7878 Federal Register / Vol. 72, No. 34 / Wednesday, February 21, 2007 / Notices
1 71 Fr 69282 (Nov. 30, 2006).
2 These guidelines are also intended to apply to
assessment rate adjustment determinations for
insured foreign branches, whose initial assessment
rates are determined from ROCA ratings under the
final rule.
FEDERAL DEPOSIT INSURANCE
CORPORATION
Proposed Assessment Rate
Adjustment Guidelines for Large
Institutions and Insured Foreign
Branches in Risk Category I
AGENCY: Federal Deposit Insurance
Corporation (FDIC).
ACTION: Notice and request for comment.
SUMMARY: The FDIC is seeking comment
on proposed guidelines it will use for
determining how adjustments of up to
0.50 basis points would be made to the
quarterly assessment rates of insured
institutions defined as large Risk
Category I institutions, and insured
foreign branches in Risk Category I,
according to the Final Assessments Rule
(the final rule).1 These guidelines are
intended to further clarify the analytical
processes, and the controls applied to
these processes, in making assessment
rate adjustment determinations.
DATES: Comments must be submitted on
or before March 23, 2007.
ADDRESSES: You may submit comments,
identified by ‘‘Adjustment Guidelines’’,
by any of the following methods:
• Agency Web site: http://
www.fdic.gov/regulations/laws/federal.
Follow instructions for submitting
comments on the Agency Web site.
• E-mail: Comments@FDIC.gov.
Include ‘‘Adjustment Guidelines’’ in 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/Courier: 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.
Instructions: All comments received
will be posted without change to http://
www.fdic.gov/regulations/laws/federal
including any personal information
provided. Comments may be inspected
and photocopied in the FDIC Public
Information Center, 3501 North Fairfax
Drive, Room E–1002, Arlington, VA
22226, between 9 a.m. and 5 p.m. (EST)
on business days. Paper copies of public
comments may be ordered from the
Public Information Center by telephone
at (877) 275–3342 or (703) 562–2200.
FOR FURTHER INFORMATION CONTACT:
Miguel Browne, Associate Director,
Division of Insurance and Research,
(202) 898–6789; Steven Burton, Senior
Financial Analyst, Division of Insurance
and Research, (202) 898–3539; and
Christopher Bellotto, Counsel, Legal
Division, (202) 898–3801.
SUPPLEMENTARY INFORMATION:
I. Background
Under the final rule, the assessment
rates of large Risk Category I institutions
are first determined using either
supervisory and long-term debt issuer
ratings, or supervisory ratings and
financial ratios for large institutions that
have no publicly available long-term
debt issuer ratings. While the resulting
assessment rates are largely reflective of
the rank ordering of risk, the final rule
indicates that FDIC may determine, in
consultation with the primary federal
regulator, whether limited adjustments
to these initial assessment rates are
warranted based upon consideration of
additional risk information. Any
adjustments will be limited to no more
than 0.50 basis points higher or lower
than the initial assessment rate and in
no case would the resulting rate exceed
the maximum rate or fall below the
minimum rate in effect for an
assessment period. Further, upward
adjustments will not take effect without
notification being made to the primary
federal regulator and the institution or
without consideration of any additional
information provided by the primary
federal regulator and the institution to
these notifications; and downward
adjustments will not take effect without
notification being made to the primary
federal regulator or without
consideration of any additional
information provided by the primary
federal regulator to these notifications.
Examples of additional risk information
that would be considered in making
such adjustments, and a general
description of how this information
would be evaluated, are also discussed
in the final rule. However, in the final
rule, the FDIC acknowledged the need
to further clarify its processes for
making adjustments to assessment rates
and indicated that no adjustments
would be made until additional
guidelines were approved by the FDIC’s
Board.
The FDIC seeks comments on these
proposed guidelines for evaluating how
assessment rate adjustments, if
warranted, will be made, and the size of
any adjustments.2 Following a 30-day
comment period, the FDIC will review
comments and revise the guidelines as
appropriate. Although the FDIC has in
this instance chosen to publish the
proposed guidelines and solicit
comment from the industry, notice and
comment are not required and need not
be employed to make future changes to
the guidelines.
II. Broad Objectives
In the majority of cases, the use of
agency and supervisory ratings, or the
use of supervisory ratings and financial
ratios when agency ratings are not
available, will sufficiently reflect the
risk profile and rank orderings of risk in
large Risk Category I institutions.
However, in certain cases, the FDIC may
need to make adjustments to assessment
rates determined from these inputs in
order to preserve consistency in the
orderings of risk indicated by these
assessment rates, ensure fairness among
all large institutions, and ensure that
assessment rates take into account all
available information that is relevant to
the FDIC’s risk-based assessment
decision. The FDIC expects that
adjustments will be made relatively
infrequently and for a limited number of
institutions. If this is not the case, the
FDIC would likely reevaluate the
underlying assessment rate
methodology involving supervisory and
long-term debt issuer ratings, and
financial ratios for institutions without
long-term debt issuer ratings.
The following broad objectives helped
inform the formulation of a process for
determining how adjustments to an
institution’s initial assessment rate, if
appropriate, will be made, as well as the
guidelines that will govern the
adjustment process:
1. Assessment rates should reflect a
logical and reasonable rank ordering of
risk among large Risk Category I
institutions. That is, institutions with
similar risk profiles should pay similar
assessment rates; and institutions with
higher (lower) risk profiles should pay
higher (lower) assessment rates.
2. Assessment rates for any given
quarter should be based on the most
recent information that pertains to an
institution’s risk profile.
3. The rank ordering of risk
represented by assessment rates should
be reconcilable to other risk measures
including supervisory ratings, financial
performance information, market
information, quantitative measures of an
institution’s ability to withstand adverse
events, and loss severity indicators.
4. Assessment rate determinations
should consider all available
information relating to both the
likelihood of failure and loss severity in
the event of failure. Loss severity
information should include quantitative
and qualitative considerations that
relate to potential resolution costs.
VerDate Aug<31>2005 15:09 Feb 20, 2007 Jkt 211001 PO 00000 Frm 00024 Fmt 4703 Sfmt 4703 E:\FR\FM\21FEN1.SGM 21FEN1
rmajette on PROD1PC67 with NOTICES
1 71 Fr 69282 (Nov. 30, 2006).
2 These guidelines are also intended to apply to
assessment rate adjustment determinations for
insured foreign branches, whose initial assessment
rates are determined from ROCA ratings under the
final rule.
FEDERAL DEPOSIT INSURANCE
CORPORATION
Proposed Assessment Rate
Adjustment Guidelines for Large
Institutions and Insured Foreign
Branches in Risk Category I
AGENCY: Federal Deposit Insurance
Corporation (FDIC).
ACTION: Notice and request for comment.
SUMMARY: The FDIC is seeking comment
on proposed guidelines it will use for
determining how adjustments of up to
0.50 basis points would be made to the
quarterly assessment rates of insured
institutions defined as large Risk
Category I institutions, and insured
foreign branches in Risk Category I,
according to the Final Assessments Rule
(the final rule).1 These guidelines are
intended to further clarify the analytical
processes, and the controls applied to
these processes, in making assessment
rate adjustment determinations.
DATES: Comments must be submitted on
or before March 23, 2007.
ADDRESSES: You may submit comments,
identified by ‘‘Adjustment Guidelines’’,
by any of the following methods:
• Agency Web site: http://
www.fdic.gov/regulations/laws/federal.
Follow instructions for submitting
comments on the Agency Web site.
• E-mail: Comments@FDIC.gov.
Include ‘‘Adjustment Guidelines’’ in 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/Courier: 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.
Instructions: All comments received
will be posted without change to http://
www.fdic.gov/regulations/laws/federal
including any personal information
provided. Comments may be inspected
and photocopied in the FDIC Public
Information Center, 3501 North Fairfax
Drive, Room E–1002, Arlington, VA
22226, between 9 a.m. and 5 p.m. (EST)
on business days. Paper copies of public
comments may be ordered from the
Public Information Center by telephone
at (877) 275–3342 or (703) 562–2200.
FOR FURTHER INFORMATION CONTACT:
Miguel Browne, Associate Director,
Division of Insurance and Research,
(202) 898–6789; Steven Burton, Senior
Financial Analyst, Division of Insurance
and Research, (202) 898–3539; and
Christopher Bellotto, Counsel, Legal
Division, (202) 898–3801.
SUPPLEMENTARY INFORMATION:
I. Background
Under the final rule, the assessment
rates of large Risk Category I institutions
are first determined using either
supervisory and long-term debt issuer
ratings, or supervisory ratings and
financial ratios for large institutions that
have no publicly available long-term
debt issuer ratings. While the resulting
assessment rates are largely reflective of
the rank ordering of risk, the final rule
indicates that FDIC may determine, in
consultation with the primary federal
regulator, whether limited adjustments
to these initial assessment rates are
warranted based upon consideration of
additional risk information. Any
adjustments will be limited to no more
than 0.50 basis points higher or lower
than the initial assessment rate and in
no case would the resulting rate exceed
the maximum rate or fall below the
minimum rate in effect for an
assessment period. Further, upward
adjustments will not take effect without
notification being made to the primary
federal regulator and the institution or
without consideration of any additional
information provided by the primary
federal regulator and the institution to
these notifications; and downward
adjustments will not take effect without
notification being made to the primary
federal regulator or without
consideration of any additional
information provided by the primary
federal regulator to these notifications.
Examples of additional risk information
that would be considered in making
such adjustments, and a general
description of how this information
would be evaluated, are also discussed
in the final rule. However, in the final
rule, the FDIC acknowledged the need
to further clarify its processes for
making adjustments to assessment rates
and indicated that no adjustments
would be made until additional
guidelines were approved by the FDIC’s
Board.
The FDIC seeks comments on these
proposed guidelines for evaluating how
assessment rate adjustments, if
warranted, will be made, and the size of
any adjustments.2 Following a 30-day
comment period, the FDIC will review
comments and revise the guidelines as
appropriate. Although the FDIC has in
this instance chosen to publish the
proposed guidelines and solicit
comment from the industry, notice and
comment are not required and need not
be employed to make future changes to
the guidelines.
II. Broad Objectives
In the majority of cases, the use of
agency and supervisory ratings, or the
use of supervisory ratings and financial
ratios when agency ratings are not
available, will sufficiently reflect the
risk profile and rank orderings of risk in
large Risk Category I institutions.
However, in certain cases, the FDIC may
need to make adjustments to assessment
rates determined from these inputs in
order to preserve consistency in the
orderings of risk indicated by these
assessment rates, ensure fairness among
all large institutions, and ensure that
assessment rates take into account all
available information that is relevant to
the FDIC’s risk-based assessment
decision. The FDIC expects that
adjustments will be made relatively
infrequently and for a limited number of
institutions. If this is not the case, the
FDIC would likely reevaluate the
underlying assessment rate
methodology involving supervisory and
long-term debt issuer ratings, and
financial ratios for institutions without
long-term debt issuer ratings.
The following broad objectives helped
inform the formulation of a process for
determining how adjustments to an
institution’s initial assessment rate, if
appropriate, will be made, as well as the
guidelines that will govern the
adjustment process:
1. Assessment rates should reflect a
logical and reasonable rank ordering of
risk among large Risk Category I
institutions. That is, institutions with
similar risk profiles should pay similar
assessment rates; and institutions with
higher (lower) risk profiles should pay
higher (lower) assessment rates.
2. Assessment rates for any given
quarter should be based on the most
recent information that pertains to an
institution’s risk profile.
3. The rank ordering of risk
represented by assessment rates should
be reconcilable to other risk measures
including supervisory ratings, financial
performance information, market
information, quantitative measures of an
institution’s ability to withstand adverse
events, and loss severity indicators.
4. Assessment rate determinations
should consider all available
information relating to both the
likelihood of failure and loss severity in
the event of failure. Loss severity
information should include quantitative
and qualitative considerations that
relate to potential resolution costs.
VerDate Aug<31>2005 15:09 Feb 20, 2007 Jkt 211001 PO 00000 Frm 00024 Fmt 4703 Sfmt 4703 E:\FR\FM\21FEN1.SGM 21FEN1
rmajette on PROD1PC67 with NOTICES
7879Federal Register / Vol. 72, No. 34 / Wednesday, February 21, 2007 / Notices
3 The institution will also be given advance notice
when the FDIC determines to eliminate any
downward adjustment to an institution’s
assessment rate.
4 Comparisons of risk measures will generally
treat as indicative of low risk that portion of the risk
rankings falling within the lowest X percentage of
assessment rate rankings, with X being the
proportion of large Risk Category I institutions
assigned the minimum assessment rate. For
example, as of June 30, 2006, 46 percent of large
Risk Category I institutions would have been
assigned a minimum assessment rate. Therefore, as
of June 30, 2006, risk rankings from the 1st to the
46th percentile for any given risk measure would
generally have been considered suggestive of low
risk.
III. Overview of the Adjustment Process
The FDIC adjustment process will
include the following steps. In the first
step, an initial risk ranking will be
developed for all large institutions
based on their initial assessment rates as
derived from agency and supervisory
ratings, or the use of supervisory ratings
and financial ratios when agency ratings
are not available, in accordance with the
final rule.
In the second step, the risk rankings
associated with these initial assessment
rates will be compared with risk
rankings associated with broad-based
and focused risk measures as well as the
risk rankings associated with other
market indicators such as spreads on
subordinated debt. Broad-based risk
measures include each of the inputs to
the initial assessment rate considered
separately, other summary risk
measures such as alternative publicly
available debt issuer ratings, and loss
severity estimates, which are not always
sufficiently reflected in the inputs to the
initial assessment rate or in other debt
issuer ratings. Focused risk measures
include financial performance
measures, measures of an institution’s
ability to withstand financial adversity,
and factors relating to the severity of
losses to the insurance fund in the event
of failure.
In the third step, the FDIC will
perform further analysis and review in
those cases where the risk rankings from
multiple measures (such as broad-based
risk measures, focused risk measures,
and other market indicators) appear to
be inconsistent with the risk rankings
associated with the initial assessment
rate. This step will include consultation
with an institution’s primary federal
regulator and state banking supervisor.
Although any additional information or
feedback provided by the primary
federal regulator or state banking
supervisor will be considered in the
FDIC’s ultimate decision concerning
such adjustments, participation by the
primary federal regulator or state
banking supervisory in this consultation
process should not be construed as
concurrence with the FDIC’s deposit
insurance pricing decisions.
In the final step, the FDIC will notify
an institution when it proposes to make
an upward adjustment to the
institution’s assessment rate. As
indicated in the final rule, notifications
involving an upward adjustment in an
institution’s initial assessment rate will
be made in advance of implementing
such an adjustment so that the
institution has sufficient opportunity to
respond to or address the FDIC’s
concerns.3 Adjustments will be
implemented after considering
institution responses to this notification
along with any subsequent changes
either to the inputs to the initial
assessment rate or any other risk factor
that relates to the decision to make an
assessment rate adjustment.
The following paragraphs elaborate
further on the adjustment process just
described. These paragraphs introduce
proposed guidelines relating to the
analytical process, show an example of
how these guidelines will be applied,
and present proposed guidelines
intended to serve as controls over the
assessment rate adjustment process.
IV. Proposed Guidelines for the
Analytical Process and Illustrative
Examples
To ensure consistency, fairness, and
transparency, the FDIC proposes that
the following guidelines be applied to
its analytical process for determining
how to make adjustments to the
assessment rates of large Risk Category
I institutions when appropriate. An
example of how the guidelines would be
applied in a sample institution follows
the enumeration of the principal
analytical guidelines.
Principal Analytical Guidelines
Guideline 1: The analytical process
will focus on identifying inconsistencies
between the rank orderings of risk
suggested by initial assessment rates
and the rank orderings of risk indicated
by other risk measures. This process will
consider all available information
relating to the likelihood of failure and
loss severity in the event of failure.
The purpose of the analytical process
is to identify those institutions whose
risk measures appear to be significantly
different than other institutions with
similarly assigned initial assessment
rates. This analytical process involves
the identification of possible
inconsistencies between the rank
orderings of risk associated with the
initial assessment rate and the risk
rankings associated with other risk
measures. The intent of this analysis is
not to override supervisory evaluations
or to question the validity of long-term
debt issuer ratings or financial ratios
when applicable. Rather, the analysis is
meant to ensure that the assessment
rates, produced from the combination of
these information sources, result in a
reasonable rank ordering of risk that is
consistent with risk profiles of large
Risk Category I institutions.
The starting point in the analytical
process will be the comparison of risk
rankings associated with the initial
assessment rate to risk rankings
associated with a number of broad-
based risk measures. This analysis will
be supplemented with additional
comparisons of risk rankings associated
with focused risk measures and other
market indicators to the risk rankings
associated with an institution’s initial
assessment rate.4
The FDIC will consider adjusting an
institution’s initial assessment rate
when there is sufficient corroborating
information from a combination of
broad-based risk measures, focused risk
measures, and other market indicators
to support an adjustment. The
likelihood of an adjustment will
increase when: (1) The rank orderings of
risk suggested by multiple broad-based
measures are directionally consistent
and materially different from the rank
ordering implied by the initial
assessment rate; (2) there is sufficient
corroborating information from focused
risk measures and other market
indicators to support differences in risk
levels suggested by broad-based risk
measures; (3) information pertaining to
loss severity considerations raise
prospects that an institution’s resolution
costs, when scaled by assets, would be
materially higher or lower than those of
other large institutions; or (4) additional
qualitative information from the
supervisory process or other feedback
provided by the primary federal
regulator or state banking supervisor is
consistent with differences in risk
suggested by the combination of broad-
based risk measures, focused risk
measures, and other market indicators.
The FDIC believes that its insurance
pricing determinations should take into
account risk information that relates
both to the likelihood of failure and to
the level of insurance fund losses (loss
severity) that might reasonably be
expected if an institution were to fail.
Developing risk measures related to loss
severity is especially important since
the inputs to the initial assessment rate
(supervisory and agency ratings) relate
primarily to the likelihood of failure.
VerDate Aug<31>2005 15:09 Feb 20, 2007 Jkt 211001 PO 00000 Frm 00025 Fmt 4703 Sfmt 4703 E:\FR\FM\21FEN1.SGM 21FEN1
rmajette on PROD1PC67 with NOTICES
3 The institution will also be given advance notice
when the FDIC determines to eliminate any
downward adjustment to an institution’s
assessment rate.
4 Comparisons of risk measures will generally
treat as indicative of low risk that portion of the risk
rankings falling within the lowest X percentage of
assessment rate rankings, with X being the
proportion of large Risk Category I institutions
assigned the minimum assessment rate. For
example, as of June 30, 2006, 46 percent of large
Risk Category I institutions would have been
assigned a minimum assessment rate. Therefore, as
of June 30, 2006, risk rankings from the 1st to the
46th percentile for any given risk measure would
generally have been considered suggestive of low
risk.
III. Overview of the Adjustment Process
The FDIC adjustment process will
include the following steps. In the first
step, an initial risk ranking will be
developed for all large institutions
based on their initial assessment rates as
derived from agency and supervisory
ratings, or the use of supervisory ratings
and financial ratios when agency ratings
are not available, in accordance with the
final rule.
In the second step, the risk rankings
associated with these initial assessment
rates will be compared with risk
rankings associated with broad-based
and focused risk measures as well as the
risk rankings associated with other
market indicators such as spreads on
subordinated debt. Broad-based risk
measures include each of the inputs to
the initial assessment rate considered
separately, other summary risk
measures such as alternative publicly
available debt issuer ratings, and loss
severity estimates, which are not always
sufficiently reflected in the inputs to the
initial assessment rate or in other debt
issuer ratings. Focused risk measures
include financial performance
measures, measures of an institution’s
ability to withstand financial adversity,
and factors relating to the severity of
losses to the insurance fund in the event
of failure.
In the third step, the FDIC will
perform further analysis and review in
those cases where the risk rankings from
multiple measures (such as broad-based
risk measures, focused risk measures,
and other market indicators) appear to
be inconsistent with the risk rankings
associated with the initial assessment
rate. This step will include consultation
with an institution’s primary federal
regulator and state banking supervisor.
Although any additional information or
feedback provided by the primary
federal regulator or state banking
supervisor will be considered in the
FDIC’s ultimate decision concerning
such adjustments, participation by the
primary federal regulator or state
banking supervisory in this consultation
process should not be construed as
concurrence with the FDIC’s deposit
insurance pricing decisions.
In the final step, the FDIC will notify
an institution when it proposes to make
an upward adjustment to the
institution’s assessment rate. As
indicated in the final rule, notifications
involving an upward adjustment in an
institution’s initial assessment rate will
be made in advance of implementing
such an adjustment so that the
institution has sufficient opportunity to
respond to or address the FDIC’s
concerns.3 Adjustments will be
implemented after considering
institution responses to this notification
along with any subsequent changes
either to the inputs to the initial
assessment rate or any other risk factor
that relates to the decision to make an
assessment rate adjustment.
The following paragraphs elaborate
further on the adjustment process just
described. These paragraphs introduce
proposed guidelines relating to the
analytical process, show an example of
how these guidelines will be applied,
and present proposed guidelines
intended to serve as controls over the
assessment rate adjustment process.
IV. Proposed Guidelines for the
Analytical Process and Illustrative
Examples
To ensure consistency, fairness, and
transparency, the FDIC proposes that
the following guidelines be applied to
its analytical process for determining
how to make adjustments to the
assessment rates of large Risk Category
I institutions when appropriate. An
example of how the guidelines would be
applied in a sample institution follows
the enumeration of the principal
analytical guidelines.
Principal Analytical Guidelines
Guideline 1: The analytical process
will focus on identifying inconsistencies
between the rank orderings of risk
suggested by initial assessment rates
and the rank orderings of risk indicated
by other risk measures. This process will
consider all available information
relating to the likelihood of failure and
loss severity in the event of failure.
The purpose of the analytical process
is to identify those institutions whose
risk measures appear to be significantly
different than other institutions with
similarly assigned initial assessment
rates. This analytical process involves
the identification of possible
inconsistencies between the rank
orderings of risk associated with the
initial assessment rate and the risk
rankings associated with other risk
measures. The intent of this analysis is
not to override supervisory evaluations
or to question the validity of long-term
debt issuer ratings or financial ratios
when applicable. Rather, the analysis is
meant to ensure that the assessment
rates, produced from the combination of
these information sources, result in a
reasonable rank ordering of risk that is
consistent with risk profiles of large
Risk Category I institutions.
The starting point in the analytical
process will be the comparison of risk
rankings associated with the initial
assessment rate to risk rankings
associated with a number of broad-
based risk measures. This analysis will
be supplemented with additional
comparisons of risk rankings associated
with focused risk measures and other
market indicators to the risk rankings
associated with an institution’s initial
assessment rate.4
The FDIC will consider adjusting an
institution’s initial assessment rate
when there is sufficient corroborating
information from a combination of
broad-based risk measures, focused risk
measures, and other market indicators
to support an adjustment. The
likelihood of an adjustment will
increase when: (1) The rank orderings of
risk suggested by multiple broad-based
measures are directionally consistent
and materially different from the rank
ordering implied by the initial
assessment rate; (2) there is sufficient
corroborating information from focused
risk measures and other market
indicators to support differences in risk
levels suggested by broad-based risk
measures; (3) information pertaining to
loss severity considerations raise
prospects that an institution’s resolution
costs, when scaled by assets, would be
materially higher or lower than those of
other large institutions; or (4) additional
qualitative information from the
supervisory process or other feedback
provided by the primary federal
regulator or state banking supervisor is
consistent with differences in risk
suggested by the combination of broad-
based risk measures, focused risk
measures, and other market indicators.
The FDIC believes that its insurance
pricing determinations should take into
account risk information that relates
both to the likelihood of failure and to
the level of insurance fund losses (loss
severity) that might reasonably be
expected if an institution were to fail.
Developing risk measures related to loss
severity is especially important since
the inputs to the initial assessment rate
(supervisory and agency ratings) relate
primarily to the likelihood of failure.
VerDate Aug<31>2005 15:09 Feb 20, 2007 Jkt 211001 PO 00000 Frm 00025 Fmt 4703 Sfmt 4703 E:\FR\FM\21FEN1.SGM 21FEN1
rmajette on PROD1PC67 with NOTICES