[Federal Register Volume 76, Number 166 (Friday, August 26, 2011)]
[Proposed Rules]
[Pages 53344-53346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-21659]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 76, No. 166 / Friday, August 26, 2011 / 
Proposed Rules  

[[Page 53344]]



FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AC71


Funding and Fiscal Affairs, Loan Policies and Operations, and 
Funding Operations; Capital Adequacy Risk-Weighting Revisions: 
Alternatives to Credit Ratings

AGENCY: Farm Credit Administration.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: Farm Credit Administration (FCA or Agency) regulations on the 
capital adequacy of Farm Credit System (FCS or System) institutions 
include various references to and requirements of reliance on credit 
ratings of a security or money-market instrument. Section 939A of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
or DFA), enacted on July 21, 2010, requires Federal agencies to remove 
any reference to or requirement of reliance upon such credit ratings, 
and substitute in their place standards of creditworthiness that they 
deem appropriate for such regulations. The FCA seeks public comment on 
alternatives to the use of credit ratings in these regulations.

DATES: You may send comments on or before November 25, 2011.

ADDRESSES: There are several methods for you to submit your comments. 
For accuracy and efficiency reasons, commenters are encouraged to 
submit comments by e-mail or through the FCA's Web site. As facsimiles 
(faxes) are difficult for us to process and achieve compliance with 
section 508 of the Rehabilitation Act, we are no longer accepting 
comments submitted by fax. Regardless of the method you use, please do 
not submit your comment multiple times via different methods. You may 
submit comments by any of the following methods:
     E-mail: Send us an e-mail at [email protected].
     FCA Web site: http://www.fca.gov. Select ``Public 
Commenters,'' then ``Public Comments,'' and follow the directions for 
``Submitting a Comment.''
     Federal E-Rulemaking Web site: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Send mail to Gary K. Van Meter, Director, Office of 
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, VA 22102-5090.
    You may review copies of comments we receive at our office in 
McLean, Virginia, or on our Web site at http://www.fca.gov. Once you 
are in the Web site, select ``Public Commenters,'' then ``Public 
Comments,'' and follow the directions for ``Reading Submitted Public 
Comments.'' We will show your comments as submitted, but for technical 
reasons we may omit items such as logos and special characters. 
Identifying information that you provide, such as phone numbers and 
addresses, will be publicly available. However, we will attempt to 
remove e-mail addresses to help reduce Internet spam.

FOR FURTHER INFORMATION CONTACT: 

Chris Wilson, Financial Analyst, Office of Regulatory Policy, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4204, TTY (703) 
883-4434,

 or

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

I. Background

    The FCA has promulgated its capital standards in 12 CFR Part 615 of 
its regulations. These regulations contain references to and regulatory 
requirements premised on the use of credit ratings issued by Nationally 
Recognized Statistical Rating Organizations (NRSROs).\1\ Section 939A 
of the DFA requires each Federal agency to review ``(1) Any regulation 
issued by such agency that requires the use of an assessment of the 
creditworthiness of a security or money market instrument; and (2) any 
references to or requirements in such regulations regarding credit 
ratings.'' After such review, each agency must then ``modify any such 
regulation identified by the review * * * to remove any reference to or 
requirement of reliance on credit ratings and to substitute in such 
regulations such standard of creditworthiness as each respective agency 
shall determine as appropriate for such regulations.\2\
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    \1\ An NRSRO is an entity registered with the U.S. Securities 
and Exchange Commission (SEC) under section 15E of the Securities 
and Exchange Act of 1934.
    \2\ See section 939A, Public Law 111-203, 124 Stat. 1376 (July 
21, 2010).
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    The FCA is seeking comments on how to revise our capital standards 
to comply with this requirement of Dodd-Frank.

II. FCA's Risk-Based Capital Standards

    The FCA's rules for risk-weighting capital are set forth in 
Sec. Sec.  615.5210-615.5212. Section 615.5210 describes the capital 
treatment of certain securitizations. Sections 615.5211 and 615.5212 
describe the capital treatment of on- and off-balance-sheet assets.
    FCA first adopted risk-weighting \3\ categories for System assets 
as part of the 1988 capital adequacy regulations required by the 
Agricultural Credit Act of 1987. FCA adopted many elements of the 1988 
Basel Accord in its risk-based capital rules. For instance, the 
placement of assets in risk-weight categories depends, in part, on 
NRSRO ratings.
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    \3\ We use risk weightings to compute the risk-adjusted asset 
base for System banks and associations. This base is then used to 
calculate certain regulatory capital ratios. These regulations are 
in 12 CFR part 615, subparts H and K.
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    In 1997,\4\ 1998,\5\ and 2005,\6\ the FCA adopted further revisions 
to its risk-based capital regulations. The 1997 revisions to our 
capital regulations added new standards for System banks and 
associations, a collateral ratio for System banks, and procedures for 
setting higher capital standards for individual institutions and for 
issuing capital directives. Revisions in 1998 addressed risk-weighting 
and other issues. Revisions to the capital standards in 2005 
implemented a ratings-based approach (RBA) for risk-weighting 
investments in recourse obligations, residual interests (other than 
credit-enhancing interest-only strips), direct credit substitutes, and

[[Page 53345]]

asset- and mortgage-backed securities.\7\ Under the RBA, the risk 
weighting of such assets increases as the credit rating declines.
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    \4\ See 62 FR 4429 (Jan. 30, 1997).
    \5\ See 63 FR 39219 (Jul. 22, 1998).
    \6\ See 70 FR 35336 (Jun. 17, 2005).
    \7\ For the RBA in the final rule, we took the approach that 
highly rated positions would receive a favorable risk weighting--
which we characterized as being less than 100 percent.
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    The FCA seeks to ensure that the regulatory capital framework 
applied to System institutions is broadly consistent with those of 
other Federal financial regulators (OFFRs). In addition to the 
rulemakings noted above, the FCA issued several Advance Notices of 
Proposed Rulemaking (ANPRMs) beginning in 2007 seeking comment on 
issues associated with adopting the standardized version of Basel 
II.\8\ As OFFRs revise their regulatory capital rules in order to 
implement Basel III, the FCA intends to revise its rules accordingly.
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    \8\ See 72 FR 34191 (Jun. 21, 2007), 72 FR 61568 (Oct. 31, 
2007), 75 FR 39392 (Jul. 8, 2010).
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III. Request for Comment

A. Creditworthiness Standards

    In response to the mandate in Section 939A of Dodd-Frank, we are 
considering alternative standards of creditworthiness. Alternative 
standards could be developed by the regulator, the regulated entity, or 
some third party that is not an NRSRO. In practice, all three groups 
may play a role. We seek comments on the roles best played by each 
party. To be effective, creditworthiness standards should be based on 
readily available objective data and calculated using transparent 
methodologies and assumptions. In addition, effective creditworthiness 
standards should lead diverse raters to assign similar assets to 
similar risk categories.
    In evaluating any standard of creditworthiness, we will seek, to 
the extent practical, and consistent with other objectives, to follow 
these principles:
     Foster prudent risk management by System institutions;
     Ensure that creditworthiness standards for securities and 
money-market instruments are consistent across all types of financial 
institutions and over time;
     Be transparent;
     Appropriately distinguish the credit risk associated with 
a particular exposure within an asset class;
     Provide for the timely and accurate measurement of changes 
in creditworthiness or investment quality over time;
     Allow for adequate supervisory review; and
     Be cost-efficient and strike an appropriate balance 
between the benefits resulting from increased accuracy of credit risk 
assessments and the costs of implementation.
    Question 1: The FCA seeks comment on the principles that should 
guide the Agency's formulation of creditworthiness standards. What core 
principles would be most important and appropriate in FCA's development 
of new standards of creditworthiness? Do the principles delineated 
above capture the appropriate elements of sound creditworthiness 
standards? How could such principles be strengthened?
    Question 2: How can we assure ratings consistency over time, across 
System institutions, and maintain consistency with the ratings of 
similar assets by commercial banks and other capital market 
participants? Should the creditworthiness standards developed for 
regulatory capital purposes be the same as those developed for 
regulation of the investment management or liquidity activities of FCS 
institutions?

B. Alignment of Creditworthiness Standards With the Other Federal 
Financial Regulators

    In response to the mandate of section 939A of Dodd-Frank, OFFRs 
have issued ANPRMs or proposed rulemakings seeking comment on credit-
rating alternatives. 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 issued a 
joint ANPRM in August 2010.\9\ The National Credit Union Administration 
(NCUA) issued a Notice of Proposed Rulemaking in March 2011.\10\ The 
Federal Housing Finance Agency (FHFA) issued an ANPRM in January 
2011.\11\
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    \9\ See 75 FR 52283 (Aug. 25, 2010).
    \10\ See 76 FR 11164 (Mar. 1, 2011).
    \11\ See 76 FR 5292 (Jan. 31, 2011).
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    Question 3: Should the FCA seek to be consistent with the standards 
of creditworthiness developed by OFFRs?

C. Assignment of Risk Weights

    One way to eliminate references to credit ratings in our capital 
regulations would be to assign risk weights using broad measures of 
creditworthiness. For example, our current regulations assign risk 
weights to certain sovereign and bank exposures according to whether or 
not the sovereign is a member of the Organization for Economic 
Cooperation and Development. This approach is simple to apply but 
provides little distinction among risks in this asset class.
    Alternatively, we could assign risk weights using more specific 
measures. For example, we could assign risk weights using defined 
benchmark securities, such as comparable maturity U.S. Treasury 
securities, or using obligor-specific financial data such as debt-to-
equity ratios. This approach could be more risk-sensitive but also 
require more effort.
    Question 4: We seek comments on the benefits and drawbacks of 
assigning assets to risk-weighting categories based broadly on the type 
of obligor (such as sovereign, agency, municipal, or corporate), or 
based more specifically on characteristics of the instrument itself 
(such as collateral, tenor, spread to a benchmark, or some other 
evidence of marketability).
    We must also eliminate use of credit ratings in our capital 
regulations for securitization exposures. One approach might be to 
require dollar-for-dollar capital on any exposure that does not meet 
stringent criteria for collateralization and marketability. For 
example, we could assign a risk weight to a senior-most tranche but 
require dollar-for-dollar capital for all other tranches in that 
security. Other approaches suggested by OFFRs would use some type of 
``gross up'' treatment or other specific criteria to determine the risk 
weight of the exposure.\12\
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    \12\ See 75 FR 52283 (Aug. 25, 2010).
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    Question 5: How should the FCA risk-weight structured securities, 
derivatives, and other exposures such as recourse obligations, direct 
credit substitutes and residual interests?

D. Internal Ratings-Based Models and the Use of Third Parties

    One way to eliminate reliance on NRSRO ratings would be to require 
FCS institutions to develop internal risk exposure methodologies for 
making creditworthiness determinations for certain exposures. In some 
cases, FCS institutions may need to contract with third parties to 
obtain quantitative data, such as probabilities of default, as part of 
their internal process for making such determinations. Also, FCS 
institutions could continue to use the opinions of external experts as 
an element in assessing creditworthiness. Regardless of the approach we 
adopt, we would establish criteria to ensure that the methodology 
employed is consistent with safe and sound banking practices.
    Question 6: Should each System bank be required to develop its own 
risk exposure methodology? Should each association be required to 
develop its own risk exposure methodology? If so, how should the FCA 
assure consistency

[[Page 53346]]

across the individual methodologies? How would the FCS prepare its 
quarterly and annual reports to investors? Should System banks be 
required to develop a common risk exposure methodology?
    Question 7: Are there certain types of assets that would require 
the use of a third party to provide data to FCS institutions as part of 
their internal process for making creditworthiness determinations? How 
could the use of third-party service providers be implemented to ensure 
quality, transparency, and consistency? What role should third-party 
assessors be allowed to play in determining creditworthiness? We seek 
comments on the roles best played by each party.

E. Burden

    Developing alternative measures of creditworthiness will likely 
require significant initial and ongoing costs. Accordingly, we are 
seeking comment on the burden--both financial and operational--that 
various alternative approaches to developing such standards might 
entail.

    Dated: August 18, 2011.
Mary Alice Donner,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 2011-21659 Filed 8-25-11; 8:45 am]
BILLING CODE 6705-01-P