[Federal Register Volume 85, Number 235 (Monday, December 7, 2020)]
[Proposed Rules]
[Pages 78794-78805]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25830]
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Proposed Rules
Federal Register
________________________________________________________________________
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.
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Federal Register / Vol. 85, No. 235 / Monday, December 7, 2020 /
Proposed Rules
[[Page 78794]]
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.
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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. 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.
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\
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\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).
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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 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\
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\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).
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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. The
proposal also would adjust the calculation of the loss severity measure
to remove the double counting of a
[[Page 78795]]
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\
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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).
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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\
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\8\ See 12 CFR 327.3(b)(1).
\9\ See 12 CFR 327.5.
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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. Both scorecards use quantitative financial measures that
are useful in predicting a large or highly complex bank's long-term
performance.\12\
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\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.
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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.
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\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.
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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.
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\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.
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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
[[Page 78796]]
(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.
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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).
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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\
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\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).
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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. 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\
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\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).
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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. 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
[[Page 78797]]
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\
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\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. 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 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).
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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. 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.
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\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.
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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.
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. 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
[[Page 78798]]
(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\
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\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).
\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).
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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. 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\
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\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.
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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).. 11,000............................. 11,200.
Applicable Portion of the CECL ................................... 200.
Transitional Amount.
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 deferred 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.
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\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).
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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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\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.
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[[Page 78799]]
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.
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.
---------------------------------------------------------------------------
\32\ See 12 CFR 327.16(b)(ii)(A)(2)(iv).
---------------------------------------------------------------------------
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\
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\33\ See Appendix A to subpart A of 23 CFR 327.
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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. 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\
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\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.
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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. 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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\36\ See 84 FR 4227 and 85 FR 17726.
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[[Page 78800]]
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.
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.
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. 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.
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. 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
[[Page 78801]]
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.
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. 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. 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. 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. 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
[[Page 78802]]
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.
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\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.
\39\ 5 U.S.C. 601.
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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.
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\40\ FDIC Call Report data, June 30, 2020.
---------------------------------------------------------------------------
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.
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\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).
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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.
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\42\ 4 U.S.C. 3501-3521.
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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:
---------------------------------------------------------------------------
\43\ 12 U.S.C. 4809.
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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
0
1. The authority citation for part 327 is revised to read as follows:
Authority: 12 U.S.C. 1813, 1815, 1817-19, 1821.
0
2. In Appendix A to Subpart A, amend the table under section heading,
``VI. Description of Scorecard Measures,'' by:
0
a. Redesignating footnotes 2 as 3, 3 as 4, 4 as 5, and 5 as 7;
0
b. Adding a new footnote 2 after various measures described in the
table; and
0
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 The concentration score for large institutions is the higher of the
depository institutions (excluding following two scores:
Highly Complex Institutions).
[[Page 78803]]
(1) Higher-Risk Assets/Tier 1 Sum of construction and land development (C&D) loans (funded and
Capital and Reserves \2\. 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 The measure is calculated in the following steps:
Concentrations \2\.
* * * * * * *
Concentration Measure for Highly Concentration score for highly complex institutions is the highest of
Complex Institutions. the following three scores:
(1) Higher-Risk Assets/Tier 1 Sum of C&D loans (funded and unfunded), higher-risk C&I loans (funded
Capital and Reserves \2\. and unfunded), nontraditional mortgages, higher-risk consumer loans,
and higher-risk securitizations divided by Tier 1 capital and
reserves. See Appendix C for the detailed description of the measure.
(2) Top 20 Counterparty Exposure/ Sum of the 20 largest total exposure amounts to counterparties divided
Tier 1 Capital and Reserves \2\. 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 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 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
contribution.\3\
(3) Largest Counterparty Exposure/ The largest total exposure amount to one counterparty divided by Tier 1
Tier 1 Capital and Reserves \2\. capital and reserves. The total exposure amount is equal to the sum of
the institution's exposure amounts to one counterparty (or borrower)
for derivatives, SFTs, and cleared transactions, and its gross lending
exposure (including all 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 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 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
contribution.\3\
* * * * * * *
Credit Quality Measure................. The credit quality score is the higher of the following two scores:
(1) Criticized and Classified Items/ Sum of criticized and classified items divided by the sum of Tier 1
Tier 1 Capital and Reserves \2\. capital and reserves. Criticized and classified items include items an
institution or its primary federal regulator have graded ``Special
Mention'' 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 Sum of loans that are 30 days or more past due and still accruing
Capital and Reserves \2\. 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 insurance 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
securities (excludes agency mortgage-backed securities but includes
all other agency securities issued by the U.S. Treasury, U.S.
government agencies, and U.S. government-sponsored enterprises)
divided by the sum of federal funds purchased and repurchase
agreements, other borrowings (including FHLB) with a remaining
maturity of one year or less, 5 percent of insured domestic deposits,
and 10 percent of uninsured domestic and foreign deposits.\5\
Potential Losses/Total Domestic Potential losses to the DIF in the event of failure divided by total
Deposits (Loss Severity Measure) \6\. domestic deposits. Appendix D describes the calculation of the loss
severity measure in detail.
[[Page 78804]]
Market Risk Measure for Highly Complex The market risk score is a weighted average of the following three
Institutions. scores:
* * * * * * *
(2) Market Risk Capital/Tier 1 Market risk capital divided by Tier 1 capital.\7\
Capital.
* * * * * * *
----------------------------------------------------------------------------------------------------------------
\1\ The FDIC retains the flexibility, as part of the risk-based assessment system, without the necessity of
additional notice-and-comment rulemaking, 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 assessment 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.
\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 arrangement. 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. 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 December 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 investment 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.
* * * * *
0
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
* * * * *
0
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. 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.
---------------------------------------------------------------------------
* * * * *
\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.
---------------------------------------------------------------------------
* * * * *
0
5. In Appendix E to subpart A, amend Table E.2 by:
0
a. Redesignating footnote 1 after ``Credit Quality Measure'' as 2;
0
b. Adding a new footnote 1; and
[[Page 78805]]
0
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 The market risk score is a weighted average .........................
Institutions \2\. 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. 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, the Ratio of Largest Counterparty Exposure to Tier 1 Capital and Reserves, 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 capital score, the market risk
capital to Tier 1 capital score, and the level 3 trading assets to Tier 1 capital score. All of these ratios
are described in appendix A of this subpart and the method of calculating the scores is described in appendix
B of this subpart. Each score is multiplied by its respective weight, and the resulting weighted score is
summed to compute the score for the market risk measure. An overall weight of 35 percent is allocated between
the scores for the credit quality measure and market risk measure. The allocation depends on the ratio of
average trading assets to the sum of average securities, loans and trading assets (trading asset ratio) as
follows: (1) Weight for credit quality score = 35 percent * (1--trading asset ratio); and, (2) Weight for
market risk score = 35 percent * trading asset ratio. 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 institution'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 balances 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 Leverage 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 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. 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.
* * * * *
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