[Federal Register Volume 78, Number 17 (Friday, January 25, 2013)]
[Proposed Rules]
[Pages 5320-5325]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-01500]


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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. 78, No. 17 / Friday, January 25, 2013 / 
Proposed Rules

[[Page 5320]]



FARM CREDIT ADMINISTRATION

12 CFR Part 652

RIN 3052-AC80


Federal Agricultural Mortgage Corporation Funding and Fiscal 
Affairs; Farmer Mac Capital Planning

AGENCY: Farm Credit Administration (FCA or Agency).

ACTION: Proposed rule.

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SUMMARY: The FCA, through the Office of Secondary Market Oversight 
(OSMO), is proposing regulations to require the Federal Agricultural 
Mortgage Corporation (Farmer Mac) to submit a capital plan to OSMO on 
an annual basis and to require Farmer Mac to notify OSMO under certain 
circumstances before making a capital distribution. The proposed rule 
would revise the current capital adequacy planning requirements to 
increase our regulatory focus on the quality and level of Farmer Mac's 
capital base and promote best practices for capital adequacy planning 
and stress testing. We view high quality capital as the fundamental 
resource available to cover unexpected losses and ensure long-term 
financial flexibility and viability.

DATES: Please submit comments before March 26, 2013.

ADDRESSES: Commenters are encouraged to submit comments by email 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 no longer accept comments submitted by fax. 
Regardless of the method you use, please do not submit your comments 
multiple times via different methods. You may submit comments by any of 
the following methods:
     Email: Send an email to [email protected].
     FCA Web site: http://www.fca.gov. Select ``Public 
Commenters,'' then ``Public Comments,'' and follow the directions for 
``Submitting a Comment.''
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Laurie A. Rea, Director, Office of Secondary Market 
Oversight, Farm Credit Administration, 1501 Farm Credit Drive, McLean, 
VA 22102-5090.
    You may review copies of all 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, including any 
supporting data provided, 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 email addresses to help 
reduce Internet spam.

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 General 
Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4020, TTY (703) 883-4020.

SUPPLEMENTARY INFORMATION: 

I. Objective

    The objective of this proposed rule is to improve the long-term 
safety and soundness and continuity of Farmer Mac operations so that 
Farmer Mac may better fulfill its public mission under a range of 
economic conditions. To achieve this, FCA is proposing to revise 
operational and strategic business planning requirements to enhance 
capital adequacy planning. The proposed rule is designed to (i) 
establish minimum supervisory standards for the capital planning 
process, including stress testing, (ii) describe how the Farmer Mac 
board of directors (board) and senior management should implement the 
process and strategies, and (iii) provide FCA with notification of 
Farmer Mac's proposed capital distributions before they occur.

II. Background

    Farmer Mac is an institution of the Farm Credit System, regulated 
by FCA through its Office of Secondary Market Oversight. Farmer Mac was 
established and chartered by Congress to create a secondary market for 
agricultural real estate mortgage loans, rural housing mortgage loans, 
and rural utilities loans, and it is a stockholder-owned 
instrumentality of the United States. Title VIII of the Farm Credit Act 
of 1971, as amended (Act), governs Farmer Mac.\1\
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    \1\ The Act is set forth at 12 U.S.C. 2001 et seq. Title VIII is 
in 12 U.S.C. 2279aa-2279cc.
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Farmer Mac Programs

    Under the Farmer Mac I program, Farmer Mac guarantees prompt 
payment of principal and interest on securities representing interests 
in, or obligations backed by, mortgage loans secured by first liens on 
agricultural real estate or rural housing. It also purchases, or 
commits to purchase, qualified loans or securities backed by qualified 
loans directly from lenders. Under the Farmer Mac II program, Farmer 
Mac purchases and securitizes portions of certain loans guaranteed by 
the U.S. Department of Agriculture, including farm ownership and 
operating loans and rural business and community development loans. 
Farmer Mac also guarantees the timely payment of principal and interest 
on the securities created from these loans. In 2008, Congress 
authorized Farmer Mac to purchase and guarantee securities backed by 
loans to rural electric and telephone utility cooperatives.

III. Need for Enhanced Capital Planning

    The fundamental purpose of bank capital is to provide a cushion to 
absorb unexpected losses and improve an institution's long-term 
resilience. The recent global financial crisis underscored the 
importance of capital adequacy planning, including maintaining high 
quality capital. In response to the crisis, the Basel Committee on 
Banking Supervision (BCBS) proposed the Basel III framework, which 
expands and clarifies international standards on regulatory capital 
with the intent to raise the quality, quantity, and transparency of 
regulatory capital.\2\ The Basel III

[[Page 5321]]

framework also requires banks to run stress tests to ensure they are 
able to sustain financial soundness under adverse market conditions. In 
the U.S., the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) was enacted in July 2010 to strengthen regulation of 
the financial sector. Section 165 of the Dodd-Frank Act requires 
certain financial companies whose total consolidated assets are in 
excess of $10 billion to conduct annual stress tests. The U.S. banking 
agencies (the Federal Reserve System (FRS), Federal Deposit Insurance 
Corporation (FDIC), the Office of the Comptroller of the Currency 
(OCC)) and the Federal Housing Finance Agency (FHFA) have issued 
proposed, and in some cases, final rules and guidance to enhance 
capital standards and stress testing.\3\ This proposed rule reflects 
our general agreement with the rulemaking actions of other banking 
supervision authorities, both domestic and international, which 
emphasize high quality capital maintenance, robust planning, and stress 
testing as adding value to the existing regulatory framework for 
capital adequacy and capital planning.
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    \2\ Bank for International Settlements, Basel Committee on 
Banking Supervision, Basel III, A Global Regulatory Framework for 
More Resilient Banks and Banking Systems, December 2010 (revised 
June 2011), http://www.bis.org/publ/bcbs189.pdf. The United States 
is a member of the BCBS.
    \3\ See, e.g., the FRS's final rule, Capital Plans, 76 FR 74631 
(December 1, 2011); the FRS's proposed rule, Enhanced Prudential 
Standards and Early Remediation Requirements for Covered Companies, 
77 FR 594 (January 5, 2012); the U.S. banking agencies' joint 
proposed rule, Regulatory Capital Rules; Advanced Approaches Risk-
Based Capital Rule; Market Risk Capital Rule, 77 FR 52978 (August 
30, 2012); the FDIC's proposed rule, Annual Stress Test, 77 FR 3166 
(December 23, 2012); the OCC's proposed rule, Annual Stress Test, 77 
FR 3408 (January 24, 2012); and the FHFA's proposed rule, Stress 
Testing of Regulated Entities, 77 FR 60948 (October 5, 2012).
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    Farmer Mac's statutory capital standards were enacted in 1991 \4\ 
and have not been updated since 1996.\5\ Under the Act, Farmer Mac must 
operate at or above a minimum ``core capital'' level and a minimum 
``regulatory capital'' level. ``Core capital'' is defined in section 
8.31(2) of the Act as the par value of outstanding common and preferred 
stock, paid-in capital, and retained earnings. Farmer Mac's minimum 
core capital requirement is an amount equal to the sum of 2.75 percent 
of on-balance-sheet assets and 0.75 percent of off-balance-sheet 
obligations. ``Regulatory capital'' is defined in section 8.31(5) as 
core capital plus an allowance for losses and guarantee claims (ALL). 
Farmer Mac's minimum risk-based capital requirement is the amount of 
regulatory capital for interest rate and credit risk determined by 
applying a risk-based capital stress test (RBCST) as defined in section 
8.32(a) of the Act, plus an additional 30 percent of that amount for 
management and operations risk.
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    \4\ Public Law 102-237, Title V, December 13, 1991.
    \5\ Public Law 104-105, Title I, February 10, 1996.
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    The regulatory requirements of the RBCST were implemented in FCA's 
regulations at 12 CFR part 652, subpart B in 2002 and have been revised 
several times. While the RBCST provides a valuable alternative 
perspective as a risk index of Farmer Mac's operations from quarter to 
quarter, the Act prescribes several components of the model's design 
that constrain its usefulness as the only approach to calculating risk-
based capital required by regulation. Under certain conditions, the 
Act's provisions do not impose a significant level of stress; for 
example, the Act's interest rate stress provisions do not impose a 
stressful scenario of interest rate shock in very low interest rate 
environments such as the current one.\6\ Moreover, there are a number 
of areas of the statutory design requirements in the RBCST that may no 
longer reflect best practices in economic capital modeling, which has 
advanced considerably since the provisions were enacted. We believe 
applying current best practices for comprehensive and robust stress 
testing approaches is prudent and warranted for capital planning.
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    \6\ Section 8.32(a)(2) requires interest rate shocks to be 
specified as the lesser of: (a) 50 percent of the 12-month average 
rates on 10-year Treasury obligations; or (b) 600 basis points. In 
the current interest rate environment, this requirement translates 
into an interest rate shock of just slightly more than 100 basis 
points.
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    In addition, the Act's minimum regulatory capital standards do not 
necessarily ensure that Farmer Mac holds a sufficient amount of high 
quality capital--primarily common equity and retained earnings--to 
survive periods of high financial stress. The statutory definition of 
``core capital'' broadly defines the types of capital instruments that 
may be included without distinguishing the quality of the capital 
instruments. More recent views of capital, including the Basel III 
framework for stock corporations, make much finer distinctions between, 
for example, different structures of preferred stock on the basis of 
the terms of their underlying contractual provisions. These finer 
distinctions include how much incentive is built into preferred stock 
terms for the issuer to redeem the shares. An example of such an 
incentive would be significant step-ups in dividend rates over time. 
Such provisions create greater uncertainty around the relative 
permanence of that capital and, therefore, how available it will be to 
cover unexpected losses in the future.
    Consistent with the view that high quality capital is the 
fundamental resource available to cover unexpected losses and ensure 
long-term financial flexibility and viability, we propose to revise the 
current capital adequacy planning requirements to increase our 
regulatory focus on the quality and level of capital and advance best 
practices for capital adequacy planning and stress testing at Farmer 
Mac.

IV. Proposed Revisions

    We propose to revise our regulation on Corporation Board Guidelines 
by deleting the provisions related to the capital adequacy plan that is 
part of the operational and strategic business plan requirement in 
existing Sec.  652.60(b)(5) and (c) and creating a new Sec.  652.61 
with revised and expanded guidance on capital planning. In Sec.  
652.60(a), we propose to add the requirement that Farmer Mac's capital 
be sufficient to meet goals and objectives in a newly proposed element 
(in Sec.  652.61(c)) of its operational and strategic business plan. We 
further propose to require Farmer Mac to notify the OSMO within 10 
calendar days of determining that capital is not sufficient to meet 
this new requirement. In Sec.  652.60(b), we propose to add several 
items that Farmer Mac must address in its business plan. These include 
a business and organizational overview and an assessment of management 
capabilities; an assessment of Farmer Mac's strengths and weaknesses; 
strategies for achieving mission, financial, and business goals and 
objectives; and a marketing plan. We propose to add to the required 
review of internal and external factors likely to affect Farmer Mac 
during the business planning period a required discussion of how 
factors might impact Farmer Mac's current financial position and 
business goals.
    In new Sec.  652.61, we propose to require Farmer Mac to develop 
and maintain an annual capital plan and to submit the plan for FCA 
review. The revisions generally refer to a required capital plan rather 
than the existing rule's references to capital adequacy planning, and 
the proposed requirements, while more specific and detailed, are very 
similar in their overall objective. As described more fully below, 
Farmer Mac would be required to calculate a high quality capital ratio 
as well as the ratios described in the Act and existing regulations. In 
proposed Sec.  652.62, we would require Farmer Mac to notify the FCA 
prior to making a

[[Page 5322]]

capital distribution under certain circumstances.

A. Annual Capital Planning Requirement

    We propose to define a capital plan as a written presentation of 
Farmer Mac's capital planning strategies and capital adequacy process 
that includes certain mandatory elements. The proposed capital plan 
would be organized into four main components, each with specified 
mandatory elements. The four mandatory elements are:
    (1) An assessment of the expected uses and sources of capital over 
the planning horizon (at least 12 quarters, beginning with the quarter 
preceding the quarter in which Farmer Mac submits its capital plan) 
that reflects Farmer Mac's size, complexity, risk profile and scope of 
operations, assuming both expected and stressful conditions;
    (2) A detailed description of Farmer Mac's process for assessing 
capital adequacy;
    (3) Farmer Mac's capital policy; and
    (4) A discussion of any expected changes to Farmer Mac's business 
plan that are likely to have a material impact on its capital adequacy 
or liquidity.
    The first mandatory element, the assessment of uses and sources of 
capital, must contain the following components: (i) Estimates of 
projected revenues, losses, reserves, and pro forma capital levels, 
including any minimum statutory or regulatory capital ratio, a high-
quality Tier 1 ratio as described below, and any additional capital 
measures deemed relevant by Farmer Mac, over the planning horizon under 
expected conditions and under a range of stressed scenarios, including 
any scenarios provided by FCA and at least two stressed scenarios 
developed by Farmer Mac appropriate to its business model and 
portfolios; such scenarios could include agricultural and general 
economic conditions that cause increases in delinquency rates caused by 
any variety of factors (e.g., widespread, weather-related crop losses), 
interest rate spikes that could impact historically high cropland 
values and the cost of debt funding, changes in laws that affect plant-
based renewable fuels subsidies, as well as liquidity-related stress 
such as reduced access to debt markets; and (ii) a description of all 
planned capital actions over the planning horizon. We propose to define 
a capital action as any issuance of a debt or equity capital 
instrument, a capital distribution, or any similar action that the FCA 
determines could impact Farmer Mac's capital. A capital distribution 
would include a redemption or repurchase of any debt or equity capital 
instrument, a dividend payment, a payment that may be temporarily or 
permanently suspended by Farmer Mac on any instrument that is eligible 
for inclusion in total equity (as reported in accordance with GAAP), 
and any similar transaction that the Agency determines to be in 
substance a distribution of capital.
    The second mandatory element of the capital plan, the process for 
assessing capital adequacy, must contain the following components: (i) 
A discussion of how Farmer Mac will, under normal and stressful 
conditions, be able to maintain capital commensurate with its risks, 
maintain capital above the minimum statutory and regulatory capital 
ratios and above a Tier 1 ratio set in accordance with the board's 
clearly articulated risk tolerance policy; and (ii) a discussion of how 
Farmer Mac will, under both normal and stressful conditions, maintain 
sufficient capital to continue its operations by maintaining ready 
access to funding, meeting its obligations to creditors and other 
counterparties, and continuing to serve as secondary market for 
qualifying rural markets; and (iii) a discussion of the results of any 
stress test required by law or regulation, including the RBCST, and an 
explanation of how the capital plan takes these results into account.
    We do not propose to establish a new regulatory minimum capital 
requirement in this rule. Rather, we propose to require Farmer Mac to 
establish an internal minimum standard in accordance with widely 
recognized approaches as a part of board policy on capital. To comply 
with the proposed requirements of the Tier 1 ratio, Farmer Mac must 
utilize an approach that is in accordance with an appropriate Basel 
framework (or frameworks), or comparable U.S. regulatory frameworks in 
effect (e.g., Standardized or advanced internal ratings based 
(Advanced) approaches, or both).\7\ The approach selected to calculate 
risk-weighted assets must be appropriate given Farmer Mac's business 
activities and must be consistent with broadly accepted banking 
practices and standards (e.g., Basel accords or similar U.S. 
regulations, including those applied by Farm Credit System banks and 
associations under part 615 of the FCA's regulations). The OSMO 
strongly recommends that, for capital planning purposes, Farmer Mac 
calculate and report in its business plan the ratio of Tier 1 capital 
to risk-weighted assets using both the Basel Standardized approach and 
the Advanced approach to provide alternative perspectives on the Farmer 
Mac's risk-bearing capacity.
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    \7\ Publications by the BCBS explaining these approaches 
include: (1) International Convergence of Capital Measurement and 
Capital Standards, A Revised Framework Comprehensive Version, June 
2006; (2) Enhancements to the Basel II framework July 2009; and (3) 
Basel III, A Global Regulatory Framework for More Resilient Banks 
and Banking Systems, December 2010 (revised June 2011).
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    The third mandatory element of the capital plan, the capital 
policy, is a written assessment of the principles and guidelines used 
for capital planning, capital issuance, usage and distributions, 
including internal capital goals, the quantitative or qualitative 
guidelines for dividend and stock repurchases, the strategies for 
addressing potential capital shortfalls, and the internal governance 
procedures around capital policy principles and guidelines.
    Finally, the fourth mandatory element of Farmer Mac's capital plan 
is a discussion of any expected changes to Farmer Mac's business plan 
that are likely to have a material impact on capital adequacy or 
liquidity. For example, the capital plan should reflect any expected 
material effects of new lines of business or activities on Farmer Mac's 
capital adequacy or liquidity, including revenue and losses.
    We propose to require the board, at least annually, to review the 
robustness of the process for assessing capital adequacy, ensure that 
any deficiencies in the process for assessing capital adequacy are 
appropriately remedied, and approve the capital plan. The robustness of 
Farmer Mac's capital adequacy process should be evaluated based on the 
following elements:
    (i) A sound risk management infrastructure that supports the 
identification, measurement, and assessment of all material risks 
arising from the business activities of Farmer Mac;
    (ii) An effective process for translating risk measures into 
estimates of potential loss over a range of adverse scenarios and for 
aggregating those estimated losses across Farmer Mac;
    (iii) A clear definition of available capital resources and an 
effective process for forecasting available capital resources over the 
same range of adverse scenarios used for loss forecasting;
    (iv) A process for considering the impact of loss estimates on 
capital adequacy consistent with Farmer Mac's stated goals for the 
level and composition of capital and for taking into account any 
limitations of the company's capital adequacy process and its 
components;
    (v) A process, supported by Farmer Mac's capital policy, to use its 
assessments of the impact of loss and

[[Page 5323]]

resource estimates on capital adequacy to make key decisions regarding 
the current level and composition of capital, specific capital actions, 
and capital contingency plans as they affect capital adequacy;
    (vi) Sound internal controls governing the capital adequacy 
process, including sufficient documentation, model validation and 
independent review, and audit testing; and
    (vii) Effective board and senior management oversight of Farmer 
Mac's capital adequacy process, including periodic review of capital 
goals, assessment of the appropriateness of adverse scenarios 
considered in capital planning, regular review of any limitations and 
uncertainties in the process, and approval of planned capital actions.

B. FCA's Review of Capital Plans

    FCA expects to consider the following factors in reviewing Farmer 
Mac's capital plan: (1) The comprehensiveness of the capital plan, 
including the extent to which the analysis underlying the capital plan 
captures and addresses potential risks stemming from activities across 
Farmer Mac's operations and its capital policy; (2) the reasonableness 
of its assumptions and analysis underlying the capital plan and its 
methodologies for reviewing the robustness of its capital adequacy 
process; and (3) its ability to maintain capital above the board-
established minimum Tier 1 Capital to risk-weighted assets ratio on a 
pro forma basis under both normal and stressful conditions throughout 
the planning horizon, including but not limited to any stressed 
scenarios required under this rule.
    The FCA would also consider the following information in reviewing 
Farmer Mac's capital plan:
    (i) Relevant supervisory information about Farmer Mac and its 
subsidiaries;
    (ii) Farmer Mac's regulatory and financial reports, as well as 
supporting data that will allow for an analysis of the loss, revenue, 
and reserve projections;
    (iii) Compliance with statutory and regulatory minimum capital 
standards;
    (iv) As applicable, the FCA's own pro forma estimates of Farmer 
Mac's potential losses, revenues, reserves, and resulting capital 
adequacy under both normal and stressful conditions, including but not 
limited to any stressed scenarios required under the final rule, as 
well as the results of any stress tests conducted by Farmer Mac or the 
FCA; and
    (v) Other information requested or required by the FCA, as well as 
any other information relevant to Farmer Mac's capital adequacy.

C. FCA Action on a Capital Plan

    OSMO would review the capital plan and provide an assessment to 
Farmer Mac of the capital adequacy and planning process through its 
normal examination and oversight program. In determining whether a 
capital plan or proposed capital distributions would constitute an 
unsafe or unsound practice, the FCA will consider whether Farmer Mac is 
and will remain in sound financial condition after giving effect to the 
capital plan and proposed capital distributions.
    OSMO may require Farmer Mac to submit additional data about 
planning assumptions, stress test strategies, and other qualitative and 
quantitative information. OSMO may also require Farmer Mac to revise 
and re-submit its capital plan.

D. Farmer Mac's Response to OSMO's Review

    We propose to require Farmer Mac to take into account the results 
of the stress tests conducted under the requirements of this section, 
as well as OSMO's assessment, in making changes as appropriate to 
Farmer Mac's capital structure (including the level and composition of 
capital); its exposures, concentrations, and risk positions; any plans 
for recovery and resolution; and overall risk management. In addition, 
Farmer Mac must document in writing any changes it makes to its capital 
structure such as issuance or retirement of equity securities, as well 
as decisions not to make such changes with respect to any shortcomings 
noted in OSMO's assessment.

V. Prior Notice Requirements

A. Notice to OSMO of Capital Distributions

    We believe an enhanced level of dialogue between the Agency and 
Farmer Mac in advance of capital distributions will improve the level 
of FCA's oversight of, and communication with, regulated entity. Such 
enhanced dialogue would provide the board with valuable external 
perspective on such decisions from both a safety and soundness and 
mission achievement points of view. In new Sec.  652.62, we propose to 
require Farmer Mac to provide OSMO with notice 15 calendar days prior 
to a board action to declare a capital distribution. We expect such 
notice to include a description of the capital distribution including, 
for redemptions or repurchases of securities, the gross consideration 
to be paid and the terms and sources of funding for the transaction, 
and for dividends, the amount of the dividend, as well as any 
additional information requested by OSMO (which could include, among 
other things, an assessment of Farmer Mac's capital adequacy under a 
stress scenario specified by OSMO.) There would be an exception to the 
notice requirement for dividends on common and preferred stock when 
there is no change from the amount of the dividends paid in the 
previous period.

VI. Regulatory Flexibility Act

    Farmer Mac has assets and annual income in excess of the amounts 
that would qualify it as a small entity. Therefore, Farmer Mac is not a 
``small entity'' as defined in the 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.

List of Subjects in 12 CFR Part 652

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

    For the reasons stated in the preamble, part 652 of chapter VI, 
title 12 of the Code of Federal Regulations is proposed to be amended 
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.

0
2. Revise Sec.  652.60 to read as follows:


Sec.  652.60  Corporate business planning.

    (a) Your board of directors is responsible for ensuring that you 
maintain capital at a level that is sufficient to ensure continued 
financial viability and provide for growth. In addition, your capital 
must be sufficient to meet statutory and regulatory requirements as 
well as the goals and objectives in the required element of your 
capital plan in Sec.  652.61(c)(2)(i)(B). You must notify the OSMO 
within 10 calendar days of determining that capital is not sufficient 
to meet those goals and objectives.
    (b) No later than 65 days after the end of each calendar year, your 
board of

[[Page 5324]]

directors must adopt an operational and strategic business plan for at 
least the next 3 years. The plan must include:
    (1) A mission statement;
    (2) A business and organizational overview and an assessment of 
management capabilities;
    (3) An assessment of Farmer Mac's strengths and weaknesses;
    (4) A review of the internal and external factors that are likely 
to affect you during the planning period;
    (5) Measurable goals and objectives;
    (6) A discussion of how these factors might impact Farmer Mac's 
current financial position and business goals;
    (7) Forecasted income, expense, and balance sheet statements for 
each year of the plan;
    (8) A marketing plan, and
    (9) A capital plan in accordance with Sec.  652.61.
    3. Add new Sec. Sec.  652.61 and 652.62 to read as follows:


Sec.  652.61  Capital planning.

    (a) Purpose. This section establishes capital planning requirements 
for Farmer Mac.
    (b) Definitions. For purposes of this section and Sec.  652.62, the 
following definitions apply:
    Basel III means the Basel Committee on Banking Supervision's 
document ``Basel III: A Global Regulatory Framework for More Resilient 
Banks and Banking Systems,'' June 2011 and as it may be updated from 
time to time.
    Capital action means any issuance of a debt or equity capital 
instrument, and any capital distribution, as well as any similar action 
that OSMO determines could impact Farmer Mac's consolidated capital.
    Capital distribution means a redemption or repurchase of any debt 
or equity capital instrument, a payment of common or preferred stock 
dividends, a payment that may be temporarily or permanently suspended 
by the issuer on any instrument that is eligible for inclusion in the 
numerator of any minimum capital ratio, and any similar transaction 
that OSMO determines to be in substance a distribution of capital.
    Capital plan means a written presentation of Farmer Mac's capital 
planning strategies and capital adequacy process that includes the 
mandatory elements set forth in paragraph (c)(2) of this section.
    Capital policy means Farmer Mac's written assessment of the 
principles and guidelines used for capital planning, capital issuance, 
usage and distributions, including internal capital goals; the 
quantitative or qualitative guidelines for dividend and stock 
repurchases; the strategies for addressing potential capital 
shortfalls; and the internal governance procedures around capital 
policy principles and guidelines.
    Planning horizon means the period of at least 12 quarters, 
beginning with the quarter preceding the quarter in which Farmer Mac 
submits its capital plan, over which the relevant projections extend.
    Tier 1 Capital means the components meeting the criteria of Common 
Equity Tier 1 Capital and Additional Tier 1 Capital and the regulatory 
adjustments as set forth in Basel III, or Tier 1 Capital as defined in 
regulations of the Office of the Comptroller of the Currency, the Board 
of Governors of the Federal Reserve, or the Federal Deposit Insurance 
Corporation, as revised from time to time; or another capital standard 
to measure high quality capital as approved for use under this 
regulation by the Director of OSMO.
    Tier 1 ratio means the ratio of Farmer Mac's Tier 1 Capital to 
Total Risk-Weighted Assets.
    Total Risk-Weighted Assets means a risk-weighting approach that is 
appropriate given Farmer Mac's business activities and consistent with 
broadly accepted banking practices and standards (e.g., one of the 
frameworks of the Basel Committee on Banking Supervision or similar 
U.S. regulations).
    (c) General requirements.
    (1) Annual capital planning.
    (i) Farmer Mac must develop and maintain a capital plan each year.
    (ii) Farmer Mac must submit its complete annual capital plan to 
OSMO by March 1 or such later date as directed by OSMO, after 
consultation with the FCA Board.
    (iii) Prior to submission of the capital plan under paragraph 
(c)(1)(ii) of this section, Farmer Mac's board of directors must:
    (A) Review the robustness of Farmer Mac's process for assessing 
capital adequacy,
    (B) Ensure that any deficiencies in Farmer Mac's process for 
assessing capital adequacy are appropriately remedied; and
    (C) Approve Farmer Mac's capital plan.
    (2) Mandatory elements of capital plan. The capital plan must 
contain at least the following elements:
    (i) An assessment of the expected uses and sources of capital over 
the planning horizon that reflects Farmer Mac's size, complexity, risk 
profile, and scope of operations, assuming both expected and stressful 
conditions, including:
    (A) Projected revenues, losses, reserves, and pro forma capital 
levels, including the core capital and regulatory capital ratios 
required by sections 8.32 and 8.33 of the Act, the Tier 1 ratio as 
defined in this section, and any additional capital measures deemed 
relevant by Farmer Mac, over the planning horizon under expected 
conditions and under a range of at least two progressively severe 
stress scenarios developed by Farmer Mac appropriate to its business 
model and portfolios, as well as any scenarios provided by the Director 
of OSMO. At least 15 calendar days prior to this stress testing, Farmer 
Mac must provide to OSMO a description of the expected and stressed 
scenarios that Farmer Mac intends to use to conduct its annual stress 
test under this section.
    (B) A description of all planned capital actions over the planning 
horizon.
    (ii) A detailed description of Farmer Mac's process for assessing 
capital adequacy, including:
    (A) A discussion of how Farmer Mac will, under expected and 
stressed conditions, maintain capital commensurate with its risks, 
maintain capital above the minimum core capital and regulatory capital 
ratios and above the Tier 1 ratio set in accordance with a well-
articulated risk tolerance policy established by the board of 
directors;
    (B) A discussion of how Farmer Mac will, under expected and 
stressed conditions, maintain sufficient capital to continue its 
operations by maintaining ready access to funding, meeting its 
obligations to creditors and other counterparties, and continuing to 
serve its statutory purposes; and
    (C) A discussion of the results of the risk-based stress test 
required by section 8.32 of the Act and the stress tests required by 
this section, as well as any other stress test required by law or 
regulation, and an explanation of how the capital plan takes these 
results into account.
    (iii) Farmer Mac's capital policy; and
    (iv) A discussion of any expected changes to Farmer Mac's business 
plan that are likely to have a material impact on the Corporation's 
capital adequacy or liquidity.
    (d) Review of capital plan by OSMO.
    (1) OSMO will consider the following factors in reviewing Farmer 
Mac's capital plan:
    (i) The comprehensiveness of the capital plan, including the extent 
to which the analysis underlying the capital plan captures and 
addresses risks stemming from activities across Farmer Mac's 
operations;
    (ii) The reasonableness of Farmer Mac's assumptions and analysis 
underlying the capital plan and its methodologies for reviewing the

[[Page 5325]]

robustness of its capital adequacy process; and
    (iii) Farmer Mac's ability to maintain capital above the minimum 
core capital and regulatory capital ratios and above a Tier 1 ratio set 
in accordance with a well-articulated risk tolerance policy established 
by the board of directors on a pro forma basis under expected and 
stressful conditions throughout the planning horizon, including but not 
limited to any stressed scenarios required under paragraph (c)(2)(i)(A) 
and (c)(2)(ii) of this section.
    (iv) All supervisory information about Farmer Mac and its 
subsidiaries;
    (v) Farmer Mac's regulatory and financial reports, as well as 
supporting data that would allow for an analysis of its loss, revenue, 
and projections;
    (vi) As applicable, OSMO's own pro forma estimates of Farmer Mac's 
potential losses, revenues, and resulting capital adequacy measurements 
under expected and stressful conditions, including but not limited to 
any stressed scenarios required under paragraphs (c)(2)(i)(A) and 
(c)(2)(ii) of this section, as well as the results of any other stress 
tests conducted by Farmer Mac or OSMO; and
    (vii) Other information requested or required by OSMO, as well as 
any other information relevant to Farmer Mac's capital adequacy.
    (e) OSMO action on a capital plan.
    (1) OSMO will review the capital plan and provide an assessment to 
Farmer Mac of the capital adequacy and planning process through its 
ongoing examination and oversight process.
    (2) Upon a request by OSMO, Farmer Mac must provide OSMO with 
sufficient information regarding its planning assumptions, stress test 
strategies and results and any other relevant qualitative or 
quantitative information requested by OSMO to facilitate review of 
Farmer Mac's capital plan under this section.
    (3) OSMO may require Farmer Mac to revise and re-submit its capital 
plan.
    (f) Farmer Mac response to OSMO's assessment. Regardless of whether 
re-submission is required, Farmer Mac must take the results of the 
stress tests conducted under paragraph (c)(2)(i)(A) and (c)(2)(ii) of 
this section (including any revisions required under paragraph (e)(3) 
of this section) as well as OSMO's assessment into account in making 
changes, as appropriate, to Farmer Mac's capital structure (including 
the level and composition of capital); its exposures, concentrations, 
and risk positions; any plans for recovery and resolution; and to 
improve overall risk management. Farmer Mac must document in writing 
its actions in response to the stress tests and assessment, as well as 
decisions not to take actions in response to any issues raised in the 
assessment.


Sec.  652.62  Notice to OSMO of capital distributions.

    (a) Farmer Mac must provide OSMO with notice 15 calendar days prior 
to a board consideration of a declaration of a capital distribution or 
any material changes in capital distributions policies.
    (b) Notice under paragraph (a) of this section is not required with 
respect to a regular periodic payment of dividends on common stock and 
preferred stock when there is no change in the amount of payment per 
share from the previous period.

    Dated: January 18, 2013.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2013-01500 Filed 1-24-13; 8:45 am]
BILLING CODE 6705-01-P