[Federal Register Volume 65, Number 23 (Thursday, February 3, 2000)]
[Notices]
[Pages 5340-5348]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-2334]


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FARM CREDIT SYSTEM INSURANCE CORPORATION


Policy Statement on the Secure Base Amount and Allocated 
Insurance Reserve Accounts

AGENCY:  Farm Credit System Insurance Corporation.

ACTION:  Policy statement.

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SUMMARY:  The Farm Credit System Insurance Corporation (Corporation) is 
publishing in final a Policy Statement on the Secure Base Amount and 
Allocated Insurance Reserve Accounts (AIRAs). This Policy Statement 
establishes a framework for the periodic determination of the Farm 
Credit Insurance Fund's (Insurance Fund) secure base amount. It also 
implements the Corporation's authority to allocate excess Insurance 
Fund balances above the secure base amount into an account for each 
insured Farm Credit System Bank and one for the Farm Credit System 
Financial Assistance Corporation (FAC) stockholders. The policy 
statement was published for public comment in the Federal Register on 
October 5, 1998 (63 FR 53423).

EFFECTIVE DATE:  December 15, 1999.

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.

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SUPPLEMENTARY INFORMATION:  In 1987, Congress directed the Corporation 
to build and manage the Insurance Fund to achieve and maintain the 
secure base amount (SBA). For insurance premium purposes, the statute 
defines the SBA 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.'' (12 U.S.C. 2277a-4(c)).
    The Corporation's Board of Directors (Board) reviews premiums at 
least semiannually to determine whether to adjust assessments in 
response to changing conditions. 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. (12 U.S.C. 2277a-4(a)). 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 make a default on System debt obligations less 
likely.
    In the Farm Credit System Reform Act of 1996, Congress gave the 
Corporation the discretion to reduce premium assessments before 
reaching the SBA. (12 U.S.C. 2277a-4(a)). It also established a process 
for making partial distributions of excess funds in the Insurance Fund. 
(12 U.S.C. 2277a-4(e)).

I. Secure Base Amount Determination

    The law sets out a formula for determining the SBA: ``2 percent of 
the aggregate outstanding insured obligations of all insured System 
banks.'' (12 U.S.C. 2277a-4). It also allows the Corporation to choose 
another percentage, ``as the Corporation in its sole discretion 
determines is actuarially sound to maintain in the Insurance Fund 
taking into account the risk of insuring outstanding insured 
obligations.'' Id. Thus far, the Corporation has used the statutory 
formula.

1. Accrued Interest

    In the statute, an insured obligation is defined as ``any note, 
bond, debenture, or other obligation'' issued on behalf of an insured 
System bank under the appropriate subsection of section 4.2 of the Farm 
Credit Act of 1971, as amended (Act) (12 U.S.C. 2277a). The proposed 
Policy Statement included both principal and accrued interest in the 
definition of ``insured obligation'' because section 5.52 of the Act 
established the Corporation to ensure the timely payment of principal 
and interest to investors. See 63 FR 53423, Oct. 5, 1998. Also, it is 
commonly understood that an issuer of bonds or notes has an obligation 
to pay a debt, which includes interest, when due. Accordingly, to 
promote the safety and soundness of the System and add a safeguard for 
investors, the Board included ``accrued interest'' in the definition.
    One commenter, commenting on behalf of System institutions, 
suggests that before including accrued interest in the definition, the 
Corporation should demonstrate that there is some actuarial reason for 
the secure base to be maintained at the higher level that will result 
from the inclusion of accrued interest. The Board disagrees with the 
commenter. The issue is a matter of statutory interpretation; it is not 
dependent upon an ``actuarial'' reason.
    As noted, both principal and interest are insured. Thus, the 
``insured obligation'' of FCSIC at a point in time is equal to both the 
principal and accrued interest at that point in time. The Policy 
Statement's inclusion of ``accrued interest'' in the definition of 
``insured obligation'' for purposes of determining the SBA is 
consistent with the statute and its legislative history.

2. Maintaining the SBA

    After calculating the insured obligations, the Corporation will 
apply the deductions specified in the statute for the government 
guaranteed portion of the System loans to determine the SBA. This 
calculation will be done at the end of each quarter. After the end of 
the calendar year, using the December 31 balances, the Corporation will 
decide whether the Insurance Fund exceeds the SBA. The Policy Statement 
uses the December 31 balances for this calculation because the statute, 
in the premium section, contemplates using a point in time method in 
this context (12 U.S.C. 2277a-4(c)).
    A commenter noted that the proposed Policy Statement and its 
preamble state the Corporation's commitment ``to attain and maintain'' 
the Fund at the SBA. The commenter suggested that this was a marked 
departure from the Policy Statement Concerning Adjustments to the 
Insurance Premiums and inconsistent with the statute. This contention 
is incorrect. The preamble to the Policy Statement Concerning 
Adjustments to the Insurance Premiums provides that the Corporation 
will attain and maintain the Fund at the SBA. See 61 FR 39453, July 29, 
1996. Thus, the new Policy Statement's requirement ``to attain and 
maintain'' the Fund is consistent with the earlier one on insurance 
premium adjustments.
    More importantly, this Policy Statement is consistent with the law. 
Section 5.55(b) of the Act directs the Corporation to reduce the 
premiums if the aggregate amounts in the Insurance Fund exceed the SBA. 
However, this same provision requires the Corporation to temper 
reductions so that premiums continue to be ``sufficient to ensure that 
the aggregate of amounts in the Farm Credit Insurance Fund after such 
premiums are paid is not less than the secure base amount at such 
time'' (12 U.S.C. 2277a-4(b)). This provision directs the Corporation 
to maintain the SBA, even after it reduces premiums.
    The House Report on H.R. 3030 (H. Rep. 100-295), which in large 
part was adopted by the Conference Committee in 1987 when the 
Corporation was created, supports this interpretation. It states at 
page 61: `` The fund would be maintained at 2 percent of the value of 
all System loans outstanding or such other level deemed appropriate by 
the board'' (emphasis added). While Congress amended section 5.55 of 
the Act in 1996, granting FCSIC the discretion to reduce premiums 
before reaching the SBA, it did not alter the original mandate to reach 
the secure base amount and then maintain it at 2 percent.
    In fact, when it added the AIRA accounts in 1996, Congress gave the 
Corporation ``sole discretion'' to eliminate or reduce the AIRA 
disbursements. Section 5.55(e)(6)(B) of the Act provides for 
elimination or reduction of disbursements if circumstances ``might 
require the use of the Farm Credit Insurance Fund'' and ``could cause 
the amount in the Farm Credit Insurance Fund during the calendar year 
to be less than the secure base amount'' (12 U.S.C. 2277a-4(e)(6)(B)). 
This provision demonstrates continued congressional intent to have the 
Corporation manage the Insurance Fund, including the new AIRAs, by 
maintaining the integrity of the SBA.

II. Allocated Insurance Reserve Accounts

1. Determining Whether There Are Excess Funds To Allocate to the AIRAs

    The Farm Credit System Reform Act of 1996 established a process for 
making partial distributions of the Insurance Fund's balance above the 
SBA. It established in the Insurance Fund an AIRA for the benefit of 
each insured System bank and one for the FAC stockholders. The AIRAs 
remain a part of the Insurance Fund and are available

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to the Corporation. In fact, under the statute, section 5.55(e)(5) of 
the Act, the AIRAs were designed to absorb losses first, if necessary.
    AIRA allocations would be made only at the end of any year in which 
the Insurance Fund, plus the accumulated excess balance after deducting 
expenses and insurance obligations for the next year, is greater than 
the 2 percent SBA. If the Insurance Fund exceeds the SBA at the end of 
any calendar year (using December 31 balances), the statute requires 
the Corporation to determine whether any excess funds exist for 
allocation to the AIRAs. See section 5.55 (e)(5) of the Act. In 
determining whether excess funds exist, the statute calls for the 
Corporation to first calculate ``the average secure base amount for the 
calendar year (using average daily balances).''
a. AIRAs as Excess Reserves
    The statute contemplates that the Insurance Fund be made up of two 
tiers (the SBA and the excess AIRA balances). This reading of the 
statute is supported by the House Report on H.R. 2029 (H. Rep. 104-421) 
at page 9. In explaining the purpose and need for the Farm Credit 
Reform Act of 1996, it states that the legislation is designed to 
``provide for the rebate of interest accruing on the secure base 
amount.'' At another point on the same page, it explains that the 
legislation provides ``for the disbursement of money above the secure 
base amount of the insurance fund that has accrued from excess 
interest'' (emphasis added). In fact, section 5.55(e) of the Act is 
entitled ``Allocation to System Institutions of Excess Reserves.'' 
Clearly, Congress intended that the Insurance Fund would hold more 
funds than the SBA, with a partial disbursement of the excess after 
2005, if no major losses occurred.
    One commenter takes issue with this reading of the statute and 
suggests that the Corporation consider counting the AIRAs in the SBA, 
rather than as an excess reserve. The Board believes the Policy 
Statement accurately reflects the statute and the legislative history. 
It conforms to the 1996 Act by providing a mechanism to contain future 
growth above the SBA due to investment income. The statute provides 
that the AIRAs are the first source of funds for the Corporation if 
actual operating expenses or insurance obligations exceed projections. 
Thus, the first source is the excess above the 2 percent and the second 
source is the amount below it.
    The impact of the commenter's suggestion, counting the AIRAs toward 
the SBA, is to effectively lower the SBA from the unallocated 2 
percent, without the Board determining that such a reduction is 
``actuarially sound.'' Furthermore, if you take this suggestion to its 
logical conclusion under a low growth scenario, the bulk of the Fund 
could be allocated to reserve accounts, eventually including even the 
$260 million in Treasury money and its accumulated interest. The Board 
does not believe that Congress contemplated either result.
b. Recalculating AIRAs Each Year or Fixing Them At Yearend
    The proposed Policy Statement called for the AIRAs to be 
recalculated each year at calendar yearend. The amounts credited to the 
AIRAs would replace--rather than be added to--the amounts allocated the 
previous year. Thus, the amounts in the AIRAs would fluctuate, 
depending upon the annual calculation of the SBA and any excess 
Insurance Fund balance. The advantage of this approach is any amounts 
in the AIRAs would be available to capitalize high growth in insured 
obligations. In other words, if growth during any year outstripped the 
ability of the Fund's investment earnings to capitalize it, then the 
AIRAs could be tapped to reach or maintain the 2-percent SBA. Using the 
AIRAs in this manner could reduce or eliminate the need to assess 
premiums. However, recalculating each year would also likely reduce the 
amount in the AIRAs during high growth years, limiting distributions 
and reducing the total amount of funds available in the event of 
insurance losses.
    One commenter suggested that the Board treat the amounts in the 
AIRAs as fixed at yearend. Under this approach, any funds allocated to 
an AIRA account would be tapped in the following years only if an 
insurance loss occurs or to fund underestimated expenses. The commenter 
further suggested that the Fund could grow back to the SBA through 
investment earnings or if necessary by raising insurance premiums.
    The approach taken in the proposed Policy Statement reflected the 
statutory language allocating excess funds at the end of the year if 
the Insurance Fund exceeds the SBA for that year. While the Board 
believes it is reasonable and consistent with the statute to 
recalculate the AIRAs each year concurrent with the SBA calculation, it 
agrees with the commenter that it is also reasonable to treat the 
amounts in the AIRAs as fixed at yearend. Fixing the AIRAs is 
consistent with the statutory language describing how the Corporation 
should use the funds in the AIRAs. In fact, there is a tension in the 
statute between this part and the part that describes how to allocate 
funds to the AIRAs. The Board believes it could resolve this tension by 
choosing either method because both are reasonable interpretations of 
the statute.
    By agreeing with the commenter and fixing amounts placed into the 
AIRAs more money will be retained during high growth years. This 
clearly benefits the AIRA account holders. However, the System may have 
to pay insurance premiums after a year where high growth in insured 
obligations causes the Fund to fall below the SBA; but as the commenter 
pointed out, the Board has clear authority to assess premiums in this 
circumstance. Also, the commenter noted that premiums would be paid on 
the basis of risk and growth rather than at the expense of AIRA account 
holders. For investors in the Systemwide debt, the aggregate value of 
the Insurance Fund will be higher in high growth years when insurance 
premiums are collected. Thus, this method has some advantages that are 
not present in yearend recalculation described in the proposed Policy 
Statement. For these reasons, the Board has decided not to recalculate 
the AIRAs each year but instead to fix the amounts at year-end.
c. Authorized Deductions
    If the Insurance Fund exceeds the SBA, the statute requires that 
the Insurance Fund balance be adjusted downward by an estimate for the 
next calendar year of the:
    1. Corporation's operating costs; and
    2. Insurance obligations.
    The Corporation will deduct the operating expenses it expects to 
incur for the next calendar year. Estimated insurance obligations are 
defined in the Policy Statement to include all anticipated allowances 
for insurance losses, claims, and other potential statutory uses of the 
Insurance Fund.
    The Corporation prepares its financial statements on an accrual 
basis using generally accepted accounting principles (GAAP). GAAP 
requires the Corporation to recognize in its financial statements any 
probable loss that can be reasonably estimated. Thus, the Board has 
concluded that the Corporation should deduct probable losses estimated 
for the next year, recognizing that such a deduction could mean that no 
excess funds would be available for allocation to the AIRAs in a given 
year.
    The proposed Policy Statement defined insurance obligations to 
include an estimate of expected growth in insured debt for the 
prospective 12 months, using a 3-year average to determine the 
estimate. The statute

[[Page 5343]]

grants the FCSIC, in its sole discretion, the authority to determine 
the sum of its estimated operating expenses and insurance obligations 
for purposes of determining if an excess Fund balance exists for 
allocation to the AIRAs. Accordingly, it is reasonable for the Board to 
exercise this discretion to include an amount necessary to adjust the 
Fund for anticipated growth in the System's insured debt. Including an 
anticipated growth factor as an authorized deduction from the excess 
balance will diminish the amount available for allocation to the AIRAs. 
Investors, however, would have a greater cushion of insurance 
protection.
    System institutions that commented did not favor this approach 
because they may not receive as much in AIRA allocations. One commenter 
stated that covering growth out of excess reserves causes those who are 
not growing to subsidize out of their AIRAs the insurance premiums of 
those that are growing. Also, the commenter argued that including a 
deduction for estimated growth is not what Congress intended.\1\ The 
commenter suggested that estimated growth should be considered when the 
Board reviews insurance premiums, not in the AIRA formula. This 
commenter also suggested that if the Board decided to include estimated 
growth, it should also include estimated investment earnings as a 
compensating factor. The Board agrees that it is reasonable to 
calculate operating expenses as a ``net'' figure by including estimated 
earnings if it adjusts the Insurance Fund for estimated growth.
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    \1\ This commenter also took issue with a reference in the 
preamble that noted how a deduction for estimated growth might avoid 
the need for ``supplemental insurance premiums.'' FCSIC recognizes 
that Congress did not embrace the concept of ``supplemental 
premiums.'' A better choice of words would have been ``might avoid 
the need to assess additional premiums to build back to the SBA.''
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    The Board also agrees that it can and should consider growth 
estimates when it reviews insurance premiums. Thus, the Board has 
decided not to include an estimated growth factor as an authorized 
deduction in determining if an excess Fund balance exists for 
allocation to the AIRAs. As a result, neither estimated growth nor 
estimated earnings will be included. Only estimated operating expenses 
and insurance obligations for the prospective 12 months will be 
deducted.
d. Allocation Formula When Excess Funds Are Available
    The Policy Statement includes the statutory formula for allocation 
of any excess Insurance Fund balances to FAC stockholders (10 percent) 
and to the insured System banks (90 percent). It also includes the 3-
year average loan balance formula the statute mandates when the 
Corporation adds balances to each AIRA. The commenters did not question 
this approach. Exhibit 1 is a hypothetical example of how the AIRA 
program will operate. It compares the approach used in the proposed 
Policy Statement to the final approach, including determining the 
amount of excess Insurance Fund balances and allocating the balances to 
individual AIRA holders.
e. Use of Allocated Amounts When Reductions Are Required
    The Policy Statement also interprets the statutory language 
governing use of the AIRAs when insurance obligations exceed estimated 
amounts. When actual expenses and insurance obligations exceed 
estimates from the previous yearend, the law requires the Corporation 
to reduce the balances in the AIRAs by proportional amounts. The 
statute, however, doesn't prescribe how the proportional amounts are to 
be determined.
    The Board concluded that the Corporation should use the same 
technique to calculate reductions to the AIRAs as the statute uses to 
calculate additions, i.e., the 3-year average loan balance formula. 
This weighted average allocation formula ensures that any reductions to 
AIRA balances are accomplished in the same manner as the allocations. 
The commenters did not take issue with this approach.

2. AIRA Accumulation Cycle

    The law authorizes payments of a portion of AIRA balances to the 
System banks and FAC stockholders ``as soon as practicable during each 
calendar year beginning more than 8 years after the date on which the 
aggregate of the amounts'' in the Insurance Fund exceeds the SBA. (12 
U.S.C. 2277a-4). While this language could be subject to varying 
interpretations, the Insurance Fund first attained the SBA in the first 
quarter of 1998, and thus payments could begin 8 years later. The Board 
has concluded that it is reasonable to consider making the first 
payment as soon as practicable after the first quarter in 2006. The 
proposed Policy Statement adopted the earliest possible payout date: 8 
calendar years after the quarter-end when the SBA was initially 
attained. The commenters supported this approach.
    An important corollary issue is how to address an interruption in 
the 8-year period. For example, if after establishing the AIRAs, the 
Corporation has to use them for an insurance action, does the 
accumulation cycle begin anew? The Policy Statement: (1) Grants the 
Board the authority to restart the accumulation period if the Insurance 
Fund drops below the SBA at any subsequent quarter-end during the 8-
year period; (2) allows the Board to select an accumulation period, to 
begin at the next quarter-end when the Insurance Fund again attains the 
SBA; and (3) enumerates the factors the Board will consider in 
selecting an alternative accumulation period.
    The statute grants the Board discretionary authority to determine 
whether to make distributions at the end of the 8-year AIRA 
accumulation cycle. Given this broad authority and the overall 
statutory scheme, it is reasonable for the Board to interpret the 
statute to permit it to change or restart the AIRA cycle if, at any 
time during this period, the Insurance Fund drops below the SBA.
    The Policy Statement leaves the issue of selecting an alternative 
accumulation period open to decision on a case-by-case basis. This 
approach preserves maximum flexibility to tailor any alternative 
accumulation period to best fit the causes of a future shortfall in the 
Insurance Fund. For example, the circumstances where a period of rapid 
growth causes a temporary (or small) decline in the Insurance Fund 
below the SBA for one or more quarters are far less serious than a 
decline in the Insurance Fund caused by losses as a result of increased 
risk at System banks and associations.
    One commenter found the Board's approach to be ``reasonable and 
sound.'' Another commenter did not take issue with the Board's 
discretionary authority to change or restart the 8-year AIRA cycle. It 
suggested, however, it would be inappropriate to delay the period when 
payouts begin if there is a temporary reduction below the SBA.\2\ As 
noted above, the Board agrees this would be less serious than a 
substantial reduction due to insurance losses.
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    \2\ This same commenter took issue with the preamble's 
characterization of the 8-year accumulation period as established by 
Congress to ``allow for the creation of a secondary insurance 
reserve.'' We have eliminated the reference.
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III. Issues for Later Consideration

    The statute authorizes initial payment of any balances in the AIRAs 
beginning more than 8 years after attainment of the SBA, which could be 
as early as 2006. As this date approaches, the Corporation's Board will 
have to consider the Corporation's authority to reduce or eliminate 
AIRA payments,

[[Page 5344]]

and calculation of the initial AIRA payment components.
    The Board believes that these issues can be better addressed after 
the Corporation obtains experience in administering the AIRA program 
over several years. Also, the likelihood of payment beginning in 2006 
must be considered somewhat uncertain at this time. The uncertainty 
stems from factors that will determine whether and how much of any AIRA 
accumulations will occur. These factors are:
    1. Future growth in the level of insured debt outstanding;
    2. Possible insurance claims or losses; and the
    3. Level of investment earnings.
    Because the Corporation cannot predict any of these factors with 
certainty now, it seems prudent to gain more experience with excess 
Insurance Fund balances before making these decisions about future 
payments. The commenters did not disagree with this approach.

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Farm Credit System Insurance Corporation Policy Statement on the 
Secure Base Amount and Allocated Insurance Reserve Account Program

NV-99-05
    Effective Date: Upon adoption.
    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 will 
build and manage the Farm Credit Insurance Fund (Insurance Fund) to 
attain and maintain a secure base amount (SBA), defined as 2 percent of 
the aggregate outstanding insured obligations of all insured System 
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; and
    Whereas, the Farm Credit System Reform Act of 1996, Public Law 104-
105, 110 Stat. 162 (Feb. 10, 1996), amended section 5.55 of the Act to: 
(1) Establish in the Insurance Fund an Allocated Insurance Reserve 
Account (AIRA) for the benefit of each insured System bank and one for 
the Farm Credit System Financial Assistance Corporation (FAC) 
stockholders; (2) allocate any excess balances above the SBA to these 
AIRAs; and (3) eventually make partial distributions of the excess 
funds in the AIRAs.
    NOW, therefore, the Corporation's Board of Directors (Board) adopts 
the following Policy Statement to govern the calculation of the secure 
base amount, the determination of any excess above the SBA, the 
establishment of the AIRAs, and the method for allocating any excess to 
the AIRAs.

I. Secure Base Amount Determination

    As stated in the Corporation's Policy Statement Concerning 
Adjustments to the Insurance Premiums (BM-11-JUL-96-02), the Board will 
review the premium assessments at least semiannually to determine 
whether to adjust premiums in response to changing conditions. The 
Board continued this review even after the Insurance Fund achieved the 
SBA because the law requires the Corporation to maintain the SBA. Thus, 
the Corporation must ensure that as the Farm Credit System's insured 
debt grows, or if the Insurance Fund suffers a significant loss, the 
Insurance Fund builds back to the SBA.
    The Farm Credit Reform Act of 1996 established a process for making 
partial distributions of the Insurance Fund's balance above the SBA. If 
excess reserves accumulate, these distributions can begin at a point 8 
years after the Insurance Fund reaches the SBA, but no sooner than 
2005. The Insurance Fund first attained the SBA in 1998, and thus the 
payments could begin 8 years later. To begin the process the 
Corporation must define ``the aggregate outstanding insured 
obligations'' of all the System banks. Then it must follow the steps in 
the statute to determine the SBA. Finally, at the end of any calendar 
year in which the Insurance Fund attains the secure base amount, the 
Corporation must determine whether any excess funds exist for 
allocation to the AIRAs.
    The principal calculation for determining whether the Insurance 
Fund is at the SBA amount will be 2 percent of the aggregate adjusted 
insured obligations defined as follows:
    1. ``Insured obligation'' means any note, bond, debenture, or other 
obligation issued under subsection (c) or (d) of section 4.2 of the 
Farm Credit Act on or before January 5, 1989, on behalf of any System 
bank; and after such date which, when issued, is issued on behalf of 
any insured System bank and is outstanding at the quarter-end. The 
balance outstanding at the quarter-end shall include principal and 
accrued interest payable as reported by the banks in the call reports 
submitted to the Farm Credit Administration.
    2. The balance of insured obligations determined in Number 1 shall 
be reduced by an amount equal to the sum of:
    (a) 90 percent of the guaranteed portions of principal outstanding 
on Federal Government-guaranteed loans in accrual status at all System 
institutions; and
    (b) 80 percent of the guaranteed portions of principal outstanding 
on State Government-guaranteed loans in accrual status at all System 
institutions.
    At the end of any calendar year when the Insurance Fund balance 
exceeds the SBA, calculated using December 31, balances (point-in-time 
method), the Corporation will determine whether any excess funds exist 
for allocation to the AIRAs.

II. Allocated Insurance Reserve Accounts

1. Determination of Excess Insurance Fund Balances

    An allocated insurance reserve account (AIRA) shall be established 
in the Insurance Fund for each insured System bank and for FAC 
stockholders. Amounts representing excess Insurance Fund balances would 
be allocated to the AIRAs. The AIRAs remain a part of the Insurance 
Fund and are available to the Corporation.
(a) Authorized Deductions
    In determining whether there are any excess insurance reserves, the 
December 31 Insurance Fund balance will first be adjusted downward by:
    (1) The Corporation's estimated operating expenses for the next 12 
months; and
    (2) The Corporation's estimated insurance obligations for the next 
12 months.
    The Corporation will budget for the next calendar year operating 
expenses and it will deduct the operating expenses it expects to incur. 
When determining estimated insurance obligations, the Corporation will 
include all anticipated allowances for insurance losses, claims, and 
other potential statutory uses of the Insurance Fund.
    The adjusted aggregate yearend Insurance Fund balance will then be 
compared with the SBA. The Corporation will calculate the SBA using an 
average daily balance method for the previous calendar year. The 
statute requires use of an average daily balance method for calculating 
the SBA only for purposes of determining the amount of any excess 
Insurance Fund balances.
    When the aggregate adjusted Insurance Fund balance exceeds the SBA 
calculated using the average daily balance method, the excess Fund 
balance shall be allocated to the accounts of each insured System bank 
and to the FAC stockholders. The AIRA balances will be fixed at yearend 
and any amounts to be credited in subsequent years will be added to 
amounts allocated the previous year.
(b) Allocation Formula When Excess Funds Are Available
    (1) Ten percent of the excess Insurance Fund balance shall be 
credited to the AIRA for all holders, in the aggregate, of Financial 
Assistance Corporation stock. The total amount that may be allocated to 
this AIRA is limited to $56 million.

[[Page 5348]]

    (2) The remaining amount of the excess Insurance Fund balance shall 
be credited to the AIRAs for each insured System bank. The basis for 
crediting the excess balance to each bank's AIRA shall be the ratio of 
its average daily accrual loan principal outstanding for the three 
prior years divided by the total average daily accrual loan principal 
outstanding for all System banks. System bank loan volume for making 
these allocations is defined in section 5.55(d) to include all retail 
loans made by direct lending associations, their insured System banks 
and other financing institutions (OFIs) being financed by insured 
System banks (12 U.S.C. 2277a-4(d)). The statute also requires that a 
reduction be made from each bank's ratio (numerator and denominator) 
for the guaranteed portions of government-guaranteed loans similarly on 
an average daily balance basis for the three-year period. An example of 
the allocation formula is shown in Exhibit 1.
(c) Use of Allocated Amounts When Reductions Are Required
    When the Corporation's actual operating expenses and insurance 
obligations exceed the estimated amounts used to determine any year's 
AIRA balances, section 5.55(e)(5) requires AIRA balances to absorb such 
excess expenses before using other amounts in the Insurance Fund (12 
U.S.C. 2277a-4(e)(5)). To the extent reductions are made in AIRA 
balances to absorb Corporation expenses and actual insurance 
obligations, each AIRA will be reduced by its proportional amount in 
accordance with the statute. The same formula used to make allocations 
of excess Insurance Fund balances shall be used to reduce AIRA balances 
when necessary. Ten percent of any necessary AIRA reduction will be 
applied to the FAC stockholder AIRA. The remaining 90 percent will be 
applied to the System insured banks' AIRAs on the basis of the ratio of 
each bank's average daily accrual loan principal outstanding for the 
three prior years divided by the total average daily accrual loan 
principal outstanding for all System banks.

2. AIRA Accumulation Cycle

    Section 5.55(e)(6) permits the Insurance Corporation's Board at its 
discretion to make payments of AIRA balances to the account holders 
after a minimum time period (12 U.S.C. 2277a-4(e)(6)). The minimum time 
period specified is more than 8 years after the date on which the 
aggregate amount in the Insurance Fund exceeds the secure base amount 
calculated using quarter-end balances.
    The initial starting point for the 8-year period shall be the first 
calendar quarter-end when the Insurance Fund has attained or exceeded 
its SBA. The initial attainment occurred during the first quarter of 
1998. The first payment would be in the second quarter of 2006.
    Should the Insurance Fund drop below the secure base amount at any 
subsequent quarter-end during the 8-year period, the Corporation's 
Board may restart the accumulation period. For example, the Insurance 
Fund might drop below the SBA as a result of rapid growth in insured 
System debt outstanding, or incurring insurance claims or losses. The 
Board in its discretion may select an accumulation period, to begin at 
the next quarter-end when the aggregate in the Insurance Fund again 
attains the secure base amount. Any alternative accumulation period 
however, cannot result in any payment before April 2006. The Board will 
consider the following factors in determining selection of an 
alternative accumulation period:
    (a) The reason that the Insurance Fund dropped below the SBA (i.e. 
as a result of growth in insured debt vs. an insurance expense at a 
troubled institution). The current level of the Insurance Fund and the 
amount of money and time needed to attain the SBA;
    (b) The likelihood and probable amount of any losses to the 
Insurance Fund;
    (c) 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 insured banks;
    (d) 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
    (e) 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.

III. Issues for Later Consideration

    Because of multiple factors (including rapid growth and the amount 
of any insurance obligations) which could affect future AIRA balances 
and the uncertainty of future payments, the Corporation has deferred 
consideration of several issues to a date closer to the year 2006. The 
Board anticipates gaining experience in the administration of the AIRA 
program over the next few years and expects to have a better basis for 
determining these issues, which include:
    1. Board discretionary authority to limit or restrict AIRA 
payments; and
    2. Calculation of the initial AIRA payment components.

    Adopted this 15th day of December, 1999 by order of the Board.

    Dated: January 28, 2000.
Nan P. Mitchem,
Acting Secretary to the Board, Farm Credit System Insurance 
Corporation.
[FR Doc. 00-2334 Filed 2-2-00; 8:45 am]
BILLING CODE 6710-01-P