[Federal Register Volume 63, Number 77 (Wednesday, April 22, 1998)]
[Notices]
[Pages 19918-19919]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10630]


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FARM CREDIT ADMINISTRATION

[BM-9-APR-98-02]


Financial Institution Rating System

AGENCY: Farm Credit Administration.

ACTION: Policy statement.

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SUMMARY: The Farm Credit Administration (FCA or Agency), through the 
FCA Board (Board), has adopted at its April 9, 1998, Board meeting a 
policy statement on its financial institution rating system. The 
Financial Institution Rating System (FIRS) shall be the rating system 
used by FCA examiners for evaluating and categorizing the safety and 
soundness of Farm Credit System (System) institutions on an ongoing, 
uniform and comprehensive basis. The FIRS will provide valuable 
information to the Agency for assessing risk and allocating resources 
based on the safety and soundness of regulated institutions.

EFFECTIVE DATE: April 9, 1998.

FOR FURTHER INFORMATION CONTACT: Andrew D. Jacob, Senior Policy 
Analyst, Office of Policy and Analysis, Farm Credit Administration, 
McLean, Virginia 22102-5090, (703) 883-4498, TDD (703) 883-4444; or 
Wendy R. Laguarda, Senior Attorney, Office of General Counsel, Farm 
Credit Administration, McLean, Virginia 22102-5090, (703) 883-4020, TDD 
(703) 883-4444; or Gregory Yowell, Senior Financial Analyst, Office of 
Examination, Farm Credit Administration, McLean, Virginia 22102-5090, 
(703) 883-4483, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: The text of the Board's policy statement on 
the financial institution rating system is set forth below in its 
entirety.

Policy Statement on the Financial Institution Rating System, BM-9-
APR-98-02, FCA-PS-72

    Effective Date: April 9, 1998.
    Effect on Previous Actions: None.
    Source of Authority: Sections 5.9 and 5.17 of the Farm Credit Act 
of 1971, as amended.

I. Policy

    The Financial Institution Rating System (FIRS) shall be the rating 
system used by Farm Credit Administration (FCA or Agency) examiners for 
evaluating and categorizing the safety and soundness of Farm Credit 
System (System) institutions on an ongoing, uniform and comprehensive 
basis.
    The FIRS will provide valuable information to the Agency for 
assessing risk and allocating resources based on the safety and 
soundness of regulated institutions. Ratings assigned to regulated 
institutions will be adjusted periodically so that they accurately 
reflect the condition of institutions.

II. Standards and Implementation

    Based on the conclusions reached in the ongoing examination of an 
institution's financial, managerial, and operational condition, FCA 
examiners will assign ratings to each of the six rating factor 
components and assign a composite rating that reflects the condition 
and overall safety and soundness of the System institution. These 
ratings shall be reported to the institution's Board of Directors and 
Chief Executive Officer.
    Component and composite ratings are assigned on a 1 to 5 numerical 
scale. A 1-rating indicates the strongest performance and management 
practices and the least degree of supervisory and regulatory concern, 
while a 5-rating indicates an extremely high, immediate or near-term 
probability of failure and unsatisfactory management practices and, 
therefore, the highest degree of concern.
    Although each institution has its own examination and supervisory 
issues and concerns, the FIRS is structured to evaluate all significant 
financial asset quality and management factors common to all System 
institutions. Examination criteria for each of the rating components is 
defined in the FCA Examination Manual which is available to the public. 
The FCA Examination Manual also incorporates the evaluative criteria 
under which component and composite ratings are assigned.

Composite Rating

    The FIRS provides a general framework for assimilating and 
evaluating all significant financial, managerial and operational 
factors to assign a composite rating to each System institution. The 
composite rating is based on a qualitative and quantitative analysis of 
the factors comprising each of the following components, the 
interrelationships among components, and the overall level of concern 
for those risks that affect a System institution.
    The composite rating does not assume a predetermined weight for 
each component nor does it represent an arithmetic average of assigned 
component ratings. The weight given to any individual component in 
determining composite ratings varies depending on the degree of concern 
associated with the component and the threat posed to the overall 
safety and soundness of the institution.

Component Ratings

    Listed below is a brief description of the FIRS components and the 
more common evaluative criteria and factors considered under each 
component.
     Capital--A System institution is expected to maintain 
capital commensurate with the nature and extent of risks to the 
institution and the ability of management to identify, measure, 
monitor, and control these risks. The capital component is based on an 
evaluation of an institution's capacity to absorb losses and provide 
for future growth. An evaluation of capital relies on many factors such 
as regulatory capital requirements, trends, portfolio and institutional 
risk, growth, adequacy of risk funds, management capability, and other 
factors as appropriate.
     Assets--This component is based on an assessment of both 
the quality of the current portfolio and the quality of the associated 
management processes that substantially impact the quality of assets. 
An assessment of assets relies on

[[Page 19919]]

many factors such as loan portfolio management, investment portfolio 
management, loan portfolio trends, risk identification processes, 
credit administration, allowance for loan losses, and other factors 
that affect the quality, performance, income producing capacity, and 
stability of assets.
     Management--The management component is based on an 
assessment of board and management performance against all factors 
considered necessary to operate the institution within accepted banking 
practices and in a safe and sound manner in accordance with applicable 
laws, regulations, and guidelines.
     Earnings--This component is based on an evaluation of the 
quantity, quality, and sustainability of the institution's earning 
performance. An evaluation of earnings considers factors such as the 
level of earnings, composition and quality of net income, stability of 
earnings performance, relationship to portfolio risk, quality of 
earnings management, and other factors as deemed appropriate.
     Liquidity--The liquidity component is based on an 
evaluation of an institution's capacity to promptly meet the demand for 
payment of its obligations, fund its loan portfolio, and readily meet 
the reasonable credit needs of the territory served. An evaluation of 
liquidity also considers continued access to funding, the existence of 
secondary sources of liquidity, and other factors as deemed 
appropriate.
     Sensitivity--This component reflects the degree to which 
changes in interest rates may affect earnings or the market value of an 
institution's equity. An evaluation of this component considers such 
factors as the size and complexity of the institution's financial 
activities, the level of interest rate risk exposure relative to 
capital and earnings, investment and derivatives activities, 
management's ability to identify, measure, monitor, project, and 
control interest rate risk, and other factors as deemed appropriate.

III. Responsibility

    It is the responsibility of the Chief Examiner to ensure that the 
components used to support the composite ratings are reviewed 
periodically to make certain they reflect the material matters that 
impact the safety and soundness of institutions. In this respect, the 
Chief Examiner shall make recommendations to the FCA Board to add or 
delete components as necessary. Specific evaluative criteria and 
factors for determining component and composite ratings shall be 
established by the Chief Examiner and incorporated in the FCA 
Examination Manual or by other means as appropriate. The Chief Examiner 
is responsible for ensuring that ratings assigned to institutions are 
commensurate with and accurately reflect the risk in the institutions.

IV. Reporting

    At least quarterly, the Chief Examiner will provide the FCA Board a 
report of the composite rating of all FCS institutions.

V. Implementation

    System institutions examined after the date this policy is adopted 
by the FCA Board will be assigned composite and component ratings in 
accordance with this Policy Statement.

    Dated: April 16, 1998.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 98-10630 Filed 4-21-98; 8:45 am]
BILLING CODE 6705-01-P