Proposed Rule2022-15763
Assessments, Amendments To Incorporate Troubled Debt Restructuring Accounting Standards Update
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Published
July 27, 2022
Issuing agencies
Federal Deposit Insurance Corporation
Abstract
The Federal Deposit Insurance Corporation seeks comment on a proposed rule that would incorporate updated accounting standards in the risk-based deposit insurance assessment system applicable to all large insured depository institutions (IDIs), including highly complex IDIs. The FDIC calculates deposit insurance assessment rates for large and highly complex IDIs based on supervisory ratings and financial measures, including the underperforming assets ratio and the higher- risk assets ratio, both of which are determined, in part, using restructured loans or troubled debt restructurings (TDRs). The FDIC is proposing to include modifications to borrowers experiencing financial difficulty, an accounting term recently introduced by the Financial Accounting Standards Board (FASB) to replace TDRs, in the underperforming assets ratio and higher-risk assets ratio for purposes of deposit insurance assessments.
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<title>Federal Register, Volume 87 Issue 143 (Wednesday, July 27, 2022)</title>
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[Federal Register Volume 87, Number 143 (Wednesday, July 27, 2022)]
[Proposed Rules]
[Pages 45023-45029]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-15763]
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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. 87, No. 143 / Wednesday, July 27, 2022 /
Proposed Rules
[[Page 45023]]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 327
RIN 3064-AF85
Assessments, Amendments To Incorporate Troubled Debt
Restructuring Accounting Standards Update
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Federal Deposit Insurance Corporation seeks comment on a
proposed rule that would incorporate updated accounting standards in
the risk-based deposit insurance assessment system applicable to all
large insured depository institutions (IDIs), including highly complex
IDIs. The FDIC calculates deposit insurance assessment rates for large
and highly complex IDIs based on supervisory ratings and financial
measures, including the underperforming assets ratio and the higher-
risk assets ratio, both of which are determined, in part, using
restructured loans or troubled debt restructurings (TDRs). The FDIC is
proposing to include modifications to borrowers experiencing financial
difficulty, an accounting term recently introduced by the Financial
Accounting Standards Board (FASB) to replace TDRs, in the
underperforming assets ratio and higher-risk assets ratio for purposes
of deposit insurance assessments.
DATES: Comments must be received no later than August 26, 2022.
ADDRESSES: You may submit comments on the notice of proposed rulemaking
using any of the following methods:
<bullet> Agency Website: <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/">https://www.fdic.gov/resources/regulations/federal-register-publications/</a>. Follow the instructions for
submitting comments on the agency website.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#1d7e7270707873696e5d7b79747e337a726b"><span class="__cf_email__" data-cfemail="c7a4a8aaaaa2a9b3b487a1a3aea4e9a0a8b1">[email protected]</span></a>. Include RIN 3064-AF85 on the
subject line of the message.
<bullet> Mail: James P. Sheesley, Assistant Executive Secretary,
Attention: Comments--RIN 3064-AF85, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429.
<bullet> Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street NW building (located on F
Street NW) on business days between 7 a.m. and 5 p.m.
<bullet> Public Inspection: Comments received, including any
personal information provided, may be posted without change to <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/">https://www.fdic.gov/resources/regulations/federal-register-publications/</a>.
Commenters should submit only information that the commenter wishes to
make available publicly. The FDIC may review, redact, or refrain from
posting all or any portion of any comment that it may deem to be
inappropriate for publication, such as irrelevant or obscene material.
The FDIC may post only a single representative example of identical or
substantially identical comments, and in such cases will generally
identify the number of identical or substantially identical comments
represented by the posted example. All comments that have been
redacted, as well as those that have not been posted, that contain
comments on the merits of this document will be retained in the public
comment file and will be considered as required under all applicable
laws. All comments may be accessible under the Freedom of Information
Act.
FOR FURTHER INFORMATION CONTACT: Scott Ciardi, Chief, Large Bank
Pricing, 202-898-7079, <a href="/cdn-cgi/l/email-protection#7b0818121a091f123b1d1f1218551c140d"><span class="__cf_email__" data-cfemail="7704141e1605131e3711131e1459101801">[email protected]</span></a>; Ashley Mihalik, Chief, Banking
and Regulatory Policy, 202-898-3793, <a href="/cdn-cgi/l/email-protection#a2c3cfcbcac3cecbc9e2c4c6cbc18cc5cdd4"><span class="__cf_email__" data-cfemail="1475797d7c75787d7f5472707d773a737b62">[email protected]</span></a>; Kathryn Marks,
Counsel, 202-898-3896, <a href="/cdn-cgi/l/email-protection#284345495a435b684e4c414b064f475e"><span class="__cf_email__" data-cfemail="b4dfd9d5c6dfc7f4d2d0ddd79ad3dbc2">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Policy Objective
The FDIC's objective in setting forth this proposal is to ensure
that the risk-based deposit insurance assessment system applicable to
large and highly complex banks conforms to recently updated accounting
standards.\1\ In March 2022, FASB issued Accounting Standards Update
No. 2022-02 (ASU 2022-02), ``Financial Instruments--Credit Losses
(Topic 326): Troubled Debt Restructurings and Vintage Disclosures,''
that eliminates the recognition and measurement guidance of TDRs and,
instead, introduces new requirements related to financial statement
disclosure of certain modifications of receivables made to borrowers
experiencing financial difficulty, or ``modifications to borrowers
experiencing financial difficulty.'' \2\ Risk-based deposit insurance
assessments for large and highly complex banks are determined, in part,
using TDRs. Therefore, to incorporate the updated accounting standards,
the proposed amendment would include modifications to borrowers
experiencing financial difficulty in the description of the
underperforming assets ratio, which includes restructured loans, and
definitions used in the higher-risk assets ratio, which reference TDRs.
Both of these ratios are used to determine risk-based deposit insurance
assessments for large and highly complex banks.
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\1\ For deposit insurance assessment purposes, large IDIs are
generally those that have $10 billion or more in total assets. A
highly complex IDI 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 327.8(f) and (g). As
used in this proposed rule, the term ``large bank'' is synonymous
with ``large institution,'' and the term ``highly complex bank'' is
synonymous with ``highly complex institution,'' as those terms are
defined in 12 CFR 327.8.
\2\ FASB Accounting Standards Update No. 2022-02, ``Financial
Instruments--Credit Losses (Topic 326): Troubled Debt Restructurings
and Vintage Disclosures,'' March 2022 available at <a href="https://www.fasb.org/page/getarticle?uid=fasb_Media_Advisory_03-31-22">https://www.fasb.org/page/getarticle?uid=fasb_Media_Advisory_03-31-22</a>.
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II. Background
A. Deposit Insurance Assessments
The Federal Deposit Insurance Act (FDI Act) requires that the FDIC
establish a risk-based deposit insurance assessment system.\3\ The FDIC
charges all IDIs an assessment for deposit insurance equal to the IDI's
deposit insurance assessment base multiplied by its risk-based
assessment rate.\4\ An IDI's assessment base and assessment rate are
determined each quarter using supervisory ratings and information
collected from the Consolidated Reports of Condition and Income (Call
Report) or the Report of Assets and Liabilities of U.S. Branches and
Agencies of Foreign
[[Page 45024]]
Banks (FFIEC 002), as appropriate. Generally, an IDI's assessment base
equals its average consolidated total assets minus its average tangible
equity.\5\
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\3\ 12 U.S.C. 1817(b).
\4\ See 12 CFR 327.3(b)(1).
\5\ See 12 CFR 327.5.
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An IDI's assessment rate is calculated using different methods
dependent upon whether the IDI is classified for deposit insurance
assessment purposes as a small, large, or highly complex bank.\6\ 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
Deposit Insurance Fund (DIF).\7\ 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 banks and another
applies to highly complex banks. Both scorecards use quantitative
financial measures that are useful for predicting a large or highly
complex bank's long-term performance. Two of the measures in the large
and highly complex bank scorecards, the credit quality measure and the
concentration measure, are determined using restructured loans or TDRs.
These measures are described in more detail below.
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\6\ See 12 CFR 327.8(e), (f), and (g).
\7\ See 12 CFR 327.16(b); see also 76 FR 10672 (Feb. 25, 2011)
and 77 FR 66000 (Oct. 31, 2012).
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B. Credit Quality Measure
Both the large bank and the highly complex bank scorecards include
a credit quality measure. The credit quality measure is the greater of
(1) the criticized and classified items to the sum of Tier 1 capital
and reserves score or (2) the underperforming assets to the sum of Tier
1 capital and reserves score.\8\ Each risk measure, including the
criticized and classified items ratio and the underperforming assets
ratio, is converted to a score between 0 and 100 based upon minimum and
maximum cutoff values.\9\
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\8\ See 12 CFR 327.16(b)(1)(ii)(A)(2)(iv).
\9\ See 12 CFR part 327, appendix B.
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The underperforming assets ratio is described identically in the
large and highly complex bank scorecards as the sum of loans that are
30 days or more past due and still accruing interest, nonaccrual loans,
restructured loans (including restructured 1-4 family loans), and other
real estate owned (ORE), excluding the maximum amount recoverable from
the U.S. Government, its agencies, or Government-sponsored agencies,
under guarantee or insurance provisions, divided by a sum of Tier 1
capital and reserves.\10\
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\10\ See 12 CFR part 327, appendix A.
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The specific data used to identify the ``restructured loans''
referenced in the above description are those items that banks disclose
in their Call Report on Schedule RC-C, Part I, Memorandum items 1.a.
through 1.g, ``Loans restructured in troubled debt restructurings that
are in compliance with their modified terms.'' The portion of
restructured loans that is guaranteed or insured by the U.S. Government
are excluded from underperforming assets. This data is collected in
Call Report Schedule RC-O, Memorandum item 16, ``Portion of loans
restructured in troubled debt restructurings that are in compliance
with their modified terms and are guaranteed or insured by the U.S.
government.''
C. Concentration Measure
Both the large and highly complex bank scorecards also include a
concentration measure. The concentration measure is the greater of (1)
the higher-risk assets to the sum of Tier 1 capital and reserves score
or (2) the growth-adjusted portfolio concentrations score.\11\ Each
risk measure, including the criticized and classified items ratio and
the underperforming assets ratio, is converted to a score between 0 and
100 based upon minimum and maximum cutoff values.\12\ The higher-risk
assets ratio captures the risk associated with concentrated lending in
higher-risk areas. Higher-risk assets include construction and
development (C&D) loans, higher-risk commercial and industrial (C&I)
loans, higher-risk consumer loans, nontraditional mortgage loans, and
higher-risk securitizations.\13\
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\11\ See 12 CFR 327.16(b)(1)(ii)(A)(2)(iii).
\12\ See 12 CFR part 327, appendix C.
\13\ Id.
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Higher-risk C&I loans are defined, in part, based on whether the
loan is owed to the bank by a higher-risk C&I borrower, which includes,
among other things, a borrower that obtains a refinance of an existing
C&I loan, subject to certain conditions. Higher-risk consumer loans are
defined as all consumer loans where, as of origination, or, if the loan
has been refinanced, as of refinance, the probability of default within
two years is greater than 20 percent, excluding those consumer loans
that meet the definition of a nontraditional mortgage loan. A refinance
for purposes of higher-risk C&I loans and higher-risk consumer loans is
defined in the assessment regulations and explicitly does not include
modifications to a loan that would otherwise meet the definition of a
refinance, but that result in the classification of a loan as a TDR.
D. FASB's Elimination of Troubled Debt Restructurings
On March 31, 2022, FASB issued ASU 2022-02.\14\ This update
eliminated the recognition and measurement guidance for TDRs for all
entities that have adopted ASU 2016-13, ``Financial Instruments--Credit
Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments'' and the Current Expected Credit Losses (CECL)
methodology.\15\ The rationale was that ASU 2016-13 requires the
measurement and recording of lifetime expected credit losses on an
asset that is within the scope of ASU 2016-13, and as a result, credit
losses from TDRs have been captured in the allowance for credit losses.
Therefore, stakeholders observed and asserted that the additional
designation of a loan modification as a TDR and the related accounting
were unnecessarily complex and provided less meaningful information
than under the incurred loss methodology.\16\
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\14\ FASB Accounting Standards Update No. 2022-02, ``Financial
Instruments--Credit Losses (Topic 326): Troubled Debt Restructurings
and Vintage Disclosures'' available at <a href="https://www.fasb.org/Page/ShowPdf?path=ASU+2022-02.pdf">https://www.fasb.org/Page/ShowPdf?path=ASU+2022-02.pdf</a>.
\15\ FASB Accounting Standards Update No. 2016-13, ``Financial
Instruments--Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments,'' available at <a href="https://www.fasb.org/Page/ShowPdf?path=ASU+2016-13.pdf">https://www.fasb.org/Page/ShowPdf?path=ASU+2016-13.pdf</a>.
\16\ FASB Accounting Standards Update No. 2022-02, at BC19, pp.
57-58.
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The update eliminates the recognition of TDRs and, instead,
introduces new financial statement disclosure requirements related to
certain modifications of receivables made to borrowers experiencing
financial difficulty, or ``modifications to borrowers experiencing
financial difficulty.'' Such modifications are limited to those that
result in principal forgiveness, interest rate reductions, other-than-
insignificant payment delays, or term extensions in the current
reporting period. Modifications to borrowers experiencing financial
difficulty may be different from those previously captured in TDR
disclosures because an entity no longer would have to determine whether
the creditor has granted a concession, which is a current requirement
to determine whether a modification represents a TDR. The update
requires entities to disclose information about (a) the types of
modifications provided, disaggregated by modification type, (b) the
expected
[[Page 45025]]
financial effect of those modifications, and (c) the performance of the
loans after modification.
For entities that have adopted CECL, ASU 2022-02 is effective for
fiscal years beginning after December 15, 2022.\17\ FASB also permitted
the early adoption of ASU 2022-02 by any entity that has adopted CECL.
For regulatory reporting purposes, if an institution chooses to early
adopt ASU 2022-02 during 2022, Supplemental Instructions to the Call
Report specify that the institution should implement ASU 2022-02 for
the same quarter-end report date and report ``modifications to
borrowers experiencing financial difficulty'' in the current TDR Call
Report line items.\18\ These line items include Schedule RC-C, Part I,
Memorandum items 1.a. through 1.g., which are used to identify
``restructured loans'' for the underperforming asset ratio used in the
large and highly complex bank scorecards, described above. As a result,
a large or highly complex institution that has early adopted ASU 2022-
02 and is reporting modifications to borrowers experiencing financial
difficulty in the current TDR Call Report line items will be assigned a
deposit insurance assessment rate that relies, in part, on this
reporting. The FDIC and other members of the Federal Financial
Institutions Examination Council (FFIEC) are planning to revise the
Call Report forms and instructions to replace the current TDR
terminology with updated language from ASU 2022-02 for the first
quarter of 2023.
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\17\ Generally speaking, entities that are U.S. Securities and
Exchange Commission (SEC) filers, excluding smaller reporting
companies as defined by the SEC, were required to adopt CECL
beginning in January 2020. Most other entities are required to adopt
CECL beginning in January 2023.
\18\ See Financial Institution Letter (FIL) 17-2022,
Consolidated Reports of Condition and Income for First Quarter 2022.
See also Supplemental Instructions, March 2022 Call Report
Materials, First 2022 Call, Number 299, available at <a href="https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_FFIEC041_FFIEC051_suppinst_202203.pdf">https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_FFIEC041_FFIEC051_suppinst_202203.pdf</a>.
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III. Proposed Rule
A. Summary
The FDIC proposes to incorporate into the large and highly complex
bank assessment scorecards the updated accounting standard that
eliminates the recognition of TDRs and, instead, requires new financial
statement disclosures on ``modifications to borrowers experiencing
financial difficulty.'' The FDIC is proposing to expressly define
restructured loans in the underperforming assets ratio to include
``modifications to borrowers experiencing financial difficulty.'' The
FDIC is also proposing to amend the definition of a refinance for the
purposes of determining whether a loan is a higher-risk C&I loan or a
higher-risk consumer loan, both elements of the higher-risk assets
ratio. Under the proposal, a refinance would not include modifications
to a loan that otherwise would meet the definition of a refinance, but
that result in the classification of a loan as a modification to
borrowers experiencing financial difficulty. This proposal would not
affect the small bank deposit insurance assessment system.
B. Underperforming Assets Ratio
The FDIC proposes to amend the underperforming assets ratio used in
the large and highly complex bank pricing scorecards to conform to the
updated accounting standards in ASU 2022-02. The amended text
explicitly defines restructured loans for large and highly complex
banks that have adopted CECL and ASU 2022-02 as modifications to
borrowers experiencing financial difficulty. For the remaining large
and highly complex banks that have not yet adopted CECL and ASU 2022-
02, the FDIC would continue to use TDRs for restructured loans, and the
amended text would explicitly define restructured loans for these banks
as TDRs.
The FDIC has included restructured loans in the underperforming
assets ratio since the introduction of the large and highly complex
bank scorecards in 2011. Restructured loans, in the context of the
underperforming assets measure, typically present an elevated level of
credit risk because they represent loans to borrowers unable to perform
according to the original contractual terms. The FDIC believes it is
important to capture such elevated credit risk in its measurement of
credit quality. The FDIC believes the accounting term introduced by
FASB in ASU 2022-02, ``modifications to borrowers experiencing
financial difficulty,'' will provide a similar and meaningful indicator
of credit risk.
C. Higher-Risk Assets Ratio
The FDIC proposes to amend the definition of a refinance, in
determining whether a loan is a higher-risk C&I loan or a higher-risk
consumer loan for deposit insurance assessment purposes, to conform to
the updated accounting standards in ASU 2022-02. Specifically, a
refinance of a C&I loan would not include a modification or series of
modifications to a commercial loan that would otherwise meet the
definition of a refinance, but that result in the classification of a
loan as a modification to borrowers experiencing financial difficulty,
for a large or highly complex bank that has adopted CECL and ASU 2022-
02, or that result in the classification of a loan as a TDR, for all
remaining large and highly complex banks. For purposes of higher-risk
consumer loans, a refinance would not include modifications to a loan
that would otherwise meet the definition of a refinance, but that
result in the classification of a loan as a modification to borrowers
experiencing financial difficulty, for a large or highly complex bank
that has adopted CECL and ASU 2022-02, or that result in the
classification of a loan as a TDR, for all remaining large and highly
complex banks.
Question 1: The FDIC invites comment on its proposal to include
modifications to borrowers experiencing financial difficulty in the
definition of restructured loans, used in part to determine the
underperforming assets ratio, and in the definition of refinance, used
in part to determine the higher-risk assets ratio. Does the proposal
appropriately meet the objective to incorporate updated accounting
standards under ASU 2022-02 into the large and highly complex bank
scorecards?
IV. Expected Effects
As of December 31, 2021, the FDIC insured 148 banks that were
classified as large or highly complex for deposit insurance assessment
purposes, and that would be affected by this proposed rule.\19\ The
FDIC expects most of these institutions will adopt CECL by January 1,
2023, the proposed effective date of the rule.
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\19\ FDIC Call Report data December 31, 2021.
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The primary expected effect of the proposed rule is the change in
underperforming assets, and consequent change in assessment rates, that
could occur as a result of the difference between the amount of TDRs
that most banks are currently reporting and the amount of modifications
to borrowers experiencing financial difficulty that banks will report
upon adoption of ASU 2022-02. The effect of this proposed rule on
assessments paid by large and highly complex banks is difficult to
estimate since most banks are not yet reporting modifications to
borrowers experiencing financial difficulty, and the FDIC does not know
how the amount of reported modifications to borrowers experiencing
financial difficulty will compare to the amount of TDRs that affected
banks report.
In general, the FDIC expects that the initial amount of
modifications made to borrowers experiencing financial difficulty will
be lower than previously
[[Page 45026]]
reported TDRs. This is because under ASU 2022-02, reporting of
modifications to borrowers experiencing financial difficulty should be
applied prospectively and would therefore apply only to modifications
made after a bank adopts the standard. However, in the long term it is
possible that the amount of modifications to borrowers experiencing
financial difficulty could be higher or lower than the amount of TDRs
that banks would have reported prior to adoption of ASU 2022-02.
Therefore, under the proposed rule, the underperforming assets ratio
could be higher or lower due to the adoption of ASU 2022-02, and the
resulting ratio may or may not affect an individual bank's assessment
rate, depending on whether it is the binding ratio for the credit
quality measure.
The FDIC does not have the information necessary to estimate the
expected effects of the proposal to incorporate the new accounting
standard into the large and highly complex bank scorecards. However,
the following analysis illustrates a range of potential outcomes based
on TDRs reported prior to ASU 2022-02, as the amount of modifications
to borrowers experiencing financial difficulty could be higher, lower,
or similar to previously reported TDRs. The analysis shows the effect
on assessments of higher or lower TDRs in calculating the
underperforming assets ratio for deposit insurance assessment purposes.
The FDIC calculated some illustrative examples of the effect on
assessments if modifications made to borrowers experiencing financial
difficulty are lower than certain amounts of previously reported TDRs.
For example, if all large and highly complex banks had reported zero
TDRs as of December 31, 2021, before FASB issued ASU 2022-02, the
impact on the underperforming assets ratio would have reduced total
deposit insurance assessment revenue by an annualized amount of
approximately $90 million; if modifications were 50 percent lower than
TDRs reported as of December 31, 2021, annualized assessments would
have decreased by $52 million.
Alternatively, as an extreme and unlikely scenario, if all large
and highly complex banks had reported zero TDRs during a period when
overall risk in the banking industry was higher, such as December 31,
2011, the resulting underperforming assets ratio would have reduced
total deposit insurance assessment revenue by an annualized amount of
approximately $957 million. Between 2015 and 2019, if TDRs were zero,
the resulting underperforming assets ratio would have reduced total
deposit insurance assessment revenue by about $279 million annually, on
average.
Over time, however, under ASU 2022-02 large and highly complex
banks will begin to report modifications to borrowers experiencing
financial difficulties. As noted above, the effect on assessments will
depend on how the newly reported modifications compare to the TDRs that
would have been reported under the prior accounting standard. For
example, if all large and highly complex banks had reported
modifications to borrowers experiencing financial difficulty that were
25 percent greater than the TDRs reported as of December 31, 2021, the
impact on the underperforming assets ratio would have increased total
deposit insurance assessment revenue by an annualized amount of
approximately $30 million; if the modifications exceeded TDRs by 50
percent, annualized assessments would have increased by $65 million;
and if the modifications exceeded TDRs by 100 percent, annualized
assessments would have increased by $137 million.
The analysis presented above serves as an illustrative example of
potential effects of the proposed rule. The analysis does not estimate
potential future modifications to borrowers experiencing financial
difficulty or how those amounts, once reported, will compare to
previously reported TDRs for a few reasons. First, banks were granted
temporary relief from reporting TDRs that were modified due to the
COVID-19 pandemic, so recent reporting of TDRs is likely lower than it
may otherwise have been.\20\ Second, the amount of modifications or
restructurings made by large or highly complex banks vary based on
economic conditions and future economic conditions are uncertain.
Third, a restructuring of a debt constitutes a TDR if the creditor for
economic or legal reasons related to the debtor's financial
difficulties grants a concession to the debtor that it would not
otherwise consider, while a modification to borrowers experiencing
financial difficulty is not evaluated based on whether or not a
concession has been granted. Finally, future Call Report revisions and
instructions on how modifications to borrowers experiencing financial
difficulties should be reported will affect the future reported amount
of modifications to borrowers experiencing financial difficulty.
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\20\ On March 27, 2020, the Coronavirus Aid, Relief, and
Economic Security Act (CARES Act) was signed into law. Section 4013
of the CARES Act, ``Temporary Relief From Troubled Debt
Restructurings,'' provided banks the option to temporarily suspend
certain requirements under U.S. GAAP related to TDRs to account for
the effects of COVID-19. Division N of the Consolidated
Appropriations Act, 2021 (Title V, subtitle C, section 541) was
signed into law on December 27, 2020, extending the provisions in
Section 4013 of the CARES Act to January 1, 2022. This relief
applied to certain loans modified between March 1, 2020 and January
1, 2022.
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With regard to the higher-risk assets ratio, the effect on
assessments paid by large and highly complex banks is likely to be more
muted. The assessment regulations define a higher-risk C&I or consumer
loan as a loan or refinance that meets certain risk criteria. The
proposed rule would exclude modifications to borrowers experiencing
financial difficulty from the definition of a refinance for purposes of
the higher-risk assets ratio. As a result, if a modification to a C&I
or consumer loan results in the classification of the loan as a TDR,
under the current regulations, or as a modification to borrowers
experiencing financial difficulty, under the proposed rule, a large or
highly complex bank would not have to re-evaluate whether the modified
loan meets the definition of a higher-risk asset. For example, if a
higher-risk C&I loan was subsequently modified as a TDR or modification
to borrowers experiencing financial difficulty, it would not be
considered a refinance and, therefore, would continue to be considered
a higher-risk asset. Conversely, if a C&I loan that does not meet the
definition of a higher-risk asset was subsequently modified as a TDR or
modification to borrowers experiencing financial difficulty, it would
not be considered a refinance and, therefore, would not have to be re-
evaluated to determine if it meets the definition of a higher-risk
asset. The FDIC assumes that these possible outcomes are offsetting and
the change to the rule will have minimal to no effect on deposit
insurance assessments for large and highly complex banks.
The proposed rule would pose no additional reporting burden for
large and highly complex banks.
Question 2: The FDIC invites comments on the expected effects of
the proposal on large and highly complex institutions.
V. Alternatives Considered
The FDIC considered two reasonable and possible alternatives as
described below. On balance, the FDIC believes the current proposal
would determine deposit insurance assessment rates for large and highly
complex banks in the most appropriate, accurate, and straightforward
manner.
One alternative would be to require banks to continue to report
TDRs specifically for deposit insurance
[[Page 45027]]
assessment purposes, even after they have adopted CECL and ASU 2022-02.
This alternative would maintain consistency of the data used in the
underperforming assets ratio and higher-risk assets ratio with prior
reporting periods. However, this alternative would impose additional
reporting burden on large and highly complex banks. This alternative
would also fail to recognize the potential usefulness of the new data
on modifications to borrowers experiencing financial difficulty.
Ultimately, the FDIC does not believe any benefits from continued
reporting of TDRs expressly for assessment purposes would justify the
cost to affected banks.
The FDIC also considered a second alternative: removing
restructured loans from the definition of underperforming assets
entirely and not incorporating the new data on modifications to
borrowers experiencing financial difficulty. Similar to the first
alternative, this second alternative would apply uniformly to all large
and highly complex banks, regardless of their early adoption status.
However, this alternative fails to recognize that data on modifications
to borrowers experiencing financial difficulty provide a meaningful
indicator of credit risk throughout economic cycles and should be
captured in credit quality measures such as the underperforming assets
ratio and the higher-risk assets ratio. The FDIC believes that the new
modifications data required under ASU 2022-02 can provide valuable
information and would not impose additional reporting burden.
Incorporating this new data in place of TDRs would be the most
reasonable option to ensure that large and highly complex banks are
assessed fairly and accurately, all else equal.
Question 3: The FDIC invites comment on the reasonable and possible
alternatives described in this proposed rule. Are there other
reasonable and possible alternatives that the FDIC should consider?
VI. 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 January 1, 2023, and applicable to the first
quarterly assessment period of 2023 (i.e., January 1-April 1, 2023).
Most institutions that have implemented CECL, will adopt FASB's ASU
2022-02 in 2023, unless an institution chooses to early adopt in 2022.
Institutions (those with a calendar year fiscal year) implementing CECL
on January 1, 2023, will also adopt, FASB's ASU 2022-02 at that time.
Therefore, by the first quarter of 2023, ASU 2022-02 also will be in
effect for most, if not all, large and highly complex banks. The FDIC
believes that coordinating the assessment system amendments to conform
to the new accounting standards will promote a more efficient
transition and will result in affected banks reporting their data in a
consistent manner based on the correct accounting concepts.
VII. 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.
VIII. Administrative Law Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) 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.\21\ 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 $750
million.\22\ Certain types of rules, such as rules 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 the RFA.\23\ 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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\21\ 5 U.S.C. 601 et seq.
\22\ The SBA defines a small banking organization as having $750
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 by 87 FR 18627, effective May 2, 2022). 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. See 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.
\23\ 5 U.S.C. 601.
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Based on Call Report data as of December 31, 2021, the FDIC insures
4,848 IDIs, of which 3,478 are defined as small entities by the terms
of the RFA.\24\ The proposed rule, however, would apply only to
institutions with $10 billion or greater in total assets which, by
definition, do not meet the criteria to be considered small entities
for the purposes of the RFA. Since no small entities would be affected
by the proposed rule, the FDIC certifies that the proposed rule would
not have a significant economic effect on a substantial number of small
entities.
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\24\ FDIC Call Report data, December 31, 2021.
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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.\25\ 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.\26\
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\25\ 12 U.S.C. 4802(a).
\26\ 12 U.S.C. 4802(b).
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The proposed rule would not impose additional reporting,
disclosure, or other new requirements on insured depository
institutions, including small depository institutions, or on the
customers of depository institutions. Accordingly, section 302 of
RCDRIA does not apply. Nevertheless, the requirements of RCDRIA have
been considered in setting the proposed effective date. The FDIC
invites comments that will further inform its consideration of RCDRIA.
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
[[Page 45028]]
a currently valid Office of Management and Budget (OMB) control
number.\27\ 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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\27\ 44 U.S.C. 3501-3521.
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D. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \28\ 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:
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\28\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999), 12 U.S.C. 4809.
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<bullet> Has the FDIC organized the material to suit your needs? If
not, how could the material be better organized?
<bullet> Are the requirements in the proposed regulation clearly
stated? If not, how could the regulation be stated more clearly?
<bullet> Does the proposed regulation contain language or jargon
that is unclear? If so, which language requires clarification?
<bullet> 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 for 12 CFR part 327 continues to read as follows:
Authority: 12 U.S.C. 1813, 1815, 1817-19, 1821.
0
2. Amend appendix A to subpart A in section IV, as proposed to be
redesignated on July 1, 2022, at 87 FR 39409, by:
0
a. In the entries for ``Balance Sheet Liquidity Ratio'', ``Potential
Losses/Total Domestic Deposits (Loss Severity Measure)'', and ``Market
Risk Measure for Highly Complex Institutions'', redesignating footnotes
5, 6, and 7 as footnotes 6, 7, and 8, respectively;
0
b. Redesignating footnotes 5, 6, and 7 as footnotes 6, 7, and 8 at the
end of the table;
0
c. Revising the entry for ``Credit Quality Measure''; and
0
d. Adding a new footnote 5 at the end of the table.
The revision and addition 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
----------------------------------------------------------------------------------------------------------------
* * * * * * *
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 \5\ (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.
* * * * * * *
----------------------------------------------------------------------------------------------------------------
\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.
* * * * * * *
[[Page 45029]]
\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\ Restructured loans include troubled debt restructurings and modifications to borrowers experiencing
financial difficulty, as these terms are defined in the glossary to the Call Report, as they may be amended
from time to time.
* * * * *
0
3. Amend appendix C to subpart A by:
0
a. In section I.A.2., under the heading ``Definitions'', revising the
entry for ``Refinance''; and
0
b. In section I.A.3., revising the ``Refinance'' section preceding
section I.A.4.
The revisions read as follows:
Appendix C to Subpart A of Part 327--Description of Concentration
Measures
I. * * *
A. * * *
2. * * *
Definitions
* * * * *
Refinance
For purposes of a C&I loan, a refinance includes:
(a) Replacing an original obligation by a new or modified
obligation or loan agreement;
(b) Increasing the master commitment of the line of credit (but
not adjusting sub-limits under the master commitment);
(c) Disbursing additional money other than amounts already
committed to the borrower;
(d) Extending the legal maturity date;
(e) Rescheduling principal or interest payments to create or
increase a balloon payment;
(f) Releasing a substantial amount of collateral;
(g) Consolidating multiple existing obligations; or
(h) Increasing or decreasing the interest rate.
A refinance of a C&I loan does not include a modification or
series of modifications to a commercial loan other than as described
above or modifications to a commercial loan that would otherwise
meet this definition of refinance, but that result in the
classification of a loan as a troubled debt restructuring (TDR) or a
modification to borrowers experiencing financial difficulty, as
these terms are defined in the glossary of the Call Report
instructions, as they may be amended from time to time.
* * * * *
3. * * *
Refinance
For purposes of higher-risk consumer loans, a refinance
includes:
(a) Extending new credit or additional funds on an existing
loan;
(b) Replacing an existing loan with a new or modified
obligation;
(c) Consolidating multiple existing obligations;
(d) Disbursing additional funds to the borrower. Additional
funds include a material disbursement of additional funds or, with
respect to a line of credit, a material increase in the amount of
the line of credit, but not a disbursement, draw, or the writing of
convenience checks within the original limits of the line of credit.
A material increase in the amount of a line of credit is defined as
a 10 percent or greater increase in the quarter-end line of credit
limit; however, a temporary increase in a credit card line of credit
is not a material increase;
(e) Increasing or decreasing the interest rate (except as noted
herein for credit card loans); or
(f) Rescheduling principal or interest payments to create or
increase a balloon payment or extend the legal maturity date of the
loan by more than six months.
A refinance for this purpose does not include:
(a) A re-aging, defined as returning a delinquent, open-end
account to current status without collecting the total amount of
principal, interest, and fees that are contractually due, provided:
(i) The re-aging is part of a program that, at a minimum,
adheres to the re-aging guidelines recommended in the interagency
approved Uniform Retail Credit Classification and Account Management
Policy; \[12]\
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\[12]\ Among other things, for a loan to be considered for re-
aging, the following must be true: (1) The borrower must have
demonstrated a renewed willingness and ability to repay the loan;
(2) the loan must have existed for at least nine months; and (3) the
borrower must have made at least three consecutive minimum monthly
payments or the equivalent cumulative amount.
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(ii) The program has clearly defined policy guidelines and
parameters for re-aging, as well as internal methods of ensuring the
reasonableness of those guidelines and monitoring their
effectiveness; and
(iii) The bank monitors both the number and dollar amount of re-
aged accounts, collects and analyzes data to assess the performance
of re-aged accounts, and determines the effect of re-aging practices
on past due ratios;
(b) Modifications to a loan that would otherwise meet this
definition of refinance, but result in the classification of a loan
as a TDR or modification to borrowers experiencing financial
difficulty;
(c) Any modification made to a consumer loan pursuant to a
government program, such as the Home Affordable Modification Program
or the Home Affordable Refinance Program;
(d) Deferrals under the Servicemembers Civil Relief Act;
(e) A contractual deferral of payments or change in interest
rate that is consistent with the terms of the original loan
agreement (e.g., as allowed in some student loans);
(f) Except as provided above, a modification or series of
modifications to a closed-end consumer loan;
(g) An advance of funds, an increase in the line of credit, or a
change in the interest rate that is consistent with the terms of the
loan agreement for an open-end or revolving line of credit (e.g.,
credit cards or home equity lines of credit);
(h) For credit card loans:
(i) Replacing an existing card because the original is expiring,
for security reasons, or because of a new technology or a new
system;
(ii) Reissuing a credit card that has been temporarily suspended
(as opposed to closed);
(iii) Temporarily increasing the line of credit;
(iv) Providing access to additional credit when a bank has
internally approved a higher credit line than it has made available
to the customer; or
(v) Changing the interest rate of a credit card line when
mandated by law (such as in the case of the Credit CARD Act).
* * * * *
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on July 19, 2022.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2022-15763 Filed 7-26-22; 8:45 am]
BILLING CODE 6714-01-P
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</html>Indexed from Federal Register on July 27, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.