[Federal Register Volume 68, Number 60 (Friday, March 28, 2003)]
[Rules and Regulations]
[Pages 15045-15047]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7387]



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 Rules and Regulations
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  Federal Register / Vol. 68, No. 60 / Friday, March 28, 2003 / Rules 
and Regulations  

[[Page 15045]]



FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AC14


Funding and Fiscal Affairs, Loan Policies and Operations, and 
Funding Operations; Capital Adequacy--ABS and MBS Investments

AGENCY: Farm Credit Administration.

ACTION: Interim final rule with request for comments.

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SUMMARY: The Farm Credit Administration (FCA or agency) is issuing an 
interim final rule to amend our regulatory capital standards to allow 
Farm Credit System (FCS or System) institutions to use a lower risk 
weighting for highly rated investments in non-agency asset-backed 
securities (ABS) and mortgage-backed securities (MBS) that have reduced 
exposure to credit risk. We are adopting this rule so that the capital 
requirements for risk weighting of highly rated non-agency ABS and MBS 
investments will more closely reflect an institution's relative 
exposure to credit risk and help achieve a more consistent regulatory 
capital treatment with the other financial regulatory agencies. This 
interim rule will be effective until we take final action on planned 
further amendments to our capital regulations.

DATES: This regulation will become effective 30 days after publication 
in the Federal Register during which either or both houses of Congress 
are in session. We will publish notice of the effective date in the 
Federal Register. Please send your comments to the FCA by April 28, 
2003.

ADDRESSES: Please send comments by electronic mail to ``[email protected]'' or through the Pending Regulations section of FCA's Web 
site, http://www.fca.gov. You may also send comments to Thomas G. 
McKenzie, Director, Regulation and Policy Division, Office of Policy 
and Analysis, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, Virginia 22102-5090 or by fax to (703) 734-5784. You may review 
copies of all comments at our office in McLean, Virginia.

FOR FURTHER INFORMATION CONTACT: Laurie A. Rea, Senior Policy Analyst, 
Office of Policy and Analysis, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4498; TTY (703) 883-4434; or Jennifer A. Cohn, 
Senior Attorney, Office of General Counsel, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-2020.

SUPPLEMENTARY INFORMATION: 

I. Objectives

    The objectives of our interim final rule are to:
    [sbull] Ensure FCS institutions maintain capital levels 
commensurate with their relative exposure to credit risk by allowing 
them to use a lower risk weighting for highly rated non-agency \1\ ABS 
and MBS investments that have reduced exposure to credit risk;
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    \1\ Non-agency securities are securities not issued or 
guaranteed by the United States Government, a Government agency (as 
defined in Sec.  615.5201(f)), or a Government-sponsored agency (as 
defined in Sec.  615.5201(g)).
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    [sbull] Help achieve a more consistent regulatory capital treatment 
with the other financial regulatory agencies; \2\
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    \2\ We refer collectively to the Office of the Comptroller of 
the Currency, the Board of Governors of the Federal Reserve System, 
the Federal Deposit Insurance Corporation, and the Office of Thrift 
Supervision as the ``other financial regulatory agencies.''
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    [sbull] Allow FCS institutions' capital to be used more efficiently 
in serving agriculture and rural America and support of other System 
mission activities; and
    [sbull] Reduce regulatory burden on FCS institutions.

II. Background

    Section 615.5210 specifies the risk weightings that FCS 
institutions must use to calculate capital ratios for meeting our 
minimum risk-based capital standards. This regulation requires 
institutions to risk-weight their investments in non-agency ABS and MBS 
(including commercial MBS) as follows:

------------------------------------------------------------------------
                                                           Current risk
                     Investment type                         weighting
                                                             (Percent)
------------------------------------------------------------------------
Non-agency ABS and MBS with maturities under 1 year.....              50
Non-agency ABS and MBS with maturities of 1 year or more             100
------------------------------------------------------------------------

    Section 615.5140 permits System institutions to invest in non-
agency ABS and MBS only if these securities are rated in the highest 
credit rating by a nationally recognized statistical rating 
organization (NRSRO),\3\ are marketable,\4\ and satisfy certain other 
requirements.
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    \3\ Section 615.5131 defines NRSRO as a rating organization that 
the Securities and Exchange Commission recognizes as an NRSRO.
    \4\ Section 615.5140(c) provides that an investment is 
marketable if you can sell it quickly at a price that closely 
reflects its fair value in an active and universally recognized 
secondary market.
---------------------------------------------------------------------------

    In November 2001, the other financial regulatory agencies adopted 
amendments to their regulatory capital standards that, among other 
changes, allow banking organizations \5\ to apply a lower risk 
weighting to certain transactions that have reduced exposure to credit 
risk (including highly rated non-agency ABS and MBS investments).\6\ 
These changes were implemented so that the capital requirements would 
more closely reflect a banking organization's relative exposure to 
credit risk and help achieve a consistent regulatory capital treatment 
among the financial regulatory agencies for transactions involving 
similar risk. The changes were effective for banking organization 
transactions settled after January 1, 2002.
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    \5\ We refer collectively to commercial banks, bank holding 
companies, and thrifts as ``banking organizations.''
    \6\See 66 FR 59614, November 29, 2001.
---------------------------------------------------------------------------

    In a letter dated August 26, 2002, the Farm Credit Council 
(Council), on behalf of the FCS banks, asked the FCA to allow FCS banks 
to apply a lower risk weighting for capital computation purposes to 
investments in non-agency ABS and MBS that satisfy our criteria for 
eligible investments. The Council specifically asked the FCA to allow 
the banks to apply a 20-percent risk weighting to these investments.
    Since fiscal year 2001, the FCA Board's regulatory plan has 
included a rulemaking project that would address many of the changes 
implemented by

[[Page 15046]]

the other financial regulatory agencies, to the extent appropriate for 
System institutions. In the interim, the FCA Board has decided to allow 
FCS institutions to apply the risk-based capital treatment adopted by 
the other financial regulatory agencies to non-agency ABS and MBS 
investments the institutions are authorized to purchase and hold under 
Sec.  615.5140. Accordingly, upon the effective date of this interim 
final rule, FCS institutions will be authorized to apply a 20-percent 
risk-weight to highly rated non-agency ABS and MBS investments.
    In formulating regulations, we strive continually to maintain 
approaches consistent with the other financial regulatory agencies. We 
have indicated in previous rulemakings that we intend to make our risk-
based capital requirements generally consistent with the requirements 
of the other financial regulatory agencies, to the extent appropriate 
to the System institutions. Lowering the capital requirements on high 
quality investments would increase the lending capacity of FCS 
institutions by freeing up capital. The additional lending capacity 
could be used to serve agriculture and rural America and support other 
mission activities of the System.
    In general, the FCA believes that allowing FCS institutions to 
apply a 20-percent risk weighting for non-agency ABS and MBS in which 
the institutions are authorized to invest would not adversely affect 
the risk-absorbing capacity or overall capitalization of the 
institutions. To apply the 20-percent risk-weighting treatment, the 
non-agency ABS and MBS investments must be eligible investments in 
accordance with Sec.  615.5140. Under Sec.  615.5140, a non-agency ABS 
or MBS investment is eligible only if it satisfies the following 
requirements, among others. It must:
    [sbull] Satisfy the criteria specified for its asset class;
    [sbull] Be marketable (i.e., it must be able to be sold quickly at 
a price that closely reflects its fair value in an active and 
universally recognized secondary market); and
    [sbull] Be rated at the highest credit rating by an NRSRO.
    Investments that become ``ineligible'' investments under Sec.  
615.5140 must be immediately assigned to the 100-percent risk-weight 
category and disposed of in accordance with Sec.  615.5143. Lastly, FCS 
institutions' application of the 20-percent risk weighting to eligible 
non-agency ABS and MBS will be subject to the FCA Board's further 
consideration and approval of a final rule that would amend the current 
risk-weighting requirements of our capital regulations or other action.

III. Section Analysis

    In the section analysis below, we explain our amendments to the 
current capital regulations.

Section 615.5210(f)(2)(ii)(L)--New Item Added to the 20-Percent Risk-
weight Category

    We add a new paragraph (L) to the 20-percent risk-weighting 
category in Sec.  615.5210(f)(2)(ii) for non-agency ABS and MBS 
investments. We emphasize that the investment must meet the eligibility 
requirements of Sec.  615.5140 of our investment regulations to be 
included in the 20-percent risk-weighting category. As mentioned 
previously, under Sec.  615.5140, a non-agency ABS or MBS investment 
must receive the highest credit rating by an NRSRO and must be 
marketable (i.e., may be able to be quickly sold at a price that 
closely reflects its fair value in an active and universally recognized 
secondary market).

IV. Administrative Procedure Act

    Pursuant to 5 U.S.C. 553(b), we find good cause exists for waiving 
the notice of proposed rulemaking as to this interim final rule because 
the notice is impracticable, unnecessary, and contrary to the public 
interest.
    The other financial regulatory agencies recently adopted extensive 
amendments to their regulatory capital standards governing banking 
organizations so these standards would more closely reflect a banking 
organization's relative exposure to credit risk. Those amendments, 
among others, include lowering to 20 percent the risk weighting for 
highly rated non-agency ABS and MBS investments, which have reduced 
exposure to credit risk. The changes were effective for transactions 
settled after January 1, 2002.
    In addition, as discussed previously, since fiscal year 2001 the 
FCA Board's regulatory plan has included a rulemaking project that 
would address many of the changes implemented by the other financial 
regulatory agencies and, to the extent appropriate for System 
institutions, make our risk-based capital requirements generally 
consistent with the other agencies' requirements. In the interim, we 
believe good cause exists to allow FCS institutions to risk-weight non-
agency ABS and MBS investments at 20 percent. As the other financial 
regulatory agencies have concluded, these investments have reduced 
exposure to credit risk. It is appropriate to have consistent 
regulatory capital treatment for transactions involving similar risk 
among lenders. Finally, lowering the capital requirements on high 
quality investments would increase the lending capacity of FCS 
institutions by freeing up capital. The additional lending capacity can 
be used to serve agriculture and rural America and support other 
mission activities.
    Accordingly, because this change is narrow and non-controversial, 
will relieve a regulatory burden, and will immediately further the 
mission of the System, we find that pre-promulgation comment is 
impracticable, unnecessary, and contrary to the public interest.
    We are issuing these regulations with a request for comments and 
will consider all comments received (in response to both this request 
and to our future notice of proposed rulemaking) when adopting the 
regulations in final form.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), the FCA hereby certifies that the proposed rule 
will not have a significant economic impact on a substantial number of 
small entities. Each of the banks in the System, considered together 
with its affiliated associations, has assets and annual income in 
excess of the amounts that would qualify them as small entities. 
Therefore, System institutions are not ``small entities'' as defined in 
the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 615

    Accounting, Agriculture, Banks, banking, Government securities, 
Investments, Rural areas.

0
For the reasons stated in the preamble, we propose to amend part 615 of 
chapter VI, title 12 of the Code of Federal Regulations as follows:

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, 
AND FUNDING OPERATIONS

0
1. 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, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 
6.20, 6.26, 8.0, 8.3, 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, 2154a, 2160, 2202b, 
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4, 
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of 
Pub. L. 100-233, 101 Stat. 1568, 1608.

[[Page 15047]]

Subpart H--Capital Adequacy

    2. Add new paragraph (f)(2)(ii)(L) to Sec.  615.5210 to read as 
follows:


Sec.  615.5210  Computation of the permanent capital ratio.

* * * * *
    (f) * * *
    (2) * * *
    (ii) * * *
    (L) Asset- or mortgage-backed securities (not issued or guaranteed 
by the United States Government, a Government agency, or a Government-
sponsored agency).
* * * * *

    Dated: March 24, 2003.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 03-7387 Filed 3-27-03; 8:45 am]
BILLING CODE 6705-01-P