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Deposit Insurance Assessment Appeals: Guidelines & Decisions  

AAC- 2004-06 (January 13, 2005)

(The “Bank”) filed an appeal with the Assessment Appeals Committee (“Committee”) of the Federal Deposit Insurance Corporation (“FDIC”) by letter dated October 8, 2004. The Bank is appealing a decision issued by the FDIC’s Division of Insurance and Research (“DIR”) on September 15, 2004. In that decision, DIR denied the Bank’s request for an upgrade of the Bank’s capital group (“CG”) assignment for the July 1, 2004, semiannual assessment period.

At its meeting held on December 13, 2004, the Committee allowed the Bank, pursuant to the Guidelines for Appeals of Deposit Insurance Assessment Determinations1, to appear and make an oral presentation in support of its case for an assessment risk classification change. The presentation was highly professional and helpful in resolving this matter, which involves application of the FDIC’s regulations addressing assessment risk classifications, specifically, 12 C.F.R. § 327.4(a)(1), the provision governing determination of an institution’s capital group. After carefully considering all of the written and oral submissions and facts of this case, the Committee has determined that the Bank’s appeal must be denied.

On June 2, 2004, the Bank filed with DIR a request for review of the Bank’s CG assignment for the July 1, 2004, semiannual period as provided for under 12 C.F.R. § 327.4(d). A CG of “2” (adequately capitalized) had been assigned to the Bank for that period. The Bank requested an upgrade to “1” (well capitalized). The Bank’s supervisory subgroup was at all relevant times “A.” Under the assessment schedule set out in 12 C.F.R. § 327.9(b)(2), the CG “1” rate is zero basis points, while the “2” rate is 3 basis points. The difference between the two rates resulted in an additional premium of approximately $31 million for the Bank’s July 2004 semiannual assessment.

The Bank revised its request for review by letter dated July 30, 2004, effectively withdrawing its request for an upgrade for the entire July 2004 semiannual period.

Instead, the Bank requested that DIR limit the insurance assessment based on the CG “2” rating to the period from April 1, 2004, through May 19, 2004. According to the Bank, it was during this period that its Total Risk-Based Capital Ratio failed to satisfy the well capitalized requirement. Pro rated for this portion of the semiannual period, the Bank estimated its increased assessment to be $8 million rather than $31 million. The Bank asserted that assessing the “2A” rate for the entire semiannual period – with the resulting additional assessment premium – is inconsistent with the intent of the risk-based assessment system.

DIR denied the Bank’s request by letter dated September 15, 2004. DIR explained that CGs are assigned in accordance with 12 C.F.R. § 327.4(a)(1). This regulation states, in part, that insured institutions will be assigned to one of three CGs based on data reported in an institution’s Report of Income and Condition (“Call Report”) or Thrift Financial Report (“TFR”) as of March 31 (for the semiannual assessment period beginning the following July) and as of September 30 (for the semiannual assessment period beginning the following January). DIR added that the regulations do not provide for determination of an institution’s semiannual CG based on a date or information other than as specified in the regulation, nor does the regulation permit a CG to be assigned more frequently than semiannually.

In its October 8, 2004, appeal to the Committee, the Bank contends that the “circumstances surrounding this appeal deserve special consideration.” The Bank again asks that the CG “2” assessment be levied only for the period from April 1 to May 19, 2004 (May 19 being the date of its subordinated debt issuance when, the Bank states, it returned to well capitalized status). The Bank contends that pro rata assessment during the semiannual period would impose “a meaningful additional assessment charge that is directly related to the period during which the Bank failed to satisfy the CG ‘1’ criteria.” Applying the “2” rating for the entire semiannual period, the Bank suggests, “is inconsistent with the intent of a risk-based assessment system in that an unreasonable penalty has been imposed on a bank with a strong risk profile.”

The FDI Act defines the Risk-Based Assessment System as a “system for calculating an institution’s semiannual assessment” and requires the FDIC’s Board of Directors to promulgate regulations establishing that system. 12 U.S.C. § 1817(b)(1)(C). Under the implementing regulations adopted by the Board, institutions are placed into risk classifications based primarily upon two factors: capital group categories and supervisory subgroups. See 12 C.F.R. § 327.4(a)(1) (capital group categories); 12 C.F.R. § 327.4(a)(2) (supervisory subgroup classifications).

The FDIC’s assessment regulations require insured institutions to pay a semiannual assessment in two quarterly payments. 12 C.F.R. § 327.3(a). Each institution is assigned a semiannual risk classification. The quarterly payments for a particular semiannual period are based on the deposits the institution reported in its quarterly Call Report or TFR during the preceding quarter, but the assessment risk classification remains constant throughout the semiannual period. An institution’s capital, as reported in its March Call Report or TFR, is used to determine its risk classification for the July-December semiannual period, while the capital reported in its September Call Report or TFR is used for its January-June semiannual period. 12 C.F.R. § 327.4(a)(1). Application of section 327.4(a)(1) goes to the heart of this case.

The Bank’s March 31, 2004, Call Report reflected a Total Risk-Based Capital Ratio of 9.79%. Under 12 C.F.R. § 327.4(a), to be assigned to Capital Group “1” – well capitalized – an institution must have (1) a total risk-based capital ratio of 10% or greater, (2) a Tier 1 risk-based capital ratio of 6% or greater, and (3) a Tier 1 leverage capital ratio of 5% or greater. To be rated “2” – adequately capitalized – an institution must have (1) a total risk-based capital ratio of 8% or greater, (2) a Tier 1 risk-based capital ratio of 4% or greater, and (3) a Tier 1 leverage capital ratio of 4% or greater. Under the regulation, with a Total Risk-Based Capital Ratio of 9.79%, the Bank was properly assigned a CG of “2” for the July 2004 semiannual period.

The Bank, however, offers three factors that it suggests mitigate non-compliance with the capital requirements for a rating of well capitalized. First, the Bank argues that the decline in its Total Risk-Based Capital Ratio was not caused by a material economic event that reduced the capital of the Bank, but rather by inadequate planning for capital needs. Next, the Bank contends that its Total Capital remained strong, with its Tier 1 capital ratio of 7.66% and Tier 1 leverage ratio of 5.76% both above the well capitalized thresholds of 6% and 5% respectively. Finally, the Bank asserts that it took steps to return to well-capitalized status within 24 hours of learning of the shortfall, issuing sufficient subordinated debt to bring its Total Risk-Based Capital Ratio, by its own estimate, to 10.77% as of May 19, 2004.

Based upon the Bank’s March 31, 2004 Call Report, its Total Risk-Based Capital fell short of well capitalized by approximately $970 million. Risk-based capital is vitally important to the safety and soundness of the industry and to the FDIC. Risk-based capital provides a cushion against unexpected losses, reduces the risk of failure, and mitigates the FDIC’s losses in the event of failure. Whether the Bank’s risk-based capital shortfall resulted from inadequate planning or from a material economic event does not affect the potential consequences either for the Bank or for the FDIC from the resultant decline in capital. Moreover, the Committee is reluctant to sanction an exception to the Board’s regulations for, in effect, a bank’s inadvertent failure to comply.

Nor does the Bank merit relief from the increased assessment because it fell short on just one capital test. When the regulations were adopted, the FDIC Board had the option to provide that banks would be considered well capitalized if two of the three tests were met. Instead, the FDIC’s regulations require that an institution must meet all three capital tests. As pointed out above, on the one test for Capital Group “1” that the Bank did not meet – Total Risk-Based Capital – the Bank fell short of well capitalized by approximately $970 million. The size of the shortfall and the clarity of the regulation undercut the Bank’s argument that meeting all three capital tests should not be required in this situation.

To its credit, the Bank took steps to raise its capital level as soon as it learned of the shortfall. That is one purpose of the regulation: to give banks an incentive to maintain strong capital levels. But moving quickly to restore well-capitalized status does not excuse the Bank’s failure to comply with the regulatory structure in general or section 327.4(a)(1) in particular.

Finally, the Bank contends that assessing it at the CG “2” rate for the July semiannual period is an “unreasonable penalty” and “inconsistent with the intent of a risk-based assessment system.” Assessments are not penalties; they are premiums charged by the FDIC for deposit insurance. The imposition of an increased assessment goes to the heart of the risk-based system: Institutions with lowered capital levels pose a greater risk to the insurance fund and pay higher premiums. Moreover, the request for proration of the higher risk classification for the period from April 1 to May 19, 2004 is inconsistent with the system created under the FDIC’s regulations. In fact, when the FDIC Board modified the Risk Based Assessment System in 1994, it expressly declared “Under the final rule, as under the proposal, assessment risk classifications will be assigned, and applied, semiannually.” 59 Fed. Reg. 67153, 67156 (Dec. 29, 1994). In effect, the Bank would have the Committee change the FDIC’s current regulation to allow proration of semiannual assessments, which the Committee cannot do.

In AAC Case No. 2000-01 (Jan. 11, 2001), the Committee denied relief to an institution on facts essentially similar to those at issue here. In Case No. 2000-01, the bank’s risk classification fell from “1A” to “2A” when Call Report amendments were filed to correct miscalculations, which in turn caused the bank’s capital ratios to fall below the well-capitalized thresholds. The bank sought relief from the application of section 327.4(a)(1) but was denied because the circumstances presented for waiver of the CG regulation were not unique and application of the regulation was not inequitable. According to the Committee, “consistent application of reasonable rules is extremely important. It is a general belief that while exceptions to the rules may, under compelling circumstances, be considered, such must be both rare and well supported if the system is to maintain credibility.”

Relief has been granted by this Committee where the institution – having planned certain future transactions – agreed with the FDIC before the capital cutoff date that the institution would be treated as well capitalized (AAC Case No. 2002-01 (Feb. 25, 2002)), and where unique circumstances prevented the institution, through no fault of its own, from consummating a previously arranged transaction that would have made the institution well capitalized on the cutoff date, once by terrorist acts (AAC Case No. 2002-02 (April 23, 2002)) and once by the primary federal regulator’s delay in granting a needed approval (AAC Case No. 2004-02 (March 23, 2004)). In each of these cases, relief was fashioned to preserve the assignment and application of risk classifications on a semiannual basis.

After considering all of the facts and arguments presented by the Bank in its written submission and its oral presentation, the Committee finds that the circumstances presented are not unique nor is application of the capital group cutoff regulation in this instance inequitable.

The Bank’s capital group assignment for the July 2004 semiannual period was based on data reported in its March 31, 2004 Call Report, and the Bank was correctly assigned to capital group “2” for that period. While the Committee is sympathetic to the Bank’s position and appreciates its efforts to return quickly to well-capitalized status, no basis for granting relief from application of the capital group regulation is presented here. Accordingly, for the reasons set forth in this decision, the Bank’s appeal is denied.

By direction of the Assessment Appeals Committee, dated January 13, 2005.

1  The Guidelines are set out at 69 Fed. Reg. 41479, 41486 (July 9, 2004), and in FDIC Financial Institution Letter (“FIL”) 113-2004 (Oct. 13, 2004).


Last Updated 07/28/2005

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