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Federal Register / Vol. 86, No. 36 / Thursday, February 25, 2021 / Rules and Regulations Scorecard measures 1

3 Largest Counterparty Exposure/Tier 1 Capital and Reserves 2.

Core Earnings/Average Quarter-End Total Assets.

Credit Quality Measure
1 Criticized and Classified Items/Tier 1 Capital and Reserves 2.

2 Underperforming Assets/Tier 1 Capital and Reserves 2.
Core Deposits/Total Liabilities.
Balance Sheet Liquidity Ratio.

Potential Losses/Total Domestic Deposits Loss Severity Measure 6.
Market Risk Measure for Highly Complex Institutions.
1 Trading Revenue Volatility/Tier 1 Capital.
2 Market Risk Capital/
Tier 1 Capital.
3 Level 3 Trading Assets/Tier 1 Capital.
Average Short-term Funding/
Average Total Assets.

Description The largest total exposure amount to one counterparty divided by Tier 1 capital and reserves. The total exposure amount is equal to the sum of the institutions exposure amounts to one counterparty or borrower for derivatives, SFTs, and cleared transactions, and its gross lending exposure including all unfunded commitments to that counterparty or borrower. A counterparty includes an entitys own affiliates. Exposures to entities that are affiliates of each other are treated as exposures to one counterparty or borrower. Counterparty exposure excludes all counterparty exposure to the U.S. Government and departments or agencies of the U.S. Government that is unconditionally guaranteed by the full faith and credit of the United States. The exposure amount for derivatives, including OTC derivatives, cleared transactions that are derivative contracts, and netting sets of derivative contracts, must be calculated using the methodology set forth in 12 CFR 324.34b, but without any reduction for collateral other than cash collateral that is all or part of variation margin and that satisfies the requirements of 12 CFR 324.10c4iiC1ii and iii and 324.10c4iiC3 through 7. The exposure amount associated with SFTs, including cleared transactions that are SFTs, must be calculated using the standardized approach set forth in 12 CFR 324.37b or c. For both derivatives and SFT exposures, the exposure amount to central counterparties must also include the default fund contribution.3
Core earnings are defined as net income less extraordinary items and tax-adjusted realized gains and losses on available-for-sale AFS and held-to-maturity HTM securities, adjusted for mergers. The ratio takes a fourquarter sum of merger-adjusted core earnings and divides it by an average of five quarter-end total assets most recent and four prior quarters. If four quarters of data on core earnings are not available, data for quarters that are available will be added and annualized. If five quarters of data on total assets are not available, data for quarters that are available will be averaged.
The credit quality score is the higher of the following two scores:
Sum of criticized and classified items divided by the sum of Tier 1 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.
Sum of loans that are 30 days or more past due and still accruing interest, nonaccrual loans, restructured loans including restructured 14 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.
Total domestic deposits excluding brokered deposits and uninsured non-brokered time deposits divided by total liabilities.
Sum of cash and balances due from depository institutions, federal funds sold and securities purchased under agreements to resell, and the market value of available for sale and held to maturity agency securities excludes agency mortgage-backed securities but includes all other agency securities issued by the U.S. Treasury, U.S. government agencies, and U.S. government-sponsored enterprises divided by the sum of federal funds purchased and repurchase agreements, other borrowings including FHLB with a remaining maturity of one year or less, 5 percent of insured domestic deposits, and 10 percent of uninsured domestic and foreign deposits.5
Potential losses to the DIF in the event of failure divided by total domestic deposits. Appendix D describes the calculation of the loss severity measure in detail.
The market risk score is a weighted average of the following three scores:

Trailing 4-quarter standard deviation of quarterly trading revenue merger-adjusted divided by Tier 1 capital.
Market risk capital divided by Tier 1 capital.7
Level 3 trading assets divided by Tier 1 capital.
Quarterly average of federal funds purchased and repurchase agreements divided by the quarterly average of total assets as reported on Schedule RCK of the Call Reports.

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.
3 SFTs include repurchase agreements, reverse repurchase agreements, security lending and borrowing, and margin lending transactions, where the value of the transactions depends on market valuations and the transactions are often subject to margin agreements. The default fund contribution is the funds contributed or commitments made by a clearing member to a central counterpartys mutualized loss sharing arrangement. The other terms used in this description are as defined in 12 CFR part 324, subparts A and D, unless defined otherwise in 12 CFR part 327.

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