Small Bank Pricing

Vol. 81

Friday,

No. 98

May 20, 2016

Part III

Federal Deposit Insurance Corporation

12 CFR Part 327

Assessments; Final Rule

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Federal Register / Vol. 81, No. 98 / Friday, May 20, 2016 / Rules and Regulations

1 12 U.S.C. 1817(b). A ‘‘risk-based assessment

system’’ means a system for calculating an insured

depository institution’s deposit insurance

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).

As used in this final rule, the term ‘‘bank’’ is

synonymous with the term ‘‘insured depository

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

Federal Deposit Insurance Act (FDI Act), 12 U.S.C.

1813(c)(2). As used in this final rule, 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.

2 See 80 FR at 40838 and 40842 (July 13, 2015).

3 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).

4 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).

5 The common equity tier 1 capital ratio was

incorporated into the deposit insurance assessment

system effective January 1, 2015. 79 FR 70427

(November 26, 2014)

ystems 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).

5 The common equity tier 1 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. 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.

6 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).

7 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 sensitivity to

market risk (S).

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 327

RIN 3064–AE37

Assessments

AGENCY: Federal Deposit Insurance

Corporation (FDIC).

ACTION: Final rule

tions. 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 sensitivity to

market risk (S).

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 327

RIN 3064–AE37

Assessments

AGENCY: Federal Deposit Insurance

Corporation (FDIC).

ACTION: Final rule.

SUMMARY: The FDIC is amending its

rules to refine the deposit insurance

assessment system for small insured

depository institutions that have been

federally insured for at least five years

(established small banks) by: Revising

the financial ratios method so that it is

based on a statistical model estimating

the probability of failure over three

years; updating the financial measures

used in the financial ratios method

consistent with the statistical model;

and eliminating risk categories for

established small banks and using the

financial ratios method to determine

assessment rates for all such banks

(subject to minimum or maximum

initial assessment rates based upon a

bank’s CAMELS composite rating).

Under current regulations, deposit

insurance assessment rates will decrease

once the deposit insurance fund (DIF or

fund) reserve ratio reaches 1.15 percent.

The final rule preserves the range of

initial assessment rates authorized

under current regulations.

DATES: The final rule is effective July 1,

2016.

Applicability date: If the reserve ratio

reaches 1.15 percent before that date,

the assessment system described in the

final rule will become operative July 1,

2016. If the reserve ratio has not reached

1.15 percent by that date, the

assessment system described in the final

rule will become operative the first day

of the calendar quarter after the reserve

ratio reaches 1.15 percent.

FOR FURTHER INFORMATION CONTACT:

Munsell St

reaches 1.15 percent before that date,

the assessment system described in the

final rule will become operative July 1,

2016. If the reserve ratio has not reached

1.15 percent by that date, the

assessment system described in the final

rule will become operative the first day

of the calendar quarter after the reserve

ratio reaches 1.15 percent.

FOR FURTHER INFORMATION CONTACT:

Munsell St. Clair, Chief, Banking and

Regulatory Policy, Division of Insurance

and Research, 202–898–8967; Ashley

Mihalik, Senior Policy Analyst, Division

of Insurance and Research, 202–898–

3793; Nefretete Smith, Counsel, Legal

Division, 202–898–6851; Thomas Hearn,

Counsel, Legal Division, 202–898–6967.

SUPPLEMENTARY INFORMATION:

I. Background

Policy Objectives

The primary purpose of the final rule

is to improve the risk-based deposit

insurance assessment system applicable

to established small banks to more

accurately reflect risk.1 Additional

discussion of the policy objectives of the

final rule can be found in the notice of

proposed rulemaking adopted by the

FDIC’s Board of Directors (Board) on

June 6, 2015.2

Risk-Based Deposit Insurance

Assessments for Established Small

Banks

Since 2007, assessment rates for

established small banks (that is, small

banks other than new small banks and

insured branches of foreign banks) 3

have been determined by placing each

bank into one of four risk categories,

Risk Categories I, II, III, and IV.4 These

four risk categories are based on two

criteria: Capital levels and supervisory

ratings

essments for Established Small

Banks

Since 2007, assessment rates for

established small banks (that is, small

banks other than new small banks and

insured branches of foreign banks) 3

have been determined by placing each

bank into one of four risk categories,

Risk Categories I, II, III, and IV.4 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.5 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.6 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).7 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.

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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.

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Federal Register / Vol. 81, No. 98 / Friday, May 20, 2016 / Rules and Regulations

8 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 assessment

purposes. The FDIC and other bank supervisors do

not use such a system to determine CAMELS

composite ratings.

9 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).

10 In 2011, the Board revised and approved

regular assessment rate schedules. See 76 FR 10672

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

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

12 Insured branches are deemed small banks for

purposes of the deposit insurance assessment

system.

13 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

stem.

13 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), 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] on

insured depository institutions with total

consolidated assets of less than $10,000,000,000,’’

12 U.S.C. 1817(note). On March 15, 2016, the FDIC

adopted a final rule 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

insured depository institutions with total

consolidated assets of less than $10 billion be offset.

See 81 FR 16059 (Mar. 25, 2016).

14 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, 66272–66281 (Oct.

27, 2010)

pting 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, 66272–66281 (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.

TABLE 1—DETERMINATION OF RISK CATEGORY—Continued

Capital group

Supervisory group

A

CAMELS 1 or 2

B

CAMELS 3

C

CAMELS 4 or 5

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 8 with current financial ratios to

determine a small Risk Category I bank’s

initial assessment rate.9

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

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.10

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 CAMELS composite

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

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 CAMELS composite

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 2006.11

The financial ratios method does not

apply to new small banks or to insured

branches of foreign banks (insured

branches).12

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

percent by September 30, 2020.13

The initial assessment rates currently

in effect for small and large banks are

set forth in Table 2 below.14

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.

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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.

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Federal Register / Vol. 81, No. 98 / Friday, May 20, 2016 / Rules and Regulations

15 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. 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).

16 See 76 FR at 10717–720.

17 For new banks, however, the rates will remain

in effect even if the reserve ratio equals or exceeds

2 percent (or 2.5 percent).

18 The reserve ratio for the immediately prior

assessment period must also be less than 2 percent.

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

20 See 80 FR 40838 (July 13, 2015)

ignificant amounts of brokered

deposits. 12 CFR 327.9 (d).

16 See 76 FR at 10717–720.

17 For new banks, however, the rates will remain

in effect even if the reserve ratio equals or exceeds

2 percent (or 2.5 percent).

18 The reserve ratio for the immediately prior

assessment period must also be less than 2 percent.

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

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

An institution’s total assessment rate

may vary from the initial assessment

rate as the result of possible

adjustments.15 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 Base 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 Base 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.16 Pursuant to the FDIC’s

authority to set assessments, the

regulations currently provide that the

initial 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.17

TABLE 4—INITIAL AND TOTAL BASE ASSESSMENT RATES *

[In basis points per annum]

[Once the reserve ratio reaches 1.15 percent 18]

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

...

¥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.

*** 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 take 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

take 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

ffect

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

take 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.

The Board, by regulation, may 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.19

The 2015 Notice of Proposed

Rulemaking

On June 16, 2015, the Board

authorized publication of a notice of

proposed rulemaking (2015 NPR) to

refine the deposit insurance assessment

system for established small banks. The

2015 NPR was published in the Federal

Register on July 13, 2015.20 In the 2015

NPR, the FDIC proposed to improve the

assessment system applicable to

established small banks by: (1) Revising

the financial ratios method so that it

would be based on a statistical model

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ederal

Register on July 13, 2015.20 In the 2015

NPR, the FDIC proposed to improve the

assessment system applicable to

established small banks by: (1) Revising

the financial ratios method so that it

would be based on a statistical model

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Federal Register / Vol. 81, No. 98 / Friday, May 20, 2016 / Rules and Regulations

21 See 81 FR 6108 (Feb. 4, 2016).

22 The tier 1 leverage ratio is now known as the

leverage ratio.

23 For certain lagged variables, such as one-year

asset growth rates, the statistical analysis also used

bank financial data from 1984.

24 See 80 FR at 40857–872 (Appendix 1 in 2015

NPR), 81 FR at 6124–35 (Appendix 1 in 2016

revised NPR), and 81 FR at 6153–55 (appendix E

in 2016 revised NPR).

25 The denominator in the net income before

taxes/total assets measure is total assets rather than

risk-weighted assets as under current rules. Also,

the definition of the net income measure no longer

refers to extraordinary items. The numerator of the

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 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

ome 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 FDIC, the Office of the

Comptroller of the Currency, and the Board of

Governors of the Federal Reserve System

(collectively, the Federal banking agencies)

Continued

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, however, would be used to

place a maximum on the assessment

rates that CAMELS composite 1- and 2-

rated banks could be charged and

minimums on the assessment rates that

CAMELS composite 3-, 4- and 5-rated

banks could 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. These comments addressed

many aspects of the proposal, including

the loan mix index and the one-year

asset growth measure, but the majority

of comments expressed concern

regarding the proposed treatment of

reciprocal deposits in the 2015 NPR.

The 2016 Notice of Proposed

Rulemaking

On January 21, 2016, the Board

authorized publication of a second

notice of proposed rulemaking (the 2016

revised NPR) to revise the 2015 NPR in

response to comments received

e loan mix index and the one-year

asset growth measure, but the majority

of comments expressed concern

regarding the proposed treatment of

reciprocal deposits in the 2015 NPR.

The 2016 Notice of Proposed

Rulemaking

On January 21, 2016, the Board

authorized publication of a second

notice of proposed rulemaking (the 2016

revised NPR) to revise the 2015 NPR in

response to comments received. The

2016 revised NPR was published in the

Federal Register on February 4, 2016.21

The broad outline of the 2016 revised

NPR remained the same as the 2015

NPR, but revised the proposal by: (1)

Using a brokered deposit ratio (that

treats reciprocal deposits the same as

under current regulations)—rather than

the core deposit ratio proposed in the

2015 NPR—as a measure in the

proposed financial ratios method for

calculating assessment rates for all

established small banks; (2) removing

the existing brokered deposit

adjustment applicable to certain

established small banks, which is made

duplicative by the new brokered deposit

ratio; (3) revising the one-year asset

growth measure, another of the financial

ratios method measures proposed in the

2015 NPR; (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 received a total of 19

comment letters in response to the 2016

revised NPR. Of these, 7 were from trade

groups and 12 were from individuals or

banks. Comments addressed both the

revisions to the proposal made by the

2016 revised NPR and aspects of the

proposal that remained unchanged from

the 2015 NPR, such as the loan mix

index

would go through notice-and-

comment rulemaking.

The FDIC received a total of 19

comment letters in response to the 2016

revised NPR. Of these, 7 were from trade

groups and 12 were from individuals or

banks. Comments addressed both the

revisions to the proposal made by the

2016 revised NPR and aspects of the

proposal that remained unchanged from

the 2015 NPR, such as the loan mix

index.

All comments, those received on the

2015 NPR and the 2016 revised NPR,

were considered in developing this final

rule. Comments are discussed in the

relevant sections that follow.

II. The Final Rule

Description of the Final Rule

The final rule adopts the proposals in

the 2016 revised NPR as proposed.

The financial ratios method in the

final rule uses 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 final rule 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 FINAL RULE MEASURES IN THE FINANCIAL RATIOS METHOD

Current Risk Category I financial ratios method

Final rule financial ratios method

• Weighted Average CAMELS Component Rating .................................

• Weighted Average CAMELS Component Rating.

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

• Leverage Ratio.22

• 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

sets .................................

• 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 in the final rule

are derived from a statistical model 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 estimation of the statistical

model uses 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 the 2016 revised

NPR, and appendix E to the 2016

revised NPR, describe the statistical

model and the derivation of these

measures in detail.24

Three of the measures in the final

rule—the weighted average CAMELS

component rating, the leverage ratio,

and the net income ratio measure—are

identical or very similar to the measures

currently used in the financial ratios

method.25 The current nonperforming

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the final

rule—the weighted average CAMELS

component rating, the leverage ratio,

and the net income ratio measure—are

identical or very similar to the measures

currently used in the financial ratios

method.25 The current nonperforming

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32184

Federal Register / Vol. 81, No. 98 / Friday, May 20, 2016 / Rules and Regulations

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 income for the

net income ratio will be determined before

discontinued operations. Therefore, the FDIC is

defining the net income measure to reflect the

anticipated Call Report changes. The FDIC

recognizes that this final rule may become effective

before the Federal banking agencies finalize the

proposed Call Report changes.

Because the numerator of the 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

efore the Federal banking agencies finalize the

proposed Call Report changes.

Because the numerator of the 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.

26 Two measures in the current financial ratios

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

past due 30–89 days/gross assets—were analyzed

but are not used in the final statistical analysis and

are not among the measures in this final rule.

27 The adjusted brokered deposit ratio can affect

assessment rates only if a bank’s brokered deposits

(excluding reciprocal deposits) exceed 10 percent of

its domestic deposits and its assets have grown

more than 40 percent in the previous 4 years. 12

CFR part 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 December 31,

2015, the adjusted brokered deposit ratio affected

the assessment rate of 111 banks.

28 Reciprocal deposits are deposits that an insured

depository institution receives through a deposit

placement network on a reciprocal basis, such that:

evels

of non-reciprocal brokered deposits and high asset

growth, so the adjusted brokered deposit ratio

affects relatively few banks. As of December 31,

2015, the adjusted brokered deposit ratio affected

the assessment rate of 111 banks.

28 Reciprocal deposits are deposits that an insured

depository institution receives through a deposit

placement network on a reciprocal basis, such that:

(1) For any deposit received, the institution (as

agent for depositors) places the same amount with

other insured depository institutions through the

network; and (2) each member of the network sets

the interest rate to be paid on the entire amount of

funds it places with other network members. See 12

CFR 327.8(q).

29 12 CFR 327.9(d)(3); 12 U.S.C. 1831f.

30 FDIC Study on Core Deposits and Brokered

Deposits (2011), 54.

assets/gross assets measure includes

other real estate owned. In the final rule,

other real estate owned/gross assets is a

separate measure from nonperforming

loans and leases/gross assets.

The remaining three financial

measures—the brokered deposit ratio,

the one-year asset growth measure and

the loan mix index—are described in

detail below.26 The brokered deposit

ratio and the one-year asset growth

measure replace the current adjusted

brokered deposit ratio.

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

osit 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 both brokered deposits

that exceed 10 percent of its domestic

deposits and a high asset growth rate.27

Reciprocal deposits are not included

with other brokered deposits in the

adjusted brokered deposit ratio.28

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.29

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.

The final rule replaces the adjusted

brokered deposit ratio currently used in

the financial ratios method with a

brokered deposit ratio, defined as the

ratio of brokered deposits to total assets,

and with a one-year asset growth

measure, which is discussed later. The

final rule also eliminates the existing

brokered deposit adjustment applicable

to established small banks outside Risk

Category I. Under the new brokered

deposit ratio applicable to all

established small banks, brokered

deposits in excess of 10 percent of total

assets may increase assessment rates

ts to total assets,

and with a one-year asset growth

measure, which is discussed later. The

final rule also eliminates the existing

brokered deposit adjustment applicable

to established small banks outside Risk

Category I. Under the new brokered

deposit ratio applicable to all

established small banks, brokered

deposits in excess of 10 percent of total

assets may increase assessment rates.

For a bank that is well capitalized and

has a CAMELS composite rating of 1 or

2, reciprocal deposits will 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 will be

included with other brokered deposits.

Most commenters on the 2016 revised

NPR discussed the changes related to

the brokered deposit ratio. Some

commenters supported using a brokered

deposit ratio and some expressed

support for excluding reciprocal

deposits from the brokered deposit ratio

for banks that are well capitalized and

have a CAMELS composite rating of 1

or 2. 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 or, similarly, that

the final rule should reflect the current

treatment of reciprocal deposits.

The brokered deposit ratio as defined

in the final rule is also consistent with

the 16 comment letters on the 2015 NPR

cautioning against penalizing the use of

Federal Home Loan Bank advances in

determining assessment rates. The final

rule does not change the current

treatment of Federal Home Loan Bank

advances in the small bank deposit

insurance assessment system. The FDIC

received two comments on the 2016

revised NPR supporting the FDIC’s

responsiveness to these concerns

comment letters on the 2015 NPR

cautioning against penalizing the use of

Federal Home Loan Bank advances in

determining assessment rates. The final

rule does not change the current

treatment of Federal Home Loan Bank

advances in the small bank deposit

insurance assessment system. The FDIC

received two comments on the 2016

revised NPR supporting the FDIC’s

responsiveness to these concerns.

The FDIC received two comment

letters on the 2016 revised NPR

reiterating the argument made in 40

comment letters on the 2015 NPR that

reciprocal deposits should be treated as

core deposits or are the functional

equivalent of core deposits. Commenters

argued that reciprocal deposits do not

present the same risks as brokered

deposits, such as excessive growth or

liquidity problems, and therefore should

be formally recognized as a low risk,

desirable source of funds. One

commenter on the 2016 revised NPR

argued that reciprocal deposits should

not be included with brokered deposits

even for banks that are less than well

capitalized or have a CAMELS

composite rating of 3, 4 or 5, because a

bank’s deposits are already adequately

accounted for under the ‘‘L’’

(‘‘Liquidity’’) component of a bank’s

CAMELS rating.

As stated in the 2016 revised NPR,

however, 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 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 .

DIC agrees that reciprocal deposits

do not present 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 . . .’’ 30

(Emphasis added.) As the FDIC noted

when it adopted the current 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

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Federal Register / Vol. 81, No. 98 / Friday, May 20, 2016 / Rules and Regulations

31 74 FR 9525, 9541 (Mar. 9, 2009). 12 U.S.C.

1831f.

32 See FDIC Study on Core Deposits and Brokered

Deposits (2011), 38–44, 46–47 and 66–68

(Appendix A: Excerpts from Material Loss Reviews

And Summaries of OIG Semiannual Reports to

Congress).

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 Furthermore, some of the results of the analyses

suggest that assessment rates would increase for a

bank with a better component ratings, rather than

decrease.

35 In the analysis of the alternative suggested by

commenters, the weighted average of CAMELS

component ratings was revised to exclude the

components that were included as separate

variables

nd high levels of

brokered deposits.

34 Furthermore, some of the results of the analyses

suggest that assessment rates would increase for a

bank with a better component ratings, rather than

decrease.

35 In the analysis of the alternative suggested by

commenters, the weighted average of CAMELS

component ratings was revised to exclude the

components that were included as separate

variables.

36 The FDIC tested how well the assessment

system in the final rule, which uses separate

measures for brokered deposits and asset growth,

would have differentiated during the recent crisis

between banks that failed and those that did not

compared to an assessment system that used a

combined measure (based on the interaction

between brokered deposits and asset growth). In

each case, the FDIC, unlike the commenter, was

able to use CAMELS component ratings. The FDIC

determined out-of-sample accuracy ratios for the

assessment system in the final rule and compared

these accuracy ratios with accuracy ratios for an

assessment system using separate measures to

determine how well each version of the system

would have differentiated between banks that failed

within the projection period and those that did not.

The projection period in each case was the three

years following the date of the projection; the dates

of projection were the last day of the years 2006

through 2011. (An accuracy ratio compares how

well a model would have discriminated between

banks that failed within the projection period and

banks that did not.) For each year’s projection, the

assessment system in the final rule had accuracy

ratios that were equal to or better than the accuracy

ratios for the system using a combined measure

projection were the last day of the years 2006

through 2011. (An accuracy ratio compares how

well a model would have discriminated between

banks that failed within the projection period and

banks that did not.) For each year’s projection, the

assessment system in the final rule had accuracy

ratios that were equal to or better than the accuracy

ratios for the system using a combined measure. In

most years of the backtest, the accuracy ratios were

similar; in the 2006 projection (predicting failures

from 2007 through 2009), however, the accuracy

ratio for the assessment system using separate

measures was significantly better than the accuracy

ratio for the assessment system using a combined

measure. (Accuracy ratios are discussed in more

detail later.)

37 See FDIC Study on Core Deposits and Brokered

Deposits (2011), 38–44 and 46–47.

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.’’ 31

The brokered deposit ratio, which

deducts reciprocal deposits for well-

capitalized, well-rated banks, is

consistent with these statutory

restrictions and with the FDIC Study on

Core Deposits and Brokered Deposits.

Three commenters on the 2016

revised NPR reiterated the argument

they made in their comments on the

2015 NPR that the FDIC should not

charge higher assessment rates to banks

that hold brokered deposits, but should

instead consider how banks use

brokered deposits and whether they

remain profitable and well capitalized

ictions and with the FDIC Study on

Core Deposits and Brokered Deposits.

Three commenters on the 2016

revised NPR reiterated the argument

they made in their comments on the

2015 NPR that the FDIC should not

charge higher assessment rates to banks

that hold brokered deposits, but should

instead consider how banks use

brokered deposits and whether they

remain profitable and well capitalized.

The FDIC also received letters on both

the 2016 revised NPR and the 2015 NPR

suggesting that specific types of

brokered deposits—including stable

retail deposits, certain custodial

accounts, and longer maturing brokered

CDs used to manage interest rate risk—

be excluded from the brokered deposit

ratio, and arguing that these deposits

have similar characteristics to reciprocal

deposits and are less risky than other

brokered deposits.

Small banks do not report data on

particular types of brokered deposits

(other than reciprocal deposits). Because

of this lack of data, the FDIC cannot

analyze individual types of brokered

deposits statistically. In any event, the

FDIC’s statistical analyses and other

studies have found that brokered

deposits in general are correlated with

a higher probability of failure and, as

was acknowledged by one commenter,

higher losses upon failure.32 Collecting

additional data on particular types of

brokered deposits is not likely to

improve the assessment system’s ability

to distinguish risk enough to warrant

the additional reporting burden it would

impose on small banks.

One-Year Asset Growth Measure

In response to comments on the 2015

NPR that the one-year asset growth

measure should not penalize normal

asset growth, the final rule uses a one-

year asset growth measure that increases

an established small bank’s assessment

rate only if it has had one-year asset

growth greater than 10 percent.

The FDIC received 6 comments on the

2016 revised NPR supporting the change

from the asset growth measure as

proposed in the 2015 NPR

that the one-year asset growth

measure should not penalize normal

asset growth, the final rule uses a one-

year asset growth measure that increases

an established small bank’s assessment

rate only if it has had one-year asset

growth greater than 10 percent.

The FDIC received 6 comments on the

2016 revised NPR supporting the change

from the asset growth measure as

proposed in the 2015 NPR. Some

commenters, however, remained

concerned that the measure

inappropriately penalizes banks for

growth that may not be risky, arguing

that a bank can exceed the 10 percent

threshold for reasons such as the failure

of a competitor, economic conditions, or

an influx of deposits invested in high-

quality assets. A few commenters

suggested using CAMELS component

ratings, such as a bank’s rating for the

‘‘A’’ (‘‘Asset quality’’) or ‘‘S’’

(‘‘Sensitivity to market risk’’)

components, in place of or to limit the

effect of the one-year asset growth

measure.

The one-year asset growth 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 The FDIC analyzed whether

replacing the one-year asset growth

measure with the CAMELS component

ratings suggested by some commenters

would improve the statistical model

underlying the small bank assessment

system adopted in this final rule. The

FDIC’s analyses show that, when the

asset growth measure is replaced by the

CAMELS components suggested by

commenters, the components are highly

statistically insignificant.34 35 Thus,

these CAMELS components cannot be

used to substitute for the one-year asset

growth measure

s

would improve the statistical model

underlying the small bank assessment

system adopted in this final rule. The

FDIC’s analyses show that, when the

asset growth measure is replaced by the

CAMELS components suggested by

commenters, the components are highly

statistically insignificant.34 35 Thus,

these CAMELS components cannot be

used to substitute for the one-year asset

growth measure.

Combining the Brokered Deposit Ratio

and One-Year Asset Growth Measure

The FDIC received 4 comment letters

on the 2016 revised NPR suggesting that

the FDIC use a measure that increases

assessments only for banks that have

both rapid asset growth and high levels

of brokered deposits, similar to the

current adjusted brokered deposit ratio.

Commenters asserted that using separate

variables is not supported by the nature

of brokered deposit risk or by the

statistical model underlying the

proposed small bank deposit insurance

system. One commenter submitted the

results of a statistical analysis it had

undertaken that, in the commenter’s

view, demonstrates that a combined

measure performed better in more

recent years. (The commenter was

unable to use CAMELS ratings in its

statistical analysis, since these ratings

are confidential.)

The FDIC conducted its own backtest

of the assessment system in the final

rule and compared it with a backtest of

an assessment system using a combined

measure, as suggested by commenters.

The FDIC’s comparison revealed that,

overall, the assessment system in the

final rule actually performed better in

recent years, particularly immediately

before the recent banking crisis, in

discriminating between banks that

failed within three years and those that

did not.36

Moreover, as discussed earlier,

brokered deposits pose risks other than

enabling banks to engage in rapid asset

growth

IC’s comparison revealed that,

overall, the assessment system in the

final rule actually performed better in

recent years, particularly immediately

before the recent banking crisis, in

discriminating between banks that

failed within three years and those that

did not.36

Moreover, as discussed earlier,

brokered deposits pose risks other than

enabling banks to engage in rapid asset

growth. Brokered deposits increase a

bank’s probability of failure (even after

controlling for asset growth) and

increase the loss to the DIF in the event

of failure.37 In addition, rapid asset

growth can be funded by liabilities other

than brokered deposits. The FDIC’s

analysis of the 354 banks that, during

the recent crisis, grew rapidly in the

years before they failed reveals that,

while brokered deposits funded a

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38 ‘‘Industry-wide’’ charge-off rates are charge-off

rates for all small banks.

39 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.

40 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 final rule uses 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

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 final rule uses 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) uses

three decimal places.

significant amount of growth, other

funding sources also contributed

significantly to growth. Increasing

assessments only for banks that have

both high levels of brokered deposits

and rapid asset growth would allow

small banks to have large amounts of

brokered deposits or rapid asset growth

without any effect on their assessment

rates.

Loan Mix Index

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 industry-wide

charge-off rates to identify loan types

with higher risk.38 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.39 For each

loan category’s weighted-average

industry-wide charge-off rate, the

weight for each year’s charge-off rate is

proportional to the number of bank

failures in that year

ix

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.39 For each

loan category’s weighted-average

industry-wide charge-off rate, the

weight for each year’s charge-off rate is

proportional to 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 DIF 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 40

Weighted

charge-off

rate

percent

Loan category

as a percent of

hypothetical

bank’s

total assests

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

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

1.46

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

0.24

5.91

1.44

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

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

70.45

84.79

The weighted charge-off rates in the

table are the same for all 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

ablished

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.

The FDIC received 30 comments on

the 2015 NPR and 11 comments on the

revised 2016 NPR (10 from the same

commenters who responded to the 2015

NPR) on the loan mix index. These

comments expressed views that the loan

mix index is a poor indicator of risk

because it does not account for factors

such as the quality of loan underwriting,

geographic variation, risk mitigating

factors such as collateral or guarantees,

and an individual bank’s historical loss

ratios. Commenters argued that these

factors are more relevant to an

individual bank’s risk than industry-

wide charge-off rates for each loan type

based on the most recent financial

crisis. Several commenters argued for

modifying the loan mix index, while

others argued for eliminating the loan

mix index and instead using measures

of a bank’s own average asset quality

over time (delinquencies,

nonperforming assets, and net charge-

offs, for example, as suggested by a

banking trade group) or CAMELS

component ratings.

For several reasons, the loan mix

index does not incorporate a bank’s

quality of loan underwriting, geographic

variation, risk mitigating factors, or

individual historical loss rates on types

of loans. First, as some commenters

noted, the data that banks report in the

Call Report are not sufficient or specific

enough to distinguish these risk factors

by loan category. Collecting the data

needed to take these factors into account

likely would not improve the

assessment system’s ability to

distinguish for risk enough to warrant

the additional reporting burden it would

impose on small banks

rst, as some commenters

noted, the data that banks report in the

Call Report are not sufficient or specific

enough to distinguish these risk factors

by loan category. Collecting the data

needed to take these factors into account

likely would not improve the

assessment system’s ability to

distinguish for risk enough to warrant

the additional reporting burden it would

impose on small banks.

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41 Although the measures suggested by the

commenters reflect loan quality, including them in

the statistical model does not add information

beyond that already provided by other measures,

since the statistical model in the final rule also

relies on six other measures based on a banks’ own

balance sheet and income statement.

42 Under the suggested alternative, the ‘‘A’’

component was not statistically significant, and

some of the results of the analysis suggested that

assessment rates should increase for a bank with a

better ‘‘A’’ component ratings, rather than decrease.

Estimation problems of this nature can occur when

new variables are added that are strongly correlated

with variables already in a model.

43 See FDIC Study on Core Deposits and Brokered

Deposits (2011), Appendix A: Excerpts from

Material Loss Reviews And Summaries of OIG

Semiannual Reports to Congress (66–68).

44 FDIC. (December 1997). History of the

Eighties—Lessons for the Future, www.fdic.gov/

bank/historical/history/contents.html.

45 The FDIC tested how well the assessment

system in the final rule would have differentiated

between banks that failed and those that did not

during the recent crisis compared to an assessment

system that used a loan mix index based upon

simple averages of annual charge-off rates for each

loan type

f the

Eighties—Lessons for the Future, www.fdic.gov/

bank/historical/history/contents.html.

45 The FDIC tested how well the assessment

system in the final rule would have differentiated

between banks that failed and those that did not

during the recent crisis compared to an assessment

system that used a loan mix index based upon

simple averages of annual charge-off rates for each

loan type. The FDIC used out-of-sample accuracy

ratios to test how well each version of the system

would have differentiated between banks that failed

within the projection period and those that did not.

The projection period in each case was the three

years following the date of the projection; the dates

of projection were the last day of the years 2006

through 2011. (An accuracy ratio compares how

well a model would have discriminated between

banks that failed within the projection period and

banks that did not.) For the projections from the

end of 2006 and 2007, accuracy ratios for the

assessment system in the final rule were

significantly better. For other years, the accuracy

ratios were not materially different. (Accuracy

ratios are discussed in more detail later.)

46 The effect on assessment rates of an

incremental increase in a loan category balance in

the loan mix index varies depending on whether a

small bank is paying the minimum or maximum

rate applicable to the bank’s CAMELS composite

rating or is paying a rate between the minimum and

maximum under the final rule. For example, a small

bank that is paying the maximum assessment rate

for a bank with its CAMELS composite rating will

continue to pay the maximum rate even if it

Continued

Second, underwriting quality directly

or indirectly affects, and is reflected in,

several other measures in the financial

ratios method, including the weighted

average CAMELS component rating, the

nonperforming loans and leases

measure, the other real estate owned

measure, and the net income measure

th its CAMELS composite rating will

continue to pay the maximum rate even if it

Continued

Second, underwriting quality directly

or indirectly affects, and is reflected in,

several other measures in the financial

ratios method, including the weighted

average CAMELS component rating, the

nonperforming loans and leases

measure, the other real estate owned

measure, and the net income measure.

Therefore, the final rule should not

deter a bank from making well

underwritten loans of any type, since

good underwriting quality will be

reflected in other financial and

supervisory measures and will reduce

the bank’s assessment rate.

Third, an individual bank’s loss rates

on the types of loans in the loan mix

index do not necessarily demonstrate

how the bank will fare in the future.

Low loss rates may result from lending

in areas that suffered less in the recent

downturn. If a bank’s low loss rates

simply reflect comparatively less

stressful conditions in the bank’s

primary lending area during the past

crisis, they will not reveal how the bank

would fare during a period of severe

stress similar to that recently observed

in other areas of the country. Since it is

not possible to predict which areas of

the country will be affected by the next

downturn, the loan mix index uses

industry-wide average annual charge-off

rates for each category of loan, including

commercial and development (C&D) and

commercial and industrial (C&I) loans,

weighted by the number of bank failures

in each year.

Although these reasons are sufficient

to preclude replacing the loan mix

index, the FDIC nevertheless undertook

statistical analyses of a trade group’s

suggestion to replace the loan mix index

with a bank’s own recent history of

delinquencies, nonperforming assets,

and net charge-offs

(C&D) and

commercial and industrial (C&I) loans,

weighted by the number of bank failures

in each year.

Although these reasons are sufficient

to preclude replacing the loan mix

index, the FDIC nevertheless undertook

statistical analyses of a trade group’s

suggestion to replace the loan mix index

with a bank’s own recent history of

delinquencies, nonperforming assets,

and net charge-offs. The FDIC tried

various combinations of these measures,

but the measures did not perform as

well as the measures in the statistical

model in the final rule in estimating the

likelihood of failure.41

The FDIC also analyzed whether

replacing the loan mix index with the

‘‘A’’ CAMELS component, as suggested

by some commenters, would improve

the statistical model. Again, the

statistical model in the final rule

performed better in estimating failure

probability than this alternative.42

Several commenters argued that the

loan mix index, which uses charge-off

rates from 2001 through 2014, is

weighted too heavily by the most recent

recession. For example, some

commenters cited the failure of

agricultural and residential mortgage

lenders in the 1980s and early 1990s.

Several commenters said that the

weighted charge-off rates assigned to

C&D and C&I loans are inappropriately

high.

The loan mix index uses loan charge-

off data from 2001 through 2014 to

calculate weights for each loan category

because charge-off data for some of the

loan categories in the loan mix index is

not available before 2001. Nevertheless,

asset concentrations in commercial real

estate (CRE) loans—in particular, C&D

loans—have been found to contribute to

bank failures in both the recent crisis

and the earlier crisis of the 1980s and

early 1990s

01 through 2014 to

calculate weights for each loan category

because charge-off data for some of the

loan categories in the loan mix index is

not available before 2001. Nevertheless,

asset concentrations in commercial real

estate (CRE) loans—in particular, C&D

loans—have been found to contribute to

bank failures in both the recent crisis

and the earlier crisis of the 1980s and

early 1990s. For example, Material Loss

Reviews and Reports to Congress from

the FDIC Office of Inspector General

(OIG) have concluded that significant

concentrations in riskier assets, such as

C&D loans (also termed acquisition,

development, and construction, or ADC

loans), and other CRE loans, contribute

to bank failure.43 The FDIC’s analysis of

the banking crisis of the 1980s and early

1990s also finds that concentrations of

CRE loans (including C&D loans)

relative to total assets were higher for

banks that subsequently failed than for

banks that did not fail.44 FDIC analysis

finds that established small banks that

had a ratio of C&D loans to assets of 50

percent or more as of the end of 2008

failed over the next five years at ten

times the rate of established small banks

with lower ratios.

One banking trade group suggested

that the annual industry-wide charge-off

rates used to determine charge-off rates

in the loan mix index should not be

weighted more heavily in years with

many bank failures than in years with

few bank failures.

Annual industry-wide charge-off rates

for each type of loan in the loan mix

index are weighted by the number of

bank failures in each year to assure that

types of loans that have high charge-off

rates during downturns have an

appropriate influence on assessment

rates. Loss rates observed in periods

characterized by a higher rate of bank

failures are more relevant to the risk of

loss to the DIF than loss experience in

other periods

ch type of loan in the loan mix

index are weighted by the number of

bank failures in each year to assure that

types of loans that have high charge-off

rates during downturns have an

appropriate influence on assessment

rates. Loss rates observed in periods

characterized by a higher rate of bank

failures are more relevant to the risk of

loss to the DIF than loss experience in

other periods.

Nevertheless, the FDIC conducted a

backtest of the assessment system in the

final rule and compared it with a

backtest of an assessment system that

uses a loan mix index based on a simple

average of industry-wide annual charge-

off rates (where each annual charge-off

rate is weighted equally) for each loan

type, as suggested by the commenter.

The FDIC’s comparison revealed that

the assessment system in the final rule

would have performed better,

particularly in the early part of the last

crisis, in discriminating between banks

that subsequently failed within three

years and those that did not fail.45

According to 24 commenters, the use

of annual industry-wide charge-off rates

weighted by bank failures during the

recent crisis could lead banks to reduce

certain types of lending and increase

others.

The loan mix index reflects the

performance of loan types over many

years and appropriately assigns higher

assessment rates to banks with

concentrations in types of loans that

have been demonstrated over two crises

to be more costly to the DIF than to

banks that do not have such

concentrations. FDIC analysis finds only

a small effect—or none at all—on a

small bank’s assessment rate from an

incremental increase in the balance of

any loan category (including C&D loans)

in the loan mix index.46 Consequently,

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such

concentrations. FDIC analysis finds only

a small effect—or none at all—on a

small bank’s assessment rate from an

incremental increase in the balance of

any loan category (including C&D loans)

in the loan mix index.46 Consequently,

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Federal Register / Vol. 81, No. 98 / Friday, May 20, 2016 / Rules and Regulations

increases its loan balances, so the marginal effect

is zero. Similarly, most small banks that are paying

the minimum assessment rate for banks with their

CAMELS composite rating will continue to do so

even with an incremental increase in any particular

type of lending. For a small bank whose assessment

rate is between the minimum and maximum rate,

an incremental increase in a particular type of

lending will, at most, result in only a small increase

in a bank’s assessment rate.

Since the effect of an incremental increase in a

loan category balance on a bank’s assessment rate

will be small, the loan mix index is not likely to

have a material effect on a bank’s lending decisions.

47 See 80 FR at 40858.

48 For CAMELS 1- and 2-rated institutions,

examinations generally occur on a 12- or 18-month

cycle. 12 U.S.C.1820(d). Under interim final rules

published on February 29, 2016, the Federal

banking agencies increased the number of small

banks eligible for an 18-month examination cycle

rather than a 12-month cycle to reduce regulatory

burden on small, well-capitalized and well-

managed institutions and allow the agencies to

better focus their supervisory resources on those

institutions that present capital, managerial, or

other issues of supervisory concern. Qualifying

well-capitalized and well-managed banks with less

than $1 billion in total assets are eligible for an 18-

month examination cycle. See 81 FR 10063 (Feb.

29, 2016).

49 See 80 FR at 40858

and well-

managed institutions and allow the agencies to

better focus their supervisory resources on those

institutions that present capital, managerial, or

other issues of supervisory concern. Qualifying

well-capitalized and well-managed banks with less

than $1 billion in total assets are eligible for an 18-

month examination cycle. See 81 FR 10063 (Feb.

29, 2016).

49 See 80 FR at 40858.

50 See FDIC Study on Core Deposits and Brokered

Deposits (2011), Appendix A: Excerpts from

Material Loss Reviews And Summaries of OIG

Semiannual Reports to Congress, 66–68.

the loan mix index should not

materially affect banks’ lending

decisions.

Several commenters on both the 2015

NPR and the 2016 revised NPR

criticized the assumption that the future

will follow the path of any single past

period, noting that future bank failures

may be characterized by different

portfolio mixes than in the last

recession.

As discussed above, the method

adopted in the final rule is based upon

a statistical analysis of the available

data. Any empirical analysis necessarily

relies upon past data. While there is no

guarantee that the risks that led to past

failures will necessarily be identical to

those that lead to future failures, past

experience still provides a sound basis

for evaluating risk.

As also discussed above, each of the

measures used in the final rule,

including the loan mix index, is a

statistically significant predictor of bank

failure. Use of a loan portfolio measure

is also consistent with numerous

academic papers.47

Leverage Ratio

The FDIC received 4 comments on the

2016 revised NPR and 14 comments on

the 2015 NPR asserting that the weight

(or multiplier) assigned to the leverage

ratio was too high compared to the

current system and ‘‘would unfairly

penalize banks that meet the ’well

capitalized’ standard but do not hold

excess capital . .

asure

is also consistent with numerous

academic papers.47

Leverage Ratio

The FDIC received 4 comments on the

2016 revised NPR and 14 comments on

the 2015 NPR asserting that the weight

(or multiplier) assigned to the leverage

ratio was too high compared to the

current system and ‘‘would unfairly

penalize banks that meet the ’well

capitalized’ standard but do not hold

excess capital . . . ’’ Commenters

argued that there is no statistical

evidence that well-managed banks with

strong capital are significantly

weakened by not holding more capital

and further, excessive capital can be

counterproductive. For banks that are

well-capitalized and have a CAMELS

composite rating of 1 or 2, two

commenters suggested reducing the

weight of the leverage ratio and capping

the benefit at 8 percent.

The FDIC disagrees. The greater a

bank’s capital, the better the bank is able

to withstand stress and avoid failure.

Consequently, reducing the assessment

rate for a bank that holds capital above

the minimum level necessary to be

considered well capitalized is

appropriate. Further, as stated above,

each of the measures in the established

small bank assessment system is a

statistically significant predictor of bank

failure, and the multipliers used in the

final rule for the leverage ratio and for

all of the measures are derived from an

empirical, statistical analysis. As also

described above, because the final rule

eliminates risk categories, applies the

financial ratios method to all

established small banks, and uses some

new measures, the multipliers assigned

to the financial measures, including the

leverage ratio, are necessarily different

from the multipliers in the current Risk

Category I financial ratios method.

CAMELS Ratings

The FDIC received 17 comments on

the 2015 NPR and 11 comments on the

revised 2016 NPR (5 from commenters

who had similar comments on the 2015

NPR) related to the role of CAMELS

ratings in determining a bank’s

assessment rate

ancial measures, including the

leverage ratio, are necessarily different

from the multipliers in the current Risk

Category I financial ratios method.

CAMELS Ratings

The FDIC received 17 comments on

the 2015 NPR and 11 comments on the

revised 2016 NPR (5 from commenters

who had similar comments on the 2015

NPR) related to the role of CAMELS

ratings in determining a bank’s

assessment rate. The commenters

suggested that the FDIC should more

heavily weight CAMELS supervisory

ratings over other measures, including

the loan mix index, the one-year asset

growth ratio, and the brokered deposit

ratio, because CAMELS ratings reflect

more current, bank specific data and

judgments by examiners who are

familiar with each bank’s business

model and risks. Some commenters

suggested using individual CAMELS

component ratings in place of or to limit

the effect of other measures. For

example, as described above, some

commenters suggested using the ‘‘A’’

CAMELS component in place of a loan

mix index.

For several reasons, these comments

have not led to changes in the final rule.

First, compared to the current system,

the value of the multiplier for the

weighted average CAMELS component

rating has increased. CAMELS ratings

are among the useful predictors of a

bank’s probability of failure and, as

under current rules, continue to be a

significant determinant of assessment

rates under the final rule. The final rule

uses both a bank’s financial measures

and its weighted average CAMELS

component rating to determine an

assessment rate. Financial ratios can

provide updated information on an

institution’s risk profile between bank

examinations and allow greater

differentiation in risk.48 To take into

account idiosyncratic and

unquantifiable risks and risk mitigators

that are reflected in CAMELS composite

ratings, the final rule also establishes

minimum and maximum assessment

rates for established small banks based

on these ratings

atios can

provide updated information on an

institution’s risk profile between bank

examinations and allow greater

differentiation in risk.48 To take into

account idiosyncratic and

unquantifiable risks and risk mitigators

that are reflected in CAMELS composite

ratings, the final rule also establishes

minimum and maximum assessment

rates for established small banks based

on these ratings. Thus, the final rule

prevents the assessment system from

assigning a rate that reflects either too

little risk (for a bank with a CAMELS

composite 3, 4, or 5 rating) or too much

risk (for a bank with a CAMELS

composite 1 or 2 rating).

Second, the variables selected and

used in the underlying statistical model

are consistent with other existing

models of bank risk, including FDIC

offsite monitoring models and academic

literature. For example, FDIC offsite

monitoring models measure bank

conditions and monitor bank risk using

variables that include: The ratio of

charge-offs to total assets, asset growth,

an index measuring changes in loan

mix, and capital. Numerous academic

papers discussing models that predict

bank failures include explanatory

variables that include loan portfolio

ratios, rapid asset growth, the ratio of

core deposits to total assets, and

capital.49 Rapid asset growth, reliance

on brokered deposits, and significant

concentrations in riskier assets have all

been found to contribute to bank

failure.50

Third, as stated above, each of the

measures in the established small bank

assessment system is a statistically

significant predictor of bank failure, and

the multipliers used in the final rule for

weighted average CAMELS component

ratings and for all of the financial

measures are derived from an empirical,

statistical analysis. Commenters did not

cite or provide empirical evidence to

support their suggestion that a greater

weight be assigned to CAMELS

supervisory ratings, or that a lower

weight (or effectively no weight) be

assigned to various financial measures

the final rule for

weighted average CAMELS component

ratings and for all of the financial

measures are derived from an empirical,

statistical analysis. Commenters did not

cite or provide empirical evidence to

support their suggestion that a greater

weight be assigned to CAMELS

supervisory ratings, or that a lower

weight (or effectively no weight) be

assigned to various financial measures.

As described above, because the final

rule eliminates risk categories and

applies the financial ratios method to all

established small banks, and uses some

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51 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.

Under the final rule, for small banks that are

considered established under these rules, but do not

have a CAMELS composite rating or do not have

CAMELS component ratings:

1

tings. 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.

Under the final rule, for small banks that are

considered established under these rules, but do not

have a CAMELS composite rating or do not have

CAMELS component ratings:

1. If the bank has no CAMELS composite rating,

its initial assessment rate will 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 will 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.

52 As under rules currently in effect, the brokered

deposit adjustment will 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 will not apply to

insured branches.

53 As under rules currently in effect, however, no

adjustments apply to bridge banks or

conservatorships. These banks will continue to be

charged the minimum assessment rate applicable to

small banks.

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

55 The reserve ratio for the immediately prior

assessment period must also be less than 2 percent

osit adjustment will not apply to

insured branches.

53 As under rules currently in effect, however, no

adjustments apply to bridge banks or

conservatorships. These banks will continue to be

charged the minimum assessment rate applicable to

small banks.

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

55 The reserve ratio for the immediately prior

assessment period must also be less than 2 percent.

new measures, the multipliers assigned

to the financial measures, including the

weighted average CAMELS component

rating, are necessarily different from the

multipliers in the current Risk Category

I financial ratios method.

In sum, the financial ratios method in

the final rule, including the multipliers

assigned to the financial measures and

weighted average CAMELS component

ratings, predicts failures significantly

better than the current system.

Calculating the Initial Assessment Rate

As in the current methodology for

Risk Category I small banks, under the

final rule the weighted CAMELS

components and financial ratios will be

multiplied by statistically derived

pricing multipliers, the products

summed, and the sum added to a

uniform amount that is: (a) Derived from

the statistical analysis; (b) adjusted for

assessment rates set by the FDIC; and (c)

applied to all established small banks.51

The total will equal the bank’s initial

assessment rate. If, however, the

resulting rate is below the minimum

initial assessment rate for established

small banks, the bank’s initial

assessment rate will be the minimum

initial assessment rate; if the rate is

above the maximum, then the bank’s

initial assessment rate will be the

maximum initial rate for established

small banks

ll banks.51

The total will equal the bank’s initial

assessment rate. If, however, the

resulting rate is below the minimum

initial assessment rate for established

small banks, the bank’s initial

assessment rate will be the minimum

initial assessment rate; if the rate is

above the maximum, then the bank’s

initial assessment rate will be the

maximum initial rate for established

small banks. In addition, if the resulting

rate for an established small bank is

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 will be the

respective minimum or maximum

assessment rate for an established small

bank with its CAMELS composite

rating. This approach allows 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 appendix E to the 2016

revised NPR.

Adjustments to Initial Base Assessment

Rates

As discussed above, the final rule

eliminates the existing brokered deposit

adjustment for established small

banks.52 Under current rules, the

brokered deposit adjustment applies to

small banks only 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 will apply to all

established small banks), the final rule

eliminates the brokered deposit

adjustment for established small banks.

As under current rules, the DIDA

continues to apply to all banks, and the

unsecured debt adjustment continues to

apply to all banks except new banks and

insured branches.53

Assessment Rates

The final rule preserves the lower

overall range of initial base assessment

rates previously adopted by the Board

he final rule

eliminates the brokered deposit

adjustment for established small banks.

As under current rules, the DIDA

continues to apply to all banks, and the

unsecured debt adjustment continues to

apply to all banks except new banks and

insured branches.53

Assessment Rates

The final rule preserves the lower

overall 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 decline

automatically from the current range of

5 basis points to 35 basis points to a

range of 3 basis points to 30 basis

points, 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

appendix E to the 2016 revised NPR, the

final rule converts the statistical model

to assessment rates within this range of

3 basis points to 30 basis points in a

revenue neutral way; that is, in a

manner that does not materially change

the aggregate assessment revenue

collected from established small banks.

The final rule eliminates risk

categories and adopts the range of initial

assessment rates for established small

banks set out in Table 7 below, thus

maintaining 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.54

These rates will remain in effect as long

as the reserve ratio is less than 2

percent

risk

categories and adopts the range of initial

assessment rates for established small

banks set out in Table 7 below, thus

maintaining 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.54

These rates will remain in effect as long

as the reserve ratio is less than 2

percent. Table 7 also includes the

maximum assessment rates that apply to

CAMELS composite 1- and 2-rated

banks and the minimum assessment

rates that apply to CAMELS composite

3-rated banks and CAMELS composite

4- and 5-rated banks.

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Federal Register / Vol. 81, No. 98 / Friday, May 20, 2016 / Rules and Regulations

TABLE 7—INITIAL AND TOTAL BASE ASSESSMENT RATES *

[In basis points per annum]

[After the reserve ratio reaches 1.15 percent] 55

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.

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

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

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 final rule adopts the range of

initial assessment rates for established

small banks set out in the rate schedule

in Table 8 below, starting the quarter

after the reserve ratio reaches or exceeds

2 percent, thus maintaining the range of

initial assessment rates that the Board

previously determined will go into

effect then. These rates will remain in

effect as long as the reserve ratio for the

prior assessment period is at or above 2

percent but is less than 2.5 percent.

Table 8 also includes the maximum

assessment rates that apply to CAMELS

composite 1- and 2-rated banks and the

minimum assessment rates that 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

m]

[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 final rule also adopts the range of

initial assessment rates for established

small banks set out in the rate schedule

in Table 9 below, thus again

maintaining the range of initial

assessment rates that the Board

previously determined will go into

effect when the fund reserve ratio at the

end of the prior assessment period

meets or exceeds 2.5 percent. These

rates will remain in effect as long as the

reserve ratio for the prior assessment

period is at or above this level

anks set out in the rate schedule

in Table 9 below, thus again

maintaining the range of initial

assessment rates that the Board

previously determined will go into

effect when the fund reserve ratio at the

end of the prior assessment period

meets or exceeds 2.5 percent. These

rates will remain in effect as long as the

reserve ratio for the prior assessment

period is at or above this level. Table 9

also includes the maximum assessment

rates that apply to CAMELS composite

1- and 2-rated banks and the minimum

assessment rates that apply to CAMELS

composite 3-rated banks and CAMELS

composite 4- and 5-rated banks.

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.

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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.

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Federal Register / Vol. 81, No. 98 / Friday, May 20, 2016 / Rules and Regulations

56 The final rule converts a linear version of the

model, which was estimated in a non-linear

manner. (See appendix E to the 2016 revised NPR.)

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. See 71 FR 69282 (Nov. 30,

2006).

57 Initial assessment rates under the rate schedule

actually in effect for the fourth quarter of 2015

ranged from 5 basis points to 35 basis points, since

the DIF reserve ratio was under 1.15 percent.

58 Table 10 assumes that the assessment rate

schedule in Table 7 is in effect. The uniform

amount and pricing multipliers differ for the

assessment rates in Tables 8 and 9.

59 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

oints, since

the DIF reserve ratio was under 1.15 percent.

58 Table 10 assumes that the assessment rate

schedule in Table 7 is in effect. The uniform

amount and pricing multipliers differ for the

assessment rates in Tables 8 and 9.

59 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.

*** 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.

With respect to each of the three

assessment rate schedules (Tables 7, 8

and 9), the Board retains 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, 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 will be

determined separately for each portion

of the quarter in which it had different

CAMELS composite or component

ratings

adjustment

does not exceed 2 basis points. Also,

with respect to each of the three

schedules, 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 will 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, the final rule

converts the statistical model to the

assessment rates set out in Table 7 in a

revenue neutral manner.56 Specifically,

and as described in detail in appendix

E to the 2016 revised NPR, the final rule

converts the statistical model to

assessment rates to ensure that aggregate

assessments under the final rule for the

assessment period ending December 31,

2015, would have been approximately

the same 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).57

Table 10 below sets out the pricing

multipliers and uniform amounts that

result when the FDIC converts 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).

TABLE 10—PRICING MULTIPLIERS AND

THE UNIFORM AMOUNT 58

Model measures

Pricing

multiplier

Weighted Average CAMELS

Component Rating ................

1.519

Leverage Ratio .........................

¥1.264

Net Income Before Taxes/Total

Assets ...................................

¥0.720

Nonperforming Loans and

Leases/Gross Assets ............

0.942

Other Real Estate Owned/

Gross Assets .........................

0.533

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

0.264

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

0.061

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

0.081

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

...

¥1.264

Net Income Before Taxes/Total

Assets ...................................

¥0.720

Nonperforming Loans and

Leases/Gross Assets ............

0.942

Other Real Estate Owned/

Gross Assets .........................

0.533

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

0.264

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

0.061

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

0.081

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

7.352

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 2014.59 The FDIC does not

anticipate the need for frequent updates,

since variables and coefficients in the

underlying model are not likely to

change much absent a significant

number of failures. In any event, any

changes to the small bank deposit

insurance pricing model will go through

notice-and-comment rulemaking. The

FDIC received two comments on the

2016 revised NPR supporting the use of

notice-and-comment rulemaking for any

future changes to the small bank deposit

insurance pricing model.

Insured Branches of Foreign Banks and

New Small Banks

The final rule 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 final rule also makes no

changes to the way in which assessment

rates for insured branches and new

small banks are determined.

III

ng model.

Insured Branches of Foreign Banks and

New Small Banks

The final rule 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 final rule also makes no

changes to the way in which assessment

rates for insured branches and new

small banks are determined.

III. Expected Effects of the Final Rule

Effect on Assessment Rates

To illustrate the effects of the final

rule on established small bank

assessment rates, the FDIC compared

actual assessment rates under the

current system for established small

banks for the fourth quarter of 2015,

using a range of initial assessment rates

of 5 basis points to 35 basis points, with

the assessment rates in Table 7 of this

final rule, which has an overall range of

initial assessment rates of 3 basis points

to 30 basis points; the assessment rates

in Table 7 will take effect the quarter

after the DIF reserve ratio reaches 1.15

percent. The proportion (and number) of

established small banks paying the

minimum initial assessment rate would

have increased significantly, from 27

percent (1,632 small banks) to 58

percent under the final rule (3,552 small

banks). The proportion (and number) of

established small banks paying the

maximum initial assessment rate would

have decreased from 0.6 percent of

established small banks (35 small banks)

to 0.1 percent of established small banks

under the final rule (6 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

lished small banks (35 small banks)

to 0.1 percent of established small banks

under the final rule (6 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 final rule, a particular point

on the horizontal axis is not likely to

represent the same bank for the current

system and the final rule. Thus, the

chart does not show how an individual

bank’s assessment would change under

the final rule; it simply compares the

distribution of assessment rates under

the current system to the distribution

under the final rule.

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Federal Register / Vol. 81, No. 98 / Friday, May 20, 2016 / Rules and Regulations

60 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 final rule,

the brokered deposit adjustment is eliminated for

established small banks, but the unsecured debt

adjustment and the DIDA remain.

Due in large part to the overall decline

in rates once the reserve ratio reaches

1.15 percent reflected in Table 7, most

established small banks (5,655 or 93

percent) would have had lower total

assessment rates under the final rule.60

Among Risk Category I established

small banks, 93 percent would have had

rate decreases; the average decrease for

these banks would have been 2.6 basis

points

in large part to the overall decline

in rates once the reserve ratio reaches

1.15 percent reflected in Table 7, most

established small banks (5,655 or 93

percent) would have had lower total

assessment rates under the final rule.60

Among Risk Category I established

small banks, 93 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, 97 percent

would have had rate decreases; the

average decrease would have been 7.1

basis points. A total of 423 established

small banks (7 percent of established

small banks) would have had rate

increases. Of the Risk Category I

established small banks, 7 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, 3

percent would have had rate increases;

the average increase would have been

3.0 basis points. The results of the

comparison are similar to those that

resulted from like comparisons in the

2015 NPR and 2016 revised NPR.

To further illustrate the effects of the

final rule on small bank assessment

rates, the FDIC compared hypothetical

assessment rates under the final rule

with the assessment rates established

small banks would have been charged

for the fourth quarter of 2015 if the

assessment rate schedule in Table 4,

which, under current rules, 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 27

percent to 58 percent under the final

rule, and the proportion of established

small banks paying the maximum initial

assessment rate would also have

decreased from 0.6 percent of

established small banks to 0.1 percent of

established small banks under the final

rule

ect. The

proportion of established small banks

paying the minimum initial assessment

rate would also have increased from 27

percent to 58 percent under the final

rule, and the proportion of established

small banks paying the maximum initial

assessment rate would also have

decreased from 0.6 percent of

established small banks to 0.1 percent of

established small banks under the final

rule. Chart 2 below graphically

compares the distribution of established

small bank initial assessment rates

under this illustration.

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Federal Register / Vol. 81, No. 98 / Friday, May 20, 2016 / Rules and Regulations

Most established small banks (3,400

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, 93 percent would have had

rate decreases; the average decrease

would have been 4.6 basis points. 1,235

established small banks (20 percent of

established small banks) would have

had rate increases. Of the Risk Category

I established small banks, 22 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, 6

percent would have had rate increases;

the average increase would have been

3.3 basis points. Again, the results of the

comparison are similar to like

comparisons in the 2015 NPR and the

2016 revised NPR

established small banks, 22 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, 6

percent would have had rate increases;

the average increase would have been

3.3 basis points. Again, the results of the

comparison are similar to like

comparisons in the 2015 NPR and the

2016 revised NPR.

Effect on Capital and Earnings

Summary

Using balance sheet and trailing

twelve month income data as of the

fourth quarter of 2015, the FDIC

analyzed the effects of the final rule on

capital and income in two ways: (1) The

effect of the final rule under the rate

schedule in Table 7 (with an initial

assessment rate range of 3 basis points

to 30 basis points (F330)) 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 (C535)) (the first

comparison); and (2) the effect of the

final rule 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;

under current rules, this rate schedule

will go into effect the quarter after the

DIF reserve ratio reaches 1.15 percent

(C330)) (the second comparison).

Under either comparison, the final

rule will cause no small bank to fall

below a 4 percent or 2 percent leverage

ratio if the bank would otherwise be

above these thresholds. Under the first

comparison, the final rule will cause no

small bank to rise above a 2 percent

leverage ratio if the bank would

otherwise be below this threshold, but

will cause one bank to rise above a 4

percent leverage ratio. Under the second

comparison, the final rule will cause no

small bank to rise above a 2 percent or

4 percent leverage ratio if the bank

would otherwise be below these

thresholds

comparison, the final rule will cause no

small bank to rise above a 2 percent

leverage ratio if the bank would

otherwise be below this threshold, but

will cause one bank to rise above a 4

percent leverage ratio. Under the second

comparison, the final rule will cause no

small bank to rise above a 2 percent or

4 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 5 percent of unprofitable

small banks will face a rate increase. All

but a very few (20) of these banks will

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

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61 As discussed earlier, at present, the Call Report

combines extraordinary items with two other

adjustments: (1) The results of discontinued

operations; and (2) the cumulative effect of changes

in accounting principles not reported elsewhere in

the Call Report. As discussed in a previous

footnote, however, in January 2015, the concept of

extraordinary items was eliminated from GAAP for

fiscal years and interim periods within those fiscal

years beginning after December 15, 2015, and

extraordinary items will no longer be reported as

such in the Call Report. In addition, the cumulative

effect of changes in accounting principles will no

longer be reported as an adjustment. The results of

discontinued operations, however, will continue to

be reported as an adjustment

GAAP for

fiscal years and interim periods within those fiscal

years beginning after December 15, 2015, and

extraordinary items will no longer be reported as

such in the Call Report. In addition, the cumulative

effect of changes in accounting principles will no

longer be reported as an adjustment. The results of

discontinued operations, however, will continue to

be reported as an adjustment. Because the three

adjustments cannot be disaggregate in Call Report

data, income in the analysis is measured before all

three adjustments, even though only one

adjustment will apply in the future. In any event,

extraordinary items and the cumulative effect of

changes in accounting principles are rarely reported

and should have little effect on the analysis.

small banks will decline, resulting in

increases in income (or decreases in

losses), some of which will be

substantial. The effects on earnings of

established small banks under the final

rule in this comparison do not differ

materially from the effects discussed in

the 2015 NPR and 2016 NPR.

In the second comparison,

approximately 21 percent of profitable

established small banks and

approximately 13 percent of

unprofitable established small banks

will face a rate increase. All but 76 of

these banks will 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 56 percent of

established small banks will decline,

resulting in increases in income (or

decreases in losses), some of which will

be substantial. The effects on earnings of

established small banks under the final

rule in this comparison do not differ

materially from the effects discussed in

the 2015 NPR and 2016 revised NPR

or

less. As discussed above, assessment

rates for approximately 56 percent of

established small banks will decline,

resulting in increases in income (or

decreases in losses), some of which will

be substantial. The effects on earnings of

established small banks under the final

rule in this comparison do not differ

materially from the effects discussed in

the 2015 NPR and 2016 revised NPR.

In sum, because the final rule is

intended to generate the same total

revenue from small banks as would

have been generated absent the final

rule, the final rule should, overall, have

no material effect on the capital and

earnings of the banking industry,

although the final rule will affect the

earnings and capital of individual

institutions.

Detailed Analysis

Assumptions and Data

The analysis assumes that annual pre-

tax income for each established small

bank is equal to trailing twelve month

income as of the fourth quarter of 2015.

The analysis also assumes that the

effects of changes in assessments are not

transferred to customers in the form of

changes in borrowing rates, deposit

rates, or service fees. Since deposit

insurance assessments are a tax-

deductible operating expense, increases

in the assessment expense can lower

taxable income and decreases in the

assessment expense can increase taxable

income. Therefore, the analysis

considers the effective after-tax cost of

assessments in calculating the effect on

capital.

The effect of the change in

assessments on an established small

bank’s income is measured by the

change in deposit insurance

assessments as a percent of income

before assessments, taxes, and

extraordinary items and other

adjustments (hereafter referred to as

‘‘income’’).61 This income measure is

used to eliminate the potentially

transitory effects of extraordinary items

and taxes on profitability

of the change in

assessments on an established small

bank’s income is measured by the

change in deposit insurance

assessments as a percent of income

before assessments, taxes, and

extraordinary items and other

adjustments (hereafter referred to as

‘‘income’’).61 This income measure is

used to eliminate the potentially

transitory effects of extraordinary items

and taxes on profitability. To facilitate

a comparison of the effect of assessment

changes, established small banks were

assigned to one of two groups: Those

that were profitable and those that were

unprofitable for the twelve months

ending December 31, 2015. For this

analysis, data as of December 31, 2015,

are used to calculate each bank’s

assessment base and risk-based

assessment rate. The base and rate are

assumed to remain constant throughout

the one-year projection period. An

established small bank’s earnings

retention and dividend policies also

influence the extent to which

assessments affect equity levels. If an

established small bank maintains the

same dollar amount of dividends when

it pays a higher deposit insurance

assessment under the proposed rule,

equity (retained earnings) will be less by

the full amount of the after-tax cost of

the increase in the assessment. This

analysis instead assumes that an

established small bank will maintain its

dividend rate (that is, dividends as a

fraction of net income) unchanged from

the weighted average rate reported over

the four quarters ending December 31,

2015.

Projected Effects on Capital and

Earnings Assuming a Change in the

Initial Assessment Rate Range From 5

Basis Points to 35 Basis Points to 3 Basis

Points to 30 Basis Points (Assessment

Change F330–C535)

Under this scenario, the FDIC projects

that no established small bank facing an

increase in assessments will, as a result

of the assessment increase, fall below a

4 percent or 2 percent leverage ratio

ects on Capital and

Earnings Assuming a Change in the

Initial Assessment Rate Range From 5

Basis Points to 35 Basis Points to 3 Basis

Points to 30 Basis Points (Assessment

Change F330–C535)

Under this scenario, the FDIC projects

that no established small bank facing an

increase in assessments will, as a result

of the assessment increase, fall below a

4 percent or 2 percent leverage ratio. No

established small bank facing a decrease

in assessments will, as a result of the

decrease, have its leverage ratio rise

above a 2 percent leverage ratio, but one

bank will rise above a 4 percent leverage

ratio.

The FDIC projects that approximately

85 percent of established small banks

that were profitable during the 12

months ending December 31, 2015, will

have a decrease in assessments in an

amount between 0 and 10 percent of

income. Table 11 shows that another 8

percent of profitable established small

banks will have a reduction in

assessments exceeding 10 percent of

their income. A total of 407 profitable

established small banks will have an

increase in assessments, with all but 10

of them facing assessment increases

between 0 and 10 percent of their

income.

TABLE 11—EFFECT OF THE FINAL RULE ON INCOME FOR PROFITABLE ESTABLISHED SMALL BANKS

[F330 compared to C535]

Change in assessments relative to income

Institutions

Assets

Number

Percent of

total profitable

established

small banks

Assets

($ billions)

Percent of

total assets

of profitable

established

small banks

Decrease over 40% .........................................................................................

88

2

18

1

Decrease 20% to 40% .....................................................................................

96

2

18

1

Decrease 10% to 20% .....................................................................................

283

5

66

2

Decrease 5% to 10% ......................................................................................

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

88

2

18

1

Decrease 20% to 40% .....................................................................................

96

2

18

1

Decrease 10% to 20% .....................................................................................

283

5

66

2

Decrease 5% to 10% .......................................................................................

572

10

154

5

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TABLE 11—EFFECT OF THE FINAL RULE ON INCOME FOR PROFITABLE ESTABLISHED SMALL BANKS—Continued

[F330 compared to C535]

Change in assessments relative to income

Institutions

Assets

Number

Percent of

total profitable

established

small banks

Assets

($ billions)

Percent of

total assets

of profitable

established

small banks

Decrease 0% to 5% .........................................................................................

4,335

75

2,328

78

No Change .......................................................................................................

1

0

0

0

Increase 0% to 5% ..........................................................................................

388

7

375

13

Increase 5% to 10% ........................................................................................

9

0

6

0

Increase 10% to 20% ......................................................................................

6

0

3

0

Increase 20% to 40% ......................................................................................

2

0

6

0

Increase over 40% ...........................................................................................

2

0

0

0

All * ...........................................................................................................

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

6

0

3

0

Increase 20% to 40% ......................................................................................

2

0

6

0

Increase over 40% ...........................................................................................

2

0

0

0

All * ............................................................................................................

5,782

100

2,975

100

* Figures may not add to totals and some percentages may appear incorrect due to rounding.

Table 12 provides the same analysis

for established small banks that were

unprofitable during the 12 months

ending December 31, 2015. Table 12

shows that 46 percent of unprofitable

established small banks will have a

decrease in assessments in an amount

between 0 and 10 percent of their losses.

Another 48 percent will have lower

assessments in amounts exceeding 10

percent income. Only 16 unprofitable

banks will have assessment increases,

all of them in amounts between 0 and

10 percent of losses.

TABLE 12—EFFECT OF THE FINAL RULE ON INCOME FOR UNPROFITABLE ESTABLISHED SMALL BANKS

[F330 compared to C535]

Change in assessments relative to income

Institutions

Assets

Number

Percent

of total

unprofitable

established

small banks

Assets

($ billions)

Percent of

total assets of

unprofitable

established

small banks

Decrease over 40% .........................................................................................

47

16

7

11

Decrease 20% to 40% .....................................................................................

37

13

12

20

Decrease 10% to 20% .....................................................................................

57

19

9

14

Decrease 5% to 10% .......................................................................................

49

17

11

18

Decrease 0% to 5% ........................................................................................

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

37

13

12

20

Decrease 10% to 20% .....................................................................................

57

19

9

14

Decrease 5% to 10% .......................................................................................

49

17

11

18

Decrease 0% to 5% .........................................................................................

87

30

20

32

No Change .......................................................................................................

1

0

0

0

Increase 0% to 5% ..........................................................................................

15

5

3

5

Increase 5% to 10% ........................................................................................

1

0

0

0

Increase 10% to 20% ......................................................................................

0

0

0

0

Increase 20% to 40% ......................................................................................

0

0

0

0

Increase over 40% ...........................................................................................

0

0

0

0

All * ............................................................................................................

294

100

62

100

* Figures may not add to totals and some percentages may appear incorrect due to rounding.

Projected Effects on Capital and

Earnings Assuming Same Initial

Assessment Rate Range (F330–C330)

Under this scenario, the FDIC projects

that no established small bank facing an

increase in assessments will, as a result

of the assessment increase, fall below a

4 percent or 2 percent leverage ratio. No

established small bank facing a decrease

in assessments will, as a result of the

assessment decrease, have its leverage

ratio rise above the 4 percent or 2

percent threshold

(F330–C330)

Under this scenario, the FDIC projects

that no established small bank facing an

increase in assessments will, as a result

of the assessment increase, fall below a

4 percent or 2 percent leverage ratio. No

established small bank facing a decrease

in assessments will, as a result of the

assessment decrease, have its leverage

ratio rise above the 4 percent or 2

percent threshold.

Table 13 shows that 51 percent of

established small banks that were

profitable during the 12 months ended

December 31, 2015, will have a decrease

in assessments in an amount between 0

and 10 percent of income. Another 4

percent of profitable established small

banks will have a reduction in

assessments exceeding 10 percent of

their income. A total of 1,208 profitable

established small banks will have an

increase in assessments, with all but 23

facing assessment increases between 0

and10 percent of their income.

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62 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.

63 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.

63 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

TABLE 13—EFFECT OF THE FINAL RULE ON INCOME FOR PROFITABLE ESTABLISHED SMALL BANKS

[F330 compared to C330]

Change in assessments relative to income

Institutions

Assets

Number

Percent of

total profitable

established

small banks

Assets

($ billions)

Percent of

total assets

of profitable

established

small banks

Decrease over 40% .........................................................................................

43

1

7

0

Decrease 20% to 40% .....................................................................................

50

1

11

0

Decrease 10% to 20% .....................................................................................

121

2

22

1

Decrease 5% to 10% .......................................................................................

282

5

79

3

Decrease 0% to 5% .........................................................................................

2,655

46

1,160

39

No Change .......................................................................................................

1,423

25

591

20

Increase 0% to 5% ..........................................................................................

1,139

20

1,057

36

Increase 5% to 10% ........................................................................................

46

1

34

1

Increase 10% to 20% ......................................................................................

12

0

7

0

Increase 20% to 40% .....................................................................................

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

1,139

20

1,057

36

Increase 5% to 10% ........................................................................................

46

1

34

1

Increase 10% to 20% ......................................................................................

12

0

7

0

Increase 20% to 40% ......................................................................................

7

0

7

0

Increase over 40% ...........................................................................................

4

0

1

0

All * ............................................................................................................

5,782

100

2,975

100

* Figures may not add to totals and some percentages may appear incorrect due to rounding.

Table 14 provides the same analysis

for established small banks that were

unprofitable during the 12 months

ending December 31, 2015. Table 14

shows that 54 percent of unprofitable

established small banks will have a

decrease in assessments in an amount

between 0 and 10 percent of their losses.

Another 30 percent will have lower

assessments in amounts exceeding 10

percent of their losses. Only 39

unprofitable banks will face assessment

increases, all but 3 of them in amounts

between 0 and 10 percent of losses.

TABLE 14—EFFECT OF THE FINAL RULE ON INCOME FOR UNPROFITABLE ESTABLISHED SMALL BANKS

[F330 compared to C330]

Change in assessments relative to losses

Institutions

Assets

Number

Percent

of total

unprofitable

established

small banks

Assets

($ billions)

Percent of

total assets of

unprofitable

established

small banks

Decrease over 40% .........................................................................................

28

10

5

7

Decrease 20% to 40% .....................................................................................

23

8

2

4

Decrease 10% to 20% ....................................................................................

tal assets of

unprofitable

established

small banks

Decrease over 40% .........................................................................................

28

10

5

7

Decrease 20% to 40% .....................................................................................

23

8

2

4

Decrease 10% to 20% .....................................................................................

38

13

14

22

Decrease 5% to 10% .......................................................................................

54

18

7

11

Decrease 0% to 5% .........................................................................................

105

36

26

41

No Change .......................................................................................................

7

2

1

2

Increase 0% to 5% ..........................................................................................

32

11

6

9

Increase 5% to 10% ........................................................................................

4

1

1

2

Increase 10% to 20% ......................................................................................

2

1

0

1

Increase 20% to 40% ......................................................................................

1

0

0

0

Increase over 40% ...........................................................................................

0

0

0

0

All * ............................................................................................................

294

100

62

100

* Figures may not add to totals and some percentages may appear incorrect due to rounding.

IV. Backtesting

To evaluate the final rule, the FDIC

tested how well the assessment system

in the final rule 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 15 compares accuracy ratios for

the assessment system in the final rule

and the current system

nding.

IV. Backtesting

To evaluate the final rule, the FDIC

tested how well the assessment system

in the final rule 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 15 compares accuracy ratios for

the assessment system in the final rule

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 2009.62 A

‘‘perfect’’ projection would receive an

accuracy ratio of 1; a random projection

would receive an accuracy ratio of 0.63

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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.

64 As implied in the footnote to Table 15, the

accuracy ratios in the table for the system under the

final rule are based on in-sample backtesting

t 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.

64 As implied in the footnote to Table 15, the

accuracy ratios in the table for the system under the

final rule 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 the 2015 NPR and 2016

revised NPR, also shows that, while the current

assessment system for small banks did relatively

well at predicting failures in more recent years, the

revised system would have done significantly better

immediately before the recent crisis and at the

beginning of the crisis, but also better overall. See

80 FR at 40857 and 81 FR at 6124.

TABLE 15—ACCURACY RATIO COMPARISON BETWEEN THE FINAL RULE AND THE CURRENT SMALL BANK DEPOSIT

INSURANCE ASSESSMENT SYSTEM

Year of projection

(A)

(B)

(A ¥B)

Accuracy ratio

for the final

rule *

Accuracy ratio

for the current

small bank

assessment

system

Accuracy ratio

for the final

rule—accuracy

ratio for the

current system

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

0.7000

0.3491

0.3509

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

0.7756

0.5616

0.2141

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

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

0.7000

0.3491

0.3509

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

0.7756

0.5616

0.2141

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

0.9003

0.7825

0.1178

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

0.9354

0.9015

0.0339

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

0.9659

0.9394

0.0265

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

0.9543

0.9323

0.0219

* The accuracy ratio for the final rule 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 comparisons

of the assessment system proposed in

the 2015 NPR and 2016 revised NPR

with 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 system under the

final rule would have not only done

significantly better immediately before

the recent crisis and at the beginning of

the crisis, but also better overall.64 In

the early part of the crisis, when

CAMELS ratings had not fully reflected

the worsening condition of many banks,

the system under the final rule would

have recognized risk far better than the

current system, primarily because the

rates under the final rule are not

constrained by risk categories

ely before

the recent crisis and at the beginning of

the crisis, but also better overall.64 In

the early part of the crisis, when

CAMELS ratings had not fully reflected

the worsening condition of many banks,

the system under the final rule would

have recognized risk far better than the

current system, primarily because the

rates under the final rule are not

constrained by risk categories. As the

crisis progressed and CAMELS ratings

more fully reflected crisis conditions,

the superiority of the system under the

final rule decreased, but it still

performed better than the current

system.

Appendix 1 to the Supplementary

Information sections of the 2015 NPR

and 2016 revised NPR contains a more

detailed description of the FDIC’s

backtests of the revised system.

V. Alternatives Considered

In the 2015 NPR and 2016 revised

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 statistical

model; and no changes to the small

bank deposit insurance assessment

system.

The FDIC received 6 comments in

response to the 2015 NPR and 1

comment in response to the 2016

revised NPR related to minimum and

maximum initial assessment rates.

Specifically, commenters asserted that

the proposed minimum and maximum

assessment rates were inappropriate.

Instead of adjusting the minimum and

maximum assessment rates based on

CAMELS composite ratings,

commenters suggested that CAMELS

supervisory ratings should be given a

greater weight in the assessment

formula

6

revised NPR related to minimum and

maximum initial assessment rates.

Specifically, commenters asserted that

the proposed minimum and maximum

assessment rates were inappropriate.

Instead of adjusting the minimum and

maximum assessment rates based on

CAMELS composite ratings,

commenters suggested that CAMELS

supervisory ratings should be given a

greater weight in the assessment

formula.

In the FDIC’s view, the minimum and

maximum assessment rates adopted in

the final rule strike the proper balance

between maintaining the accuracy of the

assessment system in differentiating

between banks that will fail and those

that will not and reducing the risk that

a particular bank’s assessment rate

might be too high or too low.

The FDIC also considered but rejected

including LGD in the statistical model.

The FDIC received one comment in

response to the 2015 NPR supporting

the incorporation of LGD into the

assessments system once reliable data is

available. As described in the 2015 NPR,

actual losses for many failed banks

during the recent crisis are still

estimated, primarily because of the use

of loss-sharing agreements that have not

yet terminated.

The FDIC also considered leaving the

small bank deposit insurance

assessment system in place unchanged

(and two commenters on the 2015 NPR

supported this alternative). For the

reasons given above, the assessment

system in the final rule is superior to the

current small bank deposit insurance

system. Under the system in the final

rule, fewer riskier established small

banks will pay lower assessments and

fewer safer banks will pay higher

assessments than their conditions

warrant.

VI. Effective Date

The final rule is effective July 1, 2016.

If the reserve ratio reaches 1.15 percent

before that date, the assessment system

described in the final rule will become

operative July 1, 2016

. Under the system in the final

rule, fewer riskier established small

banks will pay lower assessments and

fewer safer banks will pay higher

assessments than their conditions

warrant.

VI. Effective Date

The final rule is effective July 1, 2016.

If the reserve ratio reaches 1.15 percent

before that date, the assessment system

described in the final rule will become

operative July 1, 2016. If the reserve

ratio has not reached 1.15 percent by

that date, the assessment system

described in the final rule will become

operative the first day of the calendar

quarter after the reserve ratio reaches

1.15 percent.

VII. Regulatory Analysis and Procedure

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA)

requires that each federal agency, in

connection with a notice of final

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

66 5 U.S.C. 601.

67 As of December 31, 2015, there were 6,182

insured commercial banks and savings institutions

and 9 insured U.S. branches of foreign banks.

68 Throughout this RFA analysis (unlike the rest

of this final rule), 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). One insured

branch of a foreign banking association and two

insured institutions established within the last five

years were excluded from the RFA analysis.

69 The analysis is based on total assessment rates,

rather than initial assessment rates

to a small

insured depository institution for purposes of

deposit insurance assessments (generally, a bank

with less than $10 billion in assets). One insured

branch of a foreign banking association and two

insured institutions established within the last five

years were excluded from the RFA analysis.

69 The analysis is based on total assessment rates,

rather than initial assessment rates.

70 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.

rulemaking, prepare a final regulatory

flexibility analysis describing the

impact of the rule on small entities or

certify that the final rule will not have

a significant economic impact on a

substantial number of small entities.65

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.66 The final 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 a final

regulatory flexibility analysis.

As of December 31, 2015, of the 6,191

FDIC-insured institutions,67 there were

4,918 small insured depository

institutions as that term is defined for

purposes of the RFA (i.e., those with

$550 million or less in assets).68

For purposes of this analysis, whether

the FDIC were to collect needed

assessments under existing regulations

or under the final rule, the total amount

of assessments collected would be the

same

the 6,191

FDIC-insured institutions,67 there were

4,918 small insured depository

institutions as that term is defined for

purposes of the RFA (i.e., those with

$550 million or less in assets).68

For purposes of this analysis, whether

the FDIC were to collect needed

assessments under existing regulations

or under the final 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 pricing system in

the final rule under the range of

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