[Federal Register Volume 63, Number 140 (Wednesday, July 22, 1998)]
[Rules and Regulations]
[Pages 39219-39229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19394]
[[Page 39219]]
=======================================================================
-----------------------------------------------------------------------
FARM CREDIT ADMINISTRATION
12 CFR Parts 611, 615, 620 and 627
RIN 3052-AB58
Organization; Funding and Fiscal Affairs, Loan Policies and
Operations, and Funding Operations; Disclosure to Shareholders; Title V
Conservators and Receivers; Capital Provisions
AGENCY: Farm Credit Administration.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA or Agency), through the
FCA Board (Board), adopts a final rule to amend its capital adequacy
and related regulations to address: interest rate risk; the grounds for
appointing a conservator or receiver; capital and bylaw requirements
for service corporations; and various computational issues and other
issues involving the capital regulations. The rule adds safety and
soundness requirements deferred from prior rulemakings, provides
greater consistency with capital requirements of other financial
regulators, and makes technical corrections.
EFFECTIVE DATE: This regulation shall become effective 30 days after
publication in the Federal Register during which either or both houses
of Congress are in session. Notice of the effective date will be
published in the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Dennis K. Carpenter, Senior Policy Analyst, Office of Policy and
Analysis, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4498, TDD (703) 883-4444,
or
Rebecca S. Orlich, Senior Attorney, Office of General Counsel, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703)
883-4444.
SUPPLEMENTARY INFORMATION:
I. General
The Agency proposed amendments to its capital regulations on
September 23, 1997 (62 FR 49623). The purpose of the proposed
regulations was to build on previous regulatory efforts by addressing
discrete issues related to capital that were deferred during
consideration of the capital adequacy regulations that became effective
in March 1997. The issues addressed in the proposed rule were:
Interest rate risk as it pertains to Farm Credit System
(System or FCS) institutions;
The definition of insolvency and of ``an unsafe or unsound
condition to transact business'' for the purpose of appointing a
conservator or receiver;
The establishment of capital and bylaw requirements for
System service corporations;
Changes to risk-weighting categories of assets;
The retirement of certain allocated equities included in
core surplus;
Deferred-tax assets;
The treatment of intra-System investments for capital
computation purposes;
Various other computational issues; and
Other technical issues.
As described more fully below, the FCA Board has made revisions to
the proposed regulations on interest rate risk management programs, the
enumerated circumstances in which the FCA could consider an institution
to be in an unsafe or unsound condition for purposes of appointing a
conservator or receiver, and the proposal regarding the treatment of
``other comprehensive income'' in calculating regulatory capital. The
remaining regulations are adopted substantially as proposed.
Comments were received on the proposed regulations from the
System's Presidents' Finance Committee, which reflected the views of
the System's banks and associations (System joint comment); two Farm
Credit banks; and a jointly managed production credit association (PCA)
and Federal land credit association (FLCA). In addition, a third Farm
Credit bank submitted a sample computation of the proposed rule's
deferred-tax asset exclusion and asked the Agency to determine whether
it had been calculated properly. The respondents did not comment
generally on the overall thrust of the proposed rule; rather, their
comments addressed specific issues as described below. All of the
comments were carefully considered in the formulation of the final
rule.
II. Interest Rate Risk
New Secs. 615.5180 and 615.5181 are added to the investment
regulations to require each System bank to establish an interest rate
risk management program and to charge the bank's board of directors and
senior management with responsibility for maintaining effective
oversight. In addition, new Sec. 615.5182 imposes the same requirements
on all other System institutions \1\ (excluding the Federal
Agricultural Mortgage Corporation) \2\ with interest rate risk
exposure.
---------------------------------------------------------------------------
\1\ Section 1.2(a) of the Farm Credit Act of 1971, as amended,
(Act) identifies System institutions as Farm Credit Banks, banks for
cooperatives, production credit associations, Federal land bank
associations, and ``such other institutions as may be made a part of
the System, all of which shall be chartered by and subject to
regulation by the Farm Credit Administration.'' Such additional
institutions would include agricultural credit banks, agricultural
credit associations, Federal land credit associations, and service
corporations chartered under section 4.25 of the Act. For purposes
of the requirements of Sec. 615.5182, the Federal Agricultural
Mortgage Corporation is not included in the discussion of System
institutions.
\2\ Regulations affecting the Federal Agricultural Mortgage
Corporation will be issued separately.
---------------------------------------------------------------------------
The language in Sec. 615.5182 has been revised from the proposed
rule to clarify that the board and management of each System
institution have a duty to identify and manage interest rate risk
exposure at their institution. The new regulation requires institutions
other than banks to establish interest rate risk management programs
for all interest rate risk, including risk that is being managed by the
bank. The board of directors of an institution is accountable for all
interest rate risk exposure of the institution regardless of whether
the institution has contracted with the funding bank to manage certain
interest rate risks. Although the funding bank may manage the interest
rate risk, the institution's board is still accountable for ensuring
that risk exposures are appropriately identified and managed. In those
cases where an institution has interest rate risk exposure in excess of
any exposure covered by the bank, the institution will also be expected
to establish additional management requirements commensurate with the
level of such exposure.
To supplement these new regulations, which are general in nature,
the FCA Board recently adopted and published for comment a proposed
interest rate risk management policy. See 63 FR 27962, May 21, 1998.
The policy statement provides guidance to System institutions on
prudent interest rate risk management principles, as well as the
criteria the FCA will use to evaluate the adequacy and effectiveness of
a System institution's interest rate risk management. The proposed
guidelines are similar in approach to the interest rate risk guidelines
issued by other Federal financial institution regulatory agencies.\3\
---------------------------------------------------------------------------
\3\ The Office of the Comptroller of the Currency, the Federal
Deposit Insurance Corporation, and the Federal Reserve Board.
---------------------------------------------------------------------------
The new interest rate risk regulations and policy statement will
improve FCA oversight of the System by supplementing existing capital
regulations, which specifically address only credit risk. The
regulations and policy statement will better inform System institutions
of the Agency's expectations for the management of
[[Page 39220]]
interest rate risk exposure. The potentially adverse effect that
interest rate risk may have on net interest income and the market value
of an institution's equity is of particular concern to the FCA. Unless
properly measured and managed, interest rate changes can have
significant adverse effects on System institutions' ability to generate
future earnings, build net worth, and maintain liquidity. The combined
effect of the final regulation and provisions of the policy statement
is to ensure sound interest rate risk management by all System
institutions.
With the publication for comment of the proposed interest rate risk
management policy, the FCA has addressed the one comment it received on
the proposed interest rate provisions. The System joint comment
included a request that the Agency continue its practice of following
the approaches taken by other Federal financial institution regulatory
agencies and that the System be provided with an opportunity to comment
on any proposed policy statement prior to final issuance.
III. Definition of Insolvency and ``Unsafe or Unsound Condition to
Transact Business''
The FCA Board adopts several changes to Sec. 627.2710, which sets
forth the grounds for appointing a conservator or receiver for a System
institution. First, the definition of ``insolvency'' as a ground for
appointing a conservator or receiver in paragraph (b)(1) is amended to
clarify that any stock or allocated equities held by current or former
borrowers are not ``obligations to members.'' There is no change in the
treatment of obligations to members such as investment bonds and
uninsured accounts. Second, the Agency revises paragraph (b)(3), which
currently provides that a conservator or receiver may be appointed if
``[t]he institution is in an unsafe or unsound condition to transact
business.'' The revision adds that ``having insufficient capital or
otherwise'' is a circumstance that the FCA could consider to be an
unsafe and unsound condition. The amendment also identifies capital and
collateral thresholds below which an institution could be considered to
be operating unsafely, as well as other conditions. The thresholds and
conditions are:
1. For banks, a net collateral ratio (as defined by
Sec. 615.5301(d)) below 102 percent.
2. For associations, a default by the association of one or more
terms of its general financing agreement (GFA) with its affiliated bank
that the FCA determines to be material.
3. For all institutions, permanent capital (as defined in
Sec. 615.5201) of less than one-half the minimum required level for the
institution.
4. For all institutions, a total surplus (as defined by
Sec. 615.5301(i)) ratio of less than 2 percent.
5. For associations, stock impairment.
The final rule contains a revision in item 2 above, which as
proposed pertained to collateral that is insufficient to enable an
association to meet the requirements of its GFA with its affiliated
bank. The FCA Board changed the provision in response to the System's
joint comment that the term ``insufficient collateral'' in the second
threshold was too imprecise. The System joint comment stated that some
GFAs might have a more ``strident'' collateral test that could result
in a technical default that could be cured in a number of ways. The
System joint comment recommended instead that a ``continuing and
material default under the terms of the association's [GFA]'' be
considered to be an unsafe and unsound condition to transact business;
it stated that the materiality standard would eliminate minor matters,
and the requirement that the default be continuing would eliminate
defaults that could be cured. The jointly managed PCA/FLCA commented
that it supported the revision proposed in the System joint comment.
The FCA Board agrees in part with the suggestion in the System
joint comment. It is appropriate to provide that a material default of
the GFA would be considered an unsafe and unsound condition for
transacting business and, consequently, a ground for appointing a
conservator or receiver. However, a provision that the default must be
continuing is too restrictive, since a material default can indicate
severe problems even when the default might be cured by, or is waived
by action of the affiliated bank. The FCA Board further believes that
the Agency, not the bank nor the association, should be responsible for
determining, as a ground for appointing a conservator or receiver, what
constitutes a material default of the GFA. Therefore, the final rule is
revised by removing the reference to ``insufficient collateral'' in the
proposed rule and providing instead that an unsafe or unsound condition
for transacting business includes an association's default under the
terms of its GFA, where such default is determined by the Agency to be
material.
While no other comments were received on the remaining standards
and conditions, the FCA Board has made some minor adjustments in the
final rule for clarity and conformity.
As was noted in the preamble to the proposed regulations, the
thresholds and conditions are intended to be examples of what the
Agency considers to be an unsafe or unsound condition to transact
business for the purpose of appointing a conservator or receiver but
are not exclusive. The FCA will continue to have the discretion to
determine if an institution is in an unsafe or unsound condition to
transact business based on other activities or circumstances that are
not enumerated in the regulation. The FCA also retains the discretion
to not appoint a conservator or receiver even when any of the
enumerated circumstances exists. The Agency will evaluate the totality
of circumstances before deciding what action, if any, to take.
The Board notes further that the delineation of the ``unsafe or
unsound'' thresholds in this regulation does not mean that an
institution is conclusively presumed to be operating safely and soundly
if it is above all of the enumerated thresholds. The FCA may still
consider an institution operating below minimum capital standards to be
operating unsafely and unsoundly, and take appropriate supervisory
action accordingly.
IV. Service Corporations
A. Capital Requirements for Service Corporations
The FCA Board amends Sec. 611.1135(c) to provide that minimum
capital requirements may be imposed on a service corporation as a
condition of approval of the service corporation's charter. The Agency
will monitor a service corporation's compliance with individually
established capital standards through the examination process. No
comments were received on the proposed revision, and the FCA Board
adopts the rule as proposed.
B. Application of Bylaw Regulations to Service Corporations
Section 615.5220 is amended by adding a new paragraph (b) requiring
each service corporation to have relevant capitalization provisions in
its bylaws. A conforming amendment to Sec. 611.1135(b)(4) is also
adopted. No comments were received on these provisions, and they are
adopted as proposed.
V. Deferred-Tax Assets
The FCA amends Sec. 615.5210 to add a new paragraph (e)(11)
establishing a requirement to exclude certain deferred-
[[Page 39221]]
tax assets in capital calculations. Section 615.5201 is also amended to
add new paragraph (d) to define deferred-tax assets that are dependent
on future income or future events. These amendments are adopted without
change from the proposal.
Under this rule, when an institution computes its required capital
ratios, it is not required to exclude deferred-tax assets that can be
realized through carrybacks to taxes paid on income earned in prior
periods. However, the rule excludes a portion of the deferred-tax
assets: (1) That an institution can realize only if it earns sufficient
taxable income in the future; or (2) that are dependent on the
occurrence of other future events for realization. The portion of
deferred-tax assets that must be excluded is the greater of:
(1) The deferred-tax assets in excess of the amount that the
institution expects to realize within 1 year of the most recent
calendar quarter-end date, based on the institution's financial
projections of taxable income and other events for that year; or
(2) The deferred-tax assets in excess of 10 percent of core surplus
capital existing before the deduction of any disallowed tax assets.
An institution must deduct the excluded deferred-tax assets from
capital and from assets when calculating capital ratios.
The Agency received one comment and a sample computation regarding
its proposal. The System joint comment objected to the FCA's statement,
in the preamble to the proposed regulation, that the proposed exclusion
was consistent with requirements implemented by the other Federal
financial institution regulatory agencies. The other agencies provide
that commercial banks and thrifts must deduct deferred-tax assets in
excess of 10 percent of their Tier 1 capital or in excess of the amount
expected to be realized within 1 year (whichever is greater). The
System joint comment asserted that the FCA's use of core surplus as the
basis for the 10-percent limitation was not consistent with the other
agencies' approach. Rather, the System contended, the 10-percent
limitation in the calculation should be 10 percent of permanent
capital, not core surplus, because permanent capital was ``a
conservative equivalent of Tier 1 capital'' for commercial banks and
thrifts.
The Agency disagrees with the characterization of permanent capital
as a ``conservative equivalent'' of a commercial bank's Tier 1 capital.
The components of Tier 1 capital are generally more stable than many
components of permanent capital. It is true that common stockholders'
equity, which is included in permanent capital but not core surplus, is
a component of a commercial bank or thrift's Tier 1 capital. However, a
commercial bank or thrift does not routinely retire its common stock.
By contrast, most Farm Credit institutions routinely retire common
stock and distribute allocated surplus. The Agency implemented a core
surplus requirement to ensure that institutions have an amount of
stable capital that is not generally subject to routine retirements or
distributions for at least the next 3 years.\4\ Furthermore, other
components of permanent capital such as term stock are not included by
commercial banks in Tier 1 capital and may be included in Tier 2
capital only up to an amount that equals the amount of the commercial
bank's Tier 1 capital.\5\ There are no such restrictions on a Farm
Credit institution's permanent capital--nearly all capital is included
without limit, except equity holdings between FCS institutions. Because
of these significant functional differences, permanent capital and Tier
1 capital are not equivalent. The FCA Board continues to believe that
core surplus is a more appropriate basis on which to limit the
inclusion of deferred-tax assets and, therefore, adopts the regulation
as proposed.
---------------------------------------------------------------------------
\4\ Associations may include routinely distributed allocated
equities in core surplus if such equities are not scheduled for
retirement in the next 3 years.
\5\ Consequently, a commercial bank or thrift that fails to meet
its Tier 1 minimum standard will also fail to meet its overall (Tier
1 plus Tier 2) risk-based standard, no matter how much capital it
may have that meets the definition of Tier 2 capital.
---------------------------------------------------------------------------
VI. Computational Issues
The FCA Board adopts technical corrections to the existing capital
adequacy regulations, primarily involving the computation of the total
surplus and core surplus capital requirements, as described below.
A. Average Daily Balance Requirement
The FCA Board adopts Sec. 615.5330(c) to require computation of the
total surplus, core surplus, and risk-adjusted asset base using average
daily balances for the most recent 3 months, in the same way they are
used for the calculation of permanent capital. Under the existing
regulations, the total and core surplus ratios have been calculated
using month-end balances. The change is made in response to requests
from a number of institutions who commented that using month-end
balances results in significant variability in the ratios due simply to
seasonal lending trends.
One comment was received regarding proposed Sec. 615.5330(c). The
commenter supported the change on the ground that basing the
calculations on point-in-time assets could lead to a distorted view of
the capital position of an institution lending to agriculture due to
its cyclical nature.
B. Maintenance of Core Surplus and Total Surplus Ratios
The FCA Board adopts several changes to its requirements that
institutions maintain core surplus and total surplus ratios. Paragraphs
(a) and (b) of Sec. 615.5330 are amended to add the phrase ``at all
times'' to the requirement that institutions must maintain core surplus
and total surplus ratios of at least the minimum required level. The
amendatory language clarifies that institutions must have the
capability to calculate capital ratios every day, so that management
decisions relative to loans in excess of the institution's loan limits,
stock retirements, and other matters related to capital levels are made
with knowledge of the institution's current capital ratios. For
example, the institution must be able to calculate capital ratios on
any date stock is retired, to ensure that minimum capital levels will
be maintained after the retirement.
Section 615.5335 is also amended to expressly require banks to
achieve and maintain at all times a net collateral ratio at or above
the regulatory minimum, as well as to have the capability to calculate
the net collateral ratio at any time using the balances outstanding at
the computation date. No comments were received on these revisions, and
they are adopted without change from the proposed rule.
C. Treatment of Intra-System Investments and Other Adjustments
1. Reciprocal Investments
The FCA amends Sec. 615.5210(e)(1) to clarify the treatment of
reciprocal holdings between two System institutions in the capital
calculations. Institutions must eliminate reciprocal holdings before
making the other required adjustments relating to intra-System
investments. The Agency makes this clarification because some
institutions have incorrectly made other required adjustments for
intra-System investments before eliminating the reciprocal investments
when calculating capital positions. The Agency intended that
elimination of investments by one System institution in another
institution be applied on a net basis after eliminating reciprocal
holdings. See 53 FR 16956, May 12, 1988. This ``netting
[[Page 39222]]
effect'' ensures that System institutions eliminate cross-capital
investments prior to other adjustments required by the capital
regulations.
A System bank, which presently has investments in several of its
affiliated associations, recommended that the Agency eliminate the
reciprocal investment provisions from the regulations for the following
reasons: (1) The FCA currently has prior approval authority over
investments by Farm Credit banks in associations and could, therefore,
control where the investment counts in the capital calculations; (2)
the recently added capital ratios are more comprehensive and preclude
the need for the reciprocal investment provisions; and (3) it is
illogical for the bank to count its investment in the association in
the bank's net collateral ratio, since the bank does not have access to
the investment.
The FCA disagrees with the commenter's rationale for how reciprocal
investments should be counted. Reciprocal investments must be
eliminated from the capital calculations because the exchange of
reciprocal stock creates no tangible worth or resources to absorb loss.
This is a characteristic of all reciprocal investments, irrespective of
the reasons why the reciprocal investment was made. It is not
appropriate for any institution to be exempted from this treatment, as
the commenter implies. Placing the requirement in the capital
regulations ensures that all institutions calculate their capital in
the same way, and that the Agency, investors, and others are then able
to make meaningful comparisons of one institution's capital ratios with
another institution's ratios. The approach suggested by the commenter
would add unnecessary and inappropriate inconsistencies in the capital
calculations of institutions.
The FCA Board also disagrees with the commenter's assertion that
the newly added capital ratios make unnecessary the elimination of
reciprocal investments in the permanent capital calculation. On the
contrary, the new ratios have not diminished the importance of the
permanent capital ratio as a reasonable indication of an institution's
available permanent capital. The permanent capital ratio continues to
be a key measurement in several important respects. An institution's
lending limit is based on its level of permanent capital and specifies
how large a loan or loans the institution can make to a single
borrower. The institution is statutorily prohibited from retiring stock
when its permanent capital is below the required minimum. Finally, with
the adoption of this rule, if an institution's permanent capital falls
below a level equal to one-half of the required minimum, a regulatory
ground for appointing a conservator or receiver exists.
The commenter's assumption that a bank's investment in an
association is included in the bank's net collateral is incorrect.
Section 615.5301(c) of the regulations provides that net collateral is
the value of a bank's collateral as defined by Sec. 615.5050, less an
amount equal to the bank's allocations to associations that are not
counted as permanent capital by the bank. Section 615.5050 does not
include a bank's investment in an association in bank collateral, but
does include the following:
Notes and other obligations representing loans made under
the Act;
Real or personal property acquired in connection with
loans made under the Act;
Obligations of the United States or an agency thereof;
Other bank assets (including marketable securities)
approved by the FCA; and
Cash or cash equivalents.
The Agency notes that the commenter may have assumed that, because
its investments in its associations were approved by the FCA pursuant
to Sec. 615.5171, they qualify for inclusion in collateral as ``other
bank assets . . . approved by the Farm Credit Administration.'' This is
an incorrect interpretation of the collateral definition, which covers
only bank assets that have been approved by the Agency specifically for
inclusion as collateral. As is clear from the list of assets that may
count as collateral, only highly liquid investments qualify. A bank's
investment in an affiliated association is not liquid: there is no
market for the stock, and--as the commenter points out--the bank does
not have access to the investment. Consequently, it would be
inappropriate to include the bank's investment in its associations in
the net collateral.
2. Computation of Total and Core Surplus Ratios
The FCA Board clarifies the treatment of intra-System equity
investments and other deductions in the computations of total and core
surplus. For the calculation of total surplus, Sec. 615.5301(i)(7) is
amended to more clearly require the same deductions as those made in
the computation of permanent capital. In addition, paragraphs (a)(2)
and (a)(3) of Sec. 615.5330, which specify how a bank and an
association treat an association's investment in its bank in the
calculation of total surplus, are eliminated because the treatment is
now covered by revised Sec. 615.5301(i)(7). No comments were received
on the proposed amendments to the total surplus calculation, and they
are adopted without change.
With respect to core surplus, Sec. 615.5301(b)(4) is amended to
require the deduction of most intra-System investments in the
computation of the core surplus of both the investing and the issuing
institutions. However, investments to capitalize loan participations
are not deducted from the investing institution's core surplus. In the
preamble to the proposed rule, the FCA invited comment on this approach
and an alternative approach of eliminating intra-System investments
relating to loan participations from the core surplus of the investing
institution. No comments were received on this issue, and the FCA Board
finds no reason to revise its earlier proposal; thus, the amendment is
adopted as proposed.
The core surplus computation in existing Sec. 615.5301(b)(3) is
amended to require institutions to make adjustments for loss-sharing
agreements and for deferred-tax assets, as well as for investments in
the Farm Credit Services Leasing Corporation (Leasing Corporation) and
for goodwill. No comments were received on this proposal, and the
proposal is adopted without change.
3. Investments in Service Corporations
The FCA Board amends Sec. 615.5210(e)(6) to require an institution
to deduct its investments in service corporations from total capital
for purposes of computing permanent capital. This is an expansion of
the existing regulation, which requires an institution to deduct only
its investment in the Leasing Corporation. The change conforms to the
Agency's view that such capital investments are committed to support
risks at the service corporation level and that such capital
investments must be available to meet any capital needs of the service
corporation. The investing institution must also deduct the investments
when calculating its core and total surplus. The FCA received no
comments on the proposed provision and adopts it with only minor
technical changes.
D. Farm Credit System Financial Assistance Corporation (FAC)
Obligations
The FCA amends 615.5210(a) to provide that Farm Credit institutions
shall exclude FAC obligations from their balance sheets only if such
obligations were issued to pay capital preservation
[[Page 39223]]
and loss-sharing agreements. This amendment conforms the regulation to
the language of section 6.9(e)(3)(E) of the Act and narrows the
existing regulation, which excludes all FAC obligations from
institutions' balance sheets. The Agency received no comments on this
provision and adopts it as proposed.
E. Risk-Weighting Categories and Credit Conversion Factors for
Calculating Risk-Adjusted Assets
The FCA Board adopts modifications to the risk-weighting categories
for on-and off-balance-sheet assets in Sec. 615.5210(f) and adds
related definitions in Sec. 615.5201. The modifications provide a more
accurate weighting of assets relative to their risk and incorporate
recent changes to the Basle Accord,\6\ as well as provide consistency
with the requirements of the other Federal financial institution
regulatory agencies. No comments were received on the proposed
revisions, and the FCA Board adopts without change the following
revisions:
---------------------------------------------------------------------------
\6\ Agreed to by the Committee on Banking Regulations and
Supervisory Practices, under the auspices of the Bank for
International Settlements in Basle, Switzerland. Under this
agreement the other Federal financial institution regulatory
agencies that are signatories to the Accord are bound to consider
such direction and revise their regulations accordingly. The FCA,
for consistency purposes, also chooses to consider and revise its
regulations, as appropriate to the System.
---------------------------------------------------------------------------
The elimination of the 10-percent category in
Sec. 615.5210(f)(2)(ii);
The 20-percent risk-weighting category that includes
conditional guarantees and Government-sponsored agency securities not
backed by the full faith and credit of the U.S. Government;
Language distinguishing the Organization for Economic
Cooperation and Development (OECD)-based group of countries from non-
OECD-based countries; and
Credit conversion factors for derivative transactions.
Additionally, in new Sec. 615.5201(m)(2), which defines
``qualifying bilateral netting contract,'' a definition of the term
``walkaway clause'' has been added.
The FCA Board also adopts an amendment to change the risk weighting
for unused commitments with an original maturity of less than 14 months
to zero percent. Under the existing regulation, the zero-percent
category applies to loan commitments of up to only 12 months. One
commenter supported the proposed change but recommended that unused
loan commitments with an original maturity of 14 to 25 months be risk-
weighted at 10 percent and that those of longer original maturity be
risk-weighted at 20 percent; currently, any unused commitments in
excess of 12 months are risk-weighted at 50 percent. The commenter
stated that such changes would not be material in terms of risk and
would allow Farm Credit institutions to offer more timely service at a
lower cost to the institutions. The FCA agrees with the commenter that
lowering the risk weighting of loans or other assets could potentially
lower the costs of institutions that do not presently have capital well
in excess of their minimum requirements. However, the Agency disagrees
with the commenter's assertion that such changes would not be material
in terms of risk. On the contrary, the changes would enable Farm Credit
institutions to increase loan commitments by two to five times without
a corresponding increase in the amount of capital required to be held.
Thus, the final rule does not reduce the 50-percent risk weighting on
loan commitments with an original maturity of greater than 14 months.
As stated in the preamble to the proposed regulations, the FCA
intends to make the risk-weighting requirements of its regulations
consistent with the requirements of the other Federal financial
institution regulatory agencies, to the extent appropriate to the
System. In this case, the FCA Board believes it is appropriate to
extend the zero-percent risk-weighting category to loans with an
original maturity of 14 months, even though this is a deviation from
the 12-month zero-percent risk-weighting category of the other
regulators. Farm Credit institutions are more directly affected by the
seasonal cycles of agriculture than are most commercial banks and
thrifts because of the System's agriculture-specific charter. Extending
the zero-percent category by 2 months will not increase materially the
risk in System institutions' portfolios. A 14-month category for zero-
percent risk weighting takes into consideration the fact that many Farm
Credit institutions make loans on an annual renewal cycle. The practice
of these institutions is to perform the credit review and subsequent
commitment 30 to 60 days prior to the end of the current loan
commitment in order to have loan commitments in place at the beginning
of each annual cycle. The revision adopted by the FCA Board will enable
institutions to risk-weight these annual loan commitments at zero
percent without substantially raising the associated risk.
The System's joint comment recommended that the FCA adopt, as
final, a risk-weighting change proposed by the other Federal financial
institution regulatory agencies in November 1997. The other agencies
proposed to revise the risk-based capital treatment of recourse
obligations, direct credit substitutes, and securitized transactions.
One proposed revision of the other regulators would lower the risk
weighting for AAA-rated asset-backed securities from 100 percent to 20
percent. The System asked in its joint comment that the Agency
incorporate this change when it adopts these capital regulations in
final form, asserting that it is unlikely that the amendment proposed
by the other agencies will be challenged. FCA staff's discussions with
the other regulators indicated no final decisions are imminent as to
what the other agencies' final rule will address and when it will be
adopted. The FCA Board believes that a change to FCA's current risk
weighting of such assets is not appropriate at this time. However, the
Agency will continue to monitor the efforts of the other regulatory
agencies and evaluate the appropriateness of FCA's capital requirements
should the other regulatory agencies implement a 20-percent risk
weighting for AAA-rated asset-backed securities.
VII. Other Issues
A. Retirement of Certain Allocated Equities Included in Core Surplus
The FCA Board amends Sec. 615.5301(b)(2) to generally disallow
certain allocated equities from treatment as association core surplus
in the event of partial retirements of similar equities allocated in
the same year. However, the revised regulation allows certain allocated
equities to remain a part of core surplus when: (1) Partial retirements
are required by section 4.14B of the Act, (2) an equityholder has
defaulted on a loan, or (3) an equityholder whose loan has been repaid
has died, and the institution's capital plan provides for retirement in
that circumstance.
Previously, the regulation did not specifically address partial
retirements of the type of allocated equities that associations may
include in core surplus pursuant to Sec. 615.5301(b)(2). By this
change, treatment of such allocated equities is consistent with the
treatment in Sec. 615.5301(b)(1)(ii) of nonqualified allocated equities
not distributed according to a plan or practice. The Agency had
intended to treat partial retirements of all allocated equities in the
same way. The change makes the consistent treatment clear for all types
of allocated equities. The Agency received no comments on this
provision and adopts it as proposed.
[[Page 39224]]
B. Ensuring Two Nominees for Each Bank Director's Position and Ensuring
Representation on the Board of All Types of Agriculture in the District
Pursuant to section 4.15 of the Act, a new Sec. 615.5230(b)(5) is
added to require banks to make a good faith effort to locate at least
two nominees for each director position and to try to assure
representation on the board that is reflective of the bank's territory.
The Agency proposed these changes to implement the statutory
requirement to adopt regulations assuring a choice for bank director
positions and board diversity. The regulation requires written
documentation of the effort a bank makes in the event it is unable to
find at least two nominees for each position. The bank must also keep a
record of the type of agriculture engaged in by each director on its
board. In addition, a reference is added in Sec. 611.350, the subpart
on director elections, to the cooperative principles set forth in
Sec. 615.5230 that apply to such elections.
One commenter asserted that the new regulations should not apply to
situations where directors are nominated by shareholders rather than by
a nominating committee. (The Act requires only associations to utilize
a nominating committee, but other institutions may also choose to do
so.) A Farm Credit bank submitted a comment in which it described its
nominating process: the bank sends ballots to all eligible shareholders
to solicit nominations for director positions, and the two individuals
receiving the highest number of votes become the nominees. In the event
that one of the nominees withdraws from the election, the bank asks the
candidate with the third-highest number of votes to run, but the bank
is sometimes unsuccessful. Consequently, only one candidate remains for
the office.
The Agency is not persuaded by the Farm Credit bank's assertion
that, because the bank uses a shareholder nomination process rather
than a nominating committee, it should not have to document in writing
its attempts to assure at least two nominees for each director
position. Section 4.15 of the Act states in pertinent part that FCA
regulations on the election of bank directors shall ``assure a choice
of two nominees for each elective office to be filled;'' the Act makes
no reference to nominating committees. Institutions must make good
faith efforts to assure at least two candidates, but the Agency does
not intend or expect the written documentation of these efforts to be
burdensome. The bank needs merely to provide a brief but reasonable
description of its efforts to seek a second nominee for inclusion in
its records. This regulation does not require two nominees for each
position. Instead, it requires documentation of the bank's efforts to
secure at least two nominees. The FCA Board adopts the regulation
without change from the proposal.
C. Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income
Sections 615.5210(e)(10), 615.5301(b)(5), and 615.5301(i)(4) are
amended to extend the exclusion currently applicable to unrealized
gains or losses on available-for-sale securities to all transactions
covered by the definition of ``accumulated other comprehensive income''
contained in the Financial Accounting Standards Board's (FASB) recently
issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 sets
forth standards for reporting and displaying comprehensive income in a
full set of financial statements for fiscal years beginning after
December 15, 1997. Transactions covered by this new statement will be
reported as a separate component of the equity (capital) section in the
statement of financial position.
The amendments are adopted in response to a suggestion made in the
System's joint comment. The Agency did not propose any changes to the
regulations in the proposed rule, on the ground that it saw no
compelling reasons to limit the impact of SFAS No. 130. But in the
preamble to the proposed rule, the FCA Board invited comment on what
effect, if any, SFAS No. 130 should have on the current capital
standards.
The System, in its joint comment, recommended that the Agency amend
the capital regulations to extend the exclusion currently applicable to
unrealized gains or losses on available-for-sale securities to all
transactions defined by SFAS No. 130 as ``accumulated other
comprehensive income.'' The commenter pointed out that the current
capital regulations at Sec. 615.5210(e)(10) exclude the net impact of
unrealized gains or losses on available-for-sale securities from the
computation of permanent capital. The commenter observed that the items
included in the category of ``other comprehensive income'' pursuant to
SFAS No. 130 are similar in nature to such unrealized gains or losses
and that it would be appropriate to treat them in the same way.
The FCA Board is persuaded by the System's joint comment and adopts
the System's suggested change. The Agency agrees that it is generally
more appropriate to treat components of capital with comparable
characteristics and terms in a like manner under the capital standards.
However, in the event that the FCA determines that an individual
component, entry, or account has characteristics or terms that diminish
its contribution to an institution's ability to absorb losses,
Secs. 615.5301(b)(6) and 615.5301(f)(6) of the current regulations
provide the Agency with sufficient flexibility to require the deduction
of all or a portion of such a component, entry, or account from core
surplus or total surplus.
D. Conforming Amendments
The FCA Board adopts several other clarifying changes to wording of
the total surplus and core surplus definitions. Paragraphs (b)(1)(ii)
and (iii), (b)(2), and (i)(2) and (3) of Sec. 615.5301 are amended to
provide additional clarity to the definitions. Paragraph (b)(1)(ii) is
amended to clarify that the term ``allocated equities'' includes
allocated stock. The FCA is concerned that some institutions may
otherwise interpret the regulation as permitting institutions to treat
allocated stock either as allocated equities (as described in
paragraphs (b)(1)(ii) and (b)(2)) or as perpetual stock (as described
in paragraphs (b)(1)(iii) and (i)(3)) when calculating core and total
surplus. In fact, the allocated stock must be treated as allocated
equities in the calculations. The FCA is also changing
Sec. 615.5301(b)(2) to clarify that, for purposes of the capital ratio
calculations, ``revolvement'' of allocated equities means any
retirement of those equities, whether or not the institution has a
formal revolvement plan. This change is made to avoid the implication
that revolvement means something other than retirement.
Furthermore, in Sec. 615.5301(b)(2)(ii), the phrase ``if subject to
revolvement, are not scheduled for revolvement during the next 3
years'' is replaced with the phrase ``if subject to a plan or practice
of revolvement or retirement, are not scheduled or intended to be
revolved or retired during the next 3 years'' in order to parallel more
closely the language in paragraphs (b)(1)(ii) and (iii) of
Sec. 615.5301. A parallel change is made to Sec. 615.5301(i)(2) by
replacing the phrase `` which, if subject to revolvement of retirement,
have an original planned revolvement or retirement date of not less
than 5 years'' with the phrase ``that are not subject to a plan or
practice of revolvement or retirement of 5 years or less.'' These
changes clarify that ``subject to
[[Page 39225]]
revolvement'' has the same meaning as the other references to a plan or
practice of revolvement or retirement in the core surplus and total
surplus definitions.
The Agency amends Sec. 620.5 to require institutions to disclose
information on their surplus and collateral ratios in the annual report
to shareholders. Conforming, nonsubstantive changes are also adopted in
Sec. 615.5201(h) to replace ``allocation'' with ``allotment'' and in
Secs. 615.5210(b) and 615.5260(a)(3)(ii) to remove obsolete language.
These amendments are adopted without change from the proposed rule.
List of Subjects
12 CFR Part 611
Agriculture, Banks, banking, Rural areas.
12 CFR Part 615
Accounting, Agriculture, Banks, banking, Government securities,
Investments, Rural areas.
12 CFR Part 620
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 627
Agriculture, Banks, banking, Claims, Rural areas.
For the reasons stated in the preamble, parts 611, 615, 620, and
627 of chapter VI, title 12 of the Code of Federal Regulations are
amended to read as follows:
PART 611--ORGANIZATION
1. The authority citation for part 611 continues to read as
follows:
Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15,
4.21, 5.9, 5.10, 5.17, 7.0-7.13, 8.5(e) of the Farm Credit Act (12
U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2209, 2243,
2244, 2252, 2279a-2279f-1, 2279aa-5(e)); secs. 411 and 412 of Pub.
L. 100-233, 101 Stat. 1568, 1638; secs. 409 and 414 of Pub. L. 100-
399, 102 Stat. 989, 1003, and 1004.
Subpart C--Election of Directors
2. Section 611.350 is added to read as follows:
Sec. 611.350 Application of cooperative principles to the election of
directors.
In the election of directors, each System institution shall comply
with the applicable cooperative principles set forth in Sec. 615.5230
of this chapter.
Subpart I--Service Organizations
3. Section 611.1135 is amended by revising paragraphs (b)(4) and
(c) to read as follows:
Sec. 611.1135 Incorporation of service organizations.
* * * * *
(b) * * *
(4) The proposed bylaws, which shall include the provisions
required by Sec. 615.5220(b) of this chapter.
* * * * *
(c) Approval. The Farm Credit Administration may condition the
issuance of a charter, including imposing minimum capital requirements,
as it deems appropriate. For good cause, the Farm Credit Administration
may deny the application. Upon approval by the Farm Credit
Administration of a completed application, which shall be kept on file
at the Farm Credit Administration, the Agency shall issue a charter for
the service corporation which shall thereupon become a corporate body
and a Federal instrumentality.
* * * * *
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
4. The authority citation for part 615 continues to read as
follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17,
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm
Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074,
2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b,
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4,
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of
Pub. L. 100-233, 101 Stat. 1568, 1608.
Subpart E--Investment Management
5. Section 615.5135 is amended by removing the first sentence of
the introductory paragraph and adding two sentences in its place to
read as follows:
Sec. 615.5135 Management of interest rate risk.
The board of directors of each Farm Credit Bank, bank for
cooperatives, and agricultural credit bank shall develop and implement
an interest rate risk management program as set forth in subpart G of
this part. The board of directors shall adopt an interest rate risk
management section of an asset/liability management policy which
establishes interest rate risk exposure limits as well as the criteria
to determine compliance with these limits. * * *
* * * * *
6. A new subpart G is added to read as follows:
Subpart G--Risk Assessment and Management
Sec.
615.5180 Interest rate risk management by banks--general.
615.5181 Bank interest rate risk management program.
615.5182 Interest rate risk management by associations and other
Farm Credit System institutions other than banks.
Subpart G--Risk Assessment and Management
Sec. 615.5180 Interest rate risk management by banks--general.
The board of directors of each Farm Credit Bank, bank for
cooperatives, and agricultural credit bank shall develop and implement
an interest rate risk management program tailored to the needs of the
institution and consistent with the requirements set forth in
Sec. 615.5135 of this part. The program shall establish a risk
management process that effectively identifies, measures, monitors, and
controls interest rate risk.
Sec. 615.5181 Bank interest rate risk management program.
(a) The board of directors of each Farm Credit Bank, bank for
cooperatives, and agricultural credit bank is responsible for providing
effective oversight to the interest rate risk management program and
must be knowledgeable of the nature and level of interest rate risk
taken by the institution.
(b) Senior management is responsible for ensuring that interest
rate risk is properly managed on both a long-range and a day-to-day
basis.
Sec. 615.5182 Interest rate risk management by associations and other
Farm Credit System institutions other than banks.
Any association or other Farm Credit System institution other than
banks, excluding the Federal Agricultural Mortgage Corporation, with
interest rate risk that could lead to significant declines in net
income or in the market value of capital shall comply with the
requirements of Secs. 615.5180 and 615.5181. The interest rate risk
management program required under Sec. 615.5181 shall be commensurate
with the level of interest rate risk of the institution.
Subpart H--Capital Adequacy
Sec. 615.5201 [Amended]
7. Section 615.5201 is amended by removing the word ``allocation''
and adding in its place, the word ``allotment'' in paragraph (h);
redesignating paragraphs (d), (e), (f), (g),
[[Page 39226]]
(h), (i), (j), (k), (l), (m), and (n) as paragraphs (e), (f), (g), (h),
(i), (k), (l), (n), (o), (p), and (q) respectively; and adding new
paragraphs (d), (j), and (m) to read as follows:
Sec. 615.5201 Definitions.
* * * * *
(d) Deferred-tax assets that are dependent on future income or
future events means:
(1) Deferred-tax assets arising from deductible temporary
differences dependent upon future income that exceed the amount of
taxes previously paid that could be recovered through loss carrybacks
if existing temporary differences (both deductible and taxable and
regardless of where the related tax-deferred effects are recorded on
the institution's balance sheet) fully reverse;
(2) Deferred-tax assets dependent upon future income arising from
operating loss and tax carryforwards; or
(3) Deferred-tax assets arising from temporary differences that
could be recovered if existing temporary differences that are dependent
upon other future events (both deductible and taxable and regardless of
where the related tax-deferred effects are recorded on the
institution's balance sheet) fully reverse.
* * * * *
(j) OECD means the group of countries that are full members of the
Organization for Economic Cooperation and Development, regardless of
entry date, as well as countries that have concluded special lending
arrangements with the International Monetary Fund's General Arrangement
to Borrow, excluding any country that has rescheduled its external
sovereign debt within the previous 5 years.
* * * * *
(m) Qualifying bilateral netting contract means a bilateral netting
contract that meets at least the following conditions:
(1) The contract is in writing;
(2) The contract is not subject to a walkaway clause, defined as a
provision that permits a non-defaulting counterparty to make lower
payments than it would make otherwise under the contract, or no payment
at all, to a defaulter or to the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
contract;
(3) The contract creates a single obligation either to pay or to
receive the net amount of the sum of positive and negative mark-to-
market values for all derivative contracts subject to the qualifying
bilateral netting contract;
(4) The institution receives a legal opinion that represents, to a
high degree of certainty, that in the event of legal challenge the
relevant court and administrative authorities would find the
institution's exposure to be the net amount;
(5) The institution establishes a procedure to monitor relevant law
and to ensure that the contracts continue to satisfy the requirements
of this section; and
(6) The institution maintains in its files adequate documentation
to support the netting of a derivatives contract.
* * * * *
8. Section 615.5210 is amended by adding new paragraph (e)(11);
removing paragraph (f)(2)(v); and revising paragraphs (a), (b), (e)
introductory text, (e)(1), (e)(6), (e)(10), (f)(2)(i), (f)(2)(ii),
heading of (f)(2)(iii), (f)(2)(iv), (f)(3)(ii)(A), and (f)(3)(iii) to
read as follows:
Sec. 615.5210 Computation of the permanent capital ratio.
(a) The institution's permanent capital ratio shall be determined
on the basis of the financial statements of the institution prepared in
accordance with generally accepted accounting principles except that
the obligations of the Farm Credit System Financial Assistance
Corporation issued to repay banks in connection with the capital
preservation and loss-sharing agreements described in section 6.9(e)(1)
of the Act shall not be considered obligations of any institution
subject to this regulation prior to their maturity.
(b) The institution's asset base and permanent capital shall be
computed using average daily balances for the most recent 3 months.
* * * * *
(e) For the purpose of computing the institution's permanent
capital ratio, the following adjustments shall be made prior to
assigning assets to risk-weight categories and computing the ratio:
(1) Where two Farm Credit System institutions have stock
investments in each other, such reciprocal holdings shall be eliminated
to the extent of the offset. If the investments are equal in amount,
each institution shall deduct from its assets and its total capital an
amount equal to the investment. If the investments are not equal in
amount, each institution shall deduct from its total capital and its
assets an amount equal to the smaller investment. The elimination of
reciprocal holdings required by this paragraph shall be made prior to
making the other adjustments required by this section.
* * * * *
(6) The double-counting of capital by a service corporation
chartered under section 4.25 of the Act and its stockholder
institutions shall be eliminated by deducting an amount equal to the
institution's investment in the service corporation from its total
capital.
* * * * *
(10) The permanent capital of an institution shall exclude the net
effect of all transactions covered by the definition of ``accumulated
other comprehensive income'' contained in the Statement of Financial
Accounting Standards No. 130, as promulgated by the Financial
Accounting Standards Board.
(11) For purposes of calculating capital ratios under this part,
deferred-tax assets are subject to the conditions, limitations, and
restrictions described in this paragraph.
(i) Each institution shall deduct an amount of deferred-tax assets,
net of any valuation allowance, from its assets and its total capital
that is equal to the greater of:
(A) The amount of deferred-tax assets that are dependent on future
income or future events in excess of the amount that is reasonably
expected to be realized within 1 year of the most recent calendar
quarter-end date, based on financial projections for that year, or
(B) The amount of deferred-tax assets that are dependent on future
income or future events in excess of ten (10) percent of the amount of
core surplus that exists before the deduction of any deferred-tax
assets.
(ii) For purposes of this calculation:
(A) The amount of deferred-tax assets that can be realized from
taxes paid in prior carryback years and from the reversal of existing
taxable temporary differences shall not be deducted from assets and
from equity capital.
(B) All existing temporary differences should be assumed to fully
reverse at the calculation date.
(C) Projected future taxable income should not include net
operating loss carryforwards to be used within 1 year or the amount of
existing temporary differences expected to reverse within that year.
(D) Financial projections shall include the estimated effect of
tax-planning strategies that are expected to be implemented to minimize
tax liabilities and realize tax benefits. Financial projections for the
current fiscal year (adjusted for any significant changes that have
occurred or are expected to occur) may be used when applying the
capital limit at an interim date within the fiscal year.
(E) The deferred tax effects of any unrealized holding gains and
losses on
[[Page 39227]]
available-for-sale debt securities may be excluded from the
determination of the amount of deferred-tax assets that are dependent
upon future taxable income and the calculation of the maximum allowable
amount of such assets. If these deferred-tax effects are excluded, this
treatment must be followed consistently over time.
(f) * * *
(2) * * *
(i) Category 1: 0 Percent.
(A) Cash on hand and demand balances held in domestic or foreign
banks.
(B) Claims on Federal Reserve Banks.
(C) Goodwill.
(D) Direct claims on and portions of claims unconditionally
guaranteed by the United States Treasury, United States Government
agencies, or central governments in other OECD countries. A United
States Government agency is defined as an instrumentality of the United
States Government whose obligations are fully and explicitly guaranteed
as to the timely repayment of principal and interest by the full faith
and credit of the United States Government.
(ii) Category 2: 20 Percent.
(A) Portions of loans and other assets collateralized by United
States Government-sponsored agency securities. A United States
Government-sponsored agency is defined as an agency originally
chartered or established to serve public purposes specified by the
United States Congress but whose obligations are not explicitly
guaranteed by the full faith and credit of the United States
Government.
(B) Portions of loans and other assets conditionally guaranteed by
the United States Government or its agencies.
(C) Portions of loans and other assets collateralized by securities
issued or guaranteed (fully or partially) by the United States
Government or its agencies (but only to the extent guaranteed).
(D) Claims on domestic banks (exclusive of demand balances).
(E) Claims on, or guarantees by, OECD banks.
(F) Claims on non-OECD banks with a remaining maturity of 1 year or
less.
(G) Investments in State and local government obligations backed by
the ``full faith and credit of State or local government.'' Other
claims (including loans) and portions of claims guaranteed by the full
faith and credit of a State government (but only to the extent
guaranteed).
(H) Claims on official multinational lending institutions or
regional development institutions in which the United States Government
is a shareholder or contributor.
(I) Loans and other obligations of and investments in Farm Credit
institutions.
(J) Local currency claims on foreign central governments to the
extent that the Farm Credit institution has local liabilities in that
country.
(K) Cash items in the process of collection.
(iii) Category 3: 50 Percent.
* * * * *
(iv) Category 4: 100 Percent.
(A) All other claims on private obligors.
(B) Claims on non-OECD banks with a remaining maturity greater than
1 year.
(C) All other assets not specified above, including but not limited
to, leases, fixed assets, and receivables.
(D) All non-local currency claims on foreign central governments,
as well as local currency claims on foreign central governments that
are not included in Category 2(J).
(3) * * *
(ii) * * *
(A) 0 Percent.
(1) Unused commitments with an original maturity of 14 months or
less; or
(2) Unused commitments with an original maturity of greater than 14
months if:
* * * * *
(iii) Credit equivalents of interest rate contracts and foreign
contracts.
(A) Credit equivalents of interest rate contracts and foreign
exchange contracts (except single currency floating/floating interest
rate swaps) shall be determined by adding the replacement cost (mark-
to-market value, if positive) to the potential future credit exposure,
determined by multiplying the notional principal amount by the
following credit conversion factors as appropriate.
Conversion Factor Matrix
[In Percent]
------------------------------------------------------------------------
Interest Exchange
Remaining maturity rate rate Commodity
------------------------------------------------------------------------
1 year or less................... 0.0 1.0 10.0
Over 1 to 5 years................ 0.5 5.0 12.0
Over 5 years..................... 1.5 7.5 15.0
------------------------------------------------------------------------
(B) For any derivative contract that does not fall within one of
the categories in the above table, the potential future credit exposure
shall be calculated using the commodity conversion factors. The net
current exposure for multiple derivative contracts with a single
counterparty and subject to a qualifying bilateral netting contract
shall be the net sum of all positive and negative mark-to-market values
for each derivative contract. The positive sum of the net current
exposure shall be added to the adjusted potential future credit
exposure for the same multiple contracts with a single counterparty.
The adjusted potential future credit exposure shall be computed as
Anet = (0.4 x Agross) + 0.6 (NGR x
Agross) where:
(1) Anet is the adjusted potential future credit
exposure;
(2) Agross is the sum of potential future credit
exposures determined by multiplying the notional principal amount by
the appropriate credit conversion factor; and
(3) NGR is the ratio of the net current credit exposure divided by
the gross current credit exposure determined as the sum of only the
positive mark-to-markets for each derivative contract with the single
counterparty.
* * * * *
Subpart I--Issuance of Equities
9. Section 615.5220 is amended by redesignating paragraphs (a)
through (h) as paragraphs (1) through (8) consecutively; by adding the
paragraph designation ``(a)'' to the introductory text; and by adding a
new paragraph (b) to read as follows:
Sec. 615.5220 Capitalization bylaws.
* * * * *
(b) The board of directors of each service corporation (including
the Farm Credit Leasing Services Corporation) shall adopt
capitalization bylaws, subject to the approval of its voting
shareholders, that set forth the
[[Page 39228]]
requirements of paragraphs (a)(1), (a)(2), and (a)(3) of this section
to the extent applicable. Such bylaws shall also set forth the manner
in which equities will be retired and the manner in which earnings will
be distributed.
10. Section 615.5230 is amended by adding a new paragraph (b)(5) to
read as follows:
Sec. 615.5230 Implementation of cooperative principles.
* * * * *
(b) * * *
(5) Each bank shall endeavor to assure that there is a choice of at
least two nominees for each elective office to be filled and that the
board represents as nearly as possible all types of agriculture in the
district. If fewer than two nominees for each position are named, the
efforts of the bank to locate two willing nominees shall be documented
in the records of the bank. The bank shall also maintain a list of the
type or types of agriculture engaged in by each director on its board.
Subpart J--Retirement of Equities
11. Section 615.5260 is amended by revising paragraph (a)(3)(ii) to
read as follows:
Sec. 615.5260 Retirement of eligible borrower stock.
(a) * * *
(3) * * *
(ii) In the case of participation certificates and other equities,
face or equivalent value; or
* * * * *
Subpart K--Surplus and Collateral Requirements
12. Section 615.5301 is amended by revising paragraphs (a),
(b)(1)(ii), (b)(1)(iii), (b)(2)(ii), (b)(3), (b)(4), (b)(5), (i)(2),
(i)(3), (i)(4), and (i)(7) to read as follows:
Sec. 615.5301 Definitions.
* * * * *
(a) The terms deferred-tax assets that are dependent on future
income or future events, institution, permanent capital, and total
capital shall have the meanings set forth in Sec. 615.5201.
(b) * * *
(1) * * *
(ii) Nonqualified allocated equities (including stock) that are not
distributed according to an established plan or practice, provided
that, in the event that a nonqualified patronage allocation is
distributed, other than as required by section 4.14B of the Act, or in
connection with a loan default or the death of an equityholder whose
loan has been repaid (to the extent provided for in the institution's
capital adequacy plan), any remaining nonqualified allocations that
were allocated in the same year will be excluded from core surplus.
(iii) Perpetual common or noncumulative perpetual preferred stock
(other than allocated stock) that is not retired according to an
established plan or practice, provided that, in the event that stock
held by a borrower is retired, other than as required by section 4.14B
of the Act or in connection with a loan default to the extent provided
for in the institution's capital plan, the remaining perpetual stock of
the same class or series shall be excluded from core surplus;
* * * * *
(2) * * *
(ii) The allocated equities, if subject to a plan or practice of
revolvement or retirement, are not scheduled or intended to be revolved
or retired during the next 3 years, provided that, in the event that
such allocated equities included in core surplus are retired, other
than as required by section 4.14B of the Act, or in connection with a
loan default or the death of an equityholder whose loan has been repaid
(to the extent provided for in the institution's capital adequacy
plan), any remaining such allocated equities that were allocated in the
same year will be excluded from core surplus.
(3) The deductions required to be made by an institution in the
computation of its permanent capital pursuant to Sec. 615.5210(e) (6),
(7), (9), and (11) shall also be made in the computation of its core
surplus. Deductions required by Sec. 615.5210(e)(1) shall also be made
to the extent that they do not duplicate deductions calculated pursuant
to this section and required by Sec. 615.5330(b)(2).
(4) Equities issued by System institutions and held by other System
institutions shall not be included in the core surplus of the issuing
institution or of the holder, unless approved pursuant to paragraph
(b)(1)(iv) of this section, except that equities held in connection
with a loan participation shall not be excluded by the holder. This
paragraph shall not apply to investments by an association in its
affiliated bank, which are governed by Sec. 615.5301(b)(1)(i).
(5) The core surplus of an institution shall exclude the net effect
of all transactions covered by the definition of ``accumulated other
comprehensive income'' contained in the Statement of Financial
Accounting Standards No. 130, as promulgated by the Financial
Accounting Standards Board.
* * * * *
(i) * * *
(2) Allocated equities, including allocated surplus and stock, that
are not subject to a plan or practice of revolvement or retirement of 5
years or less and are eligible to be included in permanent capital
pursuant to Sec. 615.5201(j)(4)(iv); and
(3) Stock (other than allocated stock) that is not purchased or
held as a condition of obtaining a loan, provided that it is either
perpetual stock or term stock with an original maturity of at least 5
years, and provided that the institution has no established plan or
practice of retiring such perpetual stock or of retiring such term
stock prior to its stated maturity. The amount of term stock that is
eligible to be included in total surplus shall be reduced by 20 percent
(net of redemptions) at the beginning of each of the last 5 years of
the term of the instrument.
(4) The total surplus of an institution shall exclude the net
effect of all transactions covered by the definition of ``accumulated
other comprehensive income'' contained in the Statement of Financial
Accounting Standards No. 130, as promulgated by the Financial
Accounting Standards Board.
* * * * *
(7) Any deductions made by an institution in the computation of its
permanent capital pursuant to Sec. 615.5210(e) shall also be made in
the computation of its total surplus.
13. Section 615.5330 is revised to read as follows:
Sec. 615.5330 Minimum surplus ratios.
(a) Total surplus. (1) Each institution shall achieve and at all
times maintain a ratio of a least 7 percent of total surplus to the
risk-adjusted asset base.
(2) The risk-adjusted asset base is the total dollar amount of the
institution's assets adjusted in accordance with Sec. 615.5301(i)(7)
and weighted on the basis of risk in accordance with Sec. 615.5210(f).
(b) Core surplus. (1) Each institution shall achieve and at all
times maintain a ratio of core surplus to the risk-adjusted asset base
of a least 3.5 percent, of which no more than 2 percentage points may
consist of allocated equities otherwise includible pursuant to
Sec. 615.5301(b).
(2) Each association shall compute its core surplus ratio by
deducting an amount equal to the net investment in the bank from its
core surplus.
(3) The risk-adjusted asset base is the total dollar amount of the
institution's
[[Page 39229]]
assets adjusted in accordance with Secs. 615.5301(b)(3) and
615.5330(b)(2), and weighted on the basis of risk in accordance with
Sec. 615.5210(f).
(c) An institution shall compute its risk-adjusted asset base,
total surplus, and core surplus ratios using average daily balances for
the most recent 3 months.
14. Section 615.5335 is revised to read as follows:
Sec. 615.5335 Bank net collateral ratio.
(a) Each bank shall achieve and at all times maintain a net
collateral ratio of at least 103 percent.
(b) At a minimum, a bank shall compute its net collateral ratio as
of the end of each month. A bank shall have the capability to compute
its net collateral ratio a day after the close of a business day using
the daily balances outstanding for assets and liabilities for that
date.
Subpart L--Establishment of Minimum Capital Ratios for an
Individual Institution
15. Section 615.5350 is amended by adding a new paragraph (b)(7) to
read as follows:
Sec. 615.5350 General--Applicability.
* * * * *
(b) * * *
(7) An institution with significant exposures to declines in net
income or in the market value of its capital due to a change in
interest rates and/or the exercising of embedded or explicit options.
Subpart M--Issuance of a Capital Directive
16. Section 615.5355 is amended by revising paragraph (a)(4) to
read as follows:
Sec. 615.5355 Purpose and scope.
(a) * * *
(4) Take other action, such as reduction of assets or the rate of
growth of assets, restrictions on the payment of dividends or
patronage, or restrictions on the retirement of stock, to achieve the
applicable capital ratios, or reduce levels of interest rate and other
risk exposures, or strengthen management expertise, or improve
management information and measurement systems; or
* * * * *
PART 620--DISCLOSURE TO SHAREHOLDERS
17. The authority citation for part 620 continues to read as
follows:
Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12
U.S.C. 2252, 2254, 2279aa-11); sec. 424 of Pub. L. 100-233, 101
Stat. 1568, 1656.
Subpart A--General
Sec. 620.1 [Amended]
18. Section 620.1 is amended by removing the reference
``Sec. 615.5201(j)'' and adding in its place, the reference
``Sec. 615.5201(l)'' in paragraph (j).
Subpart B--Annual Report to Shareholders
Sec. 620.5 [Amended]
19. Section 620.5 is amended by removing the word ``permanent''
from paragraphs (d)(2), (g)(4)(v), and (g)(4)(vi); by revising
paragraph (f)(3); and by adding paragraph (f)(4) to read as follows:
Sec. 620.5 Contents of the annual report to shareholders.
* * * * *
(f) * * *
(3) For all banks (on a bank-only basis):
(i) Permanent capital ratio.
(ii) Total surplus ratio.
(iii) Core surplus ratio.
(iv) Net collateral ratio.
(4) For all associations:
(i) Permanent capital ratio.
(ii) Total surplus ratio.
(iii) Core surplus ratio.
* * * * *
PART 627--TITLE V CONSERVATORS AND RECEIVERS
20. The authority citation for part 627 continues to read as
follows:
Authority: Secs. 4.2, 5.9, 5.10, 5.17, 5.51, 5.58 of the Farm
Credit Act (12 U.S.C. 2183, 2243, 2244, 2252, 2277a, 2277a-7).
Subpart A--General
21. Section 627.2710 is amended by revising paragraphs (b)(1) and
(b)(3) to read as follows:
Sec. 627.2710 Grounds for appointment of conservators and receivers.
* * * * *
(b) * * *
(1) The institution is insolvent, in that the assets of the
institution are less than its obligations to creditors and others,
including its members. For purposes of determining insolvency,
``obligations to members'' shall not include stock or allocated
equities held by current or former borrowers.
* * * * *
(3) The institution is in an unsafe or unsound condition to
transact business, including having insufficient capital or otherwise.
For purposes of this regulation, ``unsafe or unsound condition'' shall
include, but shall not be limited to, the following conditions:
(i) For banks, a net collateral ratio below 102 percent.
(ii) For associations, a default by the association of one or more
terms of its general financing agreement with its affiliated bank that
the Farm Credit Administration determines to be a material default.
(iii) For all institutions, permanent capital of less than one-half
the minimum required level for the institution.
(iv) For all institutions, a total surplus ratio of less than 2
percent.
(v) For associations, stock impairment.
* * * * *
Dated: July 15, 1998.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 98-19394 Filed 7-21-98; 8:45 am]
BILLING CODE 6705-01-P
