Final Rule Mitigating the Deposit Insurance Assessment Effect of Participation in the Paycheck Protection Program (PPP), the PPP Liquidity Facility, and the Money Market Mutual Fund Liquidity Facility

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1 12 U.S.C. 343(3).

2 Public Law 116–136 (Mar. 27, 2020).

3 Under the PPP, eligible borrowers generally

include businesses with fewer than 500 employees

or that are otherwise considered by the SBA to be

small, including individuals operating sole

proprietorships or acting as independent

contractors, certain franchisees, nonprofit

corporations, veterans’ organizations, and Tribal

businesses. The loan amount under the PPP would

be limited to the lesser of $10 million and 250

percent of a borrower’s average monthly payroll

costs. For more information on the Paycheck

Protection Program, see https://www.sba.gov/

funding-programs/loans/coronavirus-relief-options/

paycheck-protection-program-ppp.

4 Public Law 116–142 (June 5, 2020). The SBA

subsequently issued an interim final rule revising

the SBA’s interim final rule implementing sections

1102 and 1106 of the CARES Act temporarily

adding the Paycheck Protection Program to the

SBA’s 7(a) Loan Program published on April 15,

2020. See 85 FR 20811 (Apr. 15, 2020) and 85 FR

36308 (June 16, 2020).

5 12 U.S.C. 343(3). On April 30, 2020, the facility

was renamed the Paycheck Protection Program

Liquidity Facility, from Paycheck Protection

Program Lending Facility. See Periodic Report:

Update on Outstanding Lending Facilities

Authorized by the Board under Section 13(3) of the

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 327

RIN 3064–AF53

Assessments, Mitigating the Deposit

Insurance Assessment Effect of

Participation in the Paycheck

Protection Program (PPP), the PPP

Liquidity Facility, and the Money

Market Mutual Fund Liquidity Facility

AGENCY: Federal Deposit Insurance

Corporation (FDIC).

ACTION: Final rule

zed by the Board under Section 13(3) of the

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 327

RIN 3064–AF53

Assessments, Mitigating the Deposit

Insurance Assessment Effect of

Participation in the Paycheck

Protection Program (PPP), the PPP

Liquidity Facility, and the Money

Market Mutual Fund Liquidity Facility

AGENCY: Federal Deposit Insurance

Corporation (FDIC).

ACTION: Final rule.

SUMMARY: The Federal Deposit

Insurance Corporation is adopting a

final rule that mitigates the deposit

insurance assessment effects of

participating in the Paycheck Protection

Program (PPP) established by the Small

Business Administration (SBA), and the

Paycheck Protection Program Liquidity

Facility (PPPLF) and Money Market

Mutual Fund Liquidity Facility (MMLF)

established by the Board of Governors of

the Federal Reserve System. The final

rule removes the effect of participation

in the PPP and borrowings under the

PPPLF on various risk measures used to

calculate an insured depository

institution’s assessment rate, removes

the effect of participation in the PPP and

MMLF program on certain adjustments

to an insured depository institution’s

assessment rate; provides an offset to an

insured depository institution’s

assessment for the increase to its

assessment base attributable to

participation in the PPP and MMLF; and

removes the effect of participation in the

PPP and MMLF when classifying

insured depository institutions as small,

large, or highly complex for assessment

purposes.

DATES: The final rule is effective June

26, 2020, and will apply as of April 1,

2020.

FOR FURTHER INFORMATION CONTACT:

Michael Spencer, Associate Director,

202–898–7041, michspencer@fdic.gov;

Ashley Mihalik, Chief, Banking and

Regulatory Policy, 202–898–3793,

amihalik@fdic.gov; Nefretete Smith,

Counsel, 202–898–6851, nefsmith@

fdic.gov; Samuel Lutz, Counsel, 202–

898–3773, salutz@fdic.gov.

SUPPLEMENTARY INFORMATION:

I. Introduction

A

and will apply as of April 1,

2020.

FOR FURTHER INFORMATION CONTACT:

Michael Spencer, Associate Director,

202–898–7041, michspencer@fdic.gov;

Ashley Mihalik, Chief, Banking and

Regulatory Policy, 202–898–3793,

amihalik@fdic.gov; Nefretete Smith,

Counsel, 202–898–6851, nefsmith@

fdic.gov; Samuel Lutz, Counsel, 202–

898–3773, salutz@fdic.gov.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. Legal Authority

The FDIC, under its general

rulemaking authority in Section 9 of the

FDI Act, and its specific authority under

Section 7 of the FDI Act to establish a

risk-based assessment system and set

assessments, is finalizing modifications

to mitigate the deposit insurance

assessment effects of participation in the

PPP, PPPLF, and MMLF. For the reasons

explained below, an IDI that participates

in the PPP, PPPLF, or MMLF programs

could be subject to increased deposit

insurance assessments absent a change

to the assessment regulations.

B. Background

Recent events have significantly and

adversely impacted the global economy

and financial markets. The spread of the

Coronavirus Disease (COVID–19)

slowed economic activity in many

countries, including the United States.

Sudden disruptions in financial markets

placed increasing liquidity pressure on

money market mutual funds (MMFs)

and raised the cost of credit for most

borrowers. MMFs faced redemption

requests from clients with immediate

cash needs and may need to sell a

significant number of assets to meet

these redemption requests, which could

further increase market pressures

uding the United States.

Sudden disruptions in financial markets

placed increasing liquidity pressure on

money market mutual funds (MMFs)

and raised the cost of credit for most

borrowers. MMFs faced redemption

requests from clients with immediate

cash needs and may need to sell a

significant number of assets to meet

these redemption requests, which could

further increase market pressures.

In order to prevent the disruption in

the money markets from destabilizing

the financial system, on March 18, 2020,

the Board of Governors of the Federal

Reserve System (Board of Governors),

with approval of the Secretary of the

Treasury, authorized the Federal

Reserve Bank of Boston (FRBB) to

establish the MMLF, pursuant to section

13(3) of the Federal Reserve Act.1 Under

the MMLF, the FRBB is extending non-

recourse loans to eligible borrowers to

purchase assets from MMFs. Assets

purchased from MMFs are posted as

collateral to the FRBB. Eligible

borrowers under the MMLF include

IDIs. Eligible collateral under the MMLF

includes U.S. Treasuries and fully

guaranteed agency securities, securities

issued by government-sponsored

enterprises, and certain types of

commercial paper. The MMLF is

scheduled to terminate on September

30, 2020, unless extended by the Board

of Governors.

Small businesses also are facing

severe liquidity constraints and a

collapse in revenue streams, as millions

of Americans were ordered to stay

home, severely reducing their ability to

engage in normal commerce. Many

small businesses were forced to close

temporarily or furlough employees.

Continued access to financing will be

crucial for small businesses to weather

economic disruptions caused by

COVID–19 and, ultimately, to help

restore economic activity

collapse in revenue streams, as millions

of Americans were ordered to stay

home, severely reducing their ability to

engage in normal commerce. Many

small businesses were forced to close

temporarily or furlough employees.

Continued access to financing will be

crucial for small businesses to weather

economic disruptions caused by

COVID–19 and, ultimately, to help

restore economic activity.

As part of the Coronavirus Aid, Relief,

and Economic Security Act (CARES

Act) and in recognition of the exigent

circumstances faced by small

businesses, Congress created the PPP.2

PPP loans are fully guaranteed as to

principal and accrued interest by the

Small Business Administration (SBA),

the amount of each being determined at

the time the guarantee is exercised. As

a general matter, SBA guarantees are

backed by the full faith and credit of the

U.S. Government. PPP loans also afford

borrowers forgiveness up to the

principal amount of the PPP loan, if the

proceeds of the PPP loan are used for

certain expenses. The SBA reimburses

PPP lenders for any amount of a PPP

loan that is forgiven. PPP lenders are not

held liable for any representations made

by PPP borrowers in connection with a

borrower’s request for PPP loan

forgiveness.3 On June 5, 2020, the

Paycheck Protection Program Flexibility

Act of 2020 (PPP Flexibility Act) was

signed into law, amending key

provisions of the CARES Act, including

provisions related to loan maturity,

deferral of loan payments, and loan

forgiveness.4 Among other changes, the

amendments increase from two to five

years the maturity of PPP loans that are

approved by the SBA on or after June 5,

2020, and provide greater flexibility for

borrowers to qualify for loan

forgiveness

t) was

signed into law, amending key

provisions of the CARES Act, including

provisions related to loan maturity,

deferral of loan payments, and loan

forgiveness.4 Among other changes, the

amendments increase from two to five

years the maturity of PPP loans that are

approved by the SBA on or after June 5,

2020, and provide greater flexibility for

borrowers to qualify for loan

forgiveness.

In order to provide liquidity to small

business lenders and the broader credit

markets, and to help stabilize the

financial system, on April 8, 2020, the

Board of Governors, with approval of

the Secretary of the Treasury,

authorized each of the Federal Reserve

Banks to extend credit under the PPPLF,

pursuant to section 13(3) of the Federal

Reserve Act.5 Under the PPPLF, Federal

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Federal Reserve Act May 15, 2020, Board of

Governors of the Federal Reserve System, available

at: https://www.federalreserve.gov/publications/

files/mlf-msnlf-mself-and-ppplf-5-15-20.pdf.

6 The maturity date of the extension of credit

under the PPPLF will be accelerated if the

underlying PPP loan goes into default and the

eligible borrower sells the PPP Loan to the SBA to

realize the SBA guarantee. The maturity date of the

extension of credit under the PPPLF also will be

accelerated to the extent of any PPP loan

forgiveness reimbursement received by the eligible

borrower from the SBA.

7 Under the SBA’s interim final rule, a lender may

request that the SBA purchase the expected

forgiveness amount of a PPP loan or pool of PPP

loans at the end of the covered period. See Interim

Final Rule ‘‘Business Loan Program Temporary

Changes; Paycheck Protection Program,’’ 85 FR

20811, 20816 (Apr. 15, 2020) and 85 FR 36308 (June

16, 2020).

8 See 85 FR 16232 (Mar

orrower from the SBA.

7 Under the SBA’s interim final rule, a lender may

request that the SBA purchase the expected

forgiveness amount of a PPP loan or pool of PPP

loans at the end of the covered period. See Interim

Final Rule ‘‘Business Loan Program Temporary

Changes; Paycheck Protection Program,’’ 85 FR

20811, 20816 (Apr. 15, 2020) and 85 FR 36308 (June

16, 2020).

8 See 85 FR 16232 (Mar. 23, 2020) and 85 FR

20387 (Apr. 13, 2020).

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

10 See 12 CFR 327.3(b)(1).

11 See 12 CFR 327.5.

12 See 12 CFR 327.16(a) and (b).

13 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’’ and the term ‘‘large bank’’ is

synonymous with the term ‘‘large institution’’ or

‘‘highly complex institution,’’ as the terms are

defined in 12 CFR 327.8.

14 See 12 CFR 327.16(a); see also 81 FR 32180

(May 20, 2016).

15 See 12 CFR 327.16(b); see also 76 FR 10672

(Feb. 25, 2011) and 77 FR 66000 (Oct. 31, 2012).

16 See 12 CFR 327.16(e).

17 See 12 CFR 327.16(b)(3); see also Assessment

Rate Adjustment Guidelines for Large and Highly

Complex Institutions, 76 FR 57992 (Sept. 19, 2011).

18 85 FR 30649 (May 20, 2020).

19 See 12 U.S.C. 1817, 1819 (Tenth).

Reserve Banks are extending non-

recourse loans to institutions that are

eligible to make PPP loans, including

insured depository institutions (IDIs).

Under the PPPLF, only PPP loans that

are guaranteed by the SBA with respect

to both principal and interest and that

are originated by an eligible institution

may be pledged as collateral to the

Federal Reserve Banks (loans pledged to

the PPPLF)

ve Banks are extending non-

recourse loans to institutions that are

eligible to make PPP loans, including

insured depository institutions (IDIs).

Under the PPPLF, only PPP loans that

are guaranteed by the SBA with respect

to both principal and interest and that

are originated by an eligible institution

may be pledged as collateral to the

Federal Reserve Banks (loans pledged to

the PPPLF). The maturity date of the

extension of credit under the PPPLF 6

equals the maturity date of the PPP

loans pledged to secure the extension of

credit.7 No new extensions of credit will

be made under the PPPLF after

September 30, 2020, unless extended by

the Board of Governors and the

Department of the Treasury.

To facilitate use of the MMLF and

PPPLF, the FDIC, Board of Governors,

and Comptroller of the Currency

(together, the agencies) adopted interim

final rules on March 23, 2020, and April

13, 2020, respectively, to allow banking

organizations to neutralize the

regulatory capital effects of purchasing

assets under the MMLF program and

loans pledged to the PPPLF.8 Consistent

with Section 1102 of the CARES Act,

the April 2020 interim final rule also

required banking organizations to apply

a zero percent risk weight to PPP loans

originated by the banking organization

under the PPP for purposes of the

banking organization’s risk-based

capital requirements.

C. Deposit Insurance Assessments

Pursuant to Section 7 of the FDI Act,

the FDIC has established a risk-based

assessment system through which it

charges all IDIs an assessment amount

for deposit insurance.9

Under the FDIC’s regulations, an IDI’s

assessment is equal to its assessment

base multiplied by its risk-based

assessment rate.10 An IDI’s assessment

base and assessment rate are determined

each quarter based on supervisory

ratings and information collected on the

Consolidated Reports of Condition and

Income (Call Report) or the Report of

Assets and Liabilities of U.S

deposit insurance.9

Under the FDIC’s regulations, an IDI’s

assessment is equal to its assessment

base multiplied by its risk-based

assessment rate.10 An IDI’s assessment

base and assessment rate are determined

each quarter based on supervisory

ratings and information collected on the

Consolidated Reports of Condition and

Income (Call Report) or the Report of

Assets and Liabilities of U.S. Branches

and Agencies of Foreign Banks (FFIEC

002), as appropriate. Generally, an IDI’s

assessment base equals its average

consolidated total assets minus its

average tangible equity.11 An IDI’s

assessment rate is calculated using

different methods based on whether the

IDI is a small, large, or highly complex

institution.12 For assessment purposes,

a small bank is generally defined as an

institution with less than $10 billion in

total assets, a large bank is generally

defined as an institution with $10

billion or more in total assets, and a

highly complex bank is generally

defined as an institution that has $50

billion or more in total assets and is

controlled by a parent holding company

that has $500 billion or more in total

assets, or is a processing bank or trust

company.13

Assessment rates for established small

banks are calculated based on eight risk

measures that are statistically significant

in predicting the probability of an

institution’s failure over a three-year

horizon.14 Large banks are assessed

using a scorecard approach that

combines CAMELS ratings and certain

forward-looking financial measures to

assess the risk that a large bank poses to

the deposit insurance fund (DIF).15 All

institutions are subject to adjustments to

their assessment rates for certain

liabilities that can increase or reduce

loss to the DIF in the event the bank

fails.16 In addition, the FDIC may adjust

a large bank’s total score, which is used

in the calculation of its assessment rate,

based upon significant risk factors not

adequately captured in the appropriate

scorecard.17

Absent a change

institutions are subject to adjustments to

their assessment rates for certain

liabilities that can increase or reduce

loss to the DIF in the event the bank

fails.16 In addition, the FDIC may adjust

a large bank’s total score, which is used

in the calculation of its assessment rate,

based upon significant risk factors not

adequately captured in the appropriate

scorecard.17

Absent a change to the assessment

rules, an IDI that participates in the PPP,

PPPLF, or MMLF programs could be

subject to increased deposit insurance

assessments. For example, an institution

that holds PPP loans, including loans

pledged to the PPPLF, would increase

its total loan portfolio, all else equal,

which may increase its assessment rate.

An IDI that receives funding under the

PPPLF would increase the total assets

on its balance sheet (equal to the

amount of PPP loans pledged to the

Federal Reserve Banks), and increase its

total liabilities by the same amount,

which would increase the IDI’s

assessment base and also may increase

its assessment rate. An IDI that obtains

additional funding, such as additional

deposits or secured borrowings, to make

PPP loans would increase its total

liabilities and total assets by that

amount of funding, which would

increase its assessment base and also

may increase its assessment rate. An IDI

that relies on existing funding,

including deposits already at the

institution, to make PPP loans would

not increase its total liabilities or total

assets, which would not increase its

assessment base.

Similarly, an IDI that participates in

the MMLF would increase its total

assets by the amount of assets

purchased from MMFs under the MMLF

and increase its liabilities by the same

amount, which in turn would increase

its assessment base and may also

increase its assessment rate.

C

ns would

not increase its total liabilities or total

assets, which would not increase its

assessment base.

Similarly, an IDI that participates in

the MMLF would increase its total

assets by the amount of assets

purchased from MMFs under the MMLF

and increase its liabilities by the same

amount, which in turn would increase

its assessment base and may also

increase its assessment rate.

C. The Proposed Rule

On May 20, 2020, the FDIC published

in the Federal Register a notice of

proposed rulemaking (the proposed

rule, or proposal) 18 that would mitigate

the deposit insurance assessment effects

of an IDI’s participation in the PPP,

PPPLF, and MMLF programs.19 To

remove the effect of these programs on

the risk measures used to determine the

deposit insurance assessment rate for

each IDI, the FDIC proposed to exclude

PPP loans, which include loans pledged

to the PPPLF, from an institution’s loan

portfolio; exclude loans pledged to the

PPPLF from an institution’s total assets;

and, for institutions subject to the large

or highly complex bank scorecard,

exclude amounts borrowed from the

Federal Reserve Banks under the PPPLF

from an institution’s liabilities. In

addition, because participation in the

PPPLF and MMLF programs will have

the effect of expanding an IDI’s balance

sheet (and, by extension, its assessment

base), the FDIC proposed to exclude

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der the PPPLF

from an institution’s liabilities. In

addition, because participation in the

PPPLF and MMLF programs will have

the effect of expanding an IDI’s balance

sheet (and, by extension, its assessment

base), the FDIC proposed to exclude

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Federal Register / Vol. 85, No. 124 / Friday, June 26, 2020 / Rules and Regulations

20 See comments on the proposal, available at

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

2020/2020-assessments-ppp-3064-af53.html.

loans pledged to the PPPLF and assets

purchased under the MMLF in the

calculation of certain adjustments to an

IDI’s assessment rate, and to provide an

offset to an IDI’s total assessment

amount for the increase to its

assessment base attributable to

participation in the PPPLF and MMLF.

Finally, in classifying IDIs as small,

large, or highly complex for assessment

purposes, the FDIC proposed to exclude

from an IDI’s total assets the amount of

loans pledged to the PPPLF and assets

purchased under the MMLF.

In response to the proposal, the FDIC

received 41 comment letters from

depository institutions, depository

institution holding companies, trade

associations, and other interested

parties.20 As further detailed below,

commenters generally supported the

FDIC’s efforts to mitigate the deposit

insurance effects of an IDI’s

participation in the PPP, PPPLF, and

MMLF programs, but expressed

concerns with certain aspects of the

proposal. The FDIC considered all

comments received and is making some

changes in the final rule, while

clarifying other aspects of the rule that

remain unchanged from the proposed

rule.

II. The Final Rule

A

ted the

FDIC’s efforts to mitigate the deposit

insurance effects of an IDI’s

participation in the PPP, PPPLF, and

MMLF programs, but expressed

concerns with certain aspects of the

proposal. The FDIC considered all

comments received and is making some

changes in the final rule, while

clarifying other aspects of the rule that

remain unchanged from the proposed

rule.

II. The Final Rule

A. Summary

Under the final rule, the FDIC will

remove the effect of participation in the

PPP and borrowings under the PPPLF

on various risk measures used to

calculate an IDI’s assessment rate,

remove the effect of participation in the

PPP and MMLF program on certain

adjustments to an insured depository

institution’s assessment rate; provide an

offset to an insured depository

institution’s assessment for the increase

to its assessment base attributable to

participation in the PPP and MMLF; and

remove the effect of participation in the

PPP and MMLF when classifying

insured depository institutions as small,

large, or highly complex for assessment

purposes.

In the final rule, the FDIC tried to

balance its policy objective of

mitigating, to the fullest extent possible,

the deposit insurance assessment effect

of participation in the PPP, PPPLF, and

MMLF, while minimizing the extent to

which the final rule would result in an

IDI paying less than it would have paid

if it did not participate in the PPP,

PPPLF, or MMLF. In response to

comments and based on updated

assumptions, as described further

below, the final rule includes certain

additional mitigation steps beyond

those in the proposed rule that will

more fully mitigate the assessment effect

of participation in the aforementioned

programs for more institutions, but may

in certain cases result in over-mitigation

for some institutions

PPLF, or MMLF. In response to

comments and based on updated

assumptions, as described further

below, the final rule includes certain

additional mitigation steps beyond

those in the proposed rule that will

more fully mitigate the assessment effect

of participation in the aforementioned

programs for more institutions, but may

in certain cases result in over-mitigation

for some institutions. At the same time,

the FDIC declined to make certain

adjustments requested by commenters,

in part because such additional

adjustments, when combined with the

other provisions of the final rule, would

likely have resulted, in the FDIC’s

estimation, in more over-mitigation than

would be acceptable.

1. Exclusion of All PPP Loans

Most of the comments the FDIC

received in response to the proposed

rule stated that the proposed

modifications would not completely

offset the impact of PPP lending on

assessments. Many of these commenters

requested that the FDIC exclude all PPP

loans, whether funded under the PPPLF

or through other sources of liquidity,

including deposits or Federal Home

Loan Bank (FHLB) advances, from the

calculation of an IDI’s assessment rate,

assessment base, or both, so that the

bank’s assessment would be mitigated

accordingly, rather than excluding only

loans pledged to the PPPLF.

A bank that funded its PPP loans with

existing balance sheet liquidity would

not have increased its total assets or

total liabilities, and including these

loans in the offset to its assessment

would not be necessary because its

assessment base would not have

increased. Similarly, removing PPP

loans from total assets in calculating an

IDI’s assessment rate would not be

necessary if such loans did not increase

the bank’s total assets

g balance sheet liquidity would

not have increased its total assets or

total liabilities, and including these

loans in the offset to its assessment

would not be necessary because its

assessment base would not have

increased. Similarly, removing PPP

loans from total assets in calculating an

IDI’s assessment rate would not be

necessary if such loans did not increase

the bank’s total assets. For these

reasons, the proposal would have

removed only PPP loans pledged to the

PPPLF from an IDI’s total assets in

calculating its deposit insurance

assessment rate and certain other

measures, and in calculating the offset

due to the increase in its assessment

base due to participation in the PPPLF.

The FDIC understands that some banks

have funded PPP loans through

additional liabilities other than

borrowings under the PPPLF, which

would result in an increase to a bank’s

total assets and total liabilities. For

banks that funded PPP loans by

obtaining additional liabilities other

than borrowings under the PPPLF, the

proposal would not have fully mitigated

the deposit insurance assessment effects

of participation in the PPP.

After considering comments received,

and in recognition of the important role

IDIs play in providing liquidity to small

businesses and helping to stabilize the

broader economy in the midst of the

economic disruption caused by COVID–

19, as well as in recognition that some

banks have funded PPP loans through

additional liabilities other than

borrowings under the PPPLF, under the

final rule the FDIC will exclude the

quarter-end outstanding balance of all

PPP loans from an IDI’s total assets in

calculating an IDI’s assessment rate and

the offset to an IDI’s assessment amount

due to the inclusion of PPP loans in its

assessment base. The FDIC expects that

this exclusion will result in a more

complete mitigation of the assessment

effects of participation in PPP lending

inal rule the FDIC will exclude the

quarter-end outstanding balance of all

PPP loans from an IDI’s total assets in

calculating an IDI’s assessment rate and

the offset to an IDI’s assessment amount

due to the inclusion of PPP loans in its

assessment base. The FDIC expects that

this exclusion will result in a more

complete mitigation of the assessment

effects of participation in PPP lending.

As described below, the FDIC will

exclude the quarter-end outstanding

balance of all PPP loans from an IDI’s

total assets in the applicable risk

measures used to determine an IDI’s

assessment rate. In addition, because

participation in the MMLF program will

have the effect of expanding an IDI’s

balance sheet and because PPP lending

funded by additional liabilities could

have the effect of expanding an IDI’s

balance sheet (and, by extension, its

assessment base), the FDIC will provide

an offset to an IDI’s total assessment

amount for the increase to its

assessment base attributable to PPP

lending and participation in the MMLF.

Under the final rule, the FDIC will

calculate the offset to an IDI’s total

assessment amount based on its quarter-

end outstanding balance of PPP loans

and the quarterly average amount of

assets purchased under the MMLF. The

FDIC also will exclude the outstanding

balance of PPP loans and assets

purchased under the MMLF in the

calculation of certain adjustments to an

IDI’s assessment rate.

Moreover, in classifying IDIs as small,

large, or highly complex for assessment

purposes, the FDIC also will exclude

from an IDI’s total assets the outstanding

balance of PPP loans and assets

purchased under the MMLF

. The

FDIC also will exclude the outstanding

balance of PPP loans and assets

purchased under the MMLF in the

calculation of certain adjustments to an

IDI’s assessment rate.

Moreover, in classifying IDIs as small,

large, or highly complex for assessment

purposes, the FDIC also will exclude

from an IDI’s total assets the outstanding

balance of PPP loans and assets

purchased under the MMLF.

Because it is not possible for the FDIC

to quantify how much of an IDI’s total

assets may have increased due to PPP

loans relative to other balance sheet

changes, including increased cash or

other loans made either in response to

the economic disruption caused by

COVID–19 or that would have otherwise

been made in the normal course of

business, the final rule excludes all PPP

loans from an IDI’s total assets in

calculating its deposit insurance

assessment, rather than providing

incomplete assessment mitigation for

banks that funded PPP loans through

additional liabilities other than

borrowings under the PPPLF. To the

extent that an institution did not

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38285

Federal Register / Vol. 85, No. 124 / Friday, June 26, 2020 / Rules and Regulations

21 The agencies requested and received

emergency approvals on May 27, 2020, from the

Office of Management and Budget (OMB) to

implement revisions to the Call Report and FFIEC

002 that will take effect for the June 30, 2020,

reporting period. Starting with the June 30, 2020,

report date, the agencies will collect seven

additional items on the Call Report (FFIEC 031,

FFIEC 041, and FFIEC 051) that the FDIC will use

to make the adjustments described in the final rule

from the

Office of Management and Budget (OMB) to

implement revisions to the Call Report and FFIEC

002 that will take effect for the June 30, 2020,

reporting period. Starting with the June 30, 2020,

report date, the agencies will collect seven

additional items on the Call Report (FFIEC 031,

FFIEC 041, and FFIEC 051) that the FDIC will use

to make the adjustments described in the final rule.

The additional items are: (1) The quarter-end

outstanding balance of PPP loans; (2) the

outstanding balance of loans pledged to the PPPLF

as of quarter-end; (3) the quarterly average amount

of loans pledged to the PPPLF; (4) the outstanding

balance of borrowings from the Federal Reserve

Banks under the PPPLF with a remaining maturity

of one year or less, as of quarter-end; (5) the

outstanding balance of borrowings from the Federal

Reserve Banks under the PPPLF with a remaining

maturity of greater than one year, as of quarter-end;

(6) the outstanding amount of assets purchased

from MMFs under the MMLF as of quarter-end; and

(7) the quarterly average amount of assets

purchased under the MMLF. In addition, the

agencies will collect two additional items on the

Report of Assets and Liabilities of U.S. Branches

and Agencies of Foreign Banks (FFIEC 002): the

quarterly average amount of loans pledged to the

PPPLF and the quarterly average amount of assets

purchased from MMFs under the MMLF.

22 See 85 FR 20387 (April 13, 2020).

23 https://www.fdic.gov/deposit/insurance/

calculator.html.

24 The FDIC expects that IDIs that participate in

the PPP, PPPLF, and MMLF will earn additional

income from participation in these programs. To

minimize additional reporting burden, and as

proposed in the NPR, the FDIC is not excluding

income related to participation in these programs

from the net income before taxes to total assets ratio

in the calculation of an IDI’s deposit insurance

assessment rate

xpects that IDIs that participate in

the PPP, PPPLF, and MMLF will earn additional

income from participation in these programs. To

minimize additional reporting burden, and as

proposed in the NPR, the FDIC is not excluding

income related to participation in these programs

from the net income before taxes to total assets ratio

in the calculation of an IDI’s deposit insurance

assessment rate.

increase its total assets as a result of PPP

participation, the final rule could

provide an assessment reduction that

exceeds the actual increase in

assessments that an institution would

have experienced due to participation in

the PPP.

Some commenters requested that the

FDIC specifically exclude the quarter-

end balance of outstanding PPP loans

when calculating an IDI’s assessment, as

opposed to the quarterly average of such

loans. Under the NPR, the FDIC

proposed to exclude the quarter-end

balance of outstanding loans pledged to

the PPPLF from an IDI’s total assets in

those risk measures used to determine

the deposit insurance assessment rate

that are based on quarter-end

outstanding amounts. For measures

reported on an average basis, the FDIC

proposed to exclude the quarterly

average of loans pledged to the PPPLF.

For example, an IDI’s assessment base is

determined by subtracting its average

tangible equity from average

consolidated total assets. In calculating

the offset to an IDI’s total assessment

amount for the increase due to

participation in the PPPLF and MMLF,

the FDIC proposed to exclude quarterly

average loans pledged to the PPPLF and

quarterly average assets purchased

under the MMLF. Commenters asserted

that the assessment relief provided

under the proposal would be limited

because an IDI’s average PPPLF

participation over a quarter can be

considerably less than its quarter-end

PPP loan balance

e due to

participation in the PPPLF and MMLF,

the FDIC proposed to exclude quarterly

average loans pledged to the PPPLF and

quarterly average assets purchased

under the MMLF. Commenters asserted

that the assessment relief provided

under the proposal would be limited

because an IDI’s average PPPLF

participation over a quarter can be

considerably less than its quarter-end

PPP loan balance.

After considering comments received,

and to minimize additional reporting

burden, under the final rule the FDIC

will exclude the quarter-end

outstanding balance of PPP loans in

mitigating the effect of PPP participation

on an IDI’s deposit insurance

assessment, both for risk measures that

are calculated using amounts reported

as of quarter-end and for calculations

that use amounts reported on an average

basis.

Changes to reporting requirements

applicable to the Consolidated Reports

of Condition and Income (Call Report),

the Report of Assets and Liabilities of

U.S. Branches and Agencies of Foreign

Banks, and their respective instructions,

have been implemented in order to

make the adjustments to the assessment

system under the final rule. These

changes were effectuated in

coordination with the other member

entities of the Federal Financial

Institutions Examination Council.21

2. Tier 1 Leverage Ratio

Some commenters also suggested that

the leverage ratio, as applied in the

calculation of an IDI’s assessment rate,

should be reduced by the quarter-end

outstanding balances of all PPP loans. In

accordance with the agencies’ April 13,

2020, regulatory capital interim final

rule, banking organizations are required

to neutralize the regulatory capital

effects of assets pledged to the PPPLF on

leverage capital ratios.22 This

requirement is due to the non-recourse

nature of the Federal Reserve’s

extension of credit to the banking

organization, a protection that does not

exist if the banking organization funds

PPP loans using other sources of

liquidity

m final

rule, banking organizations are required

to neutralize the regulatory capital

effects of assets pledged to the PPPLF on

leverage capital ratios.22 This

requirement is due to the non-recourse

nature of the Federal Reserve’s

extension of credit to the banking

organization, a protection that does not

exist if the banking organization funds

PPP loans using other sources of

liquidity.

To remain consistent with the

regulatory capital interim final rule, and

consistent with the proposed rule for

mitigating assessment effects of

participation in the PPP, the FDIC will

not modify its deposit insurance

assessment pricing system with respect

to the Tier 1 leverage ratio, which is one

of the measures used to determine the

assessment rate for small, large, and

highly complex IDIs. Therefore, the

neutralization of effects of participation

in the PPPLF will be automatically

reflected in an IDI’s assessment because

the FDIC’s risk-based assessment system

incorporates an IDI’s regulatory capital

reporting of its Tier 1 leverage ratio.

3. Assessment Calculators

Three commenters asked that the

FDIC post revised assessment

calculators as soon as possible. The

FDIC will post on its public website

assessment calculators that reflect the

revisions under the final rule once data

for the reporting period ending on June

30, 2020 becomes available.23

B. Mitigating the Effects of PPP Loans on

an IDI’s Assessment Rate

Under the final rule, to mitigate the

assessment effect of PPP loans, the FDIC

will exclude the outstanding amount of

PPP loans held by an IDI and

borrowings under the PPPLF, from

various risk measures used in the

calculation of an IDI’s deposit insurance

assessment rate, as described in more

detail below.

1. Established Small Institutions

a

cts of PPP Loans on

an IDI’s Assessment Rate

Under the final rule, to mitigate the

assessment effect of PPP loans, the FDIC

will exclude the outstanding amount of

PPP loans held by an IDI and

borrowings under the PPPLF, from

various risk measures used in the

calculation of an IDI’s deposit insurance

assessment rate, as described in more

detail below.

1. Established Small Institutions

a. Exclusion of PPP Loans From Total

Assets in Various Risk Measures

The final rule excludes the

outstanding balance of all PPP loans

from total assets in risk measures used

to determine an established small

institution’s assessment rate: the net

income before taxes to total assets

ratio,24 the nonperforming loans and

leases to gross assets ratio, the other real

estate owned to gross assets ratio, the

brokered deposit ratio, the one-year

asset growth measure, and the loan mix

index (LMI).

Under the proposal, for established

small banks, the FDIC would have

excluded the outstanding balance of

loans pledged to the PPPLF from total

assets in the calculation of these risk

measures. As discussed above, some

commenters recommended that the

FDIC exclude all PPP loans from

specific measures utilized throughout

the assessment rate calculation for

established small banks, including from

the net income before taxes to total

assets ratio, the nonperforming loans

and leases to gross assets ratio, the other

real estate owned to gross assets ratio,

the brokered deposit ratio, and the one-

year asset growth measure. For the

reasons described above, under the final

rule, the FDIC will exclude the quarter-

end outstanding amount of PPP loans,

whether or not they have been pledged

to the PPPLF, from total assets in risk

measures used to determine an

established small institution’s

assessment rate.

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final

rule, the FDIC will exclude the quarter-

end outstanding amount of PPP loans,

whether or not they have been pledged

to the PPPLF, from total assets in risk

measures used to determine an

established small institution’s

assessment rate.

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38286

Federal Register / Vol. 85, No. 124 / Friday, June 26, 2020 / Rules and Regulations

25 Based on data from the SBA and on the terms

of the PPP, the FDIC expects that most PPP loans

will be categorized as Commercial and Industrial

(C&I) Loans. Collateral is not required to secure the

loans. Therefore, the FDIC expects that PPP loans

will not be included in other loan categories, such

as those that are secured by real estate or consumer

loans, in measures used to determine an IDI’s

deposit insurance assessment rate. See Public Law

116–136 (Mar. 27, 2020), Public Law 116–142 (June

5, 2020), 85 FR 20811 (Apr. 15, 2020), 85 FR 36308

(June 16, 2020), and Slide 8, Industry by NAICS

Subsector, Paycheck Protection Program (PPP)

Report: Approvals through 06/06/2020, Small

Business Administration, available at: https://

www.sba.gov/sites/default/files/2020-06/PPP_

Report_Public_200606%20FINAL_-508.pdf.

26 All Other Loans are not included in the LMI;

therefore, the FDIC will exclude the outstanding

balance of PPP loans, which include loans pledged

to the PPPLF, first from the balance of C&I Loans,

followed by Agricultural Loans. The loan categories

used in the Loan Mix Index are: Construction and

Development, Commercial and Industrial, Leases,

Other Consumer, Real Estate Loans Residual,

Multifamily Residential, Nonfarm Nonresidential,

1–4 Family Residential, Loans to Depository Banks,

Agricultural Real Estate, Agricultural Loans. 12 CFR

327.16(a)(1)(ii)(B)

the balance of C&I Loans,

followed by Agricultural Loans. The loan categories

used in the Loan Mix Index are: Construction and

Development, Commercial and Industrial, Leases,

Other Consumer, Real Estate Loans Residual,

Multifamily Residential, Nonfarm Nonresidential,

1–4 Family Residential, Loans to Depository Banks,

Agricultural Real Estate, Agricultural Loans. 12 CFR

327.16(a)(1)(ii)(B).

27 For the core earnings ratio, the FDIC divides

the four-quarter sum of merger-adjusted core

earnings by the average of five quarter-end total

assets (most recent and four prior quarters). See

Appendix A to subpart A of 12 CFR part 327.

28 For highly complex IDIs, the short-term

funding ratio is calculated by dividing average

short-term funding by average total assets. See

Appendix A to subpart A of 12 CFR part 327.

29 For large banks, the concentration measure is

the higher of the ratio of higher-risk assets to Tier

1 capital and reserves, and the growth-adjusted

portfolio measure. For highly complex institutions,

the concentration measure is the highest of three

measures: the ratio of higher risk assets to Tier 1

capital and reserves, the ratio of top 20 counterparty

exposure to Tier 1 capital and reserves, and the

ratio of the largest counterparty exposure to Tier 1

capital and reserves. See Appendix A to subpart A

of part 327.

30 All Other Loans and Agricultural Loans are not

included in the growth-adjusted portfolio

concentration measure; therefore, consistent with

the proposal, the FDIC will exclude the outstanding

balance of PPP loans from the balance of C&I Loans

under the final rule. The loan concentration

categories used in the growth-adjusted portfolio

concentration measure are: construction and

development, other commercial real estate, first lien

residential mortgages (including non-agency

residential mortgage-backed securities), closed-end

junior liens and home equity lines of credit,

commercial and industrial loans, credit card loans,

and other consumer loans

le. The loan concentration

categories used in the growth-adjusted portfolio

concentration measure are: construction and

development, other commercial real estate, first lien

residential mortgages (including non-agency

residential mortgage-backed securities), closed-end

junior liens and home equity lines of credit,

commercial and industrial loans, credit card loans,

and other consumer loans. Appendix C to subpart

A of 12 CFR part 327.

31 See 12 CFR 327.16(b)(2)(ii)(A)(2)(vii).

32 To minimize reporting burden, the FDIC will

reduce average loans in the trading asset ratio by

the outstanding balance of PPP loans, as of quarter-

b. Exclusion of PPP Loans From the

Loan Portfolio in the LMI

The LMI is a measure of the extent to

which an IDI’s total assets include

higher-risk categories of loans.

Consistent with the proposed rule,

under the final rule, the FDIC will

exclude PPP loans, which include loans

pledged to the PPPLF, from an

institution’s loan portfolio in calculating

the LMI, based on a waterfall

approach.25 Under the final rule, the

FDIC will first exclude the outstanding

balance of PPP loans from the balance

of C&I Loans in the calculation of the

LMI. In the unlikely event that the

outstanding balance of PPP loans

exceeds the balance of C&I Loans, the

FDIC will exclude any remaining

balance of these loans from the balance

of Agricultural Loans, up to the total

amount of Agricultural Loans, in the

calculation of the LMI.26

While some commenters supported

the assumptions applied under the

waterfall approach described in the

NPR, others viewed the approach as

unnecessarily complex. Several

commenters confirmed that PPP loans

will be reported as C&I Loans,

Agricultural Loans, or in All Other

Loans

e balance

of Agricultural Loans, up to the total

amount of Agricultural Loans, in the

calculation of the LMI.26

While some commenters supported

the assumptions applied under the

waterfall approach described in the

NPR, others viewed the approach as

unnecessarily complex. Several

commenters confirmed that PPP loans

will be reported as C&I Loans,

Agricultural Loans, or in All Other

Loans. Two commenters suggested

reporting PPP loans as a separate loan

category on Schedule RC–C rather than

in the form of additional memoranda

items, while another two commenters

supported the reporting revisions

recently implemented to make the

adjustments to the assessment system,

noting that many institutions have

already established processes to report

these loans in existing categories on

Schedule RC–C and would therefore

view reporting PPP loans in a separate

loan category rather than as a

memoranda item as operationally

burdensome. Two commenters

supported reducing unnecessary data

collection and categorization and

reporting of PPP loans as C&I Loans.

The FDIC has considered these

comments and is adopting the waterfall

approach as proposed. The FDIC views

the waterfall approach as the approach

that most effectively balances the goal of

minimizing reporting burden while

providing reasonably accurate

mitigation for most institutions of the

assessment effect of PPP loans.

Accordingly, the FDIC is adopting the

proposed waterfall approach as final

and will apply it, as appropriate, in the

calculation of the LMI for small banks

(and in the calculation of the growth-

adjusted portfolio concentration

measure and loss severity measure for

large or highly complex banks, as

discussed below).

Two commenters requested that all

PPP loans be excluded from total assets

in the calculation of the LMI while

others expressed support for the

proposed modifications to the LMI

ate, in the

calculation of the LMI for small banks

(and in the calculation of the growth-

adjusted portfolio concentration

measure and loss severity measure for

large or highly complex banks, as

discussed below).

Two commenters requested that all

PPP loans be excluded from total assets

in the calculation of the LMI while

others expressed support for the

proposed modifications to the LMI.

Under the final rule and as described

above, the FDIC will exclude the

quarter-end outstanding balance of PPP

loans from an IDI’s loan portfolio (the

numerator) and its total assets (the

denominator) in the calculation of the

LMI.

2. Large or Highly Complex Institutions

Under the final rule, the FDIC will

remove the outstanding balance of PPP

loans from a large or highly complex

bank’s loan portfolio and its total assets

in calculating its assessment rate. As

proposed, under the final rule the FDIC

will also exclude amounts borrowed

from the Federal Reserve Banks under

the PPPLF from a large or highly

complex bank’s liabilities in calculating

its assessment rate.

a. Exclusion of PPP Loans From Total

Assets in the Core Earnings Ratio and

the Short-Term Funding Measure

As described above, the FDIC received

numerous comments stating that the

proposed modifications would not

completely offset the impact of PPP

lending on assessment rates, and many

of these commenters recommended that

the FDIC exclude the outstanding

balance of PPP loans when calculating

a large or highly complex bank’s

assessment, rather than excluding only

the loans pledged to the PPPLF.

Specifically, several commenters

recommended that the FDIC exclude all

PPP loans from total assets in the

calculation of the core earnings ratio

and the average short-term funding

measure for purposes of determining a

large or highly complex bank’s

assessment rate

ans when calculating

a large or highly complex bank’s

assessment, rather than excluding only

the loans pledged to the PPPLF.

Specifically, several commenters

recommended that the FDIC exclude all

PPP loans from total assets in the

calculation of the core earnings ratio

and the average short-term funding

measure for purposes of determining a

large or highly complex bank’s

assessment rate. Some commenters

specified that, in making these

modifications, the FDIC should exclude

the quarter-end balance of outstanding

PPP loans, as opposed to the quarterly

average.

For the reasons described above,

under the final rule the FDIC will

exclude the quarter-end outstanding

amount of PPP loans, whether or not

they have been pledged to the PPPLF,

from total assets in the core earnings

ratio 27 and the short-term funding

measure 28 used to determine a large or

highly complex institution’s assessment

rate.

b. Exclusion of PPP Loans From the

Loan Portfolio in Various Risk Measures

As proposed, the FDIC will exclude

PPP loans from an IDI’s loan portfolio in

risk measures used to determine a large

or highly complex IDI’s assessment rate.

In calculating the growth-adjusted

portfolio concentration measure,29

which is applicable to large IDIs, the

FDIC will exclude the quarter-end

outstanding balance of PPP loans from

C&I Loans.30 In calculating the trading

asset ratio,31 which is applicable to

highly complex IDIs, the FDIC will

reduce the balance of loans by the

quarter-end outstanding balance of PPP

loans.32 The FDIC also will exclude the

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PPP loans from

C&I Loans.30 In calculating the trading

asset ratio,31 which is applicable to

highly complex IDIs, the FDIC will

reduce the balance of loans by the

quarter-end outstanding balance of PPP

loans.32 The FDIC also will exclude the

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38287

Federal Register / Vol. 85, No. 124 / Friday, June 26, 2020 / Rules and Regulations

end, rather than requiring institutions to

additionally report the average balance of PPP

loans.

33 Appendix C to subpart A of part 327 describes

the concentration measures, including the ratio of

higher-risk assets to tier 1 capital and reserves.

34 The core deposit ratio is defined as total

domestic deposits excluding brokered deposits and

uninsured non-brokered time deposits divided by

total liabilities. See Appendix A to subpart A of 12

CFR part 327.

35 The balance sheet liquidity ratio is defined as

the sum of cash and balances due from depository

institutions, federal funds sold and securities

purchased under agreements to resell, and the

market value of available-for-sale and held-to-

maturity agency securities (excludes agency

mortgage-backed securities but includes all other

agency securities issued by the U.S. Treasury, U.S.

government agencies, and U.S. government

sponsored enterprises) divided by the sum of

federal funds purchased and repurchase

agreements, other borrowings (including FHLB)

with a remaining maturity of one year or less, 5

percent of insured domestic deposits, and 10

percent of uninsured domestic and foreign deposits.

Appendix A to subpart A of 12 CFR part 327.

36 Appendix D to subpart A of 12 CFR 327

describes the calculation of the loss severity

measure.

37 For certain IDIs, adjustments include the

unsecured debt adjustment and the depository

institution debt adjustment (DIDA)

urity of one year or less, 5

percent of insured domestic deposits, and 10

percent of uninsured domestic and foreign deposits.

Appendix A to subpart A of 12 CFR part 327.

36 Appendix D to subpart A of 12 CFR 327

describes the calculation of the loss severity

measure.

37 For certain IDIs, adjustments include the

unsecured debt adjustment and the depository

institution debt adjustment (DIDA). The unsecured

debt adjustment decreases an IDI’s total assessment

rate based on the ratio of its long-term unsecured

debt to its assessment base. The DIDA increases an

IDI’s total assessment rate if it holds long-term,

unsecured debt issued by another IDI. In addition,

large IDIs that meet certain criteria and new small

IDIs are subject to the brokered deposit adjustment.

The brokered deposit adjustment increases the total

assessment rate of large IDIs that hold significant

Continued

quarter-end balance of outstanding PPP

loans from a large or highly complex

IDI’s loan portfolio in calculating the

loss severity measure, as described

below.

A few commenters suggested that PPP

loans should not be classified as ‘‘higher

risk assets’’ in calculating the

concentration measures for large or

highly complex institutions. In response

to these comments the FDIC is clarifying

that government guaranteed loans are

not considered ‘‘higher-risk assets’’ for

assessment purposes. Because PPP loans

are guaranteed by the SBA, they are

already excluded from ‘‘higher-risk

assets’’ in calculating the concentration

measures for large or highly complex

institutions and no additional

modification is necessary.33

c

ions. In response

to these comments the FDIC is clarifying

that government guaranteed loans are

not considered ‘‘higher-risk assets’’ for

assessment purposes. Because PPP loans

are guaranteed by the SBA, they are

already excluded from ‘‘higher-risk

assets’’ in calculating the concentration

measures for large or highly complex

institutions and no additional

modification is necessary.33

c. Exclusion of Borrowings Under the

PPPLF From Total Liabilities in Various

Risk Measures

As proposed, under the final rule the

FDIC will exclude borrowings from the

Federal Reserve Banks under the PPPLF

from an institution’s liabilities in the

calculation of the core deposit ratio, the

balance sheet liquidity ratio, and the

loss severity measure used to determine

a large or highly complex IDI’s

assessment rate. The final rule clarifies

that the exclusion of amounts borrowed

from the Federal Reserve Banks under

the PPPLF from an institution’s total

liabilities will only affect risk measures

used to determine the assessment rate

for a large or highly complex IDI

because secured liabilities are not

factored into the risk measures for

determining the rate for an established

small IDI.

Under the final rule, in calculating the

core deposit ratio 34 for large or highly

complex IDI, the FDIC will exclude from

total liabilities borrowings from Federal

Reserve Banks under the PPPLF.

Also as proposed, under the final rule

the FDIC will exclude an IDI’s reported

borrowings from the Federal Reserve

Banks under the PPPLF with a

remaining maturity of one year or less

from liabilities included in the

denominator of the balance sheet

liquidity ratio.35 Additionally, in

calculating the balance sheet liquidity

ratio, the FDIC will treat the quarter-end

outstanding balance of PPP loans that

exceed borrowings from the Federal

Reserve Banks under the PPPLF as

highly liquid assets, as proposed

nks under the PPPLF with a

remaining maturity of one year or less

from liabilities included in the

denominator of the balance sheet

liquidity ratio.35 Additionally, in

calculating the balance sheet liquidity

ratio, the FDIC will treat the quarter-end

outstanding balance of PPP loans that

exceed borrowings from the Federal

Reserve Banks under the PPPLF as

highly liquid assets, as proposed.

Because PPP loans are riskless and

banks with PPP loans in excess of

PPPLF borrowings can access additional

liquidity by pledging such loans to

PPPLF, the FDIC will treat these PPP

loans as highly liquid assets. To the

extent that a PPP loan represents

collateral for borrowings other than

under the PPPLF—such as an FHLB

advance—treating the loan as highly

liquid will provide an assessment

benefit for IDIs that may not be able to

readily access additional liquidity. PPP

loans can no longer be pledged as

collateral to the PPPLF after September

30, 2020, the date after which no new

extensions of credit will be made under

the PPPLF, unless extended by the

Board of Governors and the Department

of Treasury. Therefore, under the final

rule, the quarter-end outstanding

balance of PPP loans that exceed

borrowings from the Federal Reserve

Banks under the PPPLF will be treated

as highly liquid assets until September

30, 2020, unless the Board of Governors

and the Department of Treasury extend

the deadline to apply for new

extensions of credit under the PPPLF.

d. Treatment of PPP Loans and

Borrowings Under the PPPLF in

Calculating the Loss Severity Measure

The loss severity measure estimates

the relative magnitude of potential

losses to the DIF in the event of a large

or highly complex IDI’s failure.36 Under

the final rule, the FDIC will remove the

effect of participation in the PPP and

PPPLF, as proposed. In calculating the

loss severity score under the final rule,

the FDIC will remove the effect of PPP

loans in an IDI’s loan portfolio using a

waterfall approach, as proposed

the relative magnitude of potential

losses to the DIF in the event of a large

or highly complex IDI’s failure.36 Under

the final rule, the FDIC will remove the

effect of participation in the PPP and

PPPLF, as proposed. In calculating the

loss severity score under the final rule,

the FDIC will remove the effect of PPP

loans in an IDI’s loan portfolio using a

waterfall approach, as proposed. Under

this approach, the FDIC will exclude

PPP loans from an IDI’s balance of C&I

Loans. In the unlikely event that the

outstanding balance of PPP loans

exceeds the balance of C&I Loans, the

FDIC will exclude any remaining

balance from All Other Loans, up to the

total amount of All Other Loans,

followed by Agricultural Loans, up to

the total amount of Agricultural Loans.

To the extent that an IDI’s outstanding

PPP loans are not pledged to the PPPLF,

such loans may be funded by a variety

of liabilities, such as deposits and

secured borrowings. While IDIs will

report borrowings under the PPPLF that

are secured by PPP loans, the FDIC will

not have sufficient data to determine

other sources of funding for an IDI’s PPP

loans. Obtaining such data would

require additional reporting burden on

IDIs. Because the FDIC will not have

sufficient data to remove each type of

non-PPPLF funding used to make PPP

loans, under the final rule the FDIC will

remove PPP loans in excess of its PPPLF

borrowings from a large or highly

complex IDI’s loan portfolio based on

the waterfall approach described above

and reallocate the same amount to cash.

Such treatment of PPP loans is

consistent with the proposal to treat PPP

loans in excess of PPPLF borrowings as

riskless for purposes of calculating a

large or highly complex IDI’s loss

severity score

emove PPP loans in excess of its PPPLF

borrowings from a large or highly

complex IDI’s loan portfolio based on

the waterfall approach described above

and reallocate the same amount to cash.

Such treatment of PPP loans is

consistent with the proposal to treat PPP

loans in excess of PPPLF borrowings as

riskless for purposes of calculating a

large or highly complex IDI’s loss

severity score.

To match the removal of PPP loans

funded through borrowings under the

PPPLF from an IDI’s loan portfolio, the

FDIC will remove the total amount of

outstanding borrowings from the

Federal Reserve Banks under the PPPLF

from short- and long-term secured

borrowings, as appropriate.

C. Mitigating the Effects of PPP Loans

and Assets Purchased Under the MMLF

on Certain Adjustments to an IDI’s

Assessment Rate

The FDIC proposed to exclude the

quarterly average amount of loans

pledged to the PPPLF and the quarterly

average amount of assets purchased

under the MMLF from the calculation of

the unsecured debt adjustment,

depository institution debt adjustment,

and the brokered deposit adjustment.

These adjustments would continue to be

applied to an IDI’s initial base

assessment rate, as applicable, for

purposes of calculating the IDI’s total

base assessment rate.37

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tory institution debt adjustment,

and the brokered deposit adjustment.

These adjustments would continue to be

applied to an IDI’s initial base

assessment rate, as applicable, for

purposes of calculating the IDI’s total

base assessment rate.37

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Federal Register / Vol. 85, No. 124 / Friday, June 26, 2020 / Rules and Regulations

concentrations of brokered deposits and that are

less than well capitalized, not CAMELS composite

1- or 2-rated, as well as new, small IDIs that are not

assigned to Risk Category I. See 12 CFR 327.16(e).

38 Under the final rule, the offset to the total

assessment amount due for the increase to the

assessment base attributable to the quarter-end

outstanding balance of PPP loans and participation

in the MMLF will apply to all IDIs, including new

small institutions as defined in 12 CFR 327.8(w),

and insured U.S. branches and agencies of foreign

banks.

39 Under the proposed rule, the offset to the total

assessment amount due for the increase to the

assessment base attributable to participation in the

PPPLF and MMLF would have applied to all IDIs,

including new small institutions as defined in 12

CFR 327.8(w), and insured U.S. branches and

agencies of foreign banks.

40 Currently, an IDI’s total assessment amount on

its quarterly certified statement invoice is equal to

the product of the institution’s assessment base

(calculated in accordance with 12 CFR 327.5)

multiplied by the institution’s assessment rate

(calculated in accordance with 12 CFR 327.4 and

12 CFR 327.16). See 12 CFR 327.3(b)(1).

41 Insured branches are assessed for deposit

insurance in accordance with 12 CFR 327.16(c)

essment amount on

its quarterly certified statement invoice is equal to

the product of the institution’s assessment base

(calculated in accordance with 12 CFR 327.5)

multiplied by the institution’s assessment rate

(calculated in accordance with 12 CFR 327.4 and

12 CFR 327.16). See 12 CFR 327.3(b)(1).

41 Insured branches are assessed for deposit

insurance in accordance with 12 CFR 327.16(c).

As previously described, many

commenters requested that the FDIC

provide relief throughout the

assessment calculations for all PPP

lending, whether funded under the

PPPLF or through other sources of

liquidity, including deposits. A few

commenters expressed support for the

proposed modifications to these

adjustments.

After considering comments received,

and in recognition of the important role

IDIs play in providing liquidity to small

businesses and helping to stabilize the

broader economy in the midst of the

economic disruption caused by COVID–

19, as well as in recognition that some

banks have funded PPP loans through

liabilities other than borrowings under

the PPPLF, under the final rule, the

FDIC will exclude the quarter-end

outstanding amount of PPP loans and

the quarterly average amount of assets

purchased under the MMLF from the

calculation of the unsecured debt

adjustment, depository institution debt

adjustment, and the brokered deposit

adjustment.

While the deposit insurance

assessment calculations typically adjust

quarter-end amounts by quarter-end

amounts and average amounts by

average amounts, in the interest of

minimizing reporting burden, the

agencies are collecting only the quarter-

end outstanding balance of PPP loans

and not the average amount.

Accordingly, there are a few

modifications under this final rule for

which an average amount is adjusted by

the quarter-end outstanding balance of

PPP loans, as is the case with these three

adjustments to an IDI’s assessment rate.

D

the interest of

minimizing reporting burden, the

agencies are collecting only the quarter-

end outstanding balance of PPP loans

and not the average amount.

Accordingly, there are a few

modifications under this final rule for

which an average amount is adjusted by

the quarter-end outstanding balance of

PPP loans, as is the case with these three

adjustments to an IDI’s assessment rate.

D. Offset to Deposit Insurance

Assessment Due To Increase in the

Assessment Base Attributable to PPP

Loans and Assets Purchased Under the

MMLF

Under the final rule, the FDIC will

provide an offset to an IDI’s total

assessment amount due for the increase

to its assessment base attributable to the

quarter-end outstanding balance of PPP

loans and participation in the MMLF.38

Under the proposed rule, the FDIC

would have provided an offset to an

IDI’s total assessment amount due for

the increase to its assessment base

attributable to participation in the

PPPLF and MMLF.39 To determine this

offset amount, the FDIC proposed to

calculate the total of the quarterly

average amount of assets pledged to the

PPPLF and the quarterly average

amount of assets purchased under the

MMLF, multiply that amount by an IDI’s

total base assessment rate (after

excluding the effect of participation in

the MMLF and PPPLF, as proposed),

and subtract the resulting amount from

an IDI’s total assessment amount.40

The FDIC received numerous

comments stating that the proposed

modifications would not completely

offset the impact of PPP lending on the

assessment base. Some commenters

requested that the FDIC exclude the

quarter-end balance of outstanding PPP

loans from the assessment base

n in

the MMLF and PPPLF, as proposed),

and subtract the resulting amount from

an IDI’s total assessment amount.40

The FDIC received numerous

comments stating that the proposed

modifications would not completely

offset the impact of PPP lending on the

assessment base. Some commenters

requested that the FDIC exclude the

quarter-end balance of outstanding PPP

loans from the assessment base.

After considering the comments

received, and recognizing that some

banks have funded PPP loans by

obtaining additional funding, such as

deposits or borrowings other than under

the PPPLF, and therefore increased their

total assets and total liabilities, under

the final rule the FDIC will use the

quarter-end outstanding amount of PPP

loans rather than the quarterly average

amount of assets pledged to the PPPLF

in calculating the offset to an IDI’s total

assessment amount. To determine this

offset amount, the FDIC will sum the

total of the quarter-end outstanding

balance of PPP loans and the quarterly

average amount of assets purchased

under the MMLF, multiply that amount

by an IDI’s total base assessment rate

(after excluding the effects of

participation in the PPP, MMLF, and

PPPLF, consistent with the final rule),

and subtract the resulting amount from

an IDI’s total assessment amount.

While IDIs will report loans pledged

to the PPPLF and borrowings under the

PPPLF starting with the June 30, 2020,

Call Report, it will not be possible for

the FDIC to differentiate between an IDI

that increased its total assets solely due

to PPP funded by additional liabilities,

and an IDI that used existing balance

sheet liquidity to fund PPP loans and

therefore did not increase its total assets

or its assessment base. To the extent an

IDI relies on existing balance sheet

liquidity, including cash and securities

to fund PPP loans, the IDI would not

increase its total assets and would

therefore not experience an increase to

the assessment base as a result of its

participation in the PPP

ting balance

sheet liquidity to fund PPP loans and

therefore did not increase its total assets

or its assessment base. To the extent an

IDI relies on existing balance sheet

liquidity, including cash and securities

to fund PPP loans, the IDI would not

increase its total assets and would

therefore not experience an increase to

the assessment base as a result of its

participation in the PPP. An IDI that

obtains additional funding to make PPP

loans, however, would increase its total

liabilities by the amount of additional

funding and increase its total assets by

the amount of PPP loans made with

such funding, resulting in an increase in

its assessment base.

In recognition of the extraordinary

steps taken by IDIs to provide liquidity

to small businesses and help stabilize

the broader economy in the midst of the

economic disruption caused by COVID–

19, and to more fully mitigate the

deposit insurance assessment effect of

participation in the PPP, the final rule

will provide an offset to an IDI’s

assessment amount that is calculated

using the total outstanding balance of

PPP loans at quarter end and the

quarterly average balance of assets

purchased under the MMLF. Including

total PPP loans in the calculation of the

offset ensures that the final rule will

more fully mitigate the assessment

effects of participation in PPP lending.

To the extent that an institution did not

increase its total assets as a result of PPP

participation, the final rule may, for

some institutions, result in an

assessment reduction that exceeds the

actual increase in assessments that an

institution would have experienced due

to participation in the PPP.

As discussed above, in the interest of

minimizing reporting burden, there are

a few modifications under this final rule

for which an average amount is adjusted

by the quarter-end outstanding balance

of PPP loans, as is the case with the

calculation of the offset to the

assessment base

tual increase in assessments that an

institution would have experienced due

to participation in the PPP.

As discussed above, in the interest of

minimizing reporting burden, there are

a few modifications under this final rule

for which an average amount is adjusted

by the quarter-end outstanding balance

of PPP loans, as is the case with the

calculation of the offset to the

assessment base.

Because the FDIC proposed to

calculate the offset as the sum of the

quarterly average amount of loans

pledged to the PPPLF and the quarterly

average of assets purchased under the

MMLF, the Board of Governors is

requiring that insured branches of

foreign banks report only these two

additional items on the FFIEC 002

starting with the report filed as of June

30, 2020. Adjustments to the calculation

of the assessment rate of an insured

branch of foreign banks to mitigate the

effect of participation in the PPP,

PPPLF, and MMLF are not necessary.41

Under the final rule, the FDIC will

provide an offset to the assessment of an

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38289

Federal Register / Vol. 85, No. 124 / Friday, June 26, 2020 / Rules and Regulations

42 Through the Board of Governors, the FDIC

anticipates revising the reporting of the quarterly

average amount of loans pledged to the PPPLF and

instead requiring insured branches of foreign banks

to report the outstanding balance of PPP loans at

quarter-end, beginning as of September 30, 2020.

For purposes of determining the deposit insurance

assessment amount for an insured branch of a

foreign bank as of June 30, 2020, an insured branch

additionally may provide to the FDIC certified

information on the amount of outstanding PPP

loans at the end of the quarter.

43 See 12 CFR 327.16(f)

report the outstanding balance of PPP loans at

quarter-end, beginning as of September 30, 2020.

For purposes of determining the deposit insurance

assessment amount for an insured branch of a

foreign bank as of June 30, 2020, an insured branch

additionally may provide to the FDIC certified

information on the amount of outstanding PPP

loans at the end of the quarter.

43 See 12 CFR 327.16(f).

44 Section 101(a)(1) of the Paycheck Protection

Program and Health Care Enhancement Act, Public

Law 116–139, authorizes $659 billion for the

Paycheck Protection Program. The FDIC assumes all

the authorized funds will be distributed and

roughly 90 percent will be held by IDIs.

45 These assumptions reflect current participation

in the PPP and PPPLF and that all authorized funds

under the PPP will be distributed, based on data

published by the SBA and Federal Reserve Board.

These assumptions use transaction-level data

published by the Federal Reserve Board, SBA data

to estimate the participation in the PPP program of

nonbank lenders including CDFI funds, CDCs,

Microlenders, Farm Credit Lenders, and FinTechs.

See Paycheck Protection Program (PPP) Report:

Approvals through 06/06/2020, Small Business

Administration, available at: https://www.sba.gov/

sites/default/files/2020-06/PPP_Report_Public_

200606%20FINAL_-508.pdf; Factors Affecting

Reserve Balances, Federal Reserve statistical release

H.4.1, as of June 11, 2020, available at: https://

www.federalreserve.gov/releases/h41/current/;

Board of Governors of the Federal Reserve System,

Money Market Mutual Fund Liquidity Facility, as

of June 10, 2020, available at: https://

fred.stlouisfed.org/series/H41RESPPALDBNWW;

and Board of Governors of the Federal Reserve

System, PPPLF Transaction-specific Disclosures as

of May 15, 2020, available at: https://

www.federalreserve.gov/publications/files/PPPLF-

transaction-specific-disclosures-5-15-20.xlsx

f the Federal Reserve System,

Money Market Mutual Fund Liquidity Facility, as

of June 10, 2020, available at: https://

fred.stlouisfed.org/series/H41RESPPALDBNWW;

and Board of Governors of the Federal Reserve

System, PPPLF Transaction-specific Disclosures as

of May 15, 2020, available at: https://

www.federalreserve.gov/publications/files/PPPLF-

transaction-specific-disclosures-5-15-20.xlsx.

insured branch of a foreign bank that is

calculated by summing the quarterly

average amount of assets purchased

under the MMLF with either the

quarterly average amount of loans

pledged to the PPPLF or the amount of

outstanding PPP loans at the end of the

quarter, based on available data.42

E. Classification of IDIs as Small, Large,

or Highly Complex for Assessment

Purposes

In defining IDIs for assessment

purposes under the proposed rule, the

FDIC would have excluded from an

IDI’s total assets the amount of loans

pledged to the PPPLF and assets

purchased under the MMLF. Several

commenters specifically requested that

the FDIC provide full credit for the

outstanding balance of PPP loans

throughout the assessment calculations,

including in the classification of an IDI

as small, large, or highly complex for

deposit insurance assessment purposes.

After considering these comments and

for the reasons described above, the

FDIC will exclude the quarter-end

outstanding balance of all PPP loans,

rather than only those PPP loans

pledged to the PPPLF, in the

classification of an IDI as small, large, or

highly complex for assessment

purposes. As a result, the FDIC will not

reclassify a small institution as large or

a large institution as a highly complex

institution solely due to participation in

the PPPLF and MMLF programs, which

would otherwise have the effect of

expanding an IDI’s balance sheet

those PPP loans

pledged to the PPPLF, in the

classification of an IDI as small, large, or

highly complex for assessment

purposes. As a result, the FDIC will not

reclassify a small institution as large or

a large institution as a highly complex

institution solely due to participation in

the PPPLF and MMLF programs, which

would otherwise have the effect of

expanding an IDI’s balance sheet. In

addition, an institution with total assets

between $5 billion and $10 billion,

excluding the amount of PPP loans and

assets purchased under the MMLF, may

request that the FDIC determine its

assessment rate as a large institution.43

F. Other Conforming Amendments to

the Assessment Regulations

Under the final rule, the FDIC will

make conforming amendments to the

FDIC’s assessment regulations to

effectuate the modifications described

above and consistent with the proposed

rule. These conforming amendments

will ensure that the modifications to an

IDI’s assessment rate and the offset to an

IDI’s assessment amount under the final

rule are properly incorporated into the

assessment regulation provisions

governing the calculation of an IDI’s

quarterly deposit insurance assessment.

III. Expected Effects

To facilitate participation in the PPP

and use of the PPPLF and MMLF, under

the final rule the FDIC will mitigate the

deposit insurance assessment effects of

PPP loans, amounts borrowed under the

PPPLF, and assets purchased under the

MMLF. Estimating the dollar amount of

assessment mitigation resulting from the

rule is difficult

arterly deposit insurance assessment.

III. Expected Effects

To facilitate participation in the PPP

and use of the PPPLF and MMLF, under

the final rule the FDIC will mitigate the

deposit insurance assessment effects of

PPP loans, amounts borrowed under the

PPPLF, and assets purchased under the

MMLF. Estimating the dollar amount of

assessment mitigation resulting from the

rule is difficult. Because IDIs are not yet

reporting the necessary data, the FDIC

does not have sufficient data on the

distribution of loans among IDIs and

other non-bank financial institutions

made under the PPP, the loan categories

of PPP loans held, the types of liabilities

used to fund PPP lending, the extent to

which PPP participation resulted in an

increase to an IDI’s total assets and total

liabilities, nor on the dollar volume of

assets purchased under the MMLF by

IDIs. Therefore, the FDIC has estimated

the potential effects of these programs

on deposit insurance assessments based

on certain assumptions. Although this

estimate is subject to considerable

uncertainty, the FDIC estimates that

application of the final rule could

provide quarterly assessment relief to

IDIs participating in these programs

totaling approximately $150 million,

based on the assumptions described

below which improve upon the

assumptions applied in the proposal

given information provided by

commenters and FDIC analysis of

updated data published by the SBA on

the PPP and Federal Reserve Board on

the PPPLF and MMLF. Because PPP

loans must be issued by June 30, 2020,

and because the FDIC expects that

eligible IDIs will begin receiving PPP

loan forgiveness reimbursement from

the SBA, the FDIC expects that the

amount of assessment relief provided

under this final rule will decline in

subsequent quarters

is of

updated data published by the SBA on

the PPP and Federal Reserve Board on

the PPPLF and MMLF. Because PPP

loans must be issued by June 30, 2020,

and because the FDIC expects that

eligible IDIs will begin receiving PPP

loan forgiveness reimbursement from

the SBA, the FDIC expects that the

amount of assessment relief provided

under this final rule will decline in

subsequent quarters.

The FDIC anticipates that PPP loans

will be held by both IDIs and non-IDIs,

and that IDIs will fund PPP loans

through growth in liabilities, including

through additional deposits, borrowings

from Federal Reserve Banks under the

PPPLF, and other secured borrowings,

although the rate of IDI participation in

the PPP and PPPLF is uncertain.

Based on Call Report data as of March

31, 2020, and assuming that (1) $600

billion of PPP loans are held by IDIs,44

(2) the PPP loans that are held by IDIs

are evenly distributed across all IDIs

that have C&I loans, which results in a

33 percent increase in those loans,

except where IDI-specific data are

available, (3) 5.9 percent of PPP loans

held by IDIs are pledged to the PPPLF,

except where IDI-specific data are

available from the Federal Reserve

Board, (4) 100 percent of loans pledged

to the PPPLF are matched by borrowings

from the Federal Reserve Banks with

maturities greater than one year, (5) IDIs

fund the remaining 94.1 percent of PPP

loans with additional funding,

including deposits or secured

borrowings, and (6) large and highly

complex IDIs hold approximately $30

billion in assets pledged under the

MMLF,45 the FDIC estimates that (1)

quarterly deposit insurance assessments

would increase for some institutions

absent the final rule and (2) the final

rule could provide quarterly assessment

relief of approximately $150 million

h additional funding,

including deposits or secured

borrowings, and (6) large and highly

complex IDIs hold approximately $30

billion in assets pledged under the

MMLF,45 the FDIC estimates that (1)

quarterly deposit insurance assessments

would increase for some institutions

absent the final rule and (2) the final

rule could provide quarterly assessment

relief of approximately $150 million.

The actual effect of these programs on

deposit insurance assessments will vary

depending on participation in the

programs by IDIs and non-IDIs, the

maturity of borrowings from the Federal

Reserve Banks under these programs,

the extent of reliance on existing

sources of funding for PPP lending, and

the types of loans held under the PPP,

as described above. While items on the

Call Report will enable the FDIC to

quantify funding from the PPPLF, it is

not possible for the FDIC to quantify

how much an IDI’s total assets grew due

to PPP loans relative to other balance

sheet changes, including increased cash

or other loans made either in response

to the economic disruption caused by

COVID–19 or that would have otherwise

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38290

Federal Register / Vol. 85, No. 124 / Friday, June 26, 2020 / Rules and Regulations

46 See CARES Act, § 1114. Public Law 116–142

(June 05, 2020). The SBA subsequently issued an

interim final rule implementing sections 1102 and

1106 of the CARES Act. See 85 FR 20811 (April 15,

2020). On June 5, 2020, the PPP Flexibility Act was

signed into law, amending key provisions of the

CARES Act. The SBA issued an interim final rule

implementing these provisions. See 85 FR 36308

(June 16, 2020).

47 The application date of April 1, 2020, is

permissible because the effects of the final rule will

occur after its publication

d

1106 of the CARES Act. See 85 FR 20811 (April 15,

2020). On June 5, 2020, the PPP Flexibility Act was

signed into law, amending key provisions of the

CARES Act. The SBA issued an interim final rule

implementing these provisions. See 85 FR 36308

(June 16, 2020).

47 The application date of April 1, 2020, is

permissible because the effects of the final rule will

occur after its publication. The assessment amount

owed on an IDI’s quarterly certified statement

invoice for the second quarterly assessment period

of 2020 (i.e., April 1–June 30) will be calculated on

the basis of Call Report data as of June 30, 2020,

with a payment due date of September 30, 2020.

Furthermore, even if the effects of the final rule

were retroactive, a rule is impermissibly retroactive

only when it ‘‘takes away or impairs vested rights

acquired under existing law, or creates a new

obligation, imposes a new duty, or attaches a new

disability in respect to transactions or

considerations already past.’’ See Nat’l Mining

Ass’n v. Dep’t of Labor, 292 F.3d 849, 859 (D.C. Cir.

2002) (quoting Nat’l Mining Ass’n v. Dep’t of

Interior, 177 F.3d 1, 8 (D.C. Cir. 1999)) (internal

quotations omitted). This final rule does none of

those things.

48 5 U.S.C. 553.

49 5 U.S.C. 553(d).

50 5 U.S.C. 601 et seq.

51 The SBA defines a small banking organization

as having $600 million or less in assets, where an

organization’s ‘‘assets are determined by averaging

the assets reported on its four quarterly financial

statements for the preceding year.’’ See 13 CFR

121.201 (as amended, effective August 19, 2019). In

its determination, the SBA ‘‘counts the receipts,

employees, or other measure of size of the concern

whose size is at issue and all of its domestic and

foreign affiliates.’’ 13 CFR 121.103. Following these

regulations, the FDIC uses a covered entity’s

affiliated and acquired assets, averaged over the

preceding four quarters, to determine whether the

covered entity is ‘‘small’’ for the purposes of RFA.

52 5 U.S.C

SBA ‘‘counts the receipts,

employees, or other measure of size of the concern

whose size is at issue and all of its domestic and

foreign affiliates.’’ 13 CFR 121.103. Following these

regulations, the FDIC uses a covered entity’s

affiliated and acquired assets, averaged over the

preceding four quarters, to determine whether the

covered entity is ‘‘small’’ for the purposes of RFA.

52 5 U.S.C. 601.

53 FDIC Call Report data, as of March 31, 2020.

54 The FDIC does not have data to identify small

entities as of March 2020. This count includes small

entities as of December 31, 2019, as well as small

entities that opened between December 2019 and

March 2020.

been made in the normal course of

business. For example, to the extent an

IDI relies on existing balance sheet

liquidity including cash and securities

to fund PPP lending, the IDI would not

experience an increase in liabilities and

would therefore not experience an

increase to the assessment base as a

result of its participation in PPP

lending. Accordingly, the assumption

that IDIs will rely entirely on additional

funding for PPP lending could reduce

quarterly assessments by more than they

will increase due to participation in PPP

lending, as some IDIs may rely on

existing balance sheet liquidity to fund

PPP lending.

IV. Effective Date of the Final Rule

As stated above, in response to recent

events which have significantly and

adversely impacted global financial

markets along with the spread of

COVID–19, which has slowed economic

activity in many countries, including

the United States, the agencies moved

quickly due to exigent circumstances

and issued two interim final rules to

allow banking organizations to

neutralize the regulatory capital effects

of purchasing assets under the MMLF

and loans pledged to the PPPLF

sely impacted global financial

markets along with the spread of

COVID–19, which has slowed economic

activity in many countries, including

the United States, the agencies moved

quickly due to exigent circumstances

and issued two interim final rules to

allow banking organizations to

neutralize the regulatory capital effects

of purchasing assets under the MMLF

and loans pledged to the PPPLF. Since

the implementation of the PPP, PPPLF,

and MMLF, the FDIC has observed

uncertainty from the public and the

banking industry and wants to provide

clarity on how, if at all, these programs

would affect the assessments of IDIs

which participate in these programs.

Because PPP loans must be issued by

June 30, 2020, the full assessment

impact of these programs will first occur

in the second quarterly assessment

period. Congress has also given

indications that implementation of these

programs is an urgent policy matter,

instructing the SBA to issue regulations

for the PPP within 15 days of the

CARES Act’s enactment.46

The final rule will take effect

immediately upon publication in the

Federal Register with an application

date of April 1, 2020, and changes made

as a result of this rule will be reflected

in the invoices for deposit insurance

assessments due September 30, 2020.47

An immediate effective date and an

application date of April 1, 2020, will

enable the FDIC to provide the relief

contemplated in this rulemaking as soon

as practicable, starting with the second

quarter of 2020, and provide certainty to

IDIs regarding the assessment effects of

participating in the PPP, PPPLF, or

MMLF for the second quarter of 2020,

which is the first assessment quarter in

which the assessments will be affected.

V. Administrative Law Matters

A

l

enable the FDIC to provide the relief

contemplated in this rulemaking as soon

as practicable, starting with the second

quarter of 2020, and provide certainty to

IDIs regarding the assessment effects of

participating in the PPP, PPPLF, or

MMLF for the second quarter of 2020,

which is the first assessment quarter in

which the assessments will be affected.

V. Administrative Law Matters

A. Administrative Procedure Act

Under the Administrative Procedure

Act (APA),48 ‘‘[t]he required publication

or service of a substantive rule shall be

made not less than 30 days before its

effective date, except as otherwise

provided by the agency for good cause

found and published with the rule.’’ 49

Under this rulemaking, the amendments

to the FDIC’s deposit insurance

assessment regulations would be

effective upon publication of the final

rule in the Federal Register. The FDIC

finds good cause that the publication of

this final rule can be effective

immediately in order to fully effectuate

the intent of ensuring that IDIs benefit

from the mitigation effects to their

deposit insurance assessments as soon

as practicable, and to provide IDIs with

certainty regarding the assessment

effects of participating in the PPP,

PPPLF, or MMLF for the second quarter

of 2020, which is the first assessment

quarter in which the assessments will be

affected.

As explained in the Supplementary

Information section and in the proposed

rule, the FDIC expects that an IDI that

participates in either the PPP, the

PPPLF, or the MMLF program could be

subject to increased deposit insurance

assessments, beginning with the second

quarter of 2020. The FDIC invoices for

quarterly deposit insurance assessments

in arrears. As a result, invoices for the

second quarterly assessment period of

2020 (i.e., April 1—June 30) would be

made available to IDIs in September

2020, with a payment due date of

September 30, 2020.

B. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA),

5 U.S.C

, beginning with the second

quarter of 2020. The FDIC invoices for

quarterly deposit insurance assessments

in arrears. As a result, invoices for the

second quarterly assessment period of

2020 (i.e., April 1—June 30) would be

made available to IDIs in September

2020, with a payment due date of

September 30, 2020.

B. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA),

5 U.S.C. 601 et seq., generally requires

an agency, in connection with a final

rule, to prepare and make available for

public comment a final regulatory

flexibility analysis that describes the

impact of a final rule on small entities.50

However, a regulatory flexibility

analysis is not required if the agency

certifies that the rule will not have a

significant economic impact on a

substantial number of small entities.

The Small Business Administration

(SBA) has defined ‘‘small entities’’ to

include banking organizations with total

assets of less than or equal to $600

million.51 Generally, the FDIC considers

a significant effect to be a quantified

effect in excess of 5 percent of total

annual salaries and benefits per

institution, or 2.5 percent of total non-

interest expenses. The FDIC believes

that effects in excess of these thresholds

typically represent significant effects for

FDIC-insured institutions. 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.52 The final rule relates directly

to the rates imposed on IDIs for deposit

insurance and to the deposit insurance

assessment system that measures risk

and determines each established small

bank’s assessment rate and is, therefore,

not subject to the RFA. Nonetheless, the

FDIC is voluntarily presenting

information in this RFA section

rom

the definition of ‘‘rule’’ for purposes of

the RFA.52 The final rule relates directly

to the rates imposed on IDIs for deposit

insurance and to the deposit insurance

assessment system that measures risk

and determines each established small

bank’s assessment rate and is, therefore,

not subject to the RFA. Nonetheless, the

FDIC is voluntarily presenting

information in this RFA section.

Based on quarterly regulatory report

data as of March 31, 2020, the FDIC

insures 5,125 depository institutions,53

of which 3,771 are defined as small

entities by the terms of the RFA.54 The

final rule applies to all FDIC-insured

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55 Section 101(a)(1) of the Paycheck Protection

Program and Health Care Enhancement Act, Pub. L.

116–139, authorizes $659 billion for the Paycheck

Protection Program. The FDIC assumes that all the

authorized funds will be distributed and roughly 90

percent will be held by IDIs.

56 These assumptions reflect current participation

in the PPP and PPPLF and that all the authorized

funds under the PPP will be distributed, based on

data published by the SBA and Federal Reserve

Board. These assumptions use SBA data to estimate

the participation in the PPP program of nonbank

lenders including CDFI funds, CDCs, Microlenders,

Farm Credit Lenders, and FinTechs

held by IDIs.

56 These assumptions reflect current participation

in the PPP and PPPLF and that all the authorized

funds under the PPP will be distributed, based on

data published by the SBA and Federal Reserve

Board. These assumptions use SBA data to estimate

the participation in the PPP program of nonbank

lenders including CDFI funds, CDCs, Microlenders,

Farm Credit Lenders, and FinTechs. See Paycheck

Protection Program (PPP) Report: Approvals from

through 06/06/2020, Small Business

Administration, available at: https://www.sba.gov/

sites/default/files/2020-06/PPP_Report_Public_

200606%20FINAL_-508.pdf; Factors Affecting

Reserve Balances, Federal Reserve statistical release

H.4.1, as of June 11, 2020, available at: https://

www.federalreserve.gov/releases/h41/current/, and

Board of Governors of the Federal Reserve System,

Money Market Mutual Fund Liquidity Facility, as

of June 10, 2020, available at: https://

fred.stlouisfed.org/series/H41RESPPALDBNWW;

Board of Governors of the Federal Reserve System,

PPPLF Transaction-specific Disclosures as of May

15, 2020, available at: https://

www.federalreserve.gov/publications/files/PPPLF-

transaction-specific-disclosures-5-15-20.xlsx.

57 5 U.S.C. 553(b)(B), 5 U.S.C. 553(d), 5 U.S.C. 601

et seq., 5 U.S.C. 801 et seq., 5 U.S.C. 801(a)(3), 5

U.S.C. 804(2), 5 U.S.C. 808(2), 12 U.S.C. 4802(a), 12

U.S.C. 4802(b).

58 4 U.S.C. 3501–3521.

59 12 U.S.C. 4809.

60 5 U.S.C. 801 et seq.

61 5 U.S.C. 801(a)(3).

62 5 U.S.C. 804(2).

institutions, but is expected to affect

only those institutions that participate

in the PPP, PPPLF, and MMLF. The

FDIC does not presently have access to

information that would enable it to

identify which institutions are

participating in these programs and

lending facilities.

As previously discussed, to facilitate

participation in the PPP and use of the

PPPLF and MMLF, the final rule

mitigates the deposit insurance

assessment effects of PPP loans,

borrowings under the PPPLF, and assets

purchased under the MMLF

t presently have access to

information that would enable it to

identify which institutions are

participating in these programs and

lending facilities.

As previously discussed, to facilitate

participation in the PPP and use of the

PPPLF and MMLF, the final rule

mitigates the deposit insurance

assessment effects of PPP loans,

borrowings under the PPPLF, and assets

purchased under the MMLF. Therefore,

the FDIC estimated the potential effects

of these programs on deposit insurance

assessments based on certain

assumptions. Based on Call Report data

as of March 31, 2020, assuming that (1)

$600 billion of PPP loans are held by

IDIs,55 (2) the PPP loans that are held by

IDIs are evenly distributed across all

IDIs that have C&I loans, which results

in a 33 percent increase in those loans,

except where IDI-specific data are

available, (3) 5.9 percent of PPP loans

held by IDIs are pledged to the PPPLF,

except where IDI-specific data are

available, (4) 100 percent of loans

pledged to the PPPLF are matched by

borrowings from the Federal Reserve

Banks with maturities greater than one

year,56 and (5) IDIs fund the remaining

94.1 percent of PPP loans with

additional funding, including deposits

or secured borrowings, the FDIC

estimates that the final rule will save

small IDIs approximately $10 million in

quarterly deposit insurance

assessments.

The actual effect of these programs on

deposit insurance assessments will vary

depending on IDIs’ participation in the

PPP and Federal Reserve Facilities, the

maturity of borrowings from the Federal

Reserve Banks under these programs,

the extent of reliance on existing

sources of funding for PPP lending, and

the types of loans held under the PPP.

C

arterly deposit insurance

assessments.

The actual effect of these programs on

deposit insurance assessments will vary

depending on IDIs’ participation in the

PPP and Federal Reserve Facilities, the

maturity of borrowings from the Federal

Reserve Banks under these programs,

the extent of reliance on existing

sources of funding for PPP lending, and

the types of loans held under the PPP.

C. Riegle Community Development and

Regulatory Improvement Act

Section 302 of the Riegle Community

Development and Regulatory

Improvement Act (RCDRIA) requires

that the Federal banking agencies,

including the FDIC, in determining the

effective date and administrative

compliance requirements of new

regulations that impose additional

reporting, disclosure, or other

requirements on IDIs, consider,

consistent with principles of safety and

soundness and the public interest, any

administrative burdens that such

regulations would place on depository

institutions, including small depository

institutions, and customers of

depository institutions, as well as the

benefits of such regulations. In addition,

section 302(b) of RCDRIA requires new

regulations and amendments to

regulations that impose additional

reporting, disclosures, or other new

requirements on IDIs generally to take

effect on the first day of a calendar

quarter that begins on or after the date

on which the regulations are published

in final form, with certain exceptions,

including for good cause.57

The amendments to the FDIC’s

deposit insurance assessment

regulations under this final rule do not

impose additional reporting,

disclosures, or other new requirements.

Nonetheless, the FDIC considered the

requirements of RCDRIA when

finalizing this rule with an immediate

effective date. The FDIC invited

comments regarding the application of

RCDRIA to the final rule, but did not

receive comments on this topic.

D

’s

deposit insurance assessment

regulations under this final rule do not

impose additional reporting,

disclosures, or other new requirements.

Nonetheless, the FDIC considered the

requirements of RCDRIA when

finalizing this rule with an immediate

effective date. The FDIC invited

comments regarding the application of

RCDRIA to the final rule, but did not

receive comments on this topic.

D. Paperwork Reduction Act

The Paperwork Reduction Act of 1995

(PRA) states that no agency may

conduct or sponsor, nor is the

respondent required to respond to, an

information collection unless it displays

a currently valid OMB control

number.58 The final rule affects the

agencies’ current information

collections for the Call Report (FFIEC

031, FFIEC 041, and FFIEC 051). The

agencies’ OMB control numbers for the

Call Reports are: Comptroller of the

Currency OMB No. 1557–0081; Board of

Governors OMB No. 7100–0036; and

FDIC OMB No. 3064–0052. The final

rule also affects the Report of Assets and

Liabilities of U.S. Branches and

Agencies of Foreign Banks (FFIEC 002),

which the Federal Reserve System

collects and processes on behalf of the

three agencies (Board of Governors OMB

No. 7100–0032). Submissions were

made by the agencies to OMB for their

respective information collections. The

changes to the Call Report, the Report of

Assets and Liabilities of U.S. Branches

and Agencies of Foreign Banks, and

their respective instructions, have been

addressed in a separate Federal Register

notice or notices.

E. Plain Language

Section 722 of the Gramm-Leach-

Bliley Act 59 requires the Federal

banking agencies to use plain language

in all proposed and final rulemakings

published in the Federal Register after

January 1, 2000. The FDIC invited

comment regarding the use of plain

language, but did not receive any

comments on this topic.

F

dressed in a separate Federal Register

notice or notices.

E. Plain Language

Section 722 of the Gramm-Leach-

Bliley Act 59 requires the Federal

banking agencies to use plain language

in all proposed and final rulemakings

published in the Federal Register after

January 1, 2000. The FDIC invited

comment regarding the use of plain

language, but did not receive any

comments on this topic.

F. The Congressional Review Act

For purposes of Congressional Review

Act, the OMB makes a determination as

to whether a final rule constitutes a

‘‘major’’ rule.60 The OMB has

determined that the final rule is a major

rule for purposes of the Congressional

Review Act. If a rule is deemed a ‘‘major

rule’’ by the OMB, the Congressional

Review Act generally provides that the

rule may not take effect until at least 60

days following its publication.61 The

Congressional Review Act defines a

‘‘major rule’’ as any rule that the

Administrator of the Office of

Information and Regulatory Affairs of

the OMB finds has resulted in or is

likely to result in—(A) an annual effect

on the economy of $100,000,000 or

more; (B) a major increase in costs or

prices for consumers, individual

industries, Federal, State, or Local

government agencies or geographic

regions, or (C) significant adverse effects

on competition, employment,

investment, productivity, innovation, or

on the ability of United States-based

enterprises to compete with foreign-

based enterprises in domestic and

export markets.62 As required by the

Congressional Review Act, the FDIC

will submit the final rule and other

appropriate reports to Congress and the

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of United States-based

enterprises to compete with foreign-

based enterprises in domestic and

export markets.62 As required by the

Congressional Review Act, the FDIC

will submit the final rule and other

appropriate reports to Congress and the

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63 5 U.S.C. 808(2).

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

Government Accountability Office for

review.

Section 808 of the Congressional

Review Act provides that any rule as to

which an agency for good cause finds

(and incorporates the finding and a brief

statement of reasons therefor in the rule

issued) that notice and public procedure

thereon are impracticable, unnecessary,

or contrary to the public interest, shall

take effect at such time as the Federal

agency promulgating the rule

determines.63 Although OMB has

determined that this is a major rule for

purposes of the Congressional review

Act, and hence would ordinarily be

subject to a 60-day delayed effective

date, the FDIC believes there is good

cause for an immediate effective date. In

this case, the FDIC provided notice and

accepted comment, as required by

section 7 of the FDI Act, but further

public procedure and the attendant

delay would be contrary to the public

interest.64

The FDIC believes that, under section

808 of the Congressional Review Act,

good cause exists for the final rule to

become effective without further public

procedure and immediately upon its

filing for publication, as delaying the

effective date would be contrary to the

public interest

I Act, but further

public procedure and the attendant

delay would be contrary to the public

interest.64

The FDIC believes that, under section

808 of the Congressional Review Act,

good cause exists for the final rule to

become effective without further public

procedure and immediately upon its

filing for publication, as delaying the

effective date would be contrary to the

public interest. In particular, by

providing for an immediate effective

date for the final rule, the intent of

ensuring that IDIs benefit from the

mitigation effects to their deposit

insurance assessments starting with the

second quarter of 2020, which is the

first assessment quarter in which the

assessments will be affected, and will

thereby provide IDIs with certainty

regarding the assessment effects of

participating in the PPP, PPPLF, or

MMLF.

List of Subjects in 12 CFR Part 327

Bank deposit insurance, Banks,

banking, Savings associations.

Authority and Issuance

For the reasons stated above, the

Federal Deposit Insurance Corporation

amends 12 CFR part 327 as follows:

PART 327—ASSESSMENTS

■1. The authority citation for part 327

is revised to read as follows:

Authority: 12 U.S.C. 1813, 1815, 1817–19,

1821.

■2. Amend § 327.3 by revising

paragraph (b)(1) to read as follows:

§ 327.3

Payment of assessments.

*

*

*

*

*

(b) * * *

(1) Quarterly certified statement

invoice. Starting with the first

assessment period of 2007, no later than

15 days prior to the payment date

specified in paragraph (b)(2) of this

section, the Corporation will provide to

each insured depository institution a

quarterly certified statement invoice

showing the amount of the assessment

payment due from the institution for the

prior quarter (net of credits or

dividends, if any), and the computation

of that amount

sment period of 2007, no later than

15 days prior to the payment date

specified in paragraph (b)(2) of this

section, the Corporation will provide to

each insured depository institution a

quarterly certified statement invoice

showing the amount of the assessment

payment due from the institution for the

prior quarter (net of credits or

dividends, if any), and the computation

of that amount. Subject to paragraph (e)

of this section and § 327.17, the

invoiced amount on the quarterly

certified statement invoice shall be the

product of the following: The

assessment base of the institution for the

prior quarter computed in accordance

with § 327.5 multiplied by the

institution’s rate for that prior quarter as

assigned to the institution pursuant to

§§ 327.4(a) and 327.16.

*

*

*

*

*

■3. Amend § 327.8 by revising

paragraphs (e), (f), and (g)(1) to read as

follows:

§ 327.8

Definitions.

*

*

*

*

*

(e) Small institution. (1) An insured

depository institution with assets of less

than $10 billion, excluding assets as

described in § 327.17(e), as of December

31, 2006, and an insured branch of a

foreign institution shall be classified as

a small institution.

(2) Except as provided in paragraph

(e)(3) of this section and § 327.17(e), if,

after December 31, 2006, an institution

classified as large under paragraph (f) of

this section (other than an institution

classified as large for purposes of

§§ 327.9(e) and 327.16(f)) reports assets

of less than $10 billion in its quarterly

reports of condition for four consecutive

quarters, excluding assets as described

in § 327.17(e), the FDIC will reclassify

the institution as small beginning the

following quarter.

ution

classified as large under paragraph (f) of

this section (other than an institution

classified as large for purposes of

§§ 327.9(e) and 327.16(f)) reports assets

of less than $10 billion in its quarterly

reports of condition for four consecutive

quarters, excluding assets as described

in § 327.17(e), the FDIC will reclassify

the institution as small beginning the

following quarter.

(3) An insured depository institution

that elects to use the community bank

leverage ratio framework under 12 CFR

3.12(a)(3), 12 CFR 217.12(a)(3), or 12

CFR 324.12(a)(3), shall be classified as

a small institution, even if that

institution otherwise would be

classified as a large institution under

paragraph (f) of this section.

(f) Large institution. An institution

classified as large for purposes of

§§ 327.9(e) and 327.16(f) or an insured

depository institution with assets of $10

billion or more, excluding assets as

described in § 327.17(e), as of December

31, 2006 (other than an insured branch

of a foreign bank or a highly complex

institution) shall be classified as a large

institution. If, after December 31, 2006,

an institution classified as small under

paragraph (e) of this section reports

assets of $10 billion or more in its

quarterly reports of condition for four

consecutive quarters, excluding assets

as described in § 327.17(e), the FDIC

will reclassify the institution as large

beginning the following quarter.

(g) * * *

(1) A highly complex institution is:

ution. If, after December 31, 2006,

an institution classified as small under

paragraph (e) of this section reports

assets of $10 billion or more in its

quarterly reports of condition for four

consecutive quarters, excluding assets

as described in § 327.17(e), the FDIC

will reclassify the institution as large

beginning the following quarter.

(g) * * *

(1) A highly complex institution is:

(i) An insured depository institution

(excluding a credit card bank) that has

had $50 billion or more in total assets

for at least four consecutive quarters,

excluding assets as described in

§ 327.17(e), that is controlled by a U.S.

parent holding company that has had

$500 billion or more in total assets for

four consecutive quarters, or controlled

by one or more intermediate U.S. parent

holding companies that are controlled

by a U.S. holding company that has had

$500 billion or more in assets for four

consecutive quarters; or

(ii) A processing bank or trust

company.

*

*

*

*

*

■4. Amend § 327.16 by adding

introductory text and revising paragraph

(f)(1) to read as follows:

§ 327.16

Assessment pricing methods—

beginning the first assessment period after

June 30, 2016, where the reserve ratio of the

DIF as of the end of the prior assessment

period has reached or exceeded 1.15

percent.

Subject to the modifications described

in § 327.17, the following pricing

methods shall apply beginning in the

first assessment period after June 30,

2016, where the reserve ratio of the DIF

as of the end of the prior assessment

period has reached or exceeded 1.15

percent, and for all subsequent

assessment periods.

*

*

*

*

*

assessment

period has reached or exceeded 1.15

percent.

Subject to the modifications described

in § 327.17, the following pricing

methods shall apply beginning in the

first assessment period after June 30,

2016, where the reserve ratio of the DIF

as of the end of the prior assessment

period has reached or exceeded 1.15

percent, and for all subsequent

assessment periods.

*

*

*

*

*

(f) * * *

(1) Procedure. Any small institution

with assets of between $5 billion and

$10 billion, excluding assets as

described in § 327.17(e), may request

that the FDIC determine its assessment

rate as a large institution. The FDIC will

consider such a request provided that it

has sufficient information to do so. Any

such request must be made to the FDIC’s

Division of Insurance and Research.

Any approved change will become

effective within one year from the date

of the request. If an institution whose

request has been granted subsequently

reports assets of less than $5 billion in

its report of condition for four

consecutive quarters, excluding assets

as described in § 327.17(e), the

institution shall be deemed a small

institution for assessment purposes.

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Federal Register / Vol. 85, No. 124 / Friday, June 26, 2020 / Rules and Regulations

■5. Add § 327.17 to read as follows:

§ 327.17

Mitigating the Deposit Insurance

Assessment Effect of Participation in the

Money Market Mutual Fund Liquidity

Facility, the Paycheck Protection Program

Liquidity Facility, and the Paycheck

Protection Program.

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Federal Register / Vol. 85, No. 124 / Friday, June 26, 2020 / Rules and Regulations

■5. Add § 327.17 to read as follows:

§ 327.17

Mitigating the Deposit Insurance

Assessment Effect of Participation in the

Money Market Mutual Fund Liquidity

Facility, the Paycheck Protection Program

Liquidity Facility, and the Paycheck

Protection Program.

(a) Mitigating the assessment effects of

loans provided under the Paycheck

Protection Program for established small

institutions. Applicable beginning April

1, 2020, the FDIC will take the following

actions when calculating the assessment

rate for established small institutions

under § 327.16:

(1) Exclusion of loans provided under

the Paycheck Protection Program from

net income before taxes ratio,

nonperforming loans and leases ratio,

other real estate owned ratio, brokered

deposit ratio, and one-year asset growth

measure. As described in appendix E to

this subpart, the FDIC will exclude the

outstanding balance of loans provided

under the Paycheck Protection Program,

as reported on the Consolidated Report

of Condition and Income, from the total

assets in the calculation of the following

risk measures: Net income before taxes

ratio, the nonperforming loans and

leases ratio, the other real estate owned

ratio, the brokered deposit ratio, and the

one-year asset growth measure, which

are described in § 327.16(a)(1)(ii)(A).

(2) Exclusion of loans provided under

the Paycheck Protection Program from

Loan Mix Index. As described in

appendix E to this subpart A, when

calculating the loan mix index

described in § 327.16(a)(1)(ii)(B), the

FDIC will exclude:

es ratio, the other real estate owned

ratio, the brokered deposit ratio, and the

one-year asset growth measure, which

are described in § 327.16(a)(1)(ii)(A).

(2) Exclusion of loans provided under

the Paycheck Protection Program from

Loan Mix Index. As described in

appendix E to this subpart A, when

calculating the loan mix index

described in § 327.16(a)(1)(ii)(B), the

FDIC will exclude:

(i) The outstanding balance of loans

provided under the Paycheck Protection

Program, as reported on the

Consolidated Report of Condition and

Income, from the total assets; and

(ii) The outstanding balance loans

provided under the Paycheck Protection

Program, as reported on the

Consolidated Report of Condition and

Income, from an established small

institution’s balance of commercial and

industrial loans. To the extent that the

outstanding balance of loans provided

under the Paycheck Protection Program

exceeds an established small

institution’s balance of commercial and

industrial loans, as reported on the

Consolidated Report of Condition and

Income, the FDIC will exclude any

remaining balance of these loans from

the balance of agricultural loans, up to

the amount of agricultural loans, in the

calculation of the loan mix index.

(b) Mitigating the assessment effects

of loans provided under the Paycheck

Protection Program for large or highly

complex institutions. Applicable

beginning April 1, 2020, the FDIC will

take the following actions when

calculating the assessment rate for large

institutions and highly complex

institutions under § 327.16:

unt of agricultural loans, in the

calculation of the loan mix index.

(b) Mitigating the assessment effects

of loans provided under the Paycheck

Protection Program for large or highly

complex institutions. Applicable

beginning April 1, 2020, the FDIC will

take the following actions when

calculating the assessment rate for large

institutions and highly complex

institutions under § 327.16:

(1) Exclusion of Paycheck Protection

Program loans from average short-term

funding ratio, core earnings ratio,

growth-adjusted portfolio concentration

measure, and trading asset ratio. As

described in appendix E of this subpart,

the FDIC will exclude the outstanding

balance of loans provided under the

Paycheck Protection Program, as

reported on the Consolidated Report of

Condition and Income, from the

calculation of the average short-term

funding ratio, the core earnings ratio,

the growth-adjusted portfolio

concentration measure, and the trading

asset ratio.

(2) Exclusion of Paycheck Protection

Program Liquidity Facility borrowings

from core deposit ratio. As described in

appendix E of this subpart, the FDIC

will exclude the total outstanding

balance of borrowings from the Federal

Reserve Banks under the Paycheck

Protection Program Liquidity Facility, as

reported on the Consolidated Report of

Condition and Income, from the

calculation of the core deposit ratio.

(3) Exclusion of Paycheck Protection

Program Liquidity Facility borrowings

from balance sheet liquidity ratio. As

described in appendix E to this subpart,

when calculating the balance sheet

liquidity measure described under

appendix A to this subpart, the FDIC

will:

Facility, as

reported on the Consolidated Report of

Condition and Income, from the

calculation of the core deposit ratio.

(3) Exclusion of Paycheck Protection

Program Liquidity Facility borrowings

from balance sheet liquidity ratio. As

described in appendix E to this subpart,

when calculating the balance sheet

liquidity measure described under

appendix A to this subpart, the FDIC

will:

(i) Include the outstanding balance of

loans provided under the Paycheck

Protection Program that exceed total

borrowings from the Federal Reserve

Banks under the Paycheck Protection

Program Liquidity Facility, as reported

on the Consolidated Report of Condition

and Income, in the amount of highly

liquid assets until September 30, 2020,

or, if the Board of Governors of the

Federal Reserve System and the

Secretary of the Treasury determine to

extend the Paycheck Protection Program

Liquidity Facility, until such date of

extension; and

(ii) Exclude the outstanding balance

of borrowings from the Federal Reserve

Banks under the Paycheck Protection

Program Liquidity Facility with a

remaining maturity of one year or less

from other borrowings with a remaining

maturity of one year or less, both as

reported on the Consolidated Report of

Condition and Income. (4) Exclusion of

loans provided under the Paycheck

Protection Program and Paycheck

Protection Program Liquidity Facility

borrowings from loss severity measure.

As described in appendix E to this

subpart, when calculating the loss

severity measure described under

appendix A to this subpart, the FDIC

will exclude:

less, both as

reported on the Consolidated Report of

Condition and Income. (4) Exclusion of

loans provided under the Paycheck

Protection Program and Paycheck

Protection Program Liquidity Facility

borrowings from loss severity measure.

As described in appendix E to this

subpart, when calculating the loss

severity measure described under

appendix A to this subpart, the FDIC

will exclude:

(i) The total outstanding balance of

borrowings from the Federal Reserve

Banks under the Paycheck Protection

Program Liquidity Facility, as reported

on the Consolidated Report of Condition

and Income, from short- and long-term

secured borrowings, as appropriate; and

(ii) The outstanding balance of loans

provided under the Paycheck Protection

Program, as reported on the

Consolidated Report of Condition and

Income, from an institution’s balance of

commercial and industrial loans. To the

extent that the outstanding balance of

loans provided under the Paycheck

Protection Program exceeds an

institution’s balance of commercial and

industrial loans, the FDIC will exclude

any remaining balance from all other

loans, up to the total amount of all other

loans, followed by agricultural loans, up

to the total amount of agricultural loans,

as reported on the Consolidated Report

of Condition and Income. To the extent

that an institution’s outstanding balance

of loans provided under the Paycheck

Protection Program exceeds its

borrowings from the Federal Reserve

Banks under the Paycheck Protection

Program Liquidity Facility, the FDIC

will add the amount of outstanding

loans provided under the Paycheck

Protection Program in excess of

borrowings under the Paycheck

Protection Program Liquidity Facility to

cash.

institution’s outstanding balance

of loans provided under the Paycheck

Protection Program exceeds its

borrowings from the Federal Reserve

Banks under the Paycheck Protection

Program Liquidity Facility, the FDIC

will add the amount of outstanding

loans provided under the Paycheck

Protection Program in excess of

borrowings under the Paycheck

Protection Program Liquidity Facility to

cash.

(c) Mitigating the effects of loans

provided under the Paycheck Protection

Program and assets purchased under

the Money Market Mutual Fund

Liquidity Facility on the unsecured

adjustment, depository institution debt

adjustment, and the brokered deposit

adjustment to an insured depository

institution’s assessment rate. As

described in appendix E to this subpart,

when calculating an insured depository

institution’s unsecured debt adjustment,

depository institution debt adjustment,

or the brokered deposit adjustment

described in § 327.16(e), as applicable,

the FDIC will exclude the outstanding

balance of loans provided under the

Paycheck Protection Program and the

quarterly average amount of assets

purchased under the Money Market

Mutual Fund Liquidity Facility, both as

reported on the Consolidated Report of

Condition and Income.

(d) Mitigating the effects on the

assessment base attributable to loans

provided under the Paycheck Protection

Program and participation in the Money

Market Mutual Fund Liquidity Facility.

As described in appendix E to this

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dition and Income.

(d) Mitigating the effects on the

assessment base attributable to loans

provided under the Paycheck Protection

Program and participation in the Money

Market Mutual Fund Liquidity Facility.

As described in appendix E to this

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38294

Federal Register / Vol. 85, No. 124 / Friday, June 26, 2020 / Rules and Regulations

subpart, when calculating an insured

depository institution’s quarterly

deposit insurance assessment payment

due under this part, the FDIC will

provide an offset to an institution’s

assessment for the increase to its

assessment base attributable to

participation in the Money Market

Mutual Fund Liquidity Facility and

loans provided under the Paycheck

Protection Program.

(1) Calculation of offset amount. (i) To

determine the offset amount, the FDIC

will take the sum of the outstanding

balance of loans provided under the

Paycheck Protection Program and the

quarterly average amount of assets

purchased under the Money Market

Mutual Fund Liquidity Facility, both as

reported on the Consolidated Report of

Condition and Income, and multiply the

sum by an institution’s total base

assessment rate, as calculated under

§ 327.16, including any adjustments

under § 327.16(e).

(ii) To the extent that an institution

does not report the outstanding balance

of loans provided under the Paycheck

Protection Program, such as in an

insured branch’s Report of Assets and

Liabilities of U.S. Branches and

Agencies of Foreign Banks, the FDIC

will take the sum of either the quarterly

average amount of loans pledged to the

Paycheck Protection Program Liquidity

Facility as reported in the Report of

Assets and Liabilities of U.S

t the outstanding balance

of loans provided under the Paycheck

Protection Program, such as in an

insured branch’s Report of Assets and

Liabilities of U.S. Branches and

Agencies of Foreign Banks, the FDIC

will take the sum of either the quarterly

average amount of loans pledged to the

Paycheck Protection Program Liquidity

Facility as reported in the Report of

Assets and Liabilities of U.S. Branches

and Agencies of Foreign Banks, or the

outstanding balance of loans provided

under the Paycheck Protection Program,

as such certified data is provided to the

FDIC, and the quarterly average amount

of assets purchased under the Money

Market Mutual Fund Liquidity Facility,

as reported in the Report of Assets and

Liabilities of U.S. Branches and

Agencies of Foreign Banks, and

multiply the sum by an institution’s

total base assessment rate, as calculated

under § 327.16.

(2) Calculation of assessment amount

due. The FDIC will subtract the offset

amount described in § 327.17(d)(1) from

an insured depository institution’s total

assessment amount, consistent with

§ 327.3(b)(1).

(e) Mitigating the effects of loans

provided under the Paycheck Protection

Program and assets purchased under

the Money Market Mutual Fund

Liquidity Facility on the classification of

insured depository institutions as small,

large, or highly complex for deposit

insurance purposes. When classifying

an insured depository institution as

small, large, or complex for assessment

purposes under § 327.8, the FDIC will

exclude from an institution’s total assets

the outstanding balance of loans

provided under the Paycheck Protection

Program and the balance of assets

purchased under the Money Market

Mutual Fund Liquidity Facility

outstanding, both as reported on the

Consolidated Report of Condition and

Income

ry institution as

small, large, or complex for assessment

purposes under § 327.8, the FDIC will

exclude from an institution’s total assets

the outstanding balance of loans

provided under the Paycheck Protection

Program and the balance of assets

purchased under the Money Market

Mutual Fund Liquidity Facility

outstanding, both as reported on the

Consolidated Report of Condition and

Income. Any institution with assets of

between $5 billion and $10 billion,

excluding the outstanding balance of

loans provided under the Paycheck

Protection Program and the balance of

assets purchased under the MMLF, both

as reported on the Consolidated Report

of Condition and Income, may request

that the FDIC determine its assessment

rate as a large institution under

§ 327.16(f).

(f) Definitions. For the purposes of

this section:

(1) Paycheck Protection Program. The

term ‘‘Paycheck Protection Program’’

means the program of that name that

was created in section 1102 of the

Coronavirus Aid, Relief, and Economic

Security Act.

(2) Paycheck Protection Program

Liquidity Facility. The term ‘‘Paycheck

Protection Program Liquidity Facility’’

means the program of that name that

was announced by the Board of

Governors of the Federal Reserve

System on April 9, 2020, and renamed

as such on April 30, 2020.

(3) Money Market Mutual Fund

Liquidity Facility. The term ‘‘Money

Market Mutual Fund Liquidity Facility’’

means the program of that name

announced by the Board of Governors of

the Federal Reserve System on March

18, 2020.

■6. Add appendix E to subpart A of

part 327 to read as follows:

Appendix E to Subpart A of Part 327—

Mitigating the Deposit Insurance

Assessment Effect of Participation in

the Money Market Mutual Fund

Liquidity Facility, the Paycheck

Protection Program Liquidity Facility,

and the Paycheck Protection Program

I

ed by the Board of Governors of

the Federal Reserve System on March

18, 2020.

■6. Add appendix E to subpart A of

part 327 to read as follows:

Appendix E to Subpart A of Part 327—

Mitigating the Deposit Insurance

Assessment Effect of Participation in

the Money Market Mutual Fund

Liquidity Facility, the Paycheck

Protection Program Liquidity Facility,

and the Paycheck Protection Program

I. Mitigating the Assessment Effects of

Paycheck Protection Program Loans for

Established Small Institutions

TABLE E.1—EXCLUSIONS FROM CERTAIN RISK MEASURES USED TO CALCULATE THE ASSESSMENT RATE FOR

ESTABLISHED SMALL INSTITUTIONS

Variables

Description

Exclusions

Leverage Ratio (%) ..........................

Tier 1 capital divided by adjusted average assets. (Numerator and de-

nominator are both based on the definition for prompt corrective ac-

tion.)

No Exclusion.

Net Income before Taxes/Total As-

sets (%).

Income (before applicable income taxes and discontinued operations)

for the most recent twelve months divided by total assets 1.

Exclude from total assets the outstanding balance of

loans provided under the Paycheck Protection Pro-

gram.

Nonperforming Loans and Leases/

Gross Assets (%).

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

more days and still accruing interest and total nonaccrual loans and

lease financing receivables (excluding, in both cases, the maximum

amount recoverable from the U.S. Government, its agencies or gov-

ernment-sponsored enterprises, under guarantee or insurance provi-

sions) divided by gross assets 2.

Exclude from gross assets the outstanding balance

of loans provided under the Paycheck Protection

Program.

Other Real Estate Owned/Gross

Assets (%).

Other real estate owned divided by gross assets 2 .................................

Exclude from gross assets the outstanding balance

of loans provided under the Paycheck Protection

Program.

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

s assets 2.

Exclude from gross assets the outstanding balance

of loans provided under the Paycheck Protection

Program.

Other Real Estate Owned/Gross

Assets (%).

Other real estate owned divided by gross assets 2 .................................

Exclude from gross assets the outstanding balance

of loans provided under the Paycheck Protection

Program.

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

The ratio of the difference between brokered deposits and 10 percent

of total assets to total assets. For institutions that are well capitalized

and have a CAMELS composite rating of 1 or 2, brokered reciprocal

deposits as defined in § 327.8(q) are deducted from brokered depos-

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

Exclude from total assets (in both numerator and de-

nominator) the outstanding balance of loans pro-

vided under the Paycheck Protection Program.

Weighted Average of C, A, M, E, L,

and S Component Ratings.

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

components, with weights of 25 percent each for the ‘‘C’’ and ‘‘M’’

components, 20 percent for the ‘‘A’’ component, and 10 percent

each for the ‘‘E‘‘, ‘‘L’’ and ‘‘S’’ components.

No Exclusion.

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

A measure of credit risk described paragraph (A) of this section ...........

Exclusions are described in paragraph (A) of this

section.

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each for the ‘‘E‘‘, ‘‘L’’ and ‘‘S’’ components.

No Exclusion.

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

A measure of credit risk described paragraph (A) of this section ...........

Exclusions are described in paragraph (A) of this

section.

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38295

Federal Register / Vol. 85, No. 124 / Friday, June 26, 2020 / Rules and Regulations

TABLE E.1—EXCLUSIONS FROM CERTAIN RISK MEASURES USED TO CALCULATE THE ASSESSMENT RATE FOR

ESTABLISHED SMALL INSTITUTIONS—Continued

Variables

Description

Exclusions

One-Year Asset Growth (%) ............

Growth in assets (adjusted for mergers 3) over the previous year in ex-

cess of 10 percent.4 If growth is less than 10 percent, the value is

set to zero.

Exclude from total assets (in both numerator and de-

nominator) the outstanding balance of loans pro-

vided under the Paycheck Protection Program.

1 The ratio of Net Income before Taxes to Total Assets is bounded below by (and cannot be less than) -25 percent and is bounded above by (and cannot exceed) 3

percent.

2 Gross assets are total assets plus the allowance for loan and lease financing receivable losses (ALLL) or allowance for credit losses, as applicable.

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

4 The maximum value of the Asset Growth measure is 230 percent; that is, asset growth (merger adjusted) over the previous year in excess of 240 percent (230

percentage points in excess of the 10 percent threshold) will not further increase a bank’s assessment rate.

losses (ALLL) or allowance for credit losses, as applicable.

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

4 The maximum value of the Asset Growth measure is 230 percent; that is, asset growth (merger adjusted) over the previous year in excess of 240 percent (230

percentage points in excess of the 10 percent threshold) will not further increase a bank’s assessment rate.

(a) Definition of Loan Mix Index. The Loan

Mix Index assigns loans in an institution’s

loan portfolio to the categories of loans

described in the following table. Exclude

from the balance of commercial and

industrial loans the outstanding balance of

loans provided under the Paycheck

Protection Program. In the event that the

outstanding balance of loans provided under

the Paycheck Protection Program exceeds the

balance of commercial and industrial loans,

exclude the remaining balance from the

balance of agricultural loans, up to the total

amount of agricultural loans. The Loan Mix

Index is calculated by multiplying the ratio

of an institution’s amount of loans in a

particular loan category to its total assets,

excluding the outstanding balance of loans

provided under the Paycheck Protection

Program by the associated weighted average

charge-off rate for that loan category, and

summing the products for all loan categories.

The table gives the weighted average charge-

off rate for each category of loan. The Loan

Mix Index excludes credit card loans.

a

particular loan category to its total assets,

excluding the outstanding balance of loans

provided under the Paycheck Protection

Program by the associated weighted average

charge-off rate for that loan category, and

summing the products for all loan categories.

The table gives the weighted average charge-

off rate for each category of loan. The Loan

Mix Index excludes credit card loans.

(b) [Reserved]

LOAN MIX INDEX CATEGORIES AND WEIGHTED CHARGE-OFF RATE PERCENTAGES

Weighted charge-off

rate percent

Construction & Development ...................................................................................................................................................

4.4965840

Commercial & Industrial ..........................................................................................................................................................

1.5984506

Leases .....................................................................................................................................................................................

1.4974551

Other Consumer ......................................................................................................................................................................

1.4559717

Real Estate Loans Residual ....................................................................................................................................................

1.0169338

Multifamily Residential .............................................................................................................................................................

0.8847597

Nonfarm Nonresidential ...........................................................................................................................................................

0.7289274

I—4 Family Residential ...........................................................................................................................................................

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

0.8847597

Nonfarm Nonresidential ...........................................................................................................................................................

0.7289274

I—4 Family Residential ............................................................................................................................................................

0.6973778

Loans to Depository banks ......................................................................................................................................................

0.5760532

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

0.2376712

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

0.2432737

II. Mitigating the Assessment Effects of

Paycheck Protection Program Loans for

Large or Highly Complex Institutions

TABLE E.2—EXCLUSIONS FROM CERTAIN RISK MEASURES USED TO CALCULATE THE ASSESSMENT RATE FOR LARGE OR

HIGHLY COMPLEX INSTITUTIONS

Scorecard Measures1

Description

Exclusions

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

Tier 1 capital for Prompt Corrective Action (PCA) divided by ad-

justed average assets based on the definition for prompt cor-

rective action.

No Exclusion.

Concentration Measure for Large Insured de-

pository institutions (excluding Highly Com-

plex Institutions).

The concentration score for large institutions is the higher of the

following two scores:

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

Tier 1 capital for Prompt Corrective Action (PCA) divided by ad-

justed average assets based on the definition for prompt cor-

rective action.

No Exclusion.

Concentration Measure for Large Insured de-

pository institutions (excluding Highly Com-

plex Institutions).

The concentration score for large institutions is the higher of the

following two scores:

(1) Higher-Risk Assets/Tier 1 Capital and

Reserves.

Sum of construction and land development (C&D) loans (funded

and unfunded), higher-risk commercial and industrial (C&I)

loans (funded and unfunded), nontraditional mortgages, high-

er-risk consumer loans, and higher-risk securitizations divided

by Tier 1 capital and reserves. See Appendix C for the de-

tailed description of the ratio.

No Exclusion.

(2) Growth-Adjusted Portfolio Concentra-

tions.

The measure is calculated in the following steps:

(1) Concentration levels (as a ratio to Tier 1 capital and re-

serves) are calculated for each broad portfolio category:.

• Constructions and land development (C&D), ....................

• Other commercial real estate loans, ..................................

• First lien residential mortgages (including non-agency

residential mortgage-backed securities),.

• Closed-end junior liens and home equity lines of credit

(HELOCs),.

• Commercial and industrial loans (C&I), .............................

• Credit card loans, and .................................................

• Other consumer loans. ................................................

...........

• First lien residential mortgages (including non-agency

residential mortgage-backed securities),.

• Closed-end junior liens and home equity lines of credit

(HELOCs),.

• Commercial and industrial loans (C&I), .............................

• Credit card loans, and .................................................

• Other consumer loans. ................................................

(2) Risk weights are assigned to each loan category based on

historical loss rates.

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38296

Federal Register / Vol. 85, No. 124 / Friday, June 26, 2020 / Rules and Regulations

TABLE E.2—EXCLUSIONS FROM CERTAIN RISK MEASURES USED TO CALCULATE THE ASSESSMENT RATE FOR LARGE OR

HIGHLY COMPLEX INSTITUTIONS—Continued

Scorecard Measures1

Description

Exclusions

(3) Concentration levels are multiplied by risk weights and

squared to produce a risk-adjusted concentration ratio for

each portfolio.

(4) Three-year merger-adjusted portfolio growth rates are then

scaled to a growth factor of 1 to 1.2 where a 3-year cumu-

lative growth rate of 20 percent or less equals a factor of 1

and a growth rate of 80 percent or greater equals a factor of

1.2. If three years of data are not available, a growth factor of

1 will be assigned.

Exclude from C&I loan growth rate the out-

standing amount of loans provided under the

Paycheck Protection Program.

(5) The risk-adjusted concentration ratio for each portfolio is

multiplied by the growth factor and resulting values are

summed.

See Appendix C for the detailed description of the measure ......

Concentration Measure for Highly Complex In-

stitutions.

Concentration score for highly complex institutions is the highest

of the following three scores:

vided under the

Paycheck Protection Program.

(5) The risk-adjusted concentration ratio for each portfolio is

multiplied by the growth factor and resulting values are

summed.

See Appendix C for the detailed description of the measure ......

Concentration Measure for Highly Complex In-

stitutions.

Concentration score for highly complex institutions is the highest

of the following three scores:

(1) Higher-Risk Assets/Tier 1 Capital and

Reserves.

Sum of C&D loans (funded and unfunded), higher-risk C&I loans

(funded and unfunded), nontraditional mortgages, higher-risk

consumer loans, and higher-risk securitizations divided by

Tier 1 capital and reserves. See Appendix C for the detailed

description of the measure.

No Exclusion.

(2) Top 20 Counterparty Exposure/Tier 1

Capital and Reserves.

Sum of the 20 largest total exposure amounts to counterparties

divided by Tier 1 capital and reserves. The total exposure

amount is equal to the sum of the institution’s exposure

amounts to one counterparty (or borrower) for derivatives, se-

curities financing transactions (SFTs), and cleared trans-

actions, and its gross lending exposure (including all un-

funded commitments) to that counterparty (or borrower). A

counterparty includes an entity’s own affiliates. Exposures to

entities that are affiliates of each other are treated as expo-

sures to one counterparty (or borrower). Counterparty expo-

sure excludes all counterparty exposure to the U.S. Govern-

ment and departments or agencies of the U.S. Government

that is unconditionally guaranteed by the full faith and credit of

the United States

ower). A

counterparty includes an entity’s own affiliates. Exposures to

entities that are affiliates of each other are treated as expo-

sures to one counterparty (or borrower). Counterparty expo-

sure excludes all counterparty exposure to the U.S. Govern-

ment and departments or agencies of the U.S. Government

that is unconditionally guaranteed by the full faith and credit of

the United States. The exposure amount for derivatives, in-

cluding OTC derivatives, cleared transactions that are deriva-

tive contracts, and netting sets of derivative contracts, must

be calculated using the methodology set forth in 12 CFR

324.34(b), but without any reduction for collateral other than

cash collateral that is all or part of variation margin and that

satisfies the requirements of 12 CFR 324.10(c)(4)(ii)(C)(1)(ii)

and (iii) and 324.10(c)(4)(ii)(C)(3) through (7). The exposure

amount associated with SFTs, including cleared transactions

that are SFTs, must be calculated using the standardized ap-

proach set forth in 12 CFR 324.37(b) or (c). For both deriva-

tives and SFT exposures, the exposure amount to central

counterparties must also include the default fund contribution.

No Exclusion.

(3) Largest Counterparty Exposure/Tier 1

Capital and Reserves.

The largest total exposure amount to one counterparty divided

by Tier 1 capital and reserves. The total exposure amount is

equal to the sum of the institution’s exposure amounts to one

counterparty (or borrower) for derivatives, SFTs, and cleared

transactions, and its gross lending exposure (including all un-

funded commitments) to that counterparty (or borrower). A

counterparty includes an entity’s own affiliates. Exposures to

entities that are affiliates of each other are treated as expo-

sures to one counterparty (or borrower). Counterparty expo-

sure excludes all counterparty exposure to the U.S. Govern-

ment and departments or agencies of the U.S. Government

that is unconditionally guaranteed by the full faith and credit of

the United States

ower). A

counterparty includes an entity’s own affiliates. Exposures to

entities that are affiliates of each other are treated as expo-

sures to one counterparty (or borrower). Counterparty expo-

sure excludes all counterparty exposure to the U.S. Govern-

ment and departments or agencies of the U.S. Government

that is unconditionally guaranteed by the full faith and credit of

the United States. The exposure amount for derivatives, in-

cluding OTC derivatives, cleared transactions that are deriva-

tive contracts, and netting sets of derivative contracts, must

be calculated using the methodology set forth in 12 CFR

324.34(b), but without any reduction for collateral other than

cash collateral that is all or part of variation margin and that

satisfies the requirements of 12 CFR 324.10(c)(4)(ii)(C)(1)(ii)

and (iii) and 324.10(c)(4)(ii)(C)(3) through (7). The exposure

amount associated with SFTs, including cleared transactions

that are SFTs, must be calculated using the standardized ap-

proach set forth in 12 CFR 324.37(b) or (c). For both deriva-

tives and SFT exposures, the exposure amount to central

counterparties must also include the default fund contribution.

No Exclusion.

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Federal Register / Vol. 85, No. 124 / Friday, June 26, 2020 / Rules and Regulations

TABLE E.2—EXCLUSIONS FROM CERTAIN RISK MEASURES USED TO CALCULATE THE ASSESSMENT RATE FOR LARGE OR

HIGHLY COMPLEX INSTITUTIONS—Continued

Scorecard Measures1

Description

Exclusions

Core Earnings/Average Quarter-End Total As-

sets.

Core earnings are defined as net income less extraordinary

items and tax-adjusted realized gains and losses on available-

for-sale (AFS) and held-to-maturity (HTM) securities, adjusted

for mergers

RISK MEASURES USED TO CALCULATE THE ASSESSMENT RATE FOR LARGE OR

HIGHLY COMPLEX INSTITUTIONS—Continued

Scorecard Measures1

Description

Exclusions

Core Earnings/Average Quarter-End Total As-

sets.

Core earnings are defined as net income less extraordinary

items and tax-adjusted realized gains and losses on available-

for-sale (AFS) and held-to-maturity (HTM) securities, adjusted

for mergers. The ratio takes a four-quarter sum of merger-ad-

justed core earnings and divides it by an average of five quar-

ter-end total assets (most recent and four prior quarters). If

four quarters of data on core earnings are not available, data

for quarters that are available will be added and annualized. If

five quarters of data on total assets are not available, data for

quarters that are available will be averaged.

Prior to averaging, exclude from total assets for

the applicable quarter-end periods the out-

standing balance of loans provided under the

Paycheck Protection Program.

Credit Quality Measure 1 .....................................

The credit quality score is the higher of the following two scores:

(1) Criticized and Classified Items/Tier 1

Capital and Reserves.

Sum of criticized and classified items divided by the sum of Tier

1 capital and reserves. Criticized and classified items include

items an institution or its primary federal regulator have grad-

ed ‘‘Special Mention’’ or worse and include retail items under

Uniform Retail Classification Guidelines, securities, funded

and unfunded loans, other real estate owned (ORE), other as-

sets, and marked-to-market counterparty positions, less credit

valuation adjustments. Criticized and classified items exclude

loans and securities in trading books, and the amount recov-

erable from the U.S. government, its agencies, or govern-

ment-sponsored enterprises, under guarantee or insurance

provisions.

No Exclusion.

funded

and unfunded loans, other real estate owned (ORE), other as-

sets, and marked-to-market counterparty positions, less credit

valuation adjustments. Criticized and classified items exclude

loans and securities in trading books, and the amount recov-

erable from the U.S. government, its agencies, or govern-

ment-sponsored enterprises, under guarantee or insurance

provisions.

No Exclusion.

(2) Underperforming Assets/Tier 1 Capital

and Reserves.

Sum of loans that are 30 days or more past due and still accru-

ing interest, nonaccrual loans, restructured loans (including

restructured 1–4 family loans), and ORE, excluding the max-

imum amount recoverable from the U.S. government, its

agencies, or government-sponsored enterprises, under guar-

antee or insurance provisions, divided by a sum of Tier 1 cap-

ital and reserves.

No Exclusion.

Core Deposits/Total Liabilities ......................

Total domestic deposits excluding brokered deposits and unin-

sured non-brokered time deposits divided by total liabilities.

Exclude from total liabilities outstanding bor-

rowings from Federal Reserve Banks under

the Paycheck Protection Program Liquidity

Facility with a maturity of one year or less

and outstanding borrowings from the Federal

Reserve Banks under the Paycheck Protec-

tion Program Liquidity Facility with a maturity

of greater than one year.

Balance Sheet Liquidity Ratio ......................

Sum of cash and balances due from depository institutions, fed-

eral funds sold and securities purchased under agreements to

resell, and the market value of available for sale and held to

maturity agency securities (excludes agency mortgage-

backed securities but includes all other agency securities

issued by the U.S. Treasury, U.S. government agencies, and

U.S

ty Ratio ......................

Sum of cash and balances due from depository institutions, fed-

eral funds sold and securities purchased under agreements to

resell, and the market value of available for sale and held to

maturity agency securities (excludes agency mortgage-

backed securities but includes all other agency securities

issued by the U.S. Treasury, U.S. government agencies, and

U.S. government sponsored enterprises) divided by the sum

of federal funds purchased and repurchase agreements, other

borrowings (including FHLB) with a remaining maturity of one

year or less, 5 percent of insured domestic deposits, and 10

percent of uninsured domestic and foreign deposits.

Include in highly liquid assets the outstanding

balance of PPP loans that exceed borrowings

from the Federal Reserve Banks under the

PPPLF, until September 30, 2020, or if ex-

tended by the Board of Governors of the Fed-

eral Reserve System and the Secretary of the

Treasury, until such date of extension.

Exclude from other borrowings with a remaining

maturity of one year or less the balance of

outstanding borrowings from the Federal Re-

serve Banks under the Paycheck Protection

Program Liquidity Facility with a remaining

maturity of one year or less.

Potential Losses/Total Domestic Deposits (Loss

Severity Measure).

Potential losses to the DIF in the event of failure divided by total

domestic deposits. Paragraph [A] of this section describes the

calculation of the loss severity measure in detail.

Exclusions are described in paragraph (A) of

this section.

Market Risk Measure for Highly Complex Institu-

tions.

The market risk score is a weighted average of the following

three scores:

(1) Trading Revenue Volatility/Tier 1 Capital

Trailing 4-quarter standard deviation of quarterly trading revenue

(merger-adjusted) divided by Tier 1 capital.

No Exclusion.

(2) Market Risk Capital/Tier 1 Capital ..........

Market risk capital divided by Tier 1 capital .................................

No Exclusion.

ns.

The market risk score is a weighted average of the following

three scores:

(1) Trading Revenue Volatility/Tier 1 Capital

Trailing 4-quarter standard deviation of quarterly trading revenue

(merger-adjusted) divided by Tier 1 capital.

No Exclusion.

(2) Market Risk Capital/Tier 1 Capital ..........

Market risk capital divided by Tier 1 capital .................................

No Exclusion.

(3) Level 3 Trading Assets/Tier 1 Capital ....

Level 3 trading assets divided by Tier 1 capital ...........................

No Exclusion.

Average Short-term Funding/Average Total As-

sets.

Quarterly average of federal funds purchased and repurchase

agreements divided by the quarterly average of total assets

as reported on Schedule RC–K of the Call Reports.

Exclude from the quarterly average of total as-

sets the outstanding balance of loans pro-

vided under the Paycheck Protection Pro-

gram.

1 The credit quality score is the greater of the criticized and classified items to Tier 1 capital and reserves score or the underperforming assets to Tier 1 capital and

reserves score. The market risk score is the weighted average of three scores—the trading revenue volatility to Tier 1 capital score, the market risk capital to Tier 1

capital score, and the level 3 trading assets to Tier 1 capital score. All of these ratios are described in appendix A of this subpart and the method of calculating the

scores is described in appendix B of this subpart. Each score is multiplied by its respective weight, and the resulting weighted score is summed to compute the score

for the market risk measure. An overall weight of 35 percent is allocated between the scores for the credit quality measure and market risk measure. The allocation

depends on the ratio of average trading assets to the sum of average securities, loans and trading assets (trading asset ratio) as follows: (1) Weight for credit quality

score = 35 percent * (1—trading asset ratio); and, (2) Weight for market risk score = 35 percent * trading asset ratio

ercent is allocated between the scores for the credit quality measure and market risk measure. The allocation

depends on the ratio of average trading assets to the sum of average securities, loans and trading assets (trading asset ratio) as follows: (1) Weight for credit quality

score = 35 percent * (1—trading asset ratio); and, (2) Weight for market risk score = 35 percent * trading asset ratio. In calculating the trading asset ratio, exclude

from the balance of loans the outstanding balance of loans provided under the Paycheck Protection Program.

(a) Description of the loss severity measure.

The loss severity measure applies a

standardized set of assumptions to an

institution’s balance sheet to measure

possible losses to the FDIC in the event of an

institution’s failure. To determine an

institution’s loss severity rate, the FDIC first

applies assumptions about uninsured deposit

and other liability runoff, and growth in

insured deposits, to adjust the size and

composition of the institution’s liabilities.

Exclude total outstanding borrowings from

Federal Reserve Banks under the Paycheck

Protection Program Liquidity Facility from

short-and long-term secured borrowings, as

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