[Federal Register Volume 77, Number 120 (Thursday, June 21, 2012)]
[Notices]
[Pages 37399-37401]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-15124]


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FARM CREDIT SYSTEM INSURANCE CORPORATION


Policy Statement Concerning Assistance to Troubled Farm Credit 
System Institutions

AGENCY: Farm Credit System Insurance Corporation.

ACTION: Policy statement; request for comments.

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SUMMARY: The Farm Credit System Insurance Corporation (Corporation or 
FCSIC) is publishing for comment a draft Policy Statement Concerning 
Assistance to Troubled Farm Credit System (System) Institutions to 
replace the Corporation's present Policy Statement Concerning Stand-
Alone Assistance. The draft revised policy statement provides 
additional transparency concerning the Corporation's authority to 
provide assistance and how the least-cost test might be performed. The 
draft revised policy statement also includes enhanced criteria of what 
is to be included in assistance proposals, and a new section discussing 
assistance agreements.

DATES: Written comments must be submitted on or before July 23, 2012.

ADDRESSES: Comments should be mailed or delivered to James M. Morris, 
General Counsel, Farm Credit System Insurance Corporation, McLean, 
Virginia 22102. Copies of all comments will be available for 
examination by interested parties in the offices of the Farm Credit 
System Insurance Corporation.

FOR FURTHER INFORMATION CONTACT: Wade Wynn, Senior Risk Analyst, and 
James M. Morris, General Counsel, Farm Credit System Insurance 
Corporation, 1501 Farm Credit Drive, McLean, Virginia 22102, (703) 883-
4380, TDD (703) 883-4390.

SUPPLEMENTARY INFORMATION: The Corporation, in its sole discretion, is 
authorized under section 5.61(a) of the Farm Credit Act of 1971, as 
amended (Act),\1\ to provide assistance to a stand-alone System 
institution or to facilitate a merger or consolidation of a System 
institution with another System institution, provided it meets the 
statutory least-cost test.\2\ If the Corporation receives a request to 
assist a troubled System institution, it must compare the cost of 
liquidation to the cost of providing assistance to determine the least 
costly alternative to the Insurance Fund. If the cost of providing 
assistance is less than the cost of liquidation, the Corporation's 
Board of Directors has a basis for granting assistance to a troubled 
System institution. In making this determination, the Corporation is 
authorized under section 5.59(b) of the Act \3\ to gather any 
information as is necessary from the troubled System institution or any 
such other System institution to perform the least-cost test. After 
gathering all pertinent information, the Corporation must: (1) Evaluate 
alternatives on a present-value basis, using a reasonable discount 
rate, (2) document the evaluation and the assumptions on which the 
evaluation is based, and (3) retain the documentation for not less than 
5 years.
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    \1\ 12 U.S.C. 2277a-10.
    \2\ See Act, section 5.61(a)(3), 12 U.S.C. 2277a-10(a)(3).
    \3\ 12 U.S.C. 2277a-8(b).
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    The Corporation's existing policy statement is, for the most part, 
a summary of the powers of the Corporation under section 5.61(a) of the 
Act to provide assistance to a System institution, including the timing 
and steps for making the least-cost test.\4\ For example, the policy 
specifies that the Corporation's Board of Directors must determine that 
providing assistance is the least costly means of all possible 
alternatives available to the Corporation, including liquidation of the 
System institution, and lists the steps for conducting the statutory 
least-cost test. The existing policy statement also provides a list of 
criteria of what the Corporation expects to receive in assistance 
proposals to help the Corporation conduct the least-cost test.
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    \4\ 12 U.S.C. 2277a-10.
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    The Corporation is now publishing for comment a revised ``Policy 
Statement Concerning Assistance to Troubled Farm Credit System 
Institutions.'' The revised policy statement provides additional 
transparency concerning the Corporation's authority to provide 
assistance and how the least-cost test might be performed. The revised 
policy statement also includes more detailed criteria concerning what 
is to be included in assistance proposals, and a new section discussing 
assistance agreements. The text of the ``Policy Statement Concerning 
Assistance to Troubled Farm Credit System

[[Page 37400]]

Institutions'' is set out below in its entirety:

Farm Credit System Insurance Corporation Policy Statement Concerning 
Assistance to Troubled Farm Credit System Institutions

Background

    The Farm Credit System Insurance Corporation (Corporation), in its 
sole discretion, is authorized under section 5.61(a) of the Farm Credit 
Act of 1971, as amended (Act), 12 U.S.C. 2277a-10(a), to provide 
assistance, on such terms and conditions as the Corporation's Board of 
Directors may provide, to:
    (1) A stand-alone ``troubled Farm Credit System (System) 
institution'' \5\ in the form of loans, asset or debt security 
purchases, assumption of liabilities, or contributions: (a) To prevent 
the placing of the institution into receivership, (b) to restore the 
institution to normal operation, or (c) to reduce the risk to the 
Corporation posed by the institution when severe financial conditions 
threaten the stability of a significant number of other System 
institutions or System institutions possessing significant financial 
resources; or
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    \5\ A troubled System institution is one that is in danger of 
failing. The Act uses the terms ``insured System bank'' and ``bank'' 
but specifies under section 5.61(e), 12 U.S.C. 2277a-10(e), that 
such terms include production credit associations and other 
associations making direct loans under the authority provided under 
section 7.6 of the Act, 12 U.S.C. 2279b. For the purposes of this 
policy statement, the terms ``troubled System institution'' or 
``troubled institution'' are used throughout to refer to any of 
these institutions needing assistance under section 5.61(a) of the 
Act, 12 U.S.C. 2277a-10(a), to avoid liquidation.
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    (2) Facilitate a merger or consolidation of a ``qualifying'' \6\ 
troubled System institution with another System institution through 
loans, loan guarantees, asset or debt security purchases, assumption of 
liabilities, contributions, or any combination thereof.\7\
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    \6\ ``Qualifying'' means the troubled System institution is: (1) 
In receivership, (2) in danger of being placed in receivership or 
(3) determined by the Corporation to be in need of assistance. See 
Act, section 5.61(a)(2)(B), 12 U.S.C. 2277a-10(a)(2)(B).
    \7\ The Corporation is not authorized to purchase voting stock 
from the troubled System institution. See Act, section 
5.61(a)(3)(F), 12 U.S.C. 2277a-10(a)(3)(F).
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    If the Corporation receives a request for assistance to resolve a 
troubled System institution, it must compare the cost of liquidation to 
the cost of providing assistance to determine the least costly 
alternative to the Insurance Fund.\8\ If the cost of providing 
assistance is less than the cost of liquidation, the Corporation has a 
basis for granting assistance to the troubled System institution. In 
making this determination, the Corporation is authorized to gather any 
information as is necessary from the troubled System institution or any 
such other System institution to perform the least-cost test.\9\ After 
gathering all pertinent information, the Corporation must: (1) Evaluate 
alternatives on a present-value basis, using a reasonable discount 
rate, (2) document the evaluation and the assumptions on which the 
evaluation is based, and (3) retain the documentation for not less than 
5 years.\10\
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    \8\ The cost of liquidation shall be made as of the earliest of: 
(I) The date on which a conservator is appointed for the 
institution, (II) the date on which a receiver is appointed for the 
institution, or (III) the date on which the Corporation makes any 
determination to provide assistance to the institution. See Act, 
section 5.61(a)(3)(C), 12 U.S.C. 2277a-10(a)(3)(C).
    \9\ See Act, sections 5.58(8) and 5.59, 12 U.S.C. 2277a-7(8) and 
2277a-8. The Corporation will accord such other System institutions 
as the Corporation determines to be appropriate the opportunity to 
submit information relating to the determination. See Act, section 
5.61(a)(3)(A), 12 U.S.C. 2277a-10(a)(3)(A).
    \10\ See Act, section 5.61(a)(3)(B), 12 U.S.C. 2277a-
10(a)(3)(B). In addition, in regards to requests for stand-alone 
assistance, the Corporation must evaluate the adequacy of managerial 
resources of the troubled System institution. The Corporation is 
authorized to determine the continued service of any director or 
senior ranking officer who serves in a policymaking role for the 
assisted System institution as a condition of granting assistance. 
See Act, section 5.61(a)(3)(D), 12 U.S.C. 2277a-10(a)(3)(D).
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Policy Statement

    In general, the Corporation would consider a request for assistance 
to a troubled System institution under section 5.61(a) of the Act, 12 
U.S.C. 2277a-10(a), after other resolution alternatives have been 
exhausted such as voluntary assistance provided from within the System, 
voluntary merger with one or more System institutions, or involuntary 
merger with one or more System institutions as determined by the Farm 
Credit Administration (FCA) under section 4.12 of the Act, 12 U.S.C. 
2183.

Request for Assistance

    A System institution requesting assistance must submit a proposal 
to the Corporation.\11\ If the proposal is for stand-alone assistance, 
the proposal must provide justification for the assistance, including a 
detailed analysis of how such assistance will return the troubled 
System institution to a financially viable, self-sustaining operation. 
If the proposal is to facilitate a merger, the analysis must 
demonstrate that the continuing System institution can safely and 
soundly absorb the financial and operational impact that will result 
from the merger. Moreover, the Corporation would also consider FCA's 
preliminary approval of the proposed merger, pending the least-cost 
determination to provide assistance.
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    \11\ A request for assistance can be initiated either directly 
from a troubled System institution, an acquirer or acquirers 
interested in purchasing a troubled institution, or, if the troubled 
institution is an association, from its funding bank.
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    Assistance proposals must contain information to help the 
Corporation compare the cost of providing assistance to the cost of 
liquidating the troubled System institution as part of its least-cost 
determination. Assistance proposals can include requests for loans, 
loan guarantees, loss-sharing arrangements, asset or debt security 
purchases, assumption of liabilities, or cash contributions. The 
Corporation will consider the nature of the financial assistance 
requested on a case-by-case basis and may alter the form or amount of 
assistance as part of the least-cost determination. To expedite the 
least-cost analysis, the Corporation has identified the following 
minimum criteria to be included in assistance proposals:
    (1) Financial condition and performance criteria to better 
understand the problem that caused the need for assistance, including 
the rationale for seeking assistance;
    (2) The type and amount of assistance needed, as well as a 
reasonable repayment plan. Assistance proposals must include fee 
arrangements with attorneys, accountants, consultants, and other 
parties incident to the request for assistance (or projected costs for 
these arrangements). Assistance proposals should not presume that the 
Corporation would acquire or service assets of the assisted institution 
without a strong justification;
    (3) Reasonable projections to assess the future viability of the 
institution after assistance has been provided. This would include 
earnings projections and a capital restoration plan to achieve adequate 
capitalization. Earnings projections and the capital restoration plan 
must include the impact of repayment of assistance;
    (4) A business plan that would implement written policies and 
procedures designed to guide operations safely and soundly and to 
correct the problems that caused the need for assistance. The plan must 
include an internal control system to monitor on-going performance with 
measurable criteria. The plan must also include an operating budget, 
including compensation arrangements covering directors and senior 
officers. Plans to continue the service of directors and senior 
officers must be pre-approved by the Corporation before assistance is

[[Page 37401]]

granted. Moreover, compensation arrangements covering directors and 
senior officers are subject to Corporation approval, both in granting 
assistance and until assistance is repaid; and
    (5) Analysis of the effect of assistance on shareholders, uninsured 
creditors (e.g., impairment on subordinated debt), other System 
institutions and the financial markets. If the troubled System 
institution is an association, the analysis must include the impact on 
its funding bank's ability to continue meeting its insured obligations.
    The Corporation reserves the right to request additional 
information as needed to conduct the least-cost test.

The Least-Cost Test

    The Corporation will conduct a least-cost test to determine whether 
providing assistance to a troubled System institution from the 
Insurance Fund is less costly than liquidating the institution. In 
making the least-cost determination, the Corporation shall use its 
examination authority under section 5.59(b) of the Act, 12 U.S.C. 
2277a-8(b), to collect information from the troubled System institution 
to calculate the cost of liquidation.\12\ This information shall, at a 
minimum, include specific data elements as determined by Corporation 
staff to conduct a present-value analysis of the troubled System 
institution's assets, using a reasonable discount rate. As required by 
the Act, the troubled System institution needing assistance must 
provide the Corporation unrestricted on-site access to perform a due 
diligence review of all information related to performing a least-cost 
analysis.
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    \12\ The Corporation will request that FCA examiners collect the 
information.
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    Once the cost of liquidation has been determined, the Corporation 
would then compare the cost of providing assistance to the cost of 
liquidation to make its least-cost determination. If the troubled 
System institution is a bank, the Corporation would conduct a simple 
cost comparison to determine the least costly alternative to the 
Insurance Fund. However, if the troubled System institution is an 
association, the least-cost test becomes more complex, and the 
Corporation would require additional information from the funding bank 
to make a least-cost determination. Since only bank obligations are 
insured, association failures do not necessarily result in a cost to 
the Insurance Fund. For example, it is possible that the failure of a 
small or mid-sized association will have no impact on the funding 
bank's ability to continue meeting its insured obligations. The funds 
received from liquidating the small or mid-sized association's assets 
may cover the principal and interest of its direct note to the bank, or 
the bank may be able to sufficiently absorb any losses not covered by 
liquidation funds.\13\ In such situations, assistance would not be 
granted to the association, because its liquidation results in zero 
cost to the Insurance Fund. However, in situations where a sizable 
association fails, or several smaller associations fail, then it is 
possible that such failures could seriously threaten the funding bank's 
ability to continue as a going concern.\14\ In such situations, the 
Corporation's Board, in its discretion, may grant assistance, provided 
the financial assistance meets the least-cost test as specified in the 
Act.
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    \13\ It is also assumed that the loss of revenue would have 
minimal effect on the bank's ability to continue as a going concern.
    \14\ The failures might cause the bank to default on its insured 
obligations, or cause the bank to become severely undercapitalized 
so as to put the bank into conservatorship or receivership, which in 
turn, could cause the bank to seek assistance from the Corporation.
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    In analyzing assistance requests for troubled System associations, 
the Corporation would need to consider the impact to the Insurance Fund 
over time. For example, the liquidation of a sizable association may 
not have an immediate impact on the funding bank's ability to continue 
meeting its insured obligations (which would mean no immediate loss to 
the Insurance Fund). However, such a large liquidation could create a 
significant disruption throughout the district. For instance, the 
liquidation of a considerable amount of agricultural loans in a 
relatively short period of time may cause a general decline in loan 
prices throughout the district, creating higher levels of risk in the 
remaining association direct notes. Moreover, because the bank loses a 
significant source of revenue and capital, it might not be able to 
increase the cost of funds to the remaining associations to make up for 
lost revenue while simultaneously increasing their investment 
requirement to remain adequately capitalized.\15\ Without providing 
assistance to the sizable troubled association to prevent financial 
contagion, the bank might eventually fail, creating greater losses to 
the Insurance Fund.\16\ A similar scenario could result with the 
failure of several smaller associations during a period of severe 
stress in agriculture. Temporary cash infusions to troubled 
associations could counteract the effects of financial contagion and 
help avoid greater losses to the bank (and in turn potential losses to 
the Insurance Fund) in the long term. Consequently, the Corporation 
would need additional information from the funding bank to assess these 
interdependent risks before making a least-cost determination in 
relation to association requests for assistance.
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    \15\ These actions could weaken other associations or cause 
other associations in the district to fail.
    \16\ On the other hand, assistance might be structured in such a 
way that the Corporation will recoup the cost associated with 
providing assistance.
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    As required by statute, the Corporation shall use the information 
it receives during its least-cost analysis to evaluate the 
alternatives, document the evaluation and the assumptions on which the 
evaluation is based, and retain the documentation for not less than 5 
years.

Assistance Agreements

    If assistance is granted, the Corporation will enter into an 
agreement with the System institution receiving assistance. The terms 
and conditions of the agreement will be determined on a case-by-case 
basis and may include limits on (or prior approval of) the types or 
amounts of activities the institution can engage in while assistance is 
outstanding. For example, assistance agreements might include repayment 
terms and limits on concentration risk, patronage and dividend 
payments, executive compensation, and certain types of expenses. 
Assistance agreements may also provide the Corporation the right to 
have a representative attend the institution's board meetings. 
Assistance agreements will be subject to the Corporation's Board of 
Directors' approval. While assistance agreements are outstanding, the 
Corporation will use its examination authority to ensure compliance 
with the agreement. Moreover, the Corporation will require the System 
institution receiving assistance to certify and publicly disclose 
compliance with the agreement requirements, including the disclosure of 
any instances of material non-compliance with the agreement.

    Dated: June 15, 2012.
Dale L. Aultman,
Secretary to the Board, Farm Credit System Insurance Corporation.
[FR Doc. 2012-15124 Filed 6-20-12; 8:45 am]
BILLING CODE 6710-01-P