12 CFR Part 327, Subpart A, Appendix D to Subpart A of Part 327 - Description of the Loss Severity Measure

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View PDF at GPO Pt. 327, Subpt. A, App. D
Appendix D to Subpart A of Part 327—Description of the Loss Severity Measure
The loss severity measure applies a standardized set of assumptions to an institution's balance sheet to measure possible losses to the FDIC in the event of an institution's failure. To determine an institution's loss severity rate, the FDIC first applies assumptions about uninsured deposit and other unsecured liability runoff, and growth in insured deposits, to adjust the size and composition of the institution's liabilities. Assets are then reduced to match any reduction in liabilities.1 The institution's asset values are then further reduced so that the Tier 1 leverage ratio reaches 2 percent.2 In both cases, assets are adjusted pro rata to preserve the institution's asset composition. Assumptions regarding loss rates at failure for a given asset category and the extent of secured liabilities are then applied to estimated assets and liabilities at failure to determine whether the institution has enough unencumbered assets to cover domestic deposits. Any projected shortfall is divided by current domestic deposits to obtain an end-of-period loss severity ratio. The loss severity measure is an average loss severity ratio for the three most recent quarters of data available.

Footnote(s):
1 In most cases, the model would yield reductions in liabilities and assets prior to failure. Exceptions may occur for institutions primarily funded through insured deposits, which the model assumes to grow prior to failure.


Footnote(s):
2 Of course, in reality, runoff and capital declines occur more or less simultaneously as an institution approaches failure. The loss severity measure assumptions simplify this process for ease of modeling.

Runoff and Capital Adjustment Assumptions
Table D.1 contains run-off assumptions.
Table D.1—Runoff Rate Assumptions
Liability type Runoff rate *(percent)
* A negative rate implies growth.
Insured Deposits (10)
Uninsured Deposits 58
Foreign Deposits 80
Federal Funds Purchased 100
Repurchase Agreements 75
Trading Liabilities 50
Unsecured Borrowings <= 1 Year 75
Secured Borrowings <= 1 Year 25
Subordinated Debt and Limited Liability Preferred Stock 15
Given the resulting total liabilities after runoff, assets are then reduced pro rata to preserve the relative amount of assets in each of the following asset categories and to achieve a Tier 1 leverage ratio of 2 percent:
• Cash and Interest Bearing Balances;
• Trading Account Assets;
• Federal Funds Sold and Repurchase Agreements;
• Treasury and Agency Securities;
• Municipal Securities;
• Other Securities;
• Construction and Development Loans;
• Nonresidential Real Estate Loans;
• Multifamily Real Estate Loans;
• 1-4 Family Closed-End First Liens;
• 1-4 Family Closed-End Junior Liens;
• Revolving Home Equity Loans; and
• Agricultural Real Estate Loans.
Recovery Value of Assets at Failure
Table D.2 shows loss rates applied to each of the asset categories as adjusted above.
Table D.2—Asset Loss Rate Assumptions
Asset category Loss rate(percent)
Cash and Interest Bearing Balances 0.0
Trading Account Assets 0.0
Federal Funds Sold and Repurchase Agreements 0.0
Treasury and Agency Securities 0.0
Municipal Securities 10.0
Other Securities 15.0
Construction and Development Loans 38.2
Nonresidential Real Estate Loans 17.6
Multifamily Real Estate Loans 10.8
1-4 Family Closed-End First Liens 19.4
1-4 Family Closed-End Junior Liens 41.0
Revolving Home Equity Loans 41.0
Agricultural Real Estate Loans 19.7
Agricultural Loans 11.8
Commercial and Industrial Loans 21.5
Credit Card Loans 18.3
Other Consumer Loans 18.3
All Other Loans 51.0
Other Assets 75.0
Secured Liabilities at Failure
Federal home loan bank advances, secured federal funds purchased and repurchase agreements are assumed to be fully secured. Foreign deposits are treated as fully secured because of the potential for ring fencing.
Loss Severity Ratio Calculation
The FDIC's loss given failure (LGD) is calculated as:
An end-of-quarter loss severity ratio is LGD divided by total domestic deposits at quarter-end and the loss severity measure for the scorecard is an average of end-of-period loss severity ratios for three most recent quarters.
[76 FR 10724, Feb. 25, 2011]

Title 12 published on 2014-01-01

The following are only the Rules published in the Federal Register after the published date of Title 12.

For a complete list of all Rules, Proposed Rules, and Notices view the Rulemaking tab.

  • 2014-11-26; vol. 79 # 228 - Wednesday, November 26, 2014
    1. 79 FR 70427 - Assessments
      GPO FDSys XML | Text
      FEDERAL DEPOSIT INSURANCE CORPORATION
      Final rule.
      Effective date: January 1, 2015, except for the amendment to § 327.9 (amendatory instruction 5), which is effective January 1, 2018. Applicability date: The incorporation of the supplementary leverage ratio and corresponding ratio thresholds into the definition of capital evaluations is applicable January 1, 2018.
      12 CFR Part 327

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United States Code
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Title 12 published on 2014-01-01

The following are ALL rules, proposed rules, and notices (chronologically) published in the Federal Register relating to 12 CFR 327 after this date.

  • 2014-11-26; vol. 79 # 228 - Wednesday, November 26, 2014
    1. 79 FR 70427 - Assessments
      GPO FDSys XML | Text
      FEDERAL DEPOSIT INSURANCE CORPORATION
      Final rule.
      Effective date: January 1, 2015, except for the amendment to § 327.9 (amendatory instruction 5), which is effective January 1, 2018. Applicability date: The incorporation of the supplementary leverage ratio and corresponding ratio thresholds into the definition of capital evaluations is applicable January 1, 2018.
      12 CFR Part 327