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"FDIC Proposes Changes to Risk-Based Assessment System"
Robert L. Carothers, Jr.
Jones Walker Banking & Financial Services E*Lert
April 21, 2010

On April 13, 2010 the FDIC Board of Directors adopted a Notice of Proposed Rulemaking which would alter the risk-based assessment system for all large depository institutions (those having total assets of $10 billion or more for at least four consecutive quarters).  The proposal would eliminate the current use of risk categories and long-term debt issuer ratings for large institutions, and would instead use a scorecard approach.  Although the methodology used in the scorecard would be the same for all large depository institutions, two separate scorecards would be used: (i) one for most large institutions, and (ii) another for large institutions that are structurally and operationally complex, or that pose unique challenges and risks in the case of failure, generally including any institution having total assets greater than $50 billion that is owned, directly or indirectly, by a parent having total assets of more than $500 billion.

The scorecard that would be used for most large institutions would produce two scores: a “performance score” and a “loss severity score,” each on a scale ranging from 0 to 100. The performance score would be a weighted average of three components: (i) the institution’s weighted average CAMELS rating; (ii) a composite measure of its ability to withstand asset-related stress measures; and (iii) a composite measure of its ability to withstand funding-related stress measures.  Both of the composite measures would be derived from specific financial ratios and other quantitative criteria.  Each component would receive a score, and they would then be weighted and summed to arrive at the performance score.

The loss severity score would include two components: (i) the ratio of possible losses to the FDIC, in the event of the institution’s failure, to its total domestic deposits, averaged over three quarters; and (ii) the ratio of its secured liabilities to its total domestic deposits.  Each component would receive a score, and they would then be weighted and summed to arrive at the loss severity score.

In calculating the scores, the FDIC would have discretion to take additional information into account and to make limited adjustments to the performance score and the loss severity score.  The final scores then would be used to calculate the institution’s initial base assessment rate.  The initial base assessment rate then would be subject to adjustment as a result of the existing unsecured-debt adjustment, secured-liability adjustment and brokered-deposit adjustment.

The proposal would also alter the assessment rates applicable to all insured depository institutions, in order to ensure that the revenue collected under the new assessment system would approximately equal that collected under the current assessment system, and to ensure that the lowest rate applicable to small and large institutions would be the same.

Comments on the NPR are due 60 days following publication of the NPR in the Federal Register.

For more information, please contact Robert L. Carothers, Jr.