[Federal Register Volume 61, Number 146 (Monday, July 29, 1996)]
[Notices]
[Pages 39453-39455]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19170]


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FARM CREDIT SYSTEM INSURANCE CORPORATION

[BM-11-JUL-96-02]


Policy Statement Concerning Adjustments to the Insurance Premiums

AGENCY: Farm Credit System Insurance Corporation.

ACTION: Notice of policy statement.

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SUMMARY: The Farm Credit System Insurance Corporation (Corporation) 
announces that it has adopted a Policy Statement Concerning Adjustments 
to the Insurance Premiums. This policy statement establishes a 
semiannual review process, using the criteria announced in the Board's 
March proposal, 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 of 7.5 basis points for loans in 
accrual status 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. 
Finally, it adds two clarifications to the March proposal. The policy 
states the express authority of the Corporation to reduce premiums to 
zero on loans guaranteed by Federal or State governments. It also makes 
it clear that the Board will consider asset growth, not merely loan 
growth, when it does its semiannual review.

EFFECTIVE DATE: July 11, 1996.

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:

Background

    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 
timeframe 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

[[Page 39454]]

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. In 
the final policy statement, the third factor has been modified to make 
it clear that the Board will consider asset growth. Assets would 
include investments as well as loans.
    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.

Public Comments

    The policy statement was published for public comment in the 
Federal Register on April 17, 1996 (61 FR 16788). The Corporation 
received 48 comment letters, all from Farm Credit institutions or their 
representatives. Most of the letters commend the Corporation for 
addressing this issue in an expeditious manner. All but two of the 
comment letters are supportive of the policy statement.
    One Farm Credit bank, commenting for a borrower association as 
well, urged the Board to take a different approach than the general 
guidelines listed in the policy statement. It recommended that the 
Board adopt ``more definite and concrete'' criteria to be used in 
setting the assessment level, and it would leave full discretion, using 
those criteria, to set any premium level from 15 basis points to zero. 
Also, five associations, commenting together, urged the Board not to 
set a premium floor. Another bank was generally supportive of the 
policy statement, but suggested a 5 basis point premium floor, rather 
than the 7.5 specified in the policy statement. Thirty-two (32) 
commenters support the premium floor, most agreed with the Board that 
it is important to reach the secure base amount in a reasonable time 
(this includes four Farm Credit banks). After considering the diverse 
views provided by the comments, the Board has decided to finalize the 
policy statement without modifying the general guidelines or the 
premium floor.
    Two commenters sought a clarification concerning premiums on 
government-guaranteed loans. They suggested that the policy state 
expressly that premiums on guaranteed loans can be decreased to zero in 
the Board's discretion. The Board agrees that it has this authority and 
it has added a sentence to the policy to make that clear.
    Some commenters expressed support for leaving the premium on loans 
in nonaccrual status at 25 basis points. None of the comments 
recommended a reduction. The final policy statement leaves the 
insurance premium for nonaccrual loans at 25 basis points.
    One Farm Credit bank understood the policy statement to leave the 
premium on loans in nonaccrual status at 25 basis points even after the 
secure base is achieved, and indicated it would support this decision. 
Another sought a clarification on this issue and indicated its belief 
that once the secure base is achieved premiums must be reduced on 
nonaccrual loans. This policy statement only deals with the 
Corporation's discretionary authority to reduce premiums prior to the 
Insurance Fund reaching the secure base. Thus, it does not address the 
issue raised by these two commenters.
    Five associations, commenting together, encouraged the Board not to 
consider the recently authorized Financial Assistance Corporation 
repayment as a factor in its deliberations. One bank, on the other 
hand, expressed its belief that it is an appropriate consideration. The 
Board continues to believe, as it states above in the supplementary 
information, that delay in reaching the secure base amount due to 
reduced premiums also delays the Congressionally authorized rebates.
    Forty-three (43) commenters believe the Board should exercise its 
discretion to reduce the premiums. In many of these comments the 
inference was that a reduction would have no adverse effect on the 
Insurance Fund. Others stated their belief that there would be no 
adverse effect. Four commenters, all associations, recommended that the 
Board leave the premiums at their present level until the secure base 
amount is reached (one of these indicated that the institution would 
benefit from the FAC repayment). One commenter supported a reduction in 
the premiums, but not until 1997 so that the secure base could be 
reached sooner and then an even more meaningful

[[Page 39455]]

reduction could be enjoyed by all. The Board has finalized the policy 
statement and it is conducting its first semi-annual review, using the 
criteria set out in the policy. It will make its determination public 
in the near future.

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

BM-11-JUL-96-02

    Effective Date: July 11, 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, insure 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) 
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, asset 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. The premium on 
guaranteed loans will be set between zero and the statutory rate of 1.5 
basis points for Federal and 3 basis points for state. 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 this 11th day of July, 1996 by order of the Corporation 
Board.

    Dated: July 23, 1996.
Floyd Fithian,
Secretary to the Board, Farm Credit System Insurance Corporation.
[FR Doc. 96-19170 Filed 7-26-96; 8:45 am]
BILLING CODE 6710-01-P