[Federal Register Volume 61, Number 75 (Wednesday, April 17, 1996)]
[Notices]
[Pages 16788-16790]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9400]



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FARM CREDIT SYSTEM INSURANCE CORPORATION

Policy Statement Concerning Adjustments to the Insurance Premiums
AGENCY: Farm Credit System Insurance Corporation.

ACTION: Policy statement; request for comments.

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SUMMARY: The Farm Credit System Insurance Corporation (Corporation) 
announces that it is publishing for comment a Policy Statement 
Concerning Adjustments to the Insurance Premiums. This policy statement 
establishes a semiannual review process as a basis for the 
Corporation's exercise of its discretion to adjust premiums in response 
to changing conditions. It also establishes a premium floor until the 
Insurance Fund reaches the level specified in the Farm Credit Act of 
1971, as amended (the Act); 12 U.S.C. 2277a-4.

DATES: Written comments must be submitted on or before May 17, 1996.

ADDRESSES: Comments should be mailed or delivered to Dorothy L. 
Nichols, General Counsel, Farm Credit System Insurance Corporation, 
McLean,

[[Page 16789]]

Virginia 22102. Copies of all comments will be available for 
examination by interested parties in the offices of the Farm Credit 
System Insurance Corporation.

FOR FURTHER INFORMATION CONTACT: Dorothy L. Nichols, General Counsel, 
Farm Credit System Insurance Corporation, 1501 Farm Credit Drive, 
McLean, Virginia 22102, (703) 883-4380, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: In 1987, Congress directed the Corporation 
to collect premiums to reach the secure base amount, which is defined 
as 2 percent of the aggregate outstanding insured obligations of all 
insured banks (excluding a percentage of State and Federally guaranteed 
loans) or such other percentage of the aggregate amount as the 
Corporation in its sole discretion determines is ``actuarially sound.''
    The statute specifies a limited form of risk based premium 
assessments: 25 basis points for nonaccrual loans; 15 basis points for 
loans in accrual status (excluding certain State and Federally 
guaranteed loans); and a very modest premium for government guaranteed 
loans. This formula was designed as an incentive for the Farm Credit 
System to make quality loans and at the same time build the Insurance 
Fund to a level that Congress believed would prevent a default on a 
System debt obligation. The Insurance Fund represents the Corporation's 
equity, i.e., the difference between its total assets ($1,023 million 
as of yearend 1995) and its total liabilities, including its insurance 
obligations ($121 million as of yearend 1995).
    While Congress gave the Corporation the discretion to reduce the 
premium assessments before reaching the secure base amount in the Farm 
Credit System Reform Act of 1996, Pub. L. No. 104-105, 110 Stat. 162 
(Feb. 10, 1996), it did not alter the original mandate to reach and 
maintain the secure base amount. In the policy statement, the 
Corporation concludes that under these circumstances, any reduction in 
premium must take into account its impact on the original mandate.
    Neither the statute nor the legislative history provides guidance 
on how the Corporation is to balance the Congressional desire to reach 
the secure base amount with the new discretionary authority. Nor does 
the legislative history provide guidance as to the appropriate time 
frame for reaching the secure base amount. However, it is clear from 
the legislative history creating the Corporation that Congress was 
focused on assuring that the taxpayer would not be required to rescue 
the Farm Credit System again, as they had been in the mid-eighties. 
Past experience demonstrates that under severe stress, the Farm Credit 
System suffered $4.6 billion in losses from 1985-1987 and had to borrow 
$1.3 billion in U.S. Treasury-guaranteed bonds to assist institutions 
experiencing financial difficulty. It is also clear that Congress 
intended that the Fund be built in anticipation of potential problems 
in the Farm Credit System by assessing each insured bank until the 
Insurance Fund reached 2 percent of outstanding insured debt 
obligations. Recently, Congress reaffirmed the importance of the 
Insurance Fund's protection of investors and taxpayers when it provided 
reserve accounts for amounts above the secure base. The funds in these 
accounts cannot be refunded to insured banks until 8 years after the 
Insurance Fund exceeds the secure base amount and in no event before 
January 1, 2005. These funds will provide an additional layer of 
insurance protection.
    It is instructive as well that in the eighties financial 
difficulties in the banking industry often were unanticipated as early 
as 2 years prior to failure. Thus, pushing achievement of the secure 
base amount off too far in the future ignores the real risks that exist 
in lending beyond the immediate time horizon. Also, it ignores the fact 
that problems in agricultural lending tend to hit many institutions at 
the same time. This would conflict with the Corporation's duty as a 
prudent insurer to consider such possibilities for the protection of 
the Farm Credit System's investors. Thus, achieving the secure base 
amount quickly while the Farm Credit System is in good health is 
important because it would be difficult to revert to the statutory 
assessment from a very low assessment during times of financial stress. 
Substantially higher assessments then could result in adverse effects 
on bank earnings and capital precisely when the Farm Credit System 
could least afford the extra cost. Finally, Congress recognized the 
importance of redressing inequities in initial assessments to 
capitalize the Farm Credit System Financial Assistance Corporation 
(FAC) when it recently authorized rebates to associations that paid 
these assessments from the Insurance Fund, totaling $56 million, to be 
paid 8 years after the secure base amount is reached. Delay in reaching 
the secure base amount due to reduced premiums paid by the banks delays 
resolution of this issue.
    Congress believed that the premium assessment system should 
incorporate a higher rate for nonaccruing loans to provide an incentive 
to control risk-taking while at the same time covering the long-term 
costs of the insurer's obligations through a lower premium assessment 
on loans in accrual status. This limited form of risk-based premiums 
provides an incentive for sound credit extension and administration.
    For these reasons, the policy statement concludes that, while the 
Corporation may reduce premiums, it should continue to assess 
sufficient premiums to reach the secure base in a reasonable time 
period. To continue providing an incentive to control risk-taking, the 
policy statement indicates that the Corporation does not intend to 
reduce the premium on loans in nonaccrual status. In determining 
whether to adjust premiums on loans in accrual status, the Corporation 
will consider a number of pertinent factors including: (1) The current 
level of the Insurance Fund and the amount and time needed to reach the 
secure base amount; (2) the condition of the Farm Credit System; (3) 
the probability and likely amount of any losses to the Insurance Fund; 
and (4) multiple scenarios reflecting the impact of the potential 
growth on the time frame required to achieve the secure base amount. 
Furthermore, to ensure steady progress towards the secure base amount, 
the Corporation has decided to establish a premium floor, as described 
in the policy statement. Thus, premiums on loans in accrual status may 
be reduced below the statutory rate of 15 basis points but will not be 
reduced below the premium floor until the secure base amount is 
reached.

Farm Credit System Insurance Corporation, Policy Statement 
Concerning Adjustments to the Insurance Premiums No. xx

    Adoption Date: March 28, 1996.
    Effect on Previous Action: None.
    Source of Authority: Section 5.55 of the Farm Credit Act of 1971, 
as amended (the Act); 12 U.S.C. 2277a-4.
    Whereas, section 5.52 of the Act established the Farm Credit System 
Insurance Corporation (Corporation) to, among other things, ensure the 
timely payment of principal and interest on Farm Credit System 
obligations (12 U.S.C. 2277a-1); and
    Whereas, section 5.55 of the Act mandates that the Corporation 
collect premiums from all insured Farm Credit System banks until the 
Insurance Fund reaches the secure base amount, which is defined as 2 
percent of the aggregate outstanding insured obligations of all insured 
banks (excluding a percentage of State and Federally guaranteed loans)

[[Page 16790]]

or such other percentage of the aggregate amount as the Corporation 
determines is actuarially sound; and
    Whereas, the Farm Credit System Reform Act of 1996, Pub. L. No. 
104-105, 110 Stat. 162 (Feb. 10, 1996), amended section 5.55 of the Act 
to permit the Corporation to exercise its discretion to adjust the 
premium assessments applied to all insured Farm Credit System banks 
before the Insurance Fund reaches the secure base amount;
    Whereas, any reduction in the premium schedule must take into 
account its impact on the original mandate to reach the secure base 
amount. Now therefore, the Corporation's Board of Directors (Board) 
adopts the following policy statement to govern adjustments to premiums 
in response to changing conditions.
    The Board will review the premium assessment schedule at least 
semiannually in order to determine whether to exercise its discretion 
to adjust the premium assessments in response to changing conditions. 
The Board may reduce the premiums when the Farm Credit System 
demonstrates good health and sound risk management and other conditions 
warrant, and raise premiums to the statutory level if, for example, the 
Insurance Fund suffers a significant loss or if bank capital or 
collateral decreases significantly before the secure base amount is 
achieved.
    As a basis for its decision the Board will consider the following:
    1. The current level of the Insurance Fund and the amount of money 
and time needed to reach the secure base amount in light of potential 
growth;
    2. The likelihood and probable amount of any losses to the 
Insurance Fund;
    3. The overall condition of the Farm Credit System, including the 
level and quality of capital, earnings, loan growth, asset quality, 
loss allowance levels, asset liability management, as well as the 
collateral ratios of the 8 banks;
    4. The health and prospects for the agricultural economy, including 
the potential impact of governmental farm policy and the effect of the 
globalization of agriculture on opportunities and competition for U.S. 
producers; and
    5. The risks in the financial environment that may cause a problem, 
even when there is no imminent threat, such as volatility in the level 
of interest rates, the use of sophisticated investment securities and 
derivative instruments, and increasing competition from non-System 
financial institutions.
    In its review of the premium assessments, the Board will consider 
multiple scenarios that reflect the impact of potential growth in Farm 
Credit System debt levels on the time required to achieve the secure 
base amount. The secure base amount should be achieved while the Farm 
Credit System is in good health with very few problem institutions. 
Therefore, the Board will not reduce the premium below 7.5 basis points 
on loans in accrual status until the secure base amount is achieved. 
Thus, the premium on loans in accrual status will be set between 7.5 
basis points and the statutory rate of 15 basis points. Furthermore, 
the Board will not reduce the premium on loans in nonaccrual status, to 
continue providing an incentive for sound credit extension and 
administration.
    Adopted for publication before final approval this 28th day of 
March, 1996 by order of the Corporation Board.

    Dated: April 11, 1996.
Nan P. Mitchem,
Acting Secretary to the Board, Farm Credit System Insurance 
Corporation.
[FR Doc. 96-9400 Filed 4-16-96; 8:45 am]
BILLING CODE 6710-01-P