The multipliers and uniform amount were derived in such a way to ensure that, as of June 30, 2006, 45 percent of small Risk Category I institutions (other than institutions less than 5 years old) would have been charged the minimum rate and approximately 5 percent would have been charged the maximum rate. While the FDIC has not changed the multipliers and uniform amount since adoption of the 2006 assessments rule, the percentages of institutions that have been charged the minimum and maximum rates have changed over time as institutions' CAMELS component ratings and financial ratios have changed. Based upon June 30, 2008 data, approximately 28 percent of small Risk Category I institutions (other than institutions less than 5 years old) were charged the minimum rate and approximately 19 percent were charged the maximum rate.

The debt issuer rating method determines the assessment rate for large institutions that have a longterm debt issuer rating.\14\ Long term debt issuer ratings are converted to numerical values between 1 and 3 and averaged. The weighted average of an institution's CAMELS components and the average converted value of its longterm debt issuer ratings are multiplied by a common multiplier and added to a uniform amount applicable to all institutions subject to the supervisory and debt ratings method to derive the assessment rate under the base rate schedule. Again, if the rate derived is below the minimum for Risk Category I, the institution will pay the minimum assessment rate for the risk category; if the rate derived is above the maximum for Risk Category I, then the institution will pay the maximum rate for the risk category.
\14\ The final rule defined a large institution as an
institution (other than an insured branch of a foreign bank) that has $10 billion or more in assets as of December 31, 2006 (although an institution with at least $5 billion in assets may also request treatment as a large institution). If, after December 31, 2006, an institution classified as small reports assets of $10 billion or more in its reports of condition for four consecutive quarters, the FDIC will reclassify the institution as large beginning the following quarter. If, after December 31, 2006, an institution classified as large reports assets of less than $10 billion in its reports of condition for four consecutive quarters, the FDIC will reclassify the institution as small beginning the following quarter. 12 CFR 327.8(g) and (h) and 327.9(d)(6).

The multipliers and uniform amount were derived in such a way to ensure that, as of June 30, 2006, about 45 percent of Risk Category I large institutions (other than institutions less than 5 years old) would have been charged the minimum rate and approximately 5 percent would have been charged the maximum rate. These percentages have changed little from quarter to quarter thereafter even though industry conditions have changed. Based upon June 30, 2008, data, and ignoring the large bank adjustment (described below), approximately 45 percent of Risk Category I large institutions (other than institutions less than 5 years old) were charged the minimum rate and approximately 11 percent were charged the maximum rate.

Assessment rates for insured branches of foreign banks in Risk Category I are determined using ROCA components.\15\
\15\ ROCA stands for Risk Management, Operational Controls, Compliance, and Asset Quality. Like CAMELS components, ROCA component ratings range from 1 (best rating) to a 5 rating (worst rating). Risk Category 1 insured branches of foreign banks generally have a ROCA composite rating of 1 or 2 and component ratings ranging from 1 to 3.

For any Risk Category I large institution or insured branch of a foreign bank, initial assessment rate determinations may be modified up to half a basis point upon review of additional relevant information (the large bank adjustment).\16\
\16\ The FDIC has issued additional Guidelines for Large Institutions and Insured Foreign Branches in Risk Category I (the large bank guidelines) governing the large bank adjustment. 72 FR 27122 (May 14, 2007).

With certain exceptions, beginning in 2010, the 2006 assessments rule charges new institutions (those established for less than five years) in Risk Category I, regardless of size, the maximum rate applicable to Risk Category I institutions. Until then, new institutions are treated like all others, except that a well capitalized institution that has not yet received CAMELS component ratings is assessed at one basis point above the minimum rate applicable to Risk Category I institutions until it receives CAMELS component ratings.

The Need for a Restoration Plan

As part of a separate rulemaking in November 2006, the FDIC also set the DRR at 1.25 percent, effective January 1, 2007. In November 2007, the Board voted to maintain the DRR at 1.25 percent for 2008.\17\ In November 2006, the FDIC projected that the assessment rate schedule established by the 2006 assessments rule would raise the reserve ratio from 1.23 percent at the end of the second quarter of 2006 to 1.25 percent by 2009.\18\ At the time, insured institution failures were at historic lows (no insured institution had failed in almost twoanda half years prior to the rulemaking, the longest period in the FDIC's history without a failure) and industry returns on assets (ROAs) were near all time highs. The FDIC's projection assumed the continued strength of the industry. By March 2008, the condition of the industry had deteriorated, and FDIC projected higher insurance losses compared to recent years. However, even with this increase in projected failures and losses, the reserve ratio was still estimated to reach the Board's target of 1.25 percent in 2009. Therefore, the Board voted in March 2008 to maintain the existing assessment rate schedule.
\17\ 71 FR 69325 (Nov. 30, 2006) and 72 FR 65576 (Nov. 21, 2007).
\18\ Beginning in 2007, assessment rates ranged between 5 and 43 cents per $100 in assessable deposits. When setting the rate schedule, the FDIC projects future changes to the fund balance from losses, operating expenses, assessment and investment revenue, as well as the outlook for insured deposit growth. Since the final rule was issued, the Board has opted to leave rates unchanged.

Recent failures, as well as deterioration in banking and economic conditions, however, have significantly increased the fund's loss provisions, resulting in a decline in the reserve ratio. As of June 30, 2008, the reserve ratio stood at 1.01 percent, 18 basis points below the reserve ratio as of March 31, 2008. The FDIC expects a higher rate of insured institution failures in the next few years compared to recent years; thus, the reserve ratio may continue to decline. Because the reserve ratio has fallen below 1.15 percent and is expected to remain below 1.15 percent, the FDIC must establish and implement a restoration plan to restore the reserve ratio to 1.15 percent. Absent extraordinary circumstances, the reserve ratio must be restored to 1.15 percent within five years. The FDIC has adopted a restoration plan (the Restoration Plan), the critical component of which is this notice of proposed rulemaking (NPR).\19\ To fulfill
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the requirements of the Restoration Plan, the FDIC must increase the assessment rates it currently charges. Since the current rates are already 3 basis points uniformly above the base rate schedule established in the 2006 assessments rule, a new rulemaking is required. The FDIC is also proposing other changes to the assessment system, primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments.
\19\ On October 7, 2008, the FDIC established and implemented the Restoration Plan, which is being published in the Federal Register as a companion to this NPR. To determine whether the reserve ratio has returned to the statutory range within five years, the FDIC will rely on the December 31, 2013 reserve ratio, which is the first date after October 7, 2013 for which the reserve ratio will be known.

II. Overview of the Proposal

In this notice of proposed rulemaking, the FDIC proposes to improve the way the assessment system differentiates risk among insured institutions by drawing upon measures of risk that were not included when the FDIC first revised its assessment system pursuant to the Reform Act. The FDIC believes that the proposal will make the assessment system more sensitive to risk. The proposal should also make the riskbased assessment system fairer, by limiting the subsidization of riskier institutions by safer ones. In addition, the FDIC proposes to change assessment rates, including base assessment rates, to raise assessment revenue required under the Restoration Plan.

The FDIC's proposals are set out in detail in ensuing sections, but are briefly summarized here. These changes, except for the proposed rate increase for the first quarter of 2009, which is discussed below, would take effect April 1, 2009.

Risk Category I

The FDIC proposes to introduce a new financial ratio into the financial ratios method. This new ratio would capture brokered deposits (in excess of 10 percent of domestic deposits) that are used to fund rapid asset growth. In addition, the FDIC proposes to update the uniform amount and the pricing multipliers for the weighted average CAMELS rating and financial ratios.

The FDIC proposes that the assessment rate for a large institution with a longterm debt issuer rating be determined using a combination of the institution's weighted average CAMELS component rating, its longterm debt issuer ratings (converted to numbers and averaged) and the financial ratios method assessment rate, each equally weighted. The new method would be known as the large bank method.

Under the proposal, the financial ratios method or the large bank method, whichever is applicable, would determine a Risk Category I institution's initial base assessment rate. The FDIC proposes to broaden the spread between minimum and maximum initial base assessment rates in Risk Category I from the current 2 basis points to an initial range of 4 basis points and to adjust the percentage of institutions subject to these initial minimum and maximum rates.

Adjustments

Under the proposal, an institution's total base assessment rate could vary from the initial base rate as the result of possible adjustments. The FDIC proposes to increase the maximum possible Risk Category I large bank adjustment from onehalf basis point to one basis point. Any such adjustment up or down would be made before any other adjustment and would be subject to certain limits, which are described in detail below.

The FDIC proposes to lower an institution's base assessment rate based upon its ratio of longterm unsecured debt and, for small institutions, certain amounts of Tier 1 capital to domestic deposits (the unsecured debt adjustment).\20\ Any decrease in base assessment rates would be limited to two basis points.
\20\ Longterm unsecured debt includes senior unsecured and subordinated debt.

The FDIC proposes to raise an institution's base assessment rate based upon its ratio of secured liabilities to domestic deposits (the secured liability adjustment). An institution's ratio of secured liabilities to domestic deposits (if greater than 15 percent), would increase its assessment rate, but the resulting base assessment rate after any such increase could be no more than 50 percent greater than it was before the adjustment. The secured liability adjustment would be made after any large bank adjustment or unsecured debt adjustment.

An institution in Risk Category II, III or IV would be subject to the unsecured debt adjustment and secured liability adjustment. In addition, the FDIC proposes a final adjustment for brokered deposits (the brokered deposit adjustment) for institutions in these risk categories. An institution's ratio of brokered deposits to domestic deposits (if greater than 10 percent) would increase its assessment rate, but any increase would be limited to no more than 10 basis points.

Insured Branches of Foreign Banks

The FDIC proposes to make conforming changes to the pricing multipliers and uniform amount for insured branches of foreign banks in Risk Category I. The insured branch of a foreign bank's initial base assessment rate would be subject to any large bank adjustment, but not to the unsecured debt adjustment or secured liability adjustment. New Institutions

The FDIC also proposes to make conforming changes in the treatment of new insured depository institutions.\21\ For assessment periods beginning on or after January 1, 2010, any new institutions in Risk Category I would be assessed at the maximum initial base assessment rate applicable to Risk Category I institutions, as under the current rule.
\21\ Subject to exceptions, a new insured depository institution is a bank or thrift that has not been chartered for at least five years as of the last day of any quarter for which it is being assessed. 12 CFR 327.8(l)

Effective for assessment periods beginning before January 1, 2010, until a Risk Category I new institution received CAMELS component ratings, it would have an initial base assessment rate that was two basis points above the minimum initial base assessment rate applicable to Risk Category I institutions, rather than one basis point above the minimum rate, as under the current rule. All other new institutions in Risk Category I would be treated as are established institutions, except as provided in the next paragraph.

Either before or after January 1, 2010: No new institution, regardless of risk category, would be subject to the unsecured debt adjustment; any new institution, regardless of risk category, would be subject to the secured liability adjustment; and a new institution in Risk Categories II, III or IV would be subject to the brokered deposit adjustment. After January 1, 2010, no new institution in Risk Category I would be subject to the large bank adjustment.

Assessment Rates

To implement the proposed changes to riskbased assessments described above and to raise sufficient revenue to ensure that the goals of the Restoration Plan are accomplished within 5 years as required by statute, initial base assessment rates would be as set forth in Table 4 below.
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Table 4Proposed Initial Base Assessment Rates Risk category
I* II III IV Minimum Maximum Annual Rates (in basis points).................. 10 14 20 30 45 * Initial base rates that were not the minimum or maximum rate would vary between these rates.

After applying all possible adjustments, minimum and maximum total base assessment rates for each risk category would be as set out in Table 5 below.
Table 5Total Base Assessment Rates Risk category I Risk category II Risk category III Risk category IV Initial base assessment rate........ 1014...................... 20......................... 30......................... 45 Unsecured debt adjustment........... 20....................... 20....................... 20....................... 20 Secured liability adjustment........ 07........................ 010....................... 015....................... 022.5 Brokered deposit adjustment......... ........................... 010....................... 010....................... 010

Total base assessment rate...... 821.0..................... 1840.0.................... 2855.0.................... 4377.5 * All amounts for all risk categories are in basis points annually. Total base rates that were not the minimum or maximum rate would vary between these rates.

The FDIC proposes that these rates and other revisions to the assessment rules take effect for the quarter beginning April 1, 2009, and be reflected in the fund balance as of June 30, 2009, and assessments due September 30, 2009. However, at the time of the issuance of the final rule the FDIC may need to set a higher base rate schedule based on information available at that time, including any intervening institution failures and updated failure and loss projections. A higher base rate schedule may also be necessary because of changes to the proposal in the final rule, if these changes have the overall effect of changing revenue for a given rate schedule.

The proposed rule would continue to allow the FDIC Board to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice and comment rulemaking, provided that: (1) The Board could not increase or decrease rates from one quarter to the next by more than three basis points without further noticeandcomment rulemaking; and (2) cumulative increases and decreases could not be more than three basis points higher or lower than the total base rates without further noticeandcomment rulemaking.

The FDIC also proposes to raise the current rates uniformly by seven basis points for the assessment for the quarter beginning January 1, 2009, which would be reflected in the fund balance as of March 31, 2009, and assessments due June 30, 2009. Rates for the first quarter of 2009 only would be as follows:
Table 6Proposed Assessment Rates for the First Quarter of 2009 Risk category
I\*\ II III IV Minimum Maximum Annual Rates (in basis points).................. 12 14 17 35 50 \*\Rates for institutions that did not pay the minimum or maximum rate would vary between these rates. The proposed rates for the first quarter of 2009 would raise almost as much assessment revenue as under the rates proposed beginning April 1, 2009. Data and system requirements do not make it feasible to adopt the proposed changes to the riskbased assessment system discussed in previous paragraphs until the second quarter of 2009.

Technical and Other Changes

The FDIC also proposes to make technical changes and one minor non technical change to existing assessment rules. These changes, which would be effective April 1, 2009, are detailed below.
III. Risk Category I: Financial Ratios Method

Brokered Deposits and Asset Growth

The FDIC stated in the 2006 assessments rule that it: [M]ay conclude that additional or alternative financial measures, ratios or other risk factors should be used to determine riskbased assessments or that a new method of differentiating for risk should be used. In any of these events, changes would be made through noticeandcomment rulemaking.\22\

\22\ 71 FR 69,282, 69,290.

The FDIC has reached such a conclusion and proposes to add a new financial measure to the financial ratios method. This new financial measure, the adjusted brokered deposit ratio, would measure the extent to which
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brokered deposits are funding rapid asset growth. The adjusted brokered deposit ratio would affect only those established Risk Category I institutions whose total assets were more than 20 percent greater than they had been four years previously, after adjusting for mergers and acquisitions, and whose brokered deposits made up more than 10 percent of domestic deposits.^{23 24} Generally speaking, the greater an institution's asset growth and the greater its percentage of brokered deposits, the greater would be the increase in its initial base assessment rate.
\23\ Generally, an established institution is a bank or thrift that has been chartered for at least five years as of the last day of any quarter for which it is being assessed. 12 CFR 327.8(m). \24\ An institution that four years previously had filed no report of condition or had reported no assets would be treated as having no growth unless it was a participant in a merger or acquisition (either as the acquiring or acquired institution) with an institution that had reported assets four years previously.

If an institution's ratio of brokered deposits to domestic deposits were 10 percent or less or if the institution's asset growth over the previous four years were less than 20 percent, the adjusted brokered deposit ratio would be zero and would have no effect on the institution's assessment rate. If an institution's ratio of brokered deposits to domestic deposits exceeded 10 percent and its asset growth over the previous four years were more than 40 percent, the adjusted brokered deposit ratio would equal the institution's ratio of brokered deposits to domestic deposits less the 10 percent threshold. If an institution's ratio of brokered deposits to domestic deposits exceeded 10 percent but its asset growth over the previous four years were between 20 percent and 40 percent, the adjusted brokered deposit ratio would be equal to a gradually increasing fraction of the ratio of brokered deposits to domestic deposits (minus the 10 percent threshold), so that small increases in asset growth rates would lead to only small increases in assessment rates. Overall asset growth rates of 20 to 40 percent would be transformed into a fraction between 0 and 1 by multiplying an amount equal to the overall rate of growth minus 20 percent by 5 and expressing the result as a number rather than as a percentage (so that, for example, 5 times 10 percent would equal 0.500).\25\ The adjusted brokered deposit ratio would never be less than zero. Appendix A contains a detailed mathematical definition of the ratio. Table 7 gives examples of how the adjusted brokered deposit ratio would be determined.
\25\ The ratio of brokered deposits to domestic deposits and fouryear asset growth rate would remain unrounded (to the extent of computer capabilities) when calculating the adjusted brokered deposit ratio. The adjusted brokered deposit ratio itself (expressed as a percentage) would be rounded to three digits after the decimal point prior to being used to calculate the assessment rate. Table 7Adjusted Brokered Deposit Ratio A B C D E F Ratio of brokered deposits to domestic Adjusted brokered Ratio of brokered deposits minus 10 Cumulative asset Asset growth rate deposit ratio Example deposits to percent threshold growth rate over factor (Column C times domestic deposits (Column B minus 10 four years column E) percent) 1......................................... 5.0% 0.0% 5.0% .................... 0.0% 2......................................... 15.0% 5.0% 5.0% .................... 0.0% 3......................................... 5.0% 0.0% 25.0% 0.250 0.0% 4......................................... 35.0% 25.0% 30.0% 0.500 12.5% 5......................................... 25.0% 15.0% 50.0% 1.000 15.0%

In Examples 1, 2 and 3, either the institution has a ratio of brokered deposits to domestic deposits that is less than 10 percent (Column B) or its fouryear asset growth rate is less than 20 percent (Column D). Consequently, the adjusted brokered deposit ratio is zero (Column F). In Example 4, the institution has a ratio of brokered deposits to domestic deposits of 35 percent (Column B), which, after subtracting the 10 percent threshold, leaves 25 percent (Column C). Its assets are 30 percent greater than they were four years previously (Column D), so the fraction applied to obtain the adjusted brokered deposit ratio is 0.5 (Column E) (calculated as 5 [middot] (30 percent 20 percent, with the result expressed as a number rather than as a percentage)). Its adjusted brokered deposit ratio is, therefore, 12.5 percent (Column F) (which is 0.5 times 25 percent). In Example 5, the institution has a lower ratio of brokered deposits to domestic deposits (25 percent in Column B) than in Example 4 (35 percent). However, its adjusted brokered deposit ratio (15 percent in Column F) is larger than in Example 4 (12.5 percent) because its assets are more than 40 percent greater than they were four years previously (Column D). Therefore, its adjusted brokered deposit ratio is equal to its brokered deposit to domestic deposit ratio of 25 percent minus the 10 percent threshold (Column F).

The FDIC is proposing this new risk measure for a couple of reasons. A number of costly institution failures, including some recent failures, have experienced rapid asset growth before failure and have funded this growth through brokered deposits. Moreover, statistical analysis reveals a significant correlation between rapid asset growth funded by brokered deposits and the probability of an institution's being downgraded from a CAMELS composite 1 or 2 rating to a CAMELS composite 3, 4 or 5 rating within a year. A significant correlation is the standard the FDIC used when it adopted the financial ratios method in the 2006 assessments rule.

The proposed rule would adopt the definition of brokered deposit in Section 29 of the Federal Deposit Insurance Act (12 U.S.C. 1831f), which is the definition used in banks' quarterly Reports of Condition and Income (Call Reports) and thrifts' quarterly Thrift Financial Reports (TFRs). The FDIC is proposing that all brokered deposits be included in an institution's ratio of brokered deposits to domestic deposits used to determine its adjusted brokered deposit ratio, including brokered deposits that consist of balances swept into an insured institution by another institution, such as balances swept from a brokerage account. At present, it would be impossible to exclude these deposits, since institutions do not separately report them in the Call
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Report or TFR. Moreover, sweep programs may be structured so that swept balances are not brokered deposits.\26\ Nevertheless, the FDIC is particularly interested in comments on whether brokered deposits that consist of swept balances should be excluded from the ratio and, if so, how they should be excluded.
\26\ For example, a swept deposit may not be a brokered deposit if: (1) Balances are swept for the primary purposes of facilitating customers' purchase and sale of securities, rather than the placement of funds with depository institutions; (2) swept amounts do not exceed 10 percent of the brokerage's cash management account and retirement account assets; and (3) fees are paid on a per customer or account basis, rather than size of account basis, and are for administrative services, rather than for placement of deposits. Are Funds Held in ``Cash Management Accounts'' Viewed as Brokered Deposits by the FDIC? (FDIC Advisory Opinion 0502 Feb. 3, 2005).

The proposed definition of brokered deposits would also include amounts an institution receives through a network that divides large deposits and places them at more than one institution to ensure that the deposit is fully insured, even where the institution accepts these deposits only on a reciprocal basis, such that, for any deposit received, the institution places the same amount (but held by a different depositor) with another institution through the network. At present, it would again be impossible to exclude these deposits, since institutions do not separately report them in the Call Report or TFR. The FDIC is also particularly interested in comments on whether these deposits should be excluded from the ratio and, if so, how they should be excluded.

The proposed definition would exclude amounts not defined as a brokered deposit by statute. Thus, many high cost deposits would be excluded from the definition, potentially including those received through listing services or the Internet. At present, it would be impossible to include these deposits, since institutions do not separately report them in the Call Report or TFR. Nevertheless, the FDIC is particularly interested in comments on whether these deposits should be included in the definition of brokered deposits for purposes of the adjusted brokered deposit ratio and, if so, how they should be included.

Pricing Multipliers and the Uniform Amount

The FDIC also proposes to recalculate the uniform amount and the pricing multipliers for the weighted average CAMELS component rating and financial ratios. The existing uniform amount and pricing multipliers were derived from a statistical estimate of the probability that an institution will be downgraded to CAMELS 3, 4 or 5 at its next examination using data from the end of the years 1984 to 2004.\27\ These probabilities were then converted to pricing multipliers for each risk measure. The proposed new pricing multipliers were derived using essentially the same statistical techniques, but based upon data from the end of the years 1988 to 2006.\28\ The proposed new pricing multipliers are set out in Table 8 below.
\27\ Data on downgrades to CAMELS 3, 4 or 5 is from the years 1985 to 2005. The ``S'' component rating was first assigned in 1997. Because the statistical analysis relies on data from before 1997, the ``S'' component rating was excluded from the analysis.
\28\ For the adjusted brokered deposit ratio, assets at the end of each year are compared to assets at the end of the year four years earlier, so assets at the end of 1988, for example, are compared to assets at the end of 1984.
Table 8Proposed New Pricing Multipliers
Pricing Risk measures* multipliers** Tier 1 Leverage Ratio.................................... (0.056) Loans Past Due 3089 Days/Gross Assets.................. 0.576 Nonperforming Assets/Gross Assets........................ 1.073 Net Loan ChargeOffs/Gross Assets........................ 1.213 Net Income before Taxes/RiskWeighted Assets............. (0.762) Adjusted Brokered Deposit Ratio.......................... 0.055 Weighted Average CAMELS Component Rating................. 1.088 * Ratios are expressed as percentages.

** Multipliers are rounded to three decimal places.

To determine an institution's initial assessment rate under the base assessment rate schedule, each of these risk measures (that is, each institution's financial measures and weighted average CAMELS component rating) would continue to be multiplied by the corresponding pricing multipliers. The sum of these products would be added to (or subtracted from) a new uniform amount, 9.872.\29\ The new uniform amount is also derived from the same statistical analysis.\30\ As at present, no initial base assessment rate within Risk Category I would be less than the minimum initial base assessment rate applicable to the category or higher than the initial base maximum assessment rate applicable to the category. The proposed rule would set the initial minimum base assessment rate for Risk Category I at 10 basis points and the maximum initial base assessment rate for Risk Category I at 14 basis points.
\29\ Appendix A provides the derivation of the pricing multipliers and the uniform amount to be added to compute an assessment rate. The rate derived will be an annual rate, but will be determined every quarter.
\30\ The uniform amount would be the same for all institutions in Risk Category I (other than large institutions that have long term debt issuer ratings, insured branches of foreign banks and, beginning in 2010, new institutions).

To compute the values of the uniform amount and pricing multipliers shown above, the FDIC chose cutoff values for the predicted probabilities of downgrade such that, using June 30, 2008 Call Report and TFR data: (1) 25 percent of small institutions in Risk Category I (other than institutions less than 5 years old) would have been charged the minimum initial assessment rate; and (2) 15 percent of small institutions in Risk Category I (other than institutions less than 5 years old) would have been charged the maximum initial assessment rate.\31\ These cutoff values would be used in future periods, which could lead to different percentages of institutions being charged the minimum and maximum rates.
\31\ The cutoff value for the minimum assessment rate is a predicted probability of downgrade of approximately 2 percent. The cutoff value for the maximum assessment rate is approximately 15 percent.

In comparison, under the current system: (1) Approximately 28 percent of small institutions in Risk Category I (other than institutions less than 5 years old) were charged the existing minimum assessment rate; and (2) approximately 19 percent of small institutions in Risk Category I (other than institutions less than 5 years old) were charged the existing maximum assessment rate based on June 30, 2008 data.

Table 9 gives initial base assessment rates for three institutions with varying characteristics, assuming the proposed new pricing multipliers given above, using initial base assessment rates for institutions in Risk Category I of 10 basis points to 14 basis points.\32\
\32\ These are the initial base rates for Risk Category I proposed below.
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Table 9Initial Base Assessment Rates for Three Institutions * Institution 1 Institution 2 Institution 3 Pricing Contribution Contribution Contribution multiplier Risk to Risk to Risk to measure assessment measure assessment measure assessment value rate value rate value rate A B C D E F G H Uniform Amount............................................ 9.872 ........... 9.872 ........... 9.872 ........... 9.872 Tier 1 Leverage Ratio (%)................................. (0.056) 9.590 (0.537) 8.570 (0.480) 7.500 (0.420) Loans Past Due 3089 Days/Gross Assets (%)................ 0.576 0.400 0.230 0.600 0.345 1.000 0.576 Nonperforming Loans/Gross Assets (%)...................... 1.073 0.200 0.215 0.400 0.429 1.500 1.610 Net Loan ChargeOffs/Gross Assets(%)...................... 1.213 0.147 0.178 0.079 0.096 0.300 0.364 Net Income Before Taxes/RiskWeighted Assets (%).......... (0.762) 2.500 (1.905) 1.951 (1.487) 0.518 (0.395) Adjusted Brokered Deposit Ratio (%)....................... 0.055 0.000 0.000 12.827 0.705 24.355 1.340 Weighted Average CAMELS Component Ratings................. 1.088 1.200 1.306 1.450 1.578 2.100 2.285 Sum of contributions...................................... ........... ........... 9.36 ........... 11.06 ........... 15.23 Initial Base Assessment Rate.............................. ........... ........... 10.00 ........... 11.06 ........... 14.00 * Figures may not multiply or add to totals due to rounding.\33\

The initial base assessment rate for an institution in the table is calculated by multiplying the pricing multipliers (Column B) by the risk measure values (Column C, E or G) to produce each measure's contribution to the assessment rate. The sum of the products (Column D, F or H) plus the uniform amount (the first item in Column D, F and H) yields the initial base assessment rate. For Institution 1 in the table, this sum actually equals 9.36 basis points, but the table reflects the proposed initial base minimum assessment rate of 10 basis points. For Institution 3 in the table, the sum actually equals 15.23 basis points, but the table reflects the proposed initial base maximum assessment rate of 14 basis points.
\33\ Under the proposed rule, pricing multipliers, the uniform amount, and financial ratios would continue to be rounded to three digits after the decimal point. Resulting assessment rates would be rounded to the nearest onehundredth (1/100th) of a basis point.

Under the proposed rule, the FDIC would continue to have the flexibility to update the pricing multipliers and the uniform amount annually, without further noticeandcomment rulemaking. In particular, the FDIC would be able to add data from each new year to its analysis and could, from time to time, exclude some earlier years from its analysis. Because the analysis would continue to use many earlier years' data as well, pricing multiplier changes from year to year should usually be relatively small.

On the other hand, as a result of the annual review and analysis, the FDIC may conclude, as it has in the proposed rule, that additional or alternative financial measures, ratios or other risk factors should be used to determine riskbased assessments or that a new method of differentiating for risk should be used. In any of these events, the FDIC would again make changes through noticeandcomment rulemaking.

Financial measures for any given quarter would continue to be calculated from the report of condition filed by each institution as of the last day of the quarter.\34\ CAMELS component rating changes would continue to be effective as of the date that the rating change is transmitted to the institution for purposes of determining assessment rates for all institutions in Risk Category I.\35\
\34\ Reports of condition include Reports of Income and Condition and Thrift Financial Reports.
\35\ Pursuant to existing supervisory practice, the FDIC does not assign a different component rating from that assigned by an institution's primary federal regulator, even if the FDIC disagrees with a CAMELS component rating assigned by an institution's primary federal regulator, unless: (1) the disagreement over the component rating also involves a disagreement over a CAMELS composite rating; and (2) the disagreement over the CAMELS composite rating is not a disagreement over whether the CAMELS composite rating should be a 1 or a 2. The FDIC has no plans to alter this practice.

IV. Risk Category I: Large Bank Method

For large Risk Category I institutions now subject to the debt issuer rating method, the FDIC proposes to derive assessment rates from the financial ratios method as well as longterm debt issuer ratings and CAMELS component ratings. The new method would be known as the large bank method. The rate using the financial ratios method would first be converted from the range of initial base rates (10 to 14 basis points) to a scale from 1 to 3 (financial ratios score).\36\ The financial ratios score would be given a 33\1/3\ percent weight in determining the large bank method assessment rate, as would both the weighted average CAMELS component rating and debtagency ratings. \36\ The assessment rate computed using the financial ratios method would be converted to a financial ratios score by first subtracting 8 from the financial ratios method assessment rate and then multiplying the result by onehalf. For example, if an institution had an initial base assessment rate of 11, 8 would be subtracted from 11 and the result would be multiplied by onehalf to produce a financial ratios score of 1.5.

The weights of the CAMELS components would remain the same as in the current rule. The values assigned to the debt issuer ratings would also remain the same. The weighted CAMELS components and debt issuer ratings would continue to be converted to a scale from 1 to 3, as they are currently.

The initial base assessment rate under the large bank method would be derived as follows: (1) An assessment rate computed using the financial ratios method would be converted to a financial ratios score; (2) the weighted average CAMELS rating, converted longterm debt issuer ratings, and the financial ratios score would each be multiplied by a pricing multiplier and the products summed; and (3) a uniform amount would be added to the result. The resulting initial base assessment rate would be subject to a minimum and a maximum assessment rate. The pricing multiplier for the weighted average CAMELS ratings, converted longterm debt issuer rating and financial ratios score would be 1.764, [[Page 61568]]
and the uniform amount would be 1.651.\37\
\37\ Appendix 1 provides the derivation of the pricing multipliers and the uniform amount.

In recent periods, assessment rates for some large institutions have not responded in a timely manner to rapid changes in these institutions' financial conditions. Based on June 30, 2008 data and ignoring large bank adjustments, under the current system: (1) 45 percent of large institutions in Risk Category I (other than institutions less than 5 years old) would have been charged the existing minimum assessment rate, compared with 28 percent of small institutions; and (2) 11 percent of large institutions in Risk Category I (other than institutions less than 5 years old) would have been charged the existing maximum assessment rate, compared with 19 percent of small institutions. The FDIC's proposed values for pricing multipliers and the uniform amount are such that, using June 30, 2008 data, the percentages of large institutions in Risk Category I (other than new institutions less than 5 years old) that would have been charged the minimum and maximum initial base assessment rates would be the same as the percentages of small institutions that would have been charged these rates (25 percent at the minimum rate and 15 percent at the maximum rate).^{38 39} These cutoff values would be used in future periods, which could lead to different percentages of institutions being charged the minimum and maximum rates.
\38\ The cutoff value for the minimum assessment rate is an average score of approximately 1.578. The cutoff value for the maximum assessment rate is approximately 2.334.
\39\ A ``new'' institution, as defined in 12 CFR 327.8(l) is generally one that is less than 5 years old, but there are several exceptions, including, for example, certain otherwise new
institutions in certain holding company structures. 12 CFR 327.9(d)(7). The calculation of percentages of small institutions, however, was determined strictly by excluding institutions less than 5 years old, rather than by using the definition of a ``new'' institution and its regulatory exceptions, since determination of whether an institution meets an exception to the definition of ``new'' requires a casebycase investigation.

Large institutions that lack a longterm debt issuer rating are currently assessed using the financial ratios method by itself. This will continue under the proposed rule.

Under the proposed rule, the initial base assessment rate for an institution with a weighted average CAMELS converted value of 1.70, a debt issuer ratings converted value of 1.65 and a financial ratios method assessment rate of 11.50 basis points would be computed as follows:

The FDIC anticipates that incorporating the financial ratios score into the large bank method assessment rate would result in a more accurate distribution of initial assessment rates and in timelier assessment rate responses to changing risk profiles, while retaining the market and supervisory perspectives that debt and CAMELS ratings provide. A more accurate distribution of initial assessment rates should require fewer large bank adjustments to rates based upon reviews of additional relevant information.\40\
\40\ The FDIC has issued additional Guidelines for Large Institutions and Insured Foreign Branches in Risk Category I (the large bank guidelines) governing these large bank adjustments. 72 FR 27122 (May 14, 2007).
V. Adjustment for Large Institutions and Insured Branches of Foreign Banks in Risk Category I

Under current rules, within Risk Category I, large institutions and insured branches of foreign banks are subject to an assessment rate adjustment (the large bank adjustment). In determining whether to make such an adjustment for a large institution or an insured branch of a foreign bank, the FDIC may consider such information as financial performance and condition information, other market or supervisory information, potential loss severity, and stress considerations. Any large bank adjustment is limited to a change in assessment rate of up to 0.5 basis points higher or lower than the rate determined using the supervisory ratings and financial ratios method, the supervisory and debt ratings method, or the weighted average ROCA component rating method, whichever is applicable. Adjustments are meant to preserve consistency in the orderings of risk indicated by assessment rates, to ensure fairness among all large institutions, and to ensure that assessment rates take into account all available information that is relevant to the FDIC's riskbased assessment decision.

The FDIC proposes to increase the maximum possible large bank adjustment to one basis point and to make the adjustment to an institution's base assessment rate before any other adjustments are made. The adjustment could not: (1) Decrease any rate so that the resulting rate would be less than the minimum initial base assessment rate; or (2) increase any rate above the maximum initial base assessment rate.

The FDIC makes this proposal for two primary reasons. First, at present, the difference between the minimum and maximum base assessment rates in Risk Category I is two basis points. The maximum onehalf basis point large bank adjustment represents 25 percent of the difference between the minimum and maximum rates. While an adjustment of this size is generally sufficient to preserve consistency in the orderings of risk indicated by assessment rates and to ensure fairness, there have been circumstances where more than a half a basis point adjustment would have been warranted. The difference between the minimum and maximum base assessment rates would increase from two basis points under the current system to four basis points under the proposal. A half basis point large bank adjustment would represent only 12.5 percent of the difference between the minimum and maximum rates and would not be sufficient to preserve consistency in the orderings of risk indicated by assessment rates or to ensure fairness. The proposed increase in the maximum possible large bank adjustment would continue to represent 25 percent of the difference between the minimum and maximum rates.

The FDIC expects that, under the proposed rule, large bank adjustments would be made infrequently and for a limited number of institutions.\41\ The FDIC's view is that the use of supervisory ratings, financial ratios and agency ratings (when available) would sufficiently reflect the risk profile and rank orderings of risk in large Risk Category I institutions in most (but not all) cases. \41\ In the six quarters since the 2006 assessment rule went into effect, the total number of adjustments in any one quarter has ranged from 2 to 13. For the second quarter of 2008, the FDIC continued or implemented assessment rate adjustments for 13 large Risk Category I institutions, 12 to increase an institution's assessment rate, and 1 to decrease an institution's assessment rate. Additionally, the FDIC sent four institutions advance notification of a potential upward adjustment in their assessment rate.

The FDIC expects to revise its large bank guidelines. Until then, the guidelines would be applied taking into account the changes resulting from this rulemaking.
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VI. Adjustment for Unsecured Debt for all Risk Categories

The FDIC proposes to lower an institution's initial base assessment rate (after making any large bank adjustment) using its ratio of long term unsecured debt (and, for small institutions, certain amounts of Tier 1 capital) to domestic deposits.\42\ Any decrease in base assessment rates as a result of this unsecured debt adjustment would be limited to two basis points.
\42\ For this purpose, an institution would be ``small'' if it met the definition of a small institution in 12 CFR 327.8(g) generally, an institution with less than $10 billion in assets except that it would not include an institution that would otherwise meet the definition for which the FDIC had granted a request to be treated as a large institution pursuant to 12 CFR 327.9(d)(6).

For a large institution, the unsecured debt adjustment would be determined by multiplying the institution's longterm unsecured debt as a percentage of domestic deposits by 20 basis points. For example, a large institution with a longterm unsecured debt to domestic deposits ratio of 3.0 percent would see its initial base assessment rate reduced by 0.60 basis points (calculated as 20 basis points [middot] 0.03). An institution with a longterm unsecured debt ratio to domestic deposits of 11.0 percent would have its assessment rate reduced by two basis points, since the maximum possible reduction would be two basis points. (20 basis points [middot] 0.11 = 2.20 basis points, which exceeds the maximum possible reduction.)

For a small institution, the unsecured debt adjustment would factor in a certain amount of Tier 1 capital (qualified Tier 1 capital) in addition to longterm unsecured debt. The amount of qualified T

FOR FURTHER INFORMATION CONTACT

Munsell W. St. Clair, Chief, Banking and Regulatory Policy Section, Division of Insurance and Research, (202) 8988967; and Christopher Bellotto, Counsel, Legal Division, (202) 8983801.