[Federal Register Volume 59, Number 140 (Friday, July 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17907]
[[Page Unknown]]
[Federal Register: July 22, 1994]
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FARM CREDIT ADMINISTRATION
12 CFR Parts 607, 614, 615, and 620
RIN 3052-AB44
Assessment and Apportionment of Administrative Expenses; Loan
Policies and Operations; Funding and Fiscal Affairs, Loan Policies and
Operations, and Funding Operations; Disclosure to Shareholders
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit
Administration Board (Board), amends the regulations relating to the
components of permanent capital for Farm Credit System (Farm Credit or
System) banks and associations. The objective of these regulations is
to implement amendments to the Farm Credit Act of 1971 (1971 Act) made
by the Farm Credit Banks and Associations Safety and Soundness Act of
1992 (1992 Act). The effect of the regulations is to establish
requirements for the agreement between a Farm Credit Bank (FCB) and its
related direct lender associations specifying where the earnings held
by the FCB and allocated to associations may be counted as permanent
capital, to specify how these earnings would be counted in the absence
of an agreement, to provide a date certain for the exclusion from
capital of payments by Farm Credit institutions to the Farm Credit
System Financial Assistance Corporation (FAC) made in connection with
the repayment of Treasury-paid interest, and to make other conforming
changes to implement the statutory amendments. Technical and conforming
changes are made throughout the agency's regulations.
EFFECTIVE DATE: The regulations shall become effective on December 31,
1994.
FOR FURTHER INFORMATION CONTACT:
Robert S. Child, Policy Analyst, Regulation Development, Office of
Examination, 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: On June 15, 1993, the FCA Board proposed
amendments to its regulations that would implement the changes set
forth by the 1992 Act. (See 58 FR 34004, June 23, 1993.) The FCA
received comments in response to these proposed regulations from The
Farm Credit Council on behalf of its membership and the Federal Farm
Credit Banks Funding Corporation, two Farm Credit Banks (FCBs), a Farm
Credit association, and a state bankers' association. These comments
were fully considered by the FCA in drafting the final regulations. The
comments and the FCA's response to the comments are discussed below,
along with an explanation of any material changes made to the proposed
regulations. In addition, technical and clarifying changes to language
of the proposed regulations have been made in the final regulations.
I. General Comments
A commenter asserted that some of the proposed regulations,
particularly Sec. 615.5210(e)(2)(ii)(A) through (C) and (E), inject the
FCA into the decision making process of the banks and associations as
they attempt to develop agreements that will best fit their business
needs. The proposed regulations cited by the commenter pertain to the
time period of the allocation agreement, the effective date, the
prohibition on amendments more often than annually without FCA
approval, and the automatic 1-year extension if neither party objects.
As is explained in more detail below, the regulatory requirements were
proposed primarily for safety and soundness reasons but also provided
for the administrative convenience of the System institutions and the
FCA. The FCA also attempted to provide a framework that would permit
negotiation between banks and associations on an equitable basis. The
final regulations contain modifications to the proposed regulations,
including certain deletions of provisions pertaining to administrative
convenience, to the extent the FCA believes appropriate without
compromising safety and soundness and fairness principles.
A commenter asserted that the underlying impact of the proposed
regulations was to provide greater flexibility to the FCBs in competing
with private sector lenders and criticized this as contrary to the
public good and inconsistent with the objective of reducing
Government's role in the free market. The FCA disagrees. The proposed
regulations do not augment the statutory authority of the FCBs. The
``greater flexibility'' in allocating capital is provided by the
statute and is not expanded by the regulations.
A commenter stated a belief that the intent of the 1992 Act
amendment to section 4.3A(a)(1)(B) of the 1971 Act was to require FCBs
and associations to enter into allocation agreements. The FCA disagrees
that the law mandates allocation agreements and does not believe it is
appropriate or feasible to promulgate a regulation forcing nonagreeing
associations and FCBs to enter into agreements. In the event that there
is no agreement, the allocation formula provides an orderly way of
determining which institution will count the allocated investment, or
any part of it, as permanent capital.
II. Specific Comments
Section 615.5201(a)--Definition of ``Allocated Investment''
One commenter requested clarification that allocated earnings
``retained by the bank'' means ``not paid in cash.'' This was the
intended meaning of the regulation, consistent with the statutory
language. The FCA has added clarifying language in the final
regulation.
Section 615.5201(j)(6)--Definition of ``Permanent Capital''
A commenter encouraged the FCA to provide guidelines in the
regulations by which the financial assistance provided by the Farm
Credit System Insurance Corporation (FCSIC) would be counted as
permanent capital. In addition, the commenter asserted that the nature
of the security, and not the holder of the security, should be the
determinant in counting capital.
The FCA does not believe it necessary or useful to set forth in the
regulations guidelines to be followed by the FCA in determining how it
would count assistance provided by the FCSIC. Since the FCA does not
know what form FCSIC assistance may take, it is impossible to determine
at this time whether the assistance would qualify as permanent capital.
Moreover, the FCA disagrees with the comment that the FCSIC should be
treated the same as any other security holder in determining whether
FCSIC assistance is permanent capital. The role of the FCSIC as a
provider of financial assistance to System institutions is statutory
and unique.
Section 615.5210(d)--Counting of Treasury-Paid Interest as Permanent
Capital
A commenter stated a belief that the preamble description of
proposed Sec. 615.5210(d) was inconsistent with the text of the
proposed regulation, in that the preamble indicated that only
assessments passed on directly to associations would be added back to
the association's capital (and would not be added back to the bank's
capital).
For purposes of calculating the permanent capital ratio, it was not
the FCA's intention to differentiate between assessments directly
passed on to the associations and assessments passed on ``indirectly
(through loan pricing or otherwise)'' as provided by the statute.
Congress apparently contemplated that there would be three possible
ways of paying the cost of assessments:
(1) The FCB would not directly or indirectly pass on the cost, even
though the ultimate effect would be felt by the associations;
(2) The FCB would assess associations directly for an amount based
on proportionate average accruing retail loan volumes of the
associations for the preceding year; or
(3) The bank would indirectly assess associations by adjusting the
interest rate on the direct loan or some other method based on
proportionate average accruing retail loan volumes of each association
for the preceding year.
The difference between method 1 and method 3 is that the ultimate
effect of method 1 on an association is in proportion to the amount of
its investment in the bank or its direct loan, whereas method 3's
``cost'' is based on average accruing retail loan volumes. Changes have
been made in the final regulations to clarify that, when an FCB
directly assesses an association (method 2), or when it indirectly
assesses an association by specifically identifying the assessment in
other charges made by the FCB to the association (method 3), the amount
of the assessment is added back to the capital of the association (and
not to the capital of the bank).
In this connection, it is the FCA's view that, while the
regulations do not require an FCB to enter into an agreement with its
direct lender associations that would specify whether and how
assessments would be passed through, there are important advantages in
having a written understanding. This would clearly document the
understandings and expectations of all parties and would provide more
certainty to all parties for business planning and capital building
purposes.
A commenter asked how the amount of assessments passed indirectly
to an association is to be reported in the Call Reports of the
institution. The instructions to the Call Reports specify how this is
to be done.
Section 615.5210(e)(2)(ii)--Basis for Allotment of Allocated Investment
A commenter recommended that the references to ``a percentage
allotment'' of the allocated investment be changed to a ``percentage or
other allotment.'' Such a change would, for example, enable an FCB to
count the allocated investment up to a specific percentage of the
association's direct loan from the bank. Alternatively, the bank may
wish to count a specified dollar amount of the investment. The FCA
believes that an allotment based on a specific dollar amount would be
appropriate but does not believe that the allotment should be tied to
floating factors such as the direct loan amount. The permanent capital
ratio is used as one of the key determinants of a Farm Credit
institution's financial health and stability. Allowing permanent
capital to move frequently based on floating measures, such as loan
volume outstanding, diminishes the permanent capital ratio's usefulness
as a financial measure. If the allotment is left to float, it could
change daily, beyond the control of management. This may not be
appropriate during stressful periods in some institutions.1
Accordingly, the final regulation has been revised to permit only an
allocation based on a dollar amount and/or a percentage of the
allocated investment. The amount of allocated investment could be
determined based on a dollar amount, and any earnings that may be
distributed could be allotted on a percentage basis. The FCA believes
that this permits adequate flexibility.
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\1\If, for example, an institution's permanent capital ratio
were under the minimum required, the capital ratio should not be
lowered based on an automatic adjustment.
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Section 615.5210(e)(2)(ii)(C)--Amendments to Allocation Agreement
Three commenters objected to the restrictions in the proposed
regulations that would prohibit the reallotment of the association's
investment in the FCB more often than annually without the FCA's
approval. While one commenter acknowledged that the FCA may have a
legitimate regulatory concern in curbing the potential abuse of
amendments to manipulate capital ratios, the commenter asserted that
FCA prior approval is an inappropriate means of addressing the concern.
In the commenter's view, a prior approval is inconsistent with the
FCA's role as an arm's-length regulator, and without specific criteria
for granting approval the FCA could become involved in the business
decisions of the institutions.
The FCA has reexamined the proposed prior approval procedure and
has determined that it would be appropriate to replace it with a
provision enumerating specific circumstances in which a reallotment may
be made. Therefore, the final regulations permit only annual amendments
to the allocation agreement, except in the event of a reorganization or
merger, or when a reallotment is required to enable the FCB to make
payments in connection with the Capital Preservation Agreements.
The FCA strongly believes that the more frequently an allocated
investment ``moves'' in the computation of the permanent capital ratio,
the less reliable the permanent capital ratio is as an indicator of the
financial soundness of an institution or of trends in the institution's
operations. Consequently, one of the most important uses of the minimum
permanent capital standard would be eliminated if institutions were
permitted to change their allotments frequently and at will.
Other than in the context of a merger or other corporate
reorganization of one of the parties, when a reallotment would likely
be necessary, or when a reallotment is necessary to enable the FCB to
make payments in connection with the Capital Preservation Agreements,
the FCA is aware of only a limited number of situations in which there
would be any incentive for the institutions to reallot capital. For
example, as part of its examinations, the FCA makes evaluations of the
capital adequacy of each institution. The FCA is concerned that, if a
reallotment is permitted as often as desired, it would be permissible
to reallot capital in the time period between the examination of an FCB
and an affiliated association for the benefit of the institution to be
examined next.
Moreover, since the lending limit of an institution is based on the
amount of its permanent capital, it would also be permissible to
temporarily reallot capital to enable an institution to make a loan
that would otherwise be in excess of its lending limits. Similarly, an
institution could reallot capital in order to retire stock that it
would otherwise be unable to retire, or even attempt to forestall an
enforcement action by the FCA based on insufficient permanent capital.
Although these matters could be viewed by institutions as ``internal
business decisions,'' they raise safety and soundness and other issues.
Consequently, as a policy matter, the FCA views frequent changes in
where the capital is counted as undesirable. The FCA believes that it
is more efficacious to prevent the possibility of manipulation by
regulation rather than to examine institutions to determine, after the
fact, if such manipulation of their capital has occurred.
Section 615.5210(e)(2)(ii)(A)--Effective Date of Allocation Agreement
Proposed Sec. 615.5210(e)(2)(ii)(A) provided that all of the
allocation agreements would become effective at the start of the second
quarter of each year. A commenter stated that there was no need for
delay in implementing the agreement and noted that many districts
currently implement the agreement on a calendar year basis. The
commenter also stated the opinion that the effective date of these
agreements is a procedural matter that ought to be left to the
discretion of the parties and should be controlled by the business
needs and planning processes of the affected institutions.
The date proposed by the regulations was set, for the convenience
of the parties, as the quarter following the allocation of earnings
from the FCBs to associations so that the actual dollar amount of the
allocation would be known when the allotment was being determined. In
addition, setting a specific date would have facilitated the FCA's
oversight of institutions. However, upon reconsideration, the FCA
believes that the requirement to file a copy of the agreement with the
responsible FCA examination field office will be sufficient to enable
the agency to fulfill its oversight responsibilities. The final
regulations permit banks and associations to select any date as the
effective date of their agreement, provided that such date is no less
than 12 months after the effective date of the existing agreement.
Section 615.5210(e)(2)(ii)(D)--Filing of Allocation Agreement With the
FCA
Proposed Sec. 615.5210(e)(2)(ii)(D) required an allocation
agreement to be sent to the FCA and any nonparty associations (i.e.,
associations that were not parties to that allocation agreement) in the
district within 3 days after the agreement was signed. A commenter
asked that the time period be increased from 3 days to 20 business
days, stating that this would enable a district with many associations
to submit all of the agreements in one mailing.
The FCA has reconsidered the proposal and has determined that a
more flexible filing requirement would be less burdensome to the banks
and associations, without compromising the FCA's ability to monitor the
capital strength of the institutions. The final regulation deletes the
3-day FCA filing requirement and provides, instead, that a certified
copy of the agreement must be filed with the appropriate FCA field
office on or before the effective date of the agreement, and that
copies of agreements must be sent to other associations in the district
within 30 calendar days of signing.
A commenter requested assurance that the allocation agreement could
consist of a contract, an exchange of board resolutions, or an
incorporation of the terms of the agreement into the business plans of
the institutions. The commenter is correct that any of the means
described would be appropriate.
Section 615.5210(e)(2)(ii)(E)--Notification to the FCA of Objection to
the Extension of an Allocation Agreement
Proposed Sec. 615.5210(e)(2)(ii)(E) provided that the allocation
agreement would be automatically extended for another year if not
amended and if neither party to the agreement notifies the FCA of its
objection to the continuation of the agreement at least 30 days before
the expiration date. A commenter suggested that the notification to the
FCA be made in writing. The FCA agrees that this notification should be
made in writing, and the final regulations include this requirement.
The commenter also stated that the agreement itself should govern
such matters as termination and extension rather than the regulations.
The FCA has considered this comment and agrees in principle that the
bank and association should be free to provide in their agreement for
such matters as termination and extension. However, the FCA also
believes that it is appropriate to provide for an automatic extension
of the agreement if the matter has not been addressed in the agreement.
The final regulations reflect this change.
Section 615.5210(e)(2)(ii)(F)--Default Allotment Formula
A commenter asked for clarification of whether permanent capital
ratios for the default allocation formula would be computed in proposed
Sec. 615.5210(e)(2)(ii)(F) using a 3-month average daily balance, as
the regulations otherwise require for permanent capital ratio
computations. The ratios would be computed in the same manner in this
circumstance, using a 3-month average daily balance, and the final
regulations contain this clarification. The regulations further provide
that the permanent capital computations must be calculated as of the
expiration date of the existing agreement.
Section 615.5210(e)(2)(ii)(G)--Reallotment in Connection With Payments
Relating to Capital Preservation Agreements
Proposed Sec. 615.5210(e)(2)(ii)(G) required a bank and one or more
associations to amend their agreement in order to reallot the allocated
investment if such reallotment would enable the FCB to make its Capital
Preservation Agreement annuity payment and still meet minimum permanent
capital standards. However, it did not specify a basis to determine
which associations must amend their agreements. A commenter recommended
that the regulations require that the allocation agreements provide for
such reallotment.
The FCA agrees with the commenter and believes that this issue
would be appropriately provided for in the allocation agreements as
suggested. The final regulations include a provision requiring the
issue to be addressed in the allocation agreement.
Other Issues
One commenter recommended that, in addition to the preferred stock
that System institutions are presently authorized to issue,
subordinated notes and intermediate-term preferred stock be allowed to
be counted as permanent capital. The commenter suggested that such
issues be limited to 25 percent of total capital so that an institution
would not be able to rely principally on this source. Another commenter
expressed an opinion that the use of debt instruments as a substitute
for capital would undermine the safety and soundness of the System and,
therefore, opposed that part of the proposal. Yet another commenter
stated that debt securities should be included in permanent capital if
they are counted on a discounted or sinking fund basis. These proposals
are still under consideration by the FCA and will be addressed in
future proposed regulations.
The FCA has deleted from the definition of permanent capital the
reference to preferred stock issued to the FAC, since all such stock
has now been retired.
In addition, the proposed regulations inadvertently eliminated a
provision of existing Sec. 615.5210(d)(3) regarding investments made in
connection with loan participations. That provision states that, where
an institution invests in another institution to capitalize a
participation interest, the investing institution must deduct from its
total capital an amount equal to its investment in the participating
institution. The proposed regulations addressed situations where an
institution invested in a bank for any purpose, including to capitalize
a loan participation, but did not address any situation where a bank or
association invested in another association (to capitalize a loan
participation or for any other purpose). The provision from the
existing regulations has been revised to apply only to investments in
associations and restored as Sec. 615.5210(e)(5) in the final
regulations, and the succeeding paragraphs have been renumbered
accordingly. Furthermore, proposed Sec. 615.5210(e)(3) has been revised
and a new paragraph (e)(4) has been added to clarify that all earnings
allocated by a bank to a recipient will count as permanent capital of
the bank in the absence of an allocation agreement, except when the
bank is a Farm Credit Bank or agricultural credit bank and the
recipient is a Farm Credit association, in which case the default
allotment formula would apply.
Finally, these regulations include amendments to parts 607, 614,
615 (subpart E), and 620 of the regulations. These changes, as more
fully described below, are conforming and clarifying changes to
provisions containing references to existing capital regulations that
are now covered by various provisions of new Secs. 615.5201 and
615.5210(d), (e), and (f). The FCA has determined that the notice and
comment requirements of 5 U.S.C. 553 (b) and (c) do not apply in this
situation. Notice and public procedure thereon are unnecessary because
the amendments are not substantive in nature and do not impose new
requirements. Therefore, there is no reason to solicit public comments
on them. Accordingly, the FCA finds that good cause exists to
promulgate final amendments to these provisions without notice and
comment.
Conforming changes have been made to the capital regulation
references in Sec. 614.4351(a) to account primarily for the renumbering
of paragraphs. The references to revised paragraph (e) (2), (3), and
(4) of Sec. 615.5210, replace the reference to paragraph (d)(2) of that
section in the existing regulations. While the methodology in amended
Sec. 614.4351(a) for computing an institution's lending limit base will
be somewhat different, and in some cases more complicated, because of
the amendments to the capital regulations, the effect will be the
same.\2\ To facilitate institutions' understanding and interpretation
of the lending limit calculation, the language describing the
calculation has been clarified regarding the sequence of the
adjustments and regarding which institution will count the investment
in question in its lending limit base. We note, in this connection,
that the ``investment'' includes any equities that are purchased as
well as equities that are allocated in a distribution of earnings on
participations. The FCA is considering how the calculation might be
simplified and will publish for comment any proposed substantive
changes that may be appropriate.
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\2\In other words, the revised Sec. 614.4351(a) will continue to
require that an investment held to capitalize a loan participation
interest sold to another institution will be included in the lending
limit base of the institution that holds the investment (i.e., the
institution that sold the participation interest).
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With regard to regulation Sec. 614.4710(a)(1)(i), instead of the
current reference by citation to the capital regulations relating to
the elimination of certain investments for the purpose of calculating a
limit on bankers acceptances for a bank for cooperatives, the actual
referenced language has been inserted as an aid to the reader.
Lastly, the conforming amendments in Secs. 607.2, 615.5131(t), and
620.1(j) have been made to reflect the renumbering of existing capital
provisions.
List of Subjects
12 CFR Part 607
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 614
Agriculture, Banks, banking, Foreign trade, Reporting and
recordkeeping requirements, 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.
For the reasons stated in the preamble, parts 607, 614, 615, and
620 of chapter VI, title 12 of the Code of Federal Regulations are
amended to read as follows:
PART 607--ASSESSMENT AND APPORTIONMENT OF ADMINISTRATIVE EXPENSES
1. The authority citation for part 607 continues to read as
follows:
Authority: Secs. 5.15, 5.17 of the Farm Credit Act (12 U.S.C.
2250, 2252, 3025).
Sec. 607.2 [Amended]
2. Section 607.2 is amended by removing the reference
``Sec. 615.5210(e)'' and adding in its place ``Sec. 615.5210(f)'' in
the introductory text of paragraph (b).
PART 614--LOAN POLICIES AND OPERATIONS
3. The authority citation for part 614 continues to read as
follows:
Authority: Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3,
2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20,
3.28, 4.12, 4.12A, 4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E,
4.18, 4.19, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8,
7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011, 2013,
2014, 2015, 2017, 2018, 2071, 2073, 2074, 2075, 2091, 2093, 2094,
2096, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184,
2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2207, 2219a,
2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2,
2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 of Pub. L. 100-233, 101
Stat. 1568, 1639.
Subpart J--Lending Limits
4. Section 614.4351 is amended by revising paragraph (a) to read as
follows:
Sec. 614.4351 Computation of lending limit base.
(a) Lending limit base. An institution's lending limit base is
composed of the permanent capital of the institution, as defined in
Sec. 615.5201(j) of this chapter, with adjustments provided for in
Sec. 615.5210(d), (e)(1), (e)(2), (e)(3), (e)(4), and (e)(6) of this
chapter, and with the following further adjustments:
(1) Where one institution invests in another institution in
connection with the sale of a loan participation interest, the amount
of investment in the institution purchasing this participation interest
that is owned by the institution originating the loan shall be counted
in the lending limit base of the originating institution and shall not
be counted in the lending limit base of the purchasing institution.
(2) Stock protected under section 4.9A of the Act may be included
in the lending limit base until January 1, 1998.
* * * * *
Subpart Q--Banks for Cooperatives Financing International Trade
5. Section 614.4710 is amended by revising the first sentence of
paragraph (a)(1)(i) to read as follows:
Sec. 614.4710 Bankers acceptance financing.
* * * * *
(a) * * *
(1) * * *
(i) The dollar amount of such acceptances outstanding at any one
time to any one borrower, exclusive of participations sold to others,
shall be limited to 10 percent of the net worth of a bank for
cooperatives as calculated on a monthly basis after eliminating from
its net worth an amount equal to the total of the bank's investments
made to capitalize participation interests purchased by other
institutions. * * *
* * * * *
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
6. 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, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20,
6.26, 8.0, 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, 2160, 2202b, 2211, 2243, 2252, 2278b,
2278b-6, 2279aa, 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
Sec. 615.5131 [Amended]
7. Section 615.5131 is amended by removing the reference
``Sec. 615.5201(l)'' and adding in its place ``Sec. 615.5201(n)'' in
paragraph (t).
Subpart H--Capital Adequacy
8. Section 615.5201 is amended by redesignating paragraphs (a),
(b), (c), (d), (e), (f), (g), (h), (i), (j), (k), and (l) as paragraphs
(b), (c), (d), (e), (f), (g), (i), (j), (k), (l), (m), and (n)
consecutively; by removing the reference ``Sec. 615.5210(d)'' and
adding in its place ``Sec. 615.5210 (d) and (e)'' and also by removing
the reference ``Sec. 615.5210(e)'' and adding in its place
``Sec. 615.5210(f)'' in newly designated paragraph (k); by adding new
paragraphs (a) and (h); and by revising newly designated paragraph (j)
to read as follows:
Sec. 615.5201 Definitions.
* * * * *
(a) Allocated investment means earnings allocated but not paid in
cash by a System bank to an association or other recipient.
* * * * *
(h) Nonagreeing association means an association that does not have
an allocation agreement in effect with a Farm Credit Bank or
agricultural credit bank pursuant to Sec. 615.5210(e).
* * * * *
(j) Permanent capital means--
(1) Current year retained earnings;
(2) Allocated and unallocated earnings (which, in the case of
earnings allocated in any form by a System bank to any association or
other recipient and retained by the bank, shall be considered, in whole
or in part, permanent capital of the bank or of any such association or
other recipient as provided under an agreement between the bank and
each such association or other recipient);
(3) All surplus;
(4) Stock issued by a System institution, except--
(i) Stock that may be retired by the holder of the stock on
repayment of the holder's loan, or otherwise at the option or request
of the holder;
(ii) Stock that is protected under section 4.9A of the Act or is
otherwise not at risk;
(iii) Farm Credit Bank equities required to be purchased by Federal
land bank associations in connection with stock issued to borrowers
that is protected under section 4.9A of the Act;
(iv) Capital subject to revolvement, unless:
(A) The bylaws of the institution clearly provide that there is no
express or implied right for such capital to be retired at the end of
the revolvement cycle or at any other time; and
(B) The institution clearly states in the notice of allocation that
such capital may only be retired at the sole discretion of the board in
accordance with statutory and regulatory requirements and that no
express or implied right to have such capital retired at the end of the
revolvement cycle or at any other time is thereby granted;
(5) Payments to, or obligations to pay, the Farm Credit System
Financial Assistance Corporation to the extent permitted by section
6.26(c)(5)(G) of the Act and Sec. 615.5210(d); and
(6) Financial assistance provided by the Farm Credit System
Insurance Corporation that the Farm Credit Administration determines
appropriate to be considered permanent capital.
* * * * *
9. Section 615.5210 is amended by removing the reference to
``paragraph (d)'' and adding in its place ``paragraph (e)'' in
paragraph (c); by redesignating paragraphs (d) and (e) as paragraphs
(e) and (f); by adding a new paragraph (d); by removing the reference
to ``paragraph (e)(3)'' and adding in its place ``paragraph (f)(3)'' in
newly designated paragraph (f)(1); by removing the references
``(e)(3)(ii)'' and ``(e)(2)'' and by adding in their places
``(f)(3)(ii)'' and ``(f)(2)'' in newly designated paragraph (f)(3)(i);
by removing the reference ``Sec. 615.5210(e)(2)'' and adding in its
place ``Sec. 615.5210(f)(2)'' in newly designated paragraph
(f)(3)(ii)(D)(1); by redesignating newly designated paragraphs (e)(4),
(e)(5), (e)(6), and (e)(7) as paragraphs (e)(6), (e)(7), (e)(8), and
(e)(9), consecutively; by revising newly designated paragraph (e)(2);
by removing newly designated (e)(3); and by adding new paragraphs
(e)(3), (e)(4), and (e)(5) to read as follows:
Sec. 615.5210 Computation of the permanent capital ratio.
* * * * *
(d) Until September 27, 2002, payments of assessments to the Farm
Credit System Financial Assistance Corporation, and any part of the
obligation to pay future assessments to the Farm Credit System
Financial Assistance Corporation that is recognized as an expense on
the books of a bank or association, shall be included in the capital of
such bank or association for the purpose of determining its compliance
with regulatory capital requirements, to the extent allowed by section
6.26(c)(5)(G) of the Act. If the bank directly or indirectly passes on
all or part of the payments to its affiliated associations pursuant to
section 6.26(c)(5)(D) of the Act, such amounts shall be included in the
capital of the associations and shall not be included in the capital of
the bank. After September 27, 2002, no payments of assessments or
obligations to pay future assessments may be included in the capital of
the bank or association.
(e) * * *
(2) Where a Farm Credit Bank or an agricultural credit bank is
owned by one or more Farm Credit System institutions, the double
counting of capital shall be eliminated in the following manner:
(i) All equities of a Farm Credit Bank or agricultural credit bank
that have been purchased by other Farm Credit institutions shall be
considered to be permanent capital of the Farm Credit Bank or
agricultural credit bank.
(ii) Each Farm Credit Bank or agricultural credit bank and each of
its affiliated associations may enter into an agreement that specifies,
for the purpose of computing permanent capital only, a dollar amount
and/or percentage allotment of the association's allocated investment
between the bank and the association. The following conditions shall
apply:
(A) The agreement shall be for a term of 1 year or longer.
(B) The agreement shall be entered into on or before its effective
date.
(C) The agreement may be amended according to its terms, but no
more frequently than annually except in the event that a party to the
agreement is merged or reorganized, or in the event of a reallotment
pursuant to paragraph (e)(2)(ii)(G) of this section. The agreement
shall include a provision addressing how the agreement will be amended
if a reallotment is required by paragraph (e)(2)(ii)(G) of this
section.
(D) On or before the effective date of the agreement, a certified
copy of the agreement, and any amendments thereto, shall be sent to the
field office of the Farm Credit Administration responsible for
examining the institution. A copy shall also be sent within 30 calendar
days of adoption to the bank's other affiliated associations.
(E) Unless the parties otherwise agree, if the bank and the
association have not entered into a new agreement on or before the
expiration of an existing agreement, the existing agreement shall
automatically be extended for another 12 months, unless either party
notifies the Farm Credit Administration in writing of its objection to
the extension prior to the expiration of the existing agreement.
(F) In the absence of an agreement between a Farm Credit Bank or an
agricultural credit bank and one or more associations, or in the event
that an agreement expires and at least one party has timely objected to
the continuation of the terms of its agreement, the following formula
shall be applied with respect to the allocated investments held by
those associations with which there is no agreement (nonagreeing
associations), and shall not be applied to the allocated investments
held by those associations with which the bank has an agreement
(agreeing associations):
(1) The allotment formula shall be calculated annually.
(2) The permanent capital ratio of the Farm Credit Bank or
agricultural credit bank shall be computed as of the date that the
existing agreement terminates, using a 3-month average daily balance,
excluding the allocated investment from nonagreeing associations but
including any allocated investments of agreeing associations that are
allotted to the bank under applicable allocation agreements. The
permanent capital ratio of each nonagreeing association shall be
computed as of the same date using a 3-month average daily balance, and
shall be computed excluding its allocated investment in the bank.
(3) If the permanent capital ratio for the Farm Credit Bank or
agricultural credit bank calculated in accordance with paragraph
(e)(2)(ii)(F)(2) of this section is 7 percent or above, the allocated
investment of each nonagreeing association whose permanent capital
ratio calculated in accordance with paragraph (e)(2)(ii)(F)(2) of this
section is 7 percent or above shall be allotted 50 percent to the bank
and 50 percent to the association.
(4) If the permanent capital ratio of the Farm Credit Bank or
agricultural credit bank calculated in accordance with paragraph
(e)(2)(ii)(F)(2) of this section is 7 percent or above, the allocated
investment of each nonagreeing association whose capital ratio is below
7 percent shall be allotted to the association until the association's
capital ratio reaches 7 percent or until all of the investment is
allotted to the association, whichever occurs first. Any remaining
unallotted allocated investment shall be allotted 50 percent to the
bank and 50 percent to the association.
(5) If the permanent capital ratio of the Farm Credit Bank or
agricultural credit bank calculated in accordance with paragraph
(e)(2)(ii)(F)(2) of this section is less than 7 percent, the amount of
additional capital needed by the bank to reach a permanent capital
ratio of 7 percent shall be determined, and an amount of the allocated
investment of each nonagreeing association shall be allotted to the
Farm Credit Bank or agricultural credit bank as follows:
(i) If the total of the allocated investments of all nonagreeing
associations is greater than the additional capital needed by the bank,
the allocated investment of each nonagreeing association shall be
multiplied by a fraction whose numerator is the amount of capital
needed by the bank and whose denominator is the total amount of
allocated investments of the nonagreeing associations, and such amount
shall be allotted to the bank. Next, if the permanent capital ratio of
any nonagreeing association is less than 7 percent, a sufficient amount
of unallotted allocated investment shall then be allotted to each
nonagreeing association, as necessary, to increase its permanent
capital ratio to 7 percent, or until all such remaining investment is
allotted to the association, whichever occurs first. Any unallotted
allocated investment still remaining shall be allotted 50 percent to
the bank and 50 percent to the nonagreeing association.
(ii) If the additional capital needed by the bank is greater than
the total of the allocated investments of the nonagreeing associations,
all of the remaining allocated investments of the nonagreeing
associations shall be allotted to the bank.
(G) If a payment or part of a payment to the Farm Credit System
Financial Assistance Corporation pursuant to section 6.9(e)(3)(D)(ii)
of the Act would cause a bank to fall below its minimum permanent
capital requirement, the bank and one or more associations shall amend
their allocation agreements to increase the allotment of the allocated
investment to the bank sufficiently to enable the bank to make the
payment to the Farm Credit System Financial Assistance Corporation,
provided that the associations would continue to meet their minimum
permanent capital requirement. In the case of a nonagreeing
association, the Farm Credit Administration may require a revision of
the allotment sufficient to enable the bank to make the payment to the
Farm Credit System Financial Assistance Corporation, provided that the
association would continue to meet its minimum permanent capital
requirement. The Farm Credit Administration Board may, at the request
of one or more of the institutions affected, waive the requirements of
this paragraph (e)(2)(ii)(G) if the Board deems it is in the overall
best interest of the institutions affected.
(3) A Farm Credit Bank or agricultural credit bank and a recipient,
other than an association, of allocated earnings from such bank may
enter into an agreement specifying a dollar amount and/or percentage
allotment of the recipient's allocated earnings in the bank between the
bank and the recipient. Such agreement shall comply with the provisions
of paragraph (e)(2) of this section, except that, in the absence of an
agreement, the allocated investment shall be allotted 100 percent to
the allocating bank and 0 percent to the recipient. All equities of the
bank that are purchased by a recipient shall be considered as permanent
capital of the issuing bank.
(4) A bank for cooperatives and a recipient of allocated earnings
from such bank may enter into an agreement specifying a dollar amount
and/or percentage allotment of the recipient's allocated earnings in
the bank between the bank and the recipient. Such agreement shall
comply with the provisions of paragraph (e)(2) of this section, except
that, in the absence of an agreement, the allocated investment shall be
allotted 100 percent to the allocating bank and 0 percent to the
recipient. All equities of a bank that are purchased by a recipient
shall be considered as permanent capital of the issuing bank.
(5) Where a bank or association invests in an association to
capitalize a loan participation interest, the investing institution
shall deduct from its total capital an amount equal to its investment
in the participating institution.
* * * * *
PART 620--DISCLOSURE TO SHAREHOLDERS
10. 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]
11. Section 620.1 is amended by removing the reference
``Sec. 615.5201(h)'' and adding in its place ``Sec. 615.5201(j)'' in
paragraph (j).
Dated: July 19, 1994.
Curtis M. Anderson,
Secretary, Farm Credit Administration Board.
[FR Doc. 94-17907 Filed 7-21-94; 8:45 am]
BILLING CODE 6705-01-P
