Deposit Insurance Assessment System: FDIC Proposes Changes to the Ratios and Ratio Thresholds to Align the Deposit Insurance Assessment System with U.S. Basel III Capital RulesSullivan & Cromwell LLP - July 31, 2014
The Federal Deposit Insurance Corporation (“FDIC”) recently published for comment a proposed rule containing modifications to the deposit insurance assessment system (the “Proposed Rule”). The Proposed Rule would amend the FDIC’s 2011 final rule adopting a new methodology for determining insurance assessment rates for large and highly complex institutions (the “Assessments Final Rule”)— the so-called scorecard method that is currently used to calculate assessment rates for these institutions. The FDIC indicates that the Proposed Rule is meant to bring the deposit insurance assessment system for all insured depository institutions (“IDIs”)—including advanced approaches banking organizations—more in line with the standardized approach under the new U.S. Basel III-based revised capital rules (the “U.S. Basel III Capital Rules”), which were adopted by the Federal banking agencies.
Most notably, the Proposed Rule would:
- eliminate the option for highly complex institutions to measure counterparty exposure associated with derivative transactions using an internal model method (“IMM”) for deposit insurance assessment purposes. Instead, given the FDIC’s general skepticism concerning the use of models, starting in the first quarter of 2015, all institutions, including those that currently use or are permitted to use the IMM, would be required to calculate exposure as the credit equivalent amount under the standardized approach of the U.S. Basel III Capital Rules, but without the ability to recognize the benefit of collateral, as would be permitted under the standardized approach;
- reserve the right for the FDIC to recalibrate the conversion of the counterparty exposure measures to scores without further notice-and-comment on an ongoing basis;
- include central counterparties in the counterparty exposure calculation for highly complex institutions; and
- adjust the assessment base deduction for custodial banks to conform to the asset risk weights in the U.S. Basel III Capital Rules, which would have the effect of (i) excluding securitization exposures from the deduction and (ii) including in the deduction 50% of transactions that are cleared through qualifying central counterparties (such transactions are assigned a 2% or 4% risk weight under the U.S. Basel III Capital Rules).
Comments on the Proposed Rule are due on or before September 22, 2014.