[Federal Register Volume 78, Number 75 (Thursday, April 18, 2013)]
[Notices]
[Pages 23247-23251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-09165]


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FARM CREDIT SYSTEM INSURANCE CORPORATION


Policy Statement Concerning Assistance

AGENCY: Farm Credit System Insurance Corporation.

ACTION: Policy statement.

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SUMMARY: The Farm Credit System Insurance Corporation (Corporation or 
FCSIC) announces that it has given final approval to a new ``Policy 
Statement Concerning Assistance,'' which replaces the Corporation's 
existing ``Policy Statement Concerning Stand-Alone Assistance.'' The 
new policy statement provides additional transparency concerning the 
Corporation's authority to provide assistance and how the least-cost 
test might be performed. This policy statement also includes enhanced 
criteria of what is to be included in assistance proposals, and a new 
section discussing assistance agreements.

DATES: Effective Date: The policy statement is effective on April 11, 
2013.

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: 

I. Background

    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 Farm Credit System (System) 
institution or to facilitate a merger or consolidation of a System 
institution with another System institution,\2\ provided it meets the 
statutory least-cost test.\3\ 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 Farm Credit Insurance Fund (Insurance Fund). 
In making this discretionary determination, the Corporation is 
authorized under section 5.59(b) of the Act \4\ to gather any 
information necessary from the troubled System institution or any other 
System institution to perform the least-cost test. After gathering 
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\ Section 5.61(a) of the Act uses the terms ``insured System 
bank'' and ``bank'' but the Act also specifies under section 
5.61(e), 12 U.S.C. 2277a-10(e), that such terms also 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. Consequently, the terms ``troubled System 
institution,'' ``troubled System bank,'' or ``troubled System 
association'' are used to refer to those institutions specified in 
sections 5.61(a) and 5.61(e) of the Act, 12 U.S.C. 2277a-10(a) and 
2277a-10(e).
    \3\ The least-cost test is the means of determining the least-
cost resolution. Section 5.61(a)(3)(A) states, ``Assistance may not 
be provided[hellip]unless the means of providing the assistance is 
the least costly means of providing the assistance by the Farm 
Credit Insurance Fund of all possible alternatives available to the 
Corporation, including liquidation of the bank (including paying the 
insured obligations issued on behalf of the bank).'' See Act, 
section 5.61(a)(3), 12 U.S.C. 2277a-10(a)(3).
    \4\ 12 U.S.C. 2277a-8(b).
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    The Corporation's ``Policy Statement Concerning Stand-Alone 
Assistance'' 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 
troubled System institution, including the timing and steps for making 
the least-cost test.\5\ 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 troubled 
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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    \5\ 12 U.S.C. 2277a-10.
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II. Comments on the Draft Policy Statement

    On June 21, 2012, the Corporation published for comment a draft 
``Policy Statement Concerning Assistance to Troubled Farm Credit System 
Institutions'' to replace the Corporation's existing ``Policy Statement 
Concerning Stand-Alone Assistance.'' \6\ The Corporation received two 
comment letters on the draft policy statement. In brief, both 
commenters are concerned that the Corporation will not consider a 
request for assistance until after all other resolution alternatives 
are exhausted, including resolution alternatives available to the Farm 
Credit Administration (FCA). Both also commented on the least-cost test 
as it relates to the cost of liquidating a troubled System institution. 
Each of these areas is addressed below.
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    \6\ See 77 FR 37399 (June 21, 2012). On July 26, 2012, the 
Corporation extended the comment period 90 days in response to 
several commenter requests. See 77 FR 45606 (August 1, 2012).
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A. Resolution Alternatives

    In the first sentence of the draft policy statement, the 
Corporation stated that, in general, it would consider a request for 
assistance 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

[[Page 23248]]

more System institutions as determined by the FCA.\7\ Both commenters 
agree that it is reasonable to expect System institutions to engage in 
self-help mechanisms before requesting assistance from the Corporation, 
particularly within a district that is experiencing financial stress. 
They also note that the FCA has authority to resolve troubled System 
institutions either through involuntary mergers or direct transfer of 
funds of capital among System institutions.\8\ They express concern 
that the Corporation will not consider a request for assistance until 
after the FCA has exercised its authority to resolve troubled System 
institutions.\9\
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    \7\ The Act provides authority for Farm Credit banks to merge 
with other Farm Credit banks and Farm Credit associations to merge 
with other Farm Credit associations. See Act, Title VII.
    \8\ Under section 4.12(a) of the Act, 12 U.S.C. 2183(a), FCA has 
authority to require that a System association merge with another 
association if it has failed to meet its outstanding obligations or 
failed to conduct its operations in accordance with the Act. Under 
section 5.17(a) of the Act, 12 U.S.C. 2252(a), FCA has authority to 
require two or more System banks to merge if the FCA determines that 
one of the banks has failed to meet its outstanding obligations. The 
commenters also referred to 12 CFR 611.1130 which states, ``Section 
5.17(a)(6) of the Act authorizes the FCA to regulate the borrowing, 
repayment, and transfer of funds and equities between institutions 
of the System, including banks, associations, and service 
organizations organized under the Act.''
    \9\ For example, the commenters state that the draft policy 
statement ``appears to establish a vague expectation for the 
exhaustion of resolution alternatives in a manner that essentially 
forces other System institutions to provide involuntary assistance 
through FCA regulatory action,'' which may result in ``a de-facto 
joint and several financial call'' from other System institutions.
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    In response to these comments, the Corporation is removing the 
language on ``other resolution alternatives'' that the commenters found 
troubling. To clarify, FCA action is not a necessary precondition for 
the Corporation to consider a request for assistance to a troubled 
System institution. The essential precondition for the Corporation to 
consider providing assistance is the receipt of a request for 
assistance and an assistance proposal. As explained in the final policy 
statement, a request for assistance can be initiated either directly 
from a troubled System institution or from other System institutions 
seeking to acquire or assist a troubled System institution. If the 
Corporation determines it is appropriate based on the facts and 
circumstances surrounding the request, the Corporation will provide 
System institutions the opportunity to submit information related to 
the request.

B. Least-Cost Test

    In the draft policy statement, the Corporation stated that it would 
conduct a least-cost test to determine whether the cost of providing 
assistance to a troubled System institution is less costly to the 
Insurance Fund than a liquidation of the institution. In brief, the 
Corporation would review the assistance proposal and gather any 
additional information necessary to estimate the cost of liquidation. 
Once this estimate has been computed, the Corporation would determine 
the cost and type of assistance. The Corporation would then compare the 
cost of providing assistance to the cost of liquidation to make its 
least-cost determination.
    The draft policy statement also describes the complexity of 
conducting a least-cost test. For example, the Corporation describes a 
scenario where a sizable association is failing. The liquidation of the 
large association might not have an immediate impact on the funding 
bank's ability to continue meeting its insured obligations, but the 
effect of the liquidation could create significant disruption through a 
district that could threaten the bank's ability to continue as a going 
concern. Without assistance from the Corporation, the bank might 
eventually fail, creating greater losses to the Insurance Fund.
    The Corporation received two comments on the least-cost test 
discussion. Both commenters generally agree with the principles behind 
the least-cost determination, specifically the discussion of 
considering the full impact on the Insurance Fund over time. However, 
the commenters also reference a separate document titled a ``Least-Cost 
Test Example'' that the Corporation shared publicly as an example of 
how the least-cost test might be performed if the troubled System 
institution was an association. In general, the commenters believed the 
assumptions used in this example were too optimistic.\10\
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    \10\ For example, the commenters believed that some of the 
recovery levels employed in the example were too high and that the 
example did not entirely reflect all the costs associated with a 
receivership.
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    In response to these comments, it appears the commenters 
misunderstood the purpose of the Least-Cost Test Example. The 
Corporation created this example as part of its fact-gathering process 
in the development phase of the draft policy statement; the example 
itself is not a part of the draft policy statement.\11\ It also appears 
the commenters misunderstand the ``cost of liquidation'' as it relates 
to the Insurance Fund. For example, the commenters identify certain 
``indirect costs'' that may result from placing a troubled System 
institution into receivership. While these indirect costs may adversely 
affect other System institutions or the System as a whole, it is 
unclear that these costs would create losses to the Insurance Fund. For 
the Corporation to approve assistance, there must be a reasonable basis 
to conclude that the assistance would prevent a more costly loss to the 
Insurance Fund as a result of indirect losses.
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    \11\ The commenters recognized this distinction but appeared to 
want the Corporation to consider more least-cost test examples. The 
Corporation agrees with the commenters that the example was not 
complicated and may not have exhaustively considered all 
possibilities and costs associated with liquidating a troubled 
System association. The Corporation could have created a more 
complex example but this was not necessary to advance the discussion 
and gather general information to update its policy statement. In 
reality, the value of assets and costs associated with a 
receivership could widely fluctuate based on numerous factors at the 
time of liquidation such as the condition of the agricultural sector 
and general economy, the condition of the System institution being 
liquidated, the condition and extent to which other System 
institutions could provide their own assistance to the troubled 
System association, the unique characteristics of the asset 
portfolio, the potential pool of bidders at the time of liquidation, 
and so forth.
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    In view of the comments received, the Corporation is substantially 
revising the least-cost test discussion of the final ``Policy Statement 
Concerning Assistance'' to provide greater clarity concerning the 
``cost of liquidation'' as it relates to the Insurance Fund. Since the 
Insurance Fund's primary purpose is to insure the timely payment of 
principal and interest on System bank insured debt obligations, it is 
clear that a loss to the Insurance Fund occurs when a System bank 
defaults on an insured debt obligation, and the Corporation must use 
the Insurance Fund to pay the obligation. In making the least-cost 
determination, the Corporation must be able to reasonably estimate 
whether the troubled System institution's failure will impair a bank's 
ability to pay its insured debt obligations, creating losses to the 
Insurance Fund. The final policy statement provides guidance for how 
the Corporation might reasonably estimate costs to either resolve a 
troubled System institution or stem financial contagion within the 
System.
    After considering all comments received, the Corporation has given 
final approval to the ``Policy Statement Concerning Assistance,'' with 
changes. The existing ``Policy Statement Concerning Stand-Alone 
Assistance'' is withdrawn. The text of the final ``Policy

[[Page 23249]]

Statement Concerning Assistance'' is set out below in its entirety:
Farm Credit System Insurance Corporation
Policy Statement Concerning Assistance
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, on 
such terms and conditions as the Corporation's Board of Directors may 
prescribe: (1) Stand-alone assistance in the form of loans, asset or 
debt security purchases, assumption of liabilities, or contributions: 
(a) To prevent the placing of the institution \12\ 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 (2) Assistance to facilitate a merger or 
consolidation of a ``qualifying'' \13\ troubled System institution with 
another System institution through loans, loan guarantees, asset or 
debt security purchases, assumption of liabilities, contributions, or 
any combination thereof.\14\
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    \12\ Section 5.61(a) of the Act uses the terms ``insured System 
bank'' and ``bank'' but the Act also specifies under section 
5.61(e), 12 U.S.C. 2277a-10(e), that such terms also 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. Consequently, the terms ``troubled System 
institution,'' ``troubled System bank,'' or ``troubled System 
association'' are used to refer to those institutions specified in 
sections 5.61(a) and 5.61(e) of the Act, 12 U.S.C. 2277a-10(a) and 
2277a-10(e).
    \13\ ``Qualifying'' means the troubled System institution is: 
(1) In receivership, (2) in danger of being placed in receivership, 
or (3) an institution that, when severe financial conditions exist 
that threaten the stability of a significant number of System 
institutions or of System institutions possessing significant 
financial resources, requires assistance to lessen the risk to the 
Corporation posed by such System institution under such threat of 
instability. See Act, section 5.61(a)(2)(B), 12 U.S.C. 2277a-
10(a)(2)(B).
    \14\ 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, it must 
compare the cost of liquidation to the cost of providing assistance to 
determine the least costly alternative to the Insurance Fund.\15\ In 
making this discretionary determination, the Corporation is authorized 
to gather any information necessary to perform the least-cost test.\16\ 
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.\17\
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    \15\ 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).
    \16\ 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).
    \17\ 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 approving assistance. 
See Act, section 5.61(a)(3)(D), 12 U.S.C. 2277a-10(a)(3)(D).
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Policy Statement
    The Corporation will 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), upon receipt of an assistance proposal. An assistance 
proposal can be submitted either directly from a troubled System 
institution, from other System institutions seeking to acquire or 
assist a troubled System institution, or from the System banks to stem 
a liquidity crisis. Upon receipt of an assistance proposal, if the 
Corporation determines it is appropriate based on the facts and 
circumstances surrounding the request, the Corporation will provide 
System institutions the opportunity to submit any information, 
including information on the cost to the Farm Credit Insurance Fund 
(Insurance Fund) of a liquidation.\18\ The Corporation will then 
conduct a least-cost test to determine whether the cost of providing 
assistance is less costly to the Insurance Fund than the cost of 
liquidating a System institution. If the cost of providing assistance 
is less than the cost of liquidation to the Insurance Fund, and the 
Corporation, in its sole discretion, approves assistance, the 
Corporation will enter into an agreement with the System institution 
receiving assistance.
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    \18\ The Corporation will determine which System institutions 
will provide this information.
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Assistance Proposals
    A System institution requesting assistance must submit a proposal 
to the Corporation. 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 proposed assistance is to facilitate a merger, the proposal 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 consider FCA's 
preliminary approval of the proposed merger, pending the least-cost 
determination to provide assistance. If a System institution or group 
of System institutions submits an assistance proposal to resolve a 
troubled System institution or stem a liquidity crisis or financial 
contagion within the System, the proposal must contain sufficient 
information to demonstrate how the Corporation's assistance would be 
less costly to the Insurance Fund than liquidating the troubled System 
institution(s).
    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 its determination. The Corporation has identified 
the following minimum criteria to be included in a request for 
assistance and 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). The Corporation would not acquire or service 
assets without a strong justification;
    (3) Reasonable projections to assess the future viability of the 
institution after assistance has been provided. This

[[Page 23250]]

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 ongoing 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 and compensation of directors 
and senior officers must be pre-approved by the Corporation before it 
provides 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 is less costly to 
the Insurance Fund than liquidating the institution. The first step of 
the least-cost test is to determine the estimated liquidation value of 
the troubled System institution.\19\ In making this 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 estimated liquidation 
value of the troubled System institution.\20\ 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 must provide the 
Corporation all information necessary to perform a least-cost 
determination.
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    \19\ This value is computed by subtracting the present-value of 
the institution's liabilities from its assets. Liabilities include 
estimated resolution expenses.
    \20\ The Corporation will request that FCA examiners collect the 
information.
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    The second step of the least-cost test is for the Corporation to 
reasonably estimate whether the liquidation of the troubled System 
institution(s) creates a loss to the Insurance Fund. Since the 
Insurance Fund has been primarily established to insure the timely 
payment of principal and interest on System bank insured debt 
obligations,\21\ a loss to the Insurance Fund occurs when a System bank 
defaults on an insured obligation, and the Corporation must use the 
Insurance Fund to pay the obligation.\22\ Accordingly, to meet the 
least-cost test, the Corporation must be able to reasonably estimate 
whether the troubled System institution's failure will impair a bank's 
ability to pay its insured debt obligations.
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    \21\ See section 5.60(c)(1) of the Act, 12 U.S.C. 2277a-9(c)(1), 
which states, in part, ``The Corporation shall expend amounts in the 
Insurance Fund to the extent necessary to insure the timely payment 
of interest and principal on insured obligations.''
    \22\ This assumes that no other System institution is willing to 
voluntarily assist the defaulting bank to avoid a payout from the 
Insurance Fund.
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    A loss to the Insurance Fund may result from direct and/or indirect 
losses. Direct losses include the estimated losses to the Insurance 
Fund from the liquidation of a troubled System institution. Indirect 
losses to the Insurance Fund include the consequent effects of 
liquidating a troubled System institution. For example, if the troubled 
System institution is a bank, there is a direct loss to the Insurance 
Fund if the Corporation reasonably estimates that the net present value 
of the bank's assets \23\ is less than its insured debt 
obligations.\24\ If the Corporation can reasonably estimate that the 
liquidation of a troubled System bank subsequently causes one or more 
of the remaining System banks to default on insured debt obligations, 
there is an indirect loss to the Insurance Fund. Direct losses to the 
Insurance Fund can be reasonably estimated by the Corporation, but 
indirect losses to the Insurance Fund may be difficult for the 
Corporation to reasonably estimate. Consequently, it will be incumbent 
upon the remaining System banks to provide the Corporation with 
sufficient information and analysis to demonstrate that indirect losses 
to the Insurance Fund will result from the bank liquidation. For 
example, when a severe financial crisis exists, a System bank 
liquidation might cause the remaining System banks to be shut out of 
the debt market.\25\ In a less extreme scenario, a System bank 
liquidation might substantially increase the cost of funds to the 
remaining System banks. In either scenario, for indirect costs to be 
considered, the Corporation must have sufficient information so that it 
can reasonably estimate the indirect loss associated with the bank 
liquidation. If indirect losses can be reasonably estimated, the 
Corporation may consider such losses in its least-cost test and 
assistance determination.
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    \23\ The net present value of bank assets is the estimated 
present value of bank assets at liquidation less estimated payments 
to creditors with a higher priority of claims than insured debt 
obligations and estimated resolution expenses.
    \24\ Conversely, there is no direct loss to the Insurance Fund 
if the Corporation reasonably estimates that the net present value 
of the bank's assets at liquidation is greater than its insured debt 
obligations.
    \25\ In a liquidity crisis situation, the Corporation would work 
with the System banks to ensure the Insurance Fund was used to 
protect investors in insured debt obligations.
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    If the troubled System institution is an association, the 
Corporation must be able to reasonably estimate that the troubled 
System association's failure causes a loss to the Insurance Fund for 
there to be a basis for providing assistance. The funding bank would 
need to provide the Corporation with information to support the 
association request for assistance. If the Corporation reasonably 
estimates that the net present value of the association's assets \26\ 
is less than the amount of its direct note with its funding bank, there 
would be a loss to the bank. If the Corporation reasonably estimates 
that the funding bank can sufficiently absorb this loss, there would be 
no loss to the Insurance Fund and, consequently, no basis for the 
Corporation to provide assistance to the troubled System association. 
However, if the Corporation reasonably estimates that the loss on the 
direct note is significant enough that the funding bank may default on 
its insured debt obligations, the Corporation may provide assistance to 
the troubled System association.
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    \26\ The net present value of association assets is the 
estimated present value of association assets at liquidation less 
estimated payments to creditors with higher priority of claims than 
the funding bank and estimated resolution expenses. In most cases, 
receivership expenses will be paid out of the receivership estate, 
so there would be no administrative cost to the Insurance Fund from 
the liquidation of the association.
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    Moreover, if a sizable System association fails, or several smaller 
System associations fail, it is also possible that indirect losses to 
the Insurance Fund may result from association liquidations. For 
example, the liquidation of a considerable amount of agricultural loans 
in a relatively short period of time may cause a general decline in 
loan and collateral values throughout the district, creating higher

[[Page 23251]]

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. Without providing assistance to the sizable troubled 
association to prevent financial contagion, other associations could 
fail or the bank itself could fail, potentially creating losses to the 
Insurance Fund. A similar scenario could result with the failure of 
several smaller associations during a period of severe stress in 
agriculture. A temporary cash infusion to the bank could counteract the 
effects of financial contagion, stabilize the district, and help avoid 
a bank failure. The Corporation would consider structuring assistance 
so that it would recoup the cost associated with providing assistance. 
Therefore, if indirect losses can be reasonably estimated, the 
Corporation may consider such losses in its least-cost test and 
assistance determination.
    The third step of the least-cost test is to determine the type and 
amount of assistance. The cost of providing assistance will depend upon 
the structure of the assistance. For example, the Corporation's 
purchase of distressed assets from a troubled System institution may 
cost the Insurance Fund more than providing the institution a loan with 
a repayment plan.\27\ Moreover, if other System institutions are 
willing to contribute some of their funds to the troubled System 
institution to reduce the cost of providing assistance, the Corporation 
will factor this amount into its least-cost test and assistance 
determination.
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    \27\ In the event the Corporation exercises its discretion to 
provide assistance, in most cases assistance would be provided to 
the funding bank, regardless of whether the troubled System 
institution is a bank or an association. For example, the 
Corporation may provide the funding bank a collateralized loan, 
purchase subordinated debt from the funding bank, or enter into a 
loss-sharing agreement with the funding bank to either restore the 
funding bank or its affiliated association (or both) to normal 
operations. If the assistance can be structured with a repayment 
feature, it is likely to be the least costly means of providing 
assistance of all possible alternatives available to the 
Corporation.
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    The final step in the least-cost test is to compare the cost of 
liquidation to the cost of providing assistance. If the cost of 
providing assistance from the Insurance Fund is less than the cost of 
liquidating a troubled System institution (to the Insurance Fund), the 
Corporation's Board of Directors, in its discretion, may approve 
assistance to the troubled System institution. As required by statute, 
the Corporation shall use the information it receives during its least-
cost determination 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 the Corporation provides assistance, it 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. Each 
assistance agreement 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 noncompliance with the agreement.

    Dated: April 12, 2013.
 Mary Alice Donner,
Acting Secretary to the Board, Farm Credit System Insurance 
Corporation.
[FR Doc. 2013-09165 Filed 4-17-13; 8:45 am]
BILLING CODE 6710-01-P