Proposed Rulemaking to Address the Temporary Deposit Insurance Assessment Effects of the Optional Regulatory Capital Transitions for Implementing the Current Expected Credit Losses (CECL) Methodology

This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules

Federal Register

78794

Vol. 85, No. 235

Monday, December 7, 2020

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

2 57 FR 45263 (Oct. 1, 1992).

3 As used in this proposed rule, the term ‘‘insured

depository institution’’ has the same meaning as it

is used in section 3(c)(2) of the FDI Act, 12 U.S.C.

1813(c)(2).

4 See 71 FR 69282 (Nov. 30, 2006). Generally,

large IDIs have $10 billion or more in total assets

and small IDIs have less than $10 billion in total

assets. See 12 CFR 327.8(e) and (f). As used in this

proposed rule, the term ‘‘small bank’’ is

synonymous with ‘‘small institution,’’ the term

‘‘large bank’’ is synonymous with ‘‘large

institution,’’ and the term ‘‘highly complex bank’’

is synonymous with ‘‘highly complex institution,’’

as the terms are defined in 12 CFR 327.8.

5 See 76 FR 10672 (Feb. 25, 2011).

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 327

RIN 3064–AF65

Assessments, Amendments To

Address the Temporary Deposit

Insurance Assessment Effects of the

Optional Regulatory Capital

Transitions for Implementing the

Current Expected Credit Losses

Methodology

AGENCY: Federal Deposit Insurance

Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

SUMMARY: The Federal Deposit

Insurance Corporation is seeking

comment on a proposed rule that would

amend the risk-based deposit insurance

assessment system applicable to all

large insured depository institutions

(IDIs), including highly complex IDIs, to

address the temporary deposit insurance

assessment effects resulting from certain

optional regulatory capital transition

provisions relating to the

implementation of the current expected

credit losses (CECL) methodology

rule that would

amend the risk-based deposit insurance

assessment system applicable to all

large insured depository institutions

(IDIs), including highly complex IDIs, to

address the temporary deposit insurance

assessment effects resulting from certain

optional regulatory capital transition

provisions relating to the

implementation of the current expected

credit losses (CECL) methodology. The

proposal would amend the assessment

regulations to remove the double

counting of a specified portion of the

CECL transitional amount or the

modified CECL transition amount, as

applicable (collectively, the CECL

transitional amounts), in certain

financial measures that are calculated

using the sum of Tier 1 capital and

reserves and that are used to determine

assessment rates for large and highly

complex IDIs. The proposal also would

adjust the calculation of the loss

severity measure to remove the double

counting of a specified portion of the

CECL transitional amounts for a large or

highly complex IDI. This proposal

would not affect regulatory capital or

the regulatory capital relief provided in

the form of transition provisions that

allow banking organizations to phase in

the effects of CECL on their regulatory

capital ratios.

DATES: Comments must be received no

later than January 6, 2021.

ADDRESSES: You may submit comments

on the proposed rule using any of the

following methods:

• Agency Website: https://

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

Follow the instructions for submitting

comments on the agency website.

• Email: comments@fdic.gov. Include

RIN 3064–AF65 on the subject line of

the message.

• Mail: Robert E. Feldman, Executive

Secretary, Attention: Comments, Federal

Deposit Insurance Corporation, 550 17th

Street NW, Washington, DC 20429.

• Hand Delivery: Comments may be

hand delivered to the guard station at

the rear of the 550 17th Street building

(located on F Street) on business days

between 7 a.m. and 5 p.m

gov. Include

RIN 3064–AF65 on the subject line of

the message.

• Mail: Robert E. Feldman, Executive

Secretary, Attention: Comments, Federal

Deposit Insurance Corporation, 550 17th

Street NW, Washington, DC 20429.

• Hand Delivery: Comments may be

hand delivered to the guard station at

the rear of the 550 17th Street building

(located on F Street) on business days

between 7 a.m. and 5 p.m.

• Public Inspection: All comments

received, including any personal

information provided, will be posted

generally without change to https://

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

FOR FURTHER INFORMATION CONTACT:

Scott Ciardi, Chief, Large Bank Pricing,

(202) 898–7079 or sciardi@fdic.gov;

Ashley Mihalik, Chief, Banking and

Regulatory Policy, (202) 898–3793 or

amihalik@fdic.gov; Nefretete Smith,

Counsel, (202) 898–6851 or nefsmith@

fdic.gov; Sydney Mayer, Senior

Attorney, (202) 898–3669 or smayer@

fdic.gov.

SUPPLEMENTARY INFORMATION:

I. Policy Objectives

The Federal Deposit Insurance Act

(FDI Act) requires that the FDIC

establish a risk-based deposit insurance

assessment system.1 Pursuant to this

requirement, the FDIC first adopted a

risk-based deposit insurance assessment

system effective in 1993 that applied to

all IDIs.2 The FDIC implemented this

assessment system with the goals of

making the deposit insurance system

fairer to well-run institutions and

encouraging weaker institutions to

improve their condition, and thus,

promote the safety and soundness of

IDIs.3

In 2006, the FDIC adopted a final rule

that created different risk-based

assessment systems for large and small

IDIs that combined supervisory ratings

with other risk measures to differentiate

risk and determine assessment rates.4 In

2011, the FDIC amended the risk-based

assessment system applicable to large

IDIs to, among other things, better

capture risk at the time the institution

assumes the risk, to better differentiate

risk among large IDIs during periods of

good economic and banking conditions

based on how th

supervisory ratings

with other risk measures to differentiate

risk and determine assessment rates.4 In

2011, the FDIC amended the risk-based

assessment system applicable to large

IDIs to, among other things, better

capture risk at the time the institution

assumes the risk, to better differentiate

risk among large IDIs during periods of

good economic and banking conditions

based on how they would fare during

periods of stress or economic

downturns, and to better take into

account the losses that the FDIC may

incur if a large IDI fails.5

The FDIC is required by statute to set

deposit insurance assessments based on

risk, and the FDIC’s objective in setting

forth this proposal is to ensure that

banks are assessed in a manner that is

fair and accurate. The primary objective

of this proposal is to remove a double

counting issue in several financial

measures used to determine deposit

insurance assessments for large and

highly complex banks, which could

result in a deposit insurance assessment

rate for a large or highly complex bank

that does not accurately reflect the

bank’s risk to the deposit insurance

fund (DIF), all else equal. Specifically,

the proposal would amend the

assessment regulations to remove the

double counting of a portion of the

CECL transitional amounts, in certain

financial measures used to determine

deposit insurance assessments for large

and highly complex banks. In particular,

certain financial measures are

calculated by summing Tier 1 capital,

which includes the CECL transitional

amounts, and reserves, which already

reflects the implementation of CECL. As

a result, a portion of the CECL

transitional amounts is being double

counted in these measures, which in

turn affects assessment rates for large

and highly complex banks

highly complex banks. In particular,

certain financial measures are

calculated by summing Tier 1 capital,

which includes the CECL transitional

amounts, and reserves, which already

reflects the implementation of CECL. As

a result, a portion of the CECL

transitional amounts is being double

counted in these measures, which in

turn affects assessment rates for large

and highly complex banks. The

proposal also would adjust the

calculation of the loss severity measure

to remove the double counting of a

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6 Banking organizations subject to the capital rule

include national banks, state member banks, state

nonmember banks, savings associations, and top-

tier bank holding companies and savings and loan

holding companies domiciled in the United States

not subject to the Federal Reserve Board’s Small

Bank Holding Company Policy Statement (12 CFR

part 225, appendix C), but exclude certain savings

and loan holding companies that are substantially

engaged in insurance underwriting or commercial

activities or that are estate trusts, and bank holding

companies and savings and loan holding companies

that are employee stock ownership plans. See 12

CFR part 3 (Office of the Comptroller of the

Currency)); 12 CFR part 217 (Board); 12 CFR part

324 (FDIC). See also 84 FR 4222 (February 14, 2019)

and 85 FR 61577 (September 30, 2020).

7 See 84 FR 4225 (February 14, 2019).

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

9 See 12 CFR 327.5

te trusts, and bank holding

companies and savings and loan holding companies

that are employee stock ownership plans. See 12

CFR part 3 (Office of the Comptroller of the

Currency)); 12 CFR part 217 (Board); 12 CFR part

324 (FDIC). See also 84 FR 4222 (February 14, 2019)

and 85 FR 61577 (September 30, 2020).

7 See 84 FR 4225 (February 14, 2019).

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

9 See 12 CFR 327.5.

10 For assessment purposes, a large bank is

generally defined as an institution with $10 billion

or more in total assets, a small bank is generally

defined as an institution with less than $10 billion

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

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

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

12 See 76 FR 10688. The FDIC uses a different

scorecard for highly complex IDIs because those

institutions are structurally and operationally

complex, or pose unique challenges and risks in

case of failure. 76 FR 10695.

13 ASU 2016–13 covers measurement of credit

losses on financial instruments and includes three

subtopics within Topic 326: (i) Subtopic 326–10

Financial Instruments—Credit Losses—Overall; (ii)

Subtopic 326–20: Financial Instruments—Credit

Losses—Measured at Amortized Cost; and (iii)

Subtopic 326–30: Financial Instruments—Credit

Losses—Available-for-Sale Debt Securities.

14 ‘‘Other extensions of credit’’ includes trade and

reinsurance receivables, and receivables that relate

to repurchase agreements and securities lending

agreements. ‘‘Off-balance sheet credit exposures’’

includes off-balance sheet credit exposures not

accounted for as insurance, such as loan

commitments, standby letters of credit, and

financial guarantees

ailable-for-Sale Debt Securities.

14 ‘‘Other extensions of credit’’ includes trade and

reinsurance receivables, and receivables that relate

to repurchase agreements and securities lending

agreements. ‘‘Off-balance sheet credit exposures’’

includes off-balance sheet credit exposures not

accounted for as insurance, such as loan

commitments, standby letters of credit, and

financial guarantees. The FDIC notes that credit

losses for off-balance sheet credit exposures that are

unconditionally cancellable by the issuer are not

recognized under CECL.

portion of the CECL transitional

amounts for a large or highly complex

bank.

This proposal would amend the

deposit insurance system applicable to

large and highly complex banks only,

and it would not affect regulatory

capital or the regulatory capital relief

provided in the form of transition

provisions that allow banking

organizations to phase in the effects of

CECL on their regulatory capital ratios.6

Specifically, in calculating another

measure used to determine assessment

rates for all IDIs, the Tier 1 leverage

ratio, the FDIC would continue to apply

the CECL regulatory capital transition

provisions, consistent with the

regulatory capital relief provided to

address concerns that despite adequate

capital planning, unexpected economic

conditions at the time of CECL adoption

could result in higher-than-anticipated

increases in allowances.7

The proposed amendments to the

deposit insurance assessment system

and any changes to reporting

requirements pursuant to this proposal

would be required only while the

regulatory capital relief described above

is reflected in the regulatory reports of

banks.

II. Background

A

nomic

conditions at the time of CECL adoption

could result in higher-than-anticipated

increases in allowances.7

The proposed amendments to the

deposit insurance assessment system

and any changes to reporting

requirements pursuant to this proposal

would be required only while the

regulatory capital relief described above

is reflected in the regulatory reports of

banks.

II. Background

A. Deposit Insurance Assessments

The FDIC charges all IDIs an

assessment amount for deposit

insurance equal to the IDI’s deposit

insurance assessment base multiplied

by its risk-based assessment rate.8 An

IDI’s assessment base and assessment

rate are determined each quarter based

on supervisory ratings and information

collected in 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.9

An IDI’s assessment rate is calculated

using different methods based on

whether the IDI is a small, large, or

highly complex bank.10 Large and

highly complex banks are assessed

using a scorecard approach that

combines CAMELS ratings and certain

forward-looking financial measures to

assess the risk that a large or highly

complex bank poses to the DIF.11 The

score that each large or highly complex

bank receives is used to determine its

deposit insurance assessment rate. One

scorecard applies to most large IDIs and

another applies to highly complex

banks

assessed

using a scorecard approach that

combines CAMELS ratings and certain

forward-looking financial measures to

assess the risk that a large or highly

complex bank poses to the DIF.11 The

score that each large or highly complex

bank receives is used to determine its

deposit insurance assessment rate. One

scorecard applies to most large IDIs and

another applies to highly complex

banks. Both scorecards use quantitative

financial measures that are useful in

predicting a large or highly complex

bank’s long-term performance.12

As described in more detail below,

the FDIC is proposing to amend the

assessment regulations to remove the

double counting of a portion of the

CECL transitional amounts in the

calculation of the loss severity measure

and certain other financial measures

that are calculated by summing Tier 1

capital and reserves, which are used to

determine assessment rates for large and

highly complex banks.

B. The Current Expected Credit Losses

Methodology

In 2016, the Financial Accounting

Standards Board (FASB) issued

Accounting Standards Update (ASU)

No. 2016–13, Financial Instruments—

Credit Losses, Topic 326, Measurement

of Credit Losses on Financial

Instruments.13 The ASU resulted in

significant changes to credit loss

accounting under U.S. generally

accepted accounting principles (GAAP).

The revisions to credit loss accounting

under GAAP included the introduction

of CECL, which replaces the incurred

loss methodology for financial assets

measured at amortized cost. For these

assets, CECL requires banking

organizations to recognize lifetime

expected credit losses and to

incorporate reasonable and supportable

forecasts in developing the estimate of

lifetime expected credit losses, while

also maintaining the current

requirement that banking organizations

consider past events and current

conditions.

CECL allowances cover a broader

range of financial assets than the

allowance for loan and lease losses

(ALLL) under the incurred loss

methodology

sses and to

incorporate reasonable and supportable

forecasts in developing the estimate of

lifetime expected credit losses, while

also maintaining the current

requirement that banking organizations

consider past events and current

conditions.

CECL allowances cover a broader

range of financial assets than the

allowance for loan and lease losses

(ALLL) under the incurred loss

methodology. Under the incurred loss

methodology, the ALLL generally covers

credit losses on loans held for

investment and lease financing

receivables, with additional allowances

for certain other extensions of credit and

allowances for credit losses on certain

off-balance sheet credit exposures (with

the latter allowances presented as

liabilities).14 These exposures will be

within the scope of CECL. In addition,

CECL applies to credit losses on held-

to-maturity (HTM) debt securities. ASU

2016–13 also introduces new

requirements for available-for-sale (AFS)

debt securities. The new accounting

standard requires that a banking

organization recognize credit losses on

individual AFS debt securities through

credit loss allowances, rather than

through direct write-downs, as is

currently required under U.S. GAAP.

The credit loss allowances attributable

to debt securities are separate from the

credit loss allowances attributable to

loans and leases.

C. The 2019 CECL Rule

Upon adoption of CECL, a banking

organization will record a one-time

adjustment to its credit loss allowances

as of the beginning of its fiscal year of

adoption equal to the difference, if any,

between the amount of credit loss

allowances required under the incurred

loss methodology and the amount of

credit loss allowances required under

CECL. A banking organization’s

implementation of CECL will affect its

retained earnings, deferred tax assets

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of credit loss

allowances required under the incurred

loss methodology and the amount of

credit loss allowances required under

CECL. A banking organization’s

implementation of CECL will affect its

retained earnings, deferred tax assets

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15 12 CFR part 3 (OCC); 12 CFR part 217 (Board);

12 CFR part 324 (FDIC).

16 84 FR 4222 (Feb. 14, 2019).

17 85 FR 17723 (Mar. 31, 2020).

18 See 85 FR 61577 (Sept. 30, 2020).

19 A banking organization that is required to

adopt CECL under GAAP in the 2020 calendar year,

but chooses to delay use of CECL for regulatory

reporting in accordance with section 4014 of the

Coronavirus Aid Relief, and Economic Security Act

(CARES Act), is also eligible for the 2020 CECL

transition provision. The CARES Act (Pub. L. 116–

136, 4014, 134 Stat. 281 (March 27, 2020)) provides

banking organizations optional temporary relief

from complying with CECL ending on the earlier of

(1) the termination date of the current national

emergency, declared by the President on March 13,

2020 under the National Emergencies Act (50 U.S.C.

1601 et seq.) concerning COVID–19, or (2)

December 31, 2020. If a banking organization

chooses to revert to the incurred loss methodology

pursuant to the CARES Act in any quarter in 2020,

the banking organization would not apply any

transitional amounts in that quarter but would be

allowed to apply the transitional amounts in

subsequent quarters when the banking organization

resumes use of CECL.

20 See 85 FR 61578 (Sept. 30, 2020).

21 The 2019 CECL rule defined a new term for

regulatory capital purposes, adjusted allowances for

credit losses (AACL)

in any quarter in 2020,

the banking organization would not apply any

transitional amounts in that quarter but would be

allowed to apply the transitional amounts in

subsequent quarters when the banking organization

resumes use of CECL.

20 See 85 FR 61578 (Sept. 30, 2020).

21 The 2019 CECL rule defined a new term for

regulatory capital purposes, adjusted allowances for

credit losses (AACL). The meaning of the term

AACL for regulatory capital purposes is different

from the meaning of the term allowances of credit

losses (ACL) used in applicable accounting

standards. The term allowance for credit losses as

used by the FASB in ASU 2016–13 applies to both

financial assets measured at amortized cost and

AFS debt securities. In contrast, the AACL

definition includes only those allowances that have

been established through a charge against earnings

or retained earnings. Under the 2019 CECL rule, the

term AACL, rather than ALLL, applies to a banking

organization that has adopted CECL.

22 See 85 FR 61580 (Sept. 30, 2020).

23 Thus, when calculating regulatory capital, a

bank electing the 2019 CECL rule transition

provision would increase the retained earnings

reported on its balance sheet by the applicable

portion of its CECL transitional amount, i.e., 75

percent of its CECL transitional amount during the

first year of the transition period, 50 percent of its

CECL transitional amount during the second year of

the transition period, and 25 percent of its CECL

transitional amount during the third year of the

transition period

he retained earnings

reported on its balance sheet by the applicable

portion of its CECL transitional amount, i.e., 75

percent of its CECL transitional amount during the

first year of the transition period, 50 percent of its

CECL transitional amount during the second year of

the transition period, and 25 percent of its CECL

transitional amount during the third year of the

transition period. A bank electing the 2020 CECL

rule transition provision would increase the

retained earnings reported on its balance sheet by

the applicable portion of its modified CECL

transitional amount, i.e., 100 percent of its modified

CECL transitional amount during the first and

second years of the transition period, 75 percent of

its CECL modified transitional amount during the

third year of the transition period, 50 percent of its

modified CECL transitional amount during the

fourth year of the transition period, and 25 percent

(DTAs), allowances, and, as a result, its

regulatory capital ratios.

In recognition of the potential for the

implementation of CECL to affect

regulatory capital ratios, on February 14,

2019, the FDIC, the Office of the

Comptroller of the Currency (OCC), and

the Board of Governors of the Federal

Reserve System (Board) (collectively,

the agencies) issued a final rule that

revised certain regulations, including

the agencies’ regulatory capital

regulations (capital rule),15 to account

for the aforementioned changes to credit

loss accounting under GAAP, including

CECL (2019 CECL rule).16 The 2019

CECL rule includes a transition

provision that allows banking

organizations to phase in over a three-

year period the day-one adverse effects

of CECL on their regulatory capital

ratios.

D

ns, including

the agencies’ regulatory capital

regulations (capital rule),15 to account

for the aforementioned changes to credit

loss accounting under GAAP, including

CECL (2019 CECL rule).16 The 2019

CECL rule includes a transition

provision that allows banking

organizations to phase in over a three-

year period the day-one adverse effects

of CECL on their regulatory capital

ratios.

D. The 2020 CECL Rule

As part of the efforts to address the

disruption of economic activity in the

United States caused by the spread of

coronavirus disease 2019 (COVID–19),

on March 31, 2020, the agencies

adopted a second CECL transition

provision through an interim final

rule.17 The agencies subsequently

adopted a final rule (2020 CECL rule) on

September 30, 2020, that is consistent

with the interim final rule, with some

clarifications and adjustments related to

the calculation of the transition and the

eligibility criteria for using the 2020

CECL transition provision.18 The 2020

CECL rule provides banking

organizations that adopt CECL for

purposes of GAAP (as in effect January

1, 2020), for a fiscal year that begins

during the 2020 calendar year, the

option to delay for up to two years an

estimate of CECL’s effect on regulatory

capital, followed by a three-year

transition period (i.e., a five-year

transition period in total).19 The 2020

CECL rule does not replace the three-

year transition provision in the 2019

CECL rule, which remains available to

any banking organization at the time

that it adopts CECL.20

E. Double Counting of a Portion of the

CECL Transitional Amounts in Certain

Financial Measures Used To Determine

Assessments for Large and Highly

Complex Banks

An increase in a banking

organization’s allowances, including

those estimated under CECL, generally

will reduce the banking organization’s

earnings or retained earnings, and

therefore, its Tier 1 capital

e

that it adopts CECL.20

E. Double Counting of a Portion of the

CECL Transitional Amounts in Certain

Financial Measures Used To Determine

Assessments for Large and Highly

Complex Banks

An increase in a banking

organization’s allowances, including

those estimated under CECL, generally

will reduce the banking organization’s

earnings or retained earnings, and

therefore, its Tier 1 capital. For banks

electing the 2019 CECL rule, the CECL

transitional amount is the difference

between the closing balance sheet

amount of retained earnings for the

fiscal year-end immediately prior to the

bank’s adoption of CECL (pre-CECL

amount) and the bank’s balance sheet

amount of retained earnings as of the

beginning of the fiscal year in which it

adopts CECL (post-CECL amount). For

banks electing the 2020 CECL rule

transition provision, retained earnings

are increased for regulatory capital

calculation purposes by a modified

CECL transitional amount that is

adjusted to reflect changes in retained

earnings due to CECL that occur during

the first two years of the five-year

transition period. Under the 2020 CECL

rule, the change in retained earnings

due to CECL is calculated by taking the

change in reported adjusted allowances

for credit losses (AACL) 21 relative to the

first day of the fiscal year in which

CECL was adopted and applying a

scaling multiplier of 25 percent during

the first two years of the transition

period. The resulting amount is added

to the CECL transitional amount

described above. Hence, the modified

CECL transitional amount for banks

electing the 2020 CECL rule is

calculated on a quarterly basis during

the first two years of the transition

period

e fiscal year in which

CECL was adopted and applying a

scaling multiplier of 25 percent during

the first two years of the transition

period. The resulting amount is added

to the CECL transitional amount

described above. Hence, the modified

CECL transitional amount for banks

electing the 2020 CECL rule is

calculated on a quarterly basis during

the first two years of the transition

period. The bank reflects that modified

CECL transitional amount, which

includes 100 percent of the day-one

impact of CECL on retained earnings

plus a portion of the difference between

AACL reported in the most recent

regulatory report and AACL as of the

beginning of the fiscal year that the

banking organization adopts CECL, in

the transitional amount applied to

retained earnings in regulatory capital

calculations.22

For banks electing the 2020 CECL rule

transition provision that enter the third

year of their transition period and for

banks electing the three-year 2019 CECL

rule transition provision, banks must

calculate the transitional amount to

phase into their retained earnings for

purposes of their regulatory capital

calculations over a three-year period.

For banks electing the 2019 CECL rule,

the CECL transitional amount of is the

difference between the pre-CECL

amount of retained earnings and the

post-CECL amount of retained earnings.

For banks electing the 2020 CECL rule

that enter the third year of their

transition, the modified CECL

transitional amount is the difference

between the bank’s AACL at the end of

the second year of the transition period

and its AACL as of the beginning of the

fiscal year of CECL adoption multiplied

by 25 percent plus the CECL transitional

amount described above

ount of retained earnings.

For banks electing the 2020 CECL rule

that enter the third year of their

transition, the modified CECL

transitional amount is the difference

between the bank’s AACL at the end of

the second year of the transition period

and its AACL as of the beginning of the

fiscal year of CECL adoption multiplied

by 25 percent plus the CECL transitional

amount described above. The CECL

transitional amount or, at the end of the

second year of the transition period for

banks electing the 2020 CECL rule, the

modified CECL transitional amount, is

fixed and must be phased in over the

three-year transition period or the last

three years of the transition period,

respectively, on a straight-line basis, 25

percent in the first year (or third year for

banks electing the 2020 CECL rule), and

an additional 25 percent of the

transitional amount over each of the

next two years.23 At the beginning of the

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of its CECL transitional amount during the fifth year

of the transition period.

24 See 84 FR 4228 (Feb. 14, 2019) and 85 FR

61580 (Sept. 30, 2020).

25 The allowance for credit losses on loans and

leases held for investment also is reported in item

7, column A, of Call Report Schedule RI–B, Part II,

Changes in Allowances for Credit Losses.

26 This stylized example is included to illustrate

the effect of the proposed rule and omits the effects

of deferred tax assets on regulatory capital

calculations, which are addressed in the agencies’

capital rule, the 2019 CECL rule, and the 2020 CECL

rule

d for investment also is reported in item

7, column A, of Call Report Schedule RI–B, Part II,

Changes in Allowances for Credit Losses.

26 This stylized example is included to illustrate

the effect of the proposed rule and omits the effects

of deferred tax assets on regulatory capital

calculations, which are addressed in the agencies’

capital rule, the 2019 CECL rule, and the 2020 CECL

rule. The example reflects the first-quarter 2020

application by a hypothetical large bank (with no

purchased credit-deteriorated assets) that has

adopted the five-year CECL transition under the

2020 CECL rule and assumes that the full amount

of the CECL transitional amount is attributable to

the allowance for credit losses on loans and leases.

The example does not reflect any changes over the

course of the first quarterly reporting period in year

1 (i.e., no changes in the amounts reported on the

bank’s balance sheet between January 1 and March

31, 2020, the end of the reporting period for the first

quarter). As a consequence, the bank’s modified

CECL transitional amount as of March 31, 2020

equals its CECL transitional amount. See 12 CFR

part 3 (OCC); 12 CFR part 217 (Board); 12 CFR part

324 (FDIC). See also 84 FR 4222 (February 14, 2019)

and 85 FR 61577 (September 30, 2020).

sixth year for banks electing the 2020

CECL rule, or the beginning of the

fourth year for banks electing the 2019

CECL rule, the electing bank would

have completely reflected in regulatory

capital the day-one effects of CECL

(plus, for banks electing the 2020 CECL

rule, an estimate of CECL’s effect on

regulatory capital, relative to the

incurred loss methodology’s effect on

regulatory capital, during the first two

years of CECL adoption).24

Certain financial measures that are

used in the scorecard to determine

assessment rates for large and highly

complex banks are calculated using both

Tier 1 capital and reserves

for banks electing the 2020 CECL

rule, an estimate of CECL’s effect on

regulatory capital, relative to the

incurred loss methodology’s effect on

regulatory capital, during the first two

years of CECL adoption).24

Certain financial measures that are

used in the scorecard to determine

assessment rates for large and highly

complex banks are calculated using both

Tier 1 capital and reserves. Tier 1

capital is reported in Call Report

Schedule RC–R, Part I, item 26, and for

banks that elect either the three-year

transition provision contained in the

2019 CECL rule or the five-year

transition provision contained in the

2020 CECL rule, Tier 1 capital includes

(due to adjustments to the amount of

retained earnings reported on the

balance sheet) the applicable portion of

the CECL transitional amount (or

modified CECL transitional amount).

For deposit insurance assessment

purposes, reserves are calculated using

the amount reported in Call Report

Schedule RC, item 4.c, ‘‘Allowance for

loan and lease losses.’’ For all banks that

have adopted CECL, this Schedule RC

line item reflects the allowance for

credit losses on loans and leases.25 The

issue of double counting arises in

certain financial measures used to

determine assessment rates for large and

highly complex banks that are

calculated using both Tier 1 capital and

reserves because the allowance for

credit losses on loans and leases is

included during the transition period in

both reserves and, as a portion of the

CECL or modified CECL transitional

amount, Tier 1 capital

ssue of double counting arises in

certain financial measures used to

determine assessment rates for large and

highly complex banks that are

calculated using both Tier 1 capital and

reserves because the allowance for

credit losses on loans and leases is

included during the transition period in

both reserves and, as a portion of the

CECL or modified CECL transitional

amount, Tier 1 capital. For banks that

elect either the three-year transition

provision contained in the 2019 CECL

rule or the five-year transition provision

contained in the 2020 CECL rule, the

CECL transitional amounts, as defined

in section 301 of the regulatory capital

rules, additionally include the effect on

retained earnings, net of tax effect, of

establishing allowances for credit losses

in accordance with the CECL

methodology on HTM debt securities,

other financial assets measured at

amortized cost, and off-balance sheet

credit exposures as of the beginning of

the fiscal year of adoption (plus, for

banks electing the 2020 CECL rule, the

change during the first two years of the

transition period in reported AACLs for

HTM debt securities, other financial

assets measured at amortized cost, and

off-balance sheet credit exposures

relative to the balances of these AACLs

as of the beginning of the fiscal year of

CECL adoption multiplied by 25

percent). The applicable portions of the

CECL transitional amounts attributable

to allowances for credit losses on HTM

debt securities, other financial assets

measured at amortized cost, and off-

balance sheet credit exposures are

included in Tier 1 capital only and are

not double counted with reserves for

deposit insurance assessment purposes.

The CECL effective dates assigned by

ASU 2016–13 as most recently amended

by ASU No

CECL transitional amounts attributable

to allowances for credit losses on HTM

debt securities, other financial assets

measured at amortized cost, and off-

balance sheet credit exposures are

included in Tier 1 capital only and are

not double counted with reserves for

deposit insurance assessment purposes.

The CECL effective dates assigned by

ASU 2016–13 as most recently amended

by ASU No. 2019–10, the optional

temporary relief from complying with

CECL afforded by the CARES Act, and

the transitions provided for under the

2019 CECL rule and 2020 CECL rule,

provide that all banks will have

completely reflected in regulatory

capital the day-one effects of CECL

(plus, if applicable, an estimate of

CECL’s effect on regulatory capital,

relative to the incurred loss

methodology’s effect on regulatory

capital, during the first two years of

CECL adoption) by December 31, 2026.

As a result, and as discussed below, the

proposed amendments to the deposit

insurance assessment system and any

changes to reporting requirements

pursuant to this proposal would be

required only while the temporary

regulatory capital relief is reflected in

the regulatory reports of banks.

III. The Proposed Rule

A. Summary

In calculating certain measures used

in the scorecard for determining deposit

insurance assessment rates for large and

highly complex banks, the FDIC is

proposing to remove the applicable

portions of the CECL transitional

amounts added to retained earnings for

regulatory capital purposes and

attributable to the allowance for credit

losses on loans and leases held for

investment under the transitions

provided for under the 2019 and 2020

CECL rules

ermining deposit

insurance assessment rates for large and

highly complex banks, the FDIC is

proposing to remove the applicable

portions of the CECL transitional

amounts added to retained earnings for

regulatory capital purposes and

attributable to the allowance for credit

losses on loans and leases held for

investment under the transitions

provided for under the 2019 and 2020

CECL rules. Specifically, in certain

scorecard measures which are

calculated using the sum of Tier 1

capital and reserves, the FDIC would

remove a specified portion of the CECL

transitional amount (or modified CECL

transitional amount) that is added to

retained earnings for regulatory capital

purposes when determining deposit

insurance assessment rates. The FDIC is

also proposing to adjust the calculation

of the loss severity measure to remove

the double counting of a specified

portion of the CECL transitional

amounts for a large or highly complex

bank.

Absent adjustments to the calculation

of certain financial measures in the large

and highly complex bank scorecards,

the inclusion of the applicable portions

of the CECL transitional amounts added

to retained earnings for regulatory

capital purposes and attributable to the

allowance for credit losses on loans and

leases held for investment in regulatory

capital and the implementation of CECL

in calculating reserves will result in

temporary double counting of a portion

of the CECL transitional amounts in

select financial measures used to

determine assessment rates for large and

highly complex banks

ngs for regulatory

capital purposes and attributable to the

allowance for credit losses on loans and

leases held for investment in regulatory

capital and the implementation of CECL

in calculating reserves will result in

temporary double counting of a portion

of the CECL transitional amounts in

select financial measures used to

determine assessment rates for large and

highly complex banks. For example, in

the denominator of the higher-risk

assets to Tier 1 capital and reserves

ratio, the applicable portions of the

CECL transitional amounts added to

retained earnings for regulatory capital

purposes and attributable to the

allowance for credit losses on loans and

leases held for investment would be

included in Tier 1 capital, and these

portions also would be reflected in the

calculation of reserves using the

allowance amount reported in Call

Report Schedule RC, item 4.c. If left

uncorrected, this temporary double

counting could result in a deposit

insurance assessment rate for a large or

highly complex bank that does not

accurately reflect the bank’s risk to the

DIF, all else equal.

In the following simplified, stylized

example, illustrated in Table 1 below,

consider a hypothetical large bank that

has a CECL effective date of January 1,

2020, and elects a five-year transition.26

On the closing balance sheet date

immediately prior to adopting CECL

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ized

example, illustrated in Table 1 below,

consider a hypothetical large bank that

has a CECL effective date of January 1,

2020, and elects a five-year transition.26

On the closing balance sheet date

immediately prior to adopting CECL

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27 While the CECL transitional amount is

calculated using the difference between the closing

balance sheet amount of retained earnings for the

fiscal year-end immediately prior to a bank’s

adoption of CECL and the balance sheet amount of

retained earnings as of the beginning of the fiscal

year in which the bank adopts CECL, the FDIC

calculates financial measures used to determine

deposit insurance assessments using data reported

as of each quarter end.

28 Under the 2019 CECL rule, when calculating

regulatory capital ratios during the first year of an

electing bank’s CECL adoption date, the bank must

phase in 25 percent of the transitional amounts. The

bank would phase in an additional 25 percent of

the transitional amounts over each of the next two

years so that the bank would have phased in 75

percent of the day-one adverse effects of adopting

CECL during year three. At the beginning of the

fourth year, the bank would have completely

reflected in regulatory capital the day-one effects of

CECL. Under the 2020 CECL rule, the modified

CECL transitional amount is calculated on a

quarterly basis during the first two years of the

transition period. See 12 CFR part 3 (OCC); 12 CFR

part 217 (Board); 12 CFR part 324 (FDIC). See also

84 FR 4222 (February 14, 2019) and 85 FR 61577

(September 30, 2020)

e bank would have completely

reflected in regulatory capital the day-one effects of

CECL. Under the 2020 CECL rule, the modified

CECL transitional amount is calculated on a

quarterly basis during the first two years of the

transition period. See 12 CFR part 3 (OCC); 12 CFR

part 217 (Board); 12 CFR part 324 (FDIC). See also

84 FR 4222 (February 14, 2019) and 85 FR 61577

(September 30, 2020).

29 In this stylized example, the entirety of the

CECL transitional amount is attributable to the

allowance for credit losses on loans and leases and

it equals the modified CECL transitional amount

during the first quarter of the transition period. The

applicable portion of the CECL transitional amounts

is the amount that is double counted in certain

financial measures used to determine deposit

insurance assessment rates and that the FDIC is

proposing to remove from those financial measures.

However, CECL transitional amounts may also

include amounts attributable to allowances for

credit losses under CECL on HTM debt securities,

other financial assets measured at amortized cost,

and off-balance sheet credit exposures. Under the

proposal, in determining a large or highly complex

bank’s deposit insurance assessment rate, the FDIC

would continue to include in Tier 1 capital the

applicable portion of any CECL transitional

amounts attributable to allowances for credit losses

on items other than loans and leases held for

investment.

30 See 12 CFR part 3 (OCC); 12 CFR part 217

(Board); 12 CFR part 324 (FDIC). See also 84 FR

4222 (Feb. 14, 2019) and 85 FR 61577 (Sept. 30,

2020).

31 As discussed in the section on the Paperwork

Reduction Act below, the FDIC will submit a

request for one additional temporary item on the

Call Report (FFIEC 031 and FFIEC 041 only) to

make the proposed adjustments described below.

(i.e., December 31, 2019), the electing

bank has $1 million of ALLL and $10

million of Tier 1 capital

4222 (Feb. 14, 2019) and 85 FR 61577 (Sept. 30,

2020).

31 As discussed in the section on the Paperwork

Reduction Act below, the FDIC will submit a

request for one additional temporary item on the

Call Report (FFIEC 031 and FFIEC 041 only) to

make the proposed adjustments described below.

(i.e., December 31, 2019), the electing

bank has $1 million of ALLL and $10

million of Tier 1 capital. On the opening

balance sheet date immediately after

adopting CECL (i.e., January 1, 2020),

the electing bank has $1.2 million of

allowances for credit losses, of which

the entire $1.2 million qualifies as

AACL for regulatory capital purposes

and is attributable to the allowance for

credit losses on loans and leases held

for investment.27 The bank would

recognize the adoption of CECL as of

January 1, 2020, by recording an

increase in its allowances for credit

losses, and in its AACL for regulatory

capital purposes, of $200,000, with a

reduction in beginning retained

earnings of $200,000, which flows

through and results in Tier 1 capital of

$9.8 million. For each of the quarterly

reporting periods in year 1 of the five-

year transition period (i.e., 2020), the

electing bank would increase the

retained earnings reported on its

balance sheet by $200,000 for purposes

of calculating its regulatory capital

ratios, resulting in an increase in its Tier

1 capital of $200,000 to $10 million, all

else equal.28

In this example, in determining the

hypothetical large bank’s deposit

insurance assessment rate, the bank’s

Tier 1 capital of $10 million would

include the $200,000 addition to the

bank’s reported retained earnings due to

the CECL transition (entirely

attributable to the allowance for credit

losses on loans and leases), and its

reserves would equal $1.2 million, the

entire amount of which is attributable to

the allowance for credit losses on loans

and leases held for investment

ate, the bank’s

Tier 1 capital of $10 million would

include the $200,000 addition to the

bank’s reported retained earnings due to

the CECL transition (entirely

attributable to the allowance for credit

losses on loans and leases), and its

reserves would equal $1.2 million, the

entire amount of which is attributable to

the allowance for credit losses on loans

and leases held for investment. Its

combined Tier 1 capital and reserves

would equal $11.2 million ($10 million

plus $1.2 million), reflecting double

counting of the $200,000 applicable

portion of the bank’s CECL transitional

amount attributable to the allowance for

credit losses on loans and leases.29

Under the proposal, for purposes of

calculating assessments for large and

highly complex banks, the FDIC would

subtract $200,000 from the denominator

of financial measures that sum Tier 1

capital and reserves, since the amount

of $200,000 is incorporated in both Tier

1 capital (as the applicable portion of

the CECL transitional amount in year

one of the five-year transition period)

and reserves in the denominator. The

bank’s adjusted Tier 1 capital and

reserves would equal $11 million. The

FDIC also would adjust the calculation

of the loss severity measure by

$200,000, as described below.

TABLE 1—STYLIZED EXAMPLE 1 OF FIRST-QUARTER APPLICATION OF A FIVE-YEAR CECL TRANSITION IN CALCULATING

TIER 1 CAPITAL AND RESERVES FOR DEPOSIT INSURANCE ASSESSMENT PURPOSES

In thousands

Dec. 31, 2019

Jan. 1, 2020

Reserves .................................................................................................................................................

$1,000 (ALLL) ........

$1,200 (AACL).

Tier 1 Capital ..........................................................................................................................................

10,000 ....................

10,000.

Tier 1 Capital and Reserves (current) ...................................................................................................

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

$1,000 (ALLL) ........

$1,200 (AACL).

Tier 1 Capital ..........................................................................................................................................

10,000 ....................

10,000.

Tier 1 Capital and Reserves (current) ....................................................................................................

11,000 ....................

11,200.

Applicable Portion of the CECL Transitional Amount ............................................................................

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

200.

Tier 1 Capital and Reserves (proposed) ................................................................................................

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

11,000.

1 This stylized example reflects the first-quarter application of a hypothetical bank that has adopted a five-year CECL transition under the 2020

CECL rule and assumes that the full amount of the CECL transitional amount is attributable to the allowance for credit losses on loans and

leases. The example does not reflect any changes over the course of the first quarter of 2020 (i.e., no changes in the amounts reported on the

bank’s balance sheet between January 1 and March 31, 2020, the end of the reporting period for the first quarter). As a consequence, the bank’s

modified CECL transitional amount as of March 31, 2020, equals its CECL transitional amount. This stylized example omits the effects of de-

ferred tax assets, which are addressed in the agencies’ capital rule, the 2019 CECL rule, and the 2020 CECL rule

e

bank’s balance sheet between January 1 and March 31, 2020, the end of the reporting period for the first quarter). As a consequence, the bank’s

modified CECL transitional amount as of March 31, 2020, equals its CECL transitional amount. This stylized example omits the effects of de-

ferred tax assets, which are addressed in the agencies’ capital rule, the 2019 CECL rule, and the 2020 CECL rule.

This proposal would amend the

deposit insurance system applicable to

large and highly complex banks only,

and would not affect regulatory capital

or the regulatory capital relief provided

under the 2019 CECL rule or 2020 CECL

rule.30 The FDIC would continue the

application of the transition provisions

provided for under the 2019 and 2020

CECL rules to the Tier 1 leverage ratio

used in determining deposit insurance

assessment rates for all IDIs.

Temporary changes to the Call Report

forms and instructions would be

required to implement the proposed

amendments to the assessment system

to remove the double counting. These

changes would be effectuated in

coordination with the other member

entities of the Federal Financial

Institutions Examination Council

(FFIEC).31 Any changes to regulatory

reporting requirements pursuant to this

proposal would be required only while

the regulatory capital relief is reflected

in the regulatory reports of banks.

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inancial

Institutions Examination Council

(FFIEC).31 Any changes to regulatory

reporting requirements pursuant to this

proposal would be required only while

the regulatory capital relief is reflected

in the regulatory reports of banks.

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32 See 12 CFR 327.16(b)(ii)(A)(2)(iv).

33 See Appendix A to subpart A of 23 CFR 327.

34 Appendix D to subpart A of 12 CFR 327

describes the calculation of the loss severity

measure.

35 The loss severity measure is an average loss

severity ratio for the three most recent quarters of

data available. It is anticipated that any temporary

reporting changes effectuated pursuant to this

proposal would be implemented no earlier than the

first applicable reporting period following the

anticipated effective date of any final rule

promulgated by this proposal. As such, the FDIC

would adjust the calculation of the loss severity

measure to remove the double counting of the

specified portion of the CECL transitional amounts

for one of the three quarters averaged in the first

reporting period following the effective date, for

two of the three quarters averaged in the second

reporting period following the effective date, and

for all three quarters averaged in all subsequent

reporting periods, as applicable.

36 See 84 FR 4227 and 85 FR 17726.

B

counting of the

specified portion of the CECL transitional amounts

for one of the three quarters averaged in the first

reporting period following the effective date, for

two of the three quarters averaged in the second

reporting period following the effective date, and

for all three quarters averaged in all subsequent

reporting periods, as applicable.

36 See 84 FR 4227 and 85 FR 17726.

B. Adjustments to Certain Measures

Used in the Scorecard Approach for

Determining Assessments for Large and

Highly Complex Banks

The FDIC is proposing to adjust the

calculations of certain financial

measures used to determine deposit

insurance assessment rates for large and

highly complex banks to remove the

applicable portions of the CECL

transitional amounts added to retained

earnings that is attributable to the

allowance for credit losses on loans and

leases held for investment. The FDIC is

proposing to remove this part of the

CECL transitional amounts because, for

large and highly complex banks that

have adopted CECL, the measure of

reserves used in the scorecard is the

allowance for credit losses on loans and

leases reported in Call Report Schedule

RC, item 4.c.

This amount, which would be

reported in a new line item in Schedule

RC–O only on the FFIEC 031 and FFIEC

041 versions of the Call Report, would

be removed from scorecard measures

that are calculated using the sum of Tier

1 capital and reserves, as described in

more detail below. The proposal also

would adjust the calculation of the loss

severity measure to remove the double

counting by removing the applicable

portions of the CECL transitional

amounts added to retained earnings for

regulatory capital purposes and

attributable to the allowance for credit

losses on loans and leases held for

investment for large and highly complex

banks

cribed in

more detail below. The proposal also

would adjust the calculation of the loss

severity measure to remove the double

counting by removing the applicable

portions of the CECL transitional

amounts added to retained earnings for

regulatory capital purposes and

attributable to the allowance for credit

losses on loans and leases held for

investment for large and highly complex

banks.

While the FDIC recognizes that by the

anticipated effective date of any final

rule promulgated by this proposal,

numerous large and highly complex

banks will have implemented CECL and

many will have elected the transition

provided under either the 2019 CECL

rule or 2020 CECL rule, the FDIC would

not make retroactive adjustments to

prior quarterly assessments.

1. Credit Quality Measure

The score for the credit quality

measure, applicable to large and highly

complex banks, is the greater of (1) the

ratio of criticized and classified items to

Tier 1 capital and reserves score or (2)

the ratio of underperforming assets to

Tier 1 capital and reserves score.32 The

double counting results in lower ratios

and a credit quality measure that

reflects less risk than a bank actually

poses to the DIF. The FDIC is proposing

to adjust the denominator, Tier 1 capital

and reserves, used in both ratios by

removing the applicable portions of the

CECL transitional amounts added to

retained earnings for regulatory capital

purposes and attributable to the

allowance for credit losses on loans and

leases held for investment.

2. Concentration Measure

For large banks, the concentration

measure is the higher of (1) the ratio of

higher-risk assets to Tier 1 capital and

reserves or (2) the growth-adjusted

portfolio concentration measure. The

growth-adjusted portfolio concentration

measure includes the ratio of

concentration levels for several loan

portfolios to Tier 1 capital and reserves

ses held for investment.

2. Concentration Measure

For large banks, the concentration

measure is the higher of (1) the ratio of

higher-risk assets to Tier 1 capital and

reserves or (2) the growth-adjusted

portfolio concentration measure. The

growth-adjusted portfolio concentration

measure includes the ratio of

concentration levels for several loan

portfolios to Tier 1 capital and reserves.

For highly complex banks, the

concentration measure is the highest of

three measures: (1) The ratio of higher-

risk assets to Tier 1 capital and reserves,

(2) the ratio of top 20 counterparty

exposures to Tier 1 capital and reserves,

or (3) the ratio of the largest

counterparty exposure to Tier 1 capital

and reserves.33

The double counting results in lower

ratios and a concentration measure that

reflects less risk than a bank actually

poses to the DIF. The FDIC is proposing

to adjust the denominator, Tier 1 capital

and reserves, used in each of these

ratios by removing the applicable

portions of the CECL transitional

amounts added to retained earnings for

regulatory capital purposes and

attributable to the allowance for credit

losses on loans and leases held for

investment.

3. Loss Severity Measure

The loss severity measure estimates

the relative magnitude of potential

losses to the DIF in the event of an IDI’s

failure.34 In calculating this measure,

the FDIC applies a standardized set of

assumptions based on historical failures

regarding liability runoffs and the

recovery value of asset categories to

simulate possible losses to the FDIC,

reducing capital and assets until the

Tier 1 leverage ratio declines to 2

percent. The double counting results in

a greater reduction of assets during the

capital reduction phase and therefore a

lower resolution value of assets at the

time of failure, which in turn results in

a higher loss severity measure that

reflects more risk than a bank actually

poses to the DIF

losses to the FDIC,

reducing capital and assets until the

Tier 1 leverage ratio declines to 2

percent. The double counting results in

a greater reduction of assets during the

capital reduction phase and therefore a

lower resolution value of assets at the

time of failure, which in turn results in

a higher loss severity measure that

reflects more risk than a bank actually

poses to the DIF. The FDIC is proposing

to adjust the calculation of the capital

adjustment in the loss severity measure

to remove the double counting of the

applicable portion of the CECL

transitional amounts added to retained

earnings for regulatory capital purposes

and attributable to the allowance for

credit losses on loans and leases held

for investment for both large and highly

complex banks.35

Question 1: The FDIC invites

comment on its proposal to amend the

assessment regulations to remove the

double counting of a part of the CECL

transitional amounts due to the

inclusion of this amount in certain

financial measures used to determine

deposit insurance assessments for large

and highly complex banks, which could

arise when banks elect the transition

provision contained in either the 2019

CECL rule or the 2020 CECL rule.

C. Other Conforming Amendments to

the Assessment Regulations

The FDIC is proposing to make

conforming amendments to the FDIC’s

assessment regulations to effectuate the

adjustments described above. These

conforming amendments would ensure

that the proposed adjustments to the

financial measures used to calculate a

large or highly complex bank’s

assessment rate are properly

incorporated into the assessment

regulations.

D. Proposed Regulatory Reporting

Changes

A bank electing a transition under

either the 2019 CECL rule or the 2020

CECL rule must indicate its election to

use the 3-year 2019 or the 5-year 2020

CECL transition provision in Call Report

Schedule RC–R, Part I, item 2.a

d to calculate a

large or highly complex bank’s

assessment rate are properly

incorporated into the assessment

regulations.

D. Proposed Regulatory Reporting

Changes

A bank electing a transition under

either the 2019 CECL rule or the 2020

CECL rule must indicate its election to

use the 3-year 2019 or the 5-year 2020

CECL transition provision in Call Report

Schedule RC–R, Part I, item 2.a. In

addition, such an electing bank must

report the applicable portions of the

transitional amounts under the 2019

CECL rule or the 2020 CECL rule in the

affected Call Report items during the

transition period. For example, an

electing bank would add the applicable

portion of the CECL transitional amount

(or the modified CECL transitional

amount) when calculating the amount of

retained earnings it would report in

Schedule RC–R, Part I, item 2, of the

Call Report.36

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Federal Register / Vol. 85, No. 235 / Monday, December 7, 2020 / Proposed Rules

In calculating certain measures used

in the scorecard approach for

determining deposit insurance

assessments for large and highly

complex banks, the FDIC is proposing to

remove a specified portion of the CECL

transitional amounts added to retained

earnings under the transitions provided

for under the 2020 and 2019 CECL rules.

Specifically, in certain measures used in

the scorecard approach for determining

assessments for large and highly

complex banks, the FDIC would remove

the applicable portion of the CECL

transitional amount (or modified CECL

transitional amount) added to retained

earnings for regulatory capital purposes

(Call Report Schedule RC–R, Part I, Item

2), attributable to the allowance for

credits losses on loans and leases held

for investment and included in the

amount reported on the Call Report

balance sheet in Schedule RC, item 4.c

ld remove

the applicable portion of the CECL

transitional amount (or modified CECL

transitional amount) added to retained

earnings for regulatory capital purposes

(Call Report Schedule RC–R, Part I, Item

2), attributable to the allowance for

credits losses on loans and leases held

for investment and included in the

amount reported on the Call Report

balance sheet in Schedule RC, item 4.c.

However, large and highly complex

banks that have elected a CECL

transition provision do not currently

report these specific portions of the

CECL transitional amounts in the Call

Report. Thus, implementing the

proposed amendments to the risk-based

deposit insurance assessment system

applicable to large and highly complex

banks would require temporary changes

to the reporting requirements applicable

to the Call Report and its related

instructions. These reporting changes

would be proposed and effectuated in

coordination with the other member

entities of the FFIEC. As previously

described, any changes to reporting

requirements for large and highly

complex banks pursuant to this

proposal would be required only while

the temporary relief is reflected in

banks’ regulatory reports.

E. Expected Effects

The proposed rule would remove the

applicable portions of the CECL

transitional amounts added to retained

earnings for regulatory capital purposes

and attributable to the allowance for

credit losses on loans and leases held

for investment from certain financial

measures used in the scorecards that

determine deposit insurance assessment

rates for large and highly complex

banks. Absent the proposed rule, this

amount would be temporarily double

counted and could result in a deposit

insurance assessment rate for a large or

highly complex bank that does not

accurately reflect the bank’s risk to the

DIF, all else equal

vestment from certain financial

measures used in the scorecards that

determine deposit insurance assessment

rates for large and highly complex

banks. Absent the proposed rule, this

amount would be temporarily double

counted and could result in a deposit

insurance assessment rate for a large or

highly complex bank that does not

accurately reflect the bank’s risk to the

DIF, all else equal. Furthermore, the

double counting inherent in the

regulation could result in inequitable

deposit insurance assessments, as a

large or highly complex bank that has

not yet implemented CECL or that does

not utilize a transition provision could

pay a higher or lower assessment rate

than a bank that has implemented CECL

and utilizes a transition provision, even

if both banks pose equal risk to the DIF.

The FDIC estimates that the majority of

large and highly complex banks are

currently paying a lower rate as a direct

result of the double counting. However,

the FDIC also estimates that a few banks

are currently paying a higher rate than

they otherwise would pay if the issue of

double counting is corrected. The FDIC

estimates that the rate these latter banks

are paying is higher by only a de

minimis amount, and occurs where the

double counting on the loss severity

measure more than offsets the effect of

double counting on the other scorecard

measures that are calculated using the

sum of Tier 1 capital and reserves.

Based on FDIC data as of June 30,

2020, the FDIC estimates that this

double counting could be resulting in

approximately $55 million in annual

foregone assessment revenue, or 0.048

percent of the DIF balance as of that

date. This estimate includes the

majority of large and highly complex

banks that are paying a lower rate due

to the double counting and the banks

paying a higher rate, compared to if the

issue of double counting is corrected

mates that this

double counting could be resulting in

approximately $55 million in annual

foregone assessment revenue, or 0.048

percent of the DIF balance as of that

date. This estimate includes the

majority of large and highly complex

banks that are paying a lower rate due

to the double counting and the banks

paying a higher rate, compared to if the

issue of double counting is corrected.

The FDIC expects this estimated amount

of foregone assessment revenue to

increase in the near-term as additional

large and highly complex banks adopt

CECL, to the extent those large and

highly complex banks elect to apply a

transition. This amount also may

increase in the near term as large and

highly complex banks electing the 2020

CECL rule include in their modified

CECL transitional amounts an estimate

of CECL’s effect on regulatory capital,

relative to the incurred loss

methodology’s effect on regulatory

capital, during the first two years of

CECL adoption. As of June 30, 2020, the

FDIC estimates that 101 of 138 large and

highly complex banks had implemented

CECL, and that 94 had elected a

transition provided under either the

2019 CECL rule or the 2020 CECL rule.

As banks phase out the transitional

amounts over time, the assessment

effect also would decline. As described

previously, the optional temporary relief

from CECL afforded by the CARES Act,

and the transitions provided for under

the 2019 CECL rule and 2020 CECL rule,

provide that all banks will have

completely reflected in regulatory

capital the day-one effects of CECL

(plus, if applicable, an estimate of

CECL’s effect on regulatory capital,

relative to the incurred loss

methodology’s effect on regulatory

capital, during the first two years of

CECL adoption) by December 31, 2026,

thereby eliminating the double counting

effects from the scorecard for large and

highly complex banks

e

completely reflected in regulatory

capital the day-one effects of CECL

(plus, if applicable, an estimate of

CECL’s effect on regulatory capital,

relative to the incurred loss

methodology’s effect on regulatory

capital, during the first two years of

CECL adoption) by December 31, 2026,

thereby eliminating the double counting

effects from the scorecard for large and

highly complex banks. These above

estimates are subject to uncertainty

given differing CECL implementation

dates and the option for large and highly

complex banks to choose between the

transitions offered under the 2019 CECL

rule or the 2020 CECL rule, or to

recognize the full impact of CECL on

regulatory capital upon implementation.

The proposed rule could pose some

additional regulatory costs for large and

highly complex banks that elect a

transition under either the 2019 CECL

rule or the 2020 CECL rule associated

with changes to internal systems or

processes, or changes to reporting

requirements. It is the FDIC’s

understanding that banks already

calculate the portion of the CECL

transitional amount (or modified CECL

transitional amount) added to retained

earnings for regulatory capital purposes

that is attributable to the allowance for

credit losses on loans and leases held

for investment, for internal purposes. As

such, the FDIC anticipates that the

proposed addition of this temporary

item to the Call Report would not

impose significant additional burden

and any additional costs are likely to be

de minimis.

F. Alternatives Considered

The FDIC considered the reasonable

and possible alternatives described

below. The FDIC is required by statute

to set deposit insurance assessments

based on risk, and the FDIC’s objective

in setting forth the current proposal is

to ensure that banks are assessed in a

manner that is fair and accurate

l burden

and any additional costs are likely to be

de minimis.

F. Alternatives Considered

The FDIC considered the reasonable

and possible alternatives described

below. The FDIC is required by statute

to set deposit insurance assessments

based on risk, and the FDIC’s objective

in setting forth the current proposal is

to ensure that banks are assessed in a

manner that is fair and accurate. On

balance, the FDIC believes the current

proposal would adjust for double

counting of the applicable portion of the

CECL transitional amounts attributable

to allowances for credit losses on loans

and leases held for investment in certain

financial measures used to determine

deposit insurance assessment rates for

large and highly complex banks in the

most appropriate, accurate, and

straightforward manner.

One alternative would be to leave in

place the current assessment

regulations. Under this alternative, the

applicable portions of the CECL

transitional amounts would be

automatically and fully included in both

retained earnings as reported for

regulatory capital purposes (affecting

Tier 1 capital) and reserves, resulting in

double counting of the applicable

portions of these transitional amounts

attributable to allowances for credit

losses on loans and leases held for

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ed for

regulatory capital purposes (affecting

Tier 1 capital) and reserves, resulting in

double counting of the applicable

portions of these transitional amounts

attributable to allowances for credit

losses on loans and leases held for

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Federal Register / Vol. 85, No. 235 / Monday, December 7, 2020 / Proposed Rules

37 5 U.S.C. 601 et seq.

38 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.

investment in certain financial measures

that are used to determine deposit

insurance assessment rates for large and

highly complex banks. As a result, a

large or highly complex bank could pay

a deposit insurance assessment rate that

does not accurately reflect the bank’s

risk to the DIF, all else equal.

Furthermore, this double counting

could result in inequitable deposit

insurance assessments, as a large or

highly complex bank that has not yet

implemented CECL or that does not

utilize a transition provision could pay

a higher or lower assessment rate than

a bank that has implemented CECL and

utilizes a transition provision, even if

both banks pose equal risk to the DIF

all else equal.

Furthermore, this double counting

could result in inequitable deposit

insurance assessments, as a large or

highly complex bank that has not yet

implemented CECL or that does not

utilize a transition provision could pay

a higher or lower assessment rate than

a bank that has implemented CECL and

utilizes a transition provision, even if

both banks pose equal risk to the DIF.

Based on data as of June 30, 2020, the

DIF would receive approximately $55

million less annual income than it

would have received but for the double

counting of parts of the CECL

transitional amounts in the scorecard.

The FDIC also considered a second

alternative, using a proxy measure based

on existing data items on the Call Report

to remove the effect of double counting

on a large or highly complex bank’s

deposit insurance assessments.

Specifically, the FDIC could use the

difference between retained earnings

reported on Schedule RC (item 26.a.)

and Schedule RC–R (Part I, item 2.) to

approximate the amount double

counted. This proxy, however, would

provide an estimate of the applicable

portion of the full CECL transitional

amount (or modified CECL transitional

amount) rather than the applicable

portion of the CECL transitional amount

(or modified CECL transitional amount)

added retained earnings for regulatory

capital purposes and attributable to the

allowance for credit losses on loans and

leases held for investment, which is the

amount the current proposal would

remove from certain financial measures

used to determine deposit insurance

assessment rates for large and highly

complex banks

the CECL transitional amount

(or modified CECL transitional amount)

added retained earnings for regulatory

capital purposes and attributable to the

allowance for credit losses on loans and

leases held for investment, which is the

amount the current proposal would

remove from certain financial measures

used to determine deposit insurance

assessment rates for large and highly

complex banks. This proxy would

include the CECL transitional amounts

attributable to establishing allowances

for credit losses under CECL on loans

and leases held for investment through

a charge against retained earnings as of

the adoption date of CECL as well as the

amounts attributable to establishing, in

the same manner as of the same date,

allowances for credit losses under CECL

on HTM debt securities, other financial

assets measured at amortized cost, and

off-balance sheet credit exposures. Since

the proxy could result in the FDIC

reducing Tier 1 capital and reserves by

an amount that is greater than the

amount double counted, it could harm

banks with large reserves for HTM debt

securities, other financial assets

measured at amortized cost, and off-

balance sheet credit exposures by

inflating such a bank’s credit quality

and concentration measures in the

scorecards for large and highly complex

banks. As a result, the proxy could

result in the FDIC applying an

adjustment amount that is different from

the actual applicable portion of a bank’s

CECL transitional amount (or modified

CECL transitional amount) that was

added to retained earnings for

regulatory capital purposes and is

attributable to the allowance for credit

losses on loans and leases held for

investment. Thus, applying such an

adjustment amount could result in a

deposit insurance assessment rate that

does not accurately reflect a large or

highly complex bank’s risk to the DIF,

all else equal

modified

CECL transitional amount) that was

added to retained earnings for

regulatory capital purposes and is

attributable to the allowance for credit

losses on loans and leases held for

investment. Thus, applying such an

adjustment amount could result in a

deposit insurance assessment rate that

does not accurately reflect a large or

highly complex bank’s risk to the DIF,

all else equal. The amount by which the

proxy measure might differ from the

applicable portion of a bank’s CECL

transitional amount (or modified CECL

transitional amount) added to retained

earnings for regulatory capital purposes

that is attributable to the allowance for

credit losses on loans and leases held

for investment would vary by bank.

While this amount may not be

significant in most cases, the FDIC

expects that using the proxy would

generally result in higher assessments

for most banks.

Furthermore, as described above, it is

the FDIC’s understanding that banks

already calculate the applicable portion

of the CECL transitional amount (or

modified CECL transitional amount)

added to retained earnings for

regulatory capital purposes and

attributable to the allowance for credit

losses on loans and leases held for

investment, for internal purposes, and

as such, the FDIC anticipates that the

proposed addition of this temporary

item to the Call Report would not

impose significant additional burden.

The FDIC believes that temporarily

collecting this item on the Call Report

and using this item to adjust for double

counting of a portion of the CECL

transitional amounts in certain financial

measures used to determine deposit

insurance assessments for large and

highly complex banks would ensure

that banks are assessed in a manner that

is fair and accurate, all else equal.

Question 2: The FDIC invites

comment on the reasonable and possible

alternatives described in this proposed

rule. What are other reasonable and

possible alternatives that the FDIC

should consider?

G

ncial

measures used to determine deposit

insurance assessments for large and

highly complex banks would ensure

that banks are assessed in a manner that

is fair and accurate, all else equal.

Question 2: The FDIC invites

comment on the reasonable and possible

alternatives described in this proposed

rule. What are other reasonable and

possible alternatives that the FDIC

should consider?

G. Comment Period, Effective Date, and

Application Date

The FDIC is issuing this proposal with

a 30-day comment period. Following the

comment period, the FDIC expects to

issue a final rule with an effective date

of April 1, 2021, and applicable to the

second quarterly assessment period of

2021 (i.e., April 1–June 30, 2021). The

30-day comment period, along with the

expected effective date and the

proposed application date, would

ensure that the temporary effects of the

double counting of the applicable

portions of the CECL transitional

amounts in select financial measures

used in the scorecard approach for

determining assessments for large and

highly complex banks are corrected,

beginning with the second quarterly

assessment period of 2021.

IV. Request for Comment

The FDIC is requesting comment on

all aspects of the notice of proposed

rulemaking, in addition to the specific

requests for comment above.

V. Administrative Law Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA),

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

an agency, in connection with a

proposed rule, to prepare and make

available for public comment an initial

regulatory flexibility analysis that

describes the impact of a proposed rule

on small entities.37 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 U.S

ncy, in connection with a

proposed rule, to prepare and make

available for public comment an initial

regulatory flexibility analysis that

describes the impact of a proposed rule

on small entities.37 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 U.S. Small

Business Administration (SBA) has

defined ‘‘small entities’’ to include

banking organizations with total assets

of less than or equal to $600 million.38

Certain types of rules, such as rules of

particular applicability relating to rates,

corporate or financial structures, or

practices relating to such rates or

structures, are expressly excluded from

the definition of ‘‘rule’’ for purposes of

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Federal Register / Vol. 85, No. 235 / Monday, December 7, 2020 / Proposed Rules

39 5 U.S.C. 601.

40 FDIC Call Report data, June 30, 2020.

41 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).

42 4 U.S.C. 3501–3521.

43 12 U.S.C. 4809.

the RFA.39 Because the proposed 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

bank’s assessment rate, the proposed

rule is not subject to the RFA.

Nonetheless, the FDIC is voluntarily

presenting information in this RFA

section.

Based on Call Report data as of June

30, 2020, the FDIC insures 5,075

depository institutions, of which 3,665

are defined as small entities by the

terms of the RFA.40 The proposed rule,

however, would apply only to

institutions with $10 billion or greater

in total assets

sed

rule is not subject to the RFA.

Nonetheless, the FDIC is voluntarily

presenting information in this RFA

section.

Based on Call Report data as of June

30, 2020, the FDIC insures 5,075

depository institutions, of which 3,665

are defined as small entities by the

terms of the RFA.40 The proposed rule,

however, would apply only to

institutions with $10 billion or greater

in total assets. Consequently, small

entities for purposes of the RFA will

experience no significant economic

impact should the FDIC implement the

proposal in a final rule.

B. Riegle Community Development and

Regulatory Improvement Act

Section 302(a) 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.41 The

requirements of RCDRIA will be

considered as part of the overall

rulemaking process, and the FDIC

invites comments that will further

inform its consideration of RCDRIA.

C

ts 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.41 The

requirements of RCDRIA will be

considered as part of the overall

rulemaking process, and the FDIC

invites comments that will further

inform its consideration of RCDRIA.

C. Paperwork Reduction Act

The Paperwork Reduction Act of 1995

(PRA) states that no agency may

conduct or sponsor, nor is the

respondent required to respond to, an

information collection unless it displays

a currently valid Office of Management

and Budget (OMB) control number.42

The FDIC’s OMB control numbers for its

assessment regulations are 3064–0057,

3064–0151, and 3064–0179. The

proposed rule does not revise any of

these existing assessment information

collections pursuant to the PRA and

consequently, no submissions in

connection with these OMB control

numbers will be made to the OMB for

review. However, the proposed rule

affects the agencies’ current information

collections for the Call Report (FFIEC

031 and FFIEC 041, but not FFIEC 051).

The agencies’ OMB control numbers for

the Call Reports are: OCC OMB No.

1557–0081; Board OMB No. 7100–0036;

and FDIC OMB No. 3064–0052.

Proposed changes to the Call Report

forms and instructions will be

addressed in a separate Federal Register

notice.

D. Plain Language

Section 722 of the Gramm-Leach-

Bliley Act 43 requires the Federal

banking agencies to use plain language

in all proposed and final rulemakings

published in the Federal Register after

January 1, 2000. The FDIC invites your

comments on how to make this

proposed rule easier to understand

ort

forms and instructions will be

addressed in a separate Federal Register

notice.

D. Plain Language

Section 722 of the Gramm-Leach-

Bliley Act 43 requires the Federal

banking agencies to use plain language

in all proposed and final rulemakings

published in the Federal Register after

January 1, 2000. The FDIC invites your

comments on how to make this

proposed rule easier to understand. For

example:

• Has the FDIC organized the material

to suit your needs? If not, how could the

material be better organized?

• Are the requirements in the

proposed regulation clearly stated? If

not, how could the regulation be stated

more clearly?

• Does the proposed regulation

contain language or jargon that is

unclear? If so, which language requires

clarification?

• Would a different format (grouping

and order of sections, use of headings,

paragraphing) make the regulation

easier to understand?

List of Subjects in 12 CFR Part 327

Bank deposit insurance, Banks,

Banking, Savings associations.

Authority and Issuance

For the reasons stated in the

preamble, the Federal Deposit Insurance

Corporation proposes to amend 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. In Appendix A to Subpart A, amend

the table under section heading, ‘‘VI.

Description of Scorecard Measures,’’ by:

■a. Redesignating footnotes 2 as 3, 3 as

4, 4 as 5, and 5 as 7;

■b. Adding a new footnote 2 after

various measures described in the table;

and

■c. Adding a new footnote 6 after

‘‘Potential Losses/Total Domestic

Deposits (Loss Severity Measure).

The revisions and additions read as

follows:

Appendix A to Subpart A of Part 327—

Method To Derive Pricing Multipliers

and Uniform Amount

*

*

*

*

*

VI

ting footnotes 2 as 3, 3 as

4, 4 as 5, and 5 as 7;

■b. Adding a new footnote 2 after

various measures described in the table;

and

■c. Adding a new footnote 6 after

‘‘Potential Losses/Total Domestic

Deposits (Loss Severity Measure).

The revisions and additions read as

follows:

Appendix A to Subpart A of Part 327—

Method To Derive Pricing Multipliers

and Uniform Amount

*

*

*

*

*

VI. DESCRIPTION OF SCORECARD MEASURES

Scorecard measures 1

Description

*

*

*

*

*

*

*

Concentration Measure for Large

Insured

depository

institutions

(excluding Highly Complex Insti-

tutions).

The concentration score for large institutions is the higher of the following two scores:

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Federal Register / Vol. 85, No. 235 / Monday, December 7, 2020 / Proposed Rules

VI. DESCRIPTION OF SCORECARD MEASURES—Continued

Scorecard measures 1

Description

(1) Higher-Risk Assets/Tier 1

Capital and Reserves 2.

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

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

securitizations divided by Tier 1 capital and reserves. See Appendix C for the detailed description of the

ratio.

(2) Growth-Adjusted Portfolio

Concentrations 2.

The measure is calculated in the following steps:

*

*

*

*

*

*

*

Concentration Measure for Highly

Complex Institutions.

Concentration score for highly complex institutions is the highest of the following three scores:

(1) Higher-Risk Assets/Tier 1

Capital and Reserves 2.

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 re-

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

ly complex institutions is the highest of the following three scores:

(1) Higher-Risk Assets/Tier 1

Capital and Reserves 2.

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 re-

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

(2) Top 20 Counterparty Expo-

sure/Tier 1 Capital and Re-

serves 2.

Sum of the 20 largest total exposure amounts to counterparties divided by Tier 1 capital and reserves. The

total exposure amount is equal to the sum of the institution’s exposure amounts to one counterparty (or

borrower) for derivatives, securities financing transactions (SFTs), and cleared transactions, and its

gross lending exposure (including all unfunded commitments) to that counterparty (or borrower). A

counterparty includes an entity’s own affiliates. Exposures to entities that are affiliates of each other are

treated as exposures to one counterparty (or borrower). Counterparty exposure excludes all counterparty

exposure to the U.S. Government and departments or agencies of the U.S. Government that is uncondi-

tionally guaranteed by the full faith and credit of the United States. The exposure amount for derivatives,

including OTC derivatives, cleared transactions that are derivative contracts, and netting sets of deriva-

tive 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 cal-

culated using the standardized approach set forth in 12 CFR 324.37(b) or (c)

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 cal-

culated using the standardized approach set forth in 12 CFR 324.37(b) or (c). For both derivatives and

SFT exposures, the exposure amount to central counterparties must also include the default fund con-

tribution.3

(3) Largest Counterparty Expo-

sure/Tier 1 Capital and Re-

serves 2.

The largest total exposure amount to one counterparty divided by Tier 1 capital and reserves. The total ex-

posure amount is equal to the sum of the institution’s exposure amounts to one counterparty (or bor-

rower) 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 affili-

ates. Exposures to entities that are affiliates of each other are treated as exposures to one counterparty

(or borrower). Counterparty exposure excludes all counterparty exposure to the U.S. Government 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, including OTC derivatives, cleared

transactions that are derivative contracts, and netting sets of derivative contracts, must be calculated

using the methodology set forth in 12 CFR 324.34(b), but without any reduction for collateral other than

cash collateral that is all or part of variation margin and that satisfies the requirements of 12 CFR

324.10(c)(4)(ii)(C)(1)(ii) and (iii) and 324.10(c)(4)(ii)(C)(3) through (7). The exposure amount associated

with SFTs, including cleared transactions that are SFTs, must be calculated using the standardized ap-

proach set forth in 12 CFR 324.37(b) or (c)

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 derivatives and SFT exposures, the exposure

amount to central counterparties must also include the default fund contribution.3

*

*

*

*

*

*

*

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

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

(1) Criticized and Classified

Items/Tier 1 Capital and Re-

serves 2.

Sum of criticized and classified items divided by the sum of Tier 1 capital and reserves. Criticized and

classified items include items an institution or its primary federal regulator have graded ‘‘Special Men-

tion’’ or worse and include retail items under Uniform Retail Classification Guidelines, securities, funded

and unfunded loans, other real estate owned (ORE), other assets, and marked-to-market counterparty

positions, less credit valuation adjustments.4 Criticized and classified items exclude loans and securities

in trading books, and the amount recoverable from the U.S. government, its agencies, or government-

sponsored enterprises, under guarantee or insurance provisions.

(2) Underperforming Assets/

Tier

1

Capital

and

Re-

serves 2.

Sum of loans that are 30 days or more past due and still accruing interest, nonaccrual loans, restructured

loans (including restructured 1–4 family loans), and ORE, excluding the maximum amount recoverable

from the U.S. government, its agencies, or government-sponsored enterprises, under guarantee or insur-

ance provisions, divided by a sum of Tier 1 capital and reserves.

*

*

*

*

*

*

*

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

r more past due and still accruing interest, nonaccrual loans, restructured

loans (including restructured 1–4 family loans), and ORE, excluding the maximum amount recoverable

from the U.S. government, its agencies, or government-sponsored enterprises, under guarantee or insur-

ance provisions, divided by a sum of Tier 1 capital and reserves.

*

*

*

*

*

*

*

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

Sum of cash and balances due from depository institutions, federal funds sold and securities purchased

under agreements to resell, and the market value of available for sale and held to maturity agency secu-

rities (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 un-

insured domestic and foreign deposits.5

Potential

Losses/Total

Domestic

Deposits (Loss Severity Meas-

ure) 6.

Potential losses to the DIF in the event of failure divided by total domestic deposits. Appendix D describes

the calculation of the loss severity measure in detail.

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5

Potential

Losses/Total

Domestic

Deposits (Loss Severity Meas-

ure) 6.

Potential losses to the DIF in the event of failure divided by total domestic deposits. Appendix D describes

the calculation of the loss severity measure in detail.

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78804

Federal Register / Vol. 85, No. 235 / Monday, December 7, 2020 / Proposed Rules

1 For the purposes of this Appendix, the term

‘‘bank’’ means insured depository institution.

2 As described in Appendix A to this subpart, the

applicable portions of the current expected credit

loss methodology (CECL) transitional amounts

attributable to the allowance for credit losses on

loans and leases held for investment and added to

retained earnings for regulatory capital purposes

pursuant to the regulatory capital regulations, as

they may be amended from time to time (12 CFR

part 3, 12 CFR part 217, 12 CFR part 324, 85 FR

61577 (Sept. 30, 2020), and 84 FR 4222 (Feb. 14,

2019)), will be removed from the sum of Tier 1

capital and reserves throughout the large and highly

complex bank scorecards, including in the ratio of

Higher-Risk Assets to Tier 1 Capital and Reserves,

the Growth-Adjusted Portfolio Concentrations

Measure, the ratio of Top 20 Counterparty Exposure

to Tier 1 Capital and Reserves, and the Ratio of

Largest Counterparty Exposure to Tier 1 Capital and

Reserves.

*

*

*

*

*

3 The applicable portions of the current expected

credit loss methodology (CECL) transitional

amounts attributable to the allowance for credit

losses on loans and leases held for investment and

added to retained earnings for regulatory capital

purposes pursuant to the regulatory capital

regulations, as they may be amended from time to

time (12 CFR part 3, 12 CFR part 217, 12 CFR part

324, 85 FR 61577 (Sept. 30, 2020), and 84 FR 4222

(Feb. 14, 2019)), will be removed from the

calculation of the loss severity measure

nce for credit

losses on loans and leases held for investment and

added to retained earnings for regulatory capital

purposes pursuant to the regulatory capital

regulations, as they may be amended from time to

time (12 CFR part 3, 12 CFR part 217, 12 CFR part

324, 85 FR 61577 (Sept. 30, 2020), and 84 FR 4222

(Feb. 14, 2019)), will be removed from the

calculation of the loss severity measure.

VI. DESCRIPTION OF SCORECARD MEASURES—Continued

Scorecard measures 1

Description

Market Risk Measure for Highly

Complex Institutions.

The market risk score is a weighted average of the following three scores:

*

*

*

*

*

*

*

(2) Market Risk Capital/Tier 1

Capital.

Market risk capital divided by Tier 1 capital.7

*

*

*

*

*

*

*

1 The FDIC retains the flexibility, as part of the risk-based assessment system, without the necessity of additional notice-and-comment rule-

making, to update the minimum and maximum cutoff values for all measures used in the scorecard. The FDIC may update the minimum and

maximum cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio in order to maintain an approximately similar distribution of

higher-risk assets to Tier 1 capital and reserves ratio scores as reported prior to April 1, 2013, or to avoid changing the overall amount of as-

sessment revenue collected. 76 FR 10672, 10700 (February 25, 2011). The FDIC will review changes in the distribution of the higher-risk assets

to Tier 1 capital and reserves ratio scores and the resulting effect on total assessments and risk differentiation between banks when determining

changes to the cutoffs. The FDIC may update the cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio more frequently than

annually. The FDIC will provide banks with a minimum one quarter advance notice of changes in the cutoff values for the higher-risk assets to

Tier 1 capital and reserves ratio with their quarterly deposit insurance invoice

ween banks when determining

changes to the cutoffs. The FDIC may update the cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio more frequently than

annually. The FDIC will provide banks with a minimum one quarter advance notice of changes in the cutoff values for the higher-risk assets to

Tier 1 capital and reserves ratio with their quarterly deposit insurance invoice.

2 The applicable portions of the current expected credit loss methodology (CECL) transitional amounts attributable to the allowance for credit

losses on loans and leases held for investment and added to retained earnings for regulatory capital purposes pursuant to the regulatory capital

regulations, as they may be amended from time to time (12 CFR part 3, 12 CFR part 217, 12 CFR part 324, 85 FR 61577 (Sept. 30, 2020), and

84 FR 4222 (Feb. 14, 2019)), will be removed from the sum of Tier 1 capital and reserves.

3 SFTs include repurchase agreements, reverse repurchase agreements, security lending and borrowing, and margin lending transactions,

where the value of the transactions depends on market valuations and the transactions are often subject to margin agreements. The default fund

contribution is the funds contributed or commitments made by a clearing member to a central counterparty’s mutualized loss sharing arrange-

ment. The other terms used in this description are as defined in 12 CFR part 324, subparts A and D, unless defined otherwise in 12 CFR part

327.

4 A marked-to-market counterparty position is equal to the sum of the net marked-to-market derivative exposures for each counterparty. The

net marked-to-market derivative exposure equals the sum of all positive marked-to-market exposures net of legally enforceable netting provisions

and net of all collateral held under a legally enforceable CSA plus any exposure where excess collateral has been posted to the counterparty

erparty position is equal to the sum of the net marked-to-market derivative exposures for each counterparty. The

net marked-to-market derivative exposure equals the sum of all positive marked-to-market exposures net of legally enforceable netting provisions

and net of all collateral held under a legally enforceable CSA plus any exposure where excess collateral has been posted to the counterparty.

For purposes of the Criticized and Classified Items/Tier 1 Capital and Reserves definition a marked-to-market counterparty position less any

credit valuation adjustment can never be less than zero.

5 Deposit runoff rates for the balance sheet liquidity ratio reflect changes issued by the Basel Committee on Banking Supervision in its Decem-

ber 2010 document, ‘‘Basel III: International Framework for liquidity risk measurement, standards, and monitoring,’’ http://www.bis.org/publ/

bcbs188.pdf.

6 The applicable portions of the CECL transitional amounts attributable to the allowance for credit losses on loans and leases held for invest-

ment and added to retained earnings for regulatory capital purposes will be removed from the calculation of the loss severity measure.

7 Market risk is defined in 12 CFR 324.202.

*

*

*

*

*

■3. In Appendix C to Subpart A, revise

the text under section heading, ‘‘I.

Concentration Measures,’’ to read as

follows:

Appendix C to Subpart A of Part 327—

Description of Concentration Measures

I

ment and added to retained earnings for regulatory capital purposes will be removed from the calculation of the loss severity measure.

7 Market risk is defined in 12 CFR 324.202.

*

*

*

*

*

■3. In Appendix C to Subpart A, revise

the text under section heading, ‘‘I.

Concentration Measures,’’ to read as

follows:

Appendix C to Subpart A of Part 327—

Description of Concentration Measures

I. Concentration Measures

The concentration score for large banks is

the higher of the higher-risk assets to Tier 1

capital and reserves score or the growth-

adjusted portfolio concentrations score.1 The

concentration score for highly complex

institutions is the highest of the higher-risk

assets to Tier 1 capital and reserves score, the

Top 20 counterparty exposure to Tier 1

capital and reserves score, or the largest

counterparty to Tier 1 capital and reserves

score.2 The higher-risk assets to Tier 1 capital

and reserves ratio and the growth-adjusted

portfolio concentration measure are

described herein.

*

*

*

*

*

■4. In Appendix D to Subpart A, revise

the text under section heading,

‘‘Appendix D to Subpart A of Part 327—

Description of the Loss Severity

Measure,’’ to add a new footnote 3. The

revision and addition read as follows:

Appendix D to Subpart A of Part 327—

Description of the Loss Severity

Measure

The loss severity measure applies a

standardized set of assumptions to an

institution’s balance sheet to measure

possible losses to the 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 unsecured liability runoff, and

growth in insured deposits, to adjust the size

and composition of the institution’s

liabilities

andardized 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 unsecured liability runoff, and

growth in insured deposits, to adjust the size

and composition of the institution’s

liabilities. Assets are then reduced to match

any reduction in liabilities.1 The institution’s

asset values are then further reduced so that

the Leverage ratio reaches 2 percent.2 3 In

both cases, assets are adjusted pro rata to

preserve the institution’s asset composition.

Assumptions regarding loss rates at failure

for a given asset category and the extent of

secured liabilities are then applied to

estimated assets and liabilities at failure to

determine whether the institution has

enough unencumbered assets to cover

domestic deposits. Any projected shortfall is

divided by current domestic deposits to

obtain an end-of-period loss severity ratio.

The loss severity measure is an average loss

severity ratio for the three most recent

quarters of data available.

*

*

*

*

*

■5. In Appendix E to subpart A, amend

Table E.2 by:

■a. Redesignating footnote 1 after

‘‘Credit Quality Measure’’ as 2;

■b. Adding a new footnote 1; and

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everity ratio for the three most recent

quarters of data available.

*

*

*

*

*

■5. In Appendix E to subpart A, amend

Table E.2 by:

■a. Redesignating footnote 1 after

‘‘Credit Quality Measure’’ as 2;

■b. Adding a new footnote 1; and

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Federal Register / Vol. 85, No. 235 / Monday, December 7, 2020 / Proposed Rules

■c. Adding footnote 2 after ‘‘Market

Risk Measure for Highly Complex

Institutions’’.

The revisions and additions read as

follows:

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

HIGHLY COMPLEX INSTITUTIONS

Scorecard measures 1

Description

Exclusions

*

*

*

*

*

*

*

Credit Quality Measure 2 ................

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

*

*

*

*

*

*

*

Market Risk Measure for Highly

Complex Institutions 2.

The market risk score is a weighted average of the following three

scores:

*

*

*

*

*

*

*

1 The applicable portions of the current expected credit loss methodology (CECL) transitional amounts attributable to the allowance for credit

losses on loans and leases held for investment and added to retained earnings for regulatory capital purposes pursuant to the regulatory capital

regulations, as they may be amended from time to time (12 CFR part 3, 12 CFR part 217, 12 CFR part 324, 85 FR 61577 (Sept. 30, 2020), and

84 FR 4222 (Feb

ected credit loss methodology (CECL) transitional amounts attributable to the allowance for credit

losses on loans and leases held for investment and added to retained earnings for regulatory capital purposes pursuant to the regulatory capital

regulations, as they may be amended from time to time (12 CFR part 3, 12 CFR part 217, 12 CFR part 324, 85 FR 61577 (Sept. 30, 2020), and

84 FR 4222 (Feb. 14, 2019)), will be removed from the sum of Tier 1 capital and reserves throughout the large and highly complex bank score-

cards, including in the ratio of Higher-Risk Assets to Tier 1 Capital and Reserves, the Growth-Adjusted Portfolio Concentrations Measure, the

ratio of Top 20 Counterparty Exposure to Tier 1 Capital and Reserves, the Ratio of Largest Counterparty Exposure to Tier 1 Capital and Re-

serves, the ratio of Criticized and Classified Items to Tier 1 Capital and Reserves, and the ratio of Underperforming Assets to Tier 1 Capital and

Reserves. All of these ratios are described in appendix A of this subpart.

2 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 cap-

ital 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 re-

spective 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

tios 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 re-

spective weight, and the resulting weighted score is summed to compute the score for the market risk measure. An overall weight of 35 percent

is allocated between the scores for the credit quality measure and market risk measure. The allocation depends on the ratio of average trading

assets to the sum of average securities, loans and trading assets (trading asset ratio) as follows: (1) Weight for credit quality score = 35 percent

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

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

(a) Description of the loss severity measure. The loss severity measure applies a standardized set of assumptions to an institution’s balance

sheet to measure possible losses to 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 appropriate. Assets are then reduced to match any reduction in liabilities. Exclude from an insti-

tution’s balance of commercial and industrial loans the outstanding balance of loans provided under the Paycheck Protection Program

Exclude total outstanding borrowings from Federal Reserve Banks under the Paycheck Protection Program Liquidity Facility

from short-and long-term secured borrowings, as appropriate. Assets are then reduced to match any reduction in liabilities. Exclude from an insti-

tution’s balance of commercial and industrial loans the outstanding balance of loans provided under the Paycheck Protection Program. In the

event that the outstanding balance of loans provided under the Paycheck Protection Program exceeds the balance of commercial and industrial

loans, exclude any remaining balance of loans provided under the Paycheck Protection Program first from the balance of all other loans, up to

the total amount of all other loans, followed by the balance of agricultural loans, up to the total amount of agricultural loans. Increase cash bal-

ances by outstanding loans provided under the Paycheck Protection Program that exceed total outstanding borrowings from Federal Reserve

Banks under the Paycheck Protection Program Liquidity Facility, if any. The institution’s asset values are then further reduced so that the Lever-

age Ratio reaches 2 percent. In both cases, assets are adjusted pro rata to preserve the institution’s asset composition. Assumptions regarding

loss rates at failure for a given asset category and the extent of secured liabilities are then applied to estimated assets and liabilities at failure to

determine whether the institution has enough unencumbered assets to cover domestic deposits. Any projected shortfall is divided by current do-

mestic deposits to obtain an end-of-period loss severity ratio. The loss severity measure is an average loss severity ratio for the three most re-

cent quarters of data available

iabilities are then applied to estimated assets and liabilities at failure to

determine whether the institution has enough unencumbered assets to cover domestic deposits. Any projected shortfall is divided by current do-

mestic deposits to obtain an end-of-period loss severity ratio. The loss severity measure is an average loss severity ratio for the three most re-

cent quarters of data available. The applicable portions of the current expected credit loss methodology (CECL) transitional amounts attributable

to the allowance for credit losses on loans and leases held for investment and added to retained earnings for regulatory capital purposes pursu-

ant to the regulatory capital regulations, as they may be amended from time to time (12 CFR part 3, 12 CFR part 217, 12 CFR part 324, 85 FR

61577 (Sept. 30, 2020), and 84 FR 4222 (Feb. 14, 2019)), will be removed from the calculation of the loss severity measure.

*

*

*

*

*

Federal Deposit Insurance Corporation.

By order of the Board of Directors.

Dated at Washington, DC, on November 17,

2020.

James P. Sheesley,

Assistant Executive Secretary.

[FR Doc. 2020–25830 Filed 12–4–20; 8:45 am]

BILLING CODE 6714–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA–2020–1110; Project

Identifier MCAI–2020–01003–T]

RIN 2120–AA64

Airworthiness Directives; Airbus

Canada Limited Partnership (Type

Certificate Previously Held by C Series

Aircraft Limited Partnership (CSALP);

Bombardier, Inc.) Airplanes

AGENCY: Federal Aviation

Administration (FAA), DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: The FAA proposes to

supersede Airworthiness Directive (AD)

2019–23–15, which applies to certain

Airbus Canada Limited Partnership

Model BD–500–1A10 and BD–500–

1A11 airplanes. AD 2019–23–15

requires revising the existing

maintenance or inspection program, as

applicable, to incorporate new or more

restrictive airworthiness limitations

CTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: The FAA proposes to

supersede Airworthiness Directive (AD)

2019–23–15, which applies to certain

Airbus Canada Limited Partnership

Model BD–500–1A10 and BD–500–

1A11 airplanes. AD 2019–23–15

requires revising the existing

maintenance or inspection program, as

applicable, to incorporate new or more

restrictive airworthiness limitations.

Since the FAA issued AD 2019–23–15,

the FAA has determined that new or

more restrictive airworthiness

limitations are necessary. This proposed

AD would require revising the existing

maintenance or inspection program, as

applicable, to incorporate new or more

restrictive airworthiness limitations.

The FAA is proposing this AD to

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