[Federal Register Volume 73, Number 109 (Thursday, June 5, 2008)]
[Rules and Regulations]
[Pages 31937-31943]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-12245]


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FARM CREDIT ADMINISTRATION

12 CFR Part 652

RIN 3052-AC36


Federal Agricultural Mortgage Corporation Funding and Fiscal 
Affairs; Risk-Based Capital Requirements

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, Agency, or we) adopts a 
final rule that amends capital regulations governing the Federal 
Agricultural Mortgage Corporation (Farmer Mac or the Corporation). The 
final rule updates the Risk-Based Capital Stress Test (RBCST, RBC 
model, model) in response to recent changes in Farmer Mac's operations 
that are not addressed in the current version (Version 2.0). The final 
rule also amends the current model's assumption regarding the carrying 
costs of nonperforming loans to better reflect Farmer Mac's actual 
business practices. In addition, the final rule adds a new component to 
the model to recognize counterparty risk on nonprogram investments 
through application of discounts or ``haircuts'' to the yields of those 
investments and makes technical amendments to the layout of the model's 
Credit Loss Module. The effect of the rule is to update the model so 
that it continues to appropriately reflect risk in a manner consistent 
with statutory requirements for calculating Farmer Mac's regulatory 
minimum capital level under a risk-based capital stress test.

DATES: Effective Date: This regulation will be effective the later of 
30 days after publication in the Federal Register during which time 
either or both Houses of Congress are in session, or June 30, 2008. We 
will publish a notice of the effective date in the Federal Register.

FOR FURTHER INFORMATION CONTACT:
Joseph T. Connor, Associate Director for Policy and Analysis, Office of 
Secondary Market Oversight, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4280, TTY (703) 883-4434;

     or

Rebecca S. Orlich, Senior Counsel, Office of the General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4420, TTY (703) 
883-4020.

SUPPLEMENTARY INFORMATION:

I. Purpose

    Under section 8.32 of the Farm Credit Act of 1971, as amended,\1\ 
the FCA established the RBCST for Farmer Mac in 2001. It is the 
Agency's objective that the RBCST continues to determine regulatory 
capital requirements in a manner consistent with statutory requirements 
and constraints. The purpose of this final rule is to revise the risk-
based capital regulations that apply to Farmer Mac to more accurately 
reflect changes in Farmer Mac's operations and business practices. The 
substantive issues addressed in this final rule include the treatment 
of program loan volume with certain credit enhancement features (e.g., 
Off-Balance Sheet AgVantage volume, subordinated interests, and program 
loan collateral pledged in excess of Farmer Mac's guarantee obligation 
(hereafter, ``overcollateral'')), counterparty risk on nonprogram 
investments, and the carrying costs associated with the funding of 
nonperforming loans. We also describe minor formatting changes to the 
structure of the Credit Loss Module and the RBC model that are in the 
nature of technical changes. The preamble to the proposed rule, which 
was published in the Federal Register on September 13, 2007, contains a 
full description of the proposed changes. The proposed rule provided 
for a 45-day comment period that ended on October 29, 2007.\2\ Below we 
discuss only those provisions on which we received comments.
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    \1\ 12 U.S.C. 2279bb-1.
    \2\ 72 FR 52301 (Sept. 13, 2007).
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    The final rule (Version 3.0 of the RBC model) is adopted with one 
revision from the proposed rule. The revision permits the Director of 
the Office of Secondary Market Oversight to reduce the haircut level 
applied to unrated investments.

II. Background

    Our analysis of the RBCST has identified a need to update the model 
in response to changing financial markets, new business practices and 
the evolution of the loan portfolio at Farmer Mac, as well as 
continuing development of industry best practices among leading 
financial institutions. Our goal is to ensure that the RBCST reflects 
changes in the Corporation's business structure and loan portfolio that 
have occurred

[[Page 31938]]

since the model was originally developed by FCA, while complying with 
the statutory requirements and constraints on the model's design.

III. Comments

    We received one comment letter on the proposed rule from Farmer 
Mac. In general, Farmer Mac agreed with FCA's objective to revise the 
RBCST to reflect Farmer Mac's actual business risks more accurately but 
offered specific comments on three aspects of the proposed rule--the 
method of calculating the loan loss resolution time factor (LLRT), 
funding rate assumptions applied to nonperforming loan volume, and the 
treatment of unrated Government-sponsored enterprises (GSE) for 
purposes of applying discounts (or ``haircuts'') to nonprogram 
investments.

IV. Description of Comments on the Proposed Rule and FCA's Response

    Below is a description of the three specific comments on the 
proposed rule and FCA's responses to the comments.

A. Treatment of Unresolved Nonperforming Loans in the LLRT Calculation

    The proposed rule's method for calculating the LLRT called for 
first calculating the average LLRT of nonperforming loans for all such 
loans that have resolved by the calculation date.\3\ This average is 
then adjusted to incorporate the LLRT to date of unresolved 
nonperforming loans currently on Farmer Mac's books where the 
individual unresolved loan's LLRT to date is greater than the average 
LLRT of resolved loans. The average is calculated on an Unpaid 
Principal Balance (UPB)-weighted basis. Farmer Mac did not object to 
the proposed UPB weighting or generally to the method for measuring 
time in nonperforming loan status. Farmer Mac disagreed with the 
specific method for incorporating the influence of censored data.\4\ 
Farmer Mac asserted that excluding data from the portion of the data 
set made up of unresolved nonperforming loans with individual LLRTs 
lower than the average of resolved loans would bias the overall LLRT 
calculation. To correct this perceived bias, Farmer Mac suggested 
either using only loans that have resolved or employing statistical 
tests that formally accommodate censored observations in order to 
accommodate the influence of the unresolved defaults in the data set. 
Farmer Mac suggested that such an approach would improve the LLRT 
accuracy by providing an unbiased estimate of ``life expectancy'' of a 
nonperforming loan (i.e., LLRT).
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    \3\ By ``resolved,'' we mean loans that were in default for some 
period but were later paid current, paid off, liquidated, or 
transferred to real estate-owned, and are therefore no longer in 
nonperforming loan status.
    \4\ Censored data are loans that have entered nonperforming loan 
status but have not resolved as of the calculation date.
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    In developing the proposed approach, we considered several issues 
related to the application of duration or survival models, including 
the uniformity of the ``arrivals'' into default, the possible impact of 
UPB at time of default on remaining resolution experience, and general 
sample characteristics including length of observation window, fraction 
censored, and average life relative to observation window. The proposed 
approach was intended to balance the demands of a more complex modeling 
approach with the limits of the data set over the relatively short 
window (roughly 11 years), the relatively small set of loans in default 
and the observed high relative rate of default in a period centered 
near 2002 that substantially departs from a uniform arrival pattern. 
Farmer Mac correctly implies that excluding loans with relatively short 
durations in default as of the calculation date avoids a downward 
influence on the calculated LLRT. However, the treatment of unresolved 
nonperforming loans that have individual LLRTs greater than the average 
of those that have resolved as of the calculation date carries the 
opposite effect (i.e., avoids an upward influence) relative to their 
eventual resolution experience, because the current life at the 
calculation date is used in the weighted average calculation rather 
than its yet-to-be-determined actual life. The current life of this 
subset of loans at the calculation date necessarily understates their 
eventual LLRT and, thus, exerts an offsetting influence on the excluded 
subset. While there is not a formal statistical test for the relative 
impact of these two effects (treatment of both longer-than- and 
shorter-than-average LLRT), the adopted approach is intended to balance 
the two offsetting influences.
    Farmer Mac suggested consideration of a more formal method to 
accommodate censored data in a duration or life-survival type model, 
and we conducted several related analyses. Importantly, the bulk of the 
defaults occurred in a period of time relatively early in the 
observation window. While the rate of arrival into default is non-
uniform, the censored distribution displays the statistically useful 
property of increasing smoothly toward the censoring date. We 
calculated several measures of mean time in default on both UPB-
weighted and unweighted bases, with alternative treatments of the 
unresolved data. Under all subsets of data examined, the UPB-weighted 
LLRT values are consistently 15 to 20 percent larger than the 
unweighted LLRT estimates.
    We also estimated alternative specifications of the related hazard 
and survival functions using data supplied by Farmer Mac on all loans 
that had entered default status as of October 1, 2007, under (i) 
standard direct life tables with censored data, (ii) Kaplan-Meier 
methods, and (iii) Cox censored regression methods. The Kaplan-Meier 
method provides a direct method for recovery of the mean survival time 
accommodating the influence of the censored data at 1.79 years on an 
unweighted UPB basis. This value can be contrasted with a value of 1.60 
on an unweighted basis using the method in the proposed rule for the 
same data set. Including the influence of UPB-weighting results in the 
proposed rule's method increasing from 1.6 to 1.88, a value below that 
which we expect to find from any form of a censored regression or 
Lifetest model after weighting by UPB. Importantly, the survival 
function models we estimated generally confirm the significance of UPB 
on time-in-default and further argue for the use of UPB-weighted LLRT. 
Our testing of the suggested general approaches has shown that the 
joint treatment of excluded loans with lower than average current LLRTs 
and the conservative treatment of loans with longer than average but 
currently unresolved LLRTs results in a similar but slightly lower LLRT 
value compared with the censored regression methods suggested by Farmer 
Mac.
    We conclude that the simplicity of the proposed approach is 
warranted because of the similarity in estimated values and the fact 
that Farmer Mac would have to re-run this test every quarter to update 
the LLRT. We note that, as the observation window continues to lengthen 
and the influence of censored loan data continues to decline, the 
specific treatment employed becomes less important because we expect 
the censored data effects to become more diluted.

B. Carrying Costs of Nonperforming Loans

    Farmer Mac commented that the proposed funding rates applied to 
nonperforming loan volume do not reflect its actual operations and 
reiterated the comments in its letter of April 17, 2006, which related 
to the proposed rule for Version 2.0 of the RBC

[[Page 31939]]

model.\5\ That letter encouraged FCA to treat on- and off-balance sheet 
nonperforming loans in the model as being funded at the less than 1 
year (short-term) rate or in keeping with Farmer Mac's actual practice 
of using the lowest funding rate available at the time a loan became 
nonaccrual given yield curve conditions existing at that time. Given 
the consolidated reporting of funding in only two categories--less than 
1 year and greater than 1 year--we determined that tying the 
incremental carrying costs to the short-term rate was acceptable.
---------------------------------------------------------------------------

    \5\ 70 FR 69692 (Nov. 17, 2005). We discussed this comment in 
the preamble to the 2007 proposed rule (72 FR at 52305, Sept. 13, 
2007).
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    The Agency acknowledged in the proposed rule that, under unusual 
conditions, the short-term rate may not be the minimum rate, and Farmer 
Mac could potentially reallocate to some degree debt on its books in 
order to fund nonperforming loans at a point on its corporate yield 
curve that might be more advantageous than the short-term rate. Such a 
reallocation could necessitate a corresponding reallocation of funding 
to a different asset to offset the debt associated with the now-
optimally funded nonperforming loan position. We did not attempt to 
reflect forward discretionary management behavior or develop an 
``optimal'' funding practice that would result in effective funding 
durations changing throughout the modeled 10-year period of the RBCST. 
In the proposed rule, we discussed this possibility and rejected a more 
complex LLRT funding assumption in favor of the proposed approach, 
particularly in light of the fact that the model is cast with only two 
maturity groupings (``buckets'') of debt securities. To do otherwise 
would require adding substantial complexity to the components of the 
model reflecting funding costs--components which we believe are 
reasonably well calibrated to actual operations of Farmer Mac in their 
current aggregated form (i.e., two duration buckets).
    We believe the proposed approach reflects Farmer Mac's typical 
practices under normal conditions, and Farmer Mac has confirmed this is 
true in the preponderance of cases. To attempt to build an ``optimal'' 
or ``discretionary'' future duration-of-funding model that depends on 
the projected forward balance sheet composition in the model is beyond 
the scope of the model.

C. Treatment of Unrated GSE Securities

    Farmer Mac commented that the proposed method of applying haircuts 
to unrated GSE securities should be changed. Specifically, Farmer Mac 
believes the model should treat such securities as AAA-rated, rather 
than limiting such treatment only to GSE securities that are fully 
guaranteed by a GSE. Farmer Mac asserts that this approach would both 
reflect the low risk of default on all GSE securities and be consistent 
with FCA's approach to risk-weighting similar assets on the balance 
sheets of other Farm Credit System (System) institutions.\6\ FCA 
regulations of other System institutions permit a 20-percent risk 
weighting to ``all securities'' of GSEs without regard to credit 
rating. Farmer Mac asserts that FCA has recognized the low risk 
associated with GSE securities in the context of Agency regulations 
governing nonprogram investments and liquidity because they permit much 
higher obligor limits for eligible GSE investments than other types of 
nonprogram investments.\7\ Lastly, Farmer Mac asserts that the Agency 
would be justified in applying an automatic AAA-rating equivalent 
treatment to both unrated and GSE securities rated lower than AAA 
because the GSEs are closely regulated by Federal regulatory agencies 
that have access to more comprehensive and current information 
concerning the financial condition of the regulated GSE. The comment 
effectively encourages FCA to supersede the ratings of nationally 
recognized statistical rating organizations (NRSRO). This would be 
contrary to our stated goal for the regulation to avoid such a de facto 
re-rating process by the Agency in applying investment haircuts. 
However, we acknowledge there could be circumstances under which a 
reduction in the haircuts applicable to unrated investments that are 
not guaranteed by a GSE might be appropriate based on the risk 
characteristics of the investment. We believe that such circumstances 
could exist for non-GSE instruments as well as for GSE instruments. 
Therefore, in the final rule, while the default haircut on unrated 
instruments will remain as proposed, we have made a change in response 
to this comment that gives the Director of the Office of Secondary 
Market Oversight the discretion to apply a lower haircut on unrated 
investments on a case-by-case basis in accordance with the risk 
characteristics of the instrument.
---------------------------------------------------------------------------

    \6\ The FCA's capital rules for System banks and associations 
are set forth at 12 CFR part 615, subparts H and K. The risk 
weightings are in 12 CFR 615.5210-615.5212.
    \7\ See 12 CFR 615.5140.
---------------------------------------------------------------------------

    We disagree with Farmer Mac's assertion that the risk-based capital 
framework for other System institutions provides support for a policy 
that would apply AAA haircuts to all GSE securities regardless of their 
rating. The risk-based capital framework for other System institutions 
is fundamentally different from the RBCST applied to Farmer Mac as 
required by section 8.32 of the Farm Credit Act. The purpose of the 
regulations governing System capital requirements is to protect a 
System institution against unexpected losses arising from all types of 
risk, unlike this component of the RBC model, the purpose of which is 
to estimate counterparty risk. Comparing the proposed haircuts with 
capital requirements is not a relevant comparison because equity 
requirements to cover all types of unexpected losses applied as a 
percentage of volume are not comparable to haircuts to reflect 
counterparty risk that are applied by reducing estimated future 
cashflows over the RBC model's 10-year time horizon on a gradually 
increasing basis. Accordingly, GSE investments with ratings will be 
haircut in accordance with the schedule in this rule.

V. Technical Changes to the RBCST in the Final Rule

    In Version 3.0, we have revised the loan seasoning codes previously 
used in the Credit Loss Module to make off-balance sheet loan seasoning 
codes the same as those used for on-balance sheet loans and made other 
conforming data entry changes in the RBCST module. We have also 
incorporated a specification for senior subordinated loans in the 
Credit Loss Module to reduce the loss impact by the degree of 
subordination as referenced in the proposed rule.

VI. Impact of Changes on Required Capital

    Our tests indicate that changes related to the LLRT would have the 
most significant impact on risk-based capital calculated by the model. 
The table below provides an indication of the relative impact of each 
revision for the quarter ended December 31, 2007, using preliminary 
model submission information for the fourth quarter 2007. The lines 
labeled ``Impact of Carrying Costs of Nonperforming Loans within Ver. 
3.0 (estimated),'' ``Impact of Investment Haircuts within Ver. 3.0 
(estimated),'' and ``Impact of Treatment of Off-Balance Sheet AgVantage 
Program Volume and Other Credit-Enhanced Program Volume (e.g., 
Subordinated Interests) within Ver. 3.0 (estimated)'' present the 
minimum risk-based capital level calculated if that revision were 
excluded from the final

[[Page 31940]]

rule, Version 3.0 of the RBCST. The scenario used to estimate the 
impact of AgVantage Program Volume and Other Credit-Enhanced Program 
Volume excluded those two portfolios completely. As the table shows, 
the individual estimated impacts do not have an additive relationship 
to the total impact on the model relative to Version 2.0. This is due 
to the interrelationship of the changes with one another when they are 
combined in Version 3.0.

 
------------------------------------------------------------------------
     Calculated regulatory capital ($ in thousands)         12/31/2007
------------------------------------------------------------------------
RBCST Version 2.0......................................          42,754
RBCST Version 3.0 (estimated)..........................          59,965
Impact of Carrying Costs of Nonperforming Loans within           20,623
 Version 3.0 (estimated)...............................
Impact of Investment Haircuts within Version 3.0                    707
 (estimated)...........................................
Impact of the Treatment of Off-Balance Sheet AgVantage           (2,620)
 Program Volume and Other Credit-Enhanced Program
 Volume (e.g., Subordinated Interests) within Version
 3.0 (estimated).......................................
------------------------------------------------------------------------

VII. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies the rule will not have a 
significant economic impact on a substantial number of small entities. 
Farmer Mac has assets and annual income over the amounts that would 
qualify it as a small entity. Therefore, Farmer Mac is not considered a 
``small entity'' as defined in the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 652

    Agriculture, Banks, Banking, Capital, Investments, Rural areas.

0
For the reasons stated in the preamble, part 652 of chapter VI, title 
12 of the Code of Federal Regulations is amended to read as follows:

PART 652--FEDERAL AGRICULTURAL MORTGAGE CORPORATION FUNDING AND 
FISCAL AFFAIRS

0
1. The authority citation for part 652 continues to read as follows:

    Authority: Secs. 4.12, 5.9, 5.17, 8.11, 8.31, 8.32, 8.33, 8.34, 
8.35, 8.36, 8.37, 8.41 of the Farm Credit Act (12 U.S.C. 2183, 2243, 
2252, 2279aa-11, 2279bb, 2279bb-1, 2279bb-2, 2279bb-3, 2279bb-4, 
2279bb-5, 2279bb-6, 2279cc); sec. 514 of Pub. L. 102-552, 106 Stat. 
4102; sec. 118 of Pub. L. 104-105, 110 Stat. 168.

Subpart B--Risk-Based Capital Requirements

0
2. Amend Sec.  652.65 by redesignating paragraph (b)(5) as new 
paragraph (b)(6) and adding a new paragraph (b)(5) to read as follows:


Sec.  652.65  Risk-based capital stress test.

* * * * *
    (b) * * *
    (5) You will further adjust losses for loans that collateralize the 
general obligation of Off-Balance Sheet AgVantage volume, and for loans 
where the program loan counterparty retains a subordinated interest in 
accordance with Appendix A to this subpart.
* * * * *

0
3. Amend Sec.  652.85 by revising paragraph (d) to read as follows:


Sec.  652.85  When to report the risk-based capital level.

* * * * *
    (d) You must submit your quarterly risk-based capital report for 
the last day of the preceding quarter by the earlier of the reporting 
deadlines for Securities and Exchange Commission Forms 10-K and 10-Q, 
or the 40th day after each of the quarters ending March 31st, June 
30th, and September 30th, and the 75th day after the quarter ending on 
December 31st.

0
4. Appendix A of subpart B, part 652 is amended by:
0
a. Revising the table of contents;
0
b. Revising the first and second sentences of section 2.0;
0
c. Redesignating existing section 2.4 as new section 2.5;
0
d. Adding a new section 2.4;
0
e. Revising section 4.1 e.;
0
f. Revising the last sentence of section 4.2 b.(3) introductory text;
0
g. Redesignating existing section 4.2 b.(3)(C) and (D) as new 
paragraphs (3)(F) and (G);
0
h. Adding new section 4.2 b. (3)(C), (D), and (E);
0
i. Revising section 4.4;
0
j. Revising section 4.5 a.;
0
k. Removing the word ``unretained'' and adding in its place, the word 
``retained'' in the ninth sentence of section 4.6 b.

Appendix A--Subpart B of Part 652--Risk-Based Capital Stress Test

1.0 Introduction.
2.0 Credit Risk.
2.1 Loss-Frequency and Loss-Severity Models.
2.2 Loan-Seasoning Adjustment.
2.3 Example Calculation of Dollar Loss on One Loan.
2.4 Treatment of Loans Backed by an Obligation of the Counterparty 
and Loans for Which Pledged Loan Collateral Volume Exceeds Farmer 
Mac-Guaranteed Volume.
2.5 Calculation of Loss Rates for Use in the Stress Test.
3.0 Interest Rate Risk.
3.1 Process for Calculating the Interest Rate Movement.
4.0 Elements Used in Generating Cashflows.
4.1 Data Inputs.
4.2 Assumptions and Relationships.
4.3 Risk Measures.
4.4 Loan and Cashflow Accounts.
4.5 Income Statements.
4.6 Balance Sheets.
4.7 Capital.
5.0 Capital Calculations.
5.1 Method of Calculation.
* * * * *

2.0 Credit Risk

    Loan loss rates are determined by applying the loss-frequency 
equation and the loss-severity factor to Farmer Mac loan-level data. 
Using this equation and severity factor, you must calculate loan 
losses under stressful economic conditions assuming Farmer Mac's 
portfolio remains at a ``steady state.'' * * *
* * * * *

2.4 Treatment of Loans Backed by an Obligation of the Counterparty 
and Loans for Which Pledged Loan Collateral Volume Exceeds Farmer 
Mac-Guaranteed Volume

    You must calculate the age-adjusted loss rates for these loans 
that include adjustments to scale losses according to the proportion 
of total submitted collateral to the guaranteed amount as provided 
for in the ``Dollar Losses'' column of the transformed worksheets in 
the Credit Loss Module based on new data inputs required in the 
``Coefficients'' worksheet of the Credit Loss Module. Then, you must 
adjust the calculated loss rates as follows.
    a. For loans in which the seller retains a subordinated 
interest, subtract from the total estimated age-adjusted dollar 
losses on the pool the amount equal to current unpaid principal 
times the subordinated interest percentage.
    b. Some pools of loans underlying specific transactions could 
include loan collateral volume pledged to Farmer Mac in excess of 
Farmer Mac's guarantee amount (``overcollateral''). Overcollateral 
can be either: (i) Contractually required according to

[[Page 31941]]

the terms of the transaction, or (ii) not contractually required, 
but pledged in addition to the contractually required amount at the 
discretion of the counterparty, often for purposes of administrative 
convenience regarding the collateral substitution process, or (iii) 
both (i) and (ii).
    1. If a pool of loans includes collateral pledged in excess of 
the guaranteed amount, you must adjust the age-adjusted, loan-level 
dollar losses by a factor equal to the ratio of the guarantee amount 
to total submitted collateral. For example, consider a pool of two 
loans serving as security for a Farmer Mac guarantee on a note with 
a total issuance face value of $2 million and on which the 
counterparty has submitted 10-percent overcollateral. The two loans 
in the example have the following characteristics and adjustments.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                      Guarantee amount
                                                                   Origination      Age-adjusted     Estimated age-        scaling       Losses adjusted
                             Loan                                    balance          loss rate      adjusted losses   adjustment (2/          for
                                                                                      (percent)                        2.2) (Percent)    overcollateral
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.............................................................        $1,080,000               7.0           $75,600             90.91           $68,727
2.............................................................         1,120,000               5.0            56,000             90.91            50,909
--------------------------------------------------------------------------------------------------------------------------------------------------------

    2. If a pool of loans includes collateral pledged in excess of 
the guaranteed amount that is required under the terms of the 
transaction, you must further adjust the dollar losses as follows. 
Calculate the total losses on the subject portfolio of loans after 
age adjustments and any adjustments related to total submitted 
overcollateral as described in ``1.'' above. Calculate the total 
dollar amount of contractually required overcollateral in the 
subject pool. Subtract the total dollars of contractually required 
overcollateral from the adjusted total losses on the subject pool. 
If the result is less than or equal to zero, input a loss rate of 
zero for this transaction pool in the Data Inputs worksheet of the 
RBCST. A new category must be created for each such transaction in 
the RBCST. If the loss rate after subtracting contractually required 
overcollateral is greater than zero, proceed to additional 
adjustment for the risk-reducing effects of the counterparty's 
general obligation described in ``3.'' below.
    3. Loans with a positive loss estimate remaining after 
adjustments in ``1.'' and ``2.'' above are further adjusted for the 
security provided by the general obligation of the counterparty. To 
make this adjustment, multiply the estimated dollar losses remaining 
after adjustments in ``1.'' and ``2.'' above by the appropriate 
general obligation adjustment factor based on the counterparty's 
whole-letter issuer credit rating by a nationally recognized 
statistical rating organization (NRSRO).
    A. The following table sets forth the general obligation 
adjustment factors and their components by whole-letter credit 
rating (Adjustment Factor = Default Rate x Severity Rate).\15\
---------------------------------------------------------------------------

    \15\ Emery, K., Ou S., Tennant, J., Kim F., Cantor R., 
``Corporate Default and Recovery Rates, 1920-2007,'' published by 
Moody's Investors Service, February 2008--the most recent edition as 
of March 2008; Default Rates, page 24, Recovery Rates (Severity Rate 
= 1 minus Senior Unsecured Average Recovery Rate) page 20.

----------------------------------------------------------------------------------------------------------------
                                                                                                      General
                                                                                                    obligation
                       Whole-letter rating                         Default rate    Severity rate    adjustment
                                                                     (percent)       (percent)        factor
                                                                                                     (percent)
----------------------------------------------------------------------------------------------------------------
AAA.............................................................           0.897              54            0.48
AA..............................................................           2.294              54            1.24
A...............................................................           2.901              54            1.57
BBB.............................................................           7.061              54            3.82
Below BBB and Unrated...........................................          26.827              54           14.50
----------------------------------------------------------------------------------------------------------------

    B. The adjustment factors will be updated annually as Moody's 
annual report on Default and Recovery Rates of Corporate Bond 
Issuers becomes available, normally in January or February of each 
year. In the event that there is an interruption of Moody's 
publication of this annual report, or FCA determines that the format 
of the report has changed enough to prevent or call into question 
the identification of updated factors, the prior year's factors will 
remain in effect until FCA revises the process through rulemaking.
    4. Continuing the previous example, the pool contains two loans 
on which Farmer Mac is guaranteeing a total of $2 million and with 
total submitted collateral of 110 percent of the guaranteed amount. 
Of the 10-percent total overcollateral, 5 percent is contractually 
required under the terms of the transaction. The pool consists of 
two loans of slightly over $1 million. Total overcollateral is 
$200,000, of which $100,000 is contractually required. The 
counterparty has a single ``A'' credit rating, and after adjusting 
for contractually required overcollateral, estimated losses are 
greater than zero. The net loss rate is calculated as described in 
the steps in the table below.

------------------------------------------------------------------------
                                        Loan A              Loan B
------------------------------------------------------------------------
1............  Guaranteed Volume                $2,000,000
2............  Origination        $1,080,000........  $1,120,000
                Balance of 2-
                Loan Portfolio.
3............  Age-adjusted Loss  7%................  5%
                Rate.
4............  Estimated Age-     $75,600...........  $56,000
                adjusted Losses.
5............  Guarantee Volume   90.91%............  90.91%
                Scaling Factor.
6............  Losses Adjusted    $68,727...........  $50,909
                for Total
                Overcollateral.
7............  Contractually                     $100,000
                required
                Overcollateral
                on Pool (5%).
8............  Net Losses on                      $19,636
                Pool Adjusted
                for
                Contractually
                Required
                Overcollateral.
9............  General                             1.57%
                Obligation
                Adjustment
                Factor for ``A''
                Issuer.
10...........  Losses Adjusted                     $308
                for ``A''
                General
                Obligation.
11...........  Loss Rate Input                     0.02%
                in the RBCST for
                this Pool.
------------------------------------------------------------------------


[[Page 31942]]

    A. The net, fully adjusted losses are distributed over time on a 
straight-line basis. When a transaction reaches maturity within the 
10-year modeling horizon, the losses are distributed on a 
straightline over a timepath that ends in the year of the 
transaction's maturity.
    B. [Reserved]
* * * * *

4.1 Data Inputs

* * * * *
    e. Weighted Haircuts for Non-Program Investments. For non-
program investments, the stress test adjusts the weighted average 
yield data referenced in section 4.1 b. to reflect counterparty 
risk. Non-program investments are defined in Sec.  652.5. The 
Corporation must calculate the haircut to be applied to each 
investment based on the lowest whole-letter credit rating the 
investment received from a NRSRO using the haircut levels in effect 
at the time. Haircut levels shall be the same amounts calculated for 
the general obligation adjustment factor in section 2.4 b.3.A. 
above. The first table provides the mappings of NRSRO ratings to 
whole-letter ratings for purposes of applying haircuts. Any ``+'' or 
``-'' signs appended to NRSRO ratings that are not shown in the 
table should be ignored for purposes of mapping NRSRO ratings to FCA 
whole-letter ratings. The second table provides the haircut levels 
by whole-letter rating category.

                                         FCA Whole-Letter Credit Ratings Mapped to Rating Agency Credit Ratings
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
FCA Ratings Category...............  AAA...................  AA....................  A....................  BBB..................  Below BBB and
                                                                                                                                    Unrated.
Standard & Poor's Long-Term........  AAA...................  AA....................  A....................  BBB..................  Below BBB and
                                                                                                                                    Unrated.
Fitch Long-Term....................  AAA...................  AA....................  A....................  BBB..................  Below BBB and
                                                                                                                                    Unrated.
Moody's Long-Term..................  Aaa...................  Aa....................  A....................  Baa..................  Below Baa and
                                                                                                                                    Unrated.
Standard & Poor's Short-Term.......  A-1+, SP-1+...........  A-1, SP-1.............  A-2, SP-2............  A-3..................  SP-3, B, or Below and
                                                                                                                                    Unrated.
Fitch Short-Term...................  F-1+..................  F-1...................  F-2..................  F-3..................  Below F-3 and
                                                                                                                                    Unrated.
Moody's............................  ......................  Prime-1, MIG1, VMIG1..  Prime-2, MIG2, VMIG2.  Prime-3, MIG3, VMIG3.  Not Prime, SG and
                                                                                                                                    Unrated.
Fitch Bank Ratings.................  A.....................  B, A/B................  C, B/C...............  D, C/D...............  E, D/E.
Moody's Bank Financial Strength      A.....................  B.....................  C....................  D....................  E.
 Rating.
--------------------------------------------------------------------------------------------------------------------------------------------------------


       Farmer MAC RBCST Maximum Haircut by Ratings Classification
------------------------------------------------------------------------
                                                           Non-program
                                                           investment
                                                         counterparties
                Ratings classification                     (excluding
                                                          derivatives)
                                                            (percent)
------------------------------------------------------------------------
Cash..................................................              0.00
AAA...................................................              0.48
AA....................................................              1.24
A.....................................................              1.57
BBB...................................................              3.82
Below BBB and Unrated.................................             14.50
------------------------------------------------------------------------

    1. Certain special cases will receive the following treatment. 
For an investment structured as a collateralized obligation backed 
by the issuer's general obligation and, in turn, a pool of 
collateral, reference the Issuer Rating or Financial Strength Rating 
of that issuer as the credit rating applicable to the security. 
Unrated securities that are fully guaranteed by Government-sponsored 
enterprises (GSE) such as the Federal National Mortgage Corporation 
(Fannie Mae) will receive the same treatment as AAA securities. 
Unrated securities backed by the full faith and credit of the U.S. 
Government will not receive a haircut. Unrated securities that are 
not fully guaranteed by a GSE will receive the haircut level in 
place at that time for ``Below BBB and Unrated'' investments unless 
the Director, at the Director's discretion, determines to apply a 
lesser haircut. In making this determination, the Director will 
consider the risk characteristics associated with the structure of 
individual instruments.
    2. If portions of investments are later sold by Farmer Mac 
according to their specific risk characteristics, the Director will 
take reasonable measures to adjust the haircut level applied to the 
investment to recognize the change in the risk characteristics of 
the retained portion. The Director will consider relevant similar 
methods for dealing with capital requirements adopted by other 
Federal financial institution regulators in similar situations.
    3. Individual investment haircuts must then be aggregated into 
weighted-average haircuts by investment category and submitted in 
the ``Data Inputs'' worksheet. The spreadsheet uses these inputs to 
reduce the weighted-average yield on the investment category to 
account for counterparty insolvency according to a 10-year linear 
phase-in of the haircuts. Each asset account category identified in 
this data requirement is discussed in section 4.2, ``Assumptions and 
Relationships.''
* * * * *

4.2 Assumptions and Relationships

* * * * *
    b. * * *
    (3) Elements related to income and expense assumptions. * * * 
These parameters are the gain on agricultural mortgage-backed 
securities (AMBS) sales, miscellaneous income, operating expenses, 
reserve requirement, guarantee fees and loan loss resolution timing.
* * * * *
    (C) The stress test assumes that short-term cost of funds is 
incurred in relation to the amount of defaulting loans purchased 
from off-balance sheet pools. The remaining unpaid principal balance 
on this loan volume is the origination amount reduced by the 
proportion of the total portfolio that has amortized as of the end 
of the most recent quarter. This volume is assumed to be funded at 
the short-term cost of funds and this expense continues for a period 
equal to the loan loss resolution timing period (LLRT) period minus 
1. We will calculate the LLRT period from Farmer Mac data. In 
addition, during the LLRT period, all guarantee income associated 
with the loan volume ceases.
    (D) The stress test generates no interest income on the 
estimated volume of defaulted on-balance sheet loan volume required 
to be carried during the LLRT period, but continues to accrue 
funding costs during the remainder of the LLRT period.
    (E) You must update the LLRT period in response to changes in 
the Corporation's actual experience with each quarterly submission.
* * * * *

4.4 Loan and Cashflow Accounts

    The worksheet labeled ``Loan and Cashflow Data'' contains the 
categorized loan data and cashflow accounting relationships that are 
used in the stress test to generate projections of Farmer Mac's 
performance and condition. As can be seen in the worksheet, the 
steady-state formulation results in account balances that remain 
constant except for the effects of discontinued programs, maturing 
Off-Balance Sheet AgVantage positions, and the LLRT adjustment. For 
assets with maturities under 1 year, the results are reported for 
convenience as though they matured only one time per year with the 
additional convention that the earnings/cost rates are annualized. 
For the pre-1996 Act assets, maturing balances are added back to 
post-1996 Act account balances. The liability accounts are used to 
satisfy the accounting identity, which requires assets to equal 
liabilities plus owner equity. In addition to the replacement of 
maturities under a steady state, liabilities are increased to 
reflect net losses or decreased to reflect resulting net gains. 
Adjustments must be made to the long- and short-term debt accounts 
to maintain the same relative proportions as existed at the 
beginning period from which the stress test is run with the 
exception of changes associated with the funding of defaulted loans 
during the LLRT period. The primary receivable and payable accounts 
are also maintained on this worksheet, as is a summary balance of 
the volume of loans subject to credit losses.

4.5 Income Statements

    a. Information related to income performance through time is 
contained on

[[Page 31943]]

the worksheet named ``Income Statements.'' Information from the 
first period balance sheet is used in conjunction with the earnings 
and cost-spread relationships from Farmer Mac supplied data to 
generate the first period's income statement. The same set of 
accounts is maintained in this worksheet as ``Loan and Cashflow 
Accounts'' for consistency in reporting each annual period of the 
10-year stress period of the test with the exception of the line 
item labeled ``Interest reversals to carry loan losses'' which 
incorporates the LLRT adjustment to earnings from the ``Risk 
Measures'' worksheet. Loans that defaulted do not earn interest or 
guarantee and commitment fees during LLRT period. The income from 
each interest-bearing account is calculated, as are costs of 
interest-bearing liabilities. In each case, these entries are the 
associated interest rate for that period multiplied by the account 
balances.
* * * * *

    Dated: May 28, 2008.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. E8-12245 Filed 6-4-08; 8:45 am]
BILLING CODE 6705-01-P