV established small banks, 1

percent would have had rate increases;

the average increase would have been

2.5 basis points

lished

small banks (7 percent of established

small banks) would have had rate

increases. Of the Risk Category I

established small banks, 8 percent

would have had rate increases; the

average increase would have been 1.6

basis points. Of the Risk Category II, III,

and IV established small banks, 1

percent would have had rate increases;

the average increase would have been

2.5 basis points. The results of the

comparison are similar to those that

would have resulted from a comparison

of actual assessment rates to those

proposed in the 2015 NPR.

To further illustrate the effects of the

revised proposal on small bank

assessment rates, the FDIC compared

hypothetical assessment rates under the

revised proposal with the assessment

rates established small banks would

have been charged for the third quarter

of 2015 under the current system if the

assessment rate schedule that will go

into effect when the reserve ratio

reaches 1.15 percent had been in effect.

The proportion of established small

banks paying the minimum initial

assessment rate would also have

increased from 26 percent to 56 percent

under the revised proposal and the

proportion of established small banks

paying the maximum initial assessment

rate would also have decreased from 0.5

percent of established small banks to 0.1

percent of established small banks

under the revised proposal. Chart 2

below graphically compares the

distribution of established small bank

initial assessment rates under this

illustration.

Chart 2—Illustrative, Hypothetical

Comparison of Distribution of

Assessment Rates for Established Small

Banks Based on the Third Quarter of

2015 (Comparing Table 4 Initial

Assessment Rates for the Current

System to the Revised Proposal)

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othetical

Comparison of Distribution of

Assessment Rates for Established Small

Banks Based on the Third Quarter of

2015 (Comparing Table 4 Initial

Assessment Rates for the Current

System to the Revised Proposal)

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Most established small banks (3,467

or 56 percent) would have had lower

total assessment rates. Among Risk

Category I established small banks, 52

percent would have had rate decreases;

the average decrease for these banks

would have been 1.3 basis points. Of the

Risk Category II, III, and IV established

small banks, 94 percent would have had

rate decreases; the average decrease

would have been 4.6 basis points. 1,282

established small banks (21 percent of

established small banks) would have

had rate increases. Of the Risk Category

I established small banks, 23 percent

would have had rate increases; the

average increase would have been 1.8

basis points. Of the Risk Category II, III,

and IV established small banks, 5

percent would have had rate increases;

the average increase would have been

2.4 basis points. Again, the results of the

comparison are similar to those that

would have resulted from a comparison

of assessment rates that, under current

rules, would have gone into effect when

the reserve ratio reaches 1.15 percent

with those proposed in the 2015 NPR.

Effect on Capital and Earnings

Appendix 2 to the Supplementary

Information section of this notice

discusses the effect of the revised

proposal on the capital and earnings of

established small banks in detail

resulted from a comparison

of assessment rates that, under current

rules, would have gone into effect when

the reserve ratio reaches 1.15 percent

with those proposed in the 2015 NPR.

Effect on Capital and Earnings

Appendix 2 to the Supplementary

Information section of this notice

discusses the effect of the revised

proposal on the capital and earnings of

established small banks in detail. Using

balance sheet and trailing twelve month

income data as of the third quarter 2015,

Appendix 2 analyzes the effects of the

revised proposal on capital and income

in two ways: (1) The effect of the revised

proposal compared to the current small

bank deposit insurance assessment

system under the rate schedule in Table

3 (with an initial assessment rate range

of 5 basis points to 35 basis points) (the

first comparison); and (2) the effect of

the revised proposal compared to the

current small bank deposit insurance

assessment system under the rate

schedule in Table 4 (with an initial

assessment rate range of 3 basis points

to 30 basis points; this rate schedule is

to go into effect the quarter after the DIF

reserve ratio reaches 1.15 percent) (the

second comparison).

Under either comparison, the revised

proposal would cause no small bank to

fall below a 4 percent or 2 percent

leverage ratio if the bank would

otherwise be above these thresholds.

Similarly, the revised proposal would

cause no small bank to rise above a 4

percent or 2 percent leverage ratio if the

bank would otherwise be below these

thresholds.

In the first comparison, only

approximately 7 percent of profitable

established small banks and

approximately 4 percent of unprofitable

small banks would face a rate increase.

All but a very few (16) of these banks

would have resulting declines in

income (or increases in losses, where

the bank is unprofitable) of 5 percent or

less

if the

bank would otherwise be below these

thresholds.

In the first comparison, only

approximately 7 percent of profitable

established small banks and

approximately 4 percent of unprofitable

small banks would face a rate increase.

All but a very few (16) of these banks

would have resulting declines in

income (or increases in losses, where

the bank is unprofitable) of 5 percent or

less. As discussed above, assessment

rates for approximately 93 percent of

established small banks would decline,

resulting in increases in income (or

decreases in losses), some of which

would be substantial. The effect on

earnings of established small banks

under the revised proposal in this

comparison does not differ materially

from the corresponding effect in the

2015 NPR.

In the second comparison,

approximately 21 percent of profitable

established small banks and

approximately 15 percent of

unprofitable established small banks

would face a rate increase. All but 80 of

these banks would have resulting

declines in income (or increases in

losses, where the bank is unprofitable)

of 5 percent or less. As discussed above,

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46 The current small bank deposit insurance

assessment system did not exist at the end of 2006

and existed in somewhat different forms in years

before 2011. The comparison assumes that the small

bank deposit insurance assessment system in its

current form existed in each year of the comparison.

47 A ‘‘perfect’’ projection is defined as one where

the projection rates every bank that fails over the

projection period as more risky than every bank that

does not fail

t at the end of 2006

and existed in somewhat different forms in years

before 2011. The comparison assumes that the small

bank deposit insurance assessment system in its

current form existed in each year of the comparison.

47 A ‘‘perfect’’ projection is defined as one where

the projection rates every bank that fails over the

projection period as more risky than every bank that

does not fail. A random projection is one where the

projection does no better than chance; that is, any

given percentage of banks with projected higher risk

will include the same percentage of banks that fail

over the projection period. Thus, for example, in a

random projection, the 10 percent of banks that

receive the highest risk projections will include 10

percent of the banks that fail over the projection

period; the 20 percent of banks that receive the

highest risk projections will include 20 percent of

the banks that fail over the projection period, and

so on.

48 As implied in the footnote to Table 11, the

accuracy ratios in the table for the proposed system

are based on in-sample backtesting. In-sample

backtesting compares model forecasts to actual

outcomes where those outcomes are included in the

data used in model development. Out-of-sample

backtesting is the comparison of model predictions

against outcomes where those outcomes are not

used as part of the model development used to

generate predictions. Out-of-sample backtesting,

discussed in Appendix 1 of the Supplementary

Information section of this notice, also shows that,

while the current assessment system for small

banks did relatively well at predicting failures in

more recent years, the proposed system would have

done significantly better immediately before the

recent crisis and at the beginning of the crisis, but

also better overall.

49 80 FR 40838, 40851–40854

ssed in Appendix 1 of the Supplementary

Information section of this notice, also shows that,

while the current assessment system for small

banks did relatively well at predicting failures in

more recent years, the proposed system would have

done significantly better immediately before the

recent crisis and at the beginning of the crisis, but

also better overall.

49 80 FR 40838, 40851–40854.

assessment rates for approximately 56

percent of established small banks

would decline, resulting in increases in

income (or decreases in losses), some of

which would be substantial. The effect

on earnings of established small banks

under the revised proposal in this

comparison does not differ materially

from the corresponding effect in the

2015 NPR.

In sum, because the proposed

revisions are intended to generate the

same total revenue from small banks as

would have been generated absent the

revised proposal, the revisions should,

overall, have no material effect on the

capital and earnings of the banking

industry, although the revisions will

affect the earnings and capital of

individual institutions.

IV. Backtesting

To evaluate the proposed revisions to

the risk-based deposit insurance

assessment system for small banks, the

FDIC tested how well the revised system

would have differentiated between

banks that failed and those that did not

during the recent crisis compared to the

current small bank deposit insurance

assessment system.

Table 11 compares accuracy ratios for

the assessment system in the proposed

system and the current system. An

accuracy ratio compares how well each

approach would have discriminated

between banks that failed within the

projection period and those that did not.

The projection period in each case is the

three years following the date of the

projection (the first column), which is

the last day of the year given

uracy ratios for

the assessment system in the proposed

system and the current system. An

accuracy ratio compares how well each

approach would have discriminated

between banks that failed within the

projection period and those that did not.

The projection period in each case is the

three years following the date of the

projection (the first column), which is

the last day of the year given. Thus, for

example, the accuracy ratios for 2006

reflect how well each approach would

have discriminated in its projection

between banks that failed and those that

did not from 2007 through 2009.46 A

‘‘perfect’’ projection would receive an

accuracy ratio of 1; a random projection

would receive an accuracy ratio of 0.47

TABLE 11—ACCURACY RATIO COMPARISON BETWEEN THE REVISED PROPOSAL AND THE CURRENT SMALL BANK DEPOSIT

INSURANCE ASSESSMENT SYSTEM

Year of projection

(A)

(B)

Accuracy ratio

for the revised

proposal *

Accuracy ratio

for the current

small bank

assessment

system

Accuracy ratio

for the revised

proposal—

accuracy ratio

for the current

system

(A–B)

2006 .............................................................................................................................................

0.6988

0.3491

0.3498

2007 .............................................................................................................................................

0.7760

0.5616

0.2144

2008 .............................................................................................................................................

0.9015

0.7825

0.1190

2009 .............................................................................................................................................

0.9360

0.9015

0.0345

2010 ............................................................................................................................................

...........................................................

0.9015

0.7825

0.1190

2009 .............................................................................................................................................

0.9360

0.9015

0.0345

2010 .............................................................................................................................................

0.9667

0.9394

0.0272

2011 .............................................................................................................................................

0.9548

0.9323

0.0225

* The accuracy ratio for the revised proposal is based on the conversion of the statistical model as estimated based on bank data through

2011 and failure data through 2014.

The table contains results that do not

differ materially from the comparison of

the assessment system proposed in the

2015 NPR and the current small bank

deposit insurance assessment system. In

each comparison, the table reveals that,

while the current system did relatively

well at capturing risk and predicting

failures in more recent years, the

proposed system would have not only

done significantly better immediately

before the recent crisis and at the

beginning of the crisis, but also better

overall.48 In the early part of the crisis,

when CAMELS ratings had not fully

reflected the worsening condition of

many banks, the proposed system

would have recognized risk far better

than the current system, primarily

because the rates under the proposed

system are not constrained by risk

categories. As the crisis progressed and

CAMELS ratings more fully reflected

crisis conditions, the superiority of the

proposed system decreased, but it still

performed better than the current

system.

Appendix 1 to the Supplementary

Information section of this notice

contains a more detailed description of

the FDIC’s backtests of the revised

proposal.

V

stem are not constrained by risk

categories. As the crisis progressed and

CAMELS ratings more fully reflected

crisis conditions, the superiority of the

proposed system decreased, but it still

performed better than the current

system.

Appendix 1 to the Supplementary

Information section of this notice

contains a more detailed description of

the FDIC’s backtests of the revised

proposal.

V. Alternatives Considered

In the 2015 NPR, the FDIC solicited

comments on the following alternatives:

different minimum and maximum

assessment rates based on CAMELS

composite ratings, including higher,

lower, or no minimum or maximum

initial assessment rates for banks with

certain CAMELS ratings; the inclusion

of loss given default (LGD) in the new

statistical model; and no changes to the

small bank deposit insurance

assessment system. The discussion of

these alternatives is found in the 2015

NPR.49

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50 See 5 U.S.C. 603, 604 and 605.

51 5 U.S.C. 601.

52 Throughout this RFA analysis (unlike the rest

of this revised NPR), a ‘‘small institution’’ refers to

an institution with assets of $550 million or less;

a ‘‘small bank,’’ however, continues to refer to a

small insured depository institution for purposes of

deposit insurance assessments (generally, a bank

with less than $10 billion in assets).

53 The analysis is based on total assessment rates,

rather than initial assessment rates. A bank’s total

assessment rate may vary from its initial assessment

rate as the result of possible adjustments. Under the

current system, there are three possible

adjustments: The unsecured debt adjustment, the

DIDA, and the brokered deposit adjustment

ly, a bank

with less than $10 billion in assets).

53 The analysis is based on total assessment rates,

rather than initial assessment rates. A bank’s total

assessment rate may vary from its initial assessment

rate as the result of possible adjustments. Under the

current system, there are three possible

adjustments: The unsecured debt adjustment, the

DIDA, and the brokered deposit adjustment. Under

revised proposal, the brokered deposit adjustment

would be eliminated for established small banks,

but the unsecured debt adjustment and the DIDA

would remain.

54 For purposes of the analysis, an institution’s

total revenue is defined as the sum of its interest

income and noninterest income and an institution’s

profit is defined as income before taxes and

extraordinary items.

VI. Request for Comments

The FDIC seeks comment on every

aspect of this proposed rulemaking,

particularly revisions made to the 2015

NPR, including the brokered deposit

ratio and one-year asset growth

measure.

The FDIC received comments on parts

of the proposal in the 2015 NPR that

have not changed in this revised NPR.

The FDIC will consider all comments

submitted in response to the 2015 NPR,

as well as comments submitted in

response to this revised NPR, in

developing a final rule. Thus, to reduce

burden, those who submitted a

comment on the 2015 NPR need not

resubmit the comment for it to be

considered by the FDIC in developing

the final rule. However, comments on

any aspect of the revised NPR are

welcome.

VII. Regulatory Analysis and Procedure

A. Regulatory Flexibility Act

The FDIC has carefully considered the

potential impacts on all banking

organizations, including community

banking organizations, and has sought

to minimize the potential burden of

these changes where consistent with

applicable law and the agencies’ goals

. However, comments on

any aspect of the revised NPR are

welcome.

VII. Regulatory Analysis and Procedure

A. Regulatory Flexibility Act

The FDIC has carefully considered the

potential impacts on all banking

organizations, including community

banking organizations, and has sought

to minimize the potential burden of

these changes where consistent with

applicable law and the agencies’ goals.

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.50 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.51 The proposed rule relates

directly to the rates imposed on insured

depository institutions for deposit

insurance and to the deposit insurance

assessment system that measures risk

and determines each established small

bank’s assessment rate. Nonetheless, the

FDIC is voluntarily undertaking an

initial regulatory flexibility analysis of

the revised proposal and seeking

comment on it.

As of September 30, 2015, of the 6,270

insured commercial banks and savings

institutions, there were 5,015 small

insured depository institutions as that

term is defined for purposes of the RFA

(i.e., those with $550 million or less in

assets).52

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

ercial banks and savings

institutions, there were 5,015 small

insured depository institutions as that

term is defined for purposes of the RFA

(i.e., those with $550 million or less in

assets).52

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

FDIC’s aggregate projected and actual

insurance losses, expenses, investment

income, and insured deposit growth,

among other factors, and assessment

rates are set pursuant to the FDIC’s long-

term fund management plan. This

analysis demonstrates how the new

pricing system under the proposed

range of initial assessment rates of 3

basis points to 30 basis points (P330)

could affect small entities relative to the

current assessment rate schedule (C535)

and relative to the rate schedule that

under current regulations will be in

effect when the reserve ratio exceeds

1.15 percent (C330).53 Using data as of

September 30, 2015, the FDIC calculated

the total assessments that would be

collected under both rate schedules and

under the proposed rule.

The economic impact of the revised

proposal on each small institution for

RFA purposes (i.e., institutions with

assets of $550 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.54

Projected Effects on Small Entities

Assuming No Change in Initial

Assessment Rate Range (P330–C330)

Based on the September 30, 2015

data, of the total of 5,015 small

institutions, no institution would have

experienced an increase in assessments

equal to five percent or more of its total

revenue

ofits, assuming

the same total assessments collected by

the FDIC from the banking industry.54

Projected Effects on Small Entities

Assuming No Change in Initial

Assessment Rate Range (P330–C330)

Based on the September 30, 2015

data, of the total of 5,015 small

institutions, no institution would have

experienced an increase in assessments

equal to five percent or more of its total

revenue. These figures do not reflect a

significant economic impact on

revenues for a substantial number of

small insured institutions. Table 12

below sets forth the results of the

analysis in more detail.

TABLE 12—PERCENT CHANGE IN ASSESSMENTS RESULTING FROM THE REVISED PROPOSAL

[Assuming no change in the assessment rate range]

Change in assessments

Number of

institutions

Percent of

institutions

More than 5 percent lower ......................................................................................................................................

0

0

0 to 5 percent lower .................................................................................................................................................

2,984

60

0 to 5 percent higher ...............................................................................................................................................

2,031

40

More than 5 percent higher .....................................................................................................................................

0

0

Total ..................................................................................................................................................................

5,015

100

The FDIC performed a similar

analysis to determine the impact on

profits for small institutions. Based on

September 30, 2015 data, of those small

institutions with reported profits, 13

institutions would have an increase in

assessments equal to 10 percent or more

of their profits

....................................................................................................

5,015

100

The FDIC performed a similar

analysis to determine the impact on

profits for small institutions. Based on

September 30, 2015 data, of those small

institutions with reported profits, 13

institutions 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 13 sets forth the results of the

analysis in more detail.

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TABLE 13 *—ASSESSMENT CHANGES RELATIVE TO PROFITS FOR PROFITABLE SMALL INSTITUTIONS UNDER THE REVISED

PROPOSAL

[Assuming no change in the initial assessment rate range]

Change in assessments relative to profits

Number of

institutions

Percent of

institutions

Decrease in assessments equal to more than 40 percent of profits ......................................................................

56

1

Decrease in assessments equal to 20 to 40 percent of profits ..............................................................................

48

1

Decrease in assessments equal to 10 to 20 percent of profits ..............................................................................

111

2

Decrease in assessments equal to 5 to 10 percent of profits ................................................................................

269

6

Decrease in assessments equal to 0 to 5 percent of profits ..................................................................................

3,429

73

Increase in assessments equal to 0 to 5 percent of profits ...................................................................................

cent of profits ................................................................................

269

6

Decrease in assessments equal to 0 to 5 percent of profits ..................................................................................

3,429

73

Increase in assessments equal to 0 to 5 percent of profits ....................................................................................

741

16

Increase in assessments equal to 5 to 10 percent of profits ..................................................................................

34

1

Increase in assessments equal to 10 to 20 percent of profits ................................................................................

8

0

Increase in assessments equal to 20 to 40 percent of profits ................................................................................

2

0

Increase in assessments equal to more than 40 percent of profits ........................................................................

3

0

Total ..................................................................................................................................................................

4,701

** 100

* Institutions with negative or no profit were excluded. These institutions are shown in Table 14.

** Figures may not add to totals due to rounding.

Table 13 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 revised proposal on these

institutions by determining the annual

assessment change (either an increase or

a decrease) that would result. Table 14

below shows that 23 (seven percent) of

the 314 small insured institutions with

negative or no reported profits would

have an increase of $20,000 or more in

their annual assessments

ntage cannot be

calculated. The FDIC analyzed the effect

of the revised proposal on these

institutions by determining the annual

assessment change (either an increase or

a decrease) that would result. Table 14

below shows that 23 (seven percent) of

the 314 small insured institutions with

negative or no reported profits would

have an increase of $20,000 or more in

their annual assessments.

TABLE 14—CHANGE IN ASSESSMENTS FOR UNPROFITABLE SMALL INSTITUTIONS RESULTING FROM THE REVISED

PROPOSAL

[Assuming no change in the initial assessment rate range]

Change in assessments

Number of

institutions

Percent of

institutions

$20,000 or more decrease ......................................................................................................................................

136

43

$10,000–$20,000 decrease .....................................................................................................................................

56

18

$5,000–$10,000 decrease .......................................................................................................................................

32

10

$1,000–$5,000 decrease .........................................................................................................................................

30

10

$0–$1,000 decrease ................................................................................................................................................

14

4

$0–$1,000 increase .................................................................................................................................................

6

2

$1,000–$5,000 increase ..........................................................................................................................................

7

2

$5,000–$10,000 increase .......................................................................................................................................

..................................................................

6

2

$1,000–$5,000 increase ..........................................................................................................................................

7

2

$5,000–$10,000 increase ........................................................................................................................................

4

1

$10,000–$20,000 increase ......................................................................................................................................

6

2

$20,000 increase or more .......................................................................................................................................

23

7

Total ..................................................................................................................................................................

314

* 100

* Figures may not add to totals due to rounding.

Projected Effects on Small Entities

Assuming Change in the Initial

Assessment Rate Range From 5–35 Bps

to 3–30 Bps (P330–C535)

Based on the September 30, 2015

data, of the total of 5,015 small

institutions, no institution would have

experienced an increase in assessments

equal to five percent or more of its total

revenue. These figures do not reflect a

significant economic impact on

revenues for a substantial number of

small insured institutions. Table 15

below sets forth the results of the

analysis in more detail.

TABLE 15—PERCENT CHANGE IN ASSESSMENTS RESULTING FROM THE REVISED PROPOSAL

[Assuming change in the initial assessment rate range from 5–35 bps to 3–30 bps]

Change in assessments

Number of

institutions

Percent of

institutions

More than 5 percent lower .....................................................................................................................................

detail.

TABLE 15—PERCENT CHANGE IN ASSESSMENTS RESULTING FROM THE REVISED PROPOSAL

[Assuming change in the initial assessment rate range from 5–35 bps to 3–30 bps]

Change in assessments

Number of

institutions

Percent of

institutions

More than 5 percent lower ......................................................................................................................................

1

0

0 to 5 percent lower .................................................................................................................................................

4,758

95

0 to 5 percent higher ...............................................................................................................................................

256

5

More than 5 percent higher .....................................................................................................................................

0

0

Total ..................................................................................................................................................................

5,015

100

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55 5 U.S.C. 605.

The FDIC performed a similar

analysis to determine the impact on

profits for small institutions. Based on

September 30, 2015 data, of those small

institutions with reported profits, 3

institutions 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 16 sets forth the results of the

analysis in more detail

titutions. Based on

September 30, 2015 data, of those small

institutions with reported profits, 3

institutions 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 16 sets forth the results of the

analysis in more detail.

TABLE 16 *—ASSESSMENT CHANGES RELATIVE TO PROFITS FOR PROFITABLE SMALL INSTITUTIONS UNDER THE REVISED

PROPOSAL

[Assuming change in the initial assessment rate range from 5–35 bps to 3–30 bps]

Change in assessments relative to profits

Number of

institutions

Percent of

institutions

Decrease in assessments equal to more than 40 percent of profits ......................................................................

91

2

Decrease in assessments equal to 20 to 40 percent of profits ..............................................................................

98

2

Decrease in assessments equal to 10 to 20 percent of profits ..............................................................................

268

6

Decrease in assessments equal to 5 to 10 percent of profits ................................................................................

492

10

Decrease in assessments equal to 0 to 5 percent of profits ..................................................................................

3,510

75

Increase in assessments equal to 0 to 5 percent of profits ....................................................................................

235

5

Increase in assessments equal to 5 to 10 percent of profits ..................................................................................

4

0

Increase in assessments equal to 10 to 20 percent of profits ................................................................................

1

0

Increase in assessments equal to 20 to 40 percent of profits ...............................................................................

10 percent of profits ..................................................................................

4

0

Increase in assessments equal to 10 to 20 percent of profits ................................................................................

1

0

Increase in assessments equal to 20 to 40 percent of profits ................................................................................

1

0

Increase in assessments equal to more than 40 percent of profits ........................................................................

1

0

Total ..................................................................................................................................................................

4,701

100

* Institutions with negative or no profit were excluded. These institutions are shown in Table 17.

** Figures may not add to totals due to rounding.

Table 16 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 revised proposal on these

institutions by determining the annual

assessment change (either an increase or

a decrease) that would result. Table 17

below shows that just 6 (2 percent) of

the 314 small insured institutions with

negative or no reported profits would

have an increase of $20,000 or more in

their annual assessments. Again, these

figures do not reflect a significant

economic impact on profits for a

substantial number of small insured

institutions.

TABLE 17—CHANGE IN ASSESSMENTS FOR UNPROFITABLE SMALL INSTITUTIONS RESULTING FROM THE REVISED

PROPOSAL

[Assuming assessment change in the initial assessment rate range from 5–35 bps to 3–30 bps]

Change in assessments

Number of

institutions

Percent of

institutions

$20,000 or more decrease .....................................................................................................................................

FOR UNPROFITABLE SMALL INSTITUTIONS RESULTING FROM THE REVISED

PROPOSAL

[Assuming assessment change in the initial assessment rate range from 5–35 bps to 3–30 bps]

Change in assessments

Number of

institutions

Percent of

institutions

$20,000 or more decrease ......................................................................................................................................

208

66

$10,000–$20,000 decrease .....................................................................................................................................

52

17

$5,000–$10,000 decrease .......................................................................................................................................

28

9

$1,000–$5,000 decrease .........................................................................................................................................

11

4

$0–$1,000 decrease ................................................................................................................................................

4

1

$0–$1,000 increase .................................................................................................................................................

1

0

$1,000–$5,000 increase ..........................................................................................................................................

0

0

$5,000–$10,000 increase ........................................................................................................................................

2

1

$10,000–$20,000 increase ......................................................................................................................................

2

1

$20,000 increase or more ......................................................................................................................................

....................................................................

2

1

$10,000–$20,000 increase ......................................................................................................................................

2

1

$20,000 increase or more .......................................................................................................................................

6

2

Total ..................................................................................................................................................................

314

* 100

* Figures may not add to totals due to rounding.

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 (and, in fact, would

be the same as) existing compliance

requirements for the current risk-based

deposit insurance assessment system for

small banks. The FDIC is unaware of

any duplicative, overlapping or

conflicting federal rules.

The initial RFA 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 within the meaning of those

terms as used in the RFA.55

Commenters are invited to provide

the FDIC with any information they may

have about the likely quantitative effects

of the revised proposal on small insured

depository institutions (those with $550

million or less in assets).

B

proposed rule would not

have a significant economic impact on

a substantial number of small

institutions within the meaning of those

terms as used in the RFA.55

Commenters are invited to provide

the FDIC with any information they may

have about the likely quantitative effects

of the revised proposal on small insured

depository institutions (those with $550

million or less in assets).

B. Riegle Community Development and

Regulatory Improvement Act

The Riegle Community Development

and Regulatory Improvement Act

(RCDRIA) requires that the FDIC, in

determining the effective date and

administrative compliance requirements

of new regulations that impose

additional reporting, disclosure, or other

requirements on insured depository

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Federal Register / Vol. 81, No. 23 / Thursday, February 4, 2016 / Proposed Rules

56 12 U.S.C. 4802.

57 The preamble to the revised NPR refers to the

new model as the ‘‘statistical model.’’

58 80 FR 40838, 40857–40873.

institutions, consider, consistent with

principles of safety and soundness and

the public interest, any administrative

burdens that such regulations would

place on depository institutions,

including small depository institutions,

and customers of depository

institutions, as well as the benefits of

such regulations.56

This revised NPR proposes no

additional reporting or disclosure

requirements on insured depository

institutions, including small depository

institutions, nor on the customers of

depository institutions.

C. Paperwork Reduction Act

The proposed rule does not create any

new, or revise any existing collections

of information pursuant to the

Paperwork Reductions Act (44 U.S.C.

3501 et seq.). Therefore, the FDIC will

not be submitting any information

collection request to the Office of

Management and Budget.

D

g small depository

institutions, nor on the customers of

depository institutions.

C. Paperwork Reduction Act

The proposed rule does not create any

new, or revise any existing collections

of information pursuant to the

Paperwork Reductions Act (44 U.S.C.

3501 et seq.). Therefore, the FDIC will

not be submitting any information

collection request to the Office of

Management and Budget.

D. 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).

E. 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 revised proposal

easier to understand. For example:

• Has the FDIC organized the material

to suit your needs? If not, how could the

material be better organized?

• 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?

Appendix 1

Description of Statistical Model Underlying

Proposed Method for Determining Deposit

Insurance Assessments for Established Small

Insured Depository Institutions

Appendix 1 to the SUPPLEMENTARY

INFORMATION section of the 2015 NPR

provided a technical description of the

statistical model 57 u

r of sections, use of headings,

paragraphing) make the regulation

easier to understand?

Appendix 1

Description of Statistical Model Underlying

Proposed Method for Determining Deposit

Insurance Assessments for Established Small

Insured Depository Institutions

Appendix 1 to the SUPPLEMENTARY

INFORMATION section of the 2015 NPR

provided a technical description of the

statistical model 57 underlying the proposed

method for determining deposit insurance

assessments for established small banks. It

provided background information, reviewed

the data and methodology used to estimate

the statistical model underlying the proposed

method (including a discussion of variable

selection, variables used in the model,

variables considered but not used in the

model, and variables excluded from the

model), the estimation model (including a

description of the model used to estimate

failure probabilities, the time horizon chosen,

and in-sample estimation), validation

(including a backtest comparison of the

proposal to the current small bank

assessment system), and references.

Appendix 1.1 to the SUPPLEMENTARY

INFORMATION section of the 2015 NPR

discussed the loan mix index and Appendix

1.2

SUPPLEMENTARY INFORMATION section of

the 2015 NPR listed the variables tested.

Appendices 1, 1.1 and 1.2 to the

SUPPLEMENTARY INFORMATION section of the

2015 NPR are incorporated by reference.58

This Appendix 1 to the SUPPLEMENTARY

INFORMATION section of the revised proposal

updates relevant portions of Appendix 1 to

the SUPPLEMENTARY INFORMATION section of

the 2015 NPR to account for the revisions to

the definition of the asset growth variable

and the introduction of the brokered deposit

ratio variable.

I. Variables

Table 1.1 lists and describes the variables

that are included in the statistical model (the

‘‘new model’’) used in the revised proposal.

TABLE 1.1—NEW MODEL VARIABLE DESCRIPTION

Variables

Description

Tier 1 Leverage Ratio (%) ................................................

e definition of the asset growth variable

and the introduction of the brokered deposit

ratio variable.

I. Variables

Table 1.1 lists and describes the variables

that are included in the statistical model (the

‘‘new model’’) used in the revised proposal.

TABLE 1.1—NEW MODEL VARIABLE DESCRIPTION

Variables

Description

Tier 1 Leverage Ratio (%) .................................................

Tier 1 capital divided by adjusted average assets. (Numerator and denominator are

both based on the definition for prompt corrective action.)

Net Income before Taxes/Total Assets (%) .......................

Income (before income taxes and extraordinary items and other adjustments) for the

most recent twelve months divided by total assets.1

Nonperforming Loans and Leases/Gross Assets (%) .......

Sum of total loans and lease financing receivables past due 90 or more days and

still accruing interest and total nonaccrual loans and lease financing receivables

(excluding, in both cases, the maximum amount recoverable from the U.S. Gov-

ernment, its agencies or government-sponsored enterprises, under guarantee or

insurance provisions) divided by gross assets.2 3

Other Real Estate Owned/Gross Assets (%) ....................

Other real estate owned divided by gross assets.3

Brokered Deposit Ratio ......................................................

The ratio of the difference between brokered deposits and 10 percent of total assets

to total assets. For institutions that are well capitalized and have a CAMELS com-

posite rating of 1 or 2, reciprocal deposits are deducted from brokered deposits.4 If

the ratio is less than zero, the value is set to zero.

Weighted Average of C, A, M, E, L, and S Component

Ratings.

The weighted sum of the ‘‘C,’’ ‘‘A,’’ ‘‘M,’’ ‘‘E’’, ‘‘L’’, and ‘‘S’’ CAMELS components,

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

om brokered deposits.4 If

the ratio is less than zero, the value is set to zero.

Weighted Average of C, A, M, E, L, and S Component

Ratings.

The weighted sum of the ‘‘C,’’ ‘‘A,’’ ‘‘M,’’ ‘‘E’’, ‘‘L’’, and ‘‘S’’ CAMELS components,

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. In

instances where the ‘‘S’’ component is missing, the remaining components are

scaled by a factor of 10/9.5

Loan Mix Index ...................................................................

A measure of credit risk described below.

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Federal Register / Vol. 81, No. 23 / Thursday, February 4, 2016 / Proposed Rules

59 80 FR 40838 at 40858–40860.

TABLE 1.1—NEW MODEL VARIABLE DESCRIPTION—Continued

Variables

Description

Asset Growth (%) ...............................................................

Percentage growth in assets (merger adjusted 6) over the previous year in excess of

10 percent.7 If growth is less than 10 percent, the value is set to zero.

1 For purposes of calculating actual assessment rates (as opposed to model estimation), the ratio of Net Income before Taxes to Total Assets

is defined as income (before applicable income taxes and discontinued operations) for the most recent twelve months divided by total assets and

is bounded below by (and cannot be less than) ¥25 percent and is bounded above by (and cannot exceed) 3 percent. In January 2015, the Fi-

nancial Accounting Standards Board (FASB) eliminated from U.S. generally accepted accounting principles (GAAP) the concept of extraordinary

items, effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015

s and

is bounded below by (and cannot be less than) ¥25 percent and is bounded above by (and cannot exceed) 3 percent. In January 2015, the Fi-

nancial Accounting Standards Board (FASB) eliminated from U.S. generally accepted accounting principles (GAAP) the concept of extraordinary

items, effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. In September 2015, the Federal

banking agencies published a joint PRA notice and request for comment on proposed changes to the Call Report, including the elimination of the

concept of extraordinary items and revision of affected data items. That PRA process is still in progress and the FDIC expects that, at some fu-

ture time, references to extraordinary items will be removed from the Call Report. Therefore, the FDIC is proposing to define the net income

measure for purposes of calculating assessment rates to reflect the anticipated Call Report changes.

2 ‘‘Gross assets’’ are total assets plus the allowance for loan and lease financing receivable losses (ALLL); for purposes of estimating the sta-

tistical model, for years before 2001, when allocated transfer risk was not included in ALLL in Call Reports, allocated transfer risk was included in

gross assets separately.

3 Delinquency and non-accrual data on government guaranteed loans are not available for the entire estimation period. As a result, the model

is estimated without deducting delinquent or past-due government guaranteed loans from the nonperforming loans and leases to gross assets

ratio.

4 For estimation purposes, the numerator does not subtract reciprocal brokered deposits because of a lack of data for most of the estimation

period.

5 The component rating for sensitivity to market risk (the ‘‘S’’ rating) is not available for years before 1997. As a result, and as described in the

table, the model is estimated using a weighted average of five component ratings excluding the ‘‘S’’ component where the component is not

available

subtract reciprocal brokered deposits because of a lack of data for most of the estimation

period.

5 The component rating for sensitivity to market risk (the ‘‘S’’ rating) is not available for years before 1997. As a result, and as described in the

table, the model is estimated using a weighted average of five component ratings excluding the ‘‘S’’ component where the component is not

available.

6 Growth in assets is also adjusted for acquisitions of failed banks.

7 For purposes of calculating actual assessment rates (as opposed to model estimation), the maximum value of the Asset Growth measure is

230 percent; that is, asset growth (merger adjusted) over the previous year in excess of 240 percent (230 percentage points in excess of the 10

percent threshold) will not further increase a bank’s assessment rate.

The Tier 1 Leverage Ratio, Net Income

before Taxes/Total Assets, Nonperforming

Loans and Leases/Gross Assets, Weighted

Average of C, A, M, E, L, and S Component

Ratings, and Loan Mix Index (‘‘LMI’’) are

described and discussed in Appendix 1 to

the Supplementary Information section of the

2015 NPR.59

1. Asset Growth

Among the variables included in the

specifications was a one-year asset growth

rate. The FDIC also considered a two-year

growth rate and lagged one- and two-year

growth rates. The one-year growth rates

generally had the most explanatory power

and additional growth rates did not tend to

improve the model’s fit. To avoid penalizing

normal asset growth, the variable uses only

growth in excess of 10 percent. If asset

growth is less than 10 percent, the variable

is set to zero. This variable has generally the

same explanatory power as a variable

measuring any positive growth.

Mergers of troubled banks into healthier

banks and purchases of failed banks help

limit losses to the DIF. Penalizing banks for

growth that occurs through the acquisition of

troubled or failed banks would create a

disincentive for such mergers

s than 10 percent, the variable

is set to zero. This variable has generally the

same explanatory power as a variable

measuring any positive growth.

Mergers of troubled banks into healthier

banks and purchases of failed banks help

limit losses to the DIF. Penalizing banks for

growth that occurs through the acquisition of

troubled or failed banks would create a

disincentive for such mergers. Consequently,

bank asset growth was adjusted to remove

growth resulting from mergers and failed

bank acquisitions.

2. Brokered Deposit Ratio

Early test versions of the new model used

core deposits as a variable predictive of

failure. This variable was statistically

significant in-sample across all specifications

with a positive correlation with failure.

Subsequent versions used brokered deposits

as the alternative variable. It provides similar

predictive power, and is the variable used for

estimating the new model in this revised

proposal. Only the portion of brokered

deposits above 10 percent of assets is

included in the brokered deposit ratio; if the

ratio of brokered deposits to assets is less

than 10 percent, then the variable is set to

zero. For purposes of determining

assessments, as opposed to estimation of the

new model, reciprocal deposits are excluded

from the numerator for banks that are well

capitalized and have a CAMELS composite

rating of 1 or 2.

II. In-Sample Estimation

The in-sample estimation time period was

chosen to be 1985 through 2011,

incorporating Call Report data through the

end of 2011 and failures through the end of

2014.

To avoid having overlapping three-year

look-ahead periods for a given regression,

each regression uses data in which only

every third year is included

d and have a CAMELS composite

rating of 1 or 2.

II. In-Sample Estimation

The in-sample estimation time period was

chosen to be 1985 through 2011,

incorporating Call Report data through the

end of 2011 and failures through the end of

2014.

To avoid having overlapping three-year

look-ahead periods for a given regression,

each regression uses data in which only

every third year is included. One regression

uses insured depository institutions’ Call

Report and TFR data for the end of 1985 and

failures from 1986 through 1988; Call Report

and TFR data for the end of 1988 and failures

from 1989 through 1991; and so on, ending

with Call Report data for the end of 2009 and

failures from 2010 through 2012. (See Table

1.2A below.) The second regression uses

insured depository institutions’ Call Report

and TFR data for the end of 1986 and failures

from 1987 through 1989, and so on, ending

with Call Report data for the end of 2010 and

failures from 2011 through 2013. (See Table

1.2B below.) The third regression uses

insured depository institutions’ Call Report

and TFR data for the end of 1987 and failures

from 1988 through 1990, and so on, ending

with Call Report data for the end of 2011 and

failures from 2012 through 2014. (See Table

1.2C below.) Since there is no particular

reason for favoring any one of these three

regressions over another, the actual model

estimates are constructed as an average of

each of the three regression estimates for

each parameter.

The regressions only include observations

for institutions that are at least five years of

age, since younger institutions will be subject

to a different assessment methodology. Also,

since the model will be applied to banks with

under $10 billion in assets, larger banks are

not included in the regressions.

The data used for estimation is winsorized

(that is, extreme values in the data are reset

to reduce the effect of outliers) at the 1st

percentile and 99th percentile levels for each

year

unger institutions will be subject

to a different assessment methodology. Also,

since the model will be applied to banks with

under $10 billion in assets, larger banks are

not included in the regressions.

The data used for estimation is winsorized

(that is, extreme values in the data are reset

to reduce the effect of outliers) at the 1st

percentile and 99th percentile levels for each

year. For example, if a variable for a bank has

a value greater than the 99th percentile value

for that year, then the value for that bank is

set to the 99th percentile value before

estimation is made.

The test statistics applied follow the

analysis of Shumway (2001). In Shumway’s

formulation, the standard test statistics from

a logistic regression used to assess statistical

significance are divided by the average

number of bank-years per bank; this

adjustment corrects for the lack of

independence between bank-year

observations. That is, an adjustment is made

to account for a bank no longer being

observed after failure. In Tables 1.2A, 1.2B,

and 1.2C below, ‘‘WaldChiSq2’’ shows the

adjusted c-square statistic, and ‘‘ProbChiSq2’’

the associated probability value. (The lower

the value of ProbChisSq2, the more

statistically significant is the parameter

estimate. Parameter estimates with a

ProbChiSq2 below .05 are considered to be

statistically significant at the .05 level.)

As reported in Tables 1.2A, 1.2B, and 1.2C,

banks with a higher leverage ratio are less

likely to fail within the next three years.

Similarly, banks’ earnings before taxes and

their core deposits to assets ratios are

negatively correlated with failure probability.

In contrast, nonperforming loans and the

other real estate owned to assets ratios are

positively correlated with failure probability.

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their core deposits to assets ratios are

negatively correlated with failure probability.

In contrast, nonperforming loans and the

other real estate owned to assets ratios are

positively correlated with failure probability.

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60 The current small bank deposit insurance

assessment system did not exist at the end of 2006

and existed in somewhat different forms in years

before 2011. The comparison assumes that the small

bank deposit insurance assessment system in its

current form and established small bank assessment

system in the revised proposal (assuming a revenue

neutral conversion to assessment rates as of the

third quarter of 2015) had been in effect in each

year of the comparison.

61 For the out-of-sample backtests, the parameters

applied are the average of the parameters from three

separate regressions, as in the new model, except

Moreover, banks with a higher LMI, faster

asset growth, and worse weighted CAMELS

component ratings are more likely to fail

within the next three years.

The estimated coefficients of the variables

are statistically significant at the 5% level for

all three regression sets except for the asset

growth rate variable. The asset growth rate is

statistically significant for two out of the

three regressions.

TABLE 1.2A—REGRESSION WITH DECEMBER 2009 AS LAST DATA POINT FOR INDEPENDENT VARIABLES

Variable description

Estimate

WaldChiSq2

ProbChiSq2

Intercept .......................................................................................................................................

¥5.1717

122.9993

0.000000

Tier 1 Leverage Ratio (%) ..........................................................................................................

ATA POINT FOR INDEPENDENT VARIABLES

Variable description

Estimate

WaldChiSq2

ProbChiSq2

Intercept .......................................................................................................................................

¥5.1717

122.9993

0.000000

Tier 1 Leverage Ratio (%) ...........................................................................................................

¥0.3195

72.1987

0.000000

Net Income before Taxes/Assets (%) .........................................................................................

¥0.1347

10.5889

0.001138

Loan Mix Index ............................................................................................................................

0.0184

68.0000

0.000000

Brokered Deposit Ratio (%) .........................................................................................................

0.0470

4.8123

0.028257

Nonperforming Assets/Gross Assets (%) ....................................................................................

0.2604

54.7635

0.000000

Other Real Estate Owned/Gross Assets (%) ..............................................................................

0.1357

9.1723

0.002457

Asset Growth (%) ........................................................................................................................

0.0217

13.0579

0.000302

Weighted Average of C, A, M, E, L and S Component Ratings .................................................

0.4604

18.5915

0.000016

TABLE 1.2B—REGRESSION WITH DECEMBER 2010 AS LAST DATA POINT FOR INDEPENDENT VARIABLES

Variable description

Estimate

WaldChiSq2

ProbChiSq2

Intercept .......................................................................................................................................

¥4.9279

113.2177

0.000000

Tier 1 Leverage Ratio (%) ..........................................................................................................

ATA POINT FOR INDEPENDENT VARIABLES

Variable description

Estimate

WaldChiSq2

ProbChiSq2

Intercept .......................................................................................................................................

¥4.9279

113.2177

0.000000

Tier 1 Leverage Ratio (%) ...........................................................................................................

¥0.3381

73.0771

0.000000

Net Income before Taxes/Assets (%) .........................................................................................

¥0.1635

13.8092

0.000202

Loan Mix Index ............................................................................................................................

0.0240

144.1270

0.000000

Brokered Deposit Ratio (%) .........................................................................................................

0.0840

17.9979

0.000022

Nonperforming Assets/Gross Assets (%) ....................................................................................

0.2268

36.6508

0.000000

Other Real Estate Owned/Gross Assets (%) ..............................................................................

0.1495

12.5637

0.000393

Asset Growth (%) ........................................................................................................................

0.0081

1.2169

0.269976

Weighted Average of C, A, M, E, L and S Component Ratings .................................................

0.2786

6.6049

0.010170

TABLE 1.2C—REGRESSION WITH DECEMBER 2011 AS LAST DATA POINT FOR INDEPENDENT VARIABLES

Variable description

Estimate

WaldChiSq2

ProbChiSq2

Intercept .......................................................................................................................................

¥5.4491

127.5634

0.000000

Tier 1 Leverage Ratio (%) ..........................................................................................................

ATA POINT FOR INDEPENDENT VARIABLES

Variable description

Estimate

WaldChiSq2

ProbChiSq2

Intercept .......................................................................................................................................

¥5.4491

127.5634

0.000000

Tier 1 Leverage Ratio (%) ...........................................................................................................

¥0.3073

63.3053

0.000000

Net Income before Taxes/Assets (%) .........................................................................................

¥0.2518

35.5448

0.000000

Loan Mix Index ............................................................................................................................

0.0195

68.4211

0.000000

Brokered Deposit Ratio (%) .........................................................................................................

0.0707

20.3491

0.000006

Nonperforming Assets/Gross Assets (%) ....................................................................................

0.2318

38.1453

0.000000

Other Real Estate Owned/Gross Assets (%) ..............................................................................

0.1215

7.3735

0.006619

Asset Growth (%) ........................................................................................................................

0.0170

6.9063

0.008589

Weighted Average of C, A, M, E, L and S Component Ratings .................................................

0.4207

14.4167

0.000146

The parameter estimates applied for the

assessments are the average of the estimates

from the three regressions above. These

average values are show in Table 1.2D.

TABLE 1.2D—AVERAGE OF THE PA-

RAMETER ESTIMATES OVER THREE

REGRESSIONS

Variable description

Estimate

Intercept ......................................

¥5.1829

Tier 1 Leverage Ratio (%) ..........

¥0.3216

Net Income before Taxes/Assets

(%) ...........................................

¥0.1833

Loan Mix Index ..........................

ssions above. These

average values are show in Table 1.2D.

TABLE 1.2D—AVERAGE OF THE PA-

RAMETER ESTIMATES OVER THREE

REGRESSIONS

Variable description

Estimate

Intercept ......................................

¥5.1829

Tier 1 Leverage Ratio (%) ..........

¥0.3216

Net Income before Taxes/Assets

(%) ...........................................

¥0.1833

Loan Mix Index ...........................

0.0206

Brokered Deposit Ratio (%) .......

0.0672

Nonperforming Assets/Gross As-

sets (%) ...................................

0.2397

Other Real Estate Owned/Gross

Assets (%) ...............................

0.1356

Asset Growth (%) .......................

0.0156

Weighted Average of C, A, M, E,

L and S Component Ratings ..

0.3866

When the new model is used to determine

assessment rates, the variables Asset Growth

and Net Income before Taxes/Total Assets are

each bounded as follows:

Asset Growth ≤ 230

¥25 ≤ Net Income before Taxes/Total Assets

≤ 3.

For example, if Asset Growth in exces

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