[Federal Register Volume 81, Number 145 (Thursday, July 28, 2016)]
[Rules and Regulations]
[Pages 49720-49813]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12072]



[[Page 49719]]

Vol. 81

Thursday,

No. 145

July 28, 2016

Part II





Farm Credit Administration





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12 CFR Parts 607, 611, 614, et al.





Regulatory Capital Rules: Regulatory Capital, Implementation of Tier 1/
Tier 2 Framework; Final Rule

  Federal Register / Vol. 81, No. 145 / Thursday, July 28, 2016 / Rules 
and Regulations  

[[Page 49720]]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 607, 611, 614, 615, 620, 624, 627 and 628

RIN 3052-AC81


Regulatory Capital Rules: Regulatory Capital, Implementation of 
Tier 1/Tier 2 Framework

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA or we) is adopting a final 
rule that revises our regulatory capital requirements for Farm Credit 
System (System) institutions to include tier 1 and tier 2 risk-based 
capital ratio requirements (replacing core surplus and total surplus 
requirements), a tier 1 leverage requirement (replacing a net 
collateral requirement for System banks), a capital conservation buffer 
and a leverage buffer, revised risk weightings, and additional public 
disclosure requirements. The revisions to the risk weightings include 
alternatives to the use of credit ratings, as required by section 939A 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

DATES: Effective date: January 1, 2017.

FOR FURTHER INFORMATION CONTACT: J.C. Floyd, Associate Director, 
Finance and Capital Markets Team, Timothy T. Nerdahl, Senior Policy 
Analyst--Capital Markets, or Jeremy R. Edelstein, Senior Policy 
Analyst, Office of Regulatory Policy, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4414, TTY (703) 883-4056; or Rebecca 
S. Orlich, Senior Counsel, or Jennifer A. Cohn, Senior Counsel, Office 
of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, 
(703) 883-4020, TTY (703) 883-4056.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Objectives of the Final Rule
    B. Summary of the Proposed Rule
    C. Summary of the Final Rule
    D. Comments on the Proposed Rule
    E. Discussion of Threshold Issues Raised in the System Comment 
Letter
    1. Basel III, the U.S. Rule, and Cooperative Principles
    2. Treatment of Allocated Equities
    3. Required Minimum Redemption/Revolvement Periods
    4. Minimum Redemption/Revolvement Cycle for Association 
Investments in Their Funding Banks
    5. Required Capitalization Bylaws Amendments Establishing 
Minimum Holding Periods
    6. Higher Tier 1 Leverage Ratio and Minimum URE and URE 
Equivalents Requirement
    7. Safe Harbor Requirement
    8. Risk Weighting of Electric Cooperative Assets
    9. Risk Weighting of High Volatility Commercial Real Estate 
Exposures
    10. Unused Commitments To Fund Direct Loans
II. Minimum Regulatory Capital Ratios, Additional Capital 
Requirements, and Overall Capital Adequacy
    A. Minimum Risk-Based Capital Ratios and Other Regulatory 
Capital Provisions
    B. Leverage Ratio
    C. Capital Conservation Buffer
    D. Supervisory Assessment of Overall Capital Adequacy
III. Definition of Capital
    A. Capital Components and Eligibility Criteria for Regulatory 
Capital Instruments
    1. Common Equity Tier 1 (CET1) Capital
    2. Additional Tier 1 (AT1) Capital
    3. Tier 2 Capital
    4. FCA Approval of Capital Elements
    5. FCA Prior Approval Requirements for Cash Patronage, 
Dividends, and Redemptions; Safe Harbor
    B. Regulatory Adjustments and Deductions
    1. Regulatory Deductions From CET1 Capital
    a. Goodwill and Other Intangibles (Other Than Mortgage Servicing 
Assets)
    b. Gain-on-Sale Associated With a Securitization Exposure
    c. Defined Benefit Pension Fund Net Assets
    d. A System Institution's Allocated Equity Investment in Another 
System Institution
    e. Accumulated Other Comprehensive Income (AOCI) and Minority 
Interests
    f. Discretionary ``Haircut'' Deduction or Other FCA Supervisory 
Action for Redemption of Equities Included in CET1 Capital Less Than 
7 Years After Issuance or Allocation
    2. The Corresponding Deduction Approach for Purchased Equities
    3. Netting of Deferred Tax Liabilities Against Deferred Tax 
Assets and Other Deductible Assets
    C. Limits on Inclusion of Third-Party Capital
IV. Standardized Approach for Risk Weighted Assets
    A. Calculation of Standardized Total Risk Weighted Assets
    B. Risk Weighted Assets for General Credit Risk
    1. Exposures to Sovereigns
    2. Exposures to Certain Supranational Entities and Multilateral 
Development Banks
    3. Exposures to Government-Sponsored Enterprises
    4. Exposures to Depository Institutions, Foreign Banks, and 
Credit Unions
    5. Exposures to Public Sector Entities
    6. Corporate Exposures
    7. Residential Mortgage Exposures
    8. High Volatility Commercial Real Estate Exposures
    9. Past Due and Nonaccrual Exposures
    10. Other Assets
    11. Exposures to Other System Institutions
    12. Specialized Exposures
    C. Off-Balance Sheet Items
    1. Credit Conversion Factors (CCF)
    2. Credit-Enhancing Representations and Warranties
    D. Over-the-Counter Derivative Contracts
    E. Cleared Transactions
    F. Credit Risk Mitigation
    G. Unsettled Transactions
    H. Risk Weighted Assets for Securitization Exposures
    I. Equity Exposures
V. Market Discipline and Disclosure Requirements
VI. Conforming and Clarifying Changes
VII. Timeframe for Implementation
VIII. Abbreviations
IX. Regulatory Flexibility Act
Addendum: Discussion of the Final Rule

I. Introduction

A. Objectives of the Final Rule

    The FCA's objectives in adopting this final rule are:
     To modernize capital requirements while ensuring that 
institutions continue to hold enough regulatory capital to fulfill 
their mission as a Government-sponsored enterprise (GSE);
     To ensure that the System's capital requirements are 
comparable to the Basel III framework and the standardized approach 
that the Federal banking regulatory agencies have adopted, but also to 
ensure that the rules take into account the cooperative structure and 
the organization of the System;
     To make System regulatory capital requirements more 
transparent; and
     To meet the requirements of section 939A of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank 
Act).

B. Summary of the Proposed Rule

    On September 4, 2014, the FCA published in the Federal Register a 
notice of proposed rulemaking seeking public comment on revisions to 
our regulatory capital requirements governing System banks,\1\ System 
associations, the Farm Credit Leasing Services Corporation, and any 
other FCA-chartered institution the FCA determines should be subject to 
this rule (collectively, System institutions).\2\ The proposed rule, 
where appropriate, was comparable to the capital rules

[[Page 49721]]

published in October 2013 and April 2014 by the Federal banking 
regulatory agencies \3\ for the banking organizations they regulate 
(U.S. rule).\4\ Those rules follow the Basel Committee on Banking 
Supervision's (BCBS or Basel Committee) document entitled ``Basel III: 
A Global Regulatory Framework for More Resilient Banks and Banking 
Systems'' (Basel III), including subsequent changes to the BCBS's 
capital standards and BCBS consultative papers, and our proposed rule 
followed Basel III as appropriate for cooperatives.\5\
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    \1\ For purposes of this preamble and part 628, as well as some 
of the regulations in which there are conforming changes and other 
existing regulations, the term ``System bank'' includes Farm Credit 
Banks, agricultural credit banks, and banks for cooperatives. It has 
the same meaning as ``Farm Credit bank'', which is defined in Sec.  
619.9140 and will continue to be used in some of the regulations in 
which there are conforming changes as well as in other existing 
regulations. The Farm Credit Act of 1971, as amended (Farm Credit 
Act or Act), uses the term ``System bank'' in a number of its 
provisions.
    \2\ 79 FR 52814 (September 4, 2014).
    \3\ The Federal banking regulatory agencies are the Office of 
the Comptroller of the Currency (OCC), the Board of Governors of the 
Federal Reserve System (FRB), and the Federal Deposit Insurance 
Corporation (FDIC).
    \4\ 78 FR 62018 (October 11, 2013) (final rule of the OCC and 
the FRB); 79 FR 20754 (April 14, 2014) (final rule of the FDIC).
    \5\ Basel III was published in December 2010 and revised in June 
2011. The text is available at http://www.bis.org/publ/bcbs189.htm. 
The BCBS was established in 1974 by central banks with bank 
supervisory authorities in major industrial countries. The BCBS 
develops banking guidelines and recommends them for adoption by 
member countries and others. BCBS documents are available at http://www.bis.org. The FCA does not have representation on the Basel 
Committee, as do the Federal banking regulatory agencies, and is not 
required by law to follow the Basel standards.
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    The proposed rule was intended to:
     Improve the quality and quantity of System institutions' 
capital and enhance risk sensitivity in calculating risk weighted 
assets,
     Provide a more transparent picture of System institutions' 
capital to the investment-banking sector, which could facilitate System 
institutions' securities offerings to third-party investors, and
     Comply with section 939A of the Dodd-Frank Act \6\ by 
proposing alternatives to credit ratings for calculating risk weighted 
assets for certain exposures that are currently based on the ratings of 
nationally recognized statistical rating organizations (NRSROs).
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    \6\ Public Law 111-203, 124 Stat. 1376 (2010).
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    After the worldwide financial crisis that began in 2008, the BCBS 
issued the Basel III framework and has continued to issue additional 
standards, with the goal of strengthening financial organizations' 
capital. The U.S. rule reflects Basel III as well as aspects of Basel 
II and other BCBS standards. The provisions of the U.S. rule that are 
not specifically included in the Basel III framework are generally 
consistent with the goals of the framework.
    The FCA's proposed rule was comparable to the standardized approach 
rules of the Federal banking regulatory agencies to the extent 
appropriate for the System's cooperative structure and status as a GSE 
with a mission to provide a dependable source of credit and related 
services for agriculture and rural America. Consistent with the U.S. 
rule, the FCA's proposed rule incorporated key aspects of the Basel III 
tier 1 and tier 2 framework and included the following minimum risk-
based ratios:
     CET1 capital of 4.5 percent;
     Tier 1 capital of 6 percent; and
     Total capital of 8 percent.

The risk-based minimum ratios are identical to the ratios in the U.S. 
rule. In contrast to Basel III and the U.S. rule, we did not include 
all accumulated other comprehensive income (loss) (AOCI) in CET1. We 
note, however, that under the final U.S. rule, qualifying commercial 
banks can elect to opt-out of including AOCI in their regulatory 
capital ratios. We also proposed a tier 1 leverage ratio of 5 percent, 
of which at least 1.5 percent must be unallocated retained earnings 
(URE) and URE equivalents (nonqualified allocated surplus that is never 
revolved). Our proposal differed from the U.S. rule's minimum tier 1 
leverage ratio of 4 percent with no minimum URE requirement.
    We proposed a capital conservation buffer of 2.5 percent to enhance 
the resilience of System institutions, the same capital conservation 
buffer as in the U.S. rule. Our proposed capital conservation buffer 
similarly had a phase-in period of 3 years, but we did not propose to 
incorporate any of the other transition periods in Basel III and the 
U.S. rule.
    The proposed rule imposed some new patronage refund and equity 
redemption requirements, including FCA prior approvals, on System 
institutions to provide comparability with the U.S. rule and also to 
ensure the stability and permanence of the capital includable in the 
tier 1 and tier 2 capital ratios. We proposed that System institutions 
must retain equities included in CET1 capital for at least 10 years and 
retain equities included in tier 2 capital for at least 5 years, unless 
the FCA grants prior approval to redeem or revolve at an earlier date. 
We proposed to require institutions to adopt a bylaw committing the 
institutions to the minimum redemption and revolvement periods. We 
provided a ``safe harbor,'' or deemed prior approval, for cash 
patronage refund payments and equity redemptions and revolvements as 
long as the dollar amount of the institution's CET1 capital was equal 
to or above the dollar amount of the institution's CET1 on the same 
date of the previous year. Both the Basel III framework and the U.S. 
rule and applicable law have similar prior approval requirements, but 
we adapted these requirements to the System's cooperative structure and 
operations.
    The proposed rule contained regulatory deductions and adjustments 
in the capital ratio calculations that are comparable in purpose to 
those required in Basel III and the U.S. rule. However, we modified the 
deductions and adjustments in consideration of the two-tiered, 
financially interdependent, cooperative structure of the System. We 
proposed to require deductions from CET1 of goodwill and other 
intangibles and of allocated equity investments in other System 
institutions, service corporations, and the Funding Corporation. We 
also proposed to require System institutions that have purchased equity 
investments in other System institutions to deduct the investment using 
the corresponding deduction approach. A ``haircut'' deduction of a 
portion of allocated equities was required if an institution redeemed 
or revolved equities before the end of the applicable minimum 
redemption or revolvement period.
    We proposed a limit on how much third-party capital--capital held 
by investors other than other System institutions or their member-
borrowers--could count in the regulatory capital ratios. The proposed 
limit was similar to the limit the FCA had previously imposed on System 
institutions on a case-by-case basis.
    The FCA also proposed changes to its risk-based capital rules for 
determining risk weighted assets--that is, the calculation of the 
denominator of a System institution's risk-based capital ratios. We 
proposed to eliminate the credit ratings of NRSROs from risk weights 
for certain exposures, consistent with section 939A of the Dodd-Frank 
Act. As an alternative, FCA proposed to include methodologies for 
determining risk weighted assets for exposures to sovereigns, foreign 
banks, and public sector entities, securitization exposures, and 
counterparty credit risk. We proposed an increased risk-weight for 
high-volatility commercial real estate (HVCRE) exposures and for past 
due and nonaccrual exposures. We did not propose to alter FCA 
Bookletter BL-053, which since 2007 has permitted lower risk weights 
for certain exposures to generation and transmission and electric 
distribution cooperatives (electric cooperatives), but we also did not 
propose to include the lower risk weights in the rule. We proposed to 
increase the credit conversion factors (CCF) that apply to unused 
commitments, including commitments

[[Page 49722]]

from System banks to associations to fund direct loans. We proposed to 
eliminate the existing 50-percent risk weight for certain other 
financing institutions (OFIs). We proposed certain due diligence 
requirements in connection with securitization exposures. The proposed 
rule included new risk weights for cleared transactions, guarantees 
including credit derivatives, collateralized financial transactions, 
unsettled transactions, and securitization exposures.
    We generally did not propose risk weightings for exposures that 
System institutions have no authority to acquire.\7\ In some but not 
all cases, we discussed in the preamble this variance from the rules of 
the Federal banking regulatory agencies. In addition, we did not 
propose risk weightings for certain exposures that are both complex and 
unlikely; we stated that we would determine the treatment on a case-by-
case basis using our regulatory reservation of authority. We generally 
discussed these exposures in the preamble. We reminded System 
institutions that the presence of a particular risk weighting does not 
itself provide authority for a System institution to have an exposure 
to that asset or item. System authorities to acquire exposures are 
contained in other provisions of our regulations and in the Farm Credit 
Act.
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    \7\ However, we did propose risk weighting for exposures that 
System institutions are not permitted to acquire under their 
investment authorities, because such exposures could be acquired 
through foreclosures on collateral or similar transactions.
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    We did not propose to adopt the ``advanced approaches'' regulatory 
capital rules because no System institution has the volume of assets or 
foreign exposures that would subject it to those approaches if it were 
regulated by a Federal banking regulatory agency.\8\ We also did not 
propose the market risk requirements, because no System institution has 
significant exposure to market risk.
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    \8\ In general, the advanced approaches rule applies to banks 
with consolidated total assets of at least $250 billion or with 
foreign exposures of $10 billion or more. Only two System 
institutions have total assets in excess of $50 billion, and foreign 
exposures are negligible.
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    The proposed rule also required additional recordkeeping and 
disclosures by System banks, comparable to the required disclosures in 
the U.S. rule for commercial banks with assets of $50 billion and 
above. It was our belief that the benefits to the System of these 
proposed rules would more than outweigh the requirements and additional 
responsibilities we would require.
    We proposed to: (1) Place the tier 1 and tier 2 risk weighted and 
leverage capital requirements in a new part 628 of FCA regulations in 
title 12 of the Code of Federal Regulations: (2) rescind the risk-
weighting provisions in subpart H of part 615 and the core surplus, 
total surplus, and net collateral requirements in subpart K of part 
615; (3) retain in part 615 the requirements for the numerator of the 
permanent capital ratio, a measure that is mandated by the Farm Credit 
Act, but make the risk weightings for the denominator of the permanent 
capital ratio the risk weightings in new part 628; and (4) make 
conforming changes in other FCA regulations.
    In the proposed rule, we used the general format and the section 
and paragraph numbering system of the U.S. rule to the extent possible. 
In many cases, we retained the numbering system by reserving sections 
and paragraphs where we did not propose parallel provisions. We did so 
in order to facilitate the comparison of the proposal with the U.S. 
rules.

C. Summary of the Final Rule

    The final rule replaces the FCA's core surplus, total surplus, and 
net collateral rules with common equity tier 1 (CET1), tier 1, total 
capital, capital conservation buffer, and leverage buffer rules as 
described below. The final rule also revises the risk weightings in the 
existing rule and makes minor adjustments to the permanent capital 
calculation. In addition, it expands public disclosure requirements for 
System banks. After considering the comments we received, we have made 
changes in the final rule to address policy, technical, and compliance 
concerns raised by commenters.
    In the final rule, we have adopted the minimum CET1, tier 1, and 
total risk-based capital ratios as set forth in the proposed rule. We 
have adopted a lower tier 1 leverage ratio of 4 percent in the final 
rule but have retained the URE and URE equivalents requirement of 1.5 
percent, and we have added a tier 1 leverage buffer of 1 percent.
    We have adopted the capital conservation buffer of 2.5 percent as 
proposed and have provided a phase-in period of 3 years that will end 
on December 31, 2019.
    We have revised a number of the proposed patronage refund and 
equity redemption or revolvement requirements:
     We have revised the minimum CET1 redemption or revolvement 
period to 7 years from 10 years in the proposal but have adopted the 
other minimum periods as proposed.
     We have provided that institution boards may adopt a 
resolution annually that commits the institutions to comply with the 
minimum redemption and revolvement periods, as an alternative to 
adopting a capital bylaw.
     We have expanded the ``safe harbor'' to exempt 3 types of 
equity redemptions or revolvements from the applicable minimum holding 
periods: (1) Equities mandated to be redeemed or retired by a final 
order of a court of competent jurisdiction; (2) equities belonging to 
the estate of a deceased former borrower; and (3) equities that the 
institution is required to cancel under Sec.  615.5290 of our 
regulations.
    We have adopted the regulatory deductions and adjustments in the 
final rule as proposed, with several exceptions. We have revised the 
30-percent mandatory ``haircut'' for noncompliance with the minimum 
revolvement periods and have replaced it with a provision stating that 
the FCA may take a supervisory or enforcement action for noncompliance 
with the minimum revolvement periods, which may include requiring an 
institution to deduct a portion of its equities from CET1 capital.
    We have simplified the calculation for the third-party capital 
limit.
    We have not finalized the proposed provisions governing HVCRE at 
this time. We have not included lower risk weights for exposures to 
electric cooperatives in the rule, but FCA Bookletter BL-053 remains in 
effect. We have applied a 20-percent CCF to all unused commitments from 
System banks to fund direct loans without regard to maturity, rather 
than applying a 50-percent CCF to commitments longer than 14 months, 
and we have clarified that this capital treatment applies to direct 
loan commitments to OFIs as well as associations. We have retained the 
existing, but not proposed, 50-percent risk weight for loans to certain 
OFIs, but we have eliminated the credit rating standard for this risk 
weight. We have retained the higher risk weight for past due and 
nonaccrual exposures and the due diligence requirements for 
securitization exposures. We have revised the definition of Government-
sponsored enterprise (GSE) to include the System.
    We have adopted the recordkeeping disclosure requirements for 
System banks as proposed.
    We have adopted conforming changes to existing FCA regulations.

[[Page 49723]]



  Table 1--Summary of Key Provisions of the Tier 1/Tier 2 Capital Items
                 and Standardized Approach Risk Weights
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         Minimum capital ratios              Treatment in final rule
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                      Tier 1/Tier 2--Capital Items
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Common equity tier 1 (CET1) capital      A minimum requirement of 4.5
 ratio (Sec.   628.10).                   percent.
Tier 1 capital ratio (Sec.   628.10)...  A minimum requirement of 6.0
                                          percent.
Total capital ratio (Sec.   628.10)....  A minimum requirement of 8.0
                                          percent.
Tier 1 Leverage ratio (Sec.   628.10)..  A minimum tier 1 leverage ratio
                                          requirement of 4.0 percent of
                                          which at least 1.5 percent
                                          must consist of unallocated
                                          retained earnings and
                                          unallocated retained earnings
                                          equivalents. Applies to all
                                          System institutions.
Components of Capital and Eligibility    Describes the eligibility
 Criteria for Regulatory Capital          criteria for regulatory
 Instruments (Sec.  Sec.   628.20,        capital instruments and adds
 628.21, and 628.22).                     certain adjustments to and
                                          deductions from regulatory
                                          capital.
Capital Conservation Buffer and          A 2.5-percent capital
 Leverage Buffer Amounts (Sec.            conservation buffer of CET1
 628.11).                                 capital above the minimum risk-
                                          based capital requirements and
                                          a 1-percent leverage buffer of
                                          tier 1 capital above the
                                          minimum capital requirement,
                                          both of which must be
                                          maintained to avoid
                                          restrictions on capital
                                          distributions and certain
                                          discretionary bonus payments.
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               Risk weighted Assets--Standardized Approach
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Credit exposures to:                     Remains unchanged from existing
                                          regulations:
    U.S. government and its agencies...     0 percent.
    U.S. depository institutions and        20 percent.
     credit unions (including those
     that are OFIs).
    U.S. public sector entities, such       20 percent--general
     as states and municipalities.           obligations.
    Cash...............................     50 percent--revenue
                                             obligations.
    Cash items in the process of            0 percent.
     collection.
    Exposures to other System               20 percent.
     institutions that are not deducted
     from capital.
    Assets not specifically assigned to     100 percent.
     a risk weight category and not
     deducted from capital.
    (Sec.   628.32)....................     100 percent.
Exposures to certain supranational       Assigned a 0 percent risk
 entities and multilateral development    weight (reduced from 20
 banks (Sec.   628.32).                   percent).
Exposures to Government-sponsored        Non-System exposures: Risk
 enterprises (Sec.   628.32).             weight for preferred stock
                                          increased from 20 percent to
                                          100 percent. Risk weight for
                                          all other exposures (except
                                          equity exposures, which are
                                          discussed below) remains at 20
                                          percent.
                                         System exposures: Risk weight
                                          for direct loans remains at 20
                                          percent. All equities,
                                          including preferred stock,
                                          deducted from capital (not
                                          risk weighted).
Credit exposures to:
    Foreign sovereigns; Foreign banks;   Assigns risk-sensitive risk
     Foreign public sector entities       weights based on the Country
     (Sec.   628.32)                      Risk Classification measure
                                          produced by the Organization
                                          for Economic Cooperation and
                                          Development (risk weight no
                                          longer determined based on
                                          OECD membership status).
    Corporate exposures (Sec.   628.32)  Assigns a 100-percent risk
                                          weight to most corporate
                                          exposures, including exposures
                                          to agricultural borrowers and
                                          to OFIs that do not satisfy
                                          the criteria for a 20-percent
                                          or 50-percent risk weight.
                                          Assigns a 50-percent risk
                                          weight to non-depository
                                          institution/non-credit union
                                          OFIs that are investment grade
                                          or that meet standards similar
                                          to OFIs that qualify for a 20-
                                          percent risk weight.
    Residential mortgage exposures       50 percent for first lien
     (Sec.   628.32).                     residential mortgage exposures
                                          that satisfy specified
                                          underwriting criteria. 100
                                          percent otherwise.
    High volatility commercial real      Provisions assigning higher
     estate exposures (Sec.   628.32).    risk weight not adopted in
                                          this rulemaking. Additional
                                          rulemaking or guidance may
                                          take place in future.
    Past due and nonaccrual exposures    Assigns a 150-percent risk
     (Sec.   628.32).                     weight to exposures that are
                                          past due or in nonaccrual
                                          status, unless they are
                                          residential mortgage exposures
                                          or they are guaranteed or
                                          secured by financial
                                          collateral.
    Off-balance Sheet Items (Sec.        Certain credit conversion
     628.33).                             factors (CCF) revised,
                                          including the CCF for unused
                                          short-term commitments that
                                          are not unconditionally
                                          cancellable, which is
                                          increased from 0 percent to 20
                                          percent.
    OTC Derivative Contracts (does not   Modifies derivative matrix
     include cleared transactions)        table slightly. Recognizes
     (Sec.   628.34).                     credit risk mitigation of
                                          collateralized OTC derivative
                                          contracts.
    Cleared Transactions (Sec.           Provides preferential capital
     628.35).                             requirements for cleared
                                          derivative and repo-style
                                          transactions (as compared to
                                          requirements for non-cleared
                                          transactions) with central
                                          counterparties that meet
                                          specified standards.
    Guarantees and Credit Derivatives    Provides a more comprehensive
     (Sec.   628.36).                     recognition of guarantees.
    Collateralized Transactions (Sec.    Recognizes financial
     628.37).                             collateral.
    Unsettled Transactions (Sec.         Risk weight depends on number
     628.38).                             of business days past
                                          settlement date.

[[Page 49724]]

 
    Securitization Exposures (Sec.       Replaces the ratings-based
     Sec.   628.41, 628.42, 628.43,       approach with either the
     628.44, and 628.45).                 standardized supervisory
                                          formula approach (SSFA) or the
                                          gross-up approach for
                                          determining a securitization
                                          exposure's risk weight based
                                          on the underlying assets and
                                          exposure's relative position
                                          in the securitization's
                                          structure.
    Equity exposures (Sec.  Sec.         Establishes a more risk-
     628.51, 628.52, and 628.53).         sensitive treatment for equity
                                          exposures.
    Disclosure Requirements (Sec.  Sec.  Establishes qualitative and
       628.61, 628.62, and 628.63).       quantitative disclosure
                                          requirements, including
                                          regarding regulatory capital
                                          instruments, for all System
                                          banks.
------------------------------------------------------------------------
                     Existing FCA Regulatory Capital
------------------------------------------------------------------------
Minimum Capital Ratios:
    Permanent capital ratio (Sec.  Sec.  Numerator calculation remains
       615.5201 and 615.5205).            unchanged, but risk weights
                                          (denominator) are revised.
    Total surplus ratio (Sec.  Sec.      Eliminated.
     615.5301(i) and 615.5330(a)).
    Core surplus ratio (Sec.  Sec.       Eliminated.
     615.5301(b) and 615.5330(b)).
    Net collateral Ratio (banks only)    Eliminated.
     (Sec.  Sec.   615.5301(d) and
     615.5335).
------------------------------------------------------------------------

D. Comments on the Proposed Rule

    The original comment period for the proposed rule was for 120 days, 
ending on January 2, 2015. At the request of the System, on December 
23, 2014, the FCA extended the comment period to February 16, 2015,\9\ 
and on June 23, 2015 the FCA reopened the comment period for a 15-day 
period between June 26 and July 10, 2015.\10\
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    \9\ See 79 FR 76927 (December 23, 2014).
    \10\ See 80 FR 35888 (June 23, 2015). The Farm Credit Council 
stated that the reason for the System's request was to give System 
representatives the opportunity to discuss the proposed rule with 
the FCA Board members that had joined the FCA Board on March 13 and 
17, 2015.
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    The FCA received approximately 2400 public comments on the proposed 
rule. Nearly 500 of the comments were from individual System 
associations and their directors and officers; the 4 System banks; and 
the Farm Credit Council, a trade association representing the interests 
of System institutions. Approximately 1800 member-borrowers of one 
System association submitted comments.\11\ We also received a comment 
letter from a member of Congress on behalf of several of his 
constituents. The comment letter submitted by the Farm Credit Council 
(System Comment Letter) states that the System's capital workgroup 
developed the comments after soliciting input from all System 
institutions. This input was further discussed and reviewed among the 
institutions, after which the capital workgroup circulated a draft 
comment letter for further review.\12\ The System Comment Letter is 
comprehensive and detailed, covering most or all of the numerous 
regulatory philosophy, policy and technical issues directly and 
indirectly addressed in the proposed rule. Because the System Comment 
Letter was developed with input of all System institutions, the FCA 
focuses primarily on addressing those comments in this preamble. The 
preamble also addresses the individual comment letters of System 
institutions and their members and representatives, as well as those of 
non-System commenters, that contain substantially different arguments 
or discuss other issues.
---------------------------------------------------------------------------

    \11\ The great majority of the comments were the same form 
letter; however, a number of these commenters added hand-written 
comments to the form letter.
    \12\ A number of the comment letters from individual System 
institutions summarized, were identical to, or closely tracked, the 
System Comment Letter.
---------------------------------------------------------------------------

    In addition, 3 comments were from non-System agricultural lenders 
with lending relationships with System banks (other financing 
institutions or OFIs). Approximately 70 rural electric cooperatives and 
a trade association representing rural electric cooperatives submitted 
comments. Each of these two groups of commenters submitted a comment 
regarding the single issue of the proposed risk-weightings of System 
institutions' exposures to their particular business.
    We also received comments from several educational and trade 
associations promoting the interests of farmers and farm businesses, 
cooperative businesses, rural electric cooperatives, and U.S. community 
bankers. The farm-related and cooperative trade associations all 
submitted a general comment supporting the System Comment Letter. They 
urged the FCA not to adopt regulations that would diminish the 
democratic nature of cooperatives, their unique governance structure, 
and their ability to maintain financial and ethical integrity. The 
trade association representing community banks expressed concern about 
some provisions of the U.S. rule as applied to community banks and 
generally recommended the imposition of more strenuous capital 
requirements on System institutions. The trade association asserted 
that 1) there was an implicit government guarantee of the debt and 
equity of System institutions that the Basel III framework and the 
proposed rule failed to address, and that 2) this failure put taxpayers 
at risk for future bailouts, while privately-funded and well-
capitalized community banks suffer with higher funding costs and 
absence of a government backstop. These trade association letters did 
not include comments on specific aspects or requirements of the 
proposed rule.

E. Discussion of Threshold Issues Raised in the System Comment Letter

    This section of the preamble addresses the issues that the System 
Comment Letter identified as ``Threshold Issues.''
1. Basel III, the U.S. Rule, and Cooperative Principles
    The System Comment Letter expressed strong support for modernizing 
the FCA's capital regulations through the adoption of a tiered 
framework comparable to Basel III and the U.S. rule. The System stated 
that such a modernization ``will be helpful to external investors and 
others who are acquainted with the Basel III framework and understand 
the overall financial strength and capital capacity of individual 
[System] institutions as cooperative financial institutions.'' The

[[Page 49725]]

System asserted, however, that the FCA's proposed rule is ``far 
harsher'' and, in addition, ``discourages the formation, retention, and 
distribution of member-held equity, undermining cooperative business 
principles that have been in place for decades.'' The System further 
asserted that, ``[a]s expected by Basel III, FCA should take into 
account all principles specific to the constitution and legal structure 
of cooperatives.''
    The System Comment Letter is divided into three parts. The first 
part discusses 9 ``threshold'' issues important to the System, 
including a number identified as ``undermin[ing] cooperative principles 
and member participation in the management, ownership, and control of 
System institutions as required by the Act.'' The second part, Appendix 
A, contains comments to specific questions we asked in the preamble to 
the proposed rule. The third part, Appendix B, identifies ``various 
conceptual and technical issues'' that are explained in a discussion of 
particular aspects of the regulation text. We first address the general 
assertion that the proposed rule is anti-cooperative as well as the 
issues identified in the System Comment Letter as ``threshold issues.'' 
The section that follows discusses the System's remaining comments and 
other comments that we received.
    In proposing the capital rule, it was our intention to implement 
capital requirements that are comparable to the Basel III framework as 
embodied in the U.S. rule, with adjustments to take into consideration 
the structure and operations of System institutions. As the System 
Comment Letter notes, the Basel III framework's capital components are 
described by the Basel Committee in terms of the capital of joint-stock 
banks--that is, financial institutions that issue stock to investors 
whose objective is to earn a profit. (We note that System institutions, 
like some other cooperative financial institutions, do issue stock, but 
they are not joint-stock banks as that term is used by the Basel 
Committee.) Investors with voting interests in a joint-stock bank are 
not required to do business with the joint-stock bank in which they own 
stock, and there is no connection between their ownership interests and 
any customer relationship they may have with such bank. Cooperatives 
and mutual associations, unlike joint-stock banks, are not created for 
the profit of investors but rather for the benefit of their member-
borrowers, and there is a close connection between their equity 
ownership and their customer relationship with the cooperative 
institution or mutual. The Basel Committee intended the criteria for 
joint-stock banks also to apply to other banking organizations, as 
explained in footnote 12 to the Basel III document:

    The criteria also apply to non-joint stock companies, such as 
mutuals, cooperatives or savings institutions, taking into account 
their specific constitution and legal structure. The application of 
the criteria should preserve the quality of the instruments by 
requiring that they are deemed fully equivalent to common shares in 
terms of their capital quality as regards loss absorption and do not 
possess features which could cause the condition of the bank to be 
weakened as a going concern during periods of market stress. 
Supervisors will exchange information on how they apply the criteria 
to non-joint stock companies in order to ensure consistent 
implementation.

    The System Comment Letter appears to interpret this footnote to 
mean that Basel III-based regulations for cooperatives, such as the 
FCA's proposed rule, must take account of the ``specific constitution 
and legal structure'' of System institutions by deferring to ``all 
cooperative principles'' that are inconsistent with the Basel III 
criteria for joint-stock banks. Such an interpretation is not entirely 
without basis, given the lack of detail in the footnote, and this may 
have already have led to greater flexibility than intended by the Basel 
Committee in some banking agencies' regulatory interpretations. We note 
that, in December 2014, banking experts appointed by the Basel 
Committee to assess whether European Union pronouncements and its 
member countries' regulations comply with the Basel III framework 
raised concerns about exceptions some countries made to the framework 
for mutually owned institutions and suggested the Basel Committee 
consider issuing more specific guidance.\13\ The Basel framework 
provides some clarity in a discussion of strengthening the global 
capital framework, in which the Basel Committee emphasizes the need for 
uniform standards for regulatory capital:
---------------------------------------------------------------------------

    \13\ See Basel Committee on Banking Supervision, ``Regulatory 
Consistency Assessment Program (RCAP): Assessment of Basel III 
regulations--European Union,'' December 2014. Paragraph 1.4.3 states 
the following, in pertinent part:
    CET1 instruments issued by mutually owned institutions: Basel 
III permits some flexibility in order to accommodate the nature of 
capital instruments of different mutually owned banks. However, the 
Assessment Team is concerned that the CRR concessions from the 14 
CET1 criteria for mutuals go beyond the permissible flexibility in 
the Basel standard, while noting that this standard does not 
precisely define the extent of permissible flexibility. This is an 
area where the BCBS could provide additional guidance on the extent 
of flexibility considered appropriate for CET1 issued in mutual bank 
structures.
    In the case of one banking group, the Assessment Team observed 
that individual instruments of some cooperative banks were being 
marketed as being redeemable, non-loss absorbing in liquidation, and 
paying a distribution based on the face value. In the Assessment 
Team's view, this goes beyond the limits of permissible flexibility 
in Basel III. The fact that regulatory approval is required for 
redemption and that redemption may be deferred does not, in the 
team's opinion, mitigate the public perception that these 
instruments are redeemable, despite the approval requirements set 
out in the CRR.
    While the amount of such instruments is clearly material for 
banks with mutual structures, the Assessment Team understands that 
these are well understood capital structures supported by Member 
State law that have proven resilient in times of stress. Moreover, 
some of the internationally active parts of such banking groups are 
capitalised by common equity in the form of publicly listed ordinary 
shares, which serves as an alternative source of loss-absorbing 
capital. This is an area where the Assessment Team believes the 
Basel Committee could provide additional guidance on the extent of 
flexibility considered appropriate for CET1 issued in mutual bank 
structures. As a result, this issue is noted as a deviation, but the 
Assessment Team has not factored this element into the grade for the 
definition of capital category nor into the overall assessment 
grade.

    The crisis . . . revealed the inconsistency in the definition of 
capital across jurisdictions and the lack of disclosure that would 
have enabled the market to fully assess and compare the quality of 
capital between institutions.
    To this end, the predominant form of Tier 1 capital must be 
common shares and retained earnings. This standard is reinforced 
through a set of principles that also can be tailored to the context 
of non-joint stock companies to ensure they hold comparable levels 
of high quality Tier 1 capital. Deductions from capital and 
prudential filters have been harmonized internationally and 
generally applied at the level of common equity or its equivalent in 
the case of non-joint stock companies.\14\
---------------------------------------------------------------------------

    \14\ Basel III Framework, paragraphs 8 and 9.
---------------------------------------------------------------------------

    The FCA disagrees with the apparent interpretation in the System 
Comment Letter that the Basel III footnote 12 directs regulators to 
defer to mutual and cooperative constitutions and legal structures. 
There are 4 key points in the footnote, as clarified by the discussion 
in the text of the framework document, that we followed in the proposed 
rule. First, cooperative capital\15\ that is included in CET1 or tier 2 
capital must be substantively equivalent in quality to the CET1 or tier 
2 capital of joint-stock banks, and that means cooperative capital must 
be excluded if they are not substantively equivalent. Second, 
cooperative capital must be excluded if it has features (including 
features that may be typical of cooperative operations) that weaken the 
capacity of the institution to continue operations during stressful 
times. Third, exceptions and adjustments to the criteria are in some 
cases necessary because of

[[Page 49726]]

cooperative institutions' legal authorities and mandates, in order to 
ensure the uniform quality of the components and consistent 
implementation of the standards. Fourth, consistent implementation of 
the standards is required to enable the market to compare the quality 
of capital between institutions. Otherwise, the framework's goal of 
uniform capital standards among financial institutions would not be 
achieved--and the FCA could not represent our rule as comparable to 
Basel III and the U.S. rule. Not being able to represent our rule as 
comparable would eliminate a primary reason given by the System to 
modernize the capital regulations--to help third-party investors that 
are acquainted with the Basel III framework evaluate System 
institutions' capital.
---------------------------------------------------------------------------

    \15\ Cooperative capital includes common cooperative equities 
and preferred stock issued to member-borrowers or other System 
institutions.
---------------------------------------------------------------------------

    In the proposed rule we made appropriate exceptions and adjustments 
related to legal authorities, structure and also traditional operations 
that are cooperative in nature. These include the exception for the 
liquidation priorities of URE and common cooperative equities; the 
eligibility requirements to become member-borrowers; the requirement to 
purchase member stock in order to obtain a loan; the restriction of 
association voting rights to member-borrowers in agriculture and 
related businesses and the restriction of bank voting rights to member 
associations and retail cooperative member-borrowers; the one-member, 
one-vote mandate for association member-borrowers; and the proportional 
voting mandate for associations and cooperatives that borrow from 
System banks. An important difference from joint-stock corporations 
such as commercial banks is that the voting stockholders, because they 
are also the customers, want both low interest rates on their loans and 
high amounts of patronage payments, and they are in a position to 
pressure the institution to provide patronage payments on a regular 
basis. Some institutions encourage member expectations by promoting and 
illustrating patronage payments as a routine ``cash-back dividend'' 
that effectively reduces the real interest rate on a member's loan as 
demonstrated by materials on their Web sites and in press releases.
    Our proposed rule also included exceptions and adjustments to take 
into account non-cooperative differences between System institutions 
and commercial banks in legal authorities, mandates, and legal 
structure. Such differences include: (1) The two-tiered structure of 
System banks supervising and lending to the System associations that 
own them; (2) the joint and several liability of System banks for 
almost all the general debt they issue; (3) the GSE status of the 
System; (4) the limitations on System associations to borrow from 
financial institutions other than their affiliated System bank; (5) the 
statutory discretion of a System institution to redeem purchased stock 
and retire allocated equities; and (6) the requirement that System 
institution voting members must approve amendments to the 
capitalization bylaws. Commercial banks have capital-related 
restrictions, some statutory and some in the U.S. rule, that the Act 
and our regulations have not previously imposed on System institutions, 
such as: (1) Restrictions on redemption of equities without both 
regulatory approval and stockholder approval; (2) restrictions on cash 
dividend payments without regulatory approval; and (3) prompt 
corrective action. Restrictions and adjustments in our capital rule, to 
the extent consistent with the System's GSE status, are also necessary 
in order to make our regulatory capital framework substantively 
comparable to the U.S. rule.
    We note that the U.S. rule does not have specific provisions for 
mutual banking organizations.\16\ The regulatory capital of these 
mutuals is made up almost entirely of retained earnings that we 
understand are never allocated to members; consequently, the retained 
earnings of mutuals have the same characteristics as the retained 
earnings of joint-stock banks--and, in our judgment, the URE of System 
institutions. Because neither joint-stock banks nor mutuals allocate 
equities, the U.S. rule does not take into consideration the allocation 
process.\17\ In most cases, once a System institution has allocated 
equities to members, the members acquire ownership attributes that make 
the earnings stock-like and more appropriately treated like stock than 
like URE. The distinction is important because, if we treated allocated 
equities the same way we treat URE, none of the criteria that apply to 
equities included in tier 1 and tier 2 capital--including minimum 
revolvement periods and the expectation criterion discussed below--
would apply.
---------------------------------------------------------------------------

    \16\ The OCC issued a bulletin in 2014 describing the 
characteristics of mutuals and discussing supervisory 
considerations, including capital issues. See http://www.occ.gov/news-issuances/bulletins/2014/bulletin-2014-35.html. The OCC's 
decision not to adopt special provisions for mutuals appears to be 
due to the fact that the legal authorities do not differ between 
commercial banks and mutuals in ways that require adjustments to the 
rule. According to the bulletin, mutual associations are subject to 
the same laws and regulations as joint-stock banks except for 
regulations on chartering, bylaws, combinations, and member 
communications.
    \17\ When a System institution pays patronage in the form of 
equities and retains these equities for the benefit of the 
cooperative institution, this is known as the allocation process in 
which a member-borrower's name is assigned to those equities.
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2. Treatment of Allocated Equities
    The System Comment Letter states that allocated equities are 
retained earnings and uses the term ``allocated retained earnings'' 
throughout its comment, stating that ``allocated retained earnings'' 
are the same as URE and should be treated the same way. The System 
makes a number of additional assertions about Basel III and the U.S. 
rule. These assertions include:

     Basel III does not establish tiers of retained 
earnings, does not require deduction from retained earnings of 
amounts that a commercial bank has announced it plans to distribute, 
and does not exclude retained earnings from CET1 to reflect market 
pressures to pay dividends.
     The U.S. rule includes all retained earnings in CET1 
even though commercial banks are authorized to distribute retained 
earnings in amounts up to current year earnings plus net income for 
the two previous years. If the FCA does not change its position to 
treat retained earnings differently from the Basel III framework and 
the U.S. rule, it should impose only criteria applicable solely to 
retained earnings.
     Basel III and the U.S. rule do not apply any of the 
CET1 criteria to retained earnings. The FCA's proposed rule 
inappropriately applies the criteria to ``allocated retained 
earnings,'' including minimum revolvement periods established in 
capitalization bylaws.

    The System Comment Letter correctly states that Basel III and the 
U.S. rule fully include ``retained earnings'' in CET1 and do not apply 
to retained earnings any of the CET1 criteria they apply to equities. 
Our treatment of URE is identical to the treatment of ``retained 
earnings'' in Basel III and the U.S. rule. In our view, equating URE 
with the ``retained earnings'' in Basel III and the U.S. rule is 
correct because, to our knowledge, all the retained earnings of 
institutions covered by Basel III and the U.S. rule are unallocated. 
Our research has not revealed any financial cooperatives or mutuals 
under the Basel III framework or the U.S. rule that allocate equities. 
All the System's comments about treatment of retained earnings pertain 
only to our treatment of earnings that have been allocated to their 
members. Rather than establishing tiers of retained earnings, a 
structure the System's comment seems to both criticize and recommend, 
we treat allocated equities the same way we treat purchased equities, 
consistent with the provisions of the Act and our existing

[[Page 49727]]

capital regulations. Most of the System's critical comments about our 
treatment of allocated equities have to do with the capitalization 
bylaw requirement and the requirement for prior approval of 
revolvements of allocated equities that do not fit within the safe 
harbor (``deemed prior approval'') provision. We address these 
criteria-related comments when we discuss the bylaw and minimum holding 
period requirements later in this preamble.
    We address here our basis for treating allocated equities the same 
way we treat purchased equities. We treat earnings that a System 
institution has allocated to a member as equities, irrespective of 
whether the institution calls them allocated equities, allocated stock, 
allocated surplus, or allocated retained earnings. ``Allocated 
equities'' is the term we use in existing capital regulations and also 
used in the proposed rule. The Act and existing FCA capital regulations 
most commonly use the term ``allocated equities'' and treat them as 
stock; in the Act and our regulations URE is consistently treated 
differently from stock and allocated equities.
    We note that the term ``allocated retained earnings'' used in the 
System Comment Letter could potentially confuse third-party investors 
who are not familiar with the allocation process and may not understand 
the ownership attributes that attach once the earnings are 
allocated.\18\ In addition, the term is not found in the Act. The 
closest similar term is in section 4.3A(a)(1) of the Act, which defines 
permanent capital to include the following: (1) ``Current year retained 
earnings,'' (2) ``allocated and unallocated earnings,'' (3) ``all 
surplus,'' (4) stock that is not protected stock and that is not 
retireable at the discretion of the holder, and (5) other debt or 
equity instruments that the FCA determines appropriate to be considered 
permanent capital. ``Allocated and unallocated earnings'' may appear to 
be a separate and distinct category, but it overlaps with the 
categories of ``current year retained earnings'' and ``surplus.'' 
``Allocated and unallocated earnings'' also expressly overlaps with 
``stock,'' because paragraph (a)(2) of section 4.3A, which immediately 
follows the definition of permanent capital, further defines ``stock'' 
to include ``voting and nonvoting stock (including preferred stock), 
equivalent contributions to a guaranty fund, participation 
certificates, allocated equities, and other forms and types of 
equities.'' Other than the single, ambiguous reference to ``allocated 
and unallocated earnings'' in section 4.3A(a)(2) of the Act, the 
System's similar term ``allocated retained earnings'' is not a term 
used in the Act or our regulations. It has been rarely, if ever, used 
in FCA bookletters, informational memoranda, or Federal Register 
preambles.\19\
---------------------------------------------------------------------------

    \18\ A review of recent financial reports shows that some System 
institutions refer to allocated equities as ``allocated retained 
earnings'' in the reports, some institutions use both terms, and 
other institutions do not use the term ``allocated retained 
earnings.'' The [Federal Farm Credit Banks] Funding Corporation 
notably does not use the term ``allocated retained earnings'' in its 
Annual and Quarterly Statements that provide information for 
investors in the debt securities jointly issued by the four System 
banks.
    \19\ In a search of FCA databases, we found two instances of a 
definition of allocated equities as including ``allocated retained 
earnings and allocated stock'' in the Capital Management section of 
the FCA examination manual. We note that, in the preamble to the 
proposed rule, our Table 2 comparing cooperative capital to the 
capital of a joint-stock bank incorrectly categorized ``allocated 
surplus'' as comparable to retained earnings but categorized 
allocated stock as comparable to common stock.
---------------------------------------------------------------------------

    Many provisions of the Act treat URE and allocated equities in 
separate ways. Section 4.9A(d) of the Act, which defines and guarantees 
full repayment of ``eligible borrower stock,'' defines borrower stock 
to mean ``voting and nonvoting stock, equivalent contributions to a 
guaranty fund, participation certificates, allocated equities, and 
other similar equities that are subject to retirement under a revolving 
cycle issued by any System institution and held by any person other 
than any System institution.'' URE is not protected under section 4.9A 
of the Act. Sections 2.6 and 3.10 of the Act establish that 
associations and CoBank, ACB have liens on the stock and equities, 
including allocated equities, of their retail borrowers. In section 
3.2(a)(2)(A)(ii) of the Act, voting by a bank for cooperatives' retail 
borrowers is based on a stockholder's proportional equity interest 
``including allocated, but not unallocated, surplus and reserves.'' 
Retirement of stock for a bank for cooperatives as provided in sections 
3.5 and 3.21 of the Act treats the retirement of allocated equities the 
same as the retirement of ``issued'' equities. In section 6.4 of the 
Act, which pertains to the Assistance Board's certification of a System 
institution to obtain financial assistance by issuing preferred stock, 
allocated equities are treated as stock. Section 6.26(c)(1)(B) of the 
Act, pertaining to the repayment of financial assistance by the System, 
bases part of the repayment amount on an institution's amount of URE 
but not allocated equities.
    Existing FCA capital regulations are consistent with the Act's 
separate treatment of URE and allocated equities. Section 
615.5330(b)(1) provides that a portion of core surplus must consist of 
URE and other includible equities other than allocated equities. A 
provision for banks for cooperatives that was in effect until 1997 
required those banks to add at least 10 percent of their net earnings 
to their unallocated reserve account each year until URE equaled half 
the minimum permanent capital requirement (3.5 percent of risk weighted 
assets).\20\
---------------------------------------------------------------------------

    \20\ This requirement was in previous Sec.  615.5330 and was 
rescinded in 1997 when the FCA adopted the net collateral ratio for 
banks. Under that previous regulation, we permitted CoBank, ACB to 
meet the URE requirement with nonqualified allocated equities, 
issued to its retail borrowers, that CoBank, ACB had a confirmed 
plan not to revolve except in liquidation. Such treatment is similar 
to the ``URE equivalents'' treatment for the capital conservation 
buffer in the proposed rule.
---------------------------------------------------------------------------

    Though the reason for treating allocated equities differently from 
URE is not expressly stated in the Act, the difference is likely based 
on the ownership attributes of allocated equities that make allocated 
equities stock-like in nature. The rule's treatment of allocated 
equities as stock and its treatment of URE as equivalent to the 
``retained earnings'' in Basel III and the U.S. rule are consistent 
with the treatment of allocated equities and URE in the Act and 
existing FCA regulations.
3. Required Minimum Redemption/Revolvement Periods
    The proposed rule provided for minimum redemption and revolvement 
periods (holding periods) as part of the criteria for including 
equities in the new regulatory capital components. We proposed a 
minimum 10-year holding period for inclusion in CET1 capital and a 
minimum 5-year holding period for inclusion in tier 2 capital. In 
addition, consistent with Basel III and the U.S. rule, we proposed a 5-
year no-call period for inclusion of equities in additional tier 1 
capital and tier 2 capital, as well as a minimum 5-year term for term 
stock includible in tier 2 capital.
    The System Comment Letter did not object to the minimum no-call 
periods or minimum term for term stock but expressed objections to the 
minimum redemption and revolvement periods as follows:

     The minimum holding period should be eliminated because 
there is no basis for it in Basel III.
     An allocated equity with an express minimum term of 10 
years is no more permanent than an allocated equity that is 
perpetual on its face.
     The FCA has historically expressed a concern with 
member pressure on institutions for the payment of patronage or

[[Page 49728]]

redemption of allocated retained earnings. Factually, System 
institutions do not face greater pressure to distribute allocated 
equities than the pressure on commercial banks to make dividend 
payments.
     Several System institutions in the years 2007-2013 
suspended cash patronage payments or reduced allocated equity 
redemptions when they experienced credit and business issues. Loan 
volume declined in some instances due to more conservative lending 
practices but not to borrower flight. The institutions resolved 
their credit and business issues and resumed cash patronage payments 
and increased allocated equity redemptions. This demonstrates that 
System institution retained earnings should qualify as CET1 without 
application of any limiting criteria.
     If FCA remains resolute in treating allocated equities 
differently from URE, the agency should continue the requirements in 
existing FCA regulations based on minimum revolvement periods: A 
plan or practice not to revolve CET1 equities for at least 5 years 
and not to revolve additional tier 1 equities for at least 3 years, 
with no minimum revolvement period for tier 2 equities.
     If FCA decides to adopt minimum holding periods as set 
forth in the proposed rule, a minimum holding period of 7 years for 
inclusion in CET1 capital would be more workable and reasonable.

    The System is correct that Basel III does not include a minimum 
redemption or revolvement period for CET1 equities or tier 2 equities. 
Such a minimum holding period is not necessary in the Basel framework 
or in the U.S. rule because commercial banks must obtain their 
regulator's approval before redeeming any equities, no matter how many 
years the equities have been outstanding. System institutions, 
likewise, will be able to redeem or revolve equities before the holding 
period ends if the institutions receive FCA approval.\21\ What System 
institutions will be able to do that commercial banks cannot do is 
redeem and revolve equities under the safe harbor provision without 
submitting a request for approval to the FCA, provided the applicable 
minimum holding period has been completed.
---------------------------------------------------------------------------

    \21\ We note, however, that FCA does not anticipate approving 
early redemptions and revolvements routinely.
---------------------------------------------------------------------------

    We do not understand the System's comment that an allocated equity 
with an ``express minimum term of 10 years is no more permanent than an 
allocated equity that is perpetual on its face.'' In the proposed rule, 
no term equities were included in CET1. On the contrary, only equities 
that were both perpetual ``on their face'' and held for at least 10 
years were includible in CET1, and term (limited-life) equities were 
includible only in tier 2. It is true that, when an institution is 
placed into receivership, equities held by the institution at that 
point in time are available to absorb losses of the institution, 
regardless of whether the equities are perpetual or term and regardless 
of whether they have been outstanding for 10 years or for 10 days--in a 
receivership, every equity is as ``permanent'' as every other equity. 
We also acknowledge that, like the water level in a bathtub, the 
capital level of an institution will stay constant if the amount of new 
capital added is equal to the amount of capital the institution 
redeems, revolves, or otherwise pays out in cash.\22\ But this is not 
the model of ``permanency'' embodied in the Basel III framework or the 
U.S. rule. On an ongoing basis, a reliance on a constant replenishment 
of new ``permanent'' capital to replace frequently redeemed or revolved 
``permanent'' capital is inappropriately risky in a weak economy.
---------------------------------------------------------------------------

    \22\ This bathtub analogy pertains to the dollar amount of a 
capital component. Of course, even with a constant dollar amount the 
capital ratio will change if the amount of risk-based assets changes 
or if the institution incurs losses.
---------------------------------------------------------------------------

    The FCA believes that longer revolvement cycles benefit System 
institutions by enabling them to better capitalize asset growth while 
also improving the quality and quantity of capital, thus strengthening 
an institution's financial position. A System institution, like most 
cooperatives, has limited opportunities to raise capital other than 
through the direct sale of stock to member-borrowers, the sale of 
preferred stock to outside investors, and the retention of net income 
as URE or allocated equities. System associations in particular have 
adopted the statutory minimum borrower stock requirement of the lesser 
of $1,000 or 2 percent of the loan, and only one association has issued 
preferred stock to outside investors. Thus, a System institution is 
highly dependent on its ability to generate sufficient earnings to 
repay its creditors, pay cash dividends to outside investors, pay cash 
patronage to its member-borrowers, and add to its capital base. 
Cooperative institutions can pay patronage to their member-borrowers in 
three forms: (1) Cash, which is an immediate return; (2) allocated 
equities that may be revolved at some future date; or (3) a combination 
of cash and allocated equities. Allocating equities allows the 
institution to use this capital for a period of time to benefit the 
whole cooperative membership, such as for capitalizing growth or 
improving the financial condition. Many boards choose to revolve 
allocated equities on an approved cycle, provided that the institution 
can continue to meet its capital needs. Thus, capital planning assumes 
greater importance in the capital adequacy assessment for the System 
institution's long-term survival.
    Academic and professional studies \23\ conducted of agricultural 
cooperatives' patronage practices by the U.S. Department of Agriculture 
(USDA) and others have shown that longer allocated equity revolvement 
cycles result in stronger balance sheets and a more resilient 
cooperative. Institutions that maintain shorter revolvement cycles will 
have greater need to generate proportionally more earnings consistently 
to maintain the same level of capitalization. The USDA reported, ``The 
largest cooperatives redeemed equity more recently but had a revolving 
length at 17 years, which was 4 years longer than the smallest 
cooperatives.'' Those cooperatives surveyed reported a range of 
revolvement periods from 7 to 20 years. Some cooperatives also reported 
retiring equities when a farmer was between 66 years and 72 years of 
age. Service cooperatives had the shortest revolvement periods at 6 
years; and livestock, poultry, and wool cooperatives had revolvement 
periods of 7 years.\24\ This study concluded that cooperatives with 
shorter revolvement cycles are generally more leveraged and less 
resilient.\25\
---------------------------------------------------------------------------

    \23\ See, e.g., Robert C. Rathbone and Roger A. Wissman, Equity 
Redemption and Member Equity Allocation Practices of Agricultural 
Cooperatives, Agricultural Cooperative Service, U.S. Department of 
Agriculture (USDA), ACS Research Rep. No. 124 (October 1993); 
Kimberly Zeuli and Robert Cropp, Cooperatives: Principles and 
Practices in the 21st Century, University of Wisconsin Center for 
Cooperatives (2004).
    \24\ See E. Eldon Eversull, Cooperative Equity Redemption, Rural 
Business--Cooperative Programs, USDA, Research Rep. No. 220 (June 
2010) at 6-7.
    \25\ See Rathbone and Wissman at 10-11.
---------------------------------------------------------------------------

    Longer revolvement periods give an institution extra flexibility 
when earnings are stressed, as well as help maintain stronger capital 
levels when membership or existing borrowers' operations grow. The FCA 
strongly believes that System institutions, as financial cooperatives 
with GSE status, must have redemption and revolvement periods that are 
sufficiently permanent to maintain strong capital positions in a weak 
economy.
    On the issue of whether System institutions face greater pressure 
to revolve allocated equities than the pressure on commercial banks to 
make dividend payments, we disagree with the System. It has long been 
our position that members can exert more pressure on their institutions 
because of their dual relationship as borrowers and

[[Page 49729]]

voting stockholders; by contrast, the voting stockholders of a 
commercial bank rarely, if ever, have significant business ties with 
the bank. In other words, unhappy stockholders of a commercial bank do 
not necessarily or directly lead to a drop in the bank's business. We 
are particularly concerned about the circumstance of a System 
institution experiencing low earnings and low growth because the 
agricultural economy is weak and their borrowers are struggling and 
most need cash. We acknowledge that the pressure on System institutions 
to pay cash patronage payments may be comparable to the pressure on 
commercial banks to pay cash dividends to their stockholders, but we 
note that the expectation criterion in our proposed and final rule does 
not apply to cash patronage paid out of URE just as it does not apply 
to cash dividends paid out of a commercial bank's retained earnings.
    Commenters asserted that they did not experience borrower flight 
during the years 2007-2013 even given some institutions' reductions in 
patronage payments. FCA staff has reviewed the patronage payment 
activities of a number of System associations in the years 2007-2013 
leading up to and after the 2008 global financial crisis. Though the 
financial crisis was deep in many sectors of the U.S. economy, the 
agricultural economy suffered little impact. Most System institutions 
had little or no exposure to the ``toxic'' assets that crippled many 
financial institutions because of the System's limited lending and 
investment authorities. In fact, many institutions continued to grow 
their loan volume. Some impacted institutions did reduce or suspend 
cash patronage payments and planned redemptions of allocated equities. 
They did so for a variety of reasons, including to address financial 
stress and to support increased loan demand. While the experiences of 
2007-2013 are useful for analysis, there were no widespread or 
significant changes in patronage payment practices in the System, 
particularly redemption or revolvement of allocated equities. Thus, we 
do not believe these experiences are a strong indicator of what System 
institutions would experience in a severely weakened agricultural 
economy.
    In the proposed rule, we also intended the minimum holding periods 
to provide a way for System institutions to comply with the Basel III 
and U.S. rule's expectation criterion. The expectation criterion, a new 
concept in Basel III and the U.S. rule, is part of the criteria for all 
3 capital components--CET1, AT1, and tier 2 capital. For CET1, the U.S. 
rule provides that a commercial bank must not ``create at issuance of 
the instrument, through any action or communication, an expectation 
that it will buy back, cancel, or redeem the instrument, and the 
instrument [must] not include any term or feature that might give rise 
to such an expectation.'' The criteria for AT1 and tier 2 are the same 
except that the expectation is with respect to exercising a call option 
on the instrument rather than buying back, redeeming, or canceling it. 
It is our understanding that this criterion is intended to curb actions 
like those of some commercial banks that continued to make large share 
buy-backs and dividend payments during the 2008 global crisis, in order 
not to send investors a signal of weakness.\26\
---------------------------------------------------------------------------

    \26\ The Basel III document does not specifically discuss the 
expectation criterion. However, in a discussion of the need for a 
capital conservation buffer there is an explanation that we believe 
applies equally to the expectation criterion: ``At the onset of the 
financial crisis, a number of banks continued to make large 
distributions in the form of dividends, share buy backs and generous 
compensation payments even though their individual financial 
condition and the outlook for the sector were deteriorating. Much of 
this activity was driven by a collective action problem, where 
reductions in distributions were perceived as sending a signal of 
weakness. However, these actions made individual banks and the 
sector as a whole less resilient.'' Basel III Framework (December 
2010, revised July 2011), paragraph 27.
---------------------------------------------------------------------------

    There are two noteworthy aspects of the expectation criterion. 
First, it does not pertain to the intentions--implicit or explicit--of 
the commercial bank to redeem the instrument, but rather to the 
expectations created by the bank's behavior--its ``actions or 
communications''--and the focus is on the impact of the bank's actions 
on others and its communications with others that could lead the bank 
to redeem stock when such redemption could potentially weaken the bank. 
The ``others'' in question could be stockholders, potential investors, 
the market, or banking analysts and traders.
    Second, all the other criteria for CET1 and the other components of 
capital are based on primarily objective legal rights, legal status, or 
accounting principles.\27\ They cover, for example, perpetual status 
(``no maturity date''), liquidation priorities and claims, order of 
impairment, unsecured status without features that legally or 
economically enhance the seniority of the instrument, redemption only 
at the discretion of the board and with the regulator's approval, and 
classification as equity under GAAP. By extension, these criteria 
mirror the legal rights that a commercial bank's common stockholders 
have or do not have. The stockholders have no legal right to require 
the bank to retire or redeem their stock because the stock never 
matures and because the commercial bank has complete discretion whether 
to redeem it (with regulatory approval). The expectation criterion does 
not pertain to legal rights regarding a stockholder's equities; the 
criterion pertains only to behavior or a pattern of behavior by the 
commercial bank that leads the stockholder or the market to expect 
redemption. The FCA has a similar concern regarding the expectations 
that System institutions may create through their behavior and 
communications.
---------------------------------------------------------------------------

    \27\ One criterion that is less objective is the requirement 
that the instrument does not include any term or feature that 
``creates an incentive to redeem.'' However, the Federal banking 
regulatory agencies have previously provided objective standards for 
commercial banks of the types of terms that create incentives to 
redeem, such as a dividend step-up term in excess of a specified 
percentage increase.
---------------------------------------------------------------------------

    The concept of a minimum holding period for System cooperative 
equities has been a part of FCA's existing core surplus capital 
regulations that have been in effect since 1997. Under that regulation, 
an association may include in core surplus allocated equities with an 
original revolvement period of at least 5 years, as long as such 
equities are not scheduled by the board or a board practice or expected 
by the members to be revolved in the next 3 years. The exclusion from 
core surplus in the last 3 years before revolvement focuses the board 
on longer-term planning to replace the soon-to-revolve allocated 
equities and better enables the board to revolve the allocated equities 
as expected, without reducing the institution's core surplus ratio. The 
core surplus regulation reflected the Agency's judgment that, first, 
member expectations of revolvement increase as the revolvement date 
approaches and, second, minimum revolvement periods make the equities 
more stable.\28\
---------------------------------------------------------------------------

    \28\ The FCA decided not to retain the existing regulation's 
plan-or-practice standard for allocated equities included in core 
surplus or the requirement to phase the equities out of CET1 in the 
3 years before the end of the holding period. Over the years since 
we adopted the core surplus rule, a number of institutions have 
misinterpreted their yearly revolvements of allocated equities as 
not constituting a plan or practice of revolvement. They have 
erroneously included allocated equities in core surplus until 
revolved, rather than phasing them out. We believe eliminating the 
possibility of misinterpretation is the better course in the final 
rule, and the longer holding period will ease any concerns about 
including the equities in the new regulatory capital ratios until 
the date of revolvement.
---------------------------------------------------------------------------

    The fundamental purpose of allocating equities is to build capital 
by retaining earnings as opposed to distributing them out as cash. As 
such, allocated equities need to be sufficiently permanent for the 
institution to include

[[Page 49730]]

them in capital. Equities revolved in only a 2- or 3-year period have 
minimal economic substance or value from a capital perspective, and 
revolvement periods shorter than 5 years may result in unmanageable 
borrower expectations and significantly reduced board flexibility to 
temporarily suspend or defer redemption of allocated equities. Longer 
revolvement periods ensure these equities are more permanent and stable 
forms of capital. Since 1997, System institutions have remained 
adequately capitalized with the existing core surplus rule's 5-year 
revolvement minimum. However, the agricultural economy and most System 
institutions have been financially healthy since that time.
    As we stated above, we believe a longer minimum holding period for 
the highest quality capital is more appropriate to ensure adequate 
capital when the agricultural economy is weak. We believe the holding 
period for CET1 capital should be longer than the similar 5-year no-
call minimum period for lower quality additional tier 1 and tier 2 
capital and the minimum term of 5 years for term stock includible in 
tier 2 capital. The 10-year minimum holding period for CET1 capital in 
our proposed rule would, in our view, have both tempered member 
expectations of redemption or revolvement and ensured the stability of 
capital through the long cycle of the agricultural economy. However, we 
have considered the System's comments for a shorter minimum holding 
period for CET1 equities, in light of the rule's other provisions that 
ensure the retention and conservation of high quality capital, such as 
the safe harbor provision and FCA prior approval requirements, and the 
overall higher capital requirements of the rule. We have concluded that 
a minimum 7-year redemption and revolvement period for CET1 equities 
will give System institutions added flexibility to manage their capital 
planning without significantly impacting their resilience. As we have 
noted, many of the System institutions that revolve allocated equities 
have already extended, or begun to extend, their revolvement periods to 
7 years or longer. The final rule's shorter minimum CET1 holding 
period, together with our change in the final rule to permit 
institutions to commit to the minimum holding periods through an annual 
board resolution, should enable institutions to comply with the new 
capital requirements with minimal administrative burden.
    We have decided not to adopt the System's recommendations of a 3 to 
5-year minimum holding period for additional tier 1 capital and 
elimination of the minimum holding period for tier 2 equities. To do so 
would be inconsistent with the minimum no-call periods of 5 years for 
additional tier 1 and tier 2 capital in Basel III and the U.S. rule. 
Furthermore, elimination of the tier 2 minimum holding period would 
imprudently permit redemptions and revolvements of equities, such as 
the member equities issued by some System banks in connection with loan 
participation programs and the preferred stock issued by some 
associations to their members, that have been outstanding for as short 
a period as 1 quarter. In the final rule, we have retained the 5-year 
minimum holding periods for both additional tier 1 capital and tier 2 
capital.
4. Minimum Redemption/Revolvement Cycle for Association Investments in 
Their Funding Banks
    The System Comment Letter objects to the proposed rule's imposition 
of minimum redemption and revolvement periods on associations' 
investments in their funding banks. The proposal provided that these 
investments, which consist of both purchased and allocated equities, 
have the same minimum redemption and revolvement periods as all other 
cooperative equities. The System makes the following assertions about 
the proposed rule's minimum holding period requirement for the 
association investments in their banks:

     It is challenging, bureaucratic, unworkable, anti-
cooperative, costly, and burdensome without any discernible benefit 
in capital quality or quantity, and it is unnecessary to achieving 
alignment of System capital regulations with Basel III.
     It is inconsistent with statutory requirements, creates 
a ``first in first out'' redemption principle for the investment, 
impedes a bank's ability to help a struggling association by 
redeeming or revolving equities, and could create an adverse tax 
consequence that would necessarily dissipate combined bank-
association capital.
     An association's investment in its funding bank ``is 
legally and functionally a permanent capital contribution to the 
bank and is understood as such by associations,'' notwithstanding 
periodic capital equalizations by the System bank (which result in 
member associations' investments being adjusted, as necessary, to 
the same specified percentage of its outstanding borrowings from the 
bank).
     An association's investment in its funding bank 
``results from the statutorily directed financial relationship.'' 
System associations must borrow exclusively from their bank unless 
they have approval from the bank to borrow from another financial 
institution. By contrast, an association's borrowers are free to 
borrow outside of the System.
     The investment requirements imposed on retail borrowers 
by associations are unlike those imposed by a System bank on its 
affiliated associations, since associations do not have unilateral 
authority to increase the requirements. System banks have bylaws 
that authorize them to call, preserve, and build capital from their 
associations. Also, a bank's general financing agreement with its 
affiliated association enables it to increase spreads on outstanding 
direct loans immediately without association approval.

    The capital rule is consistent with statutory requirements. The 
rule applies the same minimum redemption and revolvement cycles to all 
cooperative equities except for the statutorily required investment of 
at least $1,000 or 2 percent of the loan amount, whichever is less. 
Stock or equities that meet this statutory requirement are exempt from 
a minimum redemption or revolvement period. We agree with the System 
that System banks and associations have a relationship defined by the 
Act that is long term and permanent except for very rare re-
affiliations with another System bank or a termination of System status 
by one or both institutions. However, the statutory minimum required 
investment is the same for an association to obtain a loan from its 
affiliated bank as it is for a retail borrower to obtain a loan from an 
association or from CoBank, ACB, and the exemption from a minimum 
redemption or revolvement period in our rule applies only to the 
statutory minimum required investment.
    We are not persuaded by the System's position that System banks 
have authority to call, preserve, and build capital from their 
associations that their associations lack. Associations have the same 
statutory and regulatory authority as banks to call, preserve, and 
build capital; it is the associations that have granted additional 
capital-building powers to their affiliated banks through bylaw 
provisions approved by the associations. We appreciate that 
associations are probably more willing to approve such bylaws because 
of their financial interdependence with their bank, and association 
retail members are probably less willing to commit themselves to 
purchase additional stock in the association. However, the capital-
building provisions in a bank's bylaws do not eliminate the need for 
capital to have a minimum redemption or revolvement period.
    The System Comment Letter states that the minimum holding period 
creates a ``first in first out'' redemption principle for the 
investment and impedes a bank's ability to help a struggling 
association by redeeming or revolving equities. As to the first point,

[[Page 49731]]

we are not certain what is meant by ``first in first out'' in the 
context of a redemption principle, unless it is merely another way to 
say that associations may have to pay taxes on allocated equities 
revolved by their banks. The minimum required holding period clearly 
does not impose a strict requirement that the oldest equities must be 
redeemed or revolved first. As to the second point, we note that a 
System bank may redeem or revolve equities prior to the minimum holding 
period if the bank receives prior approval to do so from the FCA. We 
believe that the FCA would have a sufficient basis to approve such a 
request if the bank established that its assistance was necessary or 
appropriate.
    The FCA disagrees with the System's assertion that an association's 
investment in its affiliated bank ``is legally and functionally a 
permanent capital contribution to the bank and is understood as such by 
associations.'' Most System associations do clearly have very long 
relationships with their affiliated banks, but not all of the equities 
invested by an association in its affiliated bank are outstanding for 
lengthy periods. In fact, it appears to us that associations well 
understand that some of their investments in their affiliated banks are 
only short-term investments. System banks have discretion under section 
4.3A(c)(1)(I) of the Act to redeem and revolve equities anytime, as 
long as the bank continues to meet the capital adequacy standards 
established under section 4.3(a) of the Act. By contrast, the CET1 
equities issued by commercial banks are more truly permanent, because 
commercial banks are not permitted to retire such equities without the 
approval of stockholders owning two thirds of the shares (a statutory 
requirement) or without the prior approval of their regulator (a 
requirement of the U.S. rule). Similarly, tier 2 equities issued by 
commercial banks either are perpetual and require prior approval by 
their regulator to retire, or are limited-life preferred stock with a 
minimum term of 5 years (with no prior approval to retire on the 
maturity date). In our view, third-party investors, relying on an 
understanding that our capital rules are comparable to Basel III and 
the U.S. rule, would expect that System institutions' common 
cooperative equity retirements are subject to substantially the same 
prior approval requirements as commercial banks' equity 
retirements.\29\ Our proposed rule was somewhat more lenient than the 
restrictions on commercial banks' equity redemptions in that we did not 
require banks or associations to obtain stockholder approval before 
each redemption or revolvement of cooperative equities. We provided 
additional leniency in a safe harbor provision permitting a certain 
level of redemptions and revolvements without FCA approval, as long as 
the equities had been outstanding for at least the minimum holding 
period. Commercial banks do not have a similar safe harbor for equity 
retirements, although they do have a safe harbor for cash dividends. We 
believed, and continue to believe, that our more lenient safe harbor 
for equities is appropriately comparable to Basel III and the U.S. rule 
because the safe harbor's broader application to total cash dividend 
payments, cash patronage payments, and equity redemptions or 
revolvements is tempered by an overall limit that is more restrictive 
than commercial banks' safe harbor to pay cash dividends.
---------------------------------------------------------------------------

    \29\ It is important to note that, if a System bank includes its 
affiliated associations' investments in the bank's CET1 capital, 
those investments will be the common cooperative equities of most 
interest to a third-party investor in the bank and will likely be a 
factor, even a significant factor, in such investor's decision 
whether to invest in a System bank. After all, the bank's URE and 
CET1 common cooperative equities are the first line of protection 
for the outstanding third-party equity investments in System banks. 
If there were no minimum redemption or revolvement period for these 
cooperative equities, a third-party investor might misunderstand the 
level of protection these cooperative equities actually provide.
---------------------------------------------------------------------------

    For many associations, the greater part of their investments in 
their affiliated banks is long term in practice. These investments 
include equities the banks allocated more than 10 years ago, and the 
banks have stated they do not intend to revolve these allocated 
equities unless their associations make corresponding allocated equity 
revolvements to their retail borrowers. Some of these allocated 
equities are quite stable, due in part to the fact that they are not 
taxable to associations until they are revolved (System banks' earnings 
derived from association business are not taxed).\30\ As soon as the 
final rule becomes effective, the banks will be able to include 
otherwise-eligible allocated equities in CET1 that have already been 
outstanding at least 7 years (or tier 2 if the allocated equities have 
been outstanding at least 5 years), and all other allocated equities 
will be includible in CET1 or tier 2 if the banks adopt a bylaw or 
annual resolution not to redeem or revolve such equities less than the 
applicable 7 years or 5 years after issuance or allocation, as long as 
the equities are otherwise eligible.
---------------------------------------------------------------------------

    \30\ An association's earnings are taxable only when derived 
from its loans and other business conducted through the parent 
agricultural credit association or its production credit association 
subsidiary.
---------------------------------------------------------------------------

    However, many associations have investments in their banks that do 
not have the same stability and ``permanence'' of the long-held 
allocated equities. Some of these investments may be the stock 
purchased by associations to capitalize their direct loans from their 
banks; other stock is purchased by associations in order to capitalize 
asset loan participation program pools. Because the capital supporting 
these loan pools is usually equalized frequently by the bank, banks 
typically equalize by issuing or redeeming purchased stock because 
there are no tax consequences when the purchased stock is redeemed. The 
FCA observes that the practice of tying the investment amount to the 
loan amount and making frequent equalizations strongly resembles the 
``compensating balance'' method of capitalization that both banks and 
associations employed in past decades--i.e., the borrower capitalized 
its loan rather than capitalizing the institution. During the 1980s, 
many System associations were in such weak financial condition they 
could not redeem member stock; the also-struggling member-borrowers 
strongly objected to those associations' not returning their 
investments when they paid down or paid off their loans, and Congress 
held a hearing to obtain the testimony of the borrowers. In the 
Agricultural Credit Act of 1987 (1987 Act), Congress established a 
statutory capitalization framework that favored capitalization of the 
institution, not the loan, and disfavored compensating balances, though 
it did not prohibit them entirely. The FCA believes, as Congress did, 
that capitalization of the institution rather than the loan provides a 
stronger and more stable capital base. At the retail level, all System 
institutions now require borrowers to make only the statutory minimum 
stock purchase, and in the nearly two decades since the enactment of 
the 1987 Act System institutions have taken advantage of a healthy 
agricultural sector to build strong capital positions of high-quality 
capital that remain in the institutions long term. In addition, one of 
the four System banks has made the decision not to equalize association 
investments any longer; instead, the bank pays interest to its 
associations who hold investments in the bank in excess of the required 
amount.
    We acknowledge that stock equalization at the bank level can be a 
tool for apportioning the bank's funding and operating costs among its 
affiliated associations. The FCA supports an equitable apportionment 
that is based

[[Page 49732]]

on each association's business with the bank and investment in the 
bank. However, short-term redemptions and revolvements of equities are 
not the sole way to ensure that costs are borne equitably by the 
associations. There are numerous other ways of apportioning the bank's 
operating costs, such as direct assessments or interest rate 
adjustments or paying interest to associations whose investments are in 
excess of bank's required amounts, that take into account the amount of 
loaned funds or other business with associations and the riskiness of 
that business. Should a bank prefer to apportion its funding and 
operating costs in part by equalizing association investments and at 
the same time hold most of its purchased stock for a term long enough 
to qualify for CET1 or tier 2 inclusion, it may consider issuing a 
class of common stock used solely for equalization purposes. The amount 
a bank might issue could be, for example, an amount equal to the 
average amount of equities the bank redeems in a given period for 
purposes of equalization. Such stock, which could be exchanged for a 
portion of existing outstanding common stock, could be issued and 
retired at the discretion of the bank and would have no minimum 
revolvement period, but it would be excluded from CET1 and tier 2 
capital. This would by no means eliminate the minimum revolvement 
period for an association's investment in its affiliated bank, but 
having a separate class would provide more administrative clarity for 
the bank, the FCA, and third-party investors.
5. Required Capitalization Bylaws Amendments Establishing Minimum 
Holding Periods
    The System Comment Letter objected to the proposed rule's provision 
that a System institution may include cooperative equities in CET1 and 
tier 2 capital if the institution has adopted capitalization bylaws 
establishing minimum required redemption and revolvement periods. The 
proposed minimum redemption and revolvement periods, or minimum holding 
periods, were 10 years for inclusion in CET1 capital and 5 years for 
inclusion in tier 2 capital. Because section 4.3A(b) of the Act 
requires System institutions to obtain the approval of their members 
for changes to the bylaws, institutions would have had to exclude 
cooperative equities from CET1 and tier 2 capital if they had chosen 
not to seek member approval of the bylaw amendment or if the members 
had disapproved it.
    The System made the following assertions about the proposed 
capitalization bylaw requirements:

     They are legally tantamount to a re-issuance of the 
cooperative equities.
     They are fundamentally unworkable, unnecessarily 
costly, and legally problematic, and they result in a meaningless 
vote that puts the System institution and its members in a Catch-22 
situation.
     The bylaw changes would undermine the institution's 
ability to function consistent with cooperative principles as 
expected by the Act. Institutions with modest amounts of cooperative 
equities may choose to exclude their cooperative equities from 
regulatory capital than bear the cost, operational burdens, member 
confusion, and uncertainty of a member vote. If a significant number 
of institutions make this choice, there could be resulting harm to 
the overall regulatory capital position of the System.
     Holders of allocated equities that are not voting 
members may sue the FCA for depriving them of the right to have the 
institution's board forgo exercising its discretion to revolve the 
equities during the minimum holding periods.
     There is no basis for a minimum holding period in Basel 
III.
     A more cost-effective way to ensure there is a legal 
distinction among equities included in the various components of 
regulatory capital is to enhance the FCA's capital planning 
regulation to require boards to adopt binding resolutions regarding 
the minimum holding periods.

    The proposed bylaw requirement to establish a minimum holding 
period was intended to provide a way for System institutions to comply 
with the Basel III and U.S. rule's ``expectation'' criterion. We 
discuss the expectation criterion under the ``Required Minimum 
Redemption/Revolvement Periods'' above.
    The FCA's proposed minimum holding periods were also intended to 
ensure that System institutions equities are substantially comparable 
to the more truly permanent equities of a commercial bank that can be 
redeemed only with the prior approval of stockholders and the bank's 
regulator. Were we to apply identical requirements, System institutions 
would not be able to redeem or revolve any purchased or allocated 
equities without FCA approval and stockholder approval. As discussed 
under the safe harbor section below, the proposed rule would have 
permitted institutions to make limited redemptions and revolvements 
without regulator and stockholder approval. We believe that a minimum 
holding period lowers expectations of redemption or revolvement, and 
the bylaw requirement ensures both institution compliance and member 
buy-in regarding the minimum periods. A bylaw requirement would have 
explicitly established that a System institution's board had firmly 
committed, with its members' support, to limit its discretion under 
section 4.3A of the Act to redeem or revolve equities, in exchange for 
being able to include the equities in tier 1 and tier 2 capital, and 
that the institution's members understood and supported this limit on 
the board's discretion. However, we have considered the System's 
comments on the bylaw approval process and are persuaded that requiring 
an institution's board to adopt a redemption and revolvement resolution 
that it must re-affirm in its capital plan each year would be 
sufficient to ensure compliance with the rule's minimum holding 
periods. As described below in the section-by-section discussion, we 
have revised the capital planning regulation in Sec.  615.5200 to 
require the institution's board to establish minimum redemption and 
revolvement periods for specifically identified equities included in 
tier 1 and tier 2 capital. Any change to the minimum periods will 
require FCA approval. The board will also be required to re-affirm 
annually its intention to comply with the capital rule's minimum 
holding periods. We note that this annual re-affirmation is not an 
annual opportunity for the board to change its mind about the 
redemption or revolvement periods of specified equities. In addition, 
for institutions that prefer a capitalization bylaw to an annual board 
resolution, we have retained the proposed capitalization bylaw 
provision as another method of compliance with the minimum holding 
periods.
6. Higher Tier 1 Leverage Ratio and Minimum URE and URE Equivalents 
Requirement
    The System Comment Letter objected to the proposed 5 percent 
minimum tier 1 leverage ratio and also on the requirement that at least 
1.5 percent of the tier 1 capital must consist of URE and URE 
equivalents. The System's objections are as follows:

     A 5-percent tier 1 leverage ratio requirement is 
excessive, is unsupported, is inconsistent with the 4 percent tier 1 
leverage ratio of Basel III and the U.S rule, would create an un-
level playing field that gives an advantage to commercial banks in 
the capitalization of loans to farmers, and may raise questions and 
suspicion that the System is fundamentally riskier compared to other 
lending institutions.
     Such an inference does irreparable harm to the System 
and its mission achievement, given the lack of any quantifiable 
support for the higher minimum. The FCA has not provided 
``reasonable facts or data analysis'' to support a higher minimum 
leverage requirement that could reduce institution lending capacity 
by over 20 percent during stressful periods. The FCA's justification 
is insufficient and unsupported by loss experience, making this 
proposed requirement arbitrary and capricious.

[[Page 49733]]

     The Basel III framework's minimum leverage ratio 
requirement, a measurement that was not required by Basel I or Basel 
II, was imposed in response to the ``drying up'' of liquidity during 
the financial crisis, which revealed inter-connections and inter-
dependences between financial institutions and resulted in pressure 
on commercial banks to retire lower quality tier 1 capital 
instruments (hybrid instruments) when they were most needed to 
absorb losses. Stress-testing and economic modeling by System 
institutions show the System has enough loss-absorbing capital to 
withstand a severe adverse economic event while continuing to 
provide a steady flow of credit to agriculture.
     The interconnectedness of System institutions is an 
inherent part of the structure of the System and, despite its 
interconnectedness and its status as a monoline lender, the System 
remained ``essentially unstressed'' during the financial crisis.
     The proposed minimum leverage ratio is inappropriate 
for wholesale System banks and appears to create economic incentives 
for shifting ownership of loans from associations to System banks. 
The agency ``appears not to have considered the two-tiered 
capitalization that exists within the System'' that results in the 
System as a whole effectively holding minimum risk-based capital for 
association retail loans totaling 120 percent of the amount required 
for commercial banks. The risk-based capital requirements are more 
than adequate to protect against not only credit risk but also 
liquidity risk, operational risk, and other risks.
     There is no empirical evidence that the System's risks 
are more significant than the systemic risks that caused the 
financial crisis. FCA should support its higher minimum leverage 
ratio by conducting a study that demonstrates and quantifies that 
the proposed significant deviation from Basel III is justified by 
facts. After such a study, if the FCA remains focused on imposing a 
higher leverage ratio, the agency should consider a 4 percent 
minimum leverage ratio with an additional 1 percent leverage ratio 
buffer composed of tier 1 (not CET1) capital and pro-rated across 
the payout categories. Overall, a capital conservation buffer 
approach would support the objective of the proposed higher leverage 
ratio without unduly penalizing those System banks primarily engaged 
in wholesale lending to associations.
     The proposed 1.5 percent minimum URE requirement 
``calls into question the cooperative structure of the System'' and 
``declares that URE is higher quality capital than CET1.'' This 
``'super' or 'superior' CET1 subclass is an unmistakable message to 
the marketplace that the System's CET1 does not match up with CET1 
of commercial banks'' and reduces comparability and transparency.
     Implementation of the URE requirement results in a 
minimum 3 percent of URE (1.5 percent by the bank and 1.5 percent by 
the association) required to be held against each dollar of loans 
made by associations to member-borrowers. This violates the 
cooperative principle that members bear the risk and reward of their 
institution.
     The 1.5 percent minimum URE requirement, similar to a 
required component of the core surplus ratio in the FCA's existing 
regulations, should not be in the new capital framework. The FCA's 
reason for the existing URE requirement in core surplus was that 
higher URE levels cushioned member stock from impairment, thus 
minimizing the prospect of members seeking protection of their 
equities from Congress. Congress has already made it clear that 
members are at risk and will suffer the losses of the cooperative. 
Congress's action with respect to Fannie Mae and Freddie Mac 
emphasizes its resolve to allow significant shareholder losses 
regardless of personal impact.

    The FCA disagrees with many of the System's comments and 
assertions. We do not believe a 5 percent minimum standard would create 
an ``unlevel'' playing field for the System that would give any 
appreciable advantage to commercial banks or raise suspicions that the 
System is fundamentally riskier than commercial banks. At the retail 
association level, there are so many differences between associations 
and commercial banks with respect to stable sources of funding, lending 
authorities, lending territories, tax status, and governance that we 
believe a higher minimum leverage ratio would not tilt the playing 
field. A higher leverage ratio requirement enhances the System's 
ability to achieve its mission by ensuring that System institutions 
have sufficient capital to achieve its mission, during good times as 
well as during periods of financial stress. More specifically, a higher 
leverage requirement will ensure that System institutions have 
sufficient amounts of capital at the height of the credit cycle so that 
they can continue to lend during a downturn, and thus, fulfill their 
mission. During a downturn, System borrowers need access to credit to 
ensure the continuation of their operations, and System institutions 
must ensure that they can continue to be a reliable source of credit to 
these borrowers. Moreover, we do not believe that a higher minimum 
leverage ratio for associations will raise suspicions in the capital 
markets. To our knowledge, individual association capital is not the 
focus of the capital markets, as we are aware of only one association 
that has raised equity capital from outside the System.\31\
---------------------------------------------------------------------------

    \31\ In fact, market investors in System banks may prefer high 
capital ratios at associations on the ground that the associations' 
higher capital levels strengthen the banks and decrease the chances 
that a bank would need to provide financial assistance to an 
association.
---------------------------------------------------------------------------

    At the System bank level, the banks are able to issue Systemwide 
debt as a single entity because they are jointly and severally liable 
on the debt. The System's combined assets were approximately $300 
billion as of December 31, 2015. By contrast, the vast majority of 
commercial banks subject to the 4 percent tier 1 leverage ratio 
requirement are considerably smaller in size than the combined size of 
the System.\32\ Commercial banks subject to the ``advanced approaches'' 
Basel framework (i.e., banks with more than $250 billion in total 
consolidated assets) are also subject to the supplementary leverage 
ratio (SLR),\33\ which has a minimum requirement of 3 percent. The SLR, 
which takes into account both on- and off-balance sheet exposures, 
could result in a higher requirement than the 4-percent tier 1 leverage 
ratio requirement, which includes only on-balance sheet exposures. 
Commercial banks with more than $700 billion in total consolidated 
assets are subject to a 2-percent leverage buffer in addition to the 3-
percent SLR (totaling 5 percent).\34\ System banks, by contrast, are 
not constrained by a supplementary leverage ratio, yet they are able to 
obtain funding at low rates comparable to the rates obtained by the 
largest U.S. banks. We would anticipate that the capital markets and 
outside investors would welcome a higher leverage ratio requirement 
that ensures higher capital levels to absorb losses and protect outside 
investors, rather than ``raise suspicion that the System is 
fundamentally riskier compared to other lending institutions.''
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    \32\ The System reported combined assets of $303 billion 
including the restricted investment in the Farm Credit Insurance 
Fund, at December 31, 2015. See 2015 Annual Information Statement of 
the Farm Credit System issued March 7, 2016.
    \33\ 78 FR 62018 (October 11, 2013).
    \34\ 79 FR 57725 (September 26, 2014).
---------------------------------------------------------------------------

    The FCA disagrees that the Basel III framework imposed a minimum 
leverage ratio requirement in response to the ``drying up'' of 
commercial bank liquidity during the financial crisis. The 2008 
financial crisis did begin with a severe liquidity crisis, but 
liquidity concerns were addressed primarily by Basel III's liquidity 
coverage ratio and the net stable funding ratio. The FCA updated the 
liquidity regulation in 2013 to incorporate the liquidity coverage 
principles of Basel III, as appropriate to the System.\35\ We also plan 
to study Basel III's liquidity coverage ratio and the net stable 
funding ratio to determine what, if any, application they should have 
to the System.\36\ The leverage ratio requirements in the Basel III 
capital framework were adopted to avoid future repetition of periods of 
excessive growth, resulting in excessive leveraging

[[Page 49734]]

of capital, that are followed by a sharp downturn in the economy that 
causes very large losses.
---------------------------------------------------------------------------

    \35\ See the amendments to Sec.  615.5134 in 78 FR 23438 (April 
18, 2013).
    \36\ See FCA's Regulatory Projects Plan at http://www.fca.gov/Download/RegProjPlanSpring2016.pdf.
---------------------------------------------------------------------------

    We agree with the System's statement that the System remained 
``essentially unstressed'' during the financial crisis despite its 
status as a monoline lender and the interconnectedness of System 
institutions. In our view, while the cyclical nature of the 
agricultural economy can increase agricultural lending risk overall, 
the agricultural economy happened to be at a very strong point in the 
cycle during the financial crisis. The System's low level of 
agriculture loan losses during the financial crisis, together with 
minimal exposure to troubled residential mortgages due to legal 
restrictions on the loans and investments System institutions can make, 
enabled the System to weather the financial crisis relatively 
unstressed.
    Contrary to another System comment, the FCA did carefully consider 
the two-tiered structure of the System--i.e., the banks' wholesale 
funding of associations' retail loans--when proposing the tier 1 and 
tier 2 risk-based capital requirements. In fact, since the agency first 
proposed and adopted risk-based capital regulations in 1988, System 
institutions have consistently objected to the 20-percent risk weight 
applied to a bank's direct loan to an affiliated association and have 
asserted that the capital held by an association against its retail 
loans results in a zero risk of loss to the bank on the direct loan. 
Our position has been, and continues to be, that the direct loan 
represents a relatively small but separate and distinct credit risk to 
the bank, and the 20-percent risk-weight is appropriate, as well as 
consistent with the risk weightings for GSE securities and debt. We do 
not agree that the small amount of risk-based capital held by the 
System bank against credit risk on its direct loans, as well as the 
relatively small amounts of capital held against credit risks on most 
of its other exposures, is an adequate substitute for a tier 1 leverage 
ratio. As explained below, we believe that both System banks and 
associations need high quality minimum leverage ratios.
    The FCA disagrees with the comment that a leverage ratio is 
inappropriate for wholesale banks. A leverage ratio can be more 
challenging for a wholesale System bank, since the majority of its 
assets are risk-weighted at 20 percent, while those of associations are 
risk weighted at 100 percent. However, as discussed elsewhere in this 
preamble, the two-tiered capitalization requirement recognizes the 
separate risks in the System structure and risks that are present to 
each party. The capital an association holds against loans to its 
borrowers offsets the general risk from those loan exposures, while the 
bank must hold capital to offset the general risk from its loan 
exposure to its affiliated associations. If banks did not hold capital 
against these exposures, the risk in loans to association borrowers 
would be present to both the bank and association but only capitalized 
by the association. In addition, the banks and associations have levels 
of operational risk, such as legal risk and management risk, that do 
not correlate with the level of credit risk. The Basel III framework 
and the U.S. rule do not exempt wholesale banks from their leverage 
ratio requirements, and we are not convinced that we should do so. As 
for the System's comment that our leverage requirements appear to 
create an economic incentive for shifting ownership of retail loans to 
the System banks, banks and associations are already doing this. If a 
bank agrees with its associations to buy their retail loans, that is a 
business decision for the institutions that is probably made for 
business reasons in addition to regulatory capital compliance.
    We also disagree with the assertion that the minimum URE 
requirement is anti-cooperative. The requirement ensures at least a 
minimum level of URE and URE equivalents, and an institution may choose 
to meet this requirement with URE equivalents plus current year 
retained earnings. URE equivalents are nonqualified allocated equities 
that are not revolved and generally not subject to offset against a 
loan in default (without prior FCA approval). In any case, the 
characterization of URE as anti-cooperative is inapt for most 
cooperatively organized financial institutions, such as mutual savings 
associations. Such institutions have regulatory capital that consists 
entirely of unallocated retained earnings. We note that the National 
Credit Union Administration (NCUA) issued a final rule in 2010 for 
corporate credit unions (which are also cooperative institutions),\37\ 
which requires that their leverage ratio must consist of at least 2 
percent of retained earnings to be adequately capitalized.\38\ The 
NCUA's logic and belief is that a corporate credit union's capital must 
consist of retained earnings, which is the only form of corporate 
capital, that when depleted, does not result in losses that flow 
downstream to natural person credit unions. Without some retained 
earnings, the corporate credit unions would be a continued source of 
instability to the credit union system as whole. FCA believes this also 
applies to System institutions, as discussed throughout this preamble.
---------------------------------------------------------------------------

    \37\ 75 FR 64789 (October 20, 2010).
    \38\ To our knowledge, all of the retained earnings of credit 
unions are unallocated. The ``corporate credit unions'' discussed 
above are cooperatives owned by natural person credit unions and 
provide liquidity and other services to their member owners.
---------------------------------------------------------------------------

    We agree that Congress, in the provisions of the 1987 Act, sent a 
message that member stock was at risk and that members would be subject 
to their institutions' losses.\39\ We also observe that Congress 
protected member stock outstanding at the time from loss. We believe 
this ``helping hand'' in a time of need illustrates Congress's 
confirmation of the importance to the entire U.S. economy of a strong 
agricultural sector and also of Congress's recognition that strength in 
the agricultural sector is inextricably linked to the personal 
financial stability of its farmers and ranchers. By contrast, in the 
case of the 2008 conservatorships of Fannie Mae and Freddie Mac, the 
actions of Congress and the Federal government ensured the continuing 
function of the secondary mortgage market for the benefit of U.S. 
homeowners but did not provide similar protection for the personal 
financial stability of the stockholders of the housing GSEs.
---------------------------------------------------------------------------

    \39\ We emphasize that, before the 1987 Act, member stock was at 
risk, but most institutions treated it like a compensating balance, 
and many associations failed to advise their retail borrowers that 
the stock was at risk. The 1987 Act added a ``guarantee'' that 
existing outstanding member stock that was issued prior to October 
1988 would be redeemed at par or face value upon repayment of the 
member's loan.
---------------------------------------------------------------------------

    The 1987 Act also sent a strong message to the System not to expect 
Congress to provide financial assistance in the event of significant 
losses in the future.\40\ We believe this reinforced the FCA's mandate 
under section 4.3(a) of the Act to ``cause System institutions to 
achieve and maintain adequate capital'' that will have the added 
benefit of protecting the institutions' members from impairment of 
their equities. In our view, a healthy portion of URE and nonrevolving 
URE equivalents reduces the possibility that those equities will be 
impaired during times of stress in the agricultural sector. URE 
protects against the risk that exists between System banks and 
associations: It protects association members against association 
losses, associations against bank losses, and the System against 
financial

[[Page 49735]]

contagion. A minimum level of URE is needed to cushion third-party and 
common cooperative equities and would greatly limit the potential 
losses to holders of these instruments. For example, if a funding bank 
had a loss and there was no URE at the bank to absorb the loss, the 
association's stock investment in the bank would be the first line of 
capital to absorb the loss. The association could be required to 
recapitalize the bank and the bank could also increase its spread it 
charges on the direct note to generate additional earnings to replenish 
its capital. If the funding bank did not have URE as the first line of 
defense in its capital to protect the association's investment, losses 
at the bank would negatively impact the association's earnings, which 
could further impact association patronage distributions to member-
borrowers. This same argument is applicable to a member-borrower's 
investment in an association. Whether or not the capital markets and 
prospective investors conclude that URE and URE equivalents are a 
``superior subclass'' of CET1 is, in our view, probably not going to 
confuse investors or make a material difference to them. What is 
important and clear to investors is that all of the CET1 elements will 
protect all of the third-party equities and sub debt issued by a System 
bank or association.
---------------------------------------------------------------------------

    \40\ Part of that message was embodied in the creation of the 
Farm Credit System Insurance Corporation (FCSIC) and the Insurance 
Fund, but the Insurance Fund primarily protects System-wide 
debtholders.
---------------------------------------------------------------------------

    The System also asserted that if FCA is determined to require a 
minimum URE standard, then it should be based on risk-adjusted assets, 
which is consistent with FCA's current regulatory requirements. The URE 
requirement would not undermine the System's ability to manage its 
capital sources as this requirement is only applicable to the tier 1 
leverage ratio. We also believe that the 1.5-percent URE requirement 
should be based on total assets rather than risk-adjusted assets, as 
System commenters recommended. We believe this requirement is simple, 
transparent, easy to understand, and reflects the true underlying risk 
inherent in each System institution. A URE minimum based on risk-
adjusted assets benefits institutions with favorable risk weights, and 
this may not be sufficient to protect System borrowers against a 
systemic event. We note that over half of the System's capital consists 
of URE and URE equivalents, with all System institutions easily meeting 
the required 1.5 percent.
    As to the System's assertion that too much URE undermines the user-
control and user-ownership principles, we disagree. Section 1.1(b) of 
the Act encourages farmer and rancher-borrowers to participate in the 
management, control, and ownership of a System institution, and the URE 
requirement does not undermine this section of the Act. All farmer and 
rancher-borrowers are allowed one vote, regardless of the amount of 
their investment in their System association. Moreover, the URE 
requirement can be fully met with nonqualified allocated surplus and 
stock, which supports the cooperative principle of user-ownership.
    The System has asserted that the FCA has not provided reasonable 
facts, data analysis of loss experience, or empirical evidence to 
justify a 5-percent minimum leverage ratio. Much of the data the Basel 
Committee studied in its formulation of the Basel III framework was 
from the recent financial crisis. For similar data on the System, the 
FCA would have to go back to the 1980s, when the weakened agricultural 
economy in combination with the System's interest-rate model at the 
time resulted in borrower flight, significant losses of System capital, 
and eventually a Federal bailout. The scarcity and age of most of the 
relevant data make it of only limited use to us in formulating a 
leverage ratio, and both the System and financial world have changed 
radically since the 1980s. Another approach would be to wait until 
after the next crisis in the System, study the data, and formulate a 
new leverage ratio based on lessons learned. However, leaving the tier 
1 leverage ratio out of our tier 1/tier 2 capital framework would make 
our capital rule far less comparable to Basel III and the U.S. rule 
than would a higher minimum leverage ratio.
    Because of the scarcity of useful data at this time, the FCA has 
decided not to do a study to ``demonstrate and quantify'' that a 5-
percent minimum leverage ratio is appropriate. However, the FCA does 
find considerable merit in the System's suggestion to replace the 5 
percent minimum leverage ratio with a 4-percent minimum leverage ratio 
and a 1 percent leverage buffer, and we have revised the final rule to 
incorporate this suggestion. A 4-percent minimum tier 1 leverage ratio 
with a 1-percent tier 1 buffer will give additional flexibility to 
System institutions to make capital distributions and discretionary 
bonus payments (albeit on a more restricted basis), will appropriately 
address the System's concerns about a higher minimum leverage ratio 
giving an unwarranted negative impression about System operations to 
the capital markets, and will assure the FCA that System institutions 
will continue to hold healthy amounts of capital against all 
institution risks.
7. Safe Harbor Requirement
    The System Comment Letter states the System ``respect[s] in 
principle'' the need for restrictions on capital distributions but 
objects to the proposed safe harbor as follows:

     Limiting capital distributions to the past year's net 
retained income and not allowing for any reductions in CET1 from the 
prior year-end makes management of regulatory capital ``exceedingly 
challenging and inflexible'' and provides no reasonable room to do 
so without seeking FCA prior approval.
     The safe harbor is far more restrictive than foreign 
cooperative bank regulators' safe harbor, allowing a reduction in 
CET1 of up to 2 percent without prior approval, and U.S. law that 
allows capital distributions equal to current year's earnings plus 
the retained net income for the prior 2 years.
     The 30-day approval process is burdensome and 
unworkable and should be streamlined for institutions with high FIRS 
ratings, with FCA granting approvals in as short a time as one day.

    In practice, System institutions rarely pay dividends on preferred 
stock, make cash patronage payments, redeem or revolve equities that 
exceed their prior 12 months' net earnings. Associations generally pay 
out less than 50 percent of earnings, and only 5 System associations 
had payout ratios that were over 60 percent of their earnings in 2014. 
The 30-day approval is in effect a notification to the FCA of the 
intended payment, and an institution may make the payment after 30 days 
if the FCA has not disapproved it or not acted on the request. We 
expect boards to give significant thought to capital distribution 
decisions and how they impact overall capitalization of their 
institution, especially regarding a cash payment that exceeds net 
income over the past 12 months. The cash payments are generally made at 
very predictable intervals during the year (unlike, for example, 
funding requests), and we have not identified any situations where 
institutions are likely to need to make unplanned, significant capital 
distributions. Therefore, the FCA does not believe the safe harbor rule 
will be exceedingly challenging and unworkable for System institutions.
    Our rule's safe harbor is different from the ``advance permission'' 
allowed by the European Bank Authority (EBA) as it is described in the 
System Comment Letter. The EBA has issued regulatory technical 
standards (RTSs) and guidelines that are binding on its member states, 
but it is up to the member states to promulgate regulations for their 
own countries. The RTS cited in the System Comment Letter regarding 
redemptions, reductions, and repurchases by European cooperative

[[Page 49736]]

financial institutions permits member states to give advance permission 
for redemption of predetermined amounts for a period of up to 1 year; 
however, the predetermined amount ``shall not exceed 2% of [CET1] 
capital.'' \41\ We have several observations. First, it is unclear to 
us whether this advance permission has the same effect as our safe 
harbor, because the EBA has responded in its online Q&A Rulebook that 
an institution must deduct from capital the predetermined amount in 
question as soon as its regulator grants authority to make the 
payment.\42\ Under our safe harbor, a System institution does not have 
to deduct a cash payment until declared or approved by its board. 
Second, we interpret the RTS merely to put a cap of 2 percent on the 
predetermined amount, and we do not know whether any member states have 
adopted the advance permission provision or, if they have, whether they 
have adopted a cap of 2 percent or a lower amount. Third, our safe 
harbor has more flexibility than the RTS in some ways. The advance 
permission caps all cash payments at an amount that equals 2 percent of 
CET1, regardless of whether CET1 declines. Our safe harbor, by 
contrast, does not restrict the amount of tier 2 cooperative equities 
that a System institution may revolve because revolvement of tier 2 
equities does not reduce the dollar amount of CET1 capital.\43\ 
Furthermore, it is theoretically possible under our safe harbor for a 
System institution's CET1 capital ratio to decline more than 2 
percent--due to a previous cash payout or simply because the 
institution's risk-based assets have increased--and the institution 
will still be able to make a cash payout as long as the dollar amount 
of CET1 does not decline below the dollar amount 12 months prior to the 
payout.
---------------------------------------------------------------------------

    \41\ See https://www.eba.europa.eu/documents/10180/359901/EBA-RTS-2013-01-draft-RTS-on-Own-Funds-Part-1.pdf/d1217588-ff05-4063-8d6f-5d7c81f2cc64.
    \42\ See http://www.eba.europa.eu/single-rule-book-qa/-/qna/view/publicId/2014_1352.
    \43\ We note that the safe harbor includes redemptions and 
revolvements of cooperative equities only, not third-party equities.
---------------------------------------------------------------------------

    We are aware that our safe harbor is more restrictive than the safe 
harbor amounts for commercial banks, in terms of cash payments for 
dividends, but we believe there are important reasons for the 
difference. First, U.S. national banks under 12 U.S.C. 60 have 
authority to pay cash dividends without prior regulatory approval in an 
amount up to current year's net income and the retained net income of 
the 2 previous years, and their regulator is not authorized to reduce 
that limit. With respect to cooperative System institutions, a lower 
limit is more prudent. We note also that our safe harbor is more 
permissive in several ways. It includes equity redemptions and 
revolvements, whereas Basel III and the U.S. rule require commercial 
banks to obtain prior regulatory approval before making stock 
redemptions. In addition, 12 U.S.C. 59 requires national banks to 
obtain the approval of shareholders owning two thirds of the shares of 
each affected class as well as OCC approval.
    The System Comment Letter requested that institutions be able to 
redeem and revolve equities owned by the estate of a deceased former 
borrower and equities related to a defaulted or restructured loan 
without restriction. As discussed below in the section-by-section 
discussion, we have decided to exempt some of these redemptions and 
revolvements, as well as redemptions and revolvements ordered by a 
court, from the minimum holding period requirements in the safe harbor. 
This means that such cash redemptions and revolvements remain subject 
to the safe harbor on the amount of cash payments the institution can 
make.
8. Risk Weighting of Electric Cooperative Assets
    By FCA Bookletter BL-053, dated February 27, 2007, the FCA 
permitted System institutions to assign a lower risk weight than would 
otherwise apply to certain electrical cooperative assets, based on the 
unique characteristics and lower risk profile of this industry 
segment.\44\ Exposures to certain electrical cooperative assets that 
satisfy specified conditions receive a 50-percent rather than a 100-
percent risk weight. Furthermore, exposures to these assets receive a 
20-percent risk weight if the assets have a AAA or AA credit rating.
---------------------------------------------------------------------------

    \44\ The FCA authorized this risk weight under our regulatory 
reservation of authority in Sec.  615.5210(f), which permits us to 
determine the appropriate risk weight for an asset if the risk 
weight specified in the regulation does not appropriately reflect 
the asset's level of risk. This provision will be replaced by Sec.  
628.1(d)(3) in the new rule.
---------------------------------------------------------------------------

    We did not propose this favorable risk weighting for these 
exposures in this rule, but we sought comment as to whether we should 
retain this risk weighting. We received comments from approximately 65 
electric cooperatives, in the System Comment Letter, and from several 
individual System institutions, all requesting that we retain a 
favorable risk weighting for these exposures.
    The electric cooperatives specifically urged us to retain the 50-
percent risk weighting, stating that the rationale in BL-053 regarding 
the unique characteristics and lower risk profile of the industry 
segment remains valid today. These commenters also asserted that 
raising the risk weighting would drive up their borrowing costs and 
would ultimately hurt rural electric rate payers.
    The System Comment Letter and the individual System institutions 
urged us to retain both the 50-percent and the 20-percent risk 
weighting. They stated that the bookletter's rationale for these risk 
weights remains true today. In addition, they stated that the key 
institutions that provide financing to this segment, other than CoBank, 
ACB, and the U.S. Government, are not regulated, and they asserted that 
it is critical that FCA's capital rules not affect the System's ability 
to compete and collaborate with other lenders in meeting the financing 
needs of rural electric cooperatives.
    These commenters also stated, without support, that a higher risk 
weight for these exposures would impede the ability of CoBank, ACB to 
competitively meet its mission to serve this industry and would 
therefore also harm rural residents and businesses. In addition, 
several institutions stated that their ability to purchase 
participations from CoBank, ACB allows them to diversify their own 
portfolios and therefore reduces their own credit risk.
    We do not include this lower risk weight for exposures to electric 
cooperative assets in this final rule. However, FCA Bookletter BL-053 
remains in effect. We continue to evaluate the comments we have 
received and anticipate that we will issue further guidance on the 
capital treatment of these exposures in the future. As under existing 
FCA Bookletter BL-053, this treatment would be authorized under our 
reservation of authority.
9. Risk Weighting of High Volatility Commercial Real Estate Exposures
    Because of the increased risk in these activities when compared to 
other System lending, we proposed to assign a 150-percent risk weight 
to HVCRE exposures, unless those exposures satisfied one or more of 
four specified exemptions. As in the U.S. rule, our proposed rule would 
have defined an HVCRE exposure as a credit facility that, prior to 
conversion to permanent financing, finances or has financed the 
acquisition, development, or construction of real property. Also as in 
the U.S. rule, four types of financing would have been exempted from 
this definition.

[[Page 49737]]

    The System Comment Letter and several individual System banks and 
associations expressed concern about some of the proposed HVCRE 
provisions and requested clarification of a number of issues. These 
commenters raised important questions that we wish to consider and 
analyze further. Accordingly, we are not finalizing the provisions 
governing HVCRE exposures at this time. We expect that we will engage 
in additional rulemaking or issue guidance on HVCRE exposures in the 
future.
    As we consider these issues, we will be guided by the objectives of 
this rule, which include, as stated above:

     Modernizing capital requirements while ensuring that 
institutions continue to hold enough regulatory capital to fulfill 
their mission as a GSE; and
     Ensuring that the System's capital requirements are 
comparable to the Basel III framework and the standardized approach 
the Federal banking regulatory agencies have adopted, while also 
ensuring that the rules take into account the cooperative structure 
and the organization of the System.

    We note that new Sec.  628.1(d)(3), like existing Sec.  
615.5210(f), reserves the FCA's authority to require a System 
institution to assign a different risk weight to an exposure than the 
regulation otherwise provides if that risk weight is not commensurate 
with the risk associated with the exposure. Accordingly, under both the 
existing rule and the new rule, FCA has the authority, where warranted, 
to assign a higher risk weight to an exposure that satisfies the 
characteristics of HVCRE exposures, even without a specific regulatory 
HVCRE risk weight.
    For example, FCA has recently approved requests by System 
institutions to purchase and hold investments pursuant to Sec.  
615.5140(e).\45\ As part of our approval of those investments, the FCA 
has used our regulatory reservation of authority to impose a 150-
percent risk weight on the investments, including during the time the 
facilities being financed are in the construction phase. The FCA 
expects to continue to exercise its reservation of authority as 
warranted to assign risk weights that are commensurate with the risks 
in exposures.
---------------------------------------------------------------------------

    \45\ Section 615.5140(e) authorizes System institutions to 
purchase and hold investments as approved by the FCA. The FCA 
approves such investments on a case by case basis.
---------------------------------------------------------------------------

10. Unused Commitments To Fund Direct Loans
    We proposed to impose risk weight and credit conversion factor 
(CCF) requirements on the unused commitments from System banks to 
associations to fund their direct loans.\46\ The agreement by a System 
bank to fund a direct loan satisfies the rule's definition of 
commitment, which is ``any legally binding agreement that obligates a 
System institution to extend credit or to purchase assets.''\47\ 
Moreover, as discussed in the preamble to the proposed rule, we believe 
these commitments carry risk that warrants the holding of capital 
against them.
---------------------------------------------------------------------------

    \46\ Such a commitment is not unconditionally cancelable by the 
System bank. Under the GFA that governs the commitment, a System 
bank must continue to fund the commitment as long as the association 
or OFI satisfies specified conditions.
    \47\ Section 628.2.
---------------------------------------------------------------------------

    We received comments opposing this proposal in the System Comment 
Letter and from several individual System institutions, including both 
banks and associations. Their comments, and our responses, are set 
forth below.
    The commenters stated that requiring banks to hold capital against 
these commitments results in the double counting of commitment 
exposures, because associations hold capital against their loans and 
commitments to retail borrowers, and the associations' funds come from 
their loans from the bank.
    As we explained in the preamble to our proposed rule, although this 
treatment may be viewed as the double counting of exposures, it is 
consistent with the way we treat loan exposures; we require a System 
bank to hold capital against the outstanding balance of its loan to an 
association, and we also require an association to hold capital against 
its loans to borrowers (even though the association's loaned funds come 
from its loan with the System bank).
    As with loan exposures, there are separate risks involved in System 
bank commitment exposures to associations and association commitment 
exposures to retail borrowers, and this treatment recognizes those 
separate risks. The capital an association holds against a commitment 
to its borrower offsets the general risk from that loan commitment, 
while the System bank must hold capital to offset the general risk from 
its loan commitment to its affiliated association. Even if the 
association is adequately capitalized with respect to its commitments, 
some risk to the System bank remains.\48\
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    \48\ As an illustration of why the System bank faces risk that 
is separate from the association's risk from its borrowers, an 
association could use money it borrows from the bank not only to 
establish and expand commitments and loans to borrowers but also to 
invest, hedge risk, replace equipment, or fund new facilities and 
services.
---------------------------------------------------------------------------

    The commenters also contended that this capital treatment 
undermines well-established capital adequacy management disciplines 
used within the System because it confuses the concepts of capital for 
growth purposes and capital needed to fund existing commitments; System 
banks already build additional capital in anticipation of loan growth, 
including commitments.
    While System banks may currently capitalize their commitments to 
associations as part of the capital they hold for loan growth purposes, 
capitalization of these commitments has not been pursuant to FCA 
regulations. This new regulation requires System banks to hold capital 
specifically for the purpose of capitalizing their commitments to 
associations. Beyond that amount, banks should hold sufficient 
additional capital for loan growth purposes. If, as the commenters 
assert, banks already capitalize their commitments to associations, 
then they should not need to hold additional capital under the new 
rule.
    The commenters also stated that commitments from System banks to 
associations are different from and lower risk than other commitments, 
such as commitments from System associations to retail borrowers, 
because of System interdependencies and features of the GFA.
    One difference, according to the commenters, is that in contrast to 
a typical lending relationship, such as that between an association and 
a retail borrower, in which the note establishes the definitive amount 
of the obligation, the GFA in a bank-association direct loan is open 
ended, providing for continued funding with no limit on the amount, as 
long as all terms and conditions of the GFA are met. Accordingly, there 
is no specific amount of unused commitment from the bank to the 
association in the traditional sense. This arrangement evolved from the 
symbiotic nature of the federated cooperative relationship between 
banks and associations, and it allows for growth of the associations 
without the necessity for administrative burdens such as numerous 
amendments to promissory notes and loan documents.
    In response to this comment, we note that Sec.  614.4125(d) 
requires the GFA or promissory note to establish a maximum credit limit 
determined by objective standards as established by the System bank. 
Prior to this rulemaking, FCA had never opined on whether this 
provision requires a specific dollar amount for the maximum credit 
limit in the GFA or promissory note. By proposing to determine the 
exposure amount of the commitment by reference to the maximum credit 
limit, however, FCA made clear that the regulation requires

[[Page 49738]]

the maximum credit limit to be a specific dollar amount. We believe 
that this requirement ensures that banks engage in appropriate planning 
so that they will always be able to fund these commitments.
    We do not believe that this requirement would lead to numerous 
amendments to the GFA or promissory note. System banks and associations 
should establish a reasonable, specific dollar amount by considering 
the association's existing retail loans, commitments, other credit 
needs, and expected growth over the term of the commitment. If 
institutions engage in sound planning, this amount should rarely need 
to be changed within that term. We note that some System banks already 
have established a specific dollar amount for their maximum credit 
limits and have not identified any difficulties in doing so.
    Another difference, according to the commenters, is that the GFA 
protects the System bank in a way that associations are not protected 
with respect to their retail borrowers. The GFA is typically secured by 
all of an association's assets, with discounts that cause the bank's 
collateral position to exceed the borrowing base.
    In addition, according to the commenters, the GFA contains a number 
of covenants that provide safeguards that make it unnecessary for the 
bank to hold capital to support its commitments to fund direct loans. 
These covenants include a liquidity covenant that effectively limits 
the association's ability to borrow in excess of a percentage below the 
actual borrowing base without the bank's approval, which serves as an 
equity buffer to absorb losses in the event of credit adversity.
    These covenants also include a requirement to maintain a minimum 
return on assets ratio of one percent and the requirement to submit a 
corrective action plan if an association's adverse assets to risk funds 
ratio exceeds 50 percent and to maintain a ratio of adversely 
classified assets to risk funds of less than 75 percent. In the event 
of default of either of these ratios, the bank has the right to take a 
wide variety of actions that could control its risk. The GFA also 
provides controls for early identification of potential events of 
default for associations with credit issues.
    We are not persuaded that the GFA covenants and other provisions 
eliminate the need for System banks to hold capital against their 
commitments to fund direct loans. While these provisions do provide 
some protection to System banks, loan documents governing other 
commitments, such as the retail commitments of associations, often 
contain provisions that provide similar protections.\49\ Nevertheless, 
those commitments require the holding of capital. Even with these 
protections, the commitments still carry risk.
---------------------------------------------------------------------------

    \49\ For example, an institution's retail loan to a large 
agribusiness can be collateralized by all assets of the borrower and 
can include financial, reporting, and negative covenants similar to 
those the commenters note exist in the GFA.
---------------------------------------------------------------------------

    Moreover, we believe the relationship between System banks and 
affiliated associations carries risk that isn't present in most other 
lending relationships, such as that between associations and their 
retail borrowers. Although the GFA permits a bank to terminate an 
association's loan or to refuse to make additional disbursements in the 
event of default, an association can borrow only from its affiliated 
bank.\50\ We believe a bank would be reluctant to terminate an 
association's loan or refuse to make additional disbursements, even if 
the association is in default, because that would leave the association 
with insufficient funds to carry on its operations. Accordingly, a bank 
has an incentive to continue to fund an affiliated association, even if 
that association is in default. This risk factor is not present in most 
other lending relationships.
---------------------------------------------------------------------------

    \50\ The bank can authorize the association to obtain funding 
elsewhere. Sections 2.2(12) and 2.12(16) of the Act.
---------------------------------------------------------------------------

    Nevertheless, because of the nature of the relationship between a 
System bank and its associations, we believe the risk in the commitment 
to fund the direct loan does not increase with the term of the 
commitment, as it does with other commitments. Accordingly, the final 
rule assigns a 20-percent CCF to all unused commitments to fund direct 
loans, regardless of the terms of the commitments.\51\ We are not 
assigning a 50-percent CCF to such commitments with original maturities 
greater than 14 months, as we proposed. We believe this difference in 
capital treatment for unused commitments on System direct loans is 
warranted because of the nature of the System bank-association 
relationship, which has no equivalent outside of the System.
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    \51\ Currently, no System GFA has a term longer than 3 years.
---------------------------------------------------------------------------

II. Minimum Regulatory Capital Ratios, Additional Capital Requirements, 
and Overall Capital Adequacy

A. Minimum Risk-Based Capital Ratios and Other Regulatory Capital 
Provisions

    The FCA proposed to adopt the following minimum capital ratios: (1) 
A common equity tier 1 (CET1) capital ratio of 4.5 percent; (2) a tier 
1 capital ratio of 6 percent; (3) a total capital ratio of 8 percent; 
and (4) a tier 1 capital leverage ratio of 5 percent, of which at least 
1.5 percent must be composed of URE and URE equivalents. Tier 1 capital 
equals the sum of CET1 and AT1 capital. Total capital consists of CET1, 
AT1, and tier 2 capital. We proposed to rescind the existing core 
surplus, total surplus, and net collateral regulations and proposed 
amendments to the permanent capital requirements. We did not propose to 
rescind the permanent capital regulations because the permanent capital 
ratio is required by the Farm Credit Act.
    In addition, we proposed a capital conservation buffer in excess of 
the new risk-based capital requirements that imposed limitations on 
capital distributions and certain discretionary bonuses, as described 
in section II.C below. The capital conservation buffer is not 
considered to be a minimum capital ratio requirement.
    In the final rule, we are adopting the new risk-based minimum 
ratios and the capital conservation buffer as proposed. However, we 
revised the minimum tier 1 leverage ratio requirement to 4 percent and 
added a 1-percent leverage buffer requirement as described in section 
II.B below.
    Consistent with the FCA's authority under the Farm Credit Act and 
current capital regulations, Sec.  628.10(d) of the final rule confirms 
FCA's authority to require an institution to hold a different amount of 
regulatory capital from what is otherwise required under the final 
rule, if we determine that the institution's regulatory capital is not 
commensurate with its credit, operational, or other risks. Therefore, 
the FCA will continue to hold each System institution accountable to 
maintain sufficient capital commensurate with the level and nature of 
the risks to which it is exposed. This may require capital 
significantly above the minimum requirements, depending on the 
institution's activities and risk profile. Section D below describes 
the requirement for overall capital adequacy of System institutions and 
the supervisory assessment of an institution's capital adequacy.

B. Leverage Ratio

    Consistent with Basel III and the U.S. rule, we proposed a tier 1 
leverage ratio for all System institutions. We proposed a minimum 
leverage ratio of 5 percent, of which at least 1.5 percent of non-risk 
weighted total assets must be URE and

[[Page 49739]]

URE equivalents.\52\ FCA's proposal differed in two respects from the 
leverage ratio adopted by the Federal regulatory banking agencies: 
There is no minimum URE and URE equivalents requirement in their 
leverage ratio, and their minimum requirement for the majority of 
commercial banks is 4 percent. We received numerous comments opposing 
the 5-percent tier 1 leverage ratio requirement and the 1.5-percent URE 
and URE equivalents minimum requirements in the System Comment Letter 
and from individual System banks and associations. We discuss their 
comments in Section I.E.6 above.
---------------------------------------------------------------------------

    \52\ Only System banks are subject to the net collateral ratio 
requirement, which has similarities to that of a leverage ratio, the 
tier 1 leverage ratio would replace the net collateral ratio 
requirement for System banks.
---------------------------------------------------------------------------

    In response to the comments, we are adopting a 4-percent minimum 
leverage ratio, of which at least 1.5 percent must be URE and URE 
equivalents, and we are adding a leverage buffer of 1 percent in the 
final rule. We believe this revised requirement in the final rule 
addresses commenters' concerns, is not unduly restrictive, and will 
ensure that System institutions hold sufficient capital to continue to 
fulfill their mission as a GSE. In addition, we have revised the 
definition of URE equivalents to require institutions to designate 
equities as URE equivalents in their bylaws or board resolutions, and 
we have added corresponding language to paragraph (d) of the capital 
planning requirements in Sec.  615.5200. We have also provided an 
exception to the offset prohibition for offsets required by court order 
and under Sec.  615.5290.
    The tier 1 leverage ratio buffer incorporates the same restrictions 
as the capital conservation buffer but is based on a 1-percent buffer 
as opposed to a 2.5-percent buffer. To avoid restrictions on cash 
dividend payments, cash patronage payments, and allocated equity 
redemptions (collectively, capital distributions) or discretionary 
executive bonuses, an institution's tier 1 leverage ratio must be at 
least 1 percent above the minimum requirement of 4 percent. The tier 1 
leverage ratio buffer consists of tier 1 capital. If the institution's 
tier 1 leverage ratio is below the minimum requirement of 4 percent, 
the institution's leverage buffer is zero. There will be no phase-in 
for the leverage buffer as our analysis based on September 30, 2015 
call reports shows that all System institutions will be above the 1 
percent leverage buffer.
    The maximum leverage payout ratio is the percentage of eligible 
retained income that a System institution would be allowed to pay out 
in capital distributions and discretionary bonuses during the current 
calendar quarter and is determined by the amount of the tier 1 leverage 
ratio buffer held by the institution during the previous calendar 
quarter. The eligible retained income computation is the same as for 
the capital conservation buffer.
    A System institution's maximum leverage payout amount for the 
current calendar quarter is equal to its eligible retained income 
multiplied by the applicable maximum leverage payout ratio in 
accordance with table 2 in Sec.  628.11. An institution with a leverage 
buffer that is greater than 1 percent is not subject to a maximum 
leverage payout amount under this provision (although capital 
distributions without FCA prior approval may be restricted by other 
provisions in this proposed rule). If the applicable leverage buffer 
falls under 1 percent, the institution would remain subject to payout 
restrictions until it raises its leverage buffer above 1 percent. In 
addition, a System institution would not generally be able to make 
capital distributions or pay discretionary bonuses during the current 
calendar quarter if its eligible retained income is negative and its 
capital conservation buffer is less than 2.5 percent, or its leverage 
buffer is less than 1 percent, as of the end of the previous quarter. 
In the event that a System institution's capital requirements fall 
below the 1-percent leverage buffer as well as the 2.5-percent capital 
conservation buffer, when calculating the applicable payout amount, the 
institution must use the lower between the maximum payout ratio and the 
maximum leverage payout ratio. For example, under the capital 
conservation buffer, if an institution's total capital regulatory ratio 
is 10.25 percent (fully phased-in), based on table 1 in Sec.  628.11, 
the maximum payout ratio would be 60 percent. Under the leverage 
buffer, the same institution's tier 1 leverage ratio is 4.6 percent and 
based on table 2 in Sec.  628.11, the maximum leverage payout ratio 
would be 40 percent. As the leverage buffer is the lower maximum payout 
between the two, in this example, the payout ratio the System 
institution must use is 40 percent.
    The leverage buffer is divided into quartiles, with greater 
restrictions on capital distributions and discretionary bonus payments 
as the leverage buffer falls closer to 0. Payouts are restricted to 60 
percent of eligible retained income if the buffer is above 0.75 percent 
but at or below 1 percent. When the buffer is above 0.50 percent but 
less than or equal to 0.75 percent, the payout would be restricted to 
40 percent of eligible retained income. When the buffer is above 0.25 
percent but less than or equal to 0.50 percent, the payout would be 
restricted to 20 percent of eligible retained income. A leverage buffer 
of 0.25 percent or below would result in a 0 percent payout.
    For the reasons discussed above, the proposed requirement of the 
tier 1 leverage ratio consisting of at least 1.5 percent of URE and URE 
equivalents is not modified in the final rule.

C. Capital Conservation Buffer

    Consistent with Basel III and the U.S. rule, we proposed a capital 
conservation buffer to enhance the resilience of System institutions 
throughout financial cycles. To avoid restrictions on cash payments for 
capital distributions or discretionary executive bonuses, an 
institution's risk weighted regulatory capital ratios must be at least 
2.5 percent above the minimums when the buffer is fully phased in. The 
proposed buffer provided an incentive for institutions to hold capital 
well above the minimum required levels to ensure that they would meet 
the regulatory minimums even during stressful conditions.
    The FCA is adopting the capital conservation buffer requirements in 
Sec.  628.11 with minor modifications from the proposed rule, as 
described below.
    The capital conservation buffer consists of tier 1 capital and is 
the lowest of the following risk weighted measures:

     The institution's CET1 ratio minus its minimum CET1 
ratio;
     The institution's tier 1 ratio minus its minimum tier 1 
ratio; and
     The institution's total capital ratio minus its minimum 
total capital ratio.

    If any of the institution's risk weighted ratios are at or below 
the minimum required ratios, the institution's capital conservation 
buffer is zero.
    The maximum payout ratio is the percentage of eligible retained 
income that a System institution is allowed to pay out in capital 
distributions and discretionary bonuses during the current calendar 
quarter and is determined by the amount of the capital conservation 
buffer held by the institution during the previous calendar quarter. 
Eligible retained income is defined as the institution's net income as 
reported in its quarterly call reports to the FCA for the four calendar 
quarters preceding the current calendar quarter, net of any capital 
distributions, certain discretionary bonus payments, and associated tax 
effects not already reflected in net income.

[[Page 49740]]

    The System Comment Letter expressed concerns over the proposed 
definition of eligible retained income. The System stated that the 
proposed definition results in an excess deduction based on prior year 
distributions from current eligible retained income because the 
patronage distribution practices of cooperatives create a far more 
restrictive requirement than applicable to commercial banks. The System 
included an example that, to determine the eligible retained income in 
the first quarter of 2015, this would be based on 2014 net income, less 
the patronage distribution of 2013 that was paid in the first quarter 
of 2014. The System asserted that this is inappropriate and that 
deductions for patronage distributions should be aligned with when the 
earnings were generated.
    The final rule adopts the proposed definition of eligible retained 
income without change. We believe that this definition of eligible 
retained income is appropriate and is essentially the same as the 
definition in the U.S. rule. We believe eligible retained income must 
reflect a System institution's most recent 12-month period at each 
quarter end, so that restrictions on capital distributions and 
discretionary payments to executive officers are based on the 
institution's most recent performance results. If a System institution 
declares a dividend payment or patronage payment in a specified year, 
the institution can recognize and accrue the dividend payment or 
patronage payment in the same year it was earned; that way it is 
reflected in that specified year's income. This could result in a 
change of practice for many institutions that do not recognize and 
accrue the patronage income in the year it was earned, but rather the 
following year when it is distributed. If an institution chooses not to 
change its patronage payment accounting practices, this treatment 
remains appropriate because at the declaration date, the dividend 
payment and patronage payment is deducted from the current year's 
earnings, even if it was based on the previous year's earnings. 
Furthermore, if the System institution wants to declare a dividend 
payment or patronage payment in the same quarter of every year, it will 
not be subject to a double deduction under the regulation.
    We believe for this calculation that the declaration date 
determines what year the dividend payment and patronage payment are 
attributed. As the calculation is a rolling 12-month calculation for 
eligible retained income calculated each quarter, we believe 
institutions may decide to declare the dividend payment or patronage 
dividend payments the same quarter, in order to make this calculation 
comparable from year to year and quarter to quarter. To do otherwise 
would hinder both the FCA's and the System's ability to conduct quarter 
to quarter comparisons.
    A System institution's maximum payout amount under the capital 
conservation buffer for the current calendar quarter is equal to its 
eligible retained income multiplied by the applicable maximum payout 
ratio in accordance with table 1 in Sec.  628.11. An institution with a 
capital conservation buffer that is greater than 2.5 percent is not 
subject to a maximum payout amount under this provision (although 
capital distributions without FCA prior approval may be restricted by 
other provisions in this rule). If an institution's CET1, tier 1, or 
total capital ratio is 2.5 percent or less above the minimum ratio, the 
maximum payout ratio also declines. The institution remains subject to 
payout restrictions until it raises its capital conservation buffer 
above 2.5 percent. In addition, a System institution will not generally 
be able to make capital distributions or pay discretionary bonuses 
during the current calendar quarter if its eligible retained income is 
negative and its capital conservation buffer is less than 2.5 percent 
as of the end of the previous quarter.
    The capital conservation buffer is divided into quartiles, with 
greater restrictions on capital distributions and discretionary bonus 
payments as the capital conservation buffer falls closer to 0 percent. 
When the buffer is fully phased in, payouts are restricted to 60 
percent of eligible retained income if the buffer is above 1.875 
percent but at or below 2.5 percent. When the buffer is above 1.25 
percent but less than or equal to 1.875 percent, the payout is 
restricted to 40 percent of eligible retained income. When the buffer 
is above 0.625 percent but equal to or below 1.25 percent, the payout 
is restricted to 20 percent of eligible retained income. A capital 
conservation buffer of 0.625 percent or below results in a 0 percent 
payout.
    We have made several changes to the definition of ``capital 
distribution'' to ensure the intent of the buffers--to conserve 
capital--is fulfilled, and to ensure comparability with the U.S. rule. 
In paragraphs (A) and (B) of Sec.  628.11(a)(2)(vii), we have specified 
that the replacement capital instrument must be purchased capital. In 
paragraph (D) of Sec.  628.11(a)(2)(vii), we have replaced the 
reference to ``any tier 2 capital instrument'' with a reference to 
``any capital instrument other than a tier 1 capital instrument'' to 
ensure inclusion of any dividend declarations or interest payments on 
capital instruments that are not included in tier 1 or tier 2 capital. 
The final rule defines a capital distribution as:

     A reduction of tier 1 capital through the repurchase or 
redemption of a tier 1 capital instrument or by other means, unless 
the redeemed capital is replaced in the same quarter by purchased 
tier 1 qualifying capital;
     A reduction of tier 2 capital through the repurchase, 
or redemption prior to maturity, of a tier 2 capital instrument or 
by other means, unless the redeemed capital is replaced in the same 
quarter by purchased qualifying tier 1 or tier 2 capital;
     A dividend declaration or payment on any tier 1 capital 
instrument;
     A dividend declaration or interest payment on any 
capital instrument other than a tier 1 capital instrument if the 
institution has full discretion to suspend such payments permanently 
or temporarily without triggering an event of default;
     A cash patronage payment declaration or payment;
     A patronage payment declaration in the form of 
allocated equities that do not qualify as tier 1 or tier 2 capital; 
\53\ or
---------------------------------------------------------------------------

    \53\ A patronage declaration or payment in the form of allocated 
equities that qualify as tier 1 capital is not a reduction in tier 1 
capital. It is merely a reclassification from one tier 1 capital 
element into a different tier 1 capital element.
---------------------------------------------------------------------------

     Any similar transaction that the FCA determines to be 
in substance a capital distribution.\54\
---------------------------------------------------------------------------

    \54\ We note that the Federal regulatory banking agencies 
replaced the term ``capital distribution'' with ``distribution'' in 
their final rule. We have decided to use the term ``capital 
distribution'' to avoid potential confusion with other types of 
distributions that do not meet the definition for purposes of 
applying the capital conservation buffer.

    The rule defines a discretionary bonus payment as a payment made to 
---------------------------------------------------------------------------
a senior officer of a System institution, where:

     The System institution retains discretion whether to 
pay the bonus and how much to pay until it awards the payment to the 
senior officer;
     The System institution determines the amount of the 
bonus without prior promise to, or agreement with, the senior 
officer; and
     The senior officer has no express or implied 
contractual right to the bonus payment.

    The term ``senior officer'' is already defined in Sec.  619.9310 as 
the Chief Executive Officer, the Chief Operations Officer, the Chief 
Financial Officer, and the General Counsel, or persons in similar 
positions, and any other person responsible for a major policy-making 
function.\55\
---------------------------------------------------------------------------

    \55\ The FCA considers this definition substantively identical 
to the definition of ``executive officer'' used in the Federal 
regulatory banking agencies' rules on the capital conservation 
buffer.

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[[Page 49741]]

    The purpose of limiting restrictions on discretionary bonus 
payments to senior officers is to focus these measures on the 
individuals within an institution who could expose the institution to 
the greatest risk. We note that the institution may otherwise be 
subject to limitations on capital distributions under other provisions 
in this rule. In addition, we retain authority to approve a capital 
distribution or bonus payment if we determine that the payment would 
not be contrary to the purposes of the capital conservation buffer or 
the safety and soundness of the institution.

D. Supervisory Assessment of Overall Capital Adequacy

    Section 628.10(d)(1) of the proposed rule required each System 
institution to maintain capital commensurate with the level and nature 
of all risks to which it was exposed and to have a process for 
assessing its overall capital adequacy in relation to its risk profile, 
as well as a comprehensive strategy for maintaining an appropriate 
level of capital. We did not receive any comments on this proposal and 
adopt it as final without modifications.
    System institutions should have internal processes to assess 
capital adequacy that reflect a full understanding of risks and to 
ensure sufficient capital is held. Our supervisory assessment of 
capital adequacy must take account of the internal processes for 
capital adequacy, as well as risks and other factors that can affect an 
institution's financial condition, including the level and severity of 
problem assets and total surplus exposure to operational and interest 
rate risk. For this reason, a supervisory assessment of capital 
adequacy may differ significantly from conclusions that might be drawn 
solely from the level of the institution's risk-based capital ratios.
    The FCA expects System institutions generally to operate with 
capital levels well above the minimum risk-based ratios and to hold 
capital commensurate with the level and nature of the exposed risk. For 
example, System institutions that are growing or that anticipate growth 
in the near future should maintain strong capital levels substantially 
above the minimums and should not allow significant weakening of 
financial strength below such levels to fund their growth. System 
institutions with high levels of risk are also expected to operate with 
capital well above the minimum levels. The supervisory assessment also 
evaluates the quality and trends in an institution's capital 
composition, including the share of common cooperative equities and URE 
and equivalents.
    The supervisory assessment may include such factors as whether the 
institution has merged recently, entered new activities, or introduced 
new products. It also considers whether an institution (1) is receiving 
special supervisory attention from FCA, (2) has or is expected to have 
losses resulting in capital inadequacy, (3) has significant exposure 
due to risks from concentrations in credit or nontraditional 
activities, (4) has significant exposure to interest rate risk or 
operational risk, or (5) could be adversely affected by the activities 
or condition of an affiliated System institution.
    The supervisory assessment also evaluates the comprehensiveness and 
effectiveness of a System institution's capital as required by Sec.  
615.5200 of existing FCA regulations.\56\ An effective capital planning 
process requires a System institution to assess its risk exposures, 
develop strategies for mitigating those risks, and set capital adequacy 
goals relative to its risks and prospective economic conditions. 
Evaluation of an institution's capital adequacy process is commensurate 
with the institution's size, sophistication, and risk profile.
---------------------------------------------------------------------------

    \56\ As discussed below, the final rule revises existing Sec.  
615.5200 to require the capital planning to include the new ratios.
---------------------------------------------------------------------------

III. Definition of Capital

A. Capital Components and Eligibility Criteria for Regulatory Capital 
Instruments

1. Common Equity Tier 1 (CET1) Capital
    Section 628.20(b) of the proposed rule defined a System 
institution's CET1 as the sum of URE and common cooperative equities, 
minus the regulatory adjustments and deductions described in Sec.  
628.22. As discussed in Section I.E.1 of this preamble, we have adapted 
the criteria for the common cooperative equities in accordance with 
footnote 12 of Basel III, which states that the criteria for non-joint 
stock companies, including mutuals and cooperatives, should take into 
account their legal structure and constitution.\57\
---------------------------------------------------------------------------

    \57\ Basel III framework footnote 12 to ``Criteria for 
classification as common shares for regulatory capital purposes.''
---------------------------------------------------------------------------

    Basel III established 14 criteria a banking organization must meet 
to include an instrument in CET1 capital; the U.S. rule has 13 
criteria. These criteria ensure that the instrument will be available 
to absorb losses at the banking organization on a going-concern basis. 
Several of the criteria provide that the instrument represents the most 
subordinated claim in liquidation, is entitled to a claim on residual 
assets proportional to its share of issued capital, and must take the 
first and proportionately greatest share of any losses as they occur.
    Unlike joint-stock banks, System institutions have priorities of 
impairment among the various classes of member stock and allocated 
equities, and typically, all current and former members are entitled to 
the residual assets, based on historic patronage payments, in a 
liquidation of the institution. However, all common cooperative 
equities are impaired and depleted before all other instruments. 
Therefore, we proposed to replace some of the Basel III and U.S. rule 
criteria with criteria providing that the instrument must represent a 
claim subordinated to all other equities of an institution in 
liquidation, and the holder would receive payment only after all 
general creditors and debt holders are paid. We did not receive 
comments on the liquidation-related criteria and adopt them in the 
final rule as proposed.
    Another CET1 criterion of Basel III and the U.S. rule--a criterion 
that also applies to additional tier 1 capital and tier 2 capital--is 
that the banking organization must do nothing to create an expectation 
at issuance that the instrument will be redeemed, nor do the statutory 
or contractual terms provide any feature that might give rise to such 
an expectation. In the System, institutions issue or allocate some 
cooperative equities that are never retired and that do not give rise 
to redemption or revolvement expectations by member-borrowers. Other 
cooperative equities, by contrast, are redeemed frequently and 
routinely. Through this practice, System institutions can create 
expectations on the part of their members that these purchased and 
allocated equities will be redeemed.
    In the preamble to the proposed rule, we described our concern that 
the ``expectation'' requirement of Basel III and the U.S. rule could 
reasonably be interpreted to disallow cooperative equities redeemed or 
revolved by System institutions. We therefore proposed to permit System 
institutions to include cooperative equities in CET1 and tier 2 capital 
if they adopted bylaws committing the institution not to redeem or 
revolve for 10 years in the case of CET1 equities and for 5 years in 
the case of tier 2 equities. We also required the bylaw to state that 
the institution would not offset an instrument against a member-
borrower's

[[Page 49742]]

loan in default without prior FCA approval, to ensure the permanence 
and stability of the included equities. The proposed rule provided an 
exception to the minimum redemption and revolvement periods that 
permitted institutions to redeem or revolve an amount of member stock 
equal to the minimum stock purchase requirement set forth in the Farm 
Credit Act. The statutory minimum is $1,000 or 2 percent of the 
member's loan or loans, whichever is less. This member stock exception 
is similar to exceptions for member stock redemptions adopted by a 
number of European countries. There is a detailed discussion of this 
exception in the preamble to our proposed rule.\58\
---------------------------------------------------------------------------

    \58\ See 79 FR 52824.
---------------------------------------------------------------------------

    We received extensive comments from System institutions on the 10-
year minimum redemption and revolvement period for CET1 capital and the 
proposed bylaw requirement that we discuss in Part I.E.4 above. 
Commenters also asked us to provide exceptions permitting, without FCA 
prior approval, offsets of equities against loans in default or 
restructured loans and redemptions and revolvements of equities owned 
by the estates of former borrowers. As we described above, in the final 
rule we have given institution boards the option to adopt an annual 
resolution affirming the institution's commitment to the minimum 
redemption and revolvement periods as an alternative to adopting a 
capitalization bylaw. We have also adopted a minimum 7-year period for 
CET1 capital and retained the minimum 5-year period for tier capital. 
The final rule permits equity retirements mandated by final order of a 
court of competent jurisdiction and offsets mandated by Sec.  615.5290, 
as well as redemptions and revolvements of the equities owned by the 
estate of a former borrower before the end of the minimum redemption 
and revolvement period. Such redemptions and revolvements may be made 
under the safe harbor provision in Sec.  628.20(f) if they fit within 
the dollar limit.
    The final rule adds new paragraph (d) to the capital planning 
requirements in Sec.  615.5200, describing the requirements of the 
capital bylaw or board resolution an institution must adopt in order to 
include otherwise eligible purchased and allocated equities in CET1 and 
tier 2 capital. The institution must undertake or commit to obtain 
prior approval from the FCA under Sec.  628.20(f) before redeeming or 
revolving CET1 equities less than 7 years after issuance (in the case 
of purchased equities) or allocation (the date of declaration in the 
case of allocated equities). For additional tier 1 equities, the 
institution must commit itself to obtain prior FCA approval before 
redeeming or calling equities. For tier 2 equities, the institution 
must make the same commitment not to redeem or revolve the equities 
less than 5 years after issuance or allocation without FCA approval. In 
addition, the institution must commit to obtaining approval from the 
FCA to change the regulatory capital treatment of the equities included 
in the new capital ratios, as follows:

    (i) Redesignating URE equivalents as equities that the 
institution may exercise its discretion to redeem other than upon 
dissolution or liquidation;
    (ii) Removing equities or other instruments from CET1, 
additional tier 1, or tier 2 capital other than through repurchase, 
redemption or revolvement; and
    (iii) Redesignating equities included in one component of 
regulatory capital (CET1 capital, additional tier 1 capital, or tier 
2 capital) as included in another component of regulatory capital.

    The restrictions on removing or redesignating equities would, 
ensure that equities included in CET1 could not be redesignated by an 
institution as tier 2 equities so that the institution could redeem or 
revolve them after only 5 years. Similarly, equities cannot be removed 
from tier 1 and tier 2 capital without FCA prior approval and then 
redeemed or revolved in less than 5 years. We note that, to obtain the 
FCA approvals described here, the institutions must submit a request 
under paragraphs (f)(1) through (4) of Sec.  628.20 and cannot rely on 
the deemed prior approval or ``safe harbor'' described in paragraph 
(f)(5).
    The System Comment Letter objected to the rule's requirement that 
System institutions keep records of when they issue or allocate common 
cooperative equities included in CET1 and tier 2 (the comment refers to 
this as ``date-stamping''). The System stated that date-stamping 
requires significant unnecessary administrative burden and is not 
logical because it does not ``recognize the portfolio nature of 
cooperative equities.'' The System asserted that, for long-time 
borrowers, it does not matter whether one share of their equity is held 
for 2 years and another share is held for 10 years because the borrower 
has committed to maintain a stable and predictable level of investment 
related to its business with the institution. The System suggested that 
institutions be permitted to comply with the minimum redemption and 
revolvement requirements by using a ``loan-based approach'' instead of 
a date-stamped approach.
    The comment that cooperative equities have a portfolio nature is 
not clear to us. As for date-stamping, we disagree that it is a 
significant burden to keep these records. It is our understanding that 
the relevant software programs are available and inexpensive. Moreover, 
System associations have been required since 1997 to maintain records 
of when they issue or allocate common cooperative equities in order to 
include such equities in their core surplus ratios. System banks have 
not been required to maintain such records because they cannot include 
in core surplus the equities they issue or allocate to other System 
institutions. Currently, the System banks have various ``loan-based'' 
programs that require their borrowers to hold investments in their bank 
equal to a percentage of the outstanding loan amount. A bank may be 
able to include such equities in its CET1 and tier 2 capital ratios if 
its loan-based program operates so as to ensure that the equities meet 
the rule's applicable minimum revolvement periods and other criteria. 
The FCA will consider approving such requests from System institutions 
under Sec.  628.1(d)(2)(ii).
    As for the request to grandfather existing allocated equities for 
which the institution has no record of the date of allocation or 
issuance, we believe that most, if not all, institutions' records do 
contain the necessary data on when a borrower purchased or received 
equities. Any institution with insufficient records may submit to the 
FCA a request to include the equities in question along with an 
explanation of why the records are insufficient. We will consider 
whether to permit the institution to include such equities, or a 
portion of such equities, on a temporary basis.
    The final rule requires that the common cooperative equities 
included in CET1 satisfy all the following criteria:
    (1) The instrument is issued directly by the System institution and 
represents a claim subordinated to all preferred stock, all 
subordinated debt, and all liabilities in a receivership, insolvency, 
liquidation, or similar proceeding of the System institution;
    (2) If the holder of the instrument is entitled to a claim on the 
residual assets of the System institution, the claim will be paid only 
after all general creditors, subordinated debt holders, and preferred 
stock claims have been satisfied in a receivership, insolvency, 
liquidation, or similar proceeding;
    (3) The instrument has no maturity date, can be redeemed only at 
the

[[Page 49743]]

discretion of the System institution and with the prior approval of 
FCA, and does not contain any term or feature that creates an incentive 
to redeem;
    (4) The System institution did not create, through any action or 
communication, an expectation that it will buy back, cancel, revolve, 
or redeem the instrument, and the instrument does not include any term 
or feature that might give rise to such an expectation, except that the 
establishment of a minimum revolvement period of 7 years or more, or 
the practice of revolving or redeeming the instrument no less than 7 
years after issuance or allocation, will not be considered to create 
such an expectation;
    (5) Any cash dividend payments on the instrument are paid out of 
the System institution's net income or unallocated retained earnings, 
and are not subject to a limit imposed by the contractual terms 
governing the instrument;
    (6) The System institution has full discretion at all times to 
refrain from paying any dividends without triggering an event of 
default, a requirement to make a payment-in-kind, or an imposition of 
any other restrictions on the System institution;
    (7) Dividend payments and other distributions related to the 
instrument may be paid only after all legal and contractual obligations 
of the System institution have been satisfied, including payments due 
on more senior claims;
    (8) The holders of the instrument bear losses as they occur before 
any losses are borne by holders of preferred stock claims on the System 
institution and holders of any other claims with priority over common 
cooperative equity instruments in a receivership, insolvency, 
liquidation, or similar proceeding;
    (9) The instrument is classified as equity under GAAP;
    (10) The System institution, or an entity that the System 
institution controls, did not purchase or directly or indirectly fund 
the purchase of the instrument, except that where there is an 
obligation for a member of the institution to hold an instrument in 
order to receive a loan or service from the System institution, an 
amount of that loan equal to the minimum borrower stock requirement 
under section 4.3A of the Farm Credit Act will not be considered as a 
direct or indirect funding where:
    (a) The purpose of the loan is not the purchase of capital 
instruments of the System institution providing the loan; and
    (b) The purchase or acquisition of one or more member equities of 
the institution is necessary in order for the beneficiary of the loan 
to become a member of the System institution;
    (11) The instrument is not secured, not covered by a guarantee of 
the System institution, and is not subject to any other arrangement 
that legally or economically enhances the seniority of the instrument;
    (12) The instrument is issued in accordance with applicable laws 
and regulations and with the institution's capitalization bylaws;
    (13) The instrument is reported on the System institution's 
regulatory financial statements separately from other capital 
instruments; and
    (14) The System institution's capitalization bylaws or a resolution 
adopted by its board of directors and re-affirmed on an annual basis 
provides that it will not redeem or revolve the instrument for a period 
of at least 7 years after issuance or allocation (other than under 
Sec.  615.5290), and that it will not reduce the original redemption or 
revolvement period to less than 7 years without the prior approval of 
the FCA, except that the minimum statutory borrower stock described 
under paragraph (b)(1)(x) of Sec.  628.20 may be redeemed without a 
minimum period outstanding after issuance and without the prior 
approval of the FCA.
2. Additional Tier 1 (AT1) Capital
    The criteria for AT1 are comparable to Basel III and the Federal 
regulatory banking agencies' rules. AT1 includes primarily 
noncumulative perpetual preferred stock issued by System institutions 
and is subject to certain adjustments and deductions. Qualifying 
instruments are primarily stock issued by System banks to third-party 
investors, though all System institutions have authority to issue such 
stock. AT1 does not include common cooperative equities.
    The System Comment Letter and an individual affiliated with a 
commercial bank commented that a clause in the proposed criterion 
relating to distributions (paragraph (8) below and Sec.  
628.20(c)(1)(viii) in the final rule) was not part of the criterion in 
Basel III or the final U.S. rule. The clause in question is, ``and are 
not subject to a limit imposed by the contractual terms governing the 
instrument.'' In the proposed rule, we mistakenly included the clause 
in this criterion. We have deleted it in the final rule.
    The criteria for inclusion in AT1 capital are:
    (1) The instrument is issued and paid-in;
    (2) The instrument is subordinated to general creditors and 
subordinated debt holders of the System institution in a receivership, 
insolvency, liquidation, or similar proceeding;
    (3) The instrument is not secured, not covered by a guarantee of 
the System institution and not subject to any other arrangement that 
legally or economically enhances the seniority of the instrument;
    (4) The instrument has no maturity date and does not contain a 
dividend step-up or any other term or feature that creates an incentive 
to redeem;
    (5) If callable by its terms, the instrument may be called by the 
System institution only after a minimum of 5 years following issuance, 
except that the terms of the instrument may allow it to be called 
earlier than 5 years upon the occurrence of a regulatory event that 
precludes the instrument from being included in AT1 capital, or a tax 
event. In addition:
    (a) The System institution must receive prior approval from FCA to 
exercise a call option on the instrument.
    (b) The System institution does not create at issuance of the 
instrument, through any action or communication, an expectation that 
the call option will be exercised.
    (c) Prior to exercising the call option, or immediately thereafter, 
the System institution must either: Replace the instrument to be called 
with an equal amount of instruments that meet the criteria for a CET1 
or AT1 capital instrument; \59\ or demonstrate to the satisfaction of 
FCA that following redemption, the System institution will continue to 
hold capital commensurate with its risk;
---------------------------------------------------------------------------

    \59\ Replacement can be concurrent with redemption of existing 
AT1 capital instruments.
---------------------------------------------------------------------------

    (6) Redemption or repurchase of the instrument requires prior 
approval from FCA;
    (7) The System institution has full discretion at all times to 
cancel dividends or other capital distributions on the instrument 
without triggering an event of default, a requirement to make a 
payment-in-kind, or an imposition of other restrictions on the System 
institution except in relation to any capital distributions to holders 
of common cooperative equity instruments or other instruments that are 
pari passu with the instrument.
    (8) Any capital distributions on the instrument are paid out of the 
System institution's net income, unallocated retained earnings, or 
surplus related to other AT1 capital instruments;
    (9) The instrument does not have a credit-sensitive feature, such 
as a

[[Page 49744]]

dividend rate that is reset periodically based in whole or in part on 
the System institution's credit quality, but may have a dividend rate 
that is adjusted periodically independent of the System institution's 
credit quality, in relation to general market interest rates or similar 
adjustments;
    (10) The paid-in amount is classified as equity under GAAP;
    (11) The System institution did not purchase or directly or 
indirectly fund the purchase of the instrument;
    (12) The instrument does not have any features that would limit or 
discourage additional issuance of capital by the System institution, 
such as provisions that require the System institution to compensate 
holders of the instrument if a new instrument is issued at a lower 
price during a specified timeframe; and
    (13) The System institution's capitalization bylaws or a resolution 
adopted on an annual basis by its board of directors provides that it 
will not call or redeem the instrument without the prior approval of 
the FCA.
    Notwithstanding the criteria for AT1 capital instruments referenced 
above, an instrument with terms that provide that the instrument may be 
called earlier than 5 years upon the occurrence of a rating agency 
event does not violate the minimum 5-year issuance requirement provided 
that the instrument was issued and included in a System institution's 
core surplus capital prior to the effective date of the final rule, and 
that such instrument satisfies all other criteria under Sec.  
628.20(c).
3. Tier 2 Capital
    The FCA proposed to include in tier 2 capital the sum of tier 2 
capital instruments that satisfy the applicable criteria, plus ALL up 
to 1.25 percent of risk weighted assets, less any applicable 
adjustments and deductions. The criteria are similar to those in Basel 
III and the U.S. rule, except that common cooperative equities that are 
not includable in CET1 may be included in tier 2 if they meet the 
applicable criteria.
    The System Comment Letter suggested that we eliminate the minimum 
5-year period for redemptions of perpetual stock and allocated 
equities. As discussed above in Section I.E.3 above, we have decided to 
retain the minimum 5-year period as it is comparable to the tier 2 
required minimum term for term stock and the 5-year no-call period for 
other equities.
    We have revised the bylaw requirement to permit compliance by an 
annual board resolution, and we have added the 2 exceptions to 
redemption or revolvement before the 5-year minimum period, which are 
the redemption or revolvement of equities owned by the estate of a 
former borrower and equities mandated to be retired by a court of 
competent jurisdiction.
    The criteria for instruments (plus related surplus) included in 
tier 2 capital are:
    (1) The instrument is issued and paid-in, is a common cooperative 
equity, or is member equity purchased in accordance with Sec.  
628.20(d)(1)(viii) of the proposed rule;
    (2) The instrument is subordinated to general creditors of the 
System institution;
    (3) The instrument is not secured, not covered by a guarantee of 
the System institution and not subject to any other arrangement that 
legally or economically enhances the seniority of the instrument in 
relation to more senior claims;
    (4) The instrument has a minimum original maturity of at least 5 
years. At the beginning of each of the last 5 years of the life of the 
instrument, the amount that is eligible to be included in tier 2 
capital is reduced by 20 percent of the original amount of the 
instrument (net of redemptions) and is excluded from regulatory capital 
when the remaining maturity is less than 1 year. In addition, the 
instrument must not have any terms or features that require, or create 
significant incentives for, the System institution to redeem the 
instrument prior to maturity; \60\
---------------------------------------------------------------------------

    \60\ An instrument that by its terms automatically converts into 
a tier 1 capital instrument prior to 5 years after issuance complies 
with the 5-year maturity requirement of this criterion.
---------------------------------------------------------------------------

    (5) The instrument, by its terms, may be called by the System 
institution only after a minimum of 5 years following issuance, except 
that the terms of the instrument may allow it to be called sooner upon 
the occurrence of an event that would preclude the instrument from 
being included in tier 2 capital, or a tax event. In addition:
    (a) The System institution must receive the prior approval of FCA 
to exercise a call option on the instrument.
    (b) The System institution does not create at issuance, through 
action or communication, an expectation the call option will be 
exercised.
    (c) Prior to exercising the call option, or immediately thereafter, 
the System institution must either: Replace any amount called with an 
instrument that is of equal or higher quality regulatory capital under 
this section; \61\ or demonstrate to the satisfaction of FCA that 
following redemption, the System institution would continue to hold an 
amount of capital that is commensurate with its risk;
---------------------------------------------------------------------------

    \61\ A System institution may replace tier 2 or tier 1 capital 
instruments concurrent with the redemption of existing tier 2 
capital instruments.
---------------------------------------------------------------------------

    (6) The holder of the instrument must have no contractual right to 
accelerate payment of principal, dividends, or interest on the 
instrument, except in the event of a receivership, insolvency, 
liquidation, or similar proceeding of the System institution;
    (7) The instrument has no credit-sensitive feature, such as a 
dividend or interest rate that is reset periodically based in whole or 
in part on the System institution's credit standing, but may have a 
dividend rate that is adjusted periodically independent of the System 
institution's credit standing, in relation to general market interest 
rates or similar adjustments;
    (8) The System institution has not purchased and has not directly 
or indirectly funded the purchase of the instrument, except that where 
common cooperative equity instruments are held by a member of the 
institution in connection with a loan, and the institution funds the 
acquisition of such instruments, that loan shall not be considered as a 
direct or indirect funding where:
    (a) The purpose of the loan is not the purchase of capital 
instruments of the System institution providing the loan;
    (b) The purchase or acquisition of one or more capital instruments 
of the institution is necessary in order for the beneficiary of the 
loan to become a member of the System institution; and
    (c) The capital instruments are in excess of the statutory minimum 
stock purchase amount;
    (9) Redemption of the instrument prior to maturity or repurchase is 
at the discretion of the System institution and requires the prior 
approval of the FCA; and
    (10) If the instrument is a common cooperative equity, the System 
institution's capitalization bylaws or a resolution adopted by its 
board of directors and re-affirmed on an annual basis provides that it 
will not, except with the prior approval of the FCA, redeem such equity 
included in tier 2 capital for a period of at least 5 years after 
allocating it to a member, except that equities owned by the estate of 
a former borrower and equities required to be retired by final order of 
a court of competent jurisdiction may be redeemed without a minimum 
period outstanding after allocation.
4. FCA Approval of Capital Elements
    Proposed Sec.  628.20(e) required a System institution to obtain 
prior approval to include a new capital

[[Page 49745]]

element in its CET1 capital, AT1 capital, or tier 2 capital unless the 
element was equivalent, in terms of capital quality and ability to 
absorb losses with respect to all material terms, to a regulatory 
element the FCA had already determined may be included in regulatory 
capital. After the FCA determined that an institution could include an 
element in regulatory capital, it would make its decision publicly 
available.
    We did not receive any comments on this proposal and adopt it as 
final without modification.
5. FCA Prior Approval Requirements for Cash Patronage, Dividends, and 
Redemptions; Safe Harbor
    As described above, the proposed rule required FCA prior approval 
for the redemption of equities included in tier 1 and tier 2, 
consistent with Basel III and the U.S. rule. The proposal also required 
FCA prior approval of cash dividend payments and cash patronage 
payments. Prior approval is not a requirement of the Basel III 
framework but is a requirement imposed by statute or regulation on 
commercial banks and other federally chartered banking organizations 
regulated by the Federal banking regulatory agencies.\62\
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    \62\ Before a Federal savings association declares a dividend, 
it must send a notice, or application for approval, of the action to 
the Office of the Comptroller of the Currency (OCC). Whether OCC 
approval is required or a mere notice will suffice depends on a 
number of factors. For example, an application for approval is 
required if the proposed declaration (together with all other 
capital distributions) for the applicable calendar year exceeds the 
savings association's net income for the current year plus the 
retained net income for the 2 preceding years. A national bank must 
obtain OCC approval to declare a dividend if the total amount of all 
common and preferred dividends, including the proposed dividend, 
declared in any current year exceeds the total of the national 
bank's net income of the current year to date, combined with the 
retained net income of the previous 2 years. 12 U.S.C. 60(b).
---------------------------------------------------------------------------

    We also proposed a ``safe harbor'' provision in Sec.  628.20(f) 
permitting institutions to pay cash dividend payments, cash patronage 
payments, and to redeem equities with ``deemed'' FCA prior approval if 
the payments were within the specified parameters. Under the proposed 
safe harbor, an institution had ``deemed'' prior approval for capital 
distributions to make cash dividend payments, cash patronage payments, 
or redemptions and revolvements of qualifying common cooperative 
equities provided that, after such capital distributions, the dollar 
amount of the System institution's CET1 capital equaled or exceeded the 
dollar amount of CET1 capital on the same date in the previous calendar 
year and the institution continued to comply with all regulatory 
capital requirements and supervisory or enforcement actions. The common 
cooperative equities that qualified for redemption or revolvement under 
the safe harbor were the minimum member stock requirement of $1,000 or 
2 percent of the loan, whichever is less; equities included in CET1 
capital that were issued or allocated at least 10 years ago; and 
equities included in tier 2 capital that were issued or allocated at 
least 5 years ago.
    System institutions have not generally had to obtain FCA prior 
approval before paying dividend payments or patronage payments or 
redeeming equities under current regulations, and the Farm Credit Act 
does not require prior approval. However, prior approval of equity 
redemptions is a fundamental principle of the Basel III framework and 
U.S. rule, and there are limits on the cash dividends commercial banks 
may pay without prior approval of their Federal banking regulator. In 
order for the regulatory capital framework of System institutions to be 
comparable to the regulatory capital framework of the U.S. banking 
organizations, it was necessary to include these prior approval 
requirements in our proposed rule. However, in acknowledgment of the 
common cooperative equity redemption and revolvement practices of 
System institutions, we permitted a limited amount of these redemptions 
and revolvements under the safe harbor ``deemed'' prior approval. We 
stated our belief that most System institutions would be able to pay 
cash dividend payments, cash patronage payments, and redeem equities 
within the safe harbor at the same levels that they pay currently.
    The System Comment Letter made a number of comments, suggestions, 
and requests with respect to the prior approval requirements and the 
safe harbor provision. Two comments on the safe harbor's cap, or 
maximum payment amount, are discussed above in Section I.E.7 of this 
preamble. With respect to the prior approval process, the System 
expressed concern that the 30-day approval process would be burdensome 
and unworkable and suggested the process be streamlined for 
institutions with high FIRS ratings, with FCA granting approvals in as 
short a time as one day. A further suggestion was that the FCA could 
pre-approve all contemplated capital distributions under the capital 
plan required by Sec.  615.5200.
    The FCA has decided to retain its 30-day review in the final rule. 
We expect any proposed cash dividend payments, cash patronage payments, 
redemptions and revolvements that must be submitted to us will have 
been long planned by the institution, and we need sufficient time for 
our review. We note that a 30-day period is comparable to the review 
periods of the Federal banking regulatory agencies.
    The FCA has decided not to adopt the System's suggestion to ``pre-
approve'' all capital distributions in an institution's capital plan 
required under Sec.  615.5200. While FCA staff reviews the capital 
plans submitted by institutions, we do not formally approve the plans. 
However, as described above in the criteria for CET1 and tier 2 
capital, we have modified the criteria and the safe harbor provision to 
provide two additional exceptions, in response to a comment the System 
made with respect to the capital plan requirements in Sec.  615.5200.
    In the proposed rule, we deleted a provision in existing Sec.  
615.5200(b) pertaining to redemptions or revolvements of equities in 
connection with a loan default or the death of a former borrower. The 
deleted provisions required an institution to make a prior 
determination that such redemptions or revolvements were in the best 
interest of the institution and also required the institution to charge 
off an amount of the indebtedness equal to the amount of the equities 
that were redeemed or revolved. The System approved the deletions as 
eliminating a restriction on System institutions' ``absolute statutory 
right'' to retire cooperative equities in the event of loan default and 
restructuring without regard to any restrictions on the equities 
included in tier 1 and tier 2 capital in new part 628. The System asked 
us to clarify whether institutions will also be able to continue to 
redeem or revolve equities in connection with the death of a former 
borrower with regard to the part 628 restrictions.
    As we have discussed at some length here and in the preamble to the 
proposed rule, the required prior regulatory approval of equity 
retirements is a principle underlying the Basel III framework and the 
U.S. rule. Without the prior approval requirement, the new tier 1 and 
tier 2 framework we are adopting would not be comparable to the Basel 
III framework and the U.S. rule. System institutions forgo their 
discretion to redeem or revolve equities included in tier 1 and tier 2, 
and they must commit to obtain prior approval (or must rely on the safe 
harbor ``deemed'' prior approval) before redeeming or revolving the 
equities. The prior approval requirements apply to redemptions and 
revolvements related

[[Page 49746]]

to a loan default or restructuring and to equities of a deceased former 
borrower. Institutions will thus have to submit a request to the FCA 
for prior approval or will have to redeem or revolve the equities 
within the safe harbor parameters. However, we are aware that the safe 
harbor cannot be utilized to redeem or revolve CET1 equities that have 
been outstanding for less than the minimum 7-year holding period or for 
tier 2 equities that have been outstanding for less than 5 years. 
Therefore, we have modified the proposed safe harbor provision to add 2 
exceptions suggested by the System (with modifications) to the minimum 
retention periods in the safe harbor provision, as well as an exception 
for court orders. The new exceptions apply to:
    (a) Equities mandated to be redeemed or retired by a final order of 
a court of competent jurisdiction;
    (b) Equities held by the estate of a deceased former borrower; and
    (c) Equities required by the institution to cancel under Sec.  
615.5290 in connection with a restructuring under part 617 of this 
chapter.
    We are adding the exception for a final court order because an 
institution generally cannot disobey a court order. We are adding the 
exception for estates of former borrowers for the convenience of the 
estate administrator. The exception for a loan default or restructuring 
is limited to the required cancellation of equities under Sec.  
615.5290 and is the only offset that institutions are required to make. 
The other offset provisions in our regulations are permissive, not 
mandatory. We note that these excepted redemptions and revolvements 
will count in the total amount of cash payments an institution may make 
under the safe harbor. For payments in excess of the safe harbor cap, 
institutions will have to make a request to the FCA for prior approval.
    We are adopting the prior approval requirements with the 
modifications described, including revising the reference to the 
minimum CET1 retention period to 7 years.

B. Regulatory Adjustments and Deductions

1. Regulatory Deductions From CET1 Capital
    In the final rule, a System institution must deduct from CET1 
capital the items described in Sec.  628.22 of the proposed rule. A 
System institution must also exclude these deductions from its total 
risk weighted assets and leverage exposure. These deductions are:
a. Goodwill and Other Intangibles (Other Than Mortgage Servicing 
Assets)
    Consistent with Basel III and the Federal regulatory banking 
agencies' rules, the proposed rule excluded goodwill and other 
intangible assets from regulatory capital because of the uncertainty 
that a System institution may realize value from these assets under 
adverse financial conditions. An institution was required to deduct 
goodwill and ``non-mortgage'' servicing assets, net of associated 
deferred tax liabilities (DTLs), from CET1 capital. That portion of 
mortgage servicing assets (MSAs) and DTAs above the threshold 
deductions were not risk weighted at 250 percent. Instead, the full 
amounts of MSAs and DTAs that arise from temporary differences relating 
to net operating loss carrybacks were risk weighted at 100 percent. 
Should the levels of MSAs held by System institutions increase 
significantly in the future, the FCA stated it would reconsider the 
appropriateness of this treatment.
    The FCA did not propose the threshold deduction in Basel III and 
the U.S. rule for investments in other financial institutions. Instead, 
the proposed rule required that System institutions deduct their 
investments in other System institutions from their regulatory capital, 
as described below. Other equity investments were risk weighted 
according to Sec.  628.52.
    We stated that we did not believe DTAs that are risk weighted in 
this section would represent material items on a System institution's 
balance sheet because of System institutions' tax status. The FCBs and 
FLCAs \63\ are exempt from Federal, state, municipal, and local 
taxation.\64\ Most other System institutions' net income arises from 
both non-taxable and taxable sources. The production and cooperative 
lending business lines are taxable, but the taxable retail operations 
of CoBank, ACB and taxable System associations may reduce taxes by 
following subchapter T provisions of the Internal Revenue Code. Should 
the levels of DTAs held by System institutions increase significantly 
in the future, we stated we would reconsider the appropriateness of 
this proposed treatment.
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    \63\ FLCAs are Federal land bank associations with direct long-
term real estate lending authority. 12 CFR 619.9155.
    \64\ They are subject to taxes on real estate held to the same 
extent, according to its value, as other similar property held by 
other persons is taxed. See 12 U.S.C. 2023 and 2098.
---------------------------------------------------------------------------

    The System Comment Letter agreed with the FCA that the creation or 
purchase of MSAs is minimal and not material in the System. The System 
supported our proposal not to follow what it called the more complex 
and irrelevant Basel III deduction approach.
    The FCA has decided to finalize the goodwill, other intangibles, 
and MSA treatment as proposed.
b. Gain-on-Sale Associated With a Securitization Exposure
    The proposed rule required a System institution to deduct from CET1 
capital any after-tax gain-on-sale associated with a securitization 
exposure. Under GAAP, any gain-on-sale from a traditional 
securitization would increase a System institution's CET1 capital. 
However, if a System institution received cash from the sale of the 
securitization exposure and the MSA, it did not deduct such amount from 
its CET1 capital. Any sale of loans to a securitization structure that 
creates a gain may include an MSA that also meets the proposed 
definition of ``gain-on-sale.'' A System institution must exclude any 
portion of a gain-on-sale reported as an MSA on FCA's Call Report.
    The FCA did not receive comments on the proposed rule and is 
adopting it without modification.
c. Defined Benefit Pension Fund Net Assets
    The proposed rule required a System institution to deduct from CET1 
capital a defined benefit pension fund net asset (an overfunded 
pension), net of any associated DTLs, because of the uncertainty of 
realizing any of the value from such assets. The proposed rule 
recognized under GAAP the amount of a defined benefit pension fund 
liabilities (an underfunded pension) on the balance sheet of the 
institution, would be the same amount included as CET1 capital. 
Therefore, a System institution could not increase its CET1 capital by 
the derecognition of these defined pension fund liabilities.
    Because existing FCA regulations do not require the deduction of 
the defined benefit pension fund net assets in the regulatory capital 
calculations, our call report does not collect defined benefit pension 
fund net assets. In the proposed rule preamble, we stated that we would 
develop a call report schedule and require each System institution to 
report its individual year-end transactions for defined benefit pension 
fund net assets on their individual call report schedule.

[[Page 49747]]

    The System Comment Letter objected to the proposed deduction in 
Sec.  628.22(a)(5) of defined benefit pension fund net assets. The 
System stated that the FDIC has determined that it has access to 
commercial banks' prepaid pension assets in a receivership and, in the 
opinion of the System, the Farm Credit System Insurance Corporation 
(FCSIC) has authority to make the same determination.
    It is the FCA's position that the FCSIC as receiver would be able 
to make such a determination; however, this is an authority not 
expressly granted in our regulations. The absence of express authority 
could lead to legal challenges to the receiver's access to the prepaid 
pension fund assets. We have decided to retain the deduction 
requirement at this time.
    We note that the proposed rule preamble stated that we were 
proposing to permit an institution, with our prior approval, to risk-
weight defined benefit pension fund net assets to which the institution 
had unfettered and unrestricted access.\65\ However, this provision was 
not in the text of the proposed rule. In the final rule we have added 
it to the text. If an institution receives FCA approval to risk-weight 
the asset, it must risk-weight it as if it directly holds a 
proportional ownership share of each exposure in the defined benefit 
pension fund. For example, assume that: (1) The institution has a 
defined benefit pension fund net asset of $10; and (2) the institution 
has unfettered and unrestricted access to the assets of the defined 
benefit pension fund. Also, assume that 20 percent of the defined 
benefit pension fund is risk weighted at 100 percent and 80 percent is 
risk weighted at 300 percent. The institution must risk weight $2 at 
100 percent and $8 at 300 percent. This treatment is consistent with 
the full look-through approach described in Sec.  628.53(b) of the 
final rule.
---------------------------------------------------------------------------

    \65\ See 79 FR 52828 (September 4, 2014).
---------------------------------------------------------------------------

d. A System Institution's Allocated Equity Investment in Another System 
Institution
    Section 628.22(a)(6) of the proposed rule would have required a 
System institution to deduct any allocated equity investment in another 
System institution \66\ from its CET1 capital. Later in this preamble, 
we discuss deducting a System institution's purchased investment in 
another System institution using the corresponding deduction approach 
in Sec.  628.22(c).
---------------------------------------------------------------------------

    \66\ An example would be an association's equity investment in 
its System bank.
---------------------------------------------------------------------------

    The proposed rule had a different equity elimination method from 
the U.S. rule. Our method was more conservative than the Federal 
banking regulatory agencies' rules but consistent with the principles 
of Basel III and more appropriate for System institutions. It was also 
simpler to calculate. System associations, as member-borrowers of a 
cooperative network, have equity investments in their affiliated banks. 
System institutions also have equity investments in other System 
institutions but few outside the System. The investments that System 
institutions have in other System institutions are counted in their 
GAAP financial statements as equity of the issuing or allocating 
institution and as assets of the recipient institution. The FCA 
continues to believe, as we have stated numerous times previously, that 
equities should be counted in the regulatory capital of the institution 
that has control of the equities. The allocating institutions alone 
have discretion whether to allocate equities and when, if ever, to 
distribute those equities. Therefore, in the proposed rule the 
allocating institutions would include in their CET1 capital the 
equities they have allocated to their members, provided those equities 
meet the criteria for inclusion in CET1 capital. The institutions that 
have received allocated equities from other institutions would deduct 
those equities from their CET1 capital.
    We noted that System institutions would be able to include 
allocated equities in CET1 capital that are excluded from core surplus 
under our existing regulations. These deductions applied only to 
investments in other System institutions because, for the most part, 
our investment regulations restrict equity investments outside the 
System.
    The System Comment Letter asserted that the regulatory deductions 
in paragraphs (a) and (c) in new Sec.  628.22 ``ignore statutory 
provisions pertaining to permanent capital.'' The System stated its 
opinion that all equities categorized as tier 1 or tier 2 in the new 
rule must also qualify as permanent capital and must respect the 
allotment agreements set forth in section 4.3A(a)(1)(B). The System 
asserted that failure to respect the allotment agreements would have 
``an immediate and significant negative impact on regulatory capital 
ratios for some System institutions.'' The System requested that, 
because of such impact, we permit institutions to use the allotment 
agreements in their tier 1 and tier 2 capital ratios calculations for 
the next 5 years instead of the deductions in paragraph (a)(6) of Sec.  
628.22. The System said that this phase-in period would allow System 
banks and their affiliated associations time ``to adjust allocated 
investments to comport with the requirements.''
    The FCA disagrees with the System's apparent position that the 
allotment agreements in section 4.3A(a)(1)(B) of the Act must be 
reflected in all regulatory capital calculations, as well as the 
implication that no other deductions or adjustments may be made to 
regulatory capital ratios unless they are specified in section 4.3A of 
the Act.\67\ All of our capital regulations since the enactment of the 
1987 amendments to the Act \68\ have contained eliminations of both 
purchased and allocated equities, as well as deductions and adjustments 
for such items as goodwill, that are not mentioned in the Act. Since 
1997, under our statutory authority in section 4.3(a) of the Act, our 
capital regulations have included a core surplus ratio whose deductions 
and adjustments do not reflect the allotment agreements. As for the new 
tier 1 and tier 2 regulatory capital ratios, it is our judgment that 
the deductions and adjustments in Sec.  628.22 more appropriately 
categorize the control of shared capital as within the discretion of 
the institution that allocated the equities and not the recipient 
institution. As stated in the preamble to the proposed rule, we 
strongly believe that the deductions and adjustments for the CET1 
capital ratio calculation appropriately reflect that the allocated 
equities are within the control of, and subject to the risks in, the 
allocating institution and not the recipient institution. Moreover, we 
believe the deductions and adjustments are consistent with the intent 
of the Basel III framework and the U.S. rule.
---------------------------------------------------------------------------

    \67\ We observe that, in including up to 1.25 percent of ALL in 
tier 2 consistent with the Basel III framework and the U.S. rule, we 
are squarely deviating from the permanent capital ratio calculation 
because ALL is expressly excluded from the definition of permanent 
capital in section 4.3A(a)(1)(C).
    \68\ Agricultural Credit Act of 1987, Pub. L. 100-233, 101 Stat. 
1568 (100th Cong.), January 6, 1988.
---------------------------------------------------------------------------

    Currently a small number of associations with large allocations of 
equities from their affiliated banks count a large portion of those 
equities in their permanent capital ratio calculations. The 
associations will, of course, be able to continue to make allotment 
agreements for the permanent capital ratio calculations when the new 
rule becomes final. Our projections of System institutions' initial 
compliance

[[Page 49748]]

with the tier 1 and tier 2 capital requirements are discussed below in 
Section VII of this preamble. Those projections show that these 
associations' CET1 capital ratios are likely to be lower than they 
would have been if the calculations had included the allotment 
agreements. However, we do not expect the ``lower'' CET1 capital ratios 
to have a significant negative impact on those associations. 
Consequently, we have decided not to adopt a phase-in period for the 
deductions and adjustments.
    We are adopting the Sec.  628.22(a)(6) deduction of allocated 
equity investments without modification from the proposed rule.
e. Accumulated Other Comprehensive Income (AOCI) and Minority Interests
    We stated in the preamble to our proposed rule that we proposed not 
to include the impacts of AOCI on CET1 capital. We did not receive any 
comments on the proposal, and this treatment is unchanged in the final 
rule. As we discussed in detail in the proposed rule preamble, our 
treatment is different from Basel III and the U.S. rule, which require 
banking organizations to include most elements of AOCI in CET1.\69\ 
However, the U.S. rule permits banking organizations using the 
standardized approach to make a one-time election not to exclude most 
elements of AOCI in their regulatory capital. Under the FCA's AOCI 
treatment, the exclusion of AOCI from CET1 capital is comparable to the 
AOCI exclusions of the banking organizations that make an election not 
to include AOCI in their CET1 capital.
---------------------------------------------------------------------------

    \69\ See 79 FR 52825.
---------------------------------------------------------------------------

    Our proposed rule did not include minority interests in CET1 and 
any other component of regulatory capital because System institutions 
have few or no minority equity interests in unconsolidated 
subsidiaries. This treatment is unchanged in the final rule.
f. Discretionary ``Haircut'' Deduction or Other FCA Supervisory Action 
for Redemption of Equities Included in CET1 Capital Less Than 7 Years 
After Issuance or Allocation
    Under Sec.  628.22(f) of the proposed rule, if a System institution 
redeemed or revolved CET1 equities prior to the applicable minimum 
revolvement period, the institution was required to exclude 30 percent 
of the remaining purchased and allocated equities otherwise includable 
in CET1 capital for 3 years (30-percent haircut).
    The System Comment Letter objected to the proposed haircut as an 
entirely new concept, not found in Basel III or regulations of other 
regulators, illogical from a policy perspective, and unclear. The 
System, among other criticisms, stated that a recordkeeping error or 
other de minimis redemptions could result in the required deduction, 
and that it was unclear whether the deduction was meant to be applied 
one time only or was cumulative or overlapping for repeated violations. 
The System suggested that the haircut could be a standing deduction to 
CET1 rather than a haircut for a violation. It is unclear to us what 
this suggestion means, other than perhaps, in effect, to allow 
institutions to apply a 30-percent haircut to their CET1 in order to 
eliminate the 7-year minimum redemption and revolvement period.
    The FCA intended the 30-percent haircut to ensure proper management 
by System institutions of their member-borrowers' expectations of 
redemption and also to ensure that institutions are vigilant in their 
recordkeeping of the issuance and allocation dates of CET1. We continue 
to consider accurate recordkeeping to be very important under the new 
rule. However, in response to the comments, we have reconsidered the 
mandatory deduction and decided to revise it. Instead of a mandatory 
deduction, we have decided to identify the deduction of a portion of 
equities from CET1 as one of a possible range of supervisory or 
enforcement actions the FCA could take in response to a violation of 
the minimum redemption and revolvement period. Should we ever impose a 
haircut, we will specify the precise percentage and duration and 
whether the haircut could be cumulative or overlapping for repeated 
violations.
    The final rule states that the FCA may respond to an institution's 
redemption or revolvement in violation of the minimum holding period by 
requiring such a haircut deduction or by taking other appropriate 
supervisory or enforcement action.
2. The Corresponding Deduction Approach for Purchased Equities
    Section 628.22(c) incorporated the Basel III corresponding 
deduction approach for a System institution's purchased equity 
investment in another System institution. The corresponding deduction 
approach did not apply to allocated equity investments in another 
System institution. We responded above, in Section III.B.1.d under 
``Regulatory Adjustments and Deductions,'' to the System Comment 
Letter's objections to the deductions of both purchased and allocated 
investments in other System institutions.
    Under the final rule, a System institution is required to deduct an 
amount from the same component of capital for which the underlying 
instrument would qualify as if the System institution had issued the 
instrument itself. If a System institution does not have a sufficient 
amount of the specific component of regulatory capital for the entire 
deduction, then it must deduct the remaining portion from the next 
higher (more subordinated) capital component. Should a System 
institution not have enough AT1 capital to satisfy the required 
deduction, the shortfall must be deducted from CET1 capital elements.
    Other than as described above, we did not receive comments on the 
corresponding deduction approach in the proposed rule and adopt the 
provision without modification.
3. Netting of Deferred Tax Liabilities Against Deferred Tax Assets and 
Other Deductible Assets
    In the proposed rule, the FCA proposed to simplify the netting of 
DTLs against DTAs and other deductible assets for deductions of DTAs. 
The proposal differed from the U.S. rule for deductions of DTAs. 
Rather, System institutions were required to adjust CET1 capital under 
Sec.  628.22(a) net of any associated deferred tax effects. In 
addition, System institutions were required to deduct from CET1 capital 
elements under Sec.  628.22(a) and (c) of the rule net of associated 
DTLs, pursuant to Sec.  628.22(e). There is a detailed discussion of 
the proposal in the preamble to the proposed rule.\70\
---------------------------------------------------------------------------

    \70\ See 79 FR 52829-52830.
---------------------------------------------------------------------------

    We did not receive any comments on this proposed provision and 
adopt it without modifications.

C. Limits on Inclusion of Third-Party Capital

    In the final rule, we continue to impose limits on the inclusion of 
third-party capital. However, in response to comments, in the final 
rule we have revised the limitations on third-party capital that we 
proposed. Specifically, third-party capital allowed to be included in 
total capital is limited to the lesser of 40 percent of total capital 
or 100 percent of common-equity tier 1. The final rule does not include 
separate limits on tier 1 capital and total capital; rather, there is 
one overall limit based on the aforementioned factors. However, if 
other capital instruments, such as unallocated retained earnings or 
common cooperative equities, decline in subsequent quarters causing 
third-party capital to exceed limits set in this final

[[Page 49749]]

rule, an institution would still be able to include its existing level 
of third-party capital in its regulatory capital ratios. This limit 
increases the amount of third-party capital allowed in tier 1 from the 
proposed rule by up to 100 percent. A System institution could include 
third-party capital in tier 1 up to a level nearly equal to common-
equity tier 1 or 40 percent of total capital, whichever is less. In the 
proposed rule, third-party capital allowed in tier 1 was equal to 33 
percent of common-equity tier 1. We have substantially increased the 
amount of third-party capital allowed in tier 1 to provide member-
borrowers increased flexibility to manage the affairs of their 
institution, which include prudent capital planning and management. The 
amount of third-party capital allowed in total capital is substantially 
similar to that of the proposed rule (40 percent of total capital); 
however, we have removed the limit of an amount equal to 100 percent of 
its tier 1 capital outstanding. We believe it is appropriate to remove 
this limit given the substantial increase of third-party capital 
allowed to be included in tier 1 capital. Furthermore, removal of this 
limit would not result in a reduction of third-party capital a System 
institution could include in total capital.\71\ The calculations for 
all limits will be based on the previous four quarters to ensure 
stability of the calculation and reduce the volatility associated with 
changes in total capital and common equity tier 1 amounts.
---------------------------------------------------------------------------

    \71\ In the proposed rule, third-party capital allowed in total 
capital was limited to the lesser of: 40 percent of total capital or 
100 percent of tier 1 capital outstanding. FCA believes that the 
limiting factor in almost all cases will be the 40 percent of total 
capital limit. Given the System's current capital composition, the 
majority of capital instruments are tier 1 instruments. In order for 
100 percent of tier 1 to be lower than 40 percent of total capital, 
System institutions would need to substantially decrease tier 1 
instruments and substantially increase tier 2 instruments. As the 
regulatory minimum ratios (including capital conservation buffer) 
are 8 percent for tier 1 and 10.5 percent for total capital, as well 
as the leverage ratio is based on tier 1 capital, the FCA believes 
it is unlikely that 100 percent of tier 1 capital will ever be lower 
than 40 percent of total capital.
---------------------------------------------------------------------------

    As previously stated, FCA believes it is prudent to set a limit on 
the amount of third-party capital a System institution includes in its 
regulatory capital ratios. This limit ensures that unallocated retained 
earnings and common cooperative equities are the dominant forms of 
capital in the System and that the cooperative principal of user-
control is not undermined. This increased limit provides increased 
flexibility for System institutions to manage its capital while 
ensuring that its member-borrowers' decisions are not heavily 
influenced by meeting third-party capital obligations. Commenters 
asserted that the applicable cooperative principle is user-benefit, and 
we believe that the limits do not undermine this principle.
    The formulas for calculating third-party capital limits are:
    [GRAPHIC] [TIFF OMITTED] TR28JY16.000
    

where

CLTPC = current limit on all third-party capital (noncumulative 
perpetual preferred stock, term preferred stock, and subordinated 
debt) in total capital, calculated this quarter,
T1 = tier 1 capital,
NPPS = noncumulative perpetual preferred stock included in tier 1 
capital,
TC = total capital (tier 1 capital + tier 2 capital), and
TPC = third-party capital included in total capital, and
n = 4 previous quarters, 1-4

    2. ALTPC = max(ELTPC,CLTPC)

where

ALTPC = Aggregate limit on third-party capital,
ELTPC = existing limit on all third-party capital (noncumulative 
perpetual preferred stock, term preferred stock, and subordinated 
debt) in total capital, calculated the previous quarter,
CLTPC = current limit on all third-party capital (noncumulative 
perpetual preferred stock, term preferred stock, and subordinated 
debt) in total capital, calculated this quarter.

IV. Standardized Approach for Risk Weighted Assets

A. Calculation of Standardized Total Risk Weighted Assets

    In general, commenters stated that they believed the risk weights 
we proposed were consistent with the implementation of Basel III by 
U.S. and foreign banking regulators, and they did not identify concerns 
with most of these risk weights. Commenters did request changes to or 
clarifications of several proposed risk-weighting provisions, however. 
We discuss those comments, and explain our response, in our discussion 
of those provisions. All provisions are generally adopted as proposed, 
unless a change is discussed.\72\
---------------------------------------------------------------------------

    \72\ We do not discuss changes from the proposed rule that are 
minor, technical, and nonsubstantive.
---------------------------------------------------------------------------

    In addition to the revisions discussed below, we also adopt 
definitions of ``qualifying master netting agreement,'' ``collateral 
agreement,'' ``eligible margin loan,'' and ``repo-style transaction'' 
that are revised from what we proposed. The OCC and the Federal Reserve 
Board adopted similar revisions to these terms after they adopted their 
capital rules.\73\ These revisions are designed to ensure that the 
regulatory treatment of certain financial contracts is not affected by 
implementation of special resolution regimes in foreign jurisdictions 
or by the International Swaps and Derivatives Association Resolution 
Stay Protocol.
---------------------------------------------------------------------------

    \73\ Interim final rule with request for comment, 79 FR 78287, 
December 30, 2014. The FDIC has proposed similar revisions, 80 FR 
5063, January 30, 2015, but has not finalized them.
---------------------------------------------------------------------------

    Similar to the FCA's current risk-based capital rules, under these 
new rules a System institution must calculate its total risk weighted 
assets by adding together its on- and off-balance sheet risk weighted 
asset amounts and making any relevant adjustments to incorporate 
required capital deductions.\74\ Risk weighted asset amounts generally 
are determined by assigning on-balance sheet assets to broad risk-
weight categories according to the asset type, the counterparty or, if 
relevant, the guarantor or collateral. Similarly, risk weighted asset 
amounts for off-balance sheet items are calculated using a two-step 
process: (1) Multiplying the amount of the off-balance sheet exposure 
\75\ by a CCF to determine a credit equivalent amount; and (2) 
assigning the credit equivalent amount to a relevant risk-weight 
category.
---------------------------------------------------------------------------

    \74\ See generally the FCA's regulations at part 615, subpart H.
    \75\ The term ``exposure,'' which is defined as an amount at 
risk, is used throughout the final rule and preamble.
---------------------------------------------------------------------------

    A System institution must determine its standardized total risk 
weighted assets by calculating the sum of its risk

[[Page 49750]]

weighted assets for general credit risk, cleared transactions, 
unsettled transactions, securitization exposures, and equity exposures, 
each as defined below, less the System institution's allowance for loan 
losses (ALL) that is not included in tier 2 capital (as described in 
Sec.  628.20 of the rule). The sections below describe in more detail 
how a System institution must determine the risk weighted asset amounts 
for its exposures.

B. Risk Weighted Assets for General Credit Risk

    Under the final rule, total risk weighted assets for general credit 
risk is the sum of the risk weighted asset amounts as calculated under 
Sec.  628.31(a) of the rule. General credit risk exposures include a 
System institution's on-balance sheet exposures (other than cleared 
transactions, securitization exposures, and equity exposures, each as 
defined in Sec.  628.2 of the final rule), exposures to over-the-
counter (OTC) derivative contracts, off-balance sheet commitments, 
trade and transaction-related contingencies, guarantees, repo-style 
transactions, financial standby letters of credit, forward agreements, 
or other similar transactions. Section 628.32 of the final rule 
describes the risk weights that apply to sovereign exposures; exposures 
to certain supranational entities and multilateral development banks 
(MDBs); exposures to Government-sponsored enterprises (GSEs); exposures 
to depository institutions, foreign banks, and credit unions (including 
certain exposures to other financing institutions (OFIs) owned or 
controlled by these entities); exposures to public sector entities 
(PSEs); corporate exposures (including certain exposures to OFIs); 
residential mortgage exposures; past due and nonaccrual exposures; and 
other assets (including cash, gold bullion, and certain MSAs and DTAs).
    Generally, the exposure amount for the on-balance sheet component 
of an exposure is the System institution's carrying value for the 
exposure as determined under generally accepted accounting principles 
(GAAP). Because all System institutions use GAAP to prepare their 
financial statements, we believe that using GAAP to determine the 
amount and nature of an exposure provides a consistent framework that 
System institutions can easily apply.
    For purposes of the definition of exposure amount for available-
for-sale (AFS) or held-to-maturity (HTM) debt securities and AFS 
preferred stock not classified as equity under GAAP, the exposure 
amount is the System institution's carrying value (including net 
accrued but unpaid interest and fees) for the exposure, less any net 
unrealized gains, and plus any net unrealized losses. For purposes of 
the definition of exposure amount for AFS preferred stock classified as 
an equity security under GAAP, the exposure amount is the System 
institution's carrying value (including net accrued but unpaid interest 
and fees) for the exposure, less any net unrealized gains that are 
reflected in such carrying value but excluded from the System 
institution's regulatory capital.\76\
---------------------------------------------------------------------------

    \76\ Although System banks often classify their securities as 
AFS, associations almost always classify their securities, to the 
extent they hold any, as HTM.
---------------------------------------------------------------------------

    In most cases, the exposure amount for an off-balance sheet 
component of an exposure would typically be determined by multiplying 
the notional amount of the off-balance sheet component by the 
appropriate CCF as determined under Sec.  628.33 of the final rule. The 
exposure amount for an OTC derivative contract or cleared transaction 
that is a derivative would be determined under Sec.  628.34 of the 
final rule, whereas exposure amounts for collateralized OTC derivative 
contracts, collateralized cleared transactions that are derivatives, 
repo-style transactions, and eligible margin loans would be determined 
under Sec.  628.37 of the final rule.
1. Exposures to Sovereigns
    Under the final rule, a sovereign is defined as a central 
government (including the U.S. Government) or an agency, department, 
ministry, or central bank of a central government (for the U.S. 
Government, the central bank is the Federal Reserve). The final rule 
retains the current rules' risk weights for exposures to and claims 
directly and unconditionally guaranteed by the U.S. Government or its 
agencies.\77\ Accordingly, exposures to the U.S. Government, the 
Federal Reserve, or a U.S. Government agency, and the portion of an 
exposure that is directly and unconditionally guaranteed by the U.S. 
Government, the Federal Reserve, or a U.S. Government agency receive a 
0-percent risk weight.\78\ Consistent with the current risk-based 
capital rules, the portion of a deposit insured by the Federal Deposit 
Insurance Corporation (FDIC) or the National Credit Union 
Administration (NCUA) is also assigned a 0-percent risk weight.
---------------------------------------------------------------------------

    \77\ A U.S. Government agency is defined under the final rule as 
an instrumentality of the U.S. Government whose obligations are 
fully guaranteed as to the timely payment of principal and interest 
by the full faith and credit of the U.S. Government.
    \78\ Similar to the FCA's current risk-based capital rules, a 
claim is not considered unconditionally guaranteed by a central 
government if the validity of the guarantee is dependent upon some 
affirmative action by the holder or a third party.
---------------------------------------------------------------------------

    An exposure conditionally guaranteed by the U.S. Government, the 
Federal Reserve, or a U.S. Government agency receives a 20-percent risk 
weight. This includes an exposure that is conditionally guaranteed by 
the FDIC or the NCUA.\79\
---------------------------------------------------------------------------

    \79\ Because of the issues such an exposure would raise, the FCA 
will determine the risk-weight of any System institution exposure 
that has a FCSIC guarantee, whether conditional or unconditional, on 
a case-by-case basis.
---------------------------------------------------------------------------

    The FCA's existing risk-based capital rules generally assign risk 
weights to direct exposures to sovereigns and exposures directly 
guaranteed by sovereigns based on whether the sovereign is a member of 
the Organization for Economic Cooperation and Development (OECD) and, 
as applicable, whether the exposure is unconditionally or conditionally 
guaranteed by the sovereign.\80\
---------------------------------------------------------------------------

    \80\ Section 615.5211.
---------------------------------------------------------------------------

    The OECD assigns Country Risk Classifications (CRCs) to many 
countries as an assessment of their credit risk. CRCs are used to set 
interest rate charges for transactions covered by the OECD arrangement 
on export credits. The OECD uses a scale of 0 to 7 with 0 being the 
lowest possible risk and 7 being the highest possible risk. The OECD no 
longer assigns CRCs to certain high-income countries that are members 
of the OECD and that have previously received a CRC of 0. These 
countries exhibit a similar degree of country risk as that of a 
jurisdiction with a CRC of 0.\81\
---------------------------------------------------------------------------

    \81\ For more information on the OECD country risk 
classification methodology, see generally OECD, ``Country Risk 
Classification,'' available at http://www.oecd.org/tad/xcred/crc.htm.
---------------------------------------------------------------------------

    Under the final rule, the risk weight for exposures to countries 
with CRCs is determined based on the CRCs. Exposures to OECD member 
countries that do not have CRCs are risk weighted at 0 percent. 
Exposures to non-OECD members with no CRC are risk weighted at 100 
percent.\82\ The OECD regularly updates CRCs and makes the assessments 
publicly available on its Web site. Accordingly, the FCA believes that 
the CRC approach should not represent undue burden to System 
institutions.
---------------------------------------------------------------------------

    \82\ This final rule, like the U.S. rule, permits a lower risk 
weighting for sovereign exposures if certain conditions are met, 
including that the exposure is denominated in the sovereign's 
currency. Although the investment eligibility regulation applicable 
to System institutions require that all investments must be 
denominated in U.S. dollars (see Sec.  615.5140(a) of our 
regulations), this lower risk weight could be used if a System 
institution were to foreclose on collateral in the form of such a 
sovereign exposure.

---------------------------------------------------------------------------

[[Page 49751]]

    The FCA believes that use of CRCs in the final rule is permissible 
under section 939A of the Dodd-Frank Act and that section 939A was not 
intended to apply to assessments of creditworthiness by organizations 
such as the OECD. Section 939A is part of subtitle C of title IX of the 
Dodd-Frank Act, which, among other things, enhances regulation by the 
U.S. Securities and Exchange Commission (SEC) of credit rating 
agencies, including Nationally Recognized Statistical Rating 
Organizations (NRSROs) registered with the SEC. Section 939A requires 
agencies to remove references to credit ratings and NRSROs from Federal 
regulations. In the introductory ``findings'' section to subtitle C, 
which is entitled ``Improvements to the Regulation of Credit Ratings 
Agencies,'' Congress characterized credit rating agencies as 
organizations that play a critical ``gatekeeper'' role in the debt 
markets and perform evaluative and analytical services on behalf of 
clients, and whose activities are fundamentally commercial in 
character.\83\ Furthermore, the legislative history of section 939A 
focuses on the conflicts of interest of credit rating agencies in 
providing credit ratings to their clients, and the problem of 
government ``sanctioning'' of the credit rating agencies' credit 
ratings by having them incorporated into Federal regulations. The OECD 
is not a commercial entity that produces credit assessments for fee-
paying clients, nor does it provide the sort of evaluative and 
analytical services as credit rating agencies.
    Additionally, the FCA notes that the use of the CRCs is limited in 
the rule. The FCA considers CRCs to be a reasonable alternative to 
credit ratings for sovereign exposures and the proposed CRC methodology 
to be more granular and risk sensitive than the current risk-weighting 
methodology based solely on OECD membership.
---------------------------------------------------------------------------

    \83\ See Dodd-Frank Act, section 931 (15 U.S.C. 78o-7 note).
---------------------------------------------------------------------------

    The final rule also requires a System institution to apply a 150-
percent risk weight to sovereign exposures immediately upon determining 
that an event of sovereign default has occurred or if an event of 
sovereign default has occurred during the previous 5 years. Sovereign 
default is defined in the final rule as a noncompliance by a sovereign 
with its external debt service obligations or the inability or 
unwillingness of a sovereign government to service an existing loan 
according to its original terms, as evidenced by failure to pay 
principal or interest fully and on a timely basis, arrearages, or 
restructuring. A default includes a voluntary or involuntary 
restructuring that results in a sovereign not servicing an existing 
obligation in accordance with the obligation's original terms.

              Table 3--Risk Weights For Sovereign Exposures
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
CRC:
  0-1...................................................               0
  2.....................................................              20
  3.....................................................              50
  4-6...................................................             100
  7.....................................................             150
OECD Member with No CRC.................................               0
Non-OECD Member with No CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

2. Exposures to Certain Supranational Entities and Multilateral 
Development Banks
    Under the FCA's existing risk-based capital rules, exposures to 
certain supranational entities and multilateral development banks 
(MDBs) receive a 20-percent risk weight. Consistent with the Basel 
framework's treatment of exposures to supranational entities, the FCA's 
final rule applies a 0-percent risk weight to exposures to the Bank for 
International Settlements, the European Central Bank, the European 
Commission, and the International Monetary Fund.
    Similarly, the final rule applies a 0-percent risk weight to 
exposures to an MDB. The rule defines an MDB to include the 
International Bank for Reconstruction and Development, the Multilateral 
Investment Guarantee Agency, the International Finance Corporation, the 
Inter-American Development Bank, the Asian Development Bank, the 
African Development Bank, the European Bank for Reconstruction and 
Development, the European Investment Bank, the European Investment 
Fund, the Nordic Investment Bank, the Caribbean Development Bank, the 
Islamic Development Bank, the Council of Europe Development Bank, and 
any other multilateral lending institution or regional development bank 
in which the U.S. Government is a shareholder or contributing member or 
which the FCA determines poses comparable credit risk.
    The FCA believes this treatment is appropriate in light of the 
generally high credit quality of MDBs, their strong shareholder 
support, and a shareholder structure comprised of a significant 
proportion of sovereign entities with strong creditworthiness. 
Exposures to regional development banks and multilateral lending 
institutions that are not covered under the definition of MDB generally 
are treated as corporate exposures and receive a 100-percent risk 
weight.
3. Exposures to Government-Sponsored Enterprises
    Like the Federal banking regulatory agencies, we define GSE as an 
entity established or chartered by the U.S. Government to serve public 
purposes specified by the U.S. Congress but whose debt obligations are 
not explicitly guaranteed by the full faith and credit of the U.S. 
Government. Because we believed it would make the regulations somewhat 
simpler, our proposed rule had excluded System institutions from this 
definition for the purpose of these capital rules.
    The System is, however, a GSE, and the System Comment Letter 
asserted that our proposed definition was fundamentally incorrect and 
subject to misinterpretation. To alleviate any concerns about possible 
confusion regarding the System's GSE status, the final rule eliminates 
this exclusion. Accordingly, under our final rule, as under the U.S. 
rule, GSEs include the Federal National Mortgage Association (Fannie 
Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), the 
System, the Federal Home Loan Bank System, and Farmer Mac.\84\
---------------------------------------------------------------------------

    \84\ As discussed above, Farmer Mac is an institution of the 
System, but because this regulation does not apply to Farmer Mac, it 
is not included in references to the System or System institutions 
in this regulation or preamble.
---------------------------------------------------------------------------

    The final rule assigns a 20-percent risk weight to exposures to 
GSEs that are not equity exposures or preferred stock; this includes 
loans from System banks to associations (direct loans).\85\
---------------------------------------------------------------------------

    \85\ Because System institutions were not included within the 
proposed rule's definition of GSE, the proposed rule explicitly 
assigned a 20-percent risk weight to System bank loans to 
associations. In the final rule, these loans are included generally 
within the provision assigning a 20-percent risk weight to exposures 
to GSEs.
---------------------------------------------------------------------------

    The final rule assigns a 100-percent risk weight to preferred stock 
issued by a non-System GSE. This risk weighting represents a change to 
the FCA's existing risk-based capital rules, which currently allow a 
System institution to apply a 20-percent risk weight to GSE preferred 
stock.\86\
---------------------------------------------------------------------------

    \86\ Section 615.5211(b)(6).
---------------------------------------------------------------------------

    Under final Sec.  628.22, a System institution must deduct from 
regulatory capital all equity investments (including preferred stock) 
in another System institution, and therefore we do not provide a risk 
weighting for these

[[Page 49752]]

investments. These investments could include, for example, an 
association's investment in a System bank and a System bank's 
investment in an association.\87\
---------------------------------------------------------------------------

    \87\ As discussed above, Farmer Mac's preferred stock is 
assigned a risk weight of 100 percent.
---------------------------------------------------------------------------

    System institutions have the authority to enter into loss-sharing 
agreements with other System institutions under Sec.  614.4340. If 
System institutions enter into a loss-sharing agreement in the future, 
the FCA would assign a risk weight for any associated exposures at that 
time, using our regulatory reservation of authority.
4. Exposures to Depository Institutions, Foreign Banks, and Credit 
Unions
    The FCA's existing risk-based capital rules assign a 20-percent 
risk weight to all exposures to U.S. depository institutions and 
foreign banks incorporated in an OECD country. Short-term exposures to 
foreign banks incorporated in a non-OECD country receive a 20-percent 
risk weight and long-term exposures to such entities receive a 100-
percent risk weight.
    Under the final rule, exposures to U.S. depository institutions and 
credit unions are assigned a 20-percent risk weight.\88\ This risk 
weight applies to a System bank exposure to an OFI that is owned and 
controlled by a U.S. or state depository institution or credit union 
that guarantees the exposure. If the OFI exposure does not satisfy 
these requirements, it is assigned a 50-percent or 100-percent risk 
weight as a corporate exposure pursuant to Sec.  628.32(f).
---------------------------------------------------------------------------

    \88\ A depository institution is defined in section 3 of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(c)(1)). Under this 
final rule, a credit union refers to an insured credit union as 
defined under the Federal Credit Union Act (12 U.S.C. 1752(7)).
---------------------------------------------------------------------------

    Our existing OFI rules assign a 20-percent risk weight to a claim 
on an OFI that is an OECD bank or is owned and controlled by an OECD 
bank that guarantees the claim or if the OFI or its parent has a 
sufficiently high credit rating.\89\ This final rule imposes the same 
risk weight for OFI exposures of the same nature, except that we 
eliminate the credit rating alternative in accordance with section 939A 
of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \89\ Section 615.5211(b)((16).
---------------------------------------------------------------------------

    Under this final rule, an exposure to a foreign bank receives a 
risk weight one category higher than the risk weight assigned to a 
direct exposure to the foreign bank's home country, based on the 
assignment of risk weights by CRC, as discussed above.\90\ Exposures to 
a foreign bank in a country that does not have a CRC but that is a 
member of the OECD receive a 20-percent risk weight. A System 
institution must assign a 100-percent risk weight to an exposure to a 
foreign bank in a non-OECD member country that does not have a CRC, 
except that the institution may assign a 20-percent risk weight to 
self-liquidating, trade-related contingent items that arise from the 
movement of goods and that have a maturity of 3 months or less.
---------------------------------------------------------------------------

    \90\ Foreign bank means a foreign bank as defined in Sec.  211.2 
of the Federal Reserve Board's Regulation K (12 CFR 211.2), that is 
not a depository institution. For purposes of this final rule, home 
country meant the country where an entity is incorporated, 
chartered, or similarly established.
---------------------------------------------------------------------------

    A System institution must assign a 150-percent risk weight to an 
exposure to a foreign bank immediately upon determining that an event 
of sovereign default has occurred in the bank's home country, or if an 
event of sovereign default has occurred in the foreign bank's home 
country during the previous 5 years.

          Table 4--Risk Weights for Exposures to Foreign Banks
------------------------------------------------------------------------
                                                            Risk weight
------------------------------------------------------------------------
Sovereign CRC:
  0-1...................................................              20
  2.....................................................              50
  3.....................................................             100
  4-7...................................................             150
OECD Member with no CRC.................................              20
Non-OECD Member with no CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

    Both the Basel capital framework and our existing regulation treat 
exposures to securities firms that meet certain requirements like 
exposures to depository institutions.\91\ However, like the Federal 
banking regulatory agencies, the FCA no longer believes that the risk 
profile of these firms is sufficiently similar to depository 
institutions to justify that treatment. Accordingly, the final rule 
requires System institutions to treat exposures to securities firms as 
corporate exposures, with a 100-percent risk weight.
---------------------------------------------------------------------------

    \91\ See Sec.  615.5211(b)(14) and (15).
---------------------------------------------------------------------------

5. Exposures to Public Sector Entities
    The FCA's existing risk-based capital rules assign a 20-percent 
risk weight to general obligations of states and other political 
subdivisions of OECD countries.\92\ Exposures that rely on repayment 
from specific projects (for example, revenue bonds) are assigned a risk 
weight of 50 percent. Other exposures to state and political 
subdivisions of OECD countries (including industrial revenue bonds) and 
exposures to political subdivisions of non-OECD countries receive a 
risk weight of 100 percent. The risk weights assigned to revenue 
obligations are higher than the risk weight assigned to general 
obligations because repayment of revenue obligations depends on 
specific projects, which present more risk relative to a general 
repayment obligation of a state or political subdivision of a 
sovereign.
---------------------------------------------------------------------------

    \92\ Political subdivisions of the United States include states, 
counties, cities, towns or other municipal corporations, public 
authorities, and generally any publicly owned entities that are 
instruments of a state or municipal corporation.
---------------------------------------------------------------------------

    The final rule applies the same risk weights to exposures to U.S. 
states and municipalities as the existing risk-based capital rules 
apply. Under the final rule, these political subdivisions are included 
in the definition of ``public sector entity'' (PSE). Consistent with 
both the current rules and the Basel capital framework, the final rule 
defines a PSE as a state, local authority, or other governmental 
subdivision below the level of a sovereign. This definition includes 
U.S. states and municipalities and does not include government-owned 
commercial companies that engage in activities involving trade, 
commerce, or profit that are generally conducted or performed in the 
private sector.
    Under the final rule, a System institution would assign a 20-
percent risk weight to a general obligation exposure to a PSE that is 
organized under the laws of the United States or any state or political 
subdivision thereof and a 50-percent risk weight to a revenue 
obligation exposure to such a PSE. The final rule defines a general 
obligation as a bond or similar obligation that is backed by the full 
faith and credit of a PSE. The final rule defines a revenue obligation 
as a bond or similar obligation that is an obligation of a PSE, but 
which the PSE is committed to repay with revenues from a specific 
project financed rather than general tax funds.
    Similar to the Basel framework's use of home country risk weights 
to assign a risk weight to a PSE exposure, the final rule requires a 
System institution to apply a risk weight to an exposure to a non-U.S. 
PSE based on (1) The CRC applicable to the PSE's home country or, if 
the home country has no CRC, whether it is a member of the OECD, and 
(2) whether the exposure is a general obligation or a revenue 
obligation, in accordance with Table 5.
    The risk weights assigned to revenue obligations are higher than 
the risk weights assigned to a general obligation issued by the same 
PSE, as set forth, for non-U.S. PSEs, in Table 5. Similar to exposures 
to a foreign bank, exposures

[[Page 49753]]

to a non-U.S. PSE in a country that does not have a CRC rating receive 
a 100-percent risk weight. Exposures to a non-U.S. PSE in a country 
that has defaulted on any outstanding sovereign exposure or that has 
defaulted on any sovereign exposure during the previous 5 years receive 
a 150-percent risk weight. Table 5 illustrates the risk weights for 
exposures to non-U.S. PSEs.

 Table 5--Risk Weights for Exposures to Non-U.S. PSE General Obligations
                         and Revenue Obligations
                              [in percent]
------------------------------------------------------------------------
                                            Risk weight     Risk weight
                                           for exposures   for exposures
                                            to non-U.S.     to non-U.S.
                                            PSE general     PSE revenue
                                            obligations     obligations
------------------------------------------------------------------------
Sovereign CRC:
  0-1...................................              20              50
  2.....................................              50             100
  3.....................................             100             100
  4-7...................................             150             150
OECD Member with No CRC.................              20              50
Non-OECD Member with No CRC.............             100             100
Sovereign Default.......................             150             150
------------------------------------------------------------------------

    The final rule allows a System institution to apply a risk weight 
to an exposure to a non-U.S. PSE according to the risk weight that the 
foreign banking organization supervisor allows to be assigned to it. In 
no event, however, may the risk weight for an exposure to a non-U.S. 
PSE be lower than the risk weight assigned to direct exposures to that 
PSE's home country.
6. Corporate Exposures
    Under the FCA's existing risk-based capital rules, credit exposures 
to companies that are not depository institutions or securitization 
vehicles generally are assigned to the 100-percent risk weight 
category. A 20-percent risk weight is assigned to claims on, or 
guaranteed by, a securities firm incorporated in an OECD country that 
satisfies certain conditions.
    The requirements of the final rule are generally consistent with 
the existing risk-based capital rules and require System institutions 
generally to assign a 100-percent risk weight to all corporate 
exposures.\93\ The final rule defines a corporate exposure as an 
exposure to a company that is not an exposure to a sovereign, the Bank 
for International Settlements, the European Central Bank, the European 
Commission, the International Monetary Fund, an MDB, a depository 
institution, a foreign bank, or a credit union, a PSE, a GSE, a 
residential mortgage exposure, a cleared transaction, a securitization 
exposure, an equity exposure, or an unsettled transaction. This 
definition captures all exposures that are not otherwise included in 
another specific exposure category and is not limited to exposures to 
corporations.
---------------------------------------------------------------------------

    \93\ For reasons discussed below, exposures to lower-risk OFIs 
that do not qualify for a 20-percent risk weight are assigned a 50-
percent risk weight. The U.S. rule would assign a 100-percent risk 
weight to these exposures, because they satisfy the definition of 
corporate exposure and do not qualify for a different risk weight. 
The laws and regulations governing the banking organizations 
regulated by the Federal banking regulatory agencies do not 
contemplate the OFI relationship, as the Act does.
---------------------------------------------------------------------------

    Accordingly, this category includes borrower loans such as 
agricultural loans and consumer loans, regardless of the corporate form 
of the borrower, unless those loans qualify for different risk weights 
(such as a 50-percent risk weight for residential mortgage exposures) 
under other provisions. This category also includes premises, fixed 
assets, and other real estate owned.
    Because they are corporate exposures, we proposed to include in 
this category all OFI exposures that do not qualify for the 20-percent 
depository institution/credit union risk weight provided in Sec.  
628.32(d) and discussed above. Our existing rules also contain a 
default 100-percent risk weight category.\94\ But our existing 
regulations also contain an intermediate, 50-percent risk weight 
category for claims on OFIs that do not satisfy the requirements for a 
20-percent risk weight but that otherwise meet similar capital, risk 
identification and control, and operational standards or that carry an 
investment grade NRSRO rating.\95\ Only if an OFI does not satisfy 
these standards does a claim on it receive a 100-percent risk 
weighting.
---------------------------------------------------------------------------

    \94\ Section 615.5211(d)(11).
    \95\ Section 615.5211(c)(5).
---------------------------------------------------------------------------

    We proposed to eliminate the 50-percent risk weight for OFIs and to 
assign a 100-percent risk weight to exposures to non-depository 
institution/non-credit union OFIs. In our proposal, we noted that this 
50-percent risk weighting for what would otherwise be a corporate 
exposure is inconsistent with our treatment of other corporate 
exposures. We also noted that the Federal banking regulatory agencies 
would assign a 100-percent risk weight to these exposures.
    We sought comment on our proposed capital treatment of exposures to 
OFIs and specifically on our proposal to eliminate the 50-percent risk 
weight. We received comments on this proposal from several OFIs and in 
the System Comment Letter. All commenters urged us to retain the 50-
percent risk weight. Moreover, the OFIs suggested that we eliminate the 
100-percent risk weight entirely.
    In support of their request to retain the 50-percent risk weight, 
the OFIs stated that OFIs have historically been instrumental to the 
System and deserve recognition and fairness for their historical role. 
They also stated that FCA's policies have always been designed to 
ensure that OFIs have competitive access to System bank funding and 
that increasing the risk weight requirements could impair this 
competitive access. In addition, they stated that OFI borrowing is not 
risky because of the System banks' underwriting standards and loan 
terms and conditions and because the FCA oversees the banks' 
relationships with their OFIs and has the authority to examine OFIs.
    The System Comment Letter asserted that the current risk weight 
regime has worked effectively, as evidenced by the System's low loss 
experience on OFI loans. According to this Letter, the underwriting 
requirements for OFIs found in FCA regulations at subpart P of part 
614, coupled with the two levels of capital that support the exposure 
of System banks to OFIs (capital is held at the OFI level and at the 
individual OFI borrower level), make a higher risk weight 
inappropriate. Moreover, the Letter stated that OFIs are unique to the 
System and the FCA's regulations are designed not to hinder these 
relationships.
    We believe the existing approach to risk weighting OFI exposures 
has worked well since it was adopted in 2004. As we said at that time, 
when we first adopted a 50-percent risk weight for lower-risk non-
depository institution/non-credit union OFI exposures:

    Lowering the capital requirements for most OFI loans will lower 
the operating costs of the OFI program to Farm Credit banks. This, 
in turn, should lower the cost of funds to well-capitalized and 
well-managed OFIs. Lower funding costs should enable these OFIs to 
reduce interest rates charged to their borrowers. These results 
would advance the System's public policy mission to provide 
affordable credit on a consistent basis to agriculture and rural 
America. Greater flexibility for the risk weighting of OFI loans 
should provide the Farm Credit banks additional incentives to expand 
their lending to both existing and new OFIs.\96\
---------------------------------------------------------------------------

    \96\ 69 FR 29852, 29862, May 26, 2004.

    These ideas continue to be true today. Accordingly, the final rule 
retains a 50-percent risk weight for exposures to non-depository 
institution/non-credit union OFIs that meet capital, risk

[[Page 49754]]

identification and control, and operational standards similar to 
regulated depository institutions and credit unions. The final rule 
also retains a 50-percent risk weight for exposures to non-depository 
institution/non-credit union OFIs that are investment grade or are 
owned and controlled by an investment grade entity that guarantees the 
exposures.
    In accordance with the Dodd-Frank Act, ``investment grade'' in the 
final rule refers to the definition in the rule rather than to NRSRO 
ratings. The final rule defines ``investment grade,'' in pertinent 
part, to mean that the entity to which the System institution is 
exposed through a loan has adequate capacity to meet financial 
commitments for the projected life of the exposure. Such an entity has 
adequate capacity to meet financial commitments if the risk of its 
default is low and the full and timely repayment of principal and 
interest is expected.
    We do not intend for the elimination of NRSRO ratings to change 
substantively the standards System institutions must follow when 
deciding whether an exposure is investment grade. A System institution 
may, but is not required to, consider NRSRO ratings as part of its 
independent investment grade determination and due diligence. An 
institution's consideration of NRSRO ratings must be supplemented by 
the institution's own independent analysis; an exposure does not 
automatically satisfy an investment grade standard by virtue of its 
NRSRO rating.
    We decline to eliminate the 100-percent risk weight for exposures 
to OFIs that do not satisfy the criteria for a more favorable risk 
weight. The higher risk inherent in exposures to those OFIs warrants 
the 100-percent risk weight that is generally applicable to corporate 
exposures.
    Finally, in contrast to the FCA's existing risk-based capital 
rules, all securities firms are subject to the same treatment as 
corporate exposures.
7. Residential Mortgage Exposures
    The FCA's existing risk-based capital rules assign ``qualified 
residential loans'' to the 50-percent risk-weight category.\97\ 
Qualified residential loans include both rural home loans authorized 
under Sec.  613.3030 and single-family residential loans to bona fide 
farmers, ranchers, and producers and harvesters of aquatic products. 
Qualified residential loans must have been approved in accordance with 
prudent underwriting standards suitable for residential property and 
must not be 90 days or more past due or carried in nonaccrual 
status.\98\ If the loan does not satisfy these safety and soundness 
standards, or the property is not characteristic of residential 
property, the loan receives a 100-percent risk weight.
---------------------------------------------------------------------------

    \97\ Section 615.5211(c)(2).
    \98\ See definition of qualified residential loan in Sec.  
615.5201. In addition to these credit risk standards, qualified 
residential loans must also satisfy a number of criteria designed to 
ensure that the property is residential in nature. The conditions 
for a loan to be considered nonaccrual are set forth in Sec.  
621.6(a) of the FCA's regulations. This final rule does not change 
that provision.
---------------------------------------------------------------------------

    In general, although our existing rule is structured differently, 
our existing safety and soundness standards are very similar to the 
U.S. rule's risk-weighting requirements for residential mortgage 
exposures.\99\ The major differences between the two sets of rules are 
the FCA's criteria regarding the characteristics of residential 
property, which the U.S. rule does not have.
---------------------------------------------------------------------------

    \99\ These agencies retained their existing risk-weighting 
requirements for residential mortgage exposures when they adopted 
their new capital rules.
---------------------------------------------------------------------------

    In the interest of consistency, we now structure our final rule the 
same way as the Federal banking regulatory agencies do. Moreover, we 
adopt the safety and soundness standards of the Federal banking 
regulatory agencies. As mentioned above, and as discussed below, 
although these standards are already very similar, there are a few 
changes to our rule. Finally, while we retain two of our existing 
requirements regarding the characteristics of residential property, the 
final rule eliminates the rest of these requirements as unnecessary and 
burdensome.\100\
---------------------------------------------------------------------------

    \100\ Although the final rule deletes the specific requirements 
in this area, FCA examiners will continue to verify that residential 
property securing an exposure risk weighted as a residential 
mortgage exposure does in fact exhibit characteristics of 
residential rather than agricultural property. If examiners 
determine that the property is agricultural in nature, they will 
require appropriate adjustment of the risk-based capital treatment.
---------------------------------------------------------------------------

    The final rule defines a residential mortgage exposure as an 
exposure (other than a securitization exposure or equity exposure) that 
is primarily secured by a first or subsequent lien on one-to-four 
family residential property, provided that the dwelling (including 
attached components such as garages, porches, and decks) represents at 
least 50 percent of the total appraised value of the collateral secured 
by the first or subsequent lien.\101\
---------------------------------------------------------------------------

    \101\ To ensure that the collateral is primarily residential 
rather than agricultural in nature, the final rule revises the 
definition adopted in the U.S. rule to include the requirement 
regarding the appraised value of the dwelling relative to the value 
of the collateral as a whole.
---------------------------------------------------------------------------

    The final rule assigns a residential mortgage exposure to the 50-
percent risk-weight category if the property is either owner-occupied 
or rented \102\ and if the exposure was made in accordance with prudent 
underwriting standards suitable for residential property, including 
standards relating to the loan amount as a percentage of the appraised 
value of the property; \103\ is not 90 days or more past due or carried 
in non-accrual status; and is not restructured or modified.\104\
---------------------------------------------------------------------------

    \102\ The FCA's final risk-weighting provisions do not expand 
the lending authorities of System institutions.
    \103\ The requirement that the underwriting standards be 
suitable for residential property is the other requirement the final 
rule adds to ensure that the collateral is primarily residential 
rather than agricultural in nature.
    \104\ The FCA's existing regulation does not prohibit loans that 
have been restructured or modified from receiving a 50-percent risk 
weight. The other requirements of the final rule carry over from our 
existing regulation.
---------------------------------------------------------------------------

    A System institution must assign a 100-percent risk weight to all 
residential mortgage exposures that do not satisfy the criteria for a 
50-percent risk weight.
    The final rule maintains the current risk-based capital treatment 
for residential mortgage exposures that are guaranteed by the U.S. 
Government or U.S. Government agencies. Accordingly, residential 
mortgage exposures that are unconditionally guaranteed by the U.S. 
Government or a U.S. Government agency receive a 0-percent risk weight, 
and residential mortgage exposures that are conditionally guaranteed by 
the U.S. Government or a U.S. Government agency receive a 20-percent 
risk weight.
    Under the final rule, a residential mortgage exposure may be 
assigned to the 50-percent risk-weight category only if it is not 
restructured or modified. We believe this new restriction on System 
institution risk weighting, which the Federal banking regulatory 
agencies adopted, is appropriate based on risk.
    However, a residential mortgage exposure modified or restructured 
on a permanent or trial basis solely pursuant to the U.S. Treasury's 
Home Affordable Mortgage Program (HAMP) is not considered to be 
restructured or modified and continues to receive a 50-percent risk 
weighting. Treating mortgage loans modified pursuant to HAMP in this 
manner is appropriate in light of the special and unique incentive 
features of HAMP, and the fact that the program is offered by the U.S. 
Government to achieve the public policy objective of promoting 
sustainable loan modifications for homeowners at risk of foreclosure in 
a

[[Page 49755]]

way that balances the interests of borrowers, servicers, and 
lenders.\105\
---------------------------------------------------------------------------

    \105\ The U.S. rule establishes risk weights for ``pre-sold 
residential construction loans'' and ``statutory multifamily 
mortgages.'' These are loans that are authorized by statutes that do 
not apply to System institutions, and therefore we do not adopt risk 
weights for them.
---------------------------------------------------------------------------

    System institutions should be mindful that the residential mortgage 
market is likely to change in the future, in part because of 
regulations the CFPB is adopting to improve the quality of mortgage 
underwriting and to reduce the associated credit risk and in part for 
market-driven or other reasons. The FCA may propose changes in the 
treatment of residential mortgage exposures in the future. If so, we 
intend to take into consideration structural and product market 
developments, other relevant regulations, and potential issues with 
implementation across various product types.
8. High Volatility Commercial Real Estate Exposures
    We proposed to assign a 150-percent risk weight to HVCRE exposures, 
unless those exposures satisfied one or more of four specified 
exemptions. Because the System Comment Letter identified this as one of 
its threshold issues, we discuss this issue above, in Section I.D.8. of 
this preamble. As explained in that section, we are not finalizing the 
provisions governing HVCRE exposures at this time, but we expect that 
we will engage in additional rulemaking or issue guidance on HVCRE 
exposures in the future.
9. Past Due and Nonaccrual Exposures
    Under the FCA's existing risk-based capital rules, the risk weight 
of a loan does not change if the loan becomes past due or enters 
nonaccrual status, with the exception of certain residential mortgage 
loans. Like the Federal banking regulatory agencies, however, the FCA 
believes that a higher risk weight is appropriate for past due and 
nonaccrual exposures (such as past due or nonaccrual agricultural or 
other borrower loans) to reflect the increased risk associated with 
such exposures. We adopt without modification the proposed treatment of 
past due and nonaccrual exposures, which reflects the impaired credit 
quality of such exposures.
    The final rule requires a System institution to assign a risk 
weight of 150 percent to an exposure that is not guaranteed or is not 
secured by financial collateral (and that is not a sovereign exposure 
or a residential mortgage exposure) if it is 90 days or more past due 
or recognized as nonaccrual.\106\ We believe this risk weight is 
appropriate and that any increased capital burden, potential rise in 
procyclicality, or impact on lending associated with the increased risk 
weight is justified given the overall objective of capturing the risk 
associated with the impaired credit quality of these exposures.
---------------------------------------------------------------------------

    \106\ FCA regulations at subpart C of part 621 govern loan 
performance and valuation assessment. A loan is considered 
nonaccrual if it meets any of the conditions specified in Sec.  
621.6(a). A loan may be reinstated to accrual status if it meets 
each of the criteria specified in Sec.  621.9.
---------------------------------------------------------------------------

    Moreover, the increased risk weight does not double-count the risk 
of a past due or nonaccrual exposure, even though the ALL is already 
reflected in the risk-based capital numerator, because the ALL is 
intended to cover estimated, incurred losses as of the balance sheet 
date, not unexpected losses. The higher risk weight on past due and 
nonaccrual exposures ensures sufficient regulatory capital for the 
increased probability of unexpected losses on these exposures.
    Rather than assigning a 150-percent risk weight under this section, 
a System institution is permitted to assign a risk weight pursuant to 
Sec. Sec.  628.36 and 628.37 to the portion of a past due or nonaccrual 
exposure that is collateralized by financial collateral or that is 
guaranteed if the financial collateral, guarantee, or credit derivative 
meets the requirements for recognition described in those 
sections.\107\
---------------------------------------------------------------------------

    \107\ Final Sec.  628.2 defines financial collateral as 
collateral in the form of, in pertinent part, cash, investment grade 
debt instruments that are not resecuritization exposures, publicly 
traded equity securities and convertible bonds, and mutual fund 
(including money market fund) shares if a price is publicly quoted 
daily, in which the System institution has a perfected, first-
priority security interest (except for cash). Financial collateral 
does not include collateral such as real estate (whether 
agricultural or not) or chattel.
---------------------------------------------------------------------------

    The System Comment Letter agreed that our proposed risk weight for 
past due exposures was consistent with that of the Federal banking 
regulatory agencies, but it expressed concern that the FCA, as a matter 
of examination practice, has been prescriptive and slow to recognize 
the performance of a loan that is in past due or nonaccrual status. The 
Letter stated that the FCA's approach has resulted in a significant 
level of cash-basis nonaccrual loans, and it asked the FCA to provide 
improved examination direction for the movement of loans from 
nonaccrual to accrual.
    An association commented that System institutions are much more 
conservative than commercial banks in their willingness to move 
accounts into nonaccrual status even if the loans remain in compliance 
and are current, as evidenced by the high percentage of current 
nonaccrual loans. This association asserted that requiring 50-percent 
additional capital for these loans will create an incentive to loosen 
these conservative standards, and it recommended that we revise the 
rule to apply only to exposures that are both 90 days past due and 
nonaccrual (rather than either 90 days past due or nonaccrual, as in 
the proposed rule). Alternatively, the association requested that we 
delete the nonaccrual standard completely and retain only the 90 days 
past due standard.
    We decline to change, in this rulemaking, either our existing 
regulations governing nonaccrual status or the regulation governing 
risk weights for past due and nonaccrual loans that we now adopt. FCA's 
standards for nonaccrual loans are generally similar, although not 
identical, to those of the Federal banking regulatory agencies.\108\ 
Although there may be some differences in standards that would result 
in some loans being considered nonaccrual in the System but not 
nonaccrual by a commercial bank, we believe nonaccrual exposures have 
more risk and therefore that a higher risk weight is warranted.\109\
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    \108\ The Federal banking regulatory agencies do not appear to 
define nonaccrual standards by regulation. In its Instructions for 
Preparation of Consolidated Reports of Condition and Income (call 
report instructions), however, the Federal Financial Institutions 
Examination Council (FFIEC) defines nonaccrual status and explains 
when an asset is to be reported as being in nonaccrual status. The 
FFIEC is a formal interagency body established by law in 1979 and 
empowered, among other things, to prescribe uniform principles, 
standards, and report forms for the Federal examination of financial 
institutions by the Federal banking regulatory agencies. The 
instructions for FFIEC 031 (filed by banks with foreign offices) and 
FFIEC 041 (filed by banks without foreign offices) define 
``nonaccrual status'' in the glossary (pp. A-59--A-62) and explain 
when an asset is to be reported as being in nonaccrual status (pp. 
RC-N-2--RC-N-3). These call report instructions were last updated in 
June 2015.
    \109\ As discussed above, our existing capital rules assign a 50 
percent risk weight to ``qualified residential loans,'' the 
definition of which includes that such loans are not 90 days or more 
past due or carried in nonaccrual status, while all other 
residential loans are assigned a 100 percent risk weight.
---------------------------------------------------------------------------

    Nevertheless, we appreciate the comments we received on this issue. 
The FCA's Spring 2016 Regulatory Projects Plan, adopted by the FCA 
Board on February 11, 2016, indicates that we are reviewing, through 
April 2016, a project that would consider amendments to the criteria 
for reinstating nonaccrual loans under Sec.  621.9.\110\
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    \110\ http://www.fca.gov/Download/RegProjPlanSpring2016.pdf.

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[[Page 49756]]

10. Other Assets
    Generally consistent with our existing risk-based capital rules, 
the final rule assigns the risk weights described below for the 
following exposures:
    (1) A 0-percent risk weight to cash owned and held in all offices 
of the System institution, in transit, or in accounts at a depository 
institution or a Federal Reserve Bank; to gold bullion held in a 
depository institution's vaults on an allocated basis to the extent 
gold bullion assets are offset by gold bullion liabilities; and to 
exposures that arise from the settlement of cash transactions (such as 
equities, fixed income, spot foreign exchange and spot commodities) 
with a central counterparty where there is no assumption of ongoing 
counterparty credit risk by the central counterparty after settlement 
of the trade;
    (2) A 20-percent risk weight to cash items in the process of 
collection;
    (3) A 100-percent risk weight to DTAs arising from temporary 
differences relating to net operating loss carrybacks;
    (4) A 100-percent risk weight to all MSAs; and
    (5) A 100-percent risk weight to all assets not specifically 
assigned a different risk weight under this rule (other than exposures 
that would be deducted from tier 1 or tier 2 capital pursuant to Sec.  
628.22).
    As discussed above, the FCA's final rule, unlike the U.S. rule, 
requires a System institution to deduct from capital all DTAs, other 
than those arising from temporary differences that relating to net 
operating loss carrybacks. In addition, because System institutions 
have such little exposure to MSAs, the final rule simplifies the 
capital treatment that would apply under the U.S. rule. Accordingly, we 
risk weight DTAs and MSAs as stated above rather than adopting the 
capital treatment, including the 250-percent risk weight, adopted in 
the U.S. rule.\111\
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    \111\ If a System institution were to increase significantly its 
exposures to MSAs, we would consider exercising our authority to 
require a higher risk weight.
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11. Exposures to Other System Institutions
    Under final Sec.  628.22, as discussed above, a System institution 
must deduct from regulatory capital all equity investments (including 
preferred stock) in another System institution, and therefore we do not 
provide a risk weighting for these investments. These investments could 
include, for example, an association's investment in a System bank and 
a System bank's investment in an association.
    System institutions have the authority to enter into loss-sharing 
agreements with other System institutions under Sec.  614.4340. If 
System institutions enter into a loss-sharing agreement in the future, 
the FCA would assign a risk weight for any associated exposures at that 
time, using our regulatory reservation of authority.
12. Specialized Exposures
    By FCA Bookletter BL-052, dated January 25, 2006, the FCA permitted 
loans recorded before January 1, 2006 that were supported by Tobacco 
Buyout assignments to be risk weighted at 20 percent.\112\ FCA 
Bookletter BL-052 will remain in effect for the duration of these 
loans. Accordingly, this capital treatment does not need to be 
addressed in this final rule, and no additional guidance is necessary.
---------------------------------------------------------------------------

    \112\ Such loans recorded after this date were required to be 
risk weighted at 100 percent.
---------------------------------------------------------------------------

    By FCA Bookletter BL-053, dated February 27, 2007, the FCA 
permitted System institutions to assign a lower risk weight than would 
otherwise apply to certain electrical cooperative assets, based on the 
unique characteristics and lower risk profile of this industry 
segment.\113\ We did not propose this favorable risk weighting for 
these exposures in this rule, but we sought comment as to whether we 
should retain this risk weighting. Because the System Comment Letter 
identified this as one of its threshold issues, we discuss this issue 
above, in Section I.D.7. of this preamble. As explained in that 
section, we do not include this lower risk weight for exposures to 
electric cooperative assets in this final rule, but FCA Bookletter BL-
053 remains in effect. We continue to evaluate the comments we have 
received and anticipate that we will issue further guidance on the 
capital treatment of these exposures in the future.
---------------------------------------------------------------------------

    \113\ We authorized this treatment under our regulatory 
reservation of authority.
---------------------------------------------------------------------------

C. Off-Balance Sheet Items

1. Credit Conversion Factors (CCF)
    Under this final rule, as under our existing risk-based capital 
rules, a System institution calculates the exposure amount of an off-
balance sheet item by multiplying the off-balance sheet component, 
which is usually the contractual amount, by the applicable CCF. This 
treatment applies to off-balance sheet items, such as commitments, 
contingent items, guarantees, certain repo-style transactions, 
financial standby letters of credit, and forward agreements.
    We proposed to impose the risk weight and CCF requirements on the 
unused commitment of a System bank to an association to fund the direct 
loan.\114\ The agreement by a System bank to fund an association's 
direct loan satisfies the rule's definition of commitment, which is 
``any legally binding agreement that obligates a System institution to 
extend credit or to purchase assets.'' \115\ Moreover, as discussed in 
the preamble to the proposed rule, we believe these commitments carry 
risk that warrants the holding of capital against them.
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    \114\ Such a commitment is not unconditionally cancelable by the 
System bank. Under the GFA that governs the commitment, a System 
bank must continue to fund the direct loan as long as the 
association or OFI satisfies specified conditions.
    \115\ Section 628.2.
---------------------------------------------------------------------------

    Because the System Comment Letter identified this as one of its 
threshold issues, we discuss this issue above, in Section I.D.9. of 
this preamble. We discuss several technical and mechanical issues in 
this section.
    This final rule clarifies that unused commitments on bank loans to 
OFIs are also subject to this capital treatment. Although it was not 
stated explicitly in the proposed rule, it was clear from the 
definition of ``commitment'' that commitments from banks to OFIs were 
included in this provision.\116\
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    \116\ We note that FCA regulation Sec.  614.4560 requires System 
banks and OFIs to execute GFAs that are subject to the same 
regulations that bank-association GFAs are subject to.
---------------------------------------------------------------------------

    We provide the clarification that several commenters sought on the 
mechanics of the capital calculation. One commenter asked FCA to 
confirm that a 20-percent CCF would be applied to the wholesale unused 
commitment and that a 20-percent risk weight would be applied to the 
association obligor. With respect to associations, we confirm both of 
these interpretations. Under final Sec.  628.33(b)(2)(iii), a System 
bank's unused commitment to an association that is not unconditionally 
cancelable by the System bank is assigned a 20-percent CCF, regardless 
of maturity. And final Sec.  628.32(c) assigns a 20-percent risk weight 
to an exposure to a GSE (other than an equity exposure or preferred 
stock), including direct loans from System banks to associations.\117\
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    \117\ The unused commitment of a bank to an OFI that is not 
unconditionally cancelable by the System bank is also subject to a 
20-percent CCF, regardless of maturity. As discussed above, OFI 
exposures are assigned a risk weight of 20 percent, 50 percent, or 
100 percent, depending on the OFI.
---------------------------------------------------------------------------

    Another commenter presumed, since the GFA is usually a multi-year 
agreement, that a 50-percent CCF would be assigned to the commitment. 
As discussed above, the final rule assigns a

[[Page 49757]]

20-percent CCF to the commitment, regardless of its term, whether it is 
to an association or to an OFI.
    A commenter asked how the commitment amount should be calculated, 
since the excess amount of the borrowing base changes on a daily basis. 
As discussed above, FCA regulation Sec.  614.4125(d), which requires 
the GFA or promissory note to establish a maximum credit limit 
determined by objective standards, requires the maximum credit limit to 
be a specific dollar amount rather than an amount based on the daily 
borrowing base. Final Sec.  628.33(a)(5) provides that the exposure 
amount of a System bank's unused commitment to an association or OFI is 
the difference between the association's or OFI's maximum credit limit 
with the System bank (as established by the general financing agreement 
or promissory note, as required by Sec.  614.4125(d)) and the amount 
the association or OFI has borrowed from the System bank. For example, 
if a System bank has a $100 maximum credit limit to an association or 
OFI and the association or OFI has $80 outstanding on its direct loan, 
the System bank's exposure amount on its unused commitment would be 
$20.
    A commenter asked how frequently this calculation should be 
performed. An institution must remain above the minimum capital 
requirements at all times, and it must therefore perform the 
calculation as often as is necessary to ensure compliance with these 
regulations.
    Similar to the current risk-based capital rules, under the final 
rule a System institution would apply a 0-percent CCF to the unused 
portion of commitments that are unconditionally cancelable by the 
institution. Unconditionally cancelable means a commitment that a 
System institution may, at any time, with or without cause, refuse to 
extend credit under the commitment (to the extent permitted under 
applicable law). In the case of an operating line of credit, a System 
institution is deemed able to unconditionally cancel the commitment if 
it can, at its option, prohibit additional extensions of credit, reduce 
the credit line, and terminate the commitment to the full extent 
permitted by applicable law. If a System institution provides a 
commitment that is structured as a syndication, it is required to 
calculate the exposure amount only for its pro rata share of the 
commitment.
    The final rule maintains the current 20-percent CCF for self-
liquidating, trade-related contingencies with an original maturity of 
14 months or less.\118\ In addition, the final rule increases the CCF 
from 0 percent to 20 percent for commitments with an original maturity 
of 14 months or less that are not unconditionally cancelable by a 
System institution.
---------------------------------------------------------------------------

    \118\ As under our existing rules, we adopt a 14-month rather 
than a 12-month original maturity because the agricultural 
production cycle and related marketing efforts typically extend 
beyond 12 months. A 14-month maturity allows a commitment for an 
operating loan to cover an entire cycle. A new commitment would be 
issued for the next cycle. Allowing more favorable capital treatment 
for a 14-month rather than a 12-month commitment does not materially 
raise risk in the portfolios of System institutions.
---------------------------------------------------------------------------

    As under our existing risk-based capital rules, under the final 
rule a System institution would apply a 50-percent CCF to unused 
commitments with an original maturity of more than 14 months that are 
not unconditionally cancelable by the institution (except, as discussed 
above, commitments of System banks to fund direct loans to associations 
or OFIs, which have a CCF of 20 percent) and to transaction-related 
contingent items, including performance bonds, bid bonds, warranties, 
and performance standby letters of credit.
    Under this final rule, a System institution would be required to 
apply a 100-percent CCF to off-balance sheet guarantees, repurchase 
agreements, credit-enhancing representations and warranties that are 
not securitization exposures, securities lending and borrowing 
transactions, financial standby letters of credit, forward agreements, 
and other similar exposures. The off-balance sheet component of a 
repurchase agreement equals the sum of the current fair values of all 
positions the System institution has sold subject to repurchase. The 
off-balance sheet component of a securities lending transaction is the 
sum of the current fair values of all positions the System institution 
has lent under the transaction. For securities borrowing transactions, 
the off-balance sheet component is the sum of the current fair values 
of all non-cash positions the institution has posted as collateral 
under the transaction. In certain circumstances, a System institution 
may instead determine the exposure amount of the transaction as 
described in Sec.  628.37 of the final rule.
    In contrast to our existing risk-based capital rules, which require 
capital for securities lending and borrowing transactions and 
repurchase agreements only if they generate an on-balance sheet 
exposure, the final rule requires a System institution to hold risk-
based capital against all repo-style transactions (that is, repurchase 
agreements, reverse repurchase agreements, securities lending 
transactions, and securities borrowing transactions), regardless of 
whether they generate on-balance sheet exposures, as described in Sec.  
628.37 of the final rule. For example, capital is required against the 
cash receivable that a System institution generates when it borrows a 
security and posts cash collateral to obtain the security. We adopt 
this approach because System institutions face counterparty credit risk 
when engaging in repo-style transactions, even if those transactions do 
not generate on-balance sheet exposures, and thus these transactions 
should not be exempt from risk-based capital requirements.
2. Credit-Enhancing Representations and Warranties
    Consistent with our existing risk-based capital rules, under the 
final rule a System institution is subject to a risk-based capital 
requirement when it provides credit-enhancing representations and 
warranties on assets sold or otherwise transferred to third parties, as 
such positions are considered recourse arrangements.\119\
---------------------------------------------------------------------------

    \119\ Sections 615.5201 and 615.5210.
---------------------------------------------------------------------------

    A System institution is required to hold capital only for the 
maximum contractual amount of its exposure under the representations 
and warranties, not against the value of the underlying loan. Moreover, 
a System institution must hold capital for the life of a credit-
enhancing representation and warranty, but not after its expiration, 
regardless of the maturity of the underlying loan.

D. Over-the-Counter Derivative Contracts

    We proposed capital treatment that would require a System 
institution to hold risk-based capital for counterparty credit risk for 
an OTC derivative contract. We received no comments on this proposed 
capital treatment, and we adopt it as proposed.
    As defined in final Sec.  628.2, a derivative contract is a 
financial contract whose value is derived from the values of one or 
more underlying assets, reference rates, or indices of asset values or 
reference rates. A derivative contract includes interest rate, exchange 
rate, equity, commodity, credit, and any other derivative contract that 
poses similar counterparty credit risks. Derivative contracts also 
include unsettled securities, commodities, and foreign exchange 
transactions with a contractual settlement or delivery lag that is 
longer than the lesser of the market standard for the particular

[[Page 49758]]

instrument or 5 business days. This applies, for example, to mortgage-
backed securities (MBS) transactions that the GSEs conduct in the To-
Be-Announced market.
    Under the final rule, an OTC derivative contract does not include a 
derivative contract that is a cleared transaction, which is subject to 
a specific treatment as described elsewhere in this preamble.
    The preamble to the proposed rule explains how to determine the 
risk weighted asset amount for a single OTC derivative contract that is 
not subject to a qualifying master netting agreement and for multiple 
OTC derivative contracts subject to a qualifying master netting 
agreement.\120\ It also explains how to recognize, in risk weighting 
OTC derivative contracts, the risk mitigation benefits of financial 
collateral and credit derivatives.\121\
---------------------------------------------------------------------------

    \120\ The Federal banking regulatory agencies and the Federal 
Housing Finance Administration, together with the FCA, have adopted 
a rule that establishes minimum margin requirements for covered swap 
entities. 80 FR 74040, November 30, 2015. That margin rule permits a 
covered swap entity to calculate variation margin requirements on an 
aggregate, net basis under an eligible master netting agreement with 
a counterparty. In order to minimize operational burden for a 
covered swap entity, which otherwise would have to make a separate 
determination as to whether its netting agreements meet the 
requirements of this capital rule as well as comply with the margin 
rule, the definition of eligible master netting agreement in the 
margin rule aligns with the definition of qualifying master netting 
agreement in this capital rule. Like the proposed capital rule, 
however, this final capital rule uses the term ``qualifying master 
netting agreement'' to avoid confusion with and distinguish from the 
term used under the margin rules.
    \121\ Final Sec.  628.2 defines financial collateral as 
collateral in the form of, in pertinent part, cash, investment grade 
debt instruments that are not resecuritization exposures, publicly 
traded equity securities and convertible bonds, and mutual fund 
(including money market fund) shares if a price is publicly quoted 
daily, in which the System institution has a perfected, first-
priority security interest (except for cash). Financial collateral 
does not include collateral such as real estate (whether 
agricultural or not) or chattel.
---------------------------------------------------------------------------

    Rather than repeating the discussion of this capital treatment that 
we provided in the preamble to the proposed rule, we invite interested 
persons to review the discussion in that preamble.\122\
---------------------------------------------------------------------------

    \122\ See Section IV.D. of the preamble to the proposed rule, 79 
FR 52838-52840, September 4, 2014.
---------------------------------------------------------------------------

E. Cleared Transactions

    Like the BCBS and the Federal banking regulatory agencies, the FCA 
supports incentives designed to encourage clearing of derivative and 
repo-style transactions \123\ through a central counterparty (CCP) 
wherever possible in order to promote transparency, multilateral 
netting, and robust risk management practices. Although there are some 
risks associated with CCPs, we believe that CCPs generally help improve 
the safety and soundness of the derivatives and repo-style transactions 
markets through the multilateral netting of exposures, establishment, 
and enforcement of collateral requirements, and the promotion of market 
transparency.
---------------------------------------------------------------------------

    \123\ See Sec.  628.2 of the final rule for the definition of a 
repo-style transaction.
---------------------------------------------------------------------------

    We adopt without change the capital treatment that we proposed for 
cleared transactions. We received one comment that supported this 
proposed capital treatment.\124\
---------------------------------------------------------------------------

    \124\ The Federal banking regulatory agencies adopted regulatory 
provisions contemplating that their regulated banking organizations 
could act as clearing members as well as clearing member clients. We 
did not propose comparable provisions based on our belief that 
System institutions would not want to act as clearing members 
because of the complexity, and we stated that in the absence of such 
regulations, we could address risk-weighting issues on a case-by-
case basis. In response to our specific invitation for comment on 
whether we should adopt such provisions, the System Comment Letter 
agreed with our omission, stating that the commenters applauded 
FCA's overall philosophical approach of not including complicated 
provisions that are not currently applicable and, as a result, are 
unnecessary. Accordingly, the final rule, like the proposed rule, 
contains no such provisions.
---------------------------------------------------------------------------

    Under the final rule, a System institution, acting as a clearing 
member client, is required to hold risk-based capital for all of its 
cleared transactions. The preamble to the proposed rule explains the 
definition of cleared transaction, as well as other relevant terms, 
such as clearing member client. It also explains that derivative 
transactions must satisfy additional criteria to be cleared 
transactions and that derivative transactions that do not meet these 
additional criteria are OTC derivative transactions. In addition, it 
explains the capital treatment for cleared transactions.
    Rather than repeating the discussion of this capital treatment that 
we provided in the preamble to the proposed rule, we invite interested 
persons to review the discussion in that preamble.\125\
---------------------------------------------------------------------------

    \125\ See Section IV.E. of the preamble to the proposed rule, 79 
FR 52840-52842, September 4, 2014.
---------------------------------------------------------------------------

F. Credit Risk Mitigation

    System institutions use a number of techniques to mitigate credit 
risks. For example, a System institution may collateralize exposures 
with cash or securities; a third party may guarantee an exposure; a 
System institution may buy a credit derivative to offset an exposure's 
credit risk; or a System institution may net exposures with a 
counterparty under a netting agreement.
    The final rule adopts without change the proposed rule's approach 
to allowing System institutions to recognize the risk-mitigation 
effects of guarantees, credit derivatives, and collateral for risk-
based capital purposes. We received one comment that supported this 
proposed capital treatment.\126\
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    \126\ Unlike the Federal banking regulatory agencies, we did not 
propose to permit System institutions to calculate market price 
volatility and foreign exchange volatility using their own internal 
estimates. We explained that we believed, due to the complexity of 
developing and using these estimates, that no System institution 
would be likely to use its own estimates of haircuts, and we noted 
that even without such a provision, we would be able to permit a 
System institution to use its own estimates in the future on a case-
by-case basis, using standards similar to those contained in the 
U.S. rule.
    In response to our request for comment on whether our regulation 
should permit the use of a System institution's own estimates, the 
System Comment Letter stated that it saw no need for a provision of 
this nature. It stated that the provisions we had proposed appear 
currently workable for the System, and it applauded the FCA for not 
including provisions that are not currently applicable or expected 
to be needed any time soon. Accordingly, like the proposed rule, the 
final rule does not permit System institutions to calculate market 
price volatility and foreign exchange volatility using their own 
internal estimates.
---------------------------------------------------------------------------

    As the preamble to the proposed rule explains, a System institution 
generally may use a substitution approach to recognize the credit risk 
mitigation effect of an eligible guarantee from an eligible guarantor 
and the simple approach to recognize the credit risk mitigation effect 
of collateral. That preamble explains these approaches in detail.
    The preamble to the proposed rule also explains that although the 
use of credit risk mitigants may reduce or transfer credit risk, it 
simultaneously may increase other risks, including operational, 
liquidity, or market risk. Accordingly, a System institution is 
expected to employ robust procedures and processes to control risks, 
including roll-off and concentration risks, and monitor and manage the 
implications of using credit risk mitigants for the institution's 
overall credit risk profile.
    Rather than repeating the discussion of this capital treatment that 
we provided in the preamble to the proposed rule, we invite interested 
persons to review the discussion in that preamble.\127\
---------------------------------------------------------------------------

    \127\ See Section IV.F. of the preamble to the proposed rule, 79 
FR 52842-52846, September 4, 2014.
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G. Unsettled Transactions

    The final rule provides for a separate risk-based capital 
requirement for transactions involving securities, foreign exchange 
instruments, and commodities

[[Page 49759]]

that have a risk of delayed settlement or delivery. This capital 
requirement does not, however, apply to certain types of transactions, 
including:
    (1) Cleared transactions that are marked-to-market daily and 
subject to daily receipt and payment of variation margin;
    (2) Repo-style transactions, including unsettled repo-style 
transactions;
    (3) One-way cash payments on OTC derivative contracts; or
    (4) Transactions with a contractual settlement period that is 
longer than the normal settlement period (which the rule defines as the 
lesser of the market standard for the particular instrument or 5 
business days).\128\
---------------------------------------------------------------------------

    \128\ Such transactions are treated as derivative contracts as 
provided in Sec.  628.34 or Sec.  628.35 of the rule.
---------------------------------------------------------------------------

    Under the final rule, in the case of a system-wide failure of a 
settlement, clearing system, or central counterparty, the FCA may waive 
risk-based capital requirements for unsettled and failed transactions 
until the situation is rectified.
    This capital treatment is unchanged from that in the proposal. We 
received no comments on this proposed capital treatment.
    The preamble to the proposed rule explains that the rule provides 
separate treatments for delivery-versus-payment (DvP) and payment-
versus-payment (PvP) transactions with a normal settlement period, and 
non DvP/PvP transactions with a normal settlement period. It explains 
these transactions and their capital treatments.
    Rather than repeating the discussion of this capital treatment that 
we provided in the preamble to the proposed rule, we invite interested 
persons to review the discussion in that preamble.\129\
---------------------------------------------------------------------------

    \129\ See Section IV.G. of the preamble to the proposed rule, 79 
FR 52846-52847, September 4, 2014.
---------------------------------------------------------------------------

H. Risk Weighted Assets for Securitization Exposures

    Under the FCA's existing risk-based capital rules, a System 
institution may use external ratings issued by NRSROs to assign risk 
weights to certain recourse obligations, residual interests, direct 
credit substitutes, asset-backed securities (ABS), and MBS. The final 
rule revises the risk-based capital framework for securitization 
exposures. These revisions include removing references to and reliance 
on credit ratings to determine risk weights for these exposures and 
using alternative standards of creditworthiness, as required by section 
939A of the Dodd-Frank Act. In addition, we update the terminology for 
the securitization framework, include a definition of a securitization 
exposure that encompasses a wider range of exposures with similar risk 
characteristics, and implement new due diligence requirements for 
securitization exposures.
    The final rule adopts without change the proposed risk-based 
capital framework for securitization exposures. The final rule defines 
a securitization exposure as an on- or off-balance sheet credit 
exposure (including credit-enhancing representations and warranties) 
that arises from a traditional or synthetic securitization (including a 
resecuritization), or an exposure that directly or indirectly 
references a securitization exposure.
    The preamble to the proposed rule (1) explains that the 
securitization framework is designed to address the credit risk of 
exposures that involve the tranching of the credit risk of one or more 
underlying financial exposures; \130\ (2) provides an overview of the 
securitization framework and explains the definitions of terms used in 
the framework, such as traditional securitization, synthetic 
securitization, and resecuritization exposure; (3) explains the 
operational requirements for institutions using the securitization 
framework, including due diligence requirements; (4) explains that 
System institutions generally must calculate a risk weighted asset 
amount for a securitization exposure by applying either the simplified 
supervisory formula approach or a gross-up approach; (5) explains how 
to determine the exposure amount of a securitization exposure; and (6) 
explains exceptions under the securitization framework, alternative 
treatments for certain types of securitization exposures, and other 
important matters.
---------------------------------------------------------------------------

    \130\ Only those MBS that involve tranching of credit risk are 
considered securitization exposures. Mortgage-backed pass-through 
securities (for example, those guaranteed by Freddie Mac or Fannie 
Mae) that feature various maturities but do not involve tranching of 
credit risk do not meet the definition of a securitization exposure. 
These securities are risk weighted in accordance with the general 
risk-weighting provisions.
---------------------------------------------------------------------------

    Rather than repeating the comprehensive discussion of this capital 
treatment that we provided in the preamble to the proposed rule, we 
invite interested persons to review the discussion in that 
preamble.\131\ We received two comments on this proposed capital 
treatment, which we now address.
---------------------------------------------------------------------------

    \131\ See Section IV.H. of the preamble to the proposed rule, 79 
FR 52847-52854, September 4, 2014.
---------------------------------------------------------------------------

    First, we received comments on the omission of references to asset-
backed commercial paper (ABCP) programs in the proposed rule. The U.S. 
rule excludes certain exposures to asset-backed commercial paper (ABCP) 
programs from the definition of resecuritization exposure. That rule 
defines an ABCP program as a program established primarily for the 
purpose of issuing commercial paper that is investment grade and backed 
by underlying exposures held in a bankruptcy-remote special purpose 
entity.
    The System has access to the capital markets through the Funding 
Corporation; we believe it unlikely that a System institution would 
establish an ABCP program, because if the Funding Corporation's ability 
to issue debt ever was impeded, we believe the ability of an ABCP 
program to issue commercial paper would face the same difficulties. 
Accordingly, in the interest of simplifying our regulations where 
possible, we proposed to make no reference to ABCP programs.
    In response to our specific request for comment as to whether we 
should include provisions in our risk-based capital rules regarding 
ABCP programs that are comparable to those in the U.S. rule, the System 
Comment Letter stated that our reason for proposing to omit ABCP 
provisions seemed reasonable and logical, that it seemed unlikely that 
either the System or an individual System bank would seek to establish 
an ABCP program, and that in the unlikely event they did want to 
establish such a program, the FCA could address it on a case-by-case 
basis. The Letter concluded, therefore, that ABCP provisions are 
unnecessary. Accordingly, the final rule, like the proposed rule, makes 
no reference to ABCP programs.
    Second, we received comments on the due diligence requirements that 
we proposed for securitization exposures. Like the U.S. rule, our 
proposed due diligence requirements were designed to address the 
concern among regulators that during the recent financial crisis, many 
banking organizations relied exclusively on NRSRO ratings and did not 
perform their own credit analysis of the securitization exposures.
    Our proposed rule would have required a System institution to 
demonstrate, to the FCA's satisfaction, a comprehensive understanding 
of the features of a securitization exposure that would materially 
affect the exposure's performance. The proposed rule would have 
required the System institution's analysis to be commensurate with the 
complexity of the exposure and the

[[Page 49760]]

materiality of the exposure in relation to capital of the institution. 
On an on-going basis (no less frequently than quarterly), the System 
institution would have been required to evaluate, review, and update as 
appropriate the analysis required under Sec.  628.41(c)(1) for each 
securitization exposure. The pre- and periodic post-acquisition 
analysis of the exposure's risk characteristics would have had to 
consider:
    (1) Structural features of the securitization that would materially 
affect the performance of the exposure, for example, the contractual 
cash flow waterfall, waterfall-related triggers, credit enhancements, 
liquidity enhancements, fair value triggers, the performance of 
organizations that service the position, and deal-specific definitions 
of default;
    (2) Relevant information regarding the performance of the 
underlying credit exposure(s), for example, the percentage of loans 30, 
60, and 90 days past due; default rates; prepayment rates; loans in 
foreclosure; property types; occupancy; average credit score or other 
measures of creditworthiness; average LTV ratio; and industry and 
geographic diversification data on the underlying exposure(s);
    (3) Relevant market data on the securitization, for example, bid-
ask spread, most recent sales price and historical price volatility, 
trading volume, implied market rating, and size, depth and 
concentration level of the market for the securitization; and
    (4) For resecuritization exposures, performance information on the 
underlying securitization exposures, for example, the issuer name and 
credit quality, and the characteristics and performance of the 
exposures underlying the securitization exposures.
    Under the proposed rule, if the System institution was not able to 
meet these due diligence requirements and demonstrate a comprehensive 
understanding of a securitization exposure to the FCA's satisfaction, 
the institution would have been required to assign a risk weight of 
1,250 percent to the exposure.
    The System Comment Letter asserted that these due diligence 
requirements for ``investment securities'' contained in proposed Sec.  
628.41(c) significantly overlapped with the existing regulatory 
requirements on investment management in subpart E of part 615. The 
result, according to the Letter, would be significant redundancy and 
regulatory burden. The commenters asked us to make conforming changes 
to either the proposed capital rules or the existing investment 
management rules to eliminate duplication and potentially conflicting 
requirements.
    We note, contrary to the assertion of the System Comment Letter, 
that the new due diligence requirements contained in proposed Sec.  
628.41(c) do not apply to ``investment securities''. Rather, this 
regulation applies to securitization exposures, the definition of which 
is discussed above. In contrast, our investment management regulations 
in subpart E of part 615, including the due diligence requirements at 
Sec.  615.5133(f), apply only to investments that System banks and 
associations are authorized to hold for specified purposes. These 
investments must satisfy FCA's eligibility requirements or be 
specifically approved by FCA.\132\
---------------------------------------------------------------------------

    \132\ See Sec. Sec.  615.5132, 615.5140, and 615.5142.
---------------------------------------------------------------------------

    If a System institution has a securitization exposure that is 
subject to our investment management regulations, then both our 
investment management due diligence regulation and the new 
securitization exposure due diligence regulation would apply. If, 
however, a System institution has a securitization exposure that is not 
subject to our investment management regulations, then only the 
securitization exposure due diligence regulation would apply, and not 
our investment management due diligence regulation. And if a System 
institution has an investment subject to our investment management 
regulations that is not a securitization exposure, then only our 
investment management due diligence regulation would apply, and not the 
new securitization exposure due diligence regulation.
    Accordingly, for some exposures, only one due diligence regulation 
applies. Securitization exposures that are subject to our investment 
management regulations, however, are subject to both due diligence 
regulations. We do not believe these two due diligence regulations 
conflict with each other. Some requirements are contained in one 
regulation but not the other. For example, our investment management 
regulations require stress testing, while the securitization exposure 
regulation does not. Securitization exposures that are subject to our 
investment management regulations, therefore, like other investments, 
are subject to the investment management stress testing requirements.
    Some requirements, such as risk analysis or value determination, 
are set forth in both regulations. For securitization exposures that 
are subject to our investment management regulations, institutions must 
fulfill the requirements of both regulations, but if one analysis or 
determination satisfies both regulations, they only need to perform it 
once, thus eliminating any potential duplication.
    Because any potential overlaps can be satisfied with a single 
analysis or determination, we do not believe it is burdensome for an 
institution to have to comply with both regulations. Accordingly, we 
decline to change either of these regulations.

I. Equity Exposures

    As discussed above, under Sec.  628.22, a System institution must 
deduct from regulatory capital all equity investments (including 
preferred stock) in another System institution. Section 628.22 also 
requires a System institution to deduct from regulatory capital all 
equity investments in a service corporation or the Funding Corporation. 
Accordingly, we do not assign a risk weighting for these equity 
investments.
    This final rule revises our existing risk-based capital rules' 
treatment for equity exposures that are not to other System 
institutions, service corporations, or the Funding Corporation. 
Institutions could acquire such exposures, for example, by making 
equity investments in UBEs,\133\ by making equity investments in rural 
business investment companies (RBICs),\134\ by making equity 
investments that the FCA approves under Sec.  615.5140(e), and by 
acquiring equity exposures pledged as collateral in a loan or 
derivative transaction.
---------------------------------------------------------------------------

    \133\ System institutions have the authority to invest in UBEs 
under FCA regulations at subpart J of part 611.
    \134\ Authority for System institutions to invest in RBICs is 
governed by 7 U.S.C. 2009cc et seq.; these investments do not 
require the FCA's approval. However, a System institution that 
wishes to invest in a UBE organized for investing in an RBIC must 
comply with FCA's UBE regulations at subpart J of part 611.
---------------------------------------------------------------------------

    The rule requires a System institution to apply the Simple Risk-
Weight Approach for equity exposures that are not exposures to an 
investment fund and to apply certain look-through approaches to assign 
risk weighted asset amounts to equity exposures to an investment fund.
    We received no comments on the capital treatment for equity 
exposures that we proposed. We adopt this capital treatment without 
change, except for the following. We do not adopt the provisions we 
proposed assigning risk weights to equity exposures authorized under 
FCA regulation Sec.  615.5140(e). System institutions are authorized to 
acquire equity exposures under that regulation only with FCA's prior 
approval, and we assign a risk weight as a condition of that approval. 
Accordingly, it is unnecessary to assign

[[Page 49761]]

a risk weight to such exposures by regulation.
    The preamble to the proposed rule explains the definition of equity 
exposure and exposure measurement. It explains how to calculate the 
risk weight for various equity exposures, including those that form 
effective hedge pairs. It also explains the three methods of assigning 
risk weights to equity exposures to investment funds. Rather than 
repeating the discussion of this capital treatment that we provided in 
the preamble to the proposed rule, we invite interested persons to 
review the discussion in that preamble.\135\
---------------------------------------------------------------------------

    \135\ See Section IV.I. of the preamble to the proposed rule, 79 
FR 52854-52857, September 4, 2014.
---------------------------------------------------------------------------

V. Market Discipline and Disclosure Requirements

    Meaningful public disclosure by banking organizations is one of the 
three pillars of the Basel framework. Public disclosure complements the 
minimum capital requirements and the supervisory review process by 
encouraging market discipline. The other Federal banking regulatory 
agencies adopted disclosure requirements for the banking organizations 
that they regulate with $50 billion or more in assets.
    We proposed similar disclosure requirements for System banks on a 
bank-only basis (not on a consolidated, district-wide basis). In our 
proposal, we explained that the disclosure requirements are appropriate 
for all System banks--even those that currently have less than $50 
billion in assets--because they are jointly and severally liable for 
the Systemwide debt obligations that they issue.\136\ We further 
explained that a System bank's exposure to risks and the techniques 
that it uses to identify, measure, monitor, and control those risks are 
important factors that market participants consider in their assessment 
of the bank. We made clear that a System bank would not have to make 
any disclosures that do not apply to it.\137\
---------------------------------------------------------------------------

    \136\ Nothing in this proposed regulation or preamble would 
change any of our existing regulatory requirements, including those 
in part 620 or part 621.
    \137\ For example, Table 1 requires a System bank to make 
certain disclosures about subsidiaries. If a System bank has no 
subsidiaries, it does not have to make those disclosures.
---------------------------------------------------------------------------

    The proposal required each System bank to make these disclosures in 
its quarterly and annual reports to shareholders that are required in 
part 620 of our regulations.\138\ We specifically addressed potential 
concerns about duplicative disclosures by stating that System banks 
would not be required to make the disclosures in the exact format set 
out in the proposed regulations, or in the same location in the report, 
as long as they provide a summary table specifically indicating the 
location(s) of all disclosures.
---------------------------------------------------------------------------

    \138\ Sections 620.2 and 620.4 of the FCA's regulations require 
each System institution to prepare, provide to the FCA and 
shareholders, and make available to the public an annual report 
after the end of each fiscal year. Sections 620.2 and 620.10 require 
each System institution to prepare, provide to the FCA and 
shareholders, and make available to the public a quarterly report 
after the end of each fiscal quarter (except the fiscal quarter that 
coincides with the end of the System institution's fiscal year).
---------------------------------------------------------------------------

    We believed the proposal struck the proper balance between the 
market benefits of disclosure and the burden of providing the 
disclosures, and we invited comment on the appropriate application of 
the proposed disclosure requirements to System banks.
    We received comments in the System Comment Letter and from several 
individual System institutions on the proposed disclosure requirements. 
The commenters objected to these requirements because the disclosures 
would not be harmonized across the System; associations would have one 
set of disclosures, banks would have another, combined district 
disclosures would be different from those of the bank, and the System-
wide disclosure would be different yet again. They stated that this 
disclosure regime is not a good fit for the federated cooperative 
structure of the System. They asked the FCA to work with System banks 
on appropriate enhancements to the existing required disclosures in 
part 620 through other guidance, such as an Informational Memorandum, 
stating that this approach would be more flexible and not encumber the 
regulations with excessive requirements that apply to only four 
entities.
    These comments do not persuade us to change the disclosure 
requirements we proposed. As discussed above, our existing regulations 
in part 620 require each System institution to prepare annual and 
quarterly reports. The regulations we proposed and that we now adopt 
without substantive change require System banks to disclose additional 
information that is particularly relevant to market participants as 
they assess the System's risk, providing a more transparent picture of 
System institutions' capital to the investment-banking sector.
    We understand that any change in disclosure requirements may 
increase burden, as parties are required to disclose information they 
have never previously had to disclose. We believe, however, that the 
benefit of these additional disclosures outweighs any burden that might 
result. The disclosure requirements are similar to those adopted by the 
Federal banking regulatory agencies. As discussed above and in the 
preamble to our proposed rule, the System urged the FCA to adopt a 
capital framework that was as similar as possible to the U.S. rule, 
asserting that consistency and transparency would allow investors, 
shareholders, and others to better understand the financial strength 
and risk-bearing capacity of the System. We believe this rule 
accomplishes that objective.
    A System bank also commented that the requirement is unfair because 
the four System banks are independent institutions with separate boards 
of directors, different charters, and diverse business models, and the 
total assets of two of the banks are below the $50 billion threshold 
that would trigger the requirement under the U.S. rule. Even though the 
banks are directed and managed independently of each other, we believe 
that all four of them--even those that currently have less than $50 
billion in assets--should be required to make these disclosures. Each 
bank is jointly and severally liable for the System-wide debt 
obligations that they issue; market participants would be unable to 
assess the risk in the debt without having access to this information 
from all four banks.
    Accordingly, we adopt as final our proposal to require all System 
banks to make disclosures, without substantive change other than to 
reflect differences from the proposed capital requirements. Rather than 
repeating the discussion of these disclosure requirements that we 
provided in the preamble to the proposed rule, we invite interested 
persons to review the discussion that preamble.\139\
---------------------------------------------------------------------------

    \139\ See Section V. of the preamble to the proposed rule, 79 FR 
52857-52859, September 4, 2014.
---------------------------------------------------------------------------

VI. Conforming and Clarifying Changes

    The proposed rule contained a number of conforming changes to 
current FCA regulations. Except for a modification of the proposed 
change to Sec.  614.4351 as discussed below, we adopted the proposed 
changes in the final rule. We also added numerous additional 
nonsubstantive clarifying and conforming changes that were not in the 
proposed rule, primarily adding references in existing rules to the new 
part 628. The changes include:
    In Sec.  607.2(b), which defines ``average risk-adjusted asset 
base'' for purposes of the FCA's assessment and

[[Page 49762]]

apportionment of administrative expenses, we replaced the reference to 
Sec.  615.5210 with a reference to Sec.  615.5201.
    In Sec.  611.1265(e), which pertains to an institution in the 
process of terminating Farm Credit status, we deleted a reference to 
subpart K of part 615 and added a reference to part 628.
    In proposed Sec.  614.4351(a)(3), which describes the lending and 
leasing limit base for System institutions, we proposed to replace the 
reference to total surplus with a reference to tier 2 capital. The 
System Comment Letter pointed out that our proposed change had the 
potential effect of excluding third-party preferred stock from an 
institution's lending and leasing limit base if such stock is excluded 
under new Sec.  628.23 from the institution's tier 1 and tier 2 
capital. We agree with the System that our proposed change could have 
had this unintended effect. In the final rule, we have modified the 
language to ensure the inclusion of excess third-party capital under 
Sec.  628.23 in the lending and leasing limit base, provided such 
preferred stock is otherwise includible in tier 1 or tier 2 capital.
    In Sec.  615.5143(a) and (b), pertaining to the management of 
ineligible investments, we removed references to net collateral.
    In Sec.  615.5200, which contains capital planning requirements, we 
removed references to total capital, surplus, core surplus, total 
surplus, and unallocated surplus; we added references to CET1, tier 1 
capital, total capital, and tier 1 leverage ratio and made other minor 
nonsubstantive and technical changes. We also made a number of 
substantive changes in Sec.  615.5200 that are described above in 
Section D.3. of this preamble.
    In Sec.  615.5201, we removed of definitions that are no longer 
used in revised part 615, subpart H, including ``bank,'' 
``commitment,'' ``credit conversion factor,'' ``credit derivative,'' 
``credit-enhancing interest-only strip,'' ``credit-enhancing 
representations and warranties,'' ``deferred-tax assets that are 
dependent on future income or future events,'' ``direct credit 
substitute,'' ``direct lender institution,'' ``externally rated,'' 
``face amount,'' ``financial asset,'' ``financial standby letter of 
credit,'' ``Government agency,'' ``Government-sponsored agency,'' 
``institution,'' ``nationally recognized statistical rating 
organization,'' ``non-OECD bank,'' ``OECD,'' ``OECD bank,'' 
``performance-based standby letter of credit,'' ``qualified residential 
loan,'' ``qualifying bilateral netting contract,'' ``qualifying 
securities firm,'' ``recourse,'' ``residual interest,'' ``risk 
participation,'' ``Rural Business Investment Company,'' 
``securitization,'' ``servicer cash advance,'' ``total capital,'' 
``traded position,'' and ``U.S. depository institution''; we revised 
the definitions of ``permanent capital'' and ``risk-adjusted asset 
base''; and we added definitions of ``deferred tax assets,'' ``System 
bank,'' and ``System institution.'' We also added back the definition 
of ``allocated investment,'' which was inadvertently transferred to 
part 628 definitions in the proposed rule.
    In Sec. Sec.  615.5206 and 615.5208, we removed references to the 
defunct Farm Credit System Financial Assistance Corporation (FAC) in 
Sec.  615.5206(a); we removed Sec. Sec.  615.5206(d) and 615.5208(c), 
which pertain to the FAC; and we made other minor nonsubstantive and 
technical changes.
    In Sec.  615.5207, which pertains to adjustments in the permanent 
capital computation, we made revisions in paragraph (f) to require 
deduction of an investment in the Funding Corporation and in paragraph 
(j) to eliminate the exclusion of AOCI and to require the exclusion of 
any defined benefit pension fund net asset, in order to make the 
deductions from the numerator of the permanent capital calculation 
consistent with the deductions from the denominator.
    We removed Sec. Sec.  615.5209 through 615.5212, which pertain to 
risk-weighting for the permanent capital ratio. Under the final rule, 
the denominator of the permanent capital ratio will be computed using 
the risk weightings in part 628.
    In Sec.  615.5220, which pertains to the capitalization bylaws, we 
made minor nonsubstantive and technical changes.
    In Sec.  615.5240, which sets forth a number of permanent capital 
requirements, we added a reference to the regulatory capital standards 
in proposed part 628.
    In Sec.  615.5250, which contains disclosure requirements for 
borrower stock, we added references to the regulatory capital standards 
in part 628.
    In Sec.  615.5255, which contains disclosure and review 
requirements for other equities, we added a reference to the new part 
628 capital standards as suggested by the System Comment Letter and 
made minor nonsubstantive and technical changes. We did not make other 
changes requested by the System. In the event a disclosure statement is 
deemed to be cleared 60 days after receipt by the FCA of a proposed 
disclosure statement under paragraph (f), we did not add a reference to 
new part 628 that would have permitted the institution to treat the 
proposed issuance as CET1, additional tier 1, or tier 2 capital. This 
is consistent with the existing regulation's approach to core surplus, 
total surplus, and net collateral. We also did not shorten the FCA 
review period from 30 days to 5 days in paragraph (h) or the review 
period from 60 days to 30 days in paragraph (f). The suggested 
timeframes are not adequate for the agency's review procedures. In the 
case of third-party capital issuances, we are sensitive to the fact 
that institutions often have tight timeframes related to market 
expectations and timing, and we believe that we have been able to 
accommodate requests to expedite our review procedures whenever 
feasible.
    We revised Sec.  615.5270, pertaining to the retirement of equities 
other than eligible (protected) borrower stock, to incorporate 
restrictions and limits on redemptions of equities that are included in 
tier 1 and tier 2 capital.
    In Sec.  615.5290, pertaining to the retirement of capital stock 
and participation certificates in the event of restructuring, we made 
minor nonsubstantive and technical changes.
    In Sec.  615.5295, which pertains to the payment of dividends, we 
added a reference to part 628.
    We removed part 615, subpart K, which contained the requirements 
for the core surplus, total surplus, and net collateral standards.
    In Sec. Sec.  615.5350, 615.5352, and 615.5355, pertaining to the 
establishment of minimum capital ratios for an individual institution, 
we replaced references to core surplus, total surplus, and net 
collateral with references to tier 1 and tier 2 capital.
    In Sec.  620.5, which lists the required contents of a System 
institution's annual report, we replaced references to core surplus, 
total surplus, and net collateral with references to the new part 628 
regulatory capital requirements (including initial compliance plans 
under Sec.  628.301) in paragraphs (d)(1)(ix), (f)(2) and (3), and 
(g)(4). In addition, we added a new paragraph (4) in Sec.  620.5(f) to 
require disclosure of the core surplus, total surplus, and net 
collateral ratios in System institutions' annual reports for the years 
2017-2021 for as long as these years are part of the ``previous 5 
fiscal years'' for which disclosures are required.
    We revised Sec.  620.17, pertaining to notifying stockholders when 
a System institution falls below minimum capital requirements, to 
expand the notification requirement to include the regulatory capital 
standards in part 628.
    In Sec.  624.12, pertaining to the margin and capital requirements 
for covered

[[Page 49763]]

swap entities, we added a reference to part 628 in paragraph (b).
    In Sec.  627.2710, which sets forth the grounds for appointing a 
conservator or receiver, we deleted references to the total surplus and 
net collateral ratios.

VII. Timeframe for Implementation

    Our proposed rule provided for an effective date of January 1, 
2016. In the final rule, we are adopting an effective date of January 
1, 2017.
    We also proposed a 3-year phase-in period for the capital 
conservation buffer but without any transition or phase-in periods for 
regulatory adjustments to or deductions in the regulatory capital 
calculations. By contrast, Basel III and the U.S. rule have, in 
addition to the capital conservation buffer, numerous phase-in and 
transition periods for the capital regulations lasting from 2014 (2015 
for banking organizations not using the advanced approaches rules) 
until 2019 or after. Many of the transition provisions pertain to 
regulatory deductions and adjustments, minority interests, and 
temporary inclusion of non-qualifying instruments. We have determined 
that most of the transition and phase-in periods are not needed to give 
System institutions sufficient time to come into compliance with the 
new standards.
    We have analyzed every System institution's call report data for 
September 30, 2015. In our analysis, we first assumed that all 
institutions would extend their redemption and revolvement programs to 
7 years and would adopt required bylaw provisions or an annual board 
resolution for inclusion in CET1 capital. Under this scenario, we 
concluded that all System institutions would meet all the minimum 
amounts including the buffers for the final CET1, tier 1 and total 
capital risk-based ratios if those requirements were in effect today. 
We then assumed, alternatively, that those institutions that redeem 
allocated equities would not extend their revolvement periods to 7 
years and could not include them under CET1. Under this scenario as 
well, these institutions would still exceed the minimum capital 
requirements. Therefore, based on current information, all System 
institutions should exceed the minimum regulatory ratios on the 
effective date of the rule. The FCA believes that most, if not all, 
System institutions would adopt a bylaw provision or annual board 
resolution to ensure that the non-qualified allocated equities they do 
not redeem will meet the definition of URE equivalents, and that those 
equities that are routinely redeemed will be included in CET1.
    For the risk weightings, we used current risk weights under FCA's 
existing capital regulations. For System associations, we assumed the 
final risk weightings would not be materially different from existing 
risk weightings in existing regulations. The most significant change to 
risk weights for associations would be past-due and non-accrual 
exposures, as well as the credit conversation factors for certain 
unused commitments. As just stated, we believe the changes in risk 
weights for associations would result in a negligible impact to current 
risk weighted asset amounts and that it is appropriate to use existing 
risk weights in our analysis.
    For System banks, we believe that certain new risk weights or 
conversion factors could have a material impact. For instance, System 
banks will need to hold additional capital for their unconditionally 
cancelable unused commitments, as well as the unused commitments on the 
direct loans to their affiliated associations. To account for the new 
risk weights, our analysis increased risk-adjusted assets by 20 percent 
for each bank. With this increase, all banks still exceeded the minimum 
amounts (including the buffers) for the final CET1, tier 1 and total 
capital risk-based ratios. Our existing core surplus rules require both 
banks and associations to exclude shared capital; however, under the 
Tier 1/Tier 2 Capital Framework, System banks will be able to count the 
stock and equities they have issued or allocated to System associations 
in their regulatory capital ratios.
    All System institutions would meet the 4.0 percent minimum tier 1 
leverage ratio and 1 percent leverage buffer (including the 1.5-percent 
component of the ratio for URE and equivalents) if the final 
requirements were effective today. Our analysis indicates that the 
leverage ratio would not be a constraining ratio for System 
associations because total assets closely parallel risk-adjusted assets 
and the associations have strong tier 1 capital levels. The leverage 
ratios for associations will be similar to their tier 1 capital risk-
based ratios. If the final rule were effective today, all System banks 
would exceed the 4.0 percent minimum tier 1 leverage ratio and 1-
percent leverage buffer; however, one bank, which had a 5.4-percent 
tier 1 leverage ratio on September 30, 3015, would be near the leverage 
buffer requirement. Additionally, all System banks would significantly 
exceed the 1.5-percent URE and URE equivalents component of the minimum 
leverage ratio. This analysis assumed that System banks would be able 
to include all their non-qualified allocated surplus as URE 
equivalents. The System banks' tier 1 leverage ratios would be 
significantly lower than their tier 1 risk-based ratios because a large 
portion of their loans are to their affiliated associations and are 
risk weighted at 20 percent.
    The final rule includes a phase-in period for the capital 
conservation buffer beginning January 1, 2017, with the buffer fully 
phased-in beginning January 1, 2020. Unlike the U.S. rule's adjustments 
and deductions transitions, the calculation of our capital conservation 
buffer will not change over the phase-in period, and there will be no 
additional burden on System institutions to revise how it is calculated 
each year. Rather, the amount of the minimum capital conservation 
buffer increases every year until fully phased-in. The transition 
period for the U.S. rule began in 2015 and will be fully phased in as 
of January 1, 2019. As noted above, the FCA's final rule will become 
effective for the reporting periods beginning in 2017.
    In the event that some System institutions do not meet the tier 1 
and tier 2 minimum capital ratios as of the effective date, the final 
rule permits them to comply by submitting a capital restoration plan. 
The plan requires FCA approval, and the institution will be required to 
submit its proposed plan within 20 days of the quarter-end during which 
the new capital standards become effective--i.e., March 31, 2017. The 
plan must describe how the institution proposes to achieve and maintain 
compliance with the new requirements, demonstrating progress towards 
meeting that goal. If the FCA does not approve the plan, the 
institution must revise and re-submit the plan. There is a list of 
factors in the final rule that the FCA will consider in evaluating a 
plan. They include: (1) Circumstances leading to the institution's 
decrease in capital and whether they were caused by the institution or 
by circumstances beyond the institution's control; (2) the 
institution's financial ratios (e.g., capital, adverse assets, ALL) 
compared to those of its peers or industry norms; (3) the institution's 
previous compliance practices; and (4) the views of the institution's 
directors and managers regarding the plan. If the capital restoration 
plan is adopted by the institution and approved by the FCA within 180 
days of the quarter-end in which the tier 1 and tier 2 capital 
requirements become effective, the

[[Page 49764]]

institution will be deemed to be in compliance with the 
requirements.\140\
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    \140\ This final rule is modeled after current Sec.  615.5336, 
which was adopted in 1997 at the time the FCA adopted the core 
surplus, total surplus and net collateral requirements. Several 
System institutions achieved initial compliance with those 
requirements.
---------------------------------------------------------------------------

VIII. Abbreviations

ABCP--Asset-Backed Commercial Paper
ABS--Asset-backed Security
ADC--Acquisition, Development, or Construction
AFS--Available For Sale
ALL--Allowance for Loan Losses
AOCI--Accumulated Other Comprehensive Income
BCBS--Basel Committee on Banking Supervision
BHC--Bank Holding Company
CCF--Credit Conversion Factor
CCP--Central Counterparty
CDS--Credit Default Swap
CEIO--Credit-Enhancing Interest-Only Strip
CEM--Current Exposure Method
CFR--Code of Federal Regulations
CFPB--Consumer Financial Protection Bureau
CFTC--Commodity Futures Trading Commission
CPSS--Committee on Payment and Settlement Systems
CRC--Country Risk Classifications
CUSIP--Committee on Uniform Securities Identification Procedures
DAC--Deferred Acquisition Cost
DCO--Derivatives Clearing Organizations
DTA--Deferred Tax Asset
DTL--Deferred Tax Liability
DvP--Delivery-versus-Payment
E--Measure of Effectiveness
EE--Expected Exposure
ERISA--Employee Retirement Income Security Act of 1974
FCA--Farm Credit Administration
FDIC--Federal Deposit Insurance Corporation
FDICIA--Federal Deposit Insurance Corporation Improvement Act of 
1991
FFIEC--Federal Financial Institutions Examination Council
FHA--Federal Housing Authority
FHLB--Federal Home Loan Bank
FHLMC--Federal Home Loan Mortgage Corporation
FIRREA--Financial Institutions, Reform, Recovery and Enforcement Act
FMU--Financial Market Utility
FNMA--Federal National Mortgage Association
FR--Federal Register
GAAP--Generally Accepted Accounting Principles (U.S.)
GNMA--Government National Mortgage Association
GSE--Government-Sponsored Enterprise
HAMP--Home Affordable Mortgage Program
HOLA--Home Owners' Loan Act
HTM--Held to Maturity
HVCRE--High-Volatility Commercial Real Estate
IFRS--International Financial Reporting Standards
IOSCO--International Organization of Securities Commissions
LTV--Loan-to-Value Ratio
MBS--Mortgage-backed Security
MDB--Multilateral Development Bank
MHC--Mutual Holding Company
MSA--Mortgage Servicing Assets
NRSRO--Nationally Recognized Statistical Rating Organization
OCC--Office of the Comptroller of the Currency
OECD--Organization for Economic Cooperation and Development
OFI--Other Financing Institution
OMB--Office of Management and Budget
OTC--Over-the-Counter
OTTI--Other Than Temporary Impairment
PFE--Potential Future Exposure
PMI--Private Mortgage Insurance
PMSR--Purchased Mortgage Servicing Right
PSE--Public Sector Entities
PvP--Payment-versus-Payment
QCCP--Qualifying Central Counterparty
QIS--Quantitative Impact Study
QM--Qualified Mortgage
RBA--Ratings-Based Approach
RBC--Risk-Based Capital
REIT--Real Estate Investment Trust
Re-REMIC--Resecuritization of Real Estate Mortgage Investment 
Conduit
SAP--Statutory Accounting Principles
SEC--Securities and Exchange Commission
SFA--Supervisory Formula Approach
SLHC--Savings and Loan Holding Company
SPE--Special Purpose Entity
SRWA--Simple Risk-Weight Approach
SSFA--Simplified Supervisory Formula Approach
U.S.C.--United States Code
VA--Department of Veterans Affairs
VOBA--Value of Business Acquired
WAM--Weighted Average Maturity

IX. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA) 
(5 U.S.C. 601 et seq.), the FCA hereby certifies that the final rule 
will not have a significant economic impact on a substantial number of 
small entities. Each of the banks in the Farm Credit System, considered 
together with its affiliated associations, has assets and annual income 
in excess of the amounts that would qualify them as small entities. 
Therefore, Farm Credit System institutions are not ``small entities'' 
as defined in the Regulatory Flexibility Act.\141\
---------------------------------------------------------------------------

    \141\ The System Comment Letter questioned our RFA 
certification. In the proposed rule, we certified that the rule 
would not have a significant economic impact on a large number of 
small entities. Our certification considered each System bank 
together with ``its affiliated associations.'' The System objected 
to our combining associations with System banks, stating that 
because each institution has to comply with the regulatory 
requirements each should be considered individually for purposes of 
identifying economic impact.
    As we stated in the preamble to the final merger rule published 
August 24, 2015 (80 FR 51113), the RFA definition of a small entity 
incorporates the Small Business Administration (SBA) definition of a 
``small business concern,'' including its size standards. A small 
business concern is one independently owned and operated, and not 
dominant in its field of operation. For purposes of the RFA, the 
interrelated ownership, supervisory control, and contractual 
relationship between associations and their funding banks are the 
basis for FCA's conclusion to treat them as a single entity. 
Therefore, System institutions do not satisfy the RFA definition of 
``small entities.'' See 80 FR 51113 (August 24, 2015).
---------------------------------------------------------------------------

Addendum: Discussion of the Final Rule

Overview

    The FCA is adopting this final rule (final rule or rule) to update 
the regulatory capital rules for the System to include provisions 
consistent with those suggested by the Basel Committee on Banking 
Supervision (BCBS) to the international regulatory capital framework, 
the U.S. rule, and the requirements of the Dodd-Frank Act. Among other 
things, the final rule:
     Establishes a minimum risk-based common equity tier 1 
(CET1) risk-based ratio of 4.5 percent;
     Establishes a minimum tier 1 risk-based ratio of 6 
percent;
     Establishes a minimum total capital risk-based ratio of 8 
percent;
     Establishes a minimum tier 1 leverage ratio of 4 percent, 
of which at least 1.5 percent must consist of unallocated retained 
earnings (URE) and URE equivalents;
     Establishes a capital conservation buffer of 2.5 percent 
and a leverage buffer of 1 percent below which an institution's 
discretionary capital distributions and bonuses would be limited or 
prohibited without FCA approval;
     Increases capital requirements for past-due and nonaccrual 
loans and certain short-term unused loan commitments;
     Expands the recognition of collateral and guarantors in 
determining risk weighted assets;
     Removes references to credit ratings;
     Establishes due diligence requirements for securitization 
exposures; and
     Increases required regulatory capital disclosures of 
System banks.
    This addendum summarizes the final rule. The FCA intends for this 
addendum to act as a guide for System institutions to navigate the rule 
and identify the provisions that may be most relevant to them, but it 
is not comprehensive. The FCA expects and encourages all System 
institutions to review the final rule in its entirety.
    We remind System institutions that the presence of a particular 
risk weighting does not itself provide authority for a System 
institution to have an exposure to that asset or item.

[[Page 49765]]

A. Capital Components

1. Common Equity Tier 1 Capital (CET1)
    (a) Common cooperative equities (purchased member stock, purchased 
participation certificates, and allocated equities) with the following 
key criteria (among others):
     Borrower stock (regardless of redemption or revolvement 
period) up to the statutory minimum of $1000 or 2 percent of the loan 
amount, whichever is less;
     Equities are perpetual;
     Equities subject to discretionary revolvement or 
redemption are not retired for at least 7 years after issuance;
     Equities can be retired only with FCA prior approval 
(unless it is the statutory minimum borrower stock requirement or 
unless the distribution meets ``safe harbor'' standards) and the System 
institution has a capitalization bylaw or board of directors resolution 
(which must be re-affirmed annually) providing that it must obtain FCA 
approval prior to redeeming or revolving any equities it includes in 
CET1 before the end of the 7-year period;
     Equities represent a claim subordinated to all preferred 
stock, all subordinated debt, and all liabilities of the institution in 
a receivership, liquidation, or similar proceeding;
    (b) Unallocated retained earnings (URE); and
    (c) Paid-in capital resulting from a merger of System institutions 
or repurchase of third-party capital.
    In the final rule, System institutions are not required to include 
accumulated other comprehensive income in CET1.
2. Additional Tier 1 Capital (AT1)
    Equities other than common cooperative equities (i.e., equities 
issued primarily to third-party investors) that meet most of the CET1 
criteria, except that AT1 capital equities represent a claim that ranks 
senior to all common cooperative equities in a receivership, 
liquidation, or similar proceeding.
3. Tier 2 Capital
    (a) Equities, which may be common cooperative equities or equities 
held by third parties, not includable in Tier 1 with the following key 
criteria:
     Equities are perpetual or have an original maturity of at 
least 5 years;
     Equities subject to discretionary revolvement or 
redemption are not retired for at least 5 years after issuance; and
     Equities may not be redeemed or revolved prior to maturity 
or the end of the stated revolvement period without FCA prior approval 
(unless the distribution meets ``safe harbor'' standards);
    (b) Subordinated debt that is not callable for at least 5 years and 
not subject to acceleration except in the event of a receivership, 
liquidation, or similar proceeding; and
    (c) Allowance for losses (ALL) up to 1.25 percent of total risk 
weighted assets.
4. Regulatory Adjustments and Deductions
(a) Deductions From CET1 Capital
     Goodwill, intangible assets, gains-on-sale in connection 
with a securitization exposure, defined benefit pension fund net 
assets, and deferred tax assets due to net operating loss 
carryforwards, all of which are net of associated deferred tax 
liabilities; and
     The System institution's allocated equity investments in 
another System institution.
(b) Deductions From Regulatory Capital Using the Corresponding 
Deduction Approach
    A System institution's purchased equity investments in other System 
institutions must be deducted using the corresponding deduction 
approach. This means that a System institution would make deductions 
from the component of capital for which the underlying instrument 
qualified if it were issued by the System institution itself.
5. FCA Prior Approval of Cash Patronage Refunds, Cash Dividend 
Payments, and Allocated Equity Redemptions; ``Safe Harbor'' Treatment 
for Certain Such Payments
    FCA prior approval would be required for redemption of equities 
included in tier 1 and tier 2, comparable to Basel III and the banking 
agencies' rule. Prior approval is also required for cash dividends and 
cash patronage payments in excess of a specified level, comparable to 
U.S. banking law and regulations. Exceptions to the FCA prior approval 
requirement are that System institutions can redeem member stock up to 
an amount equal to the Farm Credit Act's minimum member-borrower stock 
requirement of $1,000 or 2 percent of the member's loan, whichever is 
less. In addition, this amount of borrower stock would not have to be 
outstanding for a minimum period of 7 years in order for the 
institution to include it in CET1. However, redemptions of such amounts 
of stock would be included in the calculation for the ``safe harbor'' 
in proposed Sec.  628.22(f)(5).
    Under the proposed ``safe harbor,'' FCA prior approval is deemed to 
be granted (i.e., a request for approval does not have to be made to 
the FCA) for cash distributions to pay dividend, patronage payments, or 
redemptions or revolvements of common cooperative equities provided 
that:
    (a) For revolvements or redemptions of common cooperative equities 
included in CET1 capital, such equities were issued or allocated at 
least 7 years before the revolvement or redemption (except the equities 
are not subject to the 7-year minimum if they are held by the estate of 
a deceased former borrower, if the institution is required to redeem or 
revolve the equities under a Sec.  615.5290 restructuring, or if a 
court order requires the institution to redeem or revolve the 
equities);
    (b) For redemptions or revolvements of common cooperative equities 
included in Tier 2 capital, such equities were issued or allocated at 
least 5 years before the redemption or revolvement (except the equities 
are not subject to the 5-year minimum if they are held by the estate of 
a deceased former borrower, if the institution is required to redeem or 
revolve the equities under a Sec.  615.5290 restructuring, or if a 
court order requires the institution to redeem or revolve the 
equities);
    (c) After such cash payments, the dollar amount of the System 
institution's CET1 capital equals or exceeds the dollar amount of CET1 
capital on the same date of the previous calendar year; and
    (d) After such cash payments, the System institution continues to 
comply with all minimum regulatory capital requirements and supervisory 
or enforcement actions.
6. Capital Buffer Amounts
    The capital conservation buffer of 2.5 percent and the leverage 
buffer of 1 percent provide a cushion above regulatory capital 
minimums. The buffers' purpose is to restrict an institution's 
discretionary capital distributions of earnings before that institution 
reaches the minimum capital requirements.
    If a System institution's CET1, tier 1 and total capital risk-based 
ratios exceed minimum requirements, the capital conservation buffer is 
the lowest of the following:
     The System institution's CET1 capital ratio minus the 
System institution's minimum CET1 capital ratio of 4.5 percent;
     The System institution's tier 1 capital ratio minus the 
System institution's minimum tier 1 capital ratio of 6 percent; and

[[Page 49766]]

     The System institution's total capital ratio minus the 
System institution's minimum total capital ratio of 8 percent.
    If the CET1 ratio, tier 1 ratio, or total capital ratio does not 
exceed minimum requirements, then the capital conservation buffer is 
zero.
    A System institution's leverage buffer is the institution's tier 1 
leverage ratio minus the minimum tier 1 leverage ratio of 4 percent. If 
the tier 1 leverage ratio is below 4 percent, the leverage buffer is 
zero.

B. Risk Weightings

1. Zero-Percent (0%) Risk Weighted Exposures
     An exposure to the U.S. Government, its central bank, or a 
U.S. Government agency--Sec.  628.32(a)(1)(i)(A);
     The portion of an exposure that is directly and 
unconditionally guaranteed by the U.S. Government, its central bank, or 
a U.S. Government agency--Sec.  628.32(a)(1)(i)(B);
     An exposure to a sovereign entity that meets certain 
criteria (as discussed below)--Sec.  628.32(a) and Table 1;
     Exposures to certain supranational entities and 
multilateral development banks--Sec.  628.32(b);
     Cash--Sec.  628.32(l);
     Certain gold bullion--Sec.  628.32(l);
     Certain exposures that arise from the settlement of cash 
transactions with a central counterparty--Sec.  628.32(l);
     An exposure to an OTC derivative contract that meets 
certain criteria--Sec.  628.37(b)(3)(i);
     The collateralized portion of an exposure with respect to 
which the financial collateral meets certain criteria--Sec.  
628.37(b)(3)(iii); and
     An equity exposure to any entity whose credit exposures 
receive a 0-percent risk weight--Sec.  628.52(b)(1).
2. Twenty-Percent (20%) Risk Weighted Exposures
     The portion of an exposure that is conditionally 
guaranteed by the U.S. Government, its central bank, or a U.S. 
Government agency--Sec.  628.32(a)(1)(ii);
     An exposure to a sovereign entity that meets certain 
criteria (as discussed below)--Sec.  628.32(a) and Table 1;
     An exposure to a GSE, other than an equity exposure or 
preferred stock--Sec.  628.32(c)(1);
     Most exposures to U.S.- or state-organized depository 
institutions or credit unions, including those that are OFIs--Sec.  
628.32(d)(1);
     An exposure to a foreign bank that meets certain criteria 
(as discussed below)--Sec.  628.32(d)(2) and Table 2;
     A general obligation exposure to a U.S. or state PSE--
Sec.  628.32(e)(1)(i);
     An exposure to a non-U.S. PSE that meets certain criteria 
(as discussed below)--Sec.  628.32(e)(2), (e)(3), and (e)(4)(i) and 
Table 3;
     Cash items in the process of collection--Sec.  
628.32(l)(2);
     A loan that a System bank makes to an association (a 
direct loan)--Sec.  628.32(m); and
     An equity exposure to a PSE or the Federal Agricultural 
Mortgage Corporation (Farmer Mac)--Sec.  628.52(b)(2).
3. Fifty-Percent (50%) Risk Weighted Exposures
     An exposure to a sovereign entity that meets certain 
criteria (as discussed below)--Sec.  628.32(a) and Table 1;
     An exposure to a foreign bank that meets certain criteria 
(as discussed below)--Sec.  628.32(d)(2) and Table 2;
     A revenue obligation exposure to a U.S. or state PSE--
Sec.  628.32(e)(1)(ii);
     An exposure to a non-U.S. PSE that meets certain criteria 
(as discussed below)--Sec.  628.32(e)(2), (e)(3), (e)(4)(ii) and Tables 
3 and 4;
     An exposure to an OFI that is not a depository institution 
or credit union but that is investment grade or that meets capital, 
risk identification and control, and operational standards similar to 
depository institutions and credit unions; and
     First lien residential mortgage exposures that meet 
certain criteria--Sec.  628.32(g).
4. One Hundred-Percent (100%) Risk Weighted Exposures
     An exposure to a sovereign entity that meets certain 
criteria (as discussed below)--Sec.  628.32(a) and Table 1;
     Preferred stock issued by a non-System GSE--Sec.  
628.32(c)(2);
     An exposure to a foreign bank that meets certain criteria 
(as discussed below)--Sec.  628.32(d)(2) and Table 2;
     An exposure to a non-U.S. PSE that meets certain criteria 
(as discussed below)--Sec.  628.32(e)(2), (e)(3), (e)(5) and Tables 3 
and 4;
     All corporate exposures--Sec.  628.32(f). This category 
would include the following:
    [cir] Borrower loans such as agricultural loans and consumer loans, 
regardless of the corporate form of the borrower, unless those loans 
qualify for different risk weights under other risk-weighting 
provisions;
    [cir] System bank exposures to OFIs that do not satisfy the 
criteria for a 20-percent or a 50-percent risk weight; and
    [cir] Premises, fixed assets, and other real estate owned;
     All residential mortgage exposures that do not satisfy the 
criteria for a 50-percent risk weight--Sec.  628.32(g);
     Deferred tax assets arising from temporary differences 
that could be realized through net operating loss carrybacks--Sec.  
628.32(l)(3);
     All mortgage servicing assets--Sec.  628.32(l)(4);
     All assets that are not specifically assigned a different 
risk weight and that are not deducted from tier 1 or tier 2 capital 
pursuant to Sec.  628.22--Sec.  628.32(l)(5);
     The effective portion of a hedge pair--Sec.  
628.52(b)(3)(ii); and
     Non-significant equity exposures--Sec.  628.52(b)(3)(iii).
5. One Hundred Fifty-Percent (150%) Risk Weighted Exposures
     An exposure to a sovereign entity that meet certain 
criteria (as discussed below)--Sec.  628.32(a) and Table 1;
     A sovereign exposure, if an event of sovereign default has 
occurred during the previous 5 years--Sec.  628.32(a)(6) and Table 1;
     An exposure to a foreign bank, if an event of sovereign 
default has occurred during the previous 5 years in the foreign bank's 
home country--Sec.  628.32(d)(2)(iv) and Table 2;
     An exposure to a non-U.S. PSE that meets certain criteria 
(as discussed below)--Sec.  628.32(e)(2), (e)(3), (e)(5) and Tables 3 
and 4;
     An exposure to a PSE, if an event of sovereign default has 
occurred during the previous 5 years in the PSE's home country--Sec.  
628.32(e)(6) and Tables 3 and 4; and
     The portion of a past due or nonaccrual exposure that is 
not guaranteed or that is not secured by financial collateral (except 
for a sovereign exposure or a residential mortgage exposure, both risk 
weighted as discussed above)--Sec.  628.32(k).
6. Six Hundred-Percent (600%) Risk Weighted Exposures
     An equity exposure to an investment firm, provided that 
the investment firm meets specified conditions--Sec.  628.52(b).
7. One Thousand Two Hundred Fifty-Percent (1,250%) Risk Weighted 
Exposures
     Certain high-risk securitization exposures, such as CEIO 
strips--Sec. Sec.  628.41-628.45.
8. Past Due Exposures (90 Days or More Past Due or in Nonaccrual 
Status)
     One hundred percent (100%)--residential mortgage 
exposures--Sec.  628.32(g);

[[Page 49767]]

     A System institution may assign a risk weight to the 
guaranteed portion of a past due or nonaccrual exposure based on the 
risk weight that applies under Sec.  628.36 if the guarantee or credit 
derivative meets the requirements of that section--Sec.  628.32(k)(2);
     A System institution may assign a risk weight to the 
portion of a past due or nonaccrual exposure that is collateralized by 
financial collateral based on the risk weight that applies under Sec.  
628.37 if the financial collateral meets the requirements of that 
section--Sec.  628.32(k)(3); and
     One hundred fifty percent (150%)--all other past due and 
nonaccrual exposures--Sec.  628.32(k)
9. Conversion Factors for Off-Balance Sheet Items--Sec.  628.33
     Zero percent (0%)--commitment that is unconditionally 
cancellable by the System institution;
     Twenty percent (20%)--
    [cir] Commitment, other than a System bank's commitment to an 
association or OFI, with an original maturity of 14 months or less that 
is not unconditionally cancellable by the System institution;
    [cir] Self-liquidating, trade-related contingent items that arise 
from the movement of goods, with an original maturity of 14 months or 
less; and
    [cir] A System bank's commitment to an association or OFI that is 
not unconditionally cancelable by the System bank, regardless of 
maturity.
     Fifty percent (50%)--
    [cir] Commitments, other than a System bank's commitment to an 
association or OFI, with an original maturity of more than 14 months 
that are not unconditionally cancellable by the System institution; and
    [cir] Transaction-related contingent items, including performance 
bonds, bid bonds, warranties, and performance standby letters of 
credit;
     One hundred percent (100%)--
    [cir] Guarantees;
    [cir] Repurchase agreements (the off-balance sheet component of 
which equals the sum of the current fair values of all positions the 
System institution has sold subject to repurchase);
    [cir] Credit-enhancing representations and warranties that are not 
securitization exposures;
    [cir] Off-balance sheet securities lending transactions (the off-
balance sheet component of which equals the sum of the current fair 
values of all positions the System institution has lent under the 
transaction);
    [cir] Off-balance sheet securities borrowing transactions (the off-
balance sheet component of which equals the sum of the current fair 
values of all non-cash positions the System institution has posted as 
collateral under the transaction);
    [cir] Financial standby letters of credit; and
    [cir] Forward agreements.
10. Over-the-Counter (OTC) Derivative Contracts--Sec.  628.34
    A System institution determines the risk-based capital requirement 
for a derivative contract by determining the exposure amount and then 
assigning a risk weight based on the counterparty or collateral. The 
exposure amount is the sum of current exposure plus potential future 
credit exposure (PFE). The current credit exposure is the greater of 0 
or the mark-to-fair value of the derivative contract. The PFE is 
generally the notional amount of the derivative contract multiplied by 
a credit conversion factor for the type of derivative contract. Table 1 
to Sec.  628.34 shows the credit conversion factors for derivative 
contracts.
11. Treatment of Cleared Transactions--Sec.  628.35
    The rule introduces a specific capital treatment for exposures to 
central counterparties (CCPs), including certain transactions conducted 
through clearing members by System institutions that are not themselves 
clearing members of a CCP. Section 628.35 describes the capital 
treatment of cleared transactions and of default fund exposures to 
CCPs, including more favorable capital treatment for cleared 
transactions through CCPs that meet certain criteria.
12. Treatment of Guarantees--Sec.  628.36
    The rule allows a System institution to substitute the risk weight 
of an eligible guarantor for the risk weight otherwise applicable to 
the guaranteed exposure. This treatment applies only to eligible 
guarantees and eligible credit derivatives, and it provides certain 
adjustments for maturity mismatches, currency mismatches, and 
situations where restructuring is not treated as a credit event. To be 
an eligible guarantee, the guarantee must be from an eligible guarantor 
(as defined in the rule) and must satisfy the definitional requirements 
of eligible guarantee.
13. Treatment of Collateralized Transactions--Sec.  628.37
    The rule allows System institutions to recognize the risk-
mitigating benefits of financial collateral (as defined) in risk 
weighted assets. In all cases, the System institution must have a 
perfected, first priority interest in the financial collateral.
    Where the collateral satisfies specified criteria, a System 
institution may use the simple approach--that is, it may apply a risk 
weight to the portion of an exposure that is secured by the fair value 
of financial collateral by using the risk weight of the collateral. 
There is a general risk weight floor of 20 percent.
    For repo-style transactions, eligible margin loans, collateralized 
derivative contracts, and single-product netting sets of such 
transactions, a System institution may instead use the collateral 
haircut approach--that is, it may reduce the amount of exposure to be 
risk weighted (rather than substituting the risk weight of the 
collateral).
    A System institution must use the same approach for similar 
exposures or transactions.
14. Unsettled Transactions--Sec.  628.38
    The rule provides for a separate risk-based capital requirement for 
transactions involving securities, foreign exchange instruments, and 
commodities that have a risk of delayed settlement or delivery. This 
capital requirement does not, however, apply to certain types of 
transactions, including cleared transactions that are marked-to-market 
daily and subject to daily receipt and payment of variation margin. The 
rule contains separate treatments for delivery-versus-payment (DvP) and 
payment-versus-payment (PvP) transactions with a normal settlement 
period, and non-DvP/non-PvP transactions with a normal settlement 
period.
15. Securitization Exposures--Sec. Sec.  628.41-628.45
    The rule introduces due diligence and other requirements for System 
institutions that own, originate, or purchase securitization exposures 
and introduces a new definition of securitization exposure. Under the 
rule, a System institution that originates the underlying exposures 
included in a securitization could have a securitization exposure and, 
if so, would be subject to the requirements.
    Note that mortgage-backed pass-through securities (for example, 
those guaranteed by the Federal Home Loan Mortgage Corporation or the 
Federal National Mortgage Association) do not meet the definition of a 
securitization exposure because they do not involve a tranching of 
credit risk. Rather, only those MBS that involve tranching of credit 
risk are securitization exposures.
16. Equity Exposures--Sec. Sec.  628.51-628.52
    A System institution must apply a simple risk-weight approach 
(SRWA) to

[[Page 49768]]

determine the risk weight for equity exposures that are not exposures 
to an investment fund.
17. Equity Exposures to Investment Funds--Sec.  628.53
    The approaches described in this section apply to equity exposures 
to investment funds such as mutual funds, but not to hedge funds or 
other leveraged investment funds. For exposures to investment funds, a 
System institution must use one of three risk-weighting approaches: The 
full-look through approach; the simple modified look-through approach; 
or the alternative modified look-through approach.
18. Foreign Exposures --Sec.  628.32(a), (d), and (e), and Tables 1, 2, 
3, and 4
    A System institution must risk weight an exposure to a foreign 
government, foreign public sector entity (PSE), and a foreign bank 
based on the Country Risk Classification (CRC) that is applicable to 
the foreign government, or the home country of the foreign PSE or 
foreign bank. If a foreign country does not have a CRC, the risk 
weighting for its government, PSEs, and banks depends on whether or not 
the country is a member of the Organization for Economic Cooperation 
and Development (OECD). A sovereign exposure is assigned a 150-percent 
risk weight immediately upon determining that an event of sovereign 
default has occurred, or if an event of sovereign default has occurred 
during the previous 5 years.
    The risk weights for foreign sovereigns, foreign banks, and foreign 
PSEs are shown in the tables below:

          Table 1--Risk Weights for Foreign Sovereign Exposures
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
Sovereign CRC:
  0-1...................................................               0
  2.....................................................              20
  3.....................................................              50
  4-6...................................................             100
  7.....................................................             150
OECD Member with no CRC.................................               0
Non-OECD Member with no CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------


          Table 2--Risk Weights for Exposures to Foreign Banks
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
Sovereign CRC:
  0-1...................................................              20
  2.....................................................              50
  3.....................................................             100
  4-7...................................................             150
OECD Member with no CRC.................................              20
Non-OECD Member with no CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------


        Table 3--Risk Weights for Foreign PSE General Obligations
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
Sovereign CRC:
  0-1...................................................              20
  2.....................................................              50
  3.....................................................             100
  4-7...................................................             150
OECD Member with no CRC.................................              20
Non-OECD Member with no CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------


        Table 4--Risk Weights for Foreign PSE Revenue Obligations
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
Sovereign CRC:
  0-1...................................................              50
  2-3...................................................             100
  4-7...................................................             150
OECD Member with no CRC.................................              50
Non-OECD Member with no CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

19. Summary Comparison of Current Risk-Weighting Rules Versus Revised 
Risk-Weighting Rules

----------------------------------------------------------------------------------------------------------------
                                         Current risk weight      Revised risk weight
               Category                      (in general)          under Final Rules             Comments
----------------------------------------------------------------------------------------------------------------
                   Risk Weights for On-Balance Sheet Exposures Under Current and Revised Rules
----------------------------------------------------------------------------------------------------------------
Cash.................................  0%.....................  0%.....................
Direct exposures to or                 0%.....................  0%.....................
 unconditionally guaranteed by the
 U.S. Government, its central bank,
 or a U.S. Government agency.
Exposures to certain supranational     20%....................  0%.....................
 entities and multilateral
 development banks.
Cash items in the process of           20%....................  20%....................
 collection.
Conditional exposures to the U.S.      20%....................  20%....................  A conditional exposure
 Government.                                                                              is one that requires
                                                                                          the satisfaction of
                                                                                          certain conditions,
                                                                                          for example, servicing
                                                                                          requirements.
Exposures to Government-sponsored      20% (including           20%--exposures other
 entities (GSEs).                       preferred stock).        than preferred stock
                                                                 and equity exposures.
                                                                100%--preferred stock
                                                                 of non-System GSEs.
                                                                All System equities,
                                                                 including preferred
                                                                 stock, deducted from
                                                                 capital (not risk
                                                                 weighted).
Most exposures to U.S. depository      20%....................  20%....................
 institutions or credit unions
 (including those that are OFIs).
Exposures to U.S. public sector        20%--general             20%--general
 entities (PSEs).                       obligations.             obligations.
                                       50%--revenue             50%--revenue
                                        obligations.             obligations..

[[Page 49769]]

 
Exposures to other System              20%....................  20%....................
 institutions that are not deducted
 from tier 1 or tier 2 capital.
Corporate exposures (including         100%--generally........  100%--generally........
 exposures to agricultural borrowers   50%--lower risk OFIs     50%--lower risk OFIs
 and to OFIs that do not satisfy the    that do not satisfy      that do not satisfy
 criteria for a lower risk weight).     the criteria for 20%.    the criteria for 20%.
Past due and nonaccrual exposures....  Generally no change      100%--residential        90 days or more past
                                        when an exposure is      mortgage exposures.      due or in nonaccrual.
                                        past due or in
                                        nonaccrual status.
                                       Past due or nonaccrual   150%--all other
                                        residential loans--      exposures, for the
                                        100%.                    portion that is not
                                                                 guaranteed or secured
                                                                 by financial
                                                                 collateral.
Servicing assets.....................  100% (not specifically   100%--MSAs.............
                                        addressed)--mortgage    (Non-MSAs deducted from
                                        servicing assets         capital).
                                        (MSAs) and non-MSAs.
Deferred tax assets..................  Certain DTAs deducted    100%--DTAs arising from
                                        from capital.            temporary differences
                                                                 relating to net
                                                                 operating carrybacks.
                                       Other DTAs--100% (not    DTAs deducted from CET1
                                        specifically             arise from net
                                        addressed).              operating
                                                                 carryforwards.
Assets not specifically assigned to a  100%...................  100%...................  Includes:
 risk-weight category and not                                                            --borrower loans such
 deducted from tier 1 or tier 2                                                           as agricultural loans
 capital.                                                                                 and consumer loans,
                                                                                          unless qualify for 50%
                                                                                          risk weighting.
                                                                                         --premises, fixed
                                                                                          assets, and other real
                                                                                          estate owned.
Exposures to foreign governments and   0% for direct and        Risk weight depends on
 their central banks.                   unconditional claims     Country Risk
                                        on OECD governments.     Classification (CRC)
                                       20% for conditional       applicable to the
                                        claims on OECD           sovereign. If there is
                                        governments.             no CRC, depends on
                                       100% for claims on non-   OECD membership. Risk
                                        OECD governments.        weights range between
                                                                 0% and 150%.
                                                                150% for a sovereign
                                                                 that has defaulted
                                                                 within the previous 5
                                                                 years.
Exposures to foreign banks...........  20% for claims on banks  Risk weight depends on
                                        in OECD countries.       home country's CRC
                                       20% for short-term        rating. If there is no
                                        claims on banks in non-  CRC, depends on OECD
                                        OECD countries.          membership of home
                                       100% for long-term        country. Risk weights
                                        claims on banks in non-  range between 20% and
                                        OECD countries.          150%.
                                                                150% in the case of a
                                                                 sovereign default in
                                                                 the bank's home
                                                                 country.
Claims on foreign PSEs...............  20% for general          Risk weight depends on
                                        obligations of states    the home country's
                                        and political            CRC. If there is no
                                        subdivisions of OECD     CRC, risk depends on
                                        countries.               OECD membership of
                                       50% for revenue           home country. Risk
                                        obligations of states    weights range between
                                        and political            20% and 150% for
                                        subdivisions of OECD     general obligations
                                        countries.               and between 50% and
                                       100% for all              150% for revenue
                                        obligations of states    obligations.
                                        and political           150% for a PSE in a
                                        subdivisions of non-     home country with a
                                        OECD countries.          sovereign default.
MBS, ABS, and structured securities..  Ratings-based approach.  Deduction for the after-
                                                                 tax gain-on-sale of a
                                                                 securitization.
                                                                1,250% risk weight for
                                                                 a CEIO.
                                                                100% for interest--only
                                                                 MBS that are not
                                                                 credit-enhancing.
                                                                System institutions may
                                                                 elect to follow a
                                                                 gross up approach--
                                                                 senior securitization
                                                                 tranches are assigned
                                                                 the risk weight
                                                                 associated with the
                                                                 underlying exposures.
                                                                System institutions may
                                                                 instead elect to
                                                                 follow the simplified
                                                                 supervisory formula
                                                                 approach (SSFA)--
                                                                 requires various data
                                                                 inputs to a
                                                                 supervisory formula
                                                                 exposure.
                                                                Alternatively, System
                                                                 institutions may apply
                                                                 a 1,250% risk weight
                                                                 to any securitization.

[[Page 49770]]

 
Unsettled transactions...............  Not addressed..........  100%, 625%, 937.5%, and
                                                                 1,250% for DvP or PvP
                                                                 transactions depending
                                                                 on the number of
                                                                 business days past the
                                                                 settlement date.
                                                                1,250% for non-DvP, non-
                                                                 PvP transactions more
                                                                 than 5 days past the
                                                                 settlement date.
                                                                The proposed capital
                                                                 requirement for
                                                                 unsettled transactions
                                                                 would not apply to
                                                                 cleared transactions
                                                                 that are marked-to-
                                                                 market daily and
                                                                 subject to daily
                                                                 receipt and payment of
                                                                 variation margin.
Equity exposures.....................  100%...................  0% risk weight: equity
                                                                 exposures to any
                                                                 entity whose credit
                                                                 exposures receive a 0%
                                                                 risk weight.
                                                                20%: Equity exposures
                                                                 to a PSE or Farmer Mac.
                                                                100%: Equity exposures
                                                                 to effective portions
                                                                 of hedge pairs and
                                                                 equity exposures to
                                                                 non-significant equity
                                                                 investments.
                                                                600%: Equity exposures
                                                                 to investment firms
                                                                 that satisfy certain
                                                                 conditions.
Equity exposures to investment funds.  There is a 20% risk      Choose among three
                                        weight floor on mutual   approaches: full look-
                                        fund holdings.           through; simple
                                                                 modified look-through;
                                                                 and alternative
                                                                 modified look-through.
                                                                Full look-through: Risk
                                                                 weight the assets of
                                                                 the fund (as if owned
                                                                 directly) multiplied
                                                                 by the System
                                                                 institution's
                                                                 proportional ownership
                                                                 in the fund.
                                                                Simple modified look-
                                                                 through: Multiply the
                                                                 System institution's
                                                                 exposure by the risk
                                                                 weight of the highest
                                                                 risk weight asset in
                                                                 the fund.
                                                                Alternative modified
                                                                 look-through: Assign
                                                                 risk weight on a pro
                                                                 rata basis based on
                                                                 the investment limits
                                                                 in the fund's
                                                                 prospectus.
                                                                For certain equity
                                                                 exposures authorized
                                                                 under Sec.
                                                                 615.5140(e), risk
                                                                 weighted asset amount
                                                                 = adjusted carrying
                                                                 value.
----------------------------------------------------------------------------------------------------------------
                       Credit Conversion Factors (CCF) Under the Current and Revised Rules
----------------------------------------------------------------------------------------------------------------
CCF for off-balance sheet items......  0% for the unused        0% for the unused
                                        portion of a             portion of a
                                        commitment with an       commitment that is
                                        original maturity of     unconditionally
                                        14 months or less, or    cancellable by the
                                        which is                 System institution.
                                        unconditionally
                                        cancellable by the
                                        System institution at
                                        any time.
                                       20% for short-term,      20% for the unused
                                        self-liquidating,        portion of a
                                        trade-related            commitment with an
                                        contingent items.        original maturity of
                                                                 14 months or less that
                                                                 is not unconditionally
                                                                 cancellable by the
                                                                 System institution.
                                       50% for the unused       20% for self-
                                        portion of a             liquidating trade-
                                        commitment with an       related contingent
                                        original maturity of     items that arise from
                                        more than 14 months      the movement of goods,
                                        that is not              with an original
                                        unconditionally          maturity of 14 months
                                        cancellable by the       or less.
                                        System institution.
                                       50% for transaction-     20% for a System bank's
                                        related contingent       commitment to an
                                        items (performance       association or OFI
                                        bonds, bid bonds,        that is not
                                        warranties, and          unconditionally
                                        standby letters of       cancelable by the
                                        credit).                 System bank,
                                                                 regardless of maturity.

[[Page 49771]]

 
                                       100% for guarantees,     50% for the unused
                                        repurchase agreements,   portion of a
                                        securities lending and   commitment, other than
                                        borrowing                a System bank's
                                        transactions,            commitment to an
                                        financial standby        association or OFI,
                                        letters of credit, and   over 14 months that is
                                        forward agreements.      not unconditionally
                                                                 cancellable by the
                                                                 System institution.
                                                                50% for transaction-
                                                                 related contingent
                                                                 items (performance
                                                                 bonds, bid bonds,
                                                                 warranties, and
                                                                 standby letters of
                                                                 credit).
                                                                100% for guarantees,
                                                                 repurchase agreements,
                                                                 securities lending and
                                                                 borrowing
                                                                 transactions,
                                                                 financial standby
                                                                 letters of credit, and
                                                                 forward agreements.
OTC derivative contracts (except       Calculation of off-      Calculation of off-
 cleared transactions).                 balance sheet credit     balance sheet credit
                                        equivalents based on     equivalents amount
                                        current exposure plus    based on current
                                        potential future         exposure plus
                                        exposure and a set of    potential future
                                        conversion factors.      exposure and a revised
                                                                 set of conversion
                                                                 factors.
                                                                Recognition of credit
                                                                 risk mitigation of
                                                                 collateralized OTC
                                                                 derivative contracts.
Cleared transactions.................  Not specifically         If collateral posted
                                        addressed.               with a qualified
                                                                 central counterparty,
                                                                 and subject to
                                                                 specific requirements,
                                                                 then assign 2 percent;
                                                                 or.
                                                                If requirements not
                                                                 met, then assign 4
                                                                 percent.
----------------------------------------------------------------------------------------------------------------
                           Credit Risk Mitigation Under the Current and Revised Rules
----------------------------------------------------------------------------------------------------------------
Guarantees...........................  Generally recognizes     Recognizes guarantees    Claims conditionally
                                        guarantees provided by   from eligible            guaranteed by the U.S.
                                        central governments,     guarantors, as defined.  government receive a
                                        GSEs, PSEs in OECD      Substitution treatment    risk weight of 20
                                        countries,               allows the System        percent.
                                        multilateral lending     institution to
                                        institutions, regional   substitute the risk
                                        development              weight of the
                                        institutions, U.S.       protection provider
                                        depository               for the risk weight
                                        institutions, foreign    ordinarily assigned to
                                        banks, and qualifying    the exposure.
                                        securities firms in     Applies only to
                                        OECD countries.          eligible guarantees
                                                                 and eligible credit
                                                                 derivatives, and
                                                                 adjusts for maturity
                                                                 mismatches, currency
                                                                 mismatches, and where
                                                                 restructuring is not
                                                                 treated as a credit
                                                                 event.
Collateralized transactions..........  No recognition.........  For financial            Financial collateral
                                                                 collateral only, the     does not include
                                                                 rule provides two        collateral such as
                                                                 approaches:              real estate or
                                                                                          chattel. In all cases
                                                                                          the System institution
                                                                                          must have a perfected,
                                                                                          1st priority interest.
                                                                1. Simple approach
                                                                A System institution     For the simple approach
                                                                 may apply a risk         there must be a
                                                                 weight to the portion    collateral agreement
                                                                 of an exposure that is   for at least the life
                                                                 secured by the fair      of the exposure;
                                                                 value of collateral by   collateral must be
                                                                 using the risk weight    revalued at least
                                                                 of the collateral--      every 6 months;
                                                                 with a general risk      collateral other than
                                                                 weight floor of 20%.     gold must be in the
                                                                                          same currency.
                                                                2. Collateral haircut
                                                                 approach
                                                                A System institution
                                                                 may use standard
                                                                 supervisory haircuts
                                                                 for eligible margin
                                                                 loans, repo-style
                                                                 transactions, and
                                                                 collateralized
                                                                 derivative contracts.
----------------------------------------------------------------------------------------------------------------

20. Disclosure Requirements--Sec. Sec.  628.61-628.63 (Including Tables 
1-10)
    The rule requires each System bank, generally on a quarterly basis, 
to make public disclosures related to its capital requirements. 
Disclosures are required as follows:
    Table 1--Scope of Application--Provides the basic context 
underlying regulatory capital calculations.
    Table 2--Capital Structure--Provides summary information on the 
terms and conditions of the main features of regulatory capital 
instruments. Also requires disclosure of the total amount of CET1, tier 
1, and total capital, with separate disclosures for deductions and 
adjustments to capital.
    Table 3--Capital Adequacy--Provides information on a System bank's 
approach for categorizing and risk-weighting its exposures, as well as 
the amount of total risk weighted assets.
    Table 4--Capital Buffers--Requires a System bank to disclosure the 
capital conservation buffer and leverage buffer, the eligible retained 
income and any limitations on capital distributions and certain 
discretionary bonus payments, as applicable.
    Table 5--Credit Risk: General Disclosures--Requires a System bank 
to

[[Page 49772]]

disclose information pertaining to its general credit risk.
    Table 6--General Disclosure for Counterparty Credit Risk-Related 
Exposures--Requires a System bank to disclose information pertaining to 
its counterparty credit risk.
    Table 7--Credit Risk Mitigation--Requires a System bank to disclose 
information pertaining to credit risk mitigation.
    Table 8--Securitization--Provides information to market 
participants on the amount of credit risk transferred and retained by a 
System bank through securitization transactions, the types of products 
involved in the System bank's securitizations, the risks inherent in 
the System bank's securitized assets, the System bank's policies 
regarding credit risk mitigation, and the names of any entities that 
provide external credit assessments of a securitization.\142\ 
Securitization transactions in which the originating System bank does 
not retain any securitization exposure are shown separately and are 
reported only for the year of inception of the transaction.\143\
---------------------------------------------------------------------------

    \142\ For purposes of these disclosures (and these capital 
regulations), a System bank is considered to have securitized assets 
if assets that it originated or purchased from third parties are 
included in a securitization.
    \143\ A System bank is authorized to act as an ``originating 
System institution,'' which the regulation defines as a System 
institution that directly or indirectly originated the underlying 
exposures included in a securitization.
---------------------------------------------------------------------------

    Table 9--Equities--Provides market participants with an 
understanding of the types of equity securities held by the System bank 
and how they are valued. Also provides information on the capital 
allocated to different equity products and the amount of unrealized 
gains and losses.
    Table 10--Interest Rate Risk for Non-Trading Activities--Requires a 
System bank to provide certain quantitative and qualitative disclosures 
regarding the System bank's management of interest rate risks.

List of Subjects

12 CFR Part 607

    Accounting, Agriculture, Banks, Banking, Reporting and 
recordkeeping requirements, Rural areas.

12 CFR Part 611

    Agriculture Banks, Banking, Rural areas.

12 CFR Part 614

    Agriculture, Banks, Banking, Foreign trade, Reporting and 
recordkeeping requirements, Rural areas.

12 CFR Part 615

    Accounting, Agriculture, Banks, Banking, Government securities, 
Investments, Rural areas.

12 CFR Part 620

    Accounting, Agriculture, Banks, Banking, Reporting and 
recordkeeping requirements, Rural areas.

12 CFR Part 624

    Accounting, Agriculture, Banks, Banking, Capital, Cooperatives, 
Credit, Margin requirements, Reporting and recordkeeping requirements, 
Risk, Rural areas, Swaps.

12 CFR Part 627

    Agriculture, Banks, Banking, Claims, Rural areas.

12 CFR Part 628

    Accounting, Agriculture, Banks, Banking, Capital, Government 
securities, Investments, Rural areas.

    For the reasons stated in the preamble, parts 607, 611, 614, 615, 
620, 624, 627, and 628 of chapter VI, title 12 of the Code of Federal 
Regulations are amended as follows:

PART 607--ASSESSMENT AND APPORTIONMENT OF ADMINISTRATIVE EXPENSES

0
1. The authority citation for part 607 continues to read as follows:

    Authority:  Secs. 5.15, 5.17 of the Farm Credit Act (12 U.S.C. 
2250, 2252) and 12 U.S.C. 3025.


0
2. Section 607.2 is amended by revising paragraph (b) introductory text 
to read as follows:


Sec.  607.2  Definitions.

* * * * *
    (b) Average risk-adjusted asset base means the average of the risk-
adjusted asset base (as defined in Sec.  615.5201 of this chapter) of 
banks, associations, and designated other System entities, calculated 
as follows:
* * * * *

PART 611--ORGANIZATION

0
3. The authority citation for part 611 continues to read as follows:

    Authority:  Secs. 1.2, 1.3, 1.4, 1.5, 1.13, 2.0, 2.1, 2.2, 2.10, 
2.11, 2.12, 3.0, 3.1, 3.2, 3.21, 4.12, 4.12A, 4.15, 4.20, 4.21, 5.9, 
5.17, 6.9, 6.26, 7.0-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 
2002, 2011, 2012, 2013, 2021, 2071, 2072, 2073, 2091, 2092, 2093, 
2121, 2122, 2123, 2142, 2183, 2184, 2203, 2208, 2209, 2243, 2252, 
2278a-9, 2278b-6, 2279a-2279f-1, 2279aa-5(e)); secs. 411 and 412 of 
Pub. L. 100-233, 101 Stat. 1568, 1638; sec. 414 of Pub. L. 100-399, 
102 Stat. 989, 1004.


0
4. Section 611.1265 is amended by revising paragraph (e) to read as 
follows:


Sec.  611.1265  Retirement of a terminating association's investment in 
its affiliated bank.

* * * * *
    (e) Exclusion of equities from capital ratios. If another Farm 
Credit institution makes an agreement to retire equities you hold in 
that institution after termination, we may require that institution to 
exclude part or all of those equities from assets and capital when the 
institution calculates its regulatory capital under parts 615 and 628 
of this chapter.

PART 614--LOAN POLICIES AND OPERATIONS

0
5. The authority citation for part 614 continues to read as follows:

    Authority:  42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs. 
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 
2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A, 
4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19, 4.25, 
4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.8, 
7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011, 2013, 
2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093, 
2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 
2184, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a, 2207, 
2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252, 2279a, 
2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 
of Pub. L. 100-233, 101 Stat. 1568, 1639.


0
6. Section 614.4351 is amended by removing paragraph (a)(2), 
redesignating paragraph (a)(3) as paragraph (a)(2), and revising newly 
redesignated paragraph (a)(2) to read as follows:


Sec.  614.4351  Computation of lending and leasing limit base.

    (a) * * *
    (2) Any amounts of preferred stock not eligible to be included in 
total capital as defined in Sec.  628.2 of this chapter must be 
deducted from the lending limit base, except that otherwise eligible 
third-party capital that is required to be excluded from total capital 
under Sec.  628.23 of this chapter may be included in the lending limit 
base.
* * * * *

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, 
AND FUNDING OPERATIONS

0
7. The authority citation for part 615 is revised to read as follows:

    Authority:  Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 
2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3,

[[Page 49773]]

4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 
8.7, 8.8, 8.10, 8.12 of the Farm Credit Act (12 U.S.C. 2013, 2015, 
2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093, 2122, 2128, 2132, 
2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 2252, 2278b, 2278b-6, 
2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 
2279aa-12); sec. 301(a), Pub. L. 100-233, 101 Stat. 1568, 1608; sec. 
939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15 U.S.C. 78o-7 note).


0
8. Section 615.5143 is amended by revising paragraphs (a)(3) and (b)(4) 
to read as follows:


Sec.  615.5143  Management of ineligible investments and reservation of 
authority to require divestiture.

    (a) * * *
    (3) It must be excluded as collateral under Sec.  615.5050.
    (b) * * *
    (4) You may continue to hold the investment as collateral under 
Sec.  615.5050 at the lower of cost or market value; and
* * * * *


0
9. Sections 615.5200 and 615.5201 are revised to read as follows:


Sec.  615.5200  Capital planning.

    (a) The Board of Directors of each System institution shall 
determine the amount of regulatory capital needed to assure the System 
institution's continued financial viability and to provide for growth 
necessary to meet the needs of its borrowers. The minimum capital 
standards specified in this part and part 628 of this chapter are not 
meant to be adopted as the optimal capital level in the System 
institution's capital adequacy plan. Rather, the standards are intended 
to serve as minimum levels of capital that each System institution must 
maintain to protect against the credit and other general risks inherent 
in its operations.
    (b) Each Board of Directors shall establish, adopt, and maintain a 
formal written capital adequacy plan as a part of the financial plan 
required by Sec.  618.8440 of this chapter. The plan shall include the 
capital targets that are necessary to achieve the System institution's 
capital adequacy goals as well as the minimum permanent capital, common 
equity tier 1 (CET1) capital, tier 1 capital, total capital, and tier 1 
leverage ratios (including the unallocated retained earnings (URE) and 
URE equivalents minimum) standards. The plan shall address any 
projected dividend payments, patronage payments, equity retirements, or 
other action that may decrease the System institution's capital or the 
components thereof for which minimum amounts are required by this part 
and part 628 of this chapter. The plan shall set forth the 
circumstances and minimum timeframes in which equities may be redeemed 
or revolved consistent with the System institution's applicable bylaws 
or board of directors resolutions. Such bylaws or resolutions must 
include the information described in paragraph (d) of this section.
    (c) In addition to factors that must be considered in meeting the 
minimum standards, the board of directors shall also consider at least 
the following factors in developing the capital adequacy plan:
    (1) Capability of management and the board of directors (the 
assessment of which may be a part of the assessments required in 
paragraphs (b)(2)(ii) and (b)(7)(i) of Sec.  618.8440 of this chapter);
    (2) Quality of operating policies, procedures, and internal 
controls;
    (3) Quality and quantity of earnings;
    (4) Asset quality and the adequacy of the allowance for losses to 
absorb potential loss within the loan and lease portfolios;
    (5) Sufficiency of liquid funds;
    (6) Needs of a System institution's customer base; and
    (7) Any other risk-oriented activities, such as funding and 
interest rate risks, potential obligations under joint and several 
liability, contingent and off-balance-sheet liabilities or other 
conditions warranting additional capital.
    (d) In order to include otherwise eligible purchased and allocated 
equities in tier 1 capital and tier 2 capital under part 628 of this 
chapter, a System institution must adopt a capitalization bylaw, or its 
board of directors must adopt a resolution, which resolution must be 
re-affirmed by the board on an annual basis in the capital adequacy 
plan, in which the institution undertakes the following:
    (1) The institution shall obtain prior FCA approval under Sec.  
628.20(f) of this chapter before:
    (i) Redeeming or revolving equities included in CET1 capital;
    (ii) Redeeming or calling equities included in additional tier 1 
capital; and
    (iii) Redeeming, revolving, or calling instruments included in tier 
2 capital other than limited life preferred stock or subordinated debt 
on the maturity date.
    (2) The institution shall have a minimum redemption or revolvement 
period of 7 years for equities included in CET1 capital, a minimum no-
call or redemption period of 5 years for additional tier 1 capital, and 
a minimum no-call, redemption, or revolvement period of 5 years for 
tier 2 capital.
    (3) The institution shall obtain prior FCA approval before:
    (i) Redesignating URE equivalents as equities that the institution 
may exercise its discretion to redeem other than upon dissolution or 
liquidation;
    (ii) Removing equities or other instruments from CET1, additional 
tier 1, or tier 2 capital other than through repurchase, cancellation, 
redemption or revolvement; and
    (iii) Redesignating equities included in one component of 
regulatory capital (CET1 capital, additional tier 1 capital, or tier 2 
capital) for inclusion in another component of regulatory capital.
    (4) The institution shall not exercise its discretion to revolve 
URE equivalents except upon dissolution or liquidation and shall not 
offset URE equivalents against a loan in default except as required 
under final order of a court of competent jurisdiction or if required 
under Sec.  615.5290 in connection with a restructuring under part 617 
of this chapter.


Sec.  615.5201  Definitions.

    For the purpose of this subpart, the following definitions apply:
    Allocated investment means earnings allocated but not paid in cash 
by a System bank to an association or other recipient.
    Deferred tax assets (DTAs) means an amount of income taxes 
refundable or recoverable in future years as a result of temporary 
differences and net operating loss or tax credit carryforwards that 
exist at the reporting date. There are three types of DTAs and they 
arise from:
    (1) A temporary difference that a System institution could realize 
through a net loss carryback;
    (2) A temporary difference that a System institution could not 
realize through net loss carryback; and
    (3) An operating loss and tax credit carryforward.
    Nonagreeing association means an association that does not have an 
allotment agreement in effect with a Farm Credit Bank or agricultural 
credit bank pursuant to Sec.  615.5207(b)(2).
    Permanent capital, subject to adjustments as described in Sec.  
615.5207, includes:
    (1) Current year earnings;
    (2) Allocated and unallocated earnings (which, in the case of 
earnings allocated in any form by a System bank to any association or 
other recipient and retained by the bank, must be considered, in whole 
or in part, permanent capital of the bank or of any such association or 
other recipient as provided under an agreement between the bank and 
each such association or other recipient);
    (3) All surplus;
    (4) Stock issued by a System institution, except:

[[Page 49774]]

    (i) Stock that may be retired by the holder of the stock on 
repayment of the holder's loan, or otherwise at the option or request 
of the holder;
    (ii) Stock that is protected under section 4.9A of the Act or is 
otherwise not at risk;
    (iii) Farm Credit Bank equities required to be purchased by Federal 
land bank associations in connection with stock issued to borrowers 
that is protected under section 4.9A of the Act;
    (iv) Capital subject to revolvement, unless:
    (A) The bylaws of the System institution clearly provide that there 
is no express or implied right for such capital to be retired at the 
end of the revolvement cycle or at any other time; and
    (B) The System institution clearly states in the notice of 
allocation that such capital may only be retired at the sole discretion 
of the board of directors in accordance with statutory and regulatory 
requirements and that the institution does not grant any express or 
implied right to have such capital retired at the end of the 
revolvement cycle or at any other time;
    (5) [Reserved]
    (6) Financial assistance provided by the Farm Credit System 
Insurance Corporation that the FCA determines appropriate to be 
considered permanent capital; and
    (7) Any other debt or equity instruments or other accounts the FCA 
has determined are appropriate to be considered permanent capital. The 
FCA may permit one or more System institutions to include all or a 
portion of such instrument, entry, or account as permanent capital, 
permanently or on a temporary basis, for purposes of this part.
    Preferred stock means stock that is permanent capital and has 
dividend and/or liquidation preference over common stock.
    Risk-adjusted asset base means ``standardized total risk-weighted 
assets'' as defined in Sec.  628.2 of this chapter, adjusted in 
accordance with Sec.  615.5207 and excluding the deduction in paragraph 
(2) of that definition for the amount of the System institution's 
allowance for loan losses that is not included in tier 2 capital.
    Stock means stock and participation certificates.
    System bank means a Farm Credit bank as defined in Sec.  619.9140 
of this chapter, which includes Farm Credit Banks, agricultural credit 
banks, and banks for cooperatives.
    System institution means a System bank, an association of the Farm 
Credit System, Farm Credit Leasing Services Corporation, and their 
successors, and any other institution chartered by the FCA that the FCA 
determines should be considered a System institution for the purposes 
of this subpart.
    Term preferred stock means preferred stock with an original 
maturity of at least 5 years and on which, if cumulative, the board of 
directors has the option to defer dividends, provided that, at the 
beginning of each of the last 5 years of the term of the stock, the 
amount that is eligible to be counted as permanent capital is reduced 
by 20 percent of the original amount of the stock (net of redemptions).

0
10. Sections 615.5206, 615.5207, and 615.5208 are revised to read as 
follows:


Sec.  615.5206  Permanent capital ratio computation.

    (a) The System institution's permanent capital ratio is determined 
on the basis of the financial statements of the System institution 
prepared in accordance with generally accepted accounting principles.
    (b) The System institution's asset base and permanent capital are 
computed using average daily balances for the most recent 3 months.
    (c) The System institution's permanent capital ratio is calculated 
by dividing the System institution's permanent capital, adjusted in 
accordance with Sec.  615.5207 (the numerator), by the risk-adjusted 
asset base (the denominator) as defined in Sec.  615.5201, to derive a 
ratio expressed as a percentage.


Sec.  615.5207  Capital adjustments and associated reductions to 
assets.

    For the purpose of computing the System institution's permanent 
capital ratio, the following adjustments must be made prior to 
assigning assets to risk-weight categories and computing the ratio:
    (a) Where two System institutions have stock investments in each 
other, such reciprocal holdings must be eliminated to the extent of the 
offset. If the investments are equal in amount, each System institution 
must deduct from its assets and its permanent capital an amount equal 
to the investment. If the investments are not equal in amount, each 
System institution must deduct from its permanent capital and its 
assets an amount equal to the smaller investment. The elimination of 
reciprocal holdings required by this paragraph must be made prior to 
making the other adjustments required by this section.
    (b) Where an association has an equity investment in a System bank, 
the double counting of capital is eliminated in the following manner:
    (1) For a purchased investment, each association must deduct its 
investment in a System bank from its permanent capital. Each System 
bank will consider all purchased stock investments as its permanent 
capital.
    (2) For an allocated investment, each System bank and each of its 
affiliated associations may enter into an agreement that specifies, for 
computing permanent capital only, a dollar amount and/or percentage 
allotment of the association's allocated investment between the bank 
and the association. Section 615.5208 provides conditions for allotment 
agreements or defines allotments in the absence of such agreements.
    (c) A Farm Credit Bank or agricultural credit bank and a recipient, 
other than an affiliated association, of allocated earnings from such 
bank may enter into an agreement specifying a dollar amount and/or 
percentage allotment of the recipient's allocated earnings in the bank 
between the bank and the recipient. Such agreement must comply with 
Sec.  615.5208, except that, in the absence of an agreement, the 
allocated investment must be allotted 100 percent to the allocating 
bank and 0 percent to the recipient. All equities of the bank that are 
purchased by a recipient are considered as permanent capital of the 
issuing bank.
    (d) A bank for cooperatives and a recipient of allocated earnings 
from such bank may enter into an agreement specifying a dollar amount 
and/or percentage allotment of the recipient's allocated earnings in 
the bank between the bank and the recipient. Such agreement must comply 
with Sec.  615.5208, except that, in the absence of an agreement, the 
allocated investment must be allotted 100 percent to the allocating 
bank and 0 percent to the recipient. All equities of a bank that are 
purchased by a recipient shall be considered as permanent capital of 
the issuing bank.
    (e) Where a System institution has an equity investment in another 
System institution to capitalize a loan participation interest, the 
investing System institution must deduct from its permanent capital an 
amount equal to its investment in the participating System institution.
    (f) Each System institution must deduct from permanent capital any 
equity investment in a service corporation chartered under section 4.25 
of the Act or the Funding Corporation chartered under section 4.9 of 
the Act.

[[Page 49775]]

    (g) Each System institution must deduct from its permanent capital 
an amount equal to all goodwill, whenever acquired.
    (h) Each System institution must deduct from its risk-adjusted 
asset base any item deducted from permanent capital under this section.
    (i) Where a System bank and an association have an enforceable 
written agreement to share losses on specifically identified assets on 
a predetermined quantifiable basis, such assets must be counted in each 
System institution's risk-adjusted asset base in the same proportion as 
the System institutions have agreed to share the loss.
    (j) The permanent capital of a System institution must exclude any 
accumulated other comprehensive income (loss) as reported under GAAP.
    (k) For purposes of calculating capital ratios under this part, 
deferred-tax assets are subject to the conditions, limitations, and 
restrictions described in Sec.  628.22(a)(3) of this chapter.
    (l) [Reserved]


Sec.  615.5208  Allotment of allocated investments.

    (a) The following conditions apply to agreements that a System bank 
enters into with an affiliated association pursuant to Sec.  
615.5207(b)(2):
    (1) The agreement must be for a term of 1 year or longer.
    (2) The agreement must be entered into on or before its effective 
date.
    (3) The agreement may be amended according to its terms, but no 
more frequently than annually except in the event that a party to the 
agreement is merged or reorganized.
    (4) On or before the effective date of the agreement, a certified 
copy of the agreement, and any amendments thereto, must be sent to the 
field office of the Farm Credit Administration responsible for 
examining the System institution. A copy must also be sent within 30 
calendar days of adoption to the bank's other affiliated associations.
    (5) Unless the parties otherwise agree, if the System bank and the 
association have not entered into a new agreement on or before the 
expiration of an existing agreement, the existing agreement will 
automatically be extended for another 12 months, unless either party 
notifies the Farm Credit Administration in writing of its objection to 
the extension prior to the expiration of the existing agreement.
    (b) In the absence of an agreement between a System bank and one or 
more associations, or in the event that an agreement expires and at 
least one party has timely objected to the continuation of the terms of 
its agreement, the following formula applies with respect to the 
allocated investments held by those associations with which there is no 
agreement (nonagreeing associations), and does not apply to the 
allocated investments held by those associations with which the bank 
has an agreement (agreeing associations):
    (1) The allotment formula must be calculated annually.
    (2) The permanent capital ratio of the System bank must be computed 
as of the date that the existing agreement terminates, using a 3-month 
average daily balance, excluding the allocated investment from 
nonagreeing associations but including any allocated investments of 
agreeing associations that are allotted to the bank under applicable 
allocation agreements. The permanent capital ratio of each nonagreeing 
association must be computed as of the same date using a 3-month 
average daily balance, and must be computed excluding its allocated 
investment in the bank.
    (3) If the permanent capital ratio of the System bank calculated in 
accordance with paragraph (b)(2) of this section is 7 percent or above, 
the allocated investment of each nonagreeing association whose 
permanent capital ratio calculated in accordance with paragraph (b)(2) 
of this section is 7 percent or above must be allotted 50 percent to 
the bank and 50 percent to the association.
    (4) If the permanent capital ratio of the System bank calculated in 
accordance with paragraph (b)(2) of this section is 7 percent or above, 
the allocated investment of each nonagreeing association whose capital 
ratio is below 7 percent must be allotted to the association until the 
association's capital ratio reaches 7 percent or until all of the 
investment is allotted to the association, whichever occurs first. Any 
remaining unallotted allocated investment must be allotted 50 percent 
to the bank and 50 percent to the association.
    (5) If the permanent capital ratio of the System bank calculated in 
accordance with paragraph (b)(2) of this section is less than 7 
percent, the amount of additional capital needed by the bank to reach a 
permanent capital ratio of 7 percent must be determined, and an amount 
of the allocated investment of each nonagreeing association must be 
allotted to the System bank, as follows:
    (i) If the total of the allocated investments of all nonagreeing 
associations is greater than the additional capital needed by the bank, 
the allocated investment of each nonagreeing association must be 
multiplied by a fraction whose numerator is the amount of capital 
needed by the bank and whose denominator is the total amount of 
allocated investments of the nonagreeing associations, and such amount 
must be allotted to the bank. Next, if the permanent capital ratio of 
any nonagreeing association is less than 7 percent, a sufficient amount 
of unallotted allocated investment must then be allotted to each 
nonagreeing association, as necessary, to increase its permanent 
capital ratio to 7 percent, or until all such remaining investment is 
allotted to the association, whichever occurs first. Any unallotted 
allocated investment still remaining must be allotted 50 percent to the 
bank and 50 percent to the nonagreeing association.
    (ii) If the additional capital needed by the bank is greater than 
the total of the allocated investments of the nonagreeing associations, 
all of the remaining allocated investments of the nonagreeing 
associations must be allotted to the bank.


Sec. Sec.  615.5209, 615.5210, 615.5211, and 615.5212  [Removed and 
reserved]

0
11. Sections 615.5209, 615.5210, 615.5211, and 615.5212 are removed and 
reserved.

0
12. Section 615.5220 is revised to read as follows:


Sec.  615.5220  Capitalization bylaws.

    (a) The board of directors of each System bank and association 
shall, pursuant to section 4.3A of the Farm Credit Act of 1971 (Act), 
adopt capitalization bylaws, subject to the approval of its voting 
shareholders, that set forth:
    (1) Classes of equities and the manner in which they shall be 
issued, transferred, converted and retired;
    (2) For each class of equities, a description of the class(es) of 
persons to whom such stock may be issued, voting rights, dividend 
rights and preferences, and priority upon liquidation, including 
rights, if any, to share in the distribution of the residual estate;
    (3) The number of shares and par value of equities authorized to be 
issued for each class of equities. However, the bylaws need not state a 
number or value limit for these equities:
    (i) Equities that are required to be purchased as a condition of 
obtaining a loan, lease, or related service.
    (ii) Non-voting stock resulting from the conversion of voting stock 
due to repayment of a loan.
    (iii) Non-voting equities that are issued to an association's 
funding bank in conjunction with any agreement for

[[Page 49776]]

a transfer of capital between the association and the bank.
    (iv) Equities resulting from the distribution of earnings.
    (4) For Farm Credit Banks, agricultural credit banks (with respect 
to loans other than to cooperatives), and associations, the percentage 
or dollar amount of equity investment (which may be expressed as a 
range within which the board of directors may from time to time 
determine the requirement) that will be required to be purchased as a 
condition for obtaining a loan, which amount shall be not less than 2 
percent of the loan amount or $1,000, whichever is less;
    (5) For banks for cooperatives and agricultural credit banks (with 
respect to loans to cooperatives), the percentage or dollar amount of 
equity or guaranty fund investment (which may be expressed as a range 
within which the board may from time to time determine the requirement) 
that serves as a target level of investment in the bank for patronage-
sourced business, which amount shall not be less than, 2 percent of the 
loan amount or $1,000, whichever is less;
    (6) The manner in which equities will be retired, including a 
provision stating that equities other than those protected under 
section 4.9A of the Act are retireable at the sole discretion of the 
board, provided minimum capital adequacy standards established in 
subpart H of this part, part 628 of this chapter, and the capital 
requirements established by the board of directors of the System 
institution, are met;
    (7) The manner in which earnings will be allocated and distributed, 
including the basis on which patronage will be paid, which shall be in 
accord with cooperative principles; and
    (8) For System banks, the manner in which the capitalization 
requirements of the Farm Credit bank shall be allocated and equalized 
from time to time among its owners.
    (b) The board of directors of each service corporation (including 
the Farm Credit Leasing Services Corporation) shall adopt 
capitalization bylaws, subject to the approval of its voting 
shareholders, that set forth the requirements of paragraphs (a)(1), 
(2), and (3) of this section to the extent applicable. Such bylaws 
shall also set forth the manner in which equities will be retired and 
the manner in which earnings will be distributed.

0
13. Section 615.5240 is revised to read as follows:


Sec.  615.5240  Regulatory capital requirements.

    (a) The capitalization bylaws shall enable the institution to meet 
the capital adequacy standards established under subpart H of this 
part, part 628 of this chapter, and the capital requirements 
established by the board of directors of the System institution.
    (b) In order to qualify as permanent capital, equities issued under 
the bylaws must meet the following requirements:
    (1) Retirement must be solely at the discretion of the board of 
directors and not upon a date certain (other than the original maturity 
date of preferred stock) or upon the happening of any event, such as 
repayment of the loan, and not pursuant to any automatic retirement or 
revolvement plan;
    (2) Retirement must be at not more than book value;
    (3) The institution must have made the disclosures required by this 
subpart;
    (4) For common stock and participation certificates, dividends must 
be noncumulative and payable only at the discretion of the board; and
    (5) For cumulative preferred stock, the board of directors must 
have discretion to defer payment of dividends.

0
14. Sections 615.5250 and 615.5255 are revised to read as follows:


Sec.  615.5250  Disclosure requirements for sales of borrower stock.

    (a) For sales of borrower stock, which for this subpart means 
equities purchased as a condition for obtaining a loan, a System 
institution must provide a prospective borrower with the following 
documents prior to loan closing:
    (1) The institution's most recent annual report filed under part 
620 of this chapter;
    (2) The institution's most recent quarterly report filed under part 
620 of this chapter, if more recent than the annual report;
    (3) A copy of the institution's capitalization bylaws; and
    (4) A written description of the terms and conditions under which 
the equity is issued. In addition to specific terms and conditions, the 
description must disclose:
    (i) That the equity is an at-risk investment and not a compensating 
balance;
    (ii) That the equity is retireable only at the discretion of the 
board of directors consistent with the institution's bylaws and only if 
minimum capital standards established under subpart H of this part and 
part 628 of this chapter are met and that such retirement may also 
require the approval of the FCA;
    (iii) Whether the institution presently meets its minimum capital 
standards established under subpart H of this part and part 628 of this 
chapter;
    (iv) Whether the institution knows of any reason the institution 
may not meet its capital standards on the next earnings distribution 
date; and
    (v) The rights, if any, to share in patronage payments.
    (b) Notwithstanding the provisions of paragraph (a) of this 
section, no materials previously provided to a purchaser (except the 
disclosures required by paragraph (a)(4) of this section) need be 
provided again unless the purchaser requests such materials.


Sec.  615.5255  Disclosure and review requirements for sales of other 
equities.

    (a) A bank, association, or service corporation must submit a 
proposed disclosure statement to the Farm Credit Administration (FCA) 
for review and clearance prior to the proposed sale of any other 
equities, which for this subpart means equities not purchased as a 
condition for obtaining a loan.
    (b) An institution may not offer to sell other equities until a 
disclosure statement is reviewed and cleared by the FCA.
    (c) A disclosure statement must include:
    (1) All of the information required by parts 620 and 628 of this 
chapter in the annual report to shareholders as of a date within 135 
days of the proposed sale. An institution may satisfy this requirement 
by referring to its most recent annual report to shareholders and the 
most recent quarterly report filed with the FCA, provided such reports 
contain the required information;
    (2) The information required by Sec.  615.5250(a)(3) and (4); and
    (3) A discussion of the intended use of the sale proceeds.
    (d) An institution is not required to provide the materials 
identified in paragraphs (c)(1) and (2) of this section to a purchaser 
who previously received them unless the purchaser requests it.
    (e) For any class of stock where each purchaser and each subsequent 
transferee acquires at least $250,000 of the stock and meets the 
definition of ``accredited investor'' or ``qualified institutional 
buyer'' contained in 17 CFR 230.501 and 230.144A, a disclosure 
statement submitted pursuant to this section is deemed reviewed and 
cleared by the FCA and an institution may treat stock that meets all 
requirements of this part as permanent capital for the purpose of 
meeting the minimum permanent capital standards established under 
subpart H of this part, unless the FCA notifies the institution to the

[[Page 49777]]

contrary within 30 days of receipt of a complete disclosure statement 
submission. A complete disclosure statement submission includes the 
proposed disclosure statement plus any additional materials requested 
by the FCA.
    (f) For all other issuances, a disclosure statement submitted 
pursuant to this section is deemed cleared by the FCA, and an 
institution may treat stock that meets all requirements of this part as 
permanent capital for the purpose of meeting the minimum permanent 
capital standards established under subpart H unless the FCA notifies 
the institution to the contrary within 60 days of receipt of a complete 
disclosure statement submission. A complete disclosure statement 
submission includes the proposed disclosure statement plus any 
additional materials requested by the FCA.
    (g) Upon request, the FCA will inform the institution how it will 
treat the proposed issuance for other regulatory capital ratios or 
computations.
    (h) No institution, officer, director, employee, or agent shall, in 
connection with the sale of equities, make any disclosure, through a 
disclosure statement or otherwise, that is inaccurate or misleading, or 
omit to make any statement needed to prevent other disclosures from 
being misleading.
    (i) Each bank and association must establish a method to disclose 
and make information on insider preferred stock purchases and 
retirements readily available to the public. At a minimum, each 
institution offering preferred stock must make this information 
available upon request.
    (j) The requirements of this section do not apply to the sale of 
Farm Credit System institution equities to:
    (1) Other Farm Credit System institutions;
    (2) Other financing institutions in connection with a lending or 
discount relationship; or
    (3) Non-Farm Credit System lenders that purchase equities in 
connection with a loan participation transaction.
    (k) In addition to the requirements of this section, each 
institution is responsible for ensuring its compliance with all 
applicable Federal and state securities laws.

0
15. Section 615.5270 is revised to read as follows:


Sec.  615.5270  Retirement of other equities.

    (a) Equities other than eligible borrower stock shall be retired at 
not more than their book value.
    (b) Subject to the redemption restrictions in part 628 of this 
chapter, no equities shall be retired, except pursuant to Sec. Sec.  
615.5280 and 615.5290 or term stock at its stated maturity, unless 
after retirement the institution would continue to meet the minimum 
permanent capital standards established under subpart H of this part, 
part 628 of this chapter, and the capital requirements established by 
the board of directors of the System institution.
    (c) A System bank, association, or service corporation board of 
directors may delegate authority to retire at-risk stock to institution 
management if:
    (1) The board has determined that the institution's capital 
position is adequate;
    (2) All retirements are in accordance with applicable provisions of 
part 628 of this chapter and the institution's capital adequacy plan or 
capital restoration plan;
    (3) After any retirements, the institution's permanent capital 
ratio will be in excess of 9 percent, its capital conservation buffer 
set forth in Sec.  628.11 of this chapter will be above 2.5 percent, 
and its leverage buffer set forth in Sec.  628.11 of this chapter will 
be above 1.0 percent;
    (4) The institution will continue to satisfy all applicable 
regulatory capital standards after any retirements; and
    (5) Management reports the aggregate amount and net effect of stock 
purchases and retirements to the board of directors each quarter.
    (d) Each board of directors of a System bank, association, or 
service corporation that issues preferred stock must adopt a written 
policy covering the retirement of preferred stock that complies with 
this paragraph and part 628 of this chapter. The policy must, at a 
minimum:
    (1) Establish any delegations of authority to retire preferred 
stock and the conditions of delegation, which must meet the 
requirements of paragraph (c) of this section and include minimum 
levels for regulatory capital standards as applicable and commensurate 
with the volatility of the preferred stock.
    (2) Identify limitations on the amount of stock that may be retired 
during a single quarterly (or shorter) time period;
    (3) Ensure that all stockholder requests for retirement are treated 
fairly and equitably;
    (4) Prohibit any insider, including institution officers, 
directors, employees, or agents, from retiring any preferred stock in 
advance of the release of material non-public information concerning 
the institution to other stockholders; and
    (5) Establish when insiders may retire their preferred stock.
    (e) The institution's board must review its policy at least 
annually to ensure that it continues to be appropriate for the 
institution's current financial condition and consistent with its long-
term goals established in its capital adequacy plan.

0
16. Section 615.5290 is revised to read as follows:


Sec.  615.5290  Retirement of capital stock and participation 
certificates in event of restructuring.

    (a) If a Farm Credit Bank or agricultural credit bank forgives and 
writes off, under Sec.  617.7415 of this chapter, any of the principal 
outstanding on a loan made to any borrower, where appropriate the 
Federal land bank association of which the borrower is a member and 
stockholder shall cancel the same dollar amount of borrower stock held 
by the borrower in respect of the loan, up to the total amount of such 
stock, and to the extent provided for in the bylaws of the Bank 
relating to its capitalization, the Farm Credit Bank or agricultural 
credit bank shall retire an equal amount of stock owned by the Federal 
land bank association.
    (b) If an association forgives and writes off, under Sec.  617.7415 
of this chapter, any of the principal outstanding on a loan made to any 
borrower, the association shall cancel the same dollar amount of 
borrower stock held by the borrower in respect of the loan, up to the 
total amount of such loan.
    (c) Notwithstanding paragraphs (a) and (b) of this section, the 
borrower shall be entitled to retain at least one share of stock to 
maintain the borrower's membership and voting interest.

0
17. Section 615.5295 is amended by revising paragraph (c) to read as 
follows:


Sec.  615.5295  Payment of dividends.

* * * * *
    (c) Each System bank, association, and service corporation must 
exclude any accrued but unpaid dividends from regulatory capital 
computations under this part and part 628 of this chapter.

Subpart K [Removed and reserved]

0
18. Subpart K, consisting of Sec. Sec.  615.5301, 615.5330, 615.5335, 
and 615.5336, is removed and reserved.

0
19. Section 615.5350 is amended by revising paragraph (a) to read as 
follows:


Sec.  615.5350  General--Applicability.

    (a) The rules and procedures specified in this subpart are 
applicable to a proceeding to establish required

[[Page 49778]]

minimum capital ratios that would otherwise be applicable to an 
institution under Sec. Sec.  615.5205 and 628.10 of this chapter. The 
Farm Credit Administration is authorized to establish such minimum 
capital requirements for an institution as the Farm Credit 
Administration, in its discretion, deems to be necessary or appropriate 
in light of the particular circumstances of the institution. 
Proceedings under this subpart also may be initiated to require an 
institution having capital ratios greater than those set forth in Sec.  
615.5205 or Sec.  628.10 of this chapter to continue to maintain those 
higher ratios.
* * * * *

0
20. Section 615.5352 is amended by revising paragraph (a) to read as 
follows:


Sec.  615.5352  Procedures.

    (a) Notice. When the Farm Credit Administration determines that 
minimum capital ratios greater than those set forth in Sec.  615.5205 
or Sec.  628.10 of this chapter are necessary or appropriate for a 
particular institution, the Farm Credit Administration will notify the 
institution in writing of the proposed minimum capital ratios and the 
date by which they should be reached (if applicable) and will provide 
an explanation of why the ratios proposed are considered necessary or 
appropriate for the institution.
* * * * *

0
21. Section 615.5354 is revised to read as follows:


Sec.  615.5354  Enforcement.

    An institution that does not have or maintain the minimum capital 
ratios applicable to it, whether required in subpart H of this part or 
part 628 of this chapter, in a decision pursuant to this subpart, in a 
written agreement or temporary or final order under part C of title V 
of the Act, or in a condition for approval of an application, or an 
institution that has failed to submit or comply with an acceptable plan 
to attain those ratios, will be subject to such administrative action 
or sanctions as the Farm Credit Administration considers appropriate. 
These sanctions may include the issuance of a capital directive 
pursuant to subpart M of this part or other enforcement action, 
assessment of civil money penalties, and/or the denial or condition of 
applications.

0
22. Section 615.5355 is amended by revising paragraph (a) introductory 
text to read as follows:


Sec.  615.5355  Purpose and scope.

    (a) This subpart is applicable to proceedings by the Farm Credit 
Administration to issue a capital directive under sections 4.3(b) and 
4.3A(e) of the Act. A capital directive is an order issued to an 
institution that does not have or maintain capital at or greater than 
the minimum ratios set forth in Sec.  615.5205 or Sec.  628.10 of this 
chapter; or established for the institution under subpart L of this 
part, by a written agreement under part C of title V of the Act, or as 
a condition for approval of an application. A capital directive may 
order the institution to:
* * * * *

PART 620--DISCLOSURE TO SHAREHOLDERS

0
23. The authority citation for part 620 continues to read as follows:

    Authority:  Secs. 4.3, 4.3A, 4.19, 5.9, 5.17, 5.19 of the Farm 
Credit Act (12 U.S.C. 2154, 2154a, 2207, 2243, 2252, 2254); sec. 424 
of Pub. L. 100-233, 101 Stat. 1568, 1656; sec. 514 of Pub. L. 102-
552, 106 Stat. 4102.


0
24. Section 620.5 is amended by revising paragraphs (d)(1)(ix), 
(f)(2)(ii) through (iv), (f)(3)(ii) and (iii), and (g)(4)(ii) and 
adding paragraphs (f)(2)(v), (f)(3)(iv), and (f)(4) to read as follows:


Sec.  620.5  Contents of the annual report to shareholders.

* * * * *
    (d) * * *
    (1) * * *
    (ix) The statutory and regulatory restrictions regarding retirement 
of stock and distribution of earnings pursuant to Sec.  615.5215 of 
this chapter, and any requirements to add capital under a plan approved 
by the Farm Credit Administration pursuant to Sec.  615.5350, Sec.  
615.5351, Sec.  615.5353, Sec.  615.5357, or Sec.  628.301 of this 
chapter.
* * * * *
    (f) * * *
    (2) * * *
    (ii) CET1 capital ratio.
    (iii) Tier 1 capital ratio.
    (iv) Total capital ratio.
    (v) Tier 1 leverage ratio.
    (3) * * *
    (ii) CET1 capital ratio.
    (iii) Tier 1 capital ratio.
    (iv) Total capital ratio.
    (4) The annual report for each fiscal year ending in 2017 through 
2021 shall also include in comparative columnar form for each fiscal 
year ending in 2012 through 2016, the following ratios:
    (i) Core surplus ratio.
    (ii) Total surplus ratio.
    (iii) For banks only, net collateral ratio.
    (iv) Tier 1 leverage ratio.
    (g) * * *
    (4) * * *
    (ii) Describe any material trends or changes in the mix and cost of 
debt and capital resources. The discussion shall consider changes in 
permanent capital, CET1 capital, tier 1 capital, total capital, the 
tier 1 leverage ratio, debt, and any off-balance-sheet financial 
arrangements.
* * * * *

0
25. Section 620.17 is revised to read as follows:


Sec.  620.17  Special notice provisions for events related to 
noncompliance with minimum regulatory capital ratios.

    (a) For purposes of this section, ``regulatory capital ratios'' 
include the capital ratios specified in Sec.  628.10 of this chapter 
and the permanent capital standard prescribed under Sec.  615.5205 of 
this chapter.
    (b) When a Farm Credit bank or association determines that it is 
not in compliance with one or more applicable minimum regulatory 
capital ratios, that institution must prepare and provide to its 
shareholders and the FCA a notice stating that the institution has 
initially determined it is not in compliance with the minimum 
regulatory capital ratio or ratios. Such notice must be given within 30 
days following the month end.
    (c) When notice is given under paragraph (b) of this section, the 
institution must also notify its shareholders and the FCA when the 
regulatory capital ratio or ratios that are the subject of such notice 
decrease by one half of 1 percent or more from the level reported in 
the original notice, or from that reported in a subsequent notice 
provided under this paragraph (c). This notice must be given within 45 
days following the end of every quarter at which the institution's 
regulatory capital ratio or ratios decrease as specified.
    (d) Each institution required to prepare a notice under paragraph 
(b) or (c) of this section shall provide the notice to shareholders or 
publish it in any publication with circulation wide enough to be 
reasonably assured that all of the institution's shareholders have 
access to the information in a timely manner. The information required 
to be included in this notice must be conspicuous, easily 
understandable, and not misleading.
    (e) A notice, at a minimum, shall include:
    (1) A statement that:
    (i) Briefly describes the minimum regulatory capital ratios 
established by the FCA and the notice requirement of paragraph (b) of 
this section;

[[Page 49779]]

    (ii) Indicates the institution's current level of capital; and
    (iii) Notifies shareholders that the institution's capital is below 
the FCA minimum regulatory capital ratio or ratios.
    (2) A statement of the effect that noncompliance has had on the 
institution and its shareholders, including whether the institution is 
currently prohibited by statute or regulation from retiring stock or 
distributing earnings or whether the FCA has issued a capital directive 
or other enforcement action to the institution.
    (3) A complete description of any event(s) that may have 
significantly contributed to the institution's noncompliance with the 
minimum regulatory capital ratio or ratios.
    (4) A statement that the institution is required by regulation to 
provide another notice to shareholders within 45 days following the end 
of any subsequent quarter at which the regulatory capital ratio or 
ratios decrease by one half of 1 percent or more from the level 
reported in the notice.

PART 624--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES

0
26. The authority citation for part 624 continues to read as follows:

    Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 2154, 
12 U.S.C. 2243, 12 U.S.C. 2252, and 12 U.S.C. 2279bb-1.


0
27. Section 624.12 is amended by revising paragraph (b) to read as 
follows:


Sec.  624.12  Capital.

* * * * *
    (b) In the case of any Farm Credit System institution other than 
the Federal Agricultural Mortgage Corporation, the capital regulations 
set forth in parts 615 and 628 of this chapter.

PART 627--TITLE V CONSERVATORS, RECEIVERS, AND VOLUNTARY 
LIQUIDATIONS

0
28. The authority citation for part 627 continues to read as follows:

    Authority: Secs. 4.2, 5.9, 5.17, 5.51, 5.58, 5.61 of the Farm 
Credit Act (12 U.S.C. 2183, 2243, 2244, 2252, 2277a, 2277a-7, 2277a-
10).

Sec.  627.2710  [Amended]

0
29. Section 627.2710 is amended by removing and reserving paragraphs 
(b)(3)(i) and (iv).

0
30. Part 628 is added to read as follows:

PART 628--CAPITAL ADEQUACY OF SYSTEM INSTITUTIONS

Subpart A--General Provisions
Sec.
628.1 Purpose, applicability, and reservations of authority.
628.2 Definitions.
628.3 Operational requirements for certain exposures.
628.4-628.9 [Reserved]
Subpart B--Capital Ratio Requirements and Buffers
628.10 Minimum capital requirements.
628.11 Capital buffer amounts.
628.12-628.19 [Reserved]
Subpart C--Definition of Capital
628.20 Capital components and eligibility criteria for tier 1 and 
tier 2 capital instruments.
628.21 [Reserved]
628.22 Regulatory capital adjustments and deductions.
628.23 Limit on inclusion of third-party capital in total (tier 1 
and tier 2) capital.
628.24-628.29 [Reserved]
Subpart D--Risk-Weighted Assets--Standardized Approach
628.30 Applicability.

Risk-Weighted Assets for General Credit Risk

628.31 Mechanics for calculating risk-weighted assets for general 
credit risk.
628.32 General risk weights.
628.33 Off-balance sheet exposures.
628.34 OTC derivative contracts.
628.35 Cleared transactions.
628.36 Guarantees and credit derivatives: substitution treatment.
628.37 Collateralized transactions.

Risk-Weighted Assets for Unsettled Transactions

628.38 Unsettled transactions.
628.39 through 628.40 [Reserved]

Risk-Weighted Assets for Securitization Exposures

628.41 Operational requirements for securitization exposures.
628.42 Risk-weighted assets for securitization exposures.
628.43 Simplified supervisory formula approach (SSFA) and the gross-
up approach.
628.44 Securitization exposures to which the SSFA and gross-up 
approach do not apply.
628.45 Recognition of credit risk mitigants for securitization 
exposures.
628.46-628.50 [Reserved]

Risk-Weighted Assets for Equity Exposures

628.51 Introduction and exposure measurement.
628.52 Simple risk-weight approach (SRWA).
628.53 Equity exposures to investment funds.
628.54 through 628.60 [Reserved]

Disclosures

628.61 Purpose and scope.
628.62 Disclosure requirements.
628.63 Disclosures.
628.64 through 628.99 [Reserved]
Subpart E--[Reserved]
Subpart F--[Reserved]
Subpart G--Transition Provisions
628.300 Transitions.
628.301 Initial compliance and reporting requirements.

    Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm 
Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 
2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4, 
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a), 
Pub. L. 100-233, 101 Stat. 1568, 1608; sec. 939A, Pub. L. 111-203, 
124 Stat. 1326, 1887 (15 U.S.C. 78o-7 note).

Subpart A--General Provisions


Sec.  628.1  Purpose, applicability, and reservations of authority.

    (a) Purpose. This part establishes minimum capital requirements and 
overall capital adequacy standards for System institutions. This part 
includes methodologies for calculating minimum capital requirements, 
public disclosure requirements related to the capital requirements, and 
transition provisions for the application of this part.
    (b) Limitation of authority. Nothing in this part limits the 
authority of FCA to take action under other provisions of law, 
including action to address unsafe or unsound practices or conditions, 
deficient capital levels, or violations of law or regulation under part 
C of title V of the Farm Credit Act.
    (c) Applicability. Subject to the requirements in paragraph (d) of 
this section:
    (1) Minimum capital requirements and overall capital adequacy 
standards. Each System institution must calculate its minimum capital 
requirements and meet the overall capital adequacy standards in subpart 
B of this part.
    (2) Regulatory capital. Each System institution must calculate its 
regulatory capital in accordance with subpart C of this part.
    (3) Risk-weighted assets. (i) Each System institution must use the 
methodologies in subpart D of this part to calculate total risk-
weighted assets.
    (ii) [Reserved]
    (4) Disclosures. (i) All System banks must make the public 
disclosures described in subpart D of this part.
    (ii) [Reserved]
    (iii) [Reserved]
    (d) Reservation of authority--(1) Additional capital in the 
aggregate. FCA

[[Page 49780]]

may require a System institution to hold an amount of regulatory 
capital greater than otherwise required under this part if FCA 
determines that the System institution's capital requirements under 
this part are not commensurate with the System institution's credit, 
market, operational, or other risks according to part 615, subparts L 
and M, of this chapter.
    (2) Regulatory capital elements. (i) If FCA determines that a 
particular common equity tier 1 (CET1), additional tier 1 (AT1), or 
tier 2 capital element has characteristics or terms that diminish its 
permanence or its ability to absorb losses, or otherwise present safety 
and soundness concerns, FCA may require the System institution to 
exclude all or a portion of such element from CET1 capital, AT1 
capital, or tier 2 capital, as appropriate.
    (ii) Notwithstanding the criteria for regulatory capital 
instruments set forth in subpart C of this part, FCA may find that a 
capital element may be included in a System institution's CET1 capital, 
AT1 capital, or tier 2 capital on a permanent or temporary basis 
consistent with the loss absorption capacity of the element and in 
accordance with Sec.  628.20(e).
    (3) Risk-weighted asset amounts. If FCA determines that the risk-
weighted asset amount calculated under this part by the System 
institution for one or more exposures is not commensurate with the 
risks associated with those exposures, FCA may require the System 
institution to assign a different risk-weighted asset amount to the 
exposure(s) or to deduct the amount of the exposure(s) from its 
regulatory capital.
    (4) Total leverage. If FCA determines that the leverage exposure 
amount, or the amount reflected in the System institution's reported 
average total consolidated assets, for a balance sheet exposure 
calculated by a System institution under Sec.  628.10 is inappropriate 
for the exposure(s) or the circumstances of the System institution, FCA 
may require the System institution to adjust this exposure amount in 
the numerator and the denominator for purposes of the leverage ratio 
calculations.
    (5) [Reserved]
    (6) Other reservation of authority. With respect to any deduction 
or limitation required under this part, FCA may require a different 
deduction or limitation, provided that such alternative deduction or 
limitation is commensurate with the System institution's risk and 
consistent with safety and soundness.
    (e) Notice and response procedures. In making a determination under 
this section, FCA will apply notice and response procedures in the same 
manner as the notice and response procedures in Sec.  615.5352 of this 
chapter.
    (f) [Reserved]


Sec.  628.2  Definitions.

    As used in this part:
    Additional tier 1 capital (AT1) is defined in Sec.  628.20(c).
    Allocated equities means stock or surplus representing a patronage 
payment to a member-borrower that a System institution has retained for 
the benefit of its membership.\1\ Allocated equities include qualified 
allocated equities and nonqualified allocated equities. Allocated 
equities are redeemable at the System institution board's discretion. 
Allocated equities contain no voting rights and are generally 
subordinated to borrower stock in receivership, insolvency, 
liquidation, or similar proceeding.
---------------------------------------------------------------------------

    \1\ System institutions as cooperatives are required to send 
borrowers a written notice of allocation specifying the amount of 
patronage payments retained as equity pursuant to the Internal 
Revenue Code section 1388.
---------------------------------------------------------------------------

    Allowances for loan losses (ALL) means valuation allowances that 
have been established through a charge against earnings to cover 
estimated credit losses on loans, lease financing receivables, or other 
extensions of credit as determined in accordance with generally 
accepted accounting principles (GAAP). For purposes of this part, ALL 
includes allowances that have been established through a charge against 
earnings to cover estimated credit losses associated with off-balance 
sheet credit exposures as determined in accordance with GAAP.
    Bank holding company means a bank holding company as defined in 
section 2 of the Bank Holding Company Act.
    Bank Holding Company Act means the Bank Holding Company Act of 
1956, as amended (12 U.S.C. 1841 et seq.).
    Bankruptcy remote means, with respect to an entity or asset, that 
the entity or asset would be excluded from an insolvent entity's estate 
in receivership, insolvency, liquidation, or similar proceeding.
    Borrower stock means the capital investment a borrower holds in a 
System institution in connection with a loan.
    Call Report means reports of condition and performance, as 
described in subpart D of part 621 of this chapter.
    Carrying value means, with respect to an asset, the value of the 
asset on the balance sheet of the System institution, determined in 
accordance with GAAP.
    Central counterparty (CCP) means a counterparty (for example, a 
clearinghouse) that facilitates trades between counterparties in one or 
more financial markets by either guaranteeing trades or novating 
contracts.
    CFTC means the U.S. Commodity Futures Trading Commission.
    Clean-up call means a contractual provision that permits an 
originating System institution or servicer to call securitization 
exposures before their stated maturity or call date.
    Cleared transaction means an exposure associated with an 
outstanding derivative contract or repo-style transaction that a System 
institution or clearing member has entered into with a central 
counterparty (that is, a transaction that a central counterparty has 
accepted).
    (1) The following transactions are cleared transactions:
    (i) [Reserved]
    (ii) [Reserved]
    (iii) A transaction between a clearing member client System 
institution and a clearing member where the clearing member acts as a 
financial intermediary on behalf of the clearing member client and 
enters into an offsetting transaction with a CCP, provided that the 
requirements set forth in Sec.  628.3(a) are met; or
    (iv) A transaction between a clearing member client System 
institution and a CCP where a clearing member guarantees the 
performance of the clearing member client System institution to the CCP 
and the transaction meets the requirements of Sec.  628.3(a)(2) and 
(3).
    (2) [Reserved]
    Clearing member means a member of, or direct participant in, a CCP 
that is entitled to enter into transactions with the CCP.
    Clearing member client means a party to a cleared transaction 
associated with a CCP in which a clearing member either acts as a 
financial intermediary with respect to the party or guarantees the 
performance of the party to the CCP.
    Collateral agreement means a legal contract that specifies the time 
when, and circumstances under which, a counterparty is required to 
pledge collateral to a System institution for a single financial 
contract or for all financial contracts in a netting set and confers 
upon the System institution a perfected, first-priority security 
interest (notwithstanding the prior security interest of any custodial 
agent), or the legal equivalent thereof, in the collateral posted by 
the counterparty under the agreement. This security interest must

[[Page 49781]]

provide the System institution with a right to close-out the financial 
positions and liquidate the collateral upon an event of default of, or 
failure to perform by, the counterparty under the collateral agreement. 
A contract would not satisfy this requirement if the System 
institution's exercise of rights under the agreement may be stayed or 
avoided under applicable law in the relevant jurisdictions, other than:
    (1) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar to the U.S. laws 
referenced in this paragraph (1) in order to facilitate the orderly 
resolution of the defaulting counterparty; or
    (2) Where the agreement is subject by its terms to any of the laws 
referenced in paragraph (1) of this definition.
    Commitment means any legally binding arrangement that obligates a 
System institution to extend credit or to purchase assets.
    Commodity derivative contract means a commodity-linked swap, 
purchased commodity-linked option, forward commodity-linked contract, 
or any other instrument linked to commodities that gives rise to 
similar counterparty credit risks.
    Commodity Exchange Act means the Commodity Exchange Act of 1936 (7 
U.S.C. 1 et seq.).
    Common cooperative equity or equities means common equities in the 
form of member-borrower stock, participation certificates, and 
allocated equities issued or allocated by a System institution to its 
current and former members.
    Common equity tier 1 capital (CET1) is defined in Sec.  628.20(b).
    Company means a corporation, partnership, limited liability 
company, depository institution, business trust, special purpose 
entity, System institution, association, or similar organization.
    Corporate exposure means an exposure to a company that is not:
    (1) An exposure to a sovereign, the Bank for International 
Settlements, the European Central Bank, the European Commission, the 
International Monetary Fund, a multi-lateral development bank (MDB), a 
depository institution, a foreign bank, a credit union, or a public 
sector entity (PSE);
    (2) An exposure to a GSE;
    (3) A residential mortgage exposure;
    (4) [Reserved]
    (5) [Reserved]
    (6) [Reserved]
    (7) A cleared transaction;
    (8) [Reserved]
    (9) A securitization exposure;
    (10) An equity exposure; or
    (11) An unsettled transaction.
    Country risk classification (CRC) with respect to a sovereign, 
means the most recent consensus CRC published by the Organization for 
Economic Cooperation and Development (OECD) as of December 31st of the 
prior calendar year that provides a view of the likelihood that the 
sovereign will service its external debt.
    Credit derivative means a financial contract executed under 
standard industry credit derivative documentation that allows one party 
(the protection purchaser) to transfer the credit risk of one or more 
exposures (reference exposure(s)) to another party (the protection 
provider) for a certain period of time.
    Credit-enhancing interest-only strip (CEIO) means an on-balance 
sheet asset that, in form or in substance:
    (1) Represents a contractual right to receive some or all of the 
interest and no more than a minimal amount of principal due on the 
underlying exposures of a securitization; and
    (2) Exposes the holder of the CEIO to credit risk directly or 
indirectly associated with the underlying exposures that exceeds a pro 
rata share of the holder's claim on the underlying exposures, whether 
through subordination provisions or other credit-enhancement 
techniques.
    Credit-enhancing representations and warranties means 
representations and warranties that are made or assumed in connection 
with a transfer of underlying exposures (including loan servicing 
assets) and that obligate a System institution to protect another party 
from losses arising from the credit risk of the underlying exposures. 
Credit-enhancing representations and warranties include provisions to 
protect a party from losses resulting from the default or 
nonperformance of the counterparties of the underlying exposures or 
from an insufficiency in the value of the collateral backing the 
underlying exposures. Credit-enhancing representations and warranties 
do not include:
    (1) Early default clauses and similar warranties that permit the 
return of, or premium refund clauses covering, 1-4 family residential 
first mortgage loans that qualify for a 50-percent risk weight for a 
period not to exceed 120 days from the date of transfer. These 
warranties may cover only those loans that were originated within 1 
year of the date of transfer;
    (2) Premium refund clauses that cover assets guaranteed, in whole 
or in part, by the U.S. Government, a U.S. Government agency or a 
Government-sponsored enterprise (GSE), provided the premium refund 
clauses are for a period not to exceed 120 days from the date of 
transfer; or
    (3) Warranties that permit the return of underlying exposures in 
instances of misrepresentation, fraud, or incomplete documentation.
    Credit risk mitigant means collateral, a credit derivative, or a 
guarantee.
    Credit union means an insured credit union as defined under the 
Federal Credit Union Act (12 U.S.C. 1752 et seq.).
    Current exposure means, with respect to a netting set, the larger 
of 0 or the fair value of a transaction or portfolio of transactions 
within the netting set that would be lost upon default of the 
counterparty, assuming no recovery on the value of the transactions. 
Current exposure is also called replacement cost.
    Current exposure methodology means the method of calculating the 
exposure amount for over-the-counter derivative contracts in Sec.  
628.34(a).
    Custodian means a company that has legal custody of collateral 
provided to a CCP.
    Depository institution means a depository institution as defined in 
section 3 of the Federal Deposit Insurance Act.
    Depository institution holding company means a bank holding company 
or savings and loan holding company.
    Derivative contract means a financial contract whose value is 
derived from the values of one or more underlying assets, reference 
rates, or indices of asset values or reference rates. Derivative 
contracts include interest rate derivative contracts, exchange rate 
derivative contracts, equity derivative contracts, commodity derivative 
contracts, credit derivative contracts, and any other instrument that 
poses similar counterparty credit risks. Derivative contracts also 
include unsettled securities, commodities, and foreign exchange 
transactions with a contractual settlement or delivery lag that is 
longer than the lesser of the market standard for the particular 
instrument or 5 business days.
    Dodd-Frank Act means the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (Pub. L. 111-203, 124 Stat. 1376).
    Early amortization provision means a provision in the documentation 
governing a securitization that, when triggered, causes investors in 
the securitization exposures to be repaid before the original stated 
maturity of the

[[Page 49782]]

securitization exposures, unless the provision:
    (1) Is triggered solely by events not directly related to the 
performance of the underlying exposures or the originating System 
institution (such as material changes in tax laws or regulations); or
    (2) Leaves investors fully exposed to future draws by borrowers on 
the underlying exposures even after the provision is triggered.
    Effective notional amount means, for an eligible guarantee or 
eligible credit derivative, the lesser of the contractual notional 
amount of the credit risk mitigant and the exposure amount of the 
hedged exposure, multiplied by the percentage coverage of the credit 
risk mitigant.
    Eligible clean-up call means a clean-up call that:
    (1) Is exercisable solely at the discretion of the originating 
System institution or servicer;
    (2) Is not structured to avoid allocating losses to securitization 
exposures held by investors or otherwise structured to provide credit 
enhancement to the securitization; and
    (3)(i) For a traditional securitization, is only exercisable when 
10 percent or less of the principal amount of the underlying exposures 
or securitization exposures (determined as of the inception of the 
securitization) is outstanding; or
    (ii) For a synthetic securitization, is only exercisable when 10 
percent or less of the principal amount of the reference portfolio of 
underlying exposures (determined as of the inception of the 
securitization) is outstanding.
    Eligible credit derivative means a credit derivative in the form of 
a credit default swap, nth-to-default swap, total return 
swap, or any other form of credit derivative approved by the FCA, 
provided that:
    (1) The contract meets the requirements of an eligible guarantee 
and has been confirmed by the protection purchaser and the protection 
provider;
    (2) Any assignment of the contract has been confirmed by all 
relevant parties;
    (3) If the credit derivative is a credit default swap or 
nth-to-default swap, the contract includes the following 
credit events:
    (i) Failure to pay any amount due under the terms of the reference 
exposure, subject to any applicable minimal payment threshold that is 
consistent with standard market practice and with a grace period that 
is closely in line with the grace period of the reference exposure; and
    (ii) Receivership, insolvency, liquidation, conservatorship or 
inability of the reference exposure issuer to pay its debts, or its 
failure or admission in writing of its inability generally to pay its 
debts as they become due, and similar events;
    (4) The terms and conditions dictating the manner in which the 
contract is to be settled are incorporated into the contract;
    (5) If the contract allows for cash settlement, the contract 
incorporates a robust valuation process to estimate loss reliably and 
specifies a reasonable period for obtaining post-credit event 
valuations of the reference exposure;
    (6) If the contract requires the protection purchaser to transfer 
an exposure to the protection provider at settlement, the terms of at 
least one of the exposures that is permitted to be transferred under 
the contract provide that any required consent to transfer may not be 
unreasonably withheld;
    (7) If the credit derivative is a credit default swap or 
nth-to-default swap, the contract clearly identifies the 
parties responsible for determining whether a credit event has 
occurred, specifies that this determination is not the sole 
responsibility of the protection provider, and gives the protection 
purchaser the right to notify the protection provider of the occurrence 
of a credit event; and
    (8) If the credit derivative is a total return swap and the System 
institution records net payments received on the swap as net income, 
the System institution records offsetting deterioration in the value of 
the hedged exposure (either through reductions in fair value or by an 
addition to reserves).
    Eligible guarantee means a guarantee from an eligible guarantor 
that:
    (1) Is written;
    (2) Is either:
    (i) Unconditional; or
    (ii) A contingent obligation of the U.S. Government or its 
agencies, the enforceability of which is dependent upon some 
affirmative action on the part of the beneficiary of the guarantee or a 
third party (for example, meeting servicing requirements);
    (3) Covers all or a pro rata portion of all contractual payments of 
the obligated party on the reference exposure;
    (4) Gives the beneficiary a direct claim against the protection 
provider;
    (5) Is not unilaterally cancelable by the protection provider for 
reasons other than the breach of the contract by the beneficiary;
    (6) Except for a guarantee by a sovereign, is legally enforceable 
against the protection provider in a jurisdiction where the protection 
provider has sufficient assets against which a judgment may be attached 
and enforced;
    (7) Requires the protection provider to make payment to the 
beneficiary on the occurrence of a default (as defined in the 
guarantee) of the obligated party on the reference exposure in a timely 
manner without the beneficiary first having to take legal actions to 
pursue the obligor for payment; and
    (8) Does not increase the beneficiary's cost of credit protection 
on the guarantee in response to deterioration in the credit quality of 
the reference exposure.
    Eligible guarantor means:
    (1) A sovereign, the Bank for International Settlements, the 
International Monetary Fund, the European Central Bank, the European 
Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage 
Corporation (Farmer Mac), a multilateral development bank (MDB), a 
depository institution, a bank holding company, a savings and loan 
holding company, a credit union, a foreign bank, or a qualifying 
central counterparty; or
    (2) An entity (other than a special purpose entity):
    (i) That at the time the guarantee is issued or anytime thereafter, 
has issued and outstanding an unsecured debt security without credit 
enhancement that is investment grade;
    (ii) Whose creditworthiness is not positively correlated with the 
credit risk of the exposures for which it has provided guarantees; and
    (iii) That is not an insurance company engaged predominately in the 
business of providing credit protection (such as a monoline bond 
insurer or re-insurer).
    Eligible margin loan means:
    (1) An extension of credit where:
    (i) The extension of credit is collateralized exclusively by liquid 
and readily marketable debt or equity securities, or gold;
    (ii) The collateral is marked-to-fair value daily, and the 
transaction is subject to daily margin maintenance requirements; and
    (iii) The extension of credit is conducted under an agreement that 
provides the System institution the right to accelerate and terminate 
the extension of credit and to liquidate or set-off collateral promptly 
upon an event of default, including upon an event of receivership, 
insolvency, liquidation, conservatorship, or similar proceeding, of the 
counterparty, provided that, in any such case, any exercise of rights 
under the agreement will not be stayed or avoided under applicable law 
in the relevant jurisdictions, other than in receivership,

[[Page 49783]]

conservatorship, resolution under the Federal Deposit Insurance Act, 
Title II of the Dodd-Frank Act, or under any similar insolvency law 
applicable to GSEs,\2\ or laws of foreign jurisdictions that are 
substantially similar to the U.S. laws referenced in this paragraph 
(1)(iii) in order to facilitate the orderly resolution of the 
defaulting counterparty.
---------------------------------------------------------------------------

    \2\ This requirement is met where all transactions under the 
agreement are (i) executed under U.S. law and (ii) constitute 
``securities contracts'' under section 555 of the Bankruptcy Code 
(11 U.S.C. 555), qualified financial contracts under section 
11(e)(8) of the Federal Deposit Insurance Act, or netting contracts 
between or among financial institutions under sections 401-407 of 
the Federal Deposit Insurance Corporation Improvement Act of the 
Federal Reserve Board's Regulation EE (12 CFR part 231).
---------------------------------------------------------------------------

    (2) In order to recognize an exposure as an eligible margin loan 
for purposes of this subpart, a System institution must comply with the 
requirements of Sec.  628.3(b) with respect to that exposure.
    Eligible servicer cash advance facility means a servicer cash 
advance facility in which:
    (1) The servicer is entitled to full reimbursement of advances, 
except that a servicer may be obligated to make non-reimbursable 
advances for a particular underlying exposure if any such advance is 
contractually limited to an insignificant amount of the outstanding 
principal balance of that exposure;
    (2) The servicer's right to reimbursement is senior in right of 
payment to all other claims on the cash flows from the underlying 
exposures of the securitization; and
    (3) The servicer has no legal obligation to, and does not make 
advances to the securitization if the servicer concludes the advances 
are unlikely to be repaid.
    Equity derivative contract means an equity-linked swap, purchased 
equity-linked option, forward equity-linked contract, or any other 
instrument linked to equities that gives rise to similar counterparty 
credit risks.
    Equity exposure means:
    (1) A security or instrument (whether voting or non-voting) that 
represents a direct or an indirect ownership interest in, and is a 
residual claim on, the assets and income of a company, unless:
    (i) The issuing company is consolidated with the System institution 
under GAAP;
    (ii) The System institution is required to deduct the ownership 
interest from tier 1 or tier 2 capital under this part;
    (iii) The ownership interest incorporates a payment or other 
similar obligation on the part of the issuing company (such as an 
obligation to make periodic payments); or
    (iv) The ownership interest is a securitization exposure;
    (2) A security or instrument that is mandatorily convertible into a 
security or instrument described in paragraph (1) of this definition;
    (3) An option or warrant that is exercisable for a security or 
instrument described in paragraph (1) of this definition; or
    (4) Any other security or instrument (other than a securitization 
exposure) to the extent the return on the security or instrument is 
based on the performance of a security or instrument described in 
paragraph (1) of this definition.
    ERISA means the Employee Retirement Income and Security Act of 1974 
(29 U.S.C. 1001 et seq.).
    Exchange rate derivative contract means a cross-currency interest 
rate swap, forward foreign-exchange contract, currency option 
purchased, or any other instrument linked to exchange rates that gives 
rise to similar counterparty credit risks.
    Exposure means an amount at risk.
    Exposure amount means:
    (1) For the on-balance sheet component of an exposure (other than 
an available-for-sale or held-to-maturity security; an OTC derivative 
contract; a repo-style transaction or an eligible margin loan for which 
the System institution determines the exposure amount under Sec.  
628.37; a cleared transaction; or a securitization exposure), the 
System institution's carrying value of the exposure.
    (2) For a security (that is not a securitization exposure, equity 
exposure, or preferred stock classified as an equity security under 
GAAP) classified as available-for-sale or held-to-maturity, the System 
institution's carrying value (including net accrued but unpaid interest 
and fees) for the exposure less any net unrealized gains on the 
exposure and plus any net unrealized losses on the exposure.
    (3) For available-for-sale preferred stock classified as an equity 
security under GAAP, the System institution's carrying value of the 
exposure less any net unrealized gains on the exposure that are 
reflected in such carrying value but excluded from the System 
institution's regulatory capital components.
    (4) For the off-balance sheet component of an exposure (other than 
an OTC derivative contract; a repo-style transaction or an eligible 
margin loan for which the System institution calculates the exposure 
amount under Sec.  628.37; a cleared transaction; or a securitization 
exposure), the notional amount of the off-balance sheet component 
multiplied by the appropriate credit conversion factor (CCF) in Sec.  
628.33.
    (5) For an exposure that is an OTC derivative contract, the 
exposure amount determined under Sec.  628.34.
    (6) For an exposure that is a cleared transaction, the exposure 
amount determined under Sec.  628.35.
    (7) For an exposure that is an eligible margin loan or repo-style 
transaction for which the bank calculates the exposure amount as 
provided in Sec.  628.37, the exposure amount determined under Sec.  
628.37.
    (8) For an exposure that is a securitization exposure, the exposure 
amount determined under Sec.  628.42.
    Farm Credit Act means the Farm Credit Act of 1971, as amended (12 
U.S.C. 2001 et seq.).
    Federal Deposit Insurance Act means the Federal Deposit Insurance 
Act (12 U.S.C. 1813).
    Federal Deposit Insurance Corporation Improvement Act means the 
Federal Deposit Insurance Corporation Improvement Act of 1991 (12 
U.S.C. 4401).
    Financial collateral means collateral:
    (1) In the form of:
    (i) Cash on deposit at a depository institution or Federal Reserve 
Bank (including cash held for the System institution by a third-party 
custodian or trustee);
    (ii) Gold bullion;
    (iii) Long-term debt securities that are not resecuritization 
exposures and that are investment grade;
    (iv) Short-term debt instruments that are not resecuritization 
exposures and that are investment grade;
    (v) Equity securities that are publicly traded;
    (vi) Convertible bonds that are publicly traded; or
    (vii) Money market fund shares and other mutual fund shares if a 
price for the shares is publicly quoted daily; and
    (2) In which the System institution has a perfected, first-priority 
security interest or, outside of the United States, the legal 
equivalent thereof (with the exception of cash on deposit at a 
depository institution or Federal Reserve Bank and notwithstanding the 
prior security interest of any custodial agent).
    First-lien residential mortgage exposure means a residential 
mortgage exposure secured by a first lien.
    Foreign bank means a foreign bank as defined in Sec.  211.2 of the 
Federal Reserve Board's Regulation K (12 CFR 211.2) (other than a 
depository institution).
    Forward agreement means a legally binding contractual obligation to

[[Page 49784]]

purchase assets with certain drawdown at a specified future date, not 
including commitments to make residential mortgage loans or forward 
foreign exchange contracts.
    GAAP means generally accepted accounting principles as used in the 
United States.
    Gain-on-sale means an increase in the equity capital of a System 
institution (as reported on the Call Report) resulting from a 
traditional securitization (other than an increase in equity capital 
resulting from the System institution's receipt of cash in connection 
with the securitization or reporting of a mortgage servicing asset on 
the Call Report).
    General obligation means a bond or similar obligation that is 
backed by the full faith and credit of a public sector entity (PSE).
    Government-sponsored enterprise (GSE) means an entity established 
or chartered by the U.S. Government to serve public purposes specified 
by the U.S. Congress but whose debt obligations are not explicitly 
guaranteed by the full faith and credit of the U.S. Government.
    Guarantee means a financial guarantee, letter of credit, insurance, 
or other similar financial instrument (other than a credit derivative) 
that allows one party (beneficiary) to transfer the credit risk of one 
or more specific exposures (reference exposure) to another party 
(protection provider).
    Home country means the country where an entity is incorporated, 
chartered, or similarly established.
    Insurance company means an insurance company as defined in section 
201 of the Dodd-Frank Act (12 U.S.C. 5381).
    Insurance underwriting company means an insurance company as 
defined in section 201 of the Dodd-Frank Act (12 U.S.C. 5381) that 
engages in insurance underwriting activities.
    Insured depository institution means an insured depository 
institution as defined in section 3 of the Federal Deposit Insurance 
Act.
    Interest rate derivative contract means a single-currency interest 
rate swap, basis swap, forward rate agreement, purchased interest rate 
option, when-issued securities, or any other instrument linked to 
interest rates that gives rise to similar counterparty credit risks.
    International Lending Supervision Act means the International 
Lending Supervision Act of 1983 (12 U.S.C. 3907).
    Investment fund means a company:
    (1) Where all or substantially all of the assets of the company are 
financial assets; and
    (2) That has no material liabilities.
    Investment grade means that the entity to which the System 
institution is exposed through a loan or security, or the reference 
entity with respect to a credit derivative, has adequate capacity to 
meet financial commitments for the projected life of the asset or 
exposure. Such an entity or reference entity has adequate capacity to 
meet financial commitments if the risk of its default is low and the 
full and timely repayment of principal and interest is expected.
    Junior-lien residential mortgage exposure means a residential 
mortgage exposure that is not a first-lien residential mortgage 
exposure.
    Member means a borrower or former borrower from a System 
institution that holds voting or nonvoting cooperative equities of the 
institution.
    Money market fund means an investment fund that is subject to 17 
CFR 270.2a-7 or any foreign equivalent thereof.
    Mortgage servicing assets (MSAs) means the contractual rights owned 
by a System institution to service for a fee mortgage loans that are 
owned by others.
    Multilateral development bank (MDB) means the International Bank 
for Reconstruction and Development, the Multilateral Investment 
Guarantee Agency, the International Finance Corporation, the Inter-
American Development Bank, the Asian Development Bank, the African 
Development Bank, the European Bank for Reconstruction and Development, 
the European Investment Bank, the European Investment Fund, the Nordic 
Investment Bank, the Caribbean Development Bank, the Islamic 
Development Bank, the Council of Europe Development Bank, and any other 
multilateral lending institution or regional development bank in which 
the U.S. Government is a shareholder or contributing member or which 
the FCA determines poses comparable credit risk.
    National Bank Act means the National Bank Act (12 U.S.C. 24).
    Netting set means a group of transactions with a single 
counterparty that are subject to a qualifying master netting agreement 
or a qualifying cross-product master netting agreement. For purposes of 
calculating risk-based capital requirements using the internal models 
methodology in subpart E of this part, this term does not cover a 
transaction:
    (1) That is not subject to such a master netting agreement; or
    (2) Where the System institution has identified specific wrong-way 
risk.
    Nonqualified allocated equities mean a patronage payment to a 
member-borrower in the form of stock or surplus that a System 
institution retains as equity for the benefit of the membership. A 
System institution does not deduct this patronage payment from its 
current taxable income according to the Internal Revenue Code sections 
1382(b) and 1383. Nonqualified allocated equities also include 
allocated surplus in a tax-exempt institution or subsidiary. When a 
System institution revolves a nonqualified allocation, the System 
institution deducts the allocation from its taxable income, if any, and 
the borrower generally recognizes the tax liability, if any, as 
ordinary income. System institutions pay two types of nonqualified 
allocated equities through written notices of allocation to the 
borrowers:
    (1) Those subject to revolvement; and
    (2) Those not subject to revolvement. The second type for GAAP 
purposes is generally considered an equivalent of unallocated surplus 
and consolidated with unallocated surplus on externally prepared 
shareholder reports.
    Nth-to-default credit derivative means a credit derivative that 
provides credit protection only for the nth-defaulting reference 
exposure in a group of reference exposures.
    Operating entity means a company established to conduct business 
with clients with the intention of earning a profit in its own right 
and that generally produces goods or provides services beyond the 
business of investing, reinvesting, holding, or trading in financial 
assets. All System banks, associations, and service corporations, and 
all unincorporated business entities, are operating entities.
    Original maturity with respect to an off-balance sheet commitment 
means the length of time between the date a commitment is issued and:
    (1) For a commitment that is not subject to extension or renewal, 
the stated expiration date of the commitment; or
    (2) For a commitment that is subject to extension or renewal, the 
earliest date on which the System institution can, at its option, 
unconditionally cancel the commitment.
    Originating System institution, with respect to a securitization, 
means a System institution that:
    (1) Directly or indirectly originated the underlying exposures 
included in the securitization; or
    (2) [Reserved]
    Other financing institution (OFI) means any entity referred to in 
section 1.7(b)(1)(B) of the Farm Credit Act.

[[Page 49785]]

    Over-the-counter (OTC) derivative contract means a derivative 
contract that is not a cleared transaction.
    Participation certificate means borrower stock held by a borrower 
or customer of a System institution that does not have voting rights.
    Patronage payment means a cash declaration or equity allocation to 
member-borrowers that pursuant to Internal Revenue Code section 1381(a) 
is based on a System institution's net income and allocated to 
borrowers based on business conducted with the institution. Patronage 
payments may be paid as cash, allocated equity (stock or surplus), or a 
combination of cash and allocated equity.
    Performance standby letter of credit (or performance bond) means an 
irrevocable obligation of a System institution to pay a third-party 
beneficiary when a customer (account party) fails to perform on any 
contractual nonfinancial or commercial obligation. To the extent 
permitted by law or regulation, performance standby letters of credit 
include arrangements backing, among other things; subcontractors' and 
suppliers' performance, labor; and materials contracts, and 
construction bids.
    Protection amount (P) means, with respect to an exposure hedged by 
an eligible guarantee or eligible credit derivative, the effective 
notional amount of the guarantee or credit derivative, reduced to 
reflect any currency mismatch, maturity mismatch, or lack of 
restructuring coverage (as provided in Sec.  628.36).
    Publicly traded means traded on:
    (1) Any exchange registered with the Securities and Exchange 
Commission (SEC) as a national securities exchange under section 6 of 
the Securities Exchange Act; or
    (2) Any non-U.S.-based securities exchange that:
    (i) Is registered with, or approved by, a national securities 
regulatory authority; and
    (ii) Provides a liquid, two-way market for the instrument in 
question.
    Public sector entity (PSE) means a state, local authority, or other 
governmental subdivision below the sovereign level.
    Qualified allocated equities means patronage allocated to a member-
borrower, in the form of stock or surplus, that a System institution 
retains as equity for the benefit of the membership. A System 
institution can deduct this patronage from its current taxable income 
provided that the borrower has agreed to include the patronage in its 
taxable income. A System institution must pay at least 20 percent of a 
qualified patronage payment in cash to borrowers. A System institution 
must provide the borrowers with a qualified written notice of 
allocation when they allocate qualified patronage payments pursuant to 
Internal Revenue Code section 1381(b) and 1388(c). A System institution 
revolves qualified allocated equities according to a board-approved 
plan.
    Qualifying central counterparty (QCCP) means a central counterparty 
that:
    (1)(i) Is a designated financial market utility (FMU), as defined 
in section 803 of the Dodd-Frank Act;
    (ii) If not located in the United States, is regulated and 
supervised in a manner equivalent to a designated FMU; or
    (iii) Meets the following standards:
    (A) The central counterparty requires all parties to contracts 
cleared by the counterparty to be fully collateralized on a daily 
basis;
    (B) The System institution demonstrates to the satisfaction of the 
FCA that the central counterparty:
    (1) Is in sound financial condition;
    (2) Is subject to supervision by the Board, the CFTC, or the 
Securities Exchange Commission (SEC), or, if the central counterparty 
is not located in the United States, is subject to effective oversight 
by a national supervisory authority in its home country; and
    (3) Meets or exceeds the risk-management standards for central 
counterparties set forth in regulations established by the Board, the 
CFTC, or the SEC under title VII or title VIII of the Dodd-Frank Act; 
or if the central counterparty is not located in the United States, 
meets or exceeds similar risk-management standards established under 
the law of its home country that are consistent with international 
standards for central counterparty risk management as established by 
the relevant standard setting body of the Bank of International 
Settlements; and
    (2)(i) Provides the System institution with the central 
counterparty's hypothetical capital requirement or the information 
necessary to calculate such hypothetical capital requirement, and other 
information the System institution is required to obtain under Sec.  
628.35(d)(3);
    (ii) Makes available to the FCA and the CCP's regulator the 
information described in paragraph (2)(i) of this definition; and
    (iii) Has not otherwise been determined by the FCA to not be a QCCP 
due to its financial condition, risk profile, failure to meet 
supervisory risk management standards, or other weaknesses or 
supervisory concerns that are inconsistent with the risk weight 
assigned to qualifying central counterparties under Sec.  628.35.
    (3) A QCCP that fails to meet the requirements of a QCCP in the 
future may still be treated as a QCCP under the conditions specified in 
Sec.  628.3(f).
    Qualifying master netting agreement means a written, legally 
enforceable agreement provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default following any stay permitted by paragraph (2) of this 
definition, including upon an event of receivership, conservatorship, 
insolvency, liquidation, or similar proceeding, of the counterparty;
    (2) The agreement provides the System institution the right to 
accelerate, terminate, and close-out on a net basis all transactions 
under the agreement and to liquidate or set-off collateral promptly 
upon an event of default, including upon an event of receivership, 
conservatorship, insolvency, liquidation, or similar proceeding, of the 
counterparty, provided that, in any such case, any exercise of rights 
under the agreement will not be stayed or avoided under applicable law 
in the relevant jurisdictions, other than:
    (i) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar to the U.S. laws 
referenced in this paragraph (2)(i) in order to facilitate the orderly 
resolution of the defaulting counterparty; or
    (ii) Where the agreement is subject by its terms to, or 
incorporates, any of the laws reference in paragraph (2)(i) of this 
definition;
    (3) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make a lower 
payment than it otherwise would make under the agreement, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate of the defaulter is a net creditor under the 
agreement); and
    (4) In order to recognize an agreement as a qualifying master 
netting agreement for purposes of this subpart, a System institution 
must comply with the requirements of Sec.  628.3(d) with respect to 
that agreement.
    Repo-style transaction means a repurchase or reverse repurchase 
transaction, or a securities borrowing or securities lending 
transaction, including a transaction in which the System institution 
acts as agent for a customer

[[Page 49786]]

and indemnifies the customer against loss, provided that:
    (1) The transaction is based solely on liquid and readily 
marketable securities, cash, or gold;
    (2) The transaction is marked-to-fair value daily and subject to 
daily margin maintenance requirements;
    (3)(i) The transaction is a ``securities contract'' or ``repurchase 
agreement'' under section 555 or 559, respectively, of the Bankruptcy 
Code (11 U.S.C. 555 or 559) or a qualified financial contract under 
section 11(e)(8) of the Federal Deposit Insurance Act; or
    (ii) If the transaction does not meet the criteria set forth in 
paragraph (3)(i) of this definition, then either:
    (A) The transaction is executed under an agreement that provides 
the System institution the right to accelerate, terminate, and close-
out the transaction on a net basis and to liquidate or set-off 
collateral promptly upon an event of default, including upon an event 
of receivership, insolvency, liquidation, or similar proceeding, of the 
counterparty, provided that, in any such case, any exercise of rights 
under the agreement will not be stayed or avoided under applicable law 
in the relevant jurisdictions, other than in receivership, 
conservatorship, or resolution under the Federal Deposit Insurance Act, 
title II of the Dodd-Frank Act, or under any similar insolvency law 
applicable to GSEs, or laws of foreign jurisdictions that are 
substantially similar to the U.S. laws referenced in this paragraph 
(3)(ii)(A) in order to facilitate the orderly resolution of the 
defaulting counterparty; or
    (B) The transaction is:
    (1) Either overnight or unconditionally cancelable at any time by 
the System institution; and
    (2) Executed under an agreement that provides the System 
institution the right to accelerate, terminate, and close-out the 
transaction on a net basis and to liquidate or set-off collateral 
promptly upon an event of counterparty default; and
    (3) [Reserved]
    (4) In order to recognize an exposure as a repo-style transaction 
for purposes of this subpart, a System institution must comply with the 
requirements of Sec.  628.3(e) of this part with respect to that 
exposure.
    Resecuritization means a securitization which has more than one 
underlying exposure and in which one or more of the underlying 
exposures is a securitization exposure.
    Resecuritization exposure means:
    (1) An on- or off-balance sheet exposure to a resecuritization; or
    (2) An exposure that directly or indirectly references a 
resecuritization exposure.
    Residential mortgage exposure means an exposure (other than a 
securitization exposure or equity exposure) that is:
    (1) An exposure that is primarily secured by a first or subsequent 
lien on one-to-four family residential property, provided that the 
dwelling (including attached components such as garages, porches, and 
decks) represents at least 50 percent of the total appraised value of 
the collateral secured by the first or subsequent lien; or
    (2) [Reserved]
    Revenue obligation means a bond or similar obligation that is an 
obligation of a PSE, but which the PSE is committed to repay with 
revenues from the specific project financed rather than general tax 
funds.
    Savings and loan holding company means a savings and loan holding 
company as defined in section 10 of the Home Owners' Loan Act (12 
U.S.C. 1467a).
    Securities and Exchange Commission (SEC) means the U.S. Securities 
and Exchange Commission.
    Securities Exchange Act means the Securities Exchange Act of 1934 
(15 U.S.C. 78).
    Securitization exposure means:
    (1) An on-balance sheet or off-balance sheet credit exposure 
(including credit-enhancing representations and warranties) that arises 
from a traditional securitization or synthetic securitization 
(including a resecuritization); or
    (2) An exposure that directly or indirectly references a 
securitization exposure described in paragraph (1) of this definition.
    Securitization special purpose entity (securitization SPE) means a 
corporation, trust, or other entity organized for the specific purpose 
of holding underlying exposures of a securitization, the activities of 
which are limited to those appropriate to accomplish this purpose, and 
the structure of which is intended to isolate the underlying exposures 
held by the entity from the credit risk of the seller of the underlying 
exposures to the entity.
    Servicer cash advance facility means a facility under which the 
servicer of the underlying exposures of a securitization may advance 
cash to ensure an uninterrupted flow of payments to investors in the 
securitization, including advances made to cover foreclosure costs or 
other expenses to facilitate the timely collection of the underlying 
exposures.
    Small Business Act means the Small Business Act (15 U.S.C. 632).
    Small Business Investment Act means the Small Business Investment 
Act of 1958 (15 U.S.C. 682).
    Sovereign means a central government (including the U.S. 
Government) or an agency, department, ministry, or central bank of a 
central government.
    Sovereign default means noncompliance by a sovereign with its 
external debt service obligations or the inability or unwillingness of 
a sovereign government to service an existing loan according to its 
original terms, as evidenced by failure to pay principal and interest 
timely and fully, arrearages, or restructuring.
    Sovereign exposure means:
    (1) A direct exposure to a sovereign; or
    (2) An exposure directly and unconditionally backed by the full 
faith and credit of a sovereign.
    Standardized total risk-weighted assets means:
    (1) The sum of:
    (i) Total risk-weighted assets for general credit risk as 
calculated under Sec.  628.31;
    (ii) Total risk-weighted assets for cleared transactions as 
calculated under Sec.  628.35;
    (iii) Total risk-weighted assets for unsettled transactions as 
calculated under Sec.  628.38;
    (iv) Total risk-weighted assets for securitization exposures as 
calculated under Sec.  628.42;
    (v) Total risk-weighted assets for equity exposures as calculated 
under Sec. Sec.  628.52 and 628.53; minus
    (vi) [Reserved]
    (2) Any amount of the System institution's allowance for loan 
losses that is not included in tier 2 capital.
    Subsidiary means, with respect to a company, a company controlled 
by that company.
    Synthetic exposure means an exposure whose value is linked to the 
value of an investment in the System institution's own capital 
instrument.
    Synthetic securitization means a transaction in which:
    (1) All or a portion of the credit risk of one or more underlying 
exposures is retained or transferred to one or more third parties 
through the use of one or more credit derivatives or guarantees (other 
than a guarantee that transfers only the credit risk of an individual 
retail exposure);
    (2) The credit risk associated with the underlying exposures has 
been separated into at least two tranches reflecting different levels 
of seniority;
    (3) Performance of the securitization exposures depends upon the 
performance of the underlying exposures; and

[[Page 49787]]

    (4) All or substantially all of the underlying exposures are 
financial exposures (such as loans, commitments, credit derivatives, 
guarantees, receivables, asset-backed securities, mortgage-backed 
securities, other debt securities, or equity securities).
    System bank means a Farm Credit Bank, an agricultural credit bank, 
and a bank for cooperatives.
    System institution means a System bank, an association of the Farm 
Credit System, Farm Credit Leasing Services Corporation, and their 
successors, and any other institution chartered by the FCA that the FCA 
determines should be considered a System institution for the purposes 
of this part.
    Tier 1 capital means the sum of common equity tier 1 capital and 
additional tier 1 capital.
    Tier 2 capital is defined in Sec.  628.20(d).
    Total capital means the sum of tier 1 capital and tier 2 capital.
    Traditional securitization means a transaction in which:
    (1) All or a portion of the credit risk of one or more underlying 
exposures is transferred to one or more third parties other than 
through the use of credit derivatives or guarantees;
    (2) The credit risk associated with the underlying exposures has 
been separated into at least two tranches reflecting different levels 
of seniority;
    (3) Performance of the securitization exposures depends upon the 
performance of the underlying exposures;
    (4) All or substantially all of the underlying exposures are 
financial exposures (such as loans, commitments, credit derivatives, 
guarantees, receivables, asset-backed securities, mortgage-backed 
securities, other debt securities, or equity securities);
    (5) The underlying exposures are not owned by an operating entity;
    (6) The underlying exposures are not owned by a rural business 
investment company described in 7 U.S.C. 2009cc et seq.;
    (7) [Reserved]
    (8) The FCA may determine that a transaction in which the 
underlying exposures are owned by an investment firm that exercises 
substantially unfettered control over the size and composition of its 
assets, liabilities, and off-balance sheet exposures is not a 
traditional securitization based on the transaction's leverage, risk 
profile, or economic substance;
    (9) The FCA may deem a transaction that meets the definition of a 
traditional securitization, notwithstanding paragraph (5), (6), or (7) 
of this definition, to be a traditional securitization based on the 
transaction's leverage, risk profile, or economic substance; and
    (10) The transaction is not:
    (i) An investment fund;
    (ii) A collective investment fund (as defined in [12 CFR 9.18 
(national bank) and 12 CFR 151.40 (Federal saving association) (OCC); 
12 CFR 208.34 (Board)];
    (iii) An employee benefit plan (as defined in paragraphs (3) and 
(32) of section 3 of ERISA), a ``governmental plan'' (as defined in 29 
U.S.C. 1002(32)) that complies with the tax deferral qualification 
requirements provided in the Internal Revenue Code, or any similar 
employee benefit plan established under the laws of a foreign 
jurisdiction;
    (iv) A synthetic exposure to the capital of a System institution to 
the extent deducted from capital under Sec.  628.22; or
    (v) Registered with the SEC under the Investment Company Act of 
1940 (15 U.S.C. 80a-1) or foreign equivalents thereof.
    Tranche means all securitization exposures associated with a 
securitization that have the same seniority level.
    Two-way market means a market where there are independent bona fide 
offers to buy and sell so that a price reasonably related to the last 
sales price or current bona fide competitive bid and offer quotations 
can be determined within 1 day and settled at that price within a 
relatively short timeframe conforming to trade custom.
    Unallocated retained earnings (URE) means accumulated net income 
that a System institution has not allocated to a member-borrower.
    Unallocated retained earnings (URE) equivalents means nonqualified 
allocated equities, other than equities allocated to other System 
institutions, and paid-in capital resulting from a merger of System 
institutions or from a repurchase of third-party capital that a System 
institution:
    (1) Designates as URE equivalents at the time of allocation (or on 
or before March 31, 2017, if allocated prior to January 1, 2017) and 
undertakes in its capitalization bylaws or a currently effective board 
of directors resolution not to change the designation without prior FCA 
approval; and
    (2) Undertakes, in its capitalization bylaws or a currently 
effective board of directors resolution, not to exercise its discretion 
to revolve except upon dissolution or liquidation and not to offset 
against a loan in default except as required under final order of a 
court of competent jurisdiction or if required under Sec.  615.5290 of 
this chapter in connection with a restructuring under part 617 of this 
chapter.
    Unconditionally cancelable means, with respect to a commitment that 
a System institution may, at any time, with or without cause, refuse to 
extend credit under the commitment (to the extent permitted under 
applicable law).
    Underlying exposures means one or more exposures that have been 
securitized in a securitization transaction.
    U.S. Government agency means an instrumentality of the U.S. 
Government whose obligations are fully guaranteed as to the timely 
payment of principal and interest by the full faith and credit of the 
U.S. Government.


Sec.  628.3  Operational requirements for certain exposures.

    For purposes of calculating risk-weighted assets under subpart D of 
this part:
    (a) Cleared transaction. In order to recognize certain exposures as 
cleared transactions pursuant to paragraph (1)(ii), (iii), or (iv) of 
the definition of ``cleared transaction'' in Sec.  628.2, the exposures 
must meet all of the requirements set forth in this paragraph (a).
    (1) The offsetting transaction must be identified by the CCP as a 
transaction for the clearing member client.
    (2) The collateral supporting the transaction must be held in a 
manner that prevents the System institution from facing any loss due to 
an event of default, including from a liquidation, receivership, 
insolvency, or similar proceeding of either the clearing member or the 
clearing member's other clients. Omnibus accounts established under 17 
CFR parts 190 and 300 satisfy the requirements of this paragraph (a).
    (3) The System institution must conduct sufficient legal review to 
conclude with a well-founded basis (and maintain sufficient written 
documentation of that legal review) that in the event of a legal 
challenge (including one resulting from a default or receivership, 
insolvency, liquidation, or similar proceeding) the relevant court and 
administrative authorities would find the arrangements of paragraph 
(a)(2) of this section to be legal, valid, binding and enforceable 
under the law of the relevant jurisdictions.
    (4) The offsetting transaction with a clearing member must be 
transferable under the transaction documents and applicable laws in the 
relevant jurisdiction(s) to another clearing member should the clearing 
member default, become insolvent, or enter

[[Page 49788]]

receivership, insolvency, liquidation, or similar proceedings.
    (b) Eligible margin loan. In order to recognize an exposure as an 
eligible margin loan as defined in Sec.  628.2, a System institution 
must conduct sufficient legal review to conclude with a well-founded 
basis (and maintain sufficient written documentation of that legal 
review) that the agreement underlying the exposure:
    (1) Meets the requirements of paragraph (1)(iii) of the definition 
of ``eligible margin loan'' in Sec.  628.2; and
    (2) Is legal, valid, binding, and enforceable under applicable law 
in the relevant jurisdictions.
    (c) [Reserved]
    (d) Qualifying master netting agreement. In order to recognize an 
agreement as a qualifying master netting agreement as defined in Sec.  
628.2, a System institution must:
    (1) Conduct sufficient legal review to conclude with a well-founded 
basis (and maintain sufficient written documentation of that legal 
review) that:
    (i) The agreement meets the requirements of paragraph (2) of the 
definition of ``qualifying master netting agreement'' in Sec.  628.2; 
and
    (ii) In the event of a legal challenge (including one resulting 
from default or from receivership, insolvency, liquidation, or similar 
proceeding) the relevant court and administrative authorities would 
find the agreement to be legal, valid, binding, and enforceable under 
the law of the relevant jurisdictions; and
    (2) Establish and maintain written procedures to monitor possible 
changes in relevant law and to ensure that the agreement continues to 
satisfy the requirements of the definition of ``qualifying master 
netting agreement'' in Sec.  628.2.
    (e) Repo-style transaction. In order to recognize an exposure as a 
repo-style transaction as defined in Sec.  628.2, a System institution 
must conduct sufficient legal review to conclude with a well-founded 
basis (and maintain sufficient written documentation of that legal 
review) that the agreement underlying the exposure:
    (1) Meets the requirements of paragraph (3) of the definition of 
``repo-style transaction'' in Sec.  628.2, and
    (2) Is legal, valid, binding, and enforceable under applicable law 
in the relevant jurisdictions.
    (f) Failure of a QCCP to satisfy the rule's requirements. If a 
System institution determines that a CCP ceases to be a QCCP due to the 
failure of the CCP to satisfy one or more of the requirements set forth 
in paragraph (2)(i) through (iii) of the definition of a ``QCCP'' in 
Sec.  628.2, the System institution may continue to treat the CCP as a 
QCCP for up to 3 months following the determination. If the CCP fails 
to remedy the relevant deficiency within 3 months after the initial 
determination, or the CCP fails to satisfy the requirements set forth 
in paragraph (2)(i) through (iii) of the definition of a QCCP 
continuously for a 3-month period after remedying the relevant 
deficiency, a System institution may not treat the CCP as a QCCP for 
the purposes of this part until after the System institution has 
determined that the CCP has satisfied the requirements in paragraph 
(2)(i) through (iii) of the definition of a QCCP for 3 continuous 
months.


Sec. Sec.  628.4-628.9   [Reserved]

Subpart B--Capital Ratio Requirements and Buffers


Sec.  628.10  Minimum capital requirements.

    (a) Computation of regulatory capital ratios. A System 
institution's regulatory capital ratios are determined on the basis of 
the financial statements of the institution prepared in accordance with 
GAAP using average daily balances for the most recent 3 months.
    (b) Minimum capital requirements. A System institution must 
maintain the following minimum capital ratios:
    (1) A common equity tier 1 (CET1) capital ratio of 4.5 percent.
    (2) A tier 1 capital ratio of 6 percent.
    (3) A total capital ratio of 8 percent.
    (4) A tier 1 leverage ratio of 4 percent, of which at least 1.5 
percent must be composed of URE and URE equivalents.
    (5) [Reserved]
    (6) A permanent capital ratio of 7 percent.
    (c) Capital ratio calculations. A System institution's regulatory 
capital ratios are as follows:
    (1) CET1 capital ratio. A System institution's CET1 capital ratio 
is the ratio of the System institution's CET1 capital to total risk-
weighted assets;
    (2) Tier 1 capital ratio. A System institution's tier 1 capital 
ratio is the ratio of the System institution's tier 1 capital to total 
risk-weighted assets;
    (3) Total capital ratio. A System institution's total capital ratio 
is the ratio of the System institution's total (tier 1 and tier 2) 
capital to total risk-weighted assets; and
    (4) Tier 1 leverage ratio. A System institution's leverage ratio is 
the ratio of the institution's tier 1 capital to the institution's 
average total consolidated assets as reported on the institution's Call 
Report minus amounts deducted from tier 1 capital under Sec. Sec.  
628.22(a) and (c) and 628.23.
    (5) Permanent capital ratio. A System institution's permanent 
capital ratio is the ratio of the institution's permanent capital to 
its total risk-adjusted asset base as reported on the institution's 
Call Report, calculated in accordance with the regulations in part 615, 
subpart H, of this chapter.
    (d) [Reserved]
    (e) Capital adequacy. (1) Notwithstanding the minimum requirements 
in this part, a System institution must maintain capital commensurate 
with the level and nature of all risks to which the System institution 
is exposed. FCA may evaluate a System institution's capital adequacy 
and require the institution to maintain higher minimum regulatory 
capital ratios using the factors listed in Sec.  615.5350 of this 
chapter.
    (2) A System institution must have a process for assessing its 
overall capital adequacy in relation to its risk profile and a 
comprehensive strategy for maintaining an appropriate level of capital 
under Sec.  615.5200 of this chapter.


Sec.  628.11  Capital buffer amounts.

    (a) Capital conservation buffer and leverage buffer--(1) 
Composition of the capital conservation buffer and leverage buffer. (i) 
The capital conservation buffer for the CET1 capital ratio, tier 1 
capital ratio, and total capital ratio is composed solely of CET1 
capital.
    (ii) The leverage buffer for the tier 1 leverage ratio is composed 
solely of tier 1 capital.
    (2) Definitions. For purposes of this section, the following 
definitions apply:
    (i) Eligible retained income. The eligible retained income of a 
System institution is the System institution's net income for the 4 
calendar quarters preceding the current calendar quarter, based on the 
System institution's quarterly Call Reports, net of any capital 
distributions and associated tax effects not already reflected in net 
income.
    (ii) Maximum payout ratio. The maximum payout ratio is the 
percentage of eligible retained income that a System institution can 
pay out in the form of capital distributions and discretionary bonus 
payments during the current calendar quarter. The maximum payout ratio 
is based on the System institution's capital conservation buffer, 
calculated as of the last day of the previous calendar quarter, as set 
forth in Table 1 to Sec.  628.11.
    (iii) Maximum payout amount. A System institution's maximum payout 
amount for the current calendar quarter is equal to the System 
institution's eligible retained income, multiplied by

[[Page 49789]]

the applicable maximum payout ratio, as set forth in Table 1 to Sec.  
628.11.
    (iv) [Reserved]
    (v) Maximum leverage payout ratio. The maximum leverage payout 
ratio is the percentage of eligible retained income that a System 
institution can pay out in the form of capital distributions and 
discretionary bonus payments during the current quarter. The maximum 
leverage payout ratio is based on the System institution's leverage 
buffer, calculated as of the last day of the previous quarter, as set 
forth in Table 2 to Sec.  628.11.
    (vi) Maximum leverage payout amount. A System institution's maximum 
leverage payout amount for the current calendar quarter is equal to the 
System institution's eligible retained income, multiplied by the 
applicable maximum leverage payout ratio, as set forth in Table 2 of 
Sec.  628.11.
    (vii) Capital distribution means:
    (A) A reduction of tier 1 capital through the repurchase, 
redemption, or revolvement of a tier 1 capital instrument or by other 
means, except when a System institution, within the same quarter when 
the repurchase is announced, fully replaces a tier 1 capital instrument 
it has repurchased, redeemed, or revolved by issuing a purchased 
capital instrument that meets the eligibility criteria for:
    (1) A CET1 capital instrument if the instrument being repurchased, 
redeemed, or revolved was part of the System institution's CET1 
capital; or
    (2) A CET1 or AT1 capital instrument if the instrument being 
repurchased, redeemed, or revolved was part of the System institution's 
tier 1 capital;
    (B) A reduction of tier 2 capital through the repurchase, 
redemption prior to maturity, or revolvement of a tier 2 capital 
instrument or by other means, except when a System institution, within 
the same quarter when the repurchase, redemption, or revolvement is 
announced, fully replaces a tier 2 capital instrument it has 
repurchased, redeemed, or revolved by issuing a purchased capital 
instrument that meets the eligibility criteria for a tier 1 or tier 2 
capital instrument;
    (C) A dividend declaration or payment on any tier 1 capital 
instrument;
    (D) A dividend declaration or interest payment on any capital 
instrument other than a tier 1 capital instrument if the System 
institution has full discretion to permanently or temporarily suspend 
such payments without triggering an event of default;
    (E) A cash patronage declaration or payment;
    (F) A patronage declaration in the form of allocated equities that 
did not qualify as tier 1 or tier 2 capital; or
    (G) Any similar transaction that the FCA determines to be in 
substance a distribution of capital.
    (viii) Discretionary bonus payment means a payment made to a senior 
officer of a System institution, where:
    (A) The System institution retains discretion as to whether to 
make, and the amount of, the payment until the payment is awarded to 
the senior officer;
    (B) The amount paid is determined by the System institution without 
prior promise to, or agreement with, the senior officer; and
    (C) The senior officer has no contractual right, whether express or 
implied, to the bonus payment.
    (ix) Senior officer means the Chief Executive Officer, the Chief 
Operations Officer, the Chief Financial Officer, the Chief Credit 
Officer, and the General Counsel, or persons in similar positions; and 
any other person responsible for a major policy-making function.
    (3) Calculation of capital conservation buffer and leverage buffer. 
(i) A System institution's capital conservation buffer is equal to the 
lowest of paragraphs (a)(3)(i)(A), (B), and (C) of this section, and 
the leverage buffer is equal to paragraph (a)(3)(i)(D) of this section, 
calculated as of the last day of the previous calendar quarter based on 
the System institution's most recent Call Report:
    (A) The System institution's CET1 capital ratio minus the System 
institution's minimum CET1 capital ratio requirement under Sec.  
628.10;
    (B) The System institution's tier 1 capital ratio minus the System 
institution's minimum tier 1 capital ratio requirement under Sec.  
628.10;
    (C) The System institution's total capital ratio minus the System 
institution's minimum total capital ratio requirement under Sec.  
628.10; and
    (D) The System institution's tier 1 leverage ratio minus the System 
institution's minimum tier 1 leverage ratio requirement under Sec.  
628.10.
    (ii) Notwithstanding paragraphs (a)(3)(i)(A) through (D) of this 
section, if the System institution's CET1 capital ratio, tier 1 capital 
ratio, total capital ratio or tier 1 leverage ratio is less than or 
equal to the System institution's minimum CET1 capital ratio, tier 1 
capital ratio, total capital ratio or tier 1 leverage ratio requirement 
under Sec.  628.10, respectively, the System institution's capital 
conservation buffer or leverage buffer is zero.
    (4) Limits on capital distributions and discretionary bonus 
payments. (i) A System institution must not make capital distributions 
or discretionary bonus payments or create an obligation to make such 
capital distributions or payments during the current calendar quarter 
that, in the aggregate, exceed the maximum payout amount or, as 
applicable, the maximum leverage payout amount.
    (ii) A System institution that has a capital conservation buffer 
that is greater than 2.5 percent and a leverage buffer that is greater 
than 1.0 percent is not subject to a maximum payout amount or maximum 
leverage payout amount under this section.
    (iii) Negative eligible retained income. Except as provided in 
paragraph (a)(4)(iv) of this section, a System institution may not make 
capital distributions or discretionary bonus payments during the 
current calendar quarter if the System institution's:
    (A) Eligible retained income is negative; and
    (B) Capital conservation buffer was less than 2.5 percent, or the 
leverage buffer was less than 1.0 percent, as of the end of the 
previous calendar quarter.
    (iv) Prior approval. Notwithstanding the limitations in paragraphs 
(a)(4)(i) through (iii) of this section, FCA may permit a System 
institution to make a capital distribution or discretionary bonus 
payment upon a request of the System institution, if FCA determines 
that the capital distribution or discretionary bonus payment would not 
be contrary to the purposes of this section, or to the safety and 
soundness of the System institution. In making such a determination, 
FCA will consider the nature and extent of the request and the 
particular circumstances giving rise to the request.

     Table 1 to Sec.   628.11--Calculation of Maximum Payout Amount
------------------------------------------------------------------------
                                           Maximum  payout ratio  (as a
       Capital conservation buffer            percentage  of eligible
                                                 retained  income)
------------------------------------------------------------------------
>2.500 percent..........................  No limitation.
<=2.500 percent, and >1.875 percent.....  60 percent.
<=1.875 percent, and >1.250 percent.....  40 percent.
<=1.250 percent, and >0.625 percent.....  20 percent.
<=0.625 percent.........................  0 percent.
------------------------------------------------------------------------


[[Page 49790]]


 Table 2 to Sec.   628.11--Calculation of Maximum Leverage Payout Amount
------------------------------------------------------------------------
                                             Maximum  leverage  payout
             Leverage buffer               ratio  (as a  percentage  of
                                            eligible  retained  income)
------------------------------------------------------------------------
>1.00 percent...........................  No limitation.
<=1.00 percent, and >0.75 percent.......  60 percent.
<=0.75 percent, and >0.50 percent.......  40 percent.
<=0.50 percent, and >0.25 percent.......  20 percent.
<=0.25 percent..........................  0 percent.
------------------------------------------------------------------------

    (v) Other limitations on capital distributions. Additional 
limitations on capital distributions may apply to a System institution 
under subpart C of this part and under part 615, subparts L and M, of 
this chapter.
    (vi) A System institution is subject to the lower of the maximum 
payout amount as determined under paragraph (a)(2)(iii) of this section 
and the maximum leverage payout amount as determined under paragraph 
(a)(2)(vi) of this section.
    (b) [Reserved]


Sec. Sec.  628.12-628.19  [Reserved]

Subpart C--Definition of Capital


Sec.  628.20  Capital components and eligibility criteria for tier 1 
and tier 2 capital instruments.

    (a) Regulatory capital components. A System institution's 
regulatory capital components are:
    (1) CET1 capital;
    (2) AT1 capital; and
    (3) Tier 2 capital.
    (b) CET1 capital. CET1 capital is the sum of the CET1 capital 
elements in paragraph (b) of this section, minus regulatory adjustments 
and deductions in Sec.  628.22. The CET1 capital elements are:
    (1) Any common cooperative equity instrument issued by a System 
institution that meets all of the following criteria:
    (i) The instrument is issued directly by the System institution and 
represents a claim subordinated to general creditors, subordinated debt 
holders, and preferred stock holders in a receivership, insolvency, 
liquidation, or similar proceeding of the System institution;
    (ii) The holder of the instrument is entitled to a claim on the 
residual assets of the System institution, the claim will be paid only 
after all creditors, subordinated debt holders, and preferred stock 
claims have been satisfied in a receivership, insolvency, liquidation, 
or similar proceeding;
    (iii) The instrument has no maturity date, can be redeemed only at 
the discretion of the System institution and with the prior approval of 
FCA, and does not contain any term or feature that creates an incentive 
to redeem;
    (iv) The System institution did not create, through any action or 
communication, an expectation that it will buy back, cancel, redeem, or 
revolve the instrument, and the instrument does not include any term or 
feature that might give rise to such an expectation, except that the 
establishment of a revolvement period of 7 years or more, or the 
practice of redeeming or revolving the instrument no less than 7 years 
after issuance or allocation, will not be considered to create such an 
expectation;
    (v) Any cash dividend payments on the instrument are paid out of 
the System institution's net income or unallocated retained earnings, 
and are not subject to a limit imposed by the contractual terms 
governing the instrument;
    (vi) The System institution has full discretion at all times to 
refrain from paying any dividends without triggering an event of 
default, a requirement to make a payment-in-kind, or an imposition of 
any other restrictions on the System institution;
    (vii) Dividend payments and other distributions related to the 
instrument may be paid only after all legal and contractual obligations 
of the System institution have been satisfied, including payments due 
on more senior claims;
    (viii) The holders of the instrument bear losses as they occur 
before any losses are borne by holders of preferred stock claims on the 
System institution and holders of any other claims with priority over 
common cooperative equity instruments in a receivership, insolvency, 
liquidation, or similar proceeding;
    (ix) The instrument is classified as equity under GAAP;
    (x) The System institution, or an entity that the System 
institution controls, did not purchase or directly or indirectly fund 
the purchase of the instrument, except that where there is an 
obligation for a member of the institution to hold an instrument in 
order to receive a loan or service from the System institution, an 
amount of that loan equal to the minimum borrower stock requirement 
under section 4.3A of the Act will not be considered as a direct or 
indirect funding where:
    (A) The purpose of the loan is not the purchase of capital 
instruments of the System institution providing the loan; and
    (B) The purchase or acquisition of one or more member equities of 
the institution is necessary in order for the beneficiary of the loan 
to become a member of the System institution;
    (xi) The instrument is not secured, not covered by a guarantee of 
the System institution, and is not subject to any other arrangement 
that legally or economically enhances the seniority of the instrument;
    (xii) The instrument is issued in accordance with applicable laws 
and regulations and with the institution's capitalization bylaws;
    (xiii) The instrument is reported on the System institution's 
regulatory financial statements separately from other capital 
instruments; and
    (xiv) The System institution's capitalization bylaws, or a 
resolution adopted by its board of directors under Sec.  615.5200(d) of 
this chapter and re-affirmed by the board on an annual basis, provides 
that the institution:
    (A) Establishes a minimum redemption or revolvement period of 7 
years for equities included in CET1; and
    (B) Shall not redeem, revolve, cancel, or remove any equities 
included in CET1 without prior approval of the FCA under Sec.  
628.20(f), except that the minimum statutory borrower stock described 
in paragraph (b)(1)(x) of this section may be redeemed without a 
minimum period outstanding after issuance and without the prior 
approval of the FCA.
    (2) Unallocated retained earnings.
    (3) Paid-in capital resulting from a merger of System institutions 
or repurchase of third-party capital.
    (4) [Reserved]
    (5) [Reserved]
    (c) AT1 capital. AT1 capital is the sum of additional tier 1 
capital elements and related surplus, minus the regulatory adjustments 
and deductions in Sec. Sec.  628.22 and 628.23. AT1 capital elements 
are:
    (1) Instruments and related surplus, other than common cooperative 
equities, that meet the following criteria:
    (i) The instrument is issued and paid-in;
    (ii) The instrument is subordinated to general creditors and 
subordinated debt holders of the System institution in a receivership, 
insolvency, liquidation, or similar proceeding;
    (iii) The instrument is not secured, not covered by a guarantee of 
the System institution and not subject to any other arrangement that 
legally or economically enhances the seniority of the instrument;

[[Page 49791]]

    (iv) The instrument has no maturity date and does not contain a 
dividend step-up or any other term or feature that creates an incentive 
to redeem;
    (v) If callable by its terms, the instrument may be called by the 
System institution only after a minimum of 5 years following issuance, 
except that the terms of the instrument may allow it to be called 
earlier than 5 years upon the occurrence of a regulatory event that 
precludes the instrument from being included in AT1 capital, or a tax 
event. In addition:
    (A) The System institution must receive prior approval from FCA to 
exercise a call option on the instrument.
    (B) The System institution does not create at issuance of the 
instrument, through any action or communication, an expectation that 
the call option will be exercised.
    (C) Prior to exercising the call option, or immediately thereafter, 
the System institution must either replace the instrument to be called 
with an equal amount of instruments that meet the criteria under 
paragraph (b) of this section or this paragraph (c),\3\ or demonstrate 
to the satisfaction of FCA that following redemption, the System 
institution will continue to hold capital commensurate with its risk;
---------------------------------------------------------------------------

    \3\ Replacement can be concurrent with redemption of existing 
AT1 capital instruments.
---------------------------------------------------------------------------

    (vi) Redemption or repurchase of the instrument requires prior 
approval from FCA;
    (vii) The System institution has full discretion at all times to 
cancel dividends or other distributions on the instrument without 
triggering an event of default, a requirement to make a payment-in-
kind, or an imposition of other restrictions on the System institution 
except in relation to any distributions to holders of common 
cooperative equity instruments or other instruments that are pari passu 
with the instrument;
    (viii) Any distributions on the instrument are paid out of the 
System institution's net income, unallocated retained earnings, or 
surplus related to other AT1 capital instruments;
    (ix) The instrument does not have a credit-sensitive feature, such 
as a dividend rate that is reset periodically based in whole or in part 
on the System institution's credit quality, but may have a dividend 
rate that is adjusted periodically independent of the System 
institution's credit quality, in relation to general market interest 
rates or similar adjustments;
    (x) The paid-in amount is classified as equity under GAAP;
    (xi) The System institution did not purchase or directly or 
indirectly fund the purchase of the instrument;
    (xii) The instrument does not have any features that would limit or 
discourage additional issuance of capital by the System institution, 
such as provisions that require the System institution to compensate 
holders of the instrument if a new instrument is issued at a lower 
price during a specified timeframe; and
    (xiii) [Reserved]
    (xiv) The System institution's capitalization bylaws, or a 
resolution adopted by its board of directors under Sec.  615.5200(d) of 
this chapter and re-affirmed by the board on an annual basis, provides 
that the institution:
    (A) Establishes a minimum redemption or no-call period of 5 years 
for equities included in additional tier 1; and
    (B) Shall not redeem, revolve, cancel, or remove any equities 
included in additional tier 1 capital without prior approval of the FCA 
under Sec.  628.20(f).
    (2) [Reserved]
    (3) [Reserved]
    (4) Notwithstanding the criteria for AT1 capital instruments 
referenced in paragraph (c)(1) of this section:
    (i) [Reserved]
    (ii) An instrument with terms that provide that the instrument may 
be called earlier than 5 years upon the occurrence of a rating agency 
event does not violate the criterion in paragraph (c)(1)(v) of this 
section provided that the instrument was issued and included in a 
System institution's core surplus capital prior to January 1, 2017, and 
that such instrument satisfies all other criteria under this Sec.  
628.20(c).
    (d) Tier 2 Capital. Tier 2 capital is the sum of tier 2 capital 
elements and any related surplus minus regulatory adjustments and 
deductions in Sec. Sec.  628.22 and 628.23. Tier 2 capital elements 
are:
    (1) Instruments (plus related surplus) that meet the following 
criteria:
    (i) The instrument is issued and paid-in, is a common cooperative 
equity, or is member equity purchased in accordance with paragraph 
(d)(1)(viii) of this section;
    (ii) The instrument is subordinated to general creditors of the 
System institution;
    (iii) The instrument is not secured, not covered by a guarantee of 
the System institution and not subject to any other arrangement that 
legally or economically enhances the seniority of the instrument in 
relation to more senior claims;
    (iv) The instrument has a minimum original maturity of at least 5 
years. At the beginning of each of the last 5 years of the life of the 
instrument, the amount that is eligible to be included in tier 2 
capital is reduced by 20 percent of the original amount of the 
instrument (net of redemptions) and is excluded from regulatory capital 
when the remaining maturity is less than 1 year. In addition, the 
instrument must not have any terms or features that require, or create 
significant incentives for, the System institution to redeem the 
instrument prior to maturity; \4\
---------------------------------------------------------------------------

    \4\ An instrument that by its terms automatically converts into 
a tier 1 capital instrument prior to five years after issuance 
complies with the five-year maturity requirement of this criterion.
---------------------------------------------------------------------------

    (v) The instrument, by its terms, may be called by the System 
institution only after a minimum of 5 years following issuance, except 
that the terms of the instrument may allow it to be called sooner upon 
the occurrence of an event that would preclude the instrument from 
being included in tier 2 capital, or a tax event. In addition:
    (A) The System institution must receive the prior approval of FCA 
to exercise a call option on the instrument.
    (B) The System institution does not create at issuance, through 
action or communication, an expectation the call option will be 
exercised.
    (C) Prior to exercising the call option, or immediately thereafter, 
the System institution must either: replace any amount called with an 
equivalent amount of an instrument that meets the criteria for 
regulatory capital under this section; \5\ or demonstrate to the 
satisfaction of FCA that following redemption, the System institution 
would continue to hold an amount of capital that is commensurate with 
its risk;
---------------------------------------------------------------------------

    \5\ A System institution may replace tier 2 capital instruments 
concurrent with the redemption of existing tier 2 capital 
instruments.
---------------------------------------------------------------------------

    (vi) The holder of the instrument must have no contractual right to 
accelerate payment of principal, dividends, or interest on the 
instrument, except in the event of a receivership, insolvency, 
liquidation, or similar proceeding of the System institution;
    (vii) The instrument has no credit-sensitive feature, such as a 
dividend or interest rate that is reset periodically based in whole or 
in part on the System institution's credit standing, but may have a 
dividend rate that is adjusted periodically independent of the System 
institution's credit standing, in relation to general market interest 
rates or similar adjustments;
    (viii) The System institution has not purchased and has not 
directly or indirectly funded the purchase of the instrument, except 
that where common

[[Page 49792]]

cooperative equity instruments are held by a member of the institution 
in connection with a loan, and the institution funds the acquisition of 
such instruments, that loan shall not be considered as a direct or 
indirect funding where:
    (A) The purpose of the loan is not the purchase of capital 
instruments of the System institution providing the loan;
    (B) The purchase or acquisition of one or more capital instruments 
of the institution is necessary in order for the beneficiary of the 
loan to become a member of the System institution; and
    (C) The capital instruments are in excess of the statutory minimum 
stock purchase amount.
    (ix) [Reserved]
    (x) Redemption of the instrument prior to maturity or repurchase is 
at the discretion of the System institution and requires the prior 
approval of the FCA;
    (xi) The System institution's capitalization bylaws, or a 
resolution adopted by its board of directors under Sec.  615.5200(d) of 
this chapter and re-affirmed by the board on an annual basis, provides 
that the institution:
    (A) Establishes a minimum call, redemption or revolvement period of 
5 years for equities included in tier 2 capital; and
    (B) Shall not call, redeem, revolve, cancel, or remove any equities 
included in tier 2 capital without prior approval of the FCA under 
Sec.  628.20(f).
    (2) [Reserved]
    (3) ALL up to 1.25 percent of the System institution's total risk-
weighted assets not including any amount of the ALL.
    (4) [Reserved]
    (5) [Reserved]
    (6) [Reserved]
    (e) FCA approval of a capital element. (1) A System institution 
must receive FCA prior approval to include a capital element (as listed 
in this section) in its CET1 capital, AT1 capital, or tier 2 capital 
unless the element is equivalent, in terms of capital quality and 
ability to absorb losses with respect to all material terms, to a 
regulatory capital element FCA determined may be included in regulatory 
capital pursuant to paragraph (e)(3) of this section.
    (i) [Reserved]
    (ii) [Reserved]
    (2) [Reserved]
    (3) After determining that a regulatory capital element may be 
included in a System institution's CET1 capital, AT1 capital, or tier 2 
capital, FCA will make its decision publicly available.
    (f) FCA prior approval of capital redemptions and dividends 
included in tier 1 and tier 2 capital. (1) Subject to the provisions of 
paragraphs (f)(5) and (6) of this section, a System institution must 
obtain the prior approval of the FCA before paying cash dividend 
payments, cash patronage payments, or redeeming equities included in 
tier 1 or tier 2 capital, other than term equities redeemed on their 
maturity date.
    (2) At least 30 days prior to the intended action, the System 
institution must submit a request for approval to the FCA. The FCA's 
30-day review period begins on the date on which the FCA receives the 
request.
    (3) The request is deemed to be granted if the FCA does not notify 
the System institution to the contrary before the end of the 30-day 
review period.
    (4)(i) A System institution may request advance approval to cover 
several anticipated cash dividend or patronage payments, or equity 
redemptions, provided that the institution projects sufficient current 
net income during those periods to support the amount of the cash 
dividend or patronage payments and equity redemptions. In determining 
whether to grant advance approval, the FCA will consider:
    (A) The reasonableness of the institution's request, including its 
historical and projected cash dividend and patronage payments and 
equity redemptions;
    (B) The institution's historical trends and current projections for 
capital growth through earnings retention;
    (C) The overall condition of the institution, with particular 
emphasis on current and projected capital adequacy as described in 
Sec.  628.10(e); and
    (D) Any other information that the FCA deems pertinent to reviewing 
the institution's request.
    (ii) After considering these standards, the FCA may grant advance 
prior approval of an institution's request to pay cash dividends and 
patronage or to redeem or revolve equity. Notwithstanding any such 
approval, an institution may not declare a dividend or patronage 
payment or redeem or revolve equities if, after such declaration, 
redemption, or revolvement, the institution would not meet its 
regulatory capital requirements set forth in this part and part 615 of 
this chapter.
    (5) Subject to any capital distribution restrictions specified in 
Sec.  628.11, a System institution is deemed to have FCA prior approval 
for revolvements and redemptions of common cooperative equities, for 
cash dividend payments on all equities, and for cash patronage payments 
on all cooperative equities, provided that:
    (i) For redemptions or revolvements of common cooperative equities 
included in CET1 capital or tier 2 capital, other than as provided in 
paragraph (f)(6) of this section, the institution issued or allocated 
such equities at least 7 years ago for CET1 capital and at least 5 
years ago for tier 2 capital;
    (ii) After such cash payments, the dollar amount of the System 
institution's CET1 capital equals or exceeds the dollar amount of CET1 
capital on the same date in the previous calendar year; and
    (iii) The System institution continues to comply with all 
regulatory capital requirements and supervisory or enforcement actions.
    (6) The following equities are eligible to be redeemed or revolved 
under paragraph (f)(5)(i) of this section in less than the applicable 
minimum required holding period (7 years for CET1 inclusion and 5 years 
for tier 2 inclusion), provided that the requirements of paragraphs 
(f)(5)(ii) and (iii) of this section are met:
    (i) Equities mandated to be redeemed or retired by a final order of 
a court of competent jurisdiction;
    (ii) Equities held by the estate of a deceased former borrower; and
    (iii) Equities that the institution is required to cancel under 
Sec.  615.5290 of this chapter in connection with a restructuring under 
part 617 of this chapter.


Sec.  628.21  [Reserved]


Sec.  628.22  Regulatory capital adjustments and deductions.

    (a) Regulatory capital deductions from CET1 capital. A System 
institution must deduct from the sum of its CET1 capital elements the 
items set forth in this paragraph (a):
    (1) Goodwill, net of associated deferred tax liabilities (DTLs) in 
accordance with paragraph (e) of this section;
    (2) Intangible assets, other than mortgage servicing assets (MSAs), 
net of associated DTLs in accordance with paragraph (e) of this 
section;
    (3) Deferred tax assets (DTAs) that arise from net operating loss 
and tax credit carryforwards net of any related valuation allowances 
and net of DTLs in accordance with paragraph (e) of this section;
    (4) Any gain-on-sale in connection with a securitization exposure;
    (5) Any defined benefit pension fund net asset, net of any 
associated DTL in accordance with paragraph (e) of this section, except 
that, with FCA prior approval, this deduction is not required for any 
defined benefit pension fund net asset to the extent the institution 
has

[[Page 49793]]

unrestricted and unfettered access to the assets in that fund;
    (6) The System institution's allocated equity investment in another 
System institution; and
    (7) [Reserved]
    (8) If, without the required prior FCA approval, the System 
institution redeems or revolves purchased or allocated equities 
included in its CET1 capital that have been outstanding for less than 7 
years, the FCA may take appropriate supervisory or enforcement actions 
against the institution, which may include requiring the institution to 
deduct a portion of its purchased and allocated equities from CET1 
capital.
    (b) [Reserved]
    (c) Deductions from regulatory capital.\6\ (1) [Reserved]
---------------------------------------------------------------------------

    \6\ The System institution must calculate amounts deducted under 
paragraphs (c) through (f) of this section and Sec.  628.23 after it 
calculates the amount of ALL includable in tier 2 capital under 
Sec.  628.20(d)(3).
---------------------------------------------------------------------------

    (2) Corresponding deduction approach. For purposes of subpart C of 
this part, the corresponding deduction approach is the methodology used 
for the deductions from regulatory capital related to purchased equity 
investments in another System institution (as described in paragraph 
(c)(5) of this section). Under the corresponding deduction approach, a 
System institution must make deductions from the component of capital 
for which the underlying instrument would qualify if it were issued by 
the System institution itself. If the System institution does not have 
a sufficient amount of a specific component of capital to effect the 
required deduction, the shortfall must be deducted according to 
paragraph (f) of this section.
    (i) [Reserved]
    (ii) [Reserved]
    (iii) [Reserved]
    (3) [Reserved]
    (4) [Reserved]
    (5) Purchased equity investments in another System institution. 
System institutions must deduct all purchased equity investments in 
another System institution, service corporation, or the Funding 
Corporation by applying the corresponding deduction approach. The 
deductions described in this section are net of associated DTLs in 
accordance with paragraph (e) of this section. With prior written 
approval of FCA, for the period stipulated by FCA, a System institution 
is not required to deduct an investment in the capital of another 
institution in distress if such investment is made to provide financial 
support to the System institution as determined by FCA.
    (d) [Reserved]
    (e) Netting of DTLs against assets subject to deduction. (1) The 
netting of DTLs against assets that are subject to deduction under this 
section is required, if the following conditions are met:
    (i) The DTL is associated with the asset; and
    (ii) The DTL would be extinguished if the associated asset becomes 
impaired or is derecognized under GAAP.
    (2) A DTL may only be netted against a single asset.
    (3) [Reserved]
    (4) [Reserved]
    (5) A System institution must net DTLs against assets subject to 
deduction under this section in a consistent manner from reporting 
period to reporting period.
    (f) Insufficient amounts of a specific regulatory capital component 
to effect deductions. Under the corresponding deduction approach, if a 
System institution does not have a sufficient amount of a specific 
component of capital to effect the required deduction after completing 
the deductions required under paragraph (c) of this section, the System 
institution must deduct the shortfall from the next higher (that is, 
more subordinated) component of regulatory capital.
    (g) Treatment of assets that are deducted. A System institution 
must exclude from total risk-weighted assets any item deducted from 
regulatory capital under paragraphs (a) and (c) of this section.
    (h) [Reserved]


Sec.  628.23  Limit on inclusion of third-party capital in total (tier 
1 and tier 2) capital.

    The combined amount of third-party capital instruments that a 
System institution may include in total (tier 1 and tier 2) capital is 
equal to the greater of the following:
    (a) The then existing limit, if any; or
    (b) The lesser of:
    (1) Forty percent of total capital, calculated by taking two thirds 
of the average of the previous 4 quarters of total capital reported on 
the institution's Call Report filed with the FCA, less any amounts of 
third-party capital reported in total capital; or
    (2) The average of the previous 4 quarters of CET1 capital reported 
on its Call Report filed with the FCA.
    (c) Treatment of assets that are deducted. A System institution 
must exclude from total risk-weighted assets any item deducted from 
regulatory capital under this section.


Sec. Sec.  628.24-628.29   [Reserved]

Subpart D--Risk Weighted Assets--Standardized Approach


Sec.  628.30  Applicability.

    (a) This subpart sets forth methodologies for determining risk-
weighted assets for purposes of the generally applicable risk-based 
capital requirements for all System institutions.
    (b) [Reserved]

Risk-Weighted Assets for General Credit Risk


Sec.  628.31  Mechanics for calculating risk-weighted assets for 
general credit risk.

    (a) General risk-weighting requirements. A System institution must 
apply risk weights to its exposures as follows:
    (1) A System institution must determine the exposure amount of each 
on-balance sheet exposure, each OTC derivative contract, and each off-
balance sheet commitment, trade and transaction-related contingency, 
guarantee, repo-style transaction, financial standby letter of credit, 
forward agreement, or other similar transaction that is not:
    (i) An unsettled transaction subject to Sec.  628.38;
    (ii) A cleared transaction subject to Sec.  628.35;
    (iii) [Reserved]
    (iv) A securitization exposure subject to Sec. Sec.  628.41 through 
628.45; or
    (v) An equity exposure (other than an equity OTC derivative 
contract) subject to Sec. Sec.  628.51 through 628.53.
    (2) The System institution must multiply each exposure amount by 
the risk weight appropriate to the exposure based on the exposure type 
or counterparty, eligible guarantor, or financial collateral to 
determine the risk-weighted asset amount for each exposure.
    (b) Total risk-weighted assets for general credit risk equals the 
sum of the risk-weighted asset amounts calculated under this section.


Sec.  628.32  General risk weights.

    (a) Sovereign exposures--(1) Exposures to the U.S. Government. (i) 
Notwithstanding any other requirement in this subpart, a System 
institution must assign a 0-percent risk weight to:
    (A) An exposure to the U.S. Government, its central bank, or a U.S. 
Government agency; and
    (B) The portion of an exposure that is directly and unconditionally 
guaranteed by the U.S. Government, its central bank, or a U.S. 
Government agency. This includes a deposit or other exposure, or the 
portion of a deposit or

[[Page 49794]]

other exposure that is insured or otherwise unconditionally guaranteed 
by the Federal Deposit Insurance Corporation or National Credit Union 
Administration.
    (ii) A System institution must assign a 20-percent risk weight to 
the portion of an exposure that is conditionally guaranteed by the U.S. 
Government, its central bank, or a U.S. Government agency. This 
includes an exposure, or the portion of an exposure, that is 
conditionally guaranteed by the Federal Deposit Insurance Corporation 
or National Credit Union Administration.
    (2) Other sovereign exposures. In accordance with Table 1 to Sec.  
628.32, a System institution must assign a risk weight to a sovereign 
exposure based on the Country Risk Classification (CRC) applicable to 
the sovereign or the sovereign's Organization for Economic Cooperation 
and Development (OECD) membership status if there is no CRC applicable 
to the sovereign.

     Table 1 to Sec.   628.32--Risk Weights for Sovereign Exposures
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
CRC:
  0-1...................................................               0
  2.....................................................              20
  3.....................................................              50
  4-6...................................................             100
  7.....................................................             150
OECD Member with no CRC.................................               0
Non-OECD Member with no CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

    (3) Certain sovereign exposures. Notwithstanding paragraph (a)(2) 
of this section, a System institution may assign to a sovereign 
exposure a risk weight that is lower than the applicable risk weight in 
Table 1 to Sec.  628.32 if:
    (i) The exposure is denominated in the sovereign's currency;
    (ii) The System institution has at least an equivalent amount of 
liabilities in that currency; and
    (iii) The risk weight is not lower than the risk weight that the 
sovereign allows banking organizations under its jurisdiction to assign 
to the same exposures to the sovereign.
    (4) Exposures to a non-OECD member sovereign with no CRC. Except as 
provided in paragraphs (a)(3), (5), and (6) of this section, a System 
institution must assign a 100-percent risk weight to a sovereign 
exposure if the sovereign does not have a CRC.
    (5) Exposures to an OECD member sovereign with no CRC. Except as 
provided in paragraph (a)(6) of this section, a System institution must 
assign a 0-percent risk weight to an exposure to a sovereign that is a 
member of the OECD if the sovereign does not have a CRC.
    (6) Sovereign default. A System institution must assign a 150-
percent risk weight to a sovereign exposure immediately upon 
determining that an event of sovereign default has occurred, or if an 
event of sovereign default has occurred during the previous 5 years.
    (b) Certain supranational entities and multilateral development 
banks (MDBs). A System institution must assign a 0-percent risk weight 
to an exposure to the Bank for International Settlements, the European 
Central Bank, the European Commission, the International Monetary Fund, 
or an MDB.
    (c) Exposures to Government-sponsored enterprises (GSEs). (1) A 
System institution must assign a 20-percent risk weight to an exposure 
to a GSE other than an equity exposure or preferred stock.
    (2) A System institution must assign a 100-percent risk weight to 
preferred stock issued by a non-System GSE.
    (3) Purchased equity investments (including preferred stock 
investments) in other System institutions do not receive a risk weight, 
because they are deducted from capital in accordance with Sec.  628.22.
    (d) Exposures to depository institutions, foreign banks, and credit 
unions--(1) Exposures to U.S. depository institutions and credit 
unions. A System institution must assign a 20-percent risk weight to an 
exposure to a depository institution or credit union that is organized 
under the laws of the United States or any state thereof, except as 
otherwise provided in this paragraph (d). This risk weight applies to 
an exposure a System bank has to another financing institution (OFI) 
that is a depository institution or credit union organized under the 
laws of the United States or any state thereof or is owned and 
controlled by such an entity that guarantees the exposure. If the OFI 
exposure does not satisfy these requirements, it must be assigned a 
risk weight as a corporate exposure pursuant to paragraph (f)(1)(ii) or 
(f)(2) of this section.
    (2) Exposures to foreign banks. (i) Except as otherwise provided 
under paragraph (d)(2)(iv) of this section, a System institution must 
assign a risk weight to an exposure to a foreign bank, in accordance 
with Table 2 to Sec.  628.32, based on the CRC rating that corresponds 
to the foreign bank's home country or the OECD membership status of the 
foreign bank's home country if there is no CRC applicable to the 
foreign bank's home country.

  Table 2 to Sec.   628.32--Risk Weights for Exposures to Foreign Banks
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
CRC:
  0-1...................................................              20
  2.....................................................              50
  3.....................................................             100
  4-7...................................................             150
OECD Member with No CRC.................................              20
Non-OECD with No CRC....................................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

    (ii) A System institution must assign a 20-percent risk weight to 
an exposure to a foreign bank whose home country is a member of the 
OECD and does not have a CRC.
    (iii) A System institution must assign a 100-percent risk weight to 
an exposure to a foreign bank whose home country is not a member of the 
OECD and does not have a CRC, with the exception of self-liquidating, 
trade-related contingent items that arise from the movement of goods, 
and that have a maturity of 3 months or less, which may be assigned a 
20-percent risk weight.
    (iv) A System institution must assign a 150-percent risk weight to 
an exposure to a foreign bank immediately upon determining that an 
event of sovereign default has occurred in the bank's home country, or 
if an event of sovereign default has occurred in the foreign bank's 
home country during the previous 5 years.
    (3) [Reserved]
    (e) Exposures to public sector entities (PSEs)--(1) Exposures to 
U.S. PSEs. (i) A System institution must assign a 20-percent risk 
weight to a general obligation exposure to a PSE that is organized 
under the laws of the United States or any state or political 
subdivision thereof.
    (ii) A System institution must assign a 50-percent risk weight to a 
revenue obligation exposure to a PSE that is organized under the laws 
of the United States or any state or political subdivision thereof.
    (2) Exposures to foreign PSEs. (i) Except as provided in paragraphs 
(e)(1) and (3) of this section, a System institution must assign a risk 
weight to a general obligation exposure to a foreign PSE, in accordance 
with Table 3 to Sec.  628.32, based on the CRC that corresponds to the 
PSE's home country or the OECD membership status of the PSE's home 
country if there is no CRC applicable to the PSE's home country.
    (ii) Except as provided in paragraphs (e)(1) and (3) of this 
section, a System institution must assign a risk weight to a revenue 
obligation exposure to a foreign PSE, in accordance with Table 4 to 
Sec.  628.32, based on the CRC that

[[Page 49795]]

corresponds to the PSE's home country; or the OECD membership status of 
the PSE's home country if there is no CRC applicable to the PSE's home 
country.
    (3) A System institution may assign a lower risk weight than would 
otherwise apply under Tables 3 and 4 to Sec.  628.32 to an exposure to 
a foreign PSE if:
    (i) The PSE's home country supervisor allows banks under its 
jurisdiction to assign a lower risk weight to such exposures; and
    (ii) The risk weight is not lower than the risk weight that 
corresponds to the PSE's home country in accordance with Table 1 to 
Sec.  628.32.

     Table 3 to Sec.   628.32--Risk Weights for Non-U.S. PSE General
                               Obligations
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
CRC:
  0-1...................................................              20
  2.....................................................              50
  3.....................................................             100
  4-7...................................................             150
OECD Member with No CRC.................................              20
Non-OECD Member with No CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------


     Table 4 to Sec.   628.32--Risk Weights for Non-U.S. PSE Revenue
                               Obligations
------------------------------------------------------------------------
                                                            Risk weight
                                                           (in percent)
------------------------------------------------------------------------
CRC:
  0-1...................................................              50
  2-3...................................................             100
  4-7...................................................             150
OECD Member with No CRC.................................              50
Non-OECD Member with No CRC.............................             100
Sovereign Default.......................................             150
------------------------------------------------------------------------

    (4) Exposures to PSEs from an OECD member sovereign with no CRC. 
(i) A System institution must assign a 20-percent risk weight to a 
general obligation exposure to a PSE whose home country is a OECD 
member sovereign with no CRC.
    (ii) A System institution must assign a 50-percent risk weight to a 
revenue obligation exposure to a PSE whose country is an OECD member 
sovereign with no CRC.
    (5) Exposures to PSEs whose home country is not an OECD member 
sovereign with no CRC. A System institution must assign a 100-percent 
risk weight to an exposure to a PSE whose home country is not a member 
of the OECD and does not have a CRC.
    (6) A System institution must assign a 150-percent risk weight to a 
PSE exposure immediately upon determining that an event of sovereign 
default has occurred in a PSE's home country or if an event of 
sovereign default has occurred in the PSE's home country during the 
previous 5 years.
    (f) Corporate exposures--(1) 100-percent risk weight. Except as 
provided in paragraph (f)(2) of this section, a System institution must 
assign a 100-percent risk weight to all its corporate exposures. Assets 
assigned a risk weight under this provision include:
    (i) Borrower loans such as agricultural loans and consumer loans, 
regardless of the corporate form of the borrower, unless those loans 
qualify for different risk weights under other provisions of this 
subpart D;
    (ii) System bank exposures to OFIs that do not satisfy the 
requirements for a 20-percent risk weight pursuant to paragraph (d)(1) 
of this section or a 50-percent risk weight pursuant to paragraph 
(f)(2) of this section; and
    (iii) Premises, fixed assets, and other real estate owned.
    (2) 50-percent risk weight. Unless the OFI satisfies the 
requirements for a 20-percent risk weight pursuant to paragraph (d)(1) 
of this section, a System institution must assign a 50-percent risk 
weight to an exposure to an OFI that satisfies at least one of the 
following requirements:
    (i) The OFI is investment grade or is owned and controlled by an 
investment grade entity that guarantees the exposure; or
    (ii) The OFI meets capital, risk identification and control, and 
operational standards similar to the OFIs identified in paragraph 
(d)(1) of this section.
    (g) Residential mortgage exposures. (1) A System institution must 
assign a 50-percent risk weight to a first-lien residential mortgage 
exposure that:
    (i) Is secured by a property that is either owner-occupied or 
rented;
    (ii) Is made in accordance with prudent underwriting standards 
suitable for residential property, including standards relating to the 
loan amount as a percent of the appraised value of the property;
    (iii) Is not 90 days or more past due or carried in nonaccrual 
status; and
    (iv) Is not restructured or modified.
    (2) A System institution must assign a 100-percent risk weight to a 
first-lien residential mortgage exposure that does not meet the 
criteria in paragraph (g)(1) of this section, and to junior-lien 
residential mortgage exposures.
    (3) For the purpose of this paragraph (g), if a System institution 
holds the first-lien and junior-lien(s) residential mortgage exposures, 
and no other party holds an intervening lien, the System institution 
must combine the exposures and treat them as a single first-lien 
residential mortgage exposure.
    (4) A loan modified or restructured solely pursuant to the U.S. 
Treasury's Home Affordable Mortgage Program is not modified or 
restructured for purposes of this section.
    (h) [Reserved]
    (i) [Reserved]
    (j) [Reserved]
    (k) Past due and nonaccrual exposures. Except for a sovereign 
exposure or a residential mortgage exposure, a System institution must 
determine a risk weight for an exposure that is 90 days or more past 
due or in nonaccrual status according to the requirements set forth in 
this paragraph (k).
    (1) A System institution must assign a 150-percent risk weight to 
the portion of the exposure that is not guaranteed or that is not 
secured by financial collateral.
    (2) A System institution may assign a risk weight to the guaranteed 
portion of a past due or nonaccrual exposure based on the risk weight 
that applies under Sec.  628.36 if the guarantee or credit derivative 
meets the requirements of that section.
    (3) A System institution may assign a risk weight to the portion of 
a past due or nonaccrual exposure that is collateralized by financial 
collateral based on the risk weight that applies under Sec.  628.37 if 
the financial collateral meets the requirements of that section.
    (l) Other assets. (1) A System institution must assign a 0-percent 
risk weight to cash owned and held in all offices of the System 
institution, in transit, or in accounts at a depository institution or 
a Federal Reserve Bank; to gold bullion held in a depository 
institution's vaults on an allocated basis, to the extent the gold 
bullion assets are offset by gold bullion liabilities; and to exposures 
that arise from the settlement of cash transactions (such as equities, 
fixed income, spot foreign exchange (FX) and spot commodities) with a 
central counterparty where there is no assumption of ongoing 
counterparty credit risk by the central counterparty after settlement 
of the trade.
    (2) A System institution must assign a 20-percent risk weight to 
cash items in the process of collection.
    (3) A System institution must assign a 100-percent risk weight to 
deferred tax assets (DTAs) arising from temporary differences in 
relation to net operating loss carrybacks.
    (4) A System institution must assign a 100-percent risk weight to 
all MSAs.

[[Page 49796]]

    (5) A System institution must assign a 100-percent risk weight to 
all assets that are not specifically assigned a different risk weight 
under this subpart and that are not deducted from tier 1 or tier 2 
capital pursuant to Sec.  628.22.
    (6) [Reserved]


Sec.  628.33  Off-balance sheet exposures.

    (a) General. (1) A System institution must calculate the exposure 
amount of an off-balance sheet exposure using the credit conversion 
factors (CCFs) in paragraph (b) of this section.
    (2) Where a System institution commits to provide a commitment, the 
System institution may apply the lower of the two applicable CCFs.
    (3) Where a System institution provides a commitment structured as 
a syndication or participation, the System institution is only required 
to calculate the exposure amount for its pro rata share of the 
commitment.
    (4) Where a System institution provides a commitment, enters into a 
repurchase agreement, or provides a credit enhancing representation and 
warranty, and such commitment, repurchase agreement, or credit-
enhancing representation and warranty is not a securitization exposure, 
the exposure amount shall be no greater than the maximum contractual 
amount of the commitment, repurchase agreement, or credit-enhancing 
representation and warranty, as applicable.
    (5) The exposure amount of a System bank's commitment to an 
association or OFI is the difference between the association's or OFI's 
maximum credit limit with the System bank (as established by the 
general financing agreement or promissory note, as required by Sec.  
614.4125(d) of this chapter), and the amount the association or OFI has 
borrowed from the System bank.
    (b) Credit conversion factors--(1) Zero-percent (0%) CCF. A System 
institution must apply a 0-percent CCF to a commitment that is 
unconditionally cancelable by the System institution.
    (2) Twenty-percent (20%) CCF. A System institution must apply a 20-
percent CCF to the amount of:
    (i) Commitments, other than a System bank's commitment to an 
association or OFI, with an original maturity of 14 months or less that 
are not unconditionally cancelable by the System institution.
    (ii) Self-liquidating, trade-related contingent items that arise 
from the movement of goods, with an original maturity of 14 months or 
less.
    (iii) A System bank's commitment to an association or OFI that is 
not unconditionally cancelable by the System bank, regardless of 
maturity.
    (3) Fifty-percent (50%) CCF. A System institution must apply a 50-
percent CCF to the amount of:
    (i) Commitments, other than a System bank's commitment to an 
association or OFI, with an original maturity of more than 14 months 
that are not unconditionally cancelable by the System institution.
    (ii) Transaction-related contingent items, including performance 
bonds, bid bonds, warranties, and performance standby letters of 
credit.
    (4) One hundred-percent (100%) CCF. A System institution must apply 
a 100-percent CCF to the following off-balance sheet items and other 
similar transactions:
    (i) Guarantees;
    (ii) Repurchase agreements (the off-balance sheet component of 
which equals the sum of the current fair values of all positions the 
System institution has sold subject to repurchase);
    (iii) Credit-enhancing representations and warranties that are not 
securitization exposures;
    (iv) Off-balance sheet securities lending transactions (the off-
balance sheet component of which equals the sum of the current fair 
values of all positions the System institution has lent under the 
transaction);
    (v) Off-balance sheet securities borrowing transactions (the off-
balance sheet component of which equals the sum of the current fair 
values of all non-cash positions the System institution has posted as 
collateral under the transaction);
    (vi) Financial standby letters of credit; and
    (vii) Forward agreements.


Sec.  628.34  OTC derivative contracts.

    (a) Exposure amount--(1) Single OTC derivative contract. Except as 
modified by paragraph (b) of this section, the exposure amount for a 
single OTC derivative contract that is not subject to a qualifying 
master netting agreement is equal to the sum of the System 
institution's current credit exposure and potential future credit 
exposure (PFE) on the OTC derivative contract.
    (i) Current credit exposure. The current credit exposure for a 
single OTC derivative contract is the greater of the mark-to-fair value 
of the OTC derivative contract or 0.
    (ii) PFE. (A) The PFE for a single OTC derivative contract, 
including an OTC derivative contract with a negative mark-to-fair 
value, is calculated by multiplying the notional principal amount of 
the OTC derivative contract by the appropriate conversion factor in 
Table 1 to Sec.  628.34.
    (B) For purposes of calculating either the PFE under this paragraph 
or the gross PFE under paragraph (a)(2) of this section for exchange 
rate contracts and other similar contracts in which the notional 
principal amount is equivalent to the cash flows, notional principal 
amount is the net receipts to each party falling due on each value date 
in each currency.
    (C) For an OTC derivative contract that does not fall within one of 
the specified categories in Table 1 to Sec.  628.34, the PFE must be 
calculated using the appropriate ``other'' conversion factor.
    (D) A System institution must use an OTC derivative contract's 
effective notional principal amount (that is, the apparent or stated 
notional principal amount multiplied by any multiplier in the OTC 
derivative contract) rather than the apparent or stated notional 
principal amount in calculating PFE.
    (E) The PFE of the protection provider of a credit derivative is 
capped at the net present value of the amount of unpaid premiums.

                                     Table 1 to Sec.   628.34--Conversion Factor Matrix for Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Credit       Credit (non-
                                                              Foreign       (investment     investment-                      Precious
         Remaining maturity \2\            Interest rate  exchange  rate       grade           grade          Equity          metals           Other
                                                             and gold        reference       reference                     (except gold)
                                                                            asset) \3\        asset)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One (1) year or less....................            0.00            0.01            0.05            0.10            0.06            0.07            0.10
Greater than one (1) year and less than            0.005            0.05            0.05            0.10            0.08            0.07            0.12
 or equal to five (5) years.............
Greater than five (5) years.............           0.015           0.075            0.05            0.10            0.10            0.08            0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
  derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
  the fair value of the contract is 0, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a
  remaining maturity of greater than 1 year that meets these criteria, the minimum conversion factor is 0.005.

[[Page 49797]]

 
\3\ A System institution must use the column labeled ``Credit (investment-grade reference asset)'' for a credit derivative whose reference asset is an
  outstanding unsecured long-term debt security without credit enhancement that is investment grade. A System institution must use the column labeled
  ``Credit (non-investment-grade reference asset)'' for all other credit derivatives.

    (2) Multiple OTC derivative contracts subject to a qualifying 
master netting agreement. Except as modified by paragraph (b) of this 
section, the exposure amount for multiple OTC derivative contracts 
subject to a qualifying master netting agreement is equal to the sum of 
the net current credit exposure and the adjusted sum of the PFE amounts 
for all OTC derivative contracts subject to the qualifying master 
netting agreement.
    (i) Net current credit exposure. The net current credit exposure is 
the greater of the net sum of all positive and negative mark-to-fair 
values of the individual OTC derivative contracts subject to the 
qualifying master netting agreement or 0.
    (ii) Adjusted sum of the PFE amounts. The adjusted sum of the PFE 
amounts, Anet, is calculated as:

Anet = (0.4xAgross) + (0.6xNGRxAgross)

Where:

Agross = the gross PFE (that is, the sum of the PFE 
amounts (as determined under paragraph (a)(1)(ii) of this section 
for each individual derivative contract subject to the qualifying 
master netting agreement); and
Net-to-gross Ratio (NGR) = the ratio of the net current credit 
exposure to the gross current credit exposure. In calculating the 
NGR, the gross current credit exposure equals the sum of the 
positive current credit exposures (as determined under paragraph 
(a)(1)(i) of this section) of all individual derivative contracts 
subject to the qualifying master netting agreement.

    (b) Recognition of credit risk mitigation of collateralized OTC 
derivative contracts. (1) A System institution may recognize the credit 
risk mitigation benefits of financial collateral that secures an OTC 
derivative contract or multiple OTC derivative contracts subject to a 
qualifying master netting agreement (netting set) by using the simple 
approach in Sec.  628.37(b).
    (2) Alternatively, if the financial collateral securing a contract 
or netting set described in paragraph (b)(1) of this section is marked-
to-fair value on a daily basis and subject to a daily margin 
maintenance requirement, a System institution may recognize the credit 
risk mitigation benefits of financial collateral that secures the 
contract or netting set by using the collateral haircut approach in 
Sec.  628.37(c).
    (c) Counterparty credit risk for OTC credit derivatives--(1) 
Protection purchasers. A System institution that purchases an OTC 
credit derivative that is recognized under Sec.  628.36 as a credit 
risk mitigant is not required to compute a separate counterparty credit 
risk capital requirement under Sec.  628.32 provided that the System 
institution does so consistently for all such credit derivatives. The 
System institution must either include all or exclude all such credit 
derivatives that are subject to a qualifying master netting agreement 
from any measure used to determine counterparty credit risk exposure to 
all relevant counterparties for risk-based capital purposes.
    (2) Protection providers. (i) A System institution that is the 
protection provider under an OTC credit derivative must treat the OTC 
credit derivative as an exposure to the underlying reference asset. The 
System institution is not required to compute a counterparty credit 
risk capital requirement for the OTC credit derivative under Sec.  
628.32, provided that this treatment is applied consistently for all 
such OTC credit derivatives. The System institution must either include 
all or exclude all such OTC credit derivatives that are subject to a 
qualifying master netting agreement from any measure used to determine 
counterparty credit risk exposure.
    (ii) The provisions of paragraph (c)(2) of this section apply to 
all relevant counterparties for risk-based capital purposes.
    (d) Counterparty credit risk for OTC equity derivatives. (1) A 
System institution must treat an OTC equity derivative contract as an 
equity exposure and compute a risk-weighted asset amount for the OTC 
equity derivative contract under Sec. Sec.  628.51 through 628.53.
    (2) [Reserved]
    (3) If the System institution risk weights the contract under the 
Simple Risk-Weight Approach (SRWA) in Sec.  628.52, the System 
institution may choose not to hold risk-based capital against the 
counterparty credit risk of the OTC equity derivative contract, as long 
as it does so for all such contracts. Where the OTC equity derivative 
contracts are subject to a qualifying master netting agreement, a 
System institution using the SRWA must either include all or exclude 
all of the contracts from any measure used to determine counterparty 
credit risk exposure.
    (e) [Reserved]


Sec.  628.35  Cleared transactions.

    (a) General requirements--(1) Clearing member clients. A System 
institution that is a clearing member client must use the methodologies 
described in paragraph (b) of this section to calculate risk-weighted 
assets for a cleared transaction.
    (2) [Reserved]
    (b) Clearing member client System institutions--(1) Risk-weighted 
assets for cleared transactions. (i) To determine the risk-weighted 
asset amount for a cleared transaction, a System institution that is a 
clearing member client must multiply the trade exposure amount for the 
cleared transaction, calculated in accordance with paragraph (b)(2) of 
this section, by the risk weight appropriate for the cleared 
transaction, determined in accordance with paragraph (b)(3) of this 
section.
    (ii) A clearing member client System institution's total risk-
weighted assets for cleared transactions is the sum of the risk-
weighted asset amounts for all its cleared transactions.
    (2) Trade exposure amount. (i) For a cleared transaction that is 
either a derivative contract or netting set of derivative contracts, 
the trade exposure amount equals:
    (A) The exposure amount for the derivative contract or netting set 
of derivative contracts, calculated using the current exposure method 
(CEM) for OTC derivative contracts under Sec.  628.34; plus
    (B) The fair value of the collateral posted by the clearing member 
client System institution and held by the central counterparty (CCP), 
clearing member, or custodian in a manner that is not bankruptcy 
remote.
    (ii) For a cleared transaction that is a repo-style transaction, 
the trade exposure amount equals:
    (A) The exposure amount for the repo-style transaction calculated 
using the collateral haircut methodology under Sec.  628.37(c); plus
    (B) The fair value of the collateral posted by the clearing member 
client System institution and held by the CCP or a clearing member in a 
manner that is not bankruptcy remote.
    (3) Cleared transaction risk weights. (i) For a cleared transaction 
with a qualifying CCP (QCCP), a clearing member client System 
institution must apply a risk weight of:
    (A) Two (2) percent if the collateral posted by the System 
institution to the QCCP or clearing member is subject to an arrangement 
that prevents any losses to the clearing member client System 
institution due to the joint default or a

[[Page 49798]]

concurrent insolvency, liquidation, or receivership proceeding of the 
clearing member and any other clearing member clients of the clearing 
member; and the clearing member client System institution has conducted 
sufficient legal review to conclude with a well-founded basis (and 
maintains sufficient written documentation of that legal review) that 
in the event of a legal challenge (including one resulting from default 
or from liquidation, insolvency, or receivership proceeding) the 
relevant court and administrative authorities would find the 
arrangements to be legal, valid, binding and enforceable under the law 
of the relevant jurisdictions; or
    (B) Four (4) percent if the requirements of paragraph (b)(3)(i)(A) 
of this section are not met.
    (ii) For a cleared transaction with a CCP that is not a QCCP, a 
clearing member client System institution must apply the risk weight 
appropriate for the CCP according to Sec.  628.32.
    (4) Collateral. (i) Notwithstanding any other requirements in this 
section, collateral posted by a clearing member client System 
institution that is held by a custodian (in its capacity as custodian) 
in a manner that is bankruptcy remote from the CCP, the custodian, 
clearing member and other clearing member clients of the clearing 
member, is not subject to a capital requirement under this section.
    (ii) A clearing member client System institution must calculate a 
risk-weighted asset amount for any collateral provided to a CCP, 
clearing member, or custodian in connection with a cleared transaction 
in accordance with the requirements under Sec.  628.32.
    (c) [Reserved]
    (d) [Reserved]


Sec.  628.36  Guarantees and credit derivatives: substitution 
treatment.

    (a) Scope--(1) General. A System institution may recognize the 
credit risk mitigation benefits of an eligible guarantee or eligible 
credit derivative by substituting the risk weight associated with the 
protection provider for the risk weight assigned to an exposure, as 
provided under this section.
    (2) This section applies to exposures for which:
    (i) Credit risk is fully covered by an eligible guarantee or 
eligible credit derivative; or
    (ii) Credit risk is covered on a pro rata basis (that is, on a 
basis in which the System institution and the protection provider share 
losses proportionately) by an eligible guarantee or eligible credit 
derivative.
    (3) Exposures on which there is a tranching of credit risk 
(reflecting at least two different levels of seniority) generally are 
securitization exposures subject to Sec. Sec.  628.41 through 628.45.
    (4) If multiple eligible guarantees or eligible credit derivatives 
cover a single exposure described in this section, a System institution 
may treat the hedged exposure as multiple separate exposures each 
covered by a single eligible guarantee or eligible credit derivative 
and may calculate a separate risk-weighted asset amount for each 
separate exposure as described in paragraph (c) of this section.
    (5) If a single eligible guarantee or eligible credit derivative 
covers multiple hedged exposures described in paragraph (a)(2) of this 
section, a System institution must treat each hedged exposure as 
covered by a separate eligible guarantee or eligible credit derivative 
and must calculate a separate risk-weighted asset amount for each 
exposure as described in paragraph (c) of this section.
    (b) Rules of recognition. (1) A System institution may only 
recognize the credit risk mitigation benefits of eligible guarantees 
and eligible credit derivatives.
    (2) A System institution may only recognize the credit risk 
mitigation benefits of an eligible credit derivative to hedge an 
exposure that is different from the credit derivative's reference 
exposure used for determining the derivative's cash settlement value, 
deliverable obligation, or occurrence of a credit event if:
    (i) The reference exposure ranks pari passu with, or is 
subordinated to, the hedged exposure; and
    (ii) The reference exposure and the hedged exposure are to the same 
legal entity, and legally enforceable cross-default or cross-
acceleration clauses are in place to ensure payments under the credit 
derivative are triggered when the obligated party of the hedged 
exposure fails to pay under the terms of the hedged exposure.
    (c) Substitution approach--(1) Full coverage. If an eligible 
guarantee or eligible credit derivative meets the conditions in 
paragraphs (a) and (b) of this section and the protection amount (P) of 
the guarantee or credit derivative is greater than or equal to the 
exposure amount of the hedged exposure, a System institution may 
recognize the guarantee or credit derivative in determining the risk-
weighted asset amount for the hedged exposure by substituting the risk 
weight applicable to the guarantor or credit derivative protection 
provider under Sec.  628.32 for the risk weight assigned to the 
exposure.
    (2) Partial coverage. If an eligible guarantee or eligible credit 
derivative meets the conditions in Sec. Sec.  628.36(a) and 628.37(b) 
and the protection amount (P) of the guarantee or credit derivative is 
less than the exposure amount of the hedged exposure, the System 
institution must treat the hedged exposure as two separate exposures 
(protected and unprotected) in order to recognize the credit risk 
mitigation benefit of the guarantee or credit derivative.
    (i) The System institution may calculate the risk-weighted asset 
amount for the protected exposure under Sec.  628.32, where the 
applicable risk weight is the risk weight applicable to the guarantor 
or credit derivative protection provider.
    (ii) The System institution must calculate the risk-weighted asset 
amount for the unprotected exposure under Sec.  628.32, where the 
applicable risk weight is that of the unprotected portion of the hedged 
exposure.
    (iii) The treatment provided in this section is applicable when the 
credit risk of an exposure is covered on a partial pro rata basis and 
may be applicable when an adjustment is made to the effective notional 
amount of the guarantee or credit derivative under paragraph (d), (e), 
or (f) of this section.
    (d) Maturity mismatch adjustment. (1) A System institution that 
recognizes an eligible guarantee or eligible credit derivative in 
determining the risk-weighted asset amount for a hedged exposure must 
adjust the effective notional amount of the credit risk mitigant to 
reflect any maturity mismatch between the hedged exposure and the 
credit risk mitigant.
    (2) A maturity mismatch occurs when the residual maturity of a 
credit risk mitigant is less than that of the hedged exposure(s).
    (3) The residual maturity of a hedged exposure is the longest 
possible remaining time before the obligated party of the hedged 
exposure is scheduled to fulfill its obligation on the hedged exposure. 
If a credit risk mitigant has embedded options that may reduce its 
term, the System institution (protection purchaser) must use the 
shortest possible residual maturity for the credit risk mitigant. If a 
call is at the discretion of the protection provider, the residual 
maturity of the credit risk mitigant is at the first call date. If the 
call is at the discretion of the System institution (protection 
purchaser), but the terms of the arrangement at origination of the 
credit risk mitigant contain a positive incentive for the System 
institution to call the transaction before contractual maturity, the 
remaining time to the first call date is the residual maturity of the 
credit risk mitigant.

[[Page 49799]]

    (4) A credit risk mitigant with a maturity mismatch may be 
recognized only if its original maturity is greater than or equal to 1 
year and its residual maturity is greater than 3 months.
    (5) When a maturity mismatch exists, the System institution must 
apply the following adjustment to reduce the effective notional amount 
of the credit risk mitigant:

Pm = E x [(t-0.25)/(T-0.25)]

Where:

Pm = effective notional amount of the credit risk mitigant, adjusted 
for maturity mismatch;
E = effective notional amount of the credit risk mitigant;
t = the lesser of T or the residual maturity of the credit risk 
mitigant, expressed in years; and
T = the lesser of 5 or the residual maturity of the hedged exposure, 
expressed in years.

    (e) Adjustment for credit derivatives without restructuring as a 
credit event. If a System institution recognizes an eligible credit 
derivative that does not include as a credit event a restructuring of 
the hedged exposure involving forgiveness or postponement of principal, 
interest, or fees that results in a credit loss event (that is, a 
charge-off, specific provision, or other similar debit to the profit 
and loss account), the System institution must apply the following 
adjustment to reduce the effective notional amount of the credit 
derivative:

Pr = Pm x 0.60

Where:

Pr = effective notional amount of the credit risk mitigant, adjusted 
for lack of restructuring event (and maturity mismatch, if 
applicable); and
Pm = effective notional amount of the credit risk mitigant (adjusted 
for maturity mismatch, if applicable).

    (f) Currency mismatch adjustment. (1) If a System institution 
recognizes an eligible guarantee or eligible credit derivative that is 
denominated in a currency different from that in which the hedged 
exposure is denominated, the System institution must apply the 
following formula to the effective notional amount of the guarantee or 
credit derivative:

Pc = Pr x (1-Hfx)

Where:

Pc = effective notional amount of the credit risk mitigant, adjusted 
for currency mismatch (and maturity mismatch and lack of 
restructuring event, if applicable);
Pr = effective notional amount of the credit risk mitigant (adjusted 
for maturity mismatch and lack of restructuring event, if 
applicable); and
Hfx = haircut appropriate for the currency mismatch between the 
credit risk mitigant and the hedged exposure.

    (2) A System institution must set Hfx equal to 8 percent.
    (3) A System institution must adjust Hfx calculated in paragraph 
(f)(2) of this section upward if the System institution revalues the 
guarantee or credit derivative less frequently than once every 10 
business days using the following square root of time formula:
[GRAPHIC] [TIFF OMITTED] TR28JY16.001

    Where TM equals the greater of 10 or the number of days between 
revaluation.


Sec.  628.37  Collateralized transactions.

    (a) General. (1) To recognize the risk-mitigating effects of 
financial collateral, a System institution may use:
    (i) The simple approach in paragraph (b) of this section for any 
exposure.
    (ii) The collateral haircut approach in paragraph (c) of this 
section for repo-style transactions, eligible margin loans, 
collateralized derivative contracts, and single-product netting sets of 
such transactions.
    (2) A System institution may use any approach described in this 
section that is valid for a particular type of exposure or transaction; 
however, it must use the same approach for similar exposures or 
transactions.
    (b) The simple approach--(1) General requirements. (i) A System 
institution may recognize the credit risk mitigation benefits of 
financial collateral that secures any exposure.
    (ii) To qualify for the simple approach, the financial collateral 
must meet the following requirements:
    (A) The collateral must be subject to a collateral agreement for at 
least the life of the exposure;
    (B) The collateral must be revalued at least every 6 months; and
    (C) The collateral (other than gold) and the exposure must be 
denominated in the same currency.
    (2) Risk-weight substitution. (i) A System institution may apply a 
risk weight to the portion of an exposure that is secured by the fair 
value of financial collateral (that meets the requirements of paragraph 
(b)(1) of this section) based on the risk weight assigned to the 
collateral under Sec.  628.32. For repurchase agreements, reverse 
repurchase agreements, and securities lending and borrowing 
transactions, the collateral is the instruments, gold, and cash the 
System institution has borrowed, purchased subject to resale, or taken 
as collateral from the counterparty under the transaction. Except as 
provided in paragraph (b)(3) of this section, the risk weight assigned 
to the collateralized portion of the exposure may not be less than 20 
percent.
    (ii) A System institution must apply a risk weight to the unsecured 
portion of the exposure based on the risk weight assigned to the 
exposure under this subpart.
    (3) Exceptions to the 20-percent risk-weight floor and other 
requirements. Notwithstanding paragraph (b)(2)(i) of this section:
    (i) A System institution may assign a 0-percent risk weight to an 
exposure to an OTC derivative contract that is marked-to-fair on a 
daily basis and subject to a daily margin maintenance requirement, to 
the extent the contract is collateralized by cash on deposit.
    (ii) A System institution may assign a 10-percent risk weight to an 
exposure to an OTC derivative contract that is marked-to-fair value 
daily and subject to a daily margin maintenance requirement, to the 
extent that the contract is collateralized by an exposure to a 
sovereign that qualifies for a 0-percent risk weight under Sec.  
628.32.
    (iii) A System institution may assign a 0-percent risk weight to 
the collateralized portion of an exposure where:
    (A) The financial collateral is cash on deposit; or
    (B) The financial collateral is an exposure to a sovereign that 
qualifies for a 0-percent risk weight under Sec.  628.32, and the 
System institution has discounted the fair value of the collateral by 
20 percent.
    (c) Collateral haircut approach--(1) General. A System institution 
may recognize the credit risk mitigation benefits of financial 
collateral that secures an eligible margin loan, repo-style 
transaction, collateralized derivative contract, or single-product 
netting set of such transactions by using the standard supervisory 
haircuts in paragraph (c)(3) of this section.
    (2) Exposure amount equation. A System institution must determine 
the exposure amount for an eligible margin loan, repo-style 
transaction, collateralized derivative contract, or a single-product 
netting set of such transactions by setting the exposure amount equal 
to max:

{0, [([sum]E--[sum]C) + [sum](Es x Hs) + [sum](Efx x Hfx)]{time} 

Where:

[sum]E = for eligible margin loans and repo-style transactions and 
netting sets thereof, the

[[Page 49800]]

value of the exposure (the sum of the current fair values of all 
instruments, gold, and cash the System institution has lent, sold 
subject to repurchase, or posted as collateral to the counterparty 
under the transaction (or netting set)); and
[sum]E = for collateralized derivative contracts and netting sets 
thereof, the exposure amount of the OTC derivative contract (or 
netting set) calculated under Sec.  628.34(c) or (d).
[sum]C = the value of the collateral (the sum of the current fair 
values of all instruments, gold and cash the System institution has 
borrowed, purchased subject to resale, or taken as collateral from 
the counterparty under the transaction (or netting set));
Es = the absolute value of the net position in a given 
instrument or in gold (where the net position in the instrument or 
gold equals the sum of the current fair values of the instrument or 
gold the System institution has lent, sold subject to repurchase, or 
posted as collateral to the counterparty minus the sum of the 
current fair values of that same instrument or gold the System 
institution has borrowed, purchased subject to resale, or taken as 
collateral from the counterparty);
Hs = the fair value price volatility haircut appropriate to the 
instrument or gold referenced in Es;
Efx = the absolute value of the net position of instruments and cash 
in a currency that is different from the settlement currency (where 
the net position in a given currency equals the sum of the current 
fair values of any instruments or cash in the currency the System 
institution has lent, sold subject to repurchase, or posted as 
collateral to the counterparty minus the sum of the current fair 
values of any instruments or cash in the currency the System 
institution has borrowed, purchased subject to resale, or taken as 
collateral from the counterparty); and
Hfx = the haircut appropriate to the mismatch between the currency 
referenced in Efx and the settlement currency.

    (3) Standard supervisory haircuts. (i) A System institution must 
use the haircuts for fair value price volatility (Hs) provided in Table 
1 to Sec.  628.37, as adjusted in certain circumstances in accordance 
with the requirements of paragraphs (c)(3)(iii) and (iv) of this 
section:

                                    Table 1 to Sec.   628.37--Standard Supervisory Market Price Volatility Haircut 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Haircut (in percent) assigned based on
                                         ------------------------------------------------------------------------------------------------   Investment
                                             Sovereign issuers risk weight under Sec.      Non-sovereign issuers risk weight under Sec.        grade
            Residual maturity                               628.32 \2\                                        628.32                      securitization
                                         ------------------------------------------------------------------------------------------------ exposures  (in
                                               Zero         20% or -50%        100%             20%             50%            100%          percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than or equal to 1 year............             0.5             1.0            15.0             1.0             2.0            25.0            4.0%
Great than 1 years and less than and                 2.0             3.0            15.0             4.0             6.0            25.0           12.0%
 equal to 5 years.......................
Greater than 5 years....................             4.0             6.0            15.0             8.0            12.0            25.0           24.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
               Main index equities (including convertible bonds) and go15.0%
             Other publically traded equities (including convertible bo25.0%
                                      MutuaHighest haircut applicable to any security in which the fund
                                                                    can invest
                                     Cash collateral                    0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircut in Table 1 to Sec.   628.37 are based on 10-day holding period.
\2\ Includes a foreign PSE that receives a 0-percent risk weight.

    (ii) For currency mismatches, a System institution must use a 
haircut for foreign exchange rate volatility (Hfx) of 8 
percent, as adjusted in certain circumstances under paragraphs 
(c)(3)(iii) and (iv) of this section.
    (iii) For repo-style transactions, a System institution may 
multiply the standard supervisory haircuts provided in paragraphs 
(c)(3)(i) and (ii) of this section by the square root of \1/2\ (which 
equals 0.707107).
    (iv) If the number of trades in a netting set exceeds 5,000 at any 
time during a quarter, a System institution must adjust the supervisory 
haircuts provided in paragraphs (c)(3)(i) and (ii) of this section 
upward on the basis of a holding period of 20 business days for the 
following quarter except in the calculation of the exposure amount for 
purposes of Sec.  628.35. If a netting set contains one or more trades 
involving illiquid collateral or an OTC derivative that cannot be 
easily replaced, a System institution must adjust the supervisory 
haircuts upward on the basis of a holding period of 20 business days. 
If over the 2 previous quarters more than two margin disputes on a 
netting set have occurred that lasted more than the holding period, 
then the System institution must adjust the supervisory haircuts upward 
for that netting set on the basis of a holding period that is at least 
two times the minimum holding period for that netting set. A System 
institution must adjust the standard supervisory haircuts upward using 
the following formula:
[GRAPHIC] [TIFF OMITTED] TR28JY16.002

Where:

TM = a holding period of longer than 10 business days for eligible 
margin loans and derivative contracts or longer than 5 business days 
for repo-style transactions;
HS = the standard supervisory haircut; and
TS = 10 business days for eligible margin loans and derivative 
contracts or 5 business days for repo-style transactions.

    (v) If the instrument a System institution has lent, sold subject 
to repurchase, or posted as collateral does not meet the definition of 
financial collateral in Sec.  628.2, the System institution must use a 
25-percent haircut for fair value price volatility (HS).
    (4) [Reserved]

Risk-Weighted Assets for Unsettled Transactions


Sec.  628.38  Unsettled transactions.

    (a) Definitions. For purposes of this section:
    (1) Delivery-versus-payment (DvP) transaction means a securities or 
commodities transaction in which the buyer is obligated to make payment 
only if the seller has made delivery of the securities or commodities 
and the seller is obligated to deliver the securities or commodities 
only if the buyer has made payment.
    (2) Payment-versus-payment (PvP) transaction means a foreign 
exchange transaction in which each counterparty is obligated to make a 
final transfer of one or more currencies only if the other counterparty 
has made a final transfer of one or more currencies.
    (3) A transaction has a normal settlement period if the contractual 
settlement period for the transaction is equal to or less than the fair 
value standard for the instrument underlying the transaction and equal 
to or less than 5 business days.

[[Page 49801]]

    (4) Positive current exposure of a System institution for a 
transaction is the difference between the transaction value at the 
agreed settlement price and the current fair value price of the 
transaction, if the difference results in a credit exposure of the 
System institution to the counterparty.
    (b) Scope. This section applies to all transactions involving 
securities, foreign exchange instruments, and commodities that have a 
risk of delayed settlement or delivery. This section does not apply to:
    (1) Cleared transactions that are marked-to-fair value daily and 
subject to daily receipt and payment of variation margin;
    (2) Repo-style transactions, including unsettled repo-style 
transactions;
    (3) One-way cash payments on OTC derivative contracts; or
    (4) Transactions with a contractual settlement period that is 
longer than the normal settlement period (which are treated as OTC 
derivative contracts as provided in Sec.  628.34).
    (c) System-wide failures. In the case of a system-wide failure of a 
settlement, clearing system or central counterparty, the FCA may waive 
risk-based capital requirements for unsettled and failed transactions 
until the situation is rectified.
    (d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP) 
transactions. A System institution must hold risk-based capital against 
any DvP or PvP transaction with a normal settlement period if the 
System institution's counterparty has not made delivery or payment 
within 5 business days after the settlement date. The System 
institution must determine its risk-weighted asset amount for such a 
transaction by multiplying the positive current exposure of the 
transaction for the System institution by the appropriate risk weight 
in Table 1 to Sec.  628.38.

    Table 1 to Sec.   628.38--Risk Weights for Unsettled DVP and PVP
                              Transactions
------------------------------------------------------------------------
                                                          Risk weight to
                                                           be applied to
  Number of business days after contractual settlement       positive
                          date                                current
                                                           exposure  (in
                                                             percent)
------------------------------------------------------------------------
From 5 to 15............................................           100.0
From 16 to 30...........................................           625.0
From 31 to 45...........................................           937.5
46 or more..............................................         1,250.0
------------------------------------------------------------------------

    (e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-
versus-payment) transactions. (1) A System institution must hold risk-
based capital against any non-DvP/non-PvP transaction with a normal 
settlement period if the System institution has delivered cash, 
securities, commodities, or currencies to its counterparty but has not 
received its corresponding deliverables by the end of the same business 
day. The System institution must continue to hold risk-based capital 
against the transaction until the System institution has received its 
corresponding deliverables.
    (2) From the business day after the System institution has made its 
delivery until 5 business days after the counterparty delivery is due, 
the System institution must calculate the risk-weighted asset amount 
for the transaction by treating the current fair value of the 
deliverables owed to the System institution as an exposure to the 
counterparty and using the applicable counterparty risk weight under 
Sec.  628.32.
    (3) If the System institution has not received its deliverables by 
the 5th business day after counterparty delivery was due, the System 
institution must assign a 1,250-percent risk weight to the current fair 
value of the deliverables owed to the System institution.
    (f) Total risk-weighted assets for unsettled transactions. Total 
risk-weighted assets for unsettled transactions is the sum of the risk-
weighted asset amounts of all DvP, PvP, and non-DvP/non-PvP 
transactions.


Sec. Sec.  628.39 through 628.40  [Reserved]

Risk-Weighted Assets for Securitization Exposures


Sec.  628.41  Operational requirements for securitization exposures.

    (a) Operational criteria for traditional securitizations. A System 
institution that transfers exposures it has originated or purchased to 
a third party in connection with a traditional securitization may 
exclude the exposures from the calculation of its risk-weighted assets 
only if each condition in this section is satisfied. A System 
institution that meets these conditions must hold risk-based capital 
against any credit risk it retains in connection with the 
securitization. A System institution that fails to meet these 
conditions must hold risk-based capital against the transferred 
exposures as if they had not been securitized and must deduct from CET1 
capital, pursuant to Sec.  628.22, any after-tax gain-on-sale resulting 
from the transaction. The conditions are:
    (1) The exposures are not reported on the System institution's 
consolidated balance sheet under GAAP;
    (2) The System institution has transferred to one or more third 
parties credit risk associated with the underlying exposures;
    (3) Any clean-up calls relating to the securitization are eligible 
clean-up calls; and
    (4) The securitization does not:
    (i) Include one or more underlying exposures in which the borrower 
is permitted to vary the drawn amount within an agreed limit under a 
line of credit; and
    (ii) Contain an early amortization provision.
    (b) Operational criteria for synthetic securitizations. For 
synthetic securitizations, a System institution may recognize for risk-
based capital purposes the use of a credit risk mitigant to hedge 
underlying exposures only if each condition in this paragraph is 
satisfied. A System institution that meets these conditions must hold 
risk-based capital against any credit risk of the exposures it retains 
in connection with the synthetic securitization. A System institution 
that fails to meet these conditions or chooses not to recognize the 
credit risk mitigant for purposes of this section must instead hold 
risk-based capital against the underlying exposures as if they had not 
been synthetically securitized. The conditions are:
    (1) The credit risk mitigant is:
    (i) Financial collateral;
    (ii) A guarantee that meets all criteria set forth in the 
definition of ``eligible guarantee'' in Sec.  628.2, except for the 
criteria in paragraph (3) of that definition; or
    (iii) A credit derivative that meets all criteria as set forth in 
the definition of ``eligible credit derivative'' in Sec.  628.2, except 
for the criteria in paragraph (3) of the definition of ``eligible 
guarantee'' in Sec.  628.2.
    (2) The System institution transfers credit risk associated with 
the underlying exposures to one or more third parties, and the terms 
and conditions in the credit risk mitigants employed do not include 
provisions that:
    (i) Allow for the termination of the credit protection due to 
deterioration in the credit quality of the underlying exposures;
    (ii) Require the System institution to alter or replace the 
underlying exposures to improve the credit quality of the pool of 
underlying exposures;
    (iii) Increase the System institution's cost of credit protection 
in response to deterioration in the credit quality of the underlying 
exposures;
    (iv) Increase the yield payable to parties other than the System 
institution in response to a deterioration in the

[[Page 49802]]

credit quality of the underlying exposures; or
    (v) Provide for increases in a retained first loss position or 
credit enhancement provided by the System institution after the 
inception of the securitization;
    (3) The System institution obtains a well-reasoned opinion from 
legal counsel that confirms the enforceability of the credit risk 
mitigant in all relevant jurisdictions; and
    (4) Any clean-up calls relating to the securitization are eligible 
clean-up calls.
    (c) Due diligence requirements. (1) Except for exposures that are 
deducted from CET1 capital (pursuant to Sec.  628.22) and exposures 
subject to Sec.  628.42(h), if a System institution is unable to 
demonstrate to the satisfaction of the FCA a comprehensive 
understanding of the features of a securitization exposure that would 
materially affect the performance of the exposure, the System 
institution must assign the securitization exposure a risk weight of 
1,250 percent. The System institution's analysis must be commensurate 
with the complexity of the securitization exposure and the materiality 
of the exposure in relation to its capital.
    (2) A System institution must demonstrate its comprehensive 
understanding of a securitization exposure under paragraph (c)(1) of 
this section for each securitization exposure by:
    (i) Conducting an analysis of the risk characteristics of a 
securitization exposure prior to acquiring the exposure, and 
documenting such analysis within 3 business days after acquiring the 
exposure, considering:
    (A) Structural features of the securitization that would materially 
impact the performance of the exposure, for example, the contractual 
cash flow waterfall, waterfall-related triggers, credit enhancements, 
liquidity enhancements, fair value triggers, the performance of 
organizations that service the exposure, and deal-specific definitions 
of default;
    (B) Relevant information regarding the performance of the 
underlying credit exposure(s), for example, the percentage of loans 30, 
60, and 90 days past due; default rates; prepayment rates; loans in 
foreclosure; property types; occupancy; average credit score or other 
measures of creditworthiness; average loan-to-value (LTV) ratio; and 
industry and geographic diversification data on the underlying 
exposure(s);
    (C) Relevant market data of the securitization, for example, bid-
ask spread, most recent sales price and historic price volatility, 
trading volume, implied market rating, and size, depth and 
concentration level of the market for the securitization; and
    (D) For resecuritization exposures, performance information on the 
underlying securitization exposures, for example, the issuer name and 
credit quality, and the characteristics and performance of the 
exposures; and
    (ii) On an on-going basis (no less frequently than quarterly), 
evaluating, reviewing, and updating as appropriate the analysis 
required under paragraph (c)(1) of this section for each securitization 
exposure.


Sec.  628.42  Risk-weighted assets for securitization exposures.

    (a) Securitization risk weight approaches. Except as provided in 
this section or in Sec.  628.41:
    (1) A System institution must deduct from CET1 capital any after-
tax gain-on-sale resulting from a securitization (as provided in Sec.  
628.22) and must apply a 1,250-percent risk weight to the portion of a 
credit-enhancing interest-only strip (CEIO) that does not constitute 
after-tax gain-on-sale.
    (2) If a securitization exposure does not require deduction under 
paragraph (a)(1) of this section, a System institution may assign a 
risk weight to the securitization exposure using the simplified 
supervisory formula approach (SSFA) in accordance with Sec.  628.43(a) 
through (d) and subject to the limitation under paragraph (e) of this 
section. Alternatively, a System institution may assign a risk weight 
to the purchased securitization exposure using the gross-up approach in 
accordance with Sec.  628.43(e), provided however, that such System 
institution must apply either the SSFA or the gross-up approach 
consistently across all of its securitization exposures, except as 
provided in paragraphs (a)(1), (3), and (4) of this section.
    (3) If a securitization exposure does not require deduction under 
paragraph (a)(1) of this section and the System institution cannot or 
chooses not to apply the SSFA or the gross-up approach to the exposure, 
the System institution must assign a risk weight to the exposure as 
described in Sec.  628.44.
    (4) If a securitization exposure is a derivative contract (other 
than protection provided by a System institution in the form of a 
credit derivative) that has a first priority claim on the cash flows 
from the underlying exposures (notwithstanding amounts due under 
interest rate or currency derivative contracts, fees due, or other 
similar payments), a System institution may choose to set the risk-
weighted asset amount of the exposure equal to the amount of the 
exposure as determined in paragraph (c) of this section.
    (b) Total risk-weighted assets for securitization exposures. A 
System institution's total risk-weighted assets for securitization 
exposures equals the sum of the risk-weighted asset amount for 
securitization exposures that the System institution risk weights under 
paragraph (a)(1) of this section, Sec.  628.41(c), and Sec.  628.43, 
Sec.  628.44, or Sec.  628.45, except as provided in paragraphs (e) 
through (j) of this section, as applicable.
    (c) Exposure amount of a securitization exposure. (1) [Reserved]
    (2) On-balance sheet securitization exposures (available-for-sale 
or held-to-maturity securities). The exposure amount of an on-balance 
sheet securitization exposure that is an available-for-sale or held-to-
maturity security is the System institution's carrying value (including 
net accrued but unpaid interest and fees), less any net unrealized 
gains on the exposure and plus any net unrealized losses on the 
exposure.
    (3) Off-balance sheet securitization exposures. (i) Except as 
provided in paragraph (j) of this section, the exposure amount of an 
off-balance sheet securitization that is not a repo-style transaction, 
an eligible margin loan, a cleared transaction (other than a credit 
derivative), or an OTC derivative contract (other than a credit 
derivative) is the notional amount of the exposure.
    (ii) [Reserved]
    (iii) [Reserved]
    (4) Repo-style transactions, eligible margin loans, and derivative 
contracts. The exposure amount of a securitization exposure that is a 
repo-style transaction, an eligible margin loan, or a derivative 
contract (other than a credit derivative) is the exposure amount of the 
transaction as calculated under Sec.  628.34 or Sec.  628.37 as 
applicable.
    (d) Overlapping exposures. If a System institution has multiple 
securitization exposures that provide duplicative coverage to the 
underlying exposures of a securitization, the System institution is not 
required to hold duplicative risk-based capital against the overlapping 
position. Instead, the System institution may apply to the overlapping 
position the applicable risk-based capital treatment that results in 
the highest risk-based capital requirement.
    (e) Implicit support. If a System institution provides support to a 
securitization in excess of the System institution's contractual 
obligation to provide credit support to the securitization (implicit 
support):

[[Page 49803]]

    (1) The System institution must include in risk-weighted assets all 
of the underlying exposures associated with the securitization as if 
the exposures had not been securitized and must deduct from CET1 
capital (pursuant to Sec.  628.22) any after-tax gain-on-sale resulting 
from the securitization; and
    (2) The System institution must disclose publicly:
    (i) That it has provided implicit support to the securitization; 
and
    (ii) The risk-based capital impact to the System institution of 
providing such implicit support.
    (f) Undrawn portion of an eligible servicer cash advance facility. 
(1) Notwithstanding any other provision of this subpart, a System 
institution that is a servicer under an eligible servicer cash advance 
facility is not required to hold risk-based capital against potential 
future cash advance payments that it may be required to provide under 
the contract governing the facility.
    (2) For a System institution that acts as a servicer, the exposure 
amount for a servicer cash advance facility that is not an eligible 
cash advance facility is equal to the amount of all potential future 
cash payments that the System institution may be contractually required 
to provide during the subsequent 12-month period under the governing 
facility.
    (g) Interest-only mortgage-backed securities. Regardless of any 
other provisions of this subpart, the risk weight for a non-credit-
enhancing interest-only mortgage-backed security may not be less than 
100 percent.
    (h) Small-business loans and leases on personal property 
transferred with retained contractual exposure. (1) Regardless of any 
other provisions of this subpart, a System institution that has 
transferred small-business loans and leases on personal property 
(small-business obligations) must include in risk-weighted assets only 
its contractual exposure to the small-business obligations if all the 
following conditions are met:
    (i) The transaction must be treated as a sale under GAAP.
    (ii) The System institution establishes and maintains, pursuant to 
GAAP, a non-capital reserve sufficient to meet the System institution's 
reasonably estimated liability under the contractual obligation.
    (iii) The small business obligations are to businesses that meet 
the criteria for a small-business concern established by the Small 
Business Administration under section 3(a) of the Small Business Act.
    (iv) [Reserved]
    (2) The total outstanding amount of contractual exposure retained 
by a System institution on transfers of small-business obligations 
receiving the capital treatment specified in paragraph (h)(1) of this 
section cannot exceed 15 percent of the System institution's total 
capital.
    (3) If a System institution exceeds the 15-percent capital 
limitation provided in paragraph (h)(2) of this section, the capital 
treatment under paragraph (h)(1) of this section will continue to apply 
to any transfers of small-business obligations with retained 
contractual exposure that occurred during the time that the System 
institution did not exceed the capital limit.
    (4) [Reserved]
    (i) [Reserved]
    (ii) [Reserved]
    (i) Nth-to-default credit derivatives--(1) Protection provider. A 
System institution must assign a risk weight to an nth-to-default 
credit derivative in accordance with FCA guidance.
    (2) [Reserved]
    (3) [Reserved]
    (4) Protection purchaser--(i) First-to-default credit derivatives. 
A System institution that obtains credit protection on a group of 
underlying exposures through a first-to-default credit derivative that 
meets the rules of recognition of Sec.  628.36(b) must determine its 
risk-based capital requirement for the underlying exposures as if the 
System institution synthetically securitized the underlying exposure 
with the smallest risk-weighted asset amount and had obtained no credit 
risk mitigant on the other underlying exposures. A System institution 
must calculate a risk-based capital requirement for counterparty credit 
risk according to Sec.  628.34 for a first-to-default credit derivative 
that does not meet the rules of recognition of Sec.  628.36(b).
    (ii) Second-or-subsequent-to-default credit derivatives. (A) A 
System institution that obtains credit protection on a group of 
underlying exposures through a nth-to-default credit derivative that 
meets the rules of recognition of Sec.  628.36(b) (other than a first-
to-default credit derivative) may recognize the credit risk mitigation 
benefits of the derivative only if:
    (1) The System institution also has obtained credit protection on 
the same underlying exposures in the form of first-through-(n-1)-to-
default credit derivatives; or
    (2) If n-1 of the underlying exposures have already defaulted.
    (B) If a System institution satisfies the requirements of paragraph 
(i)(4)(ii)(A) of this section, the System institution must determine 
its risk-based capital requirement for the underlying exposures as if 
the System institution had only synthetically securitized the 
underlying exposure with the nth smallest risk-weighted asset amount 
and had obtained no credit risk mitigant on the underlying exposures.
    (C) A System institution must calculate a risk-based capital 
requirement for counterparty credit risk according to Sec.  628.34 for 
a nth-to-default credit derivative that does not meet the rules of 
recognition of Sec.  628.36(b).
    (j) Guarantees and credit derivatives other than nth-to-default 
credit derivatives--(1) Protection provider. For a guarantee or credit 
derivative (other than an nth-to-default credit derivative) provided by 
a System institution that covers the full amount or a pro rata share of 
a securitization exposure's principal and interest, the System 
institution must risk weight the guarantee or credit derivative in 
accordance with FCA guidance.
    (2) Protection purchaser. (i) A System institution that purchases a 
guarantee or OTC credit derivative (other than an nth-to-default credit 
derivative) that is recognized under Sec.  628.45 as a credit risk 
mitigant (including via collateral recognized under Sec.  628.37) is 
not required to compute a separate credit risk capital requirement 
under Sec.  628.31, in accordance with Sec.  628.34(c).
    (ii) If a System institution cannot, or chooses not to, recognize a 
purchased credit derivative as a credit risk mitigant under Sec.  
628.45, the System institution must determine the exposure amount of 
the credit derivative under Sec.  628.34.
    (A) If the System institution purchases credit protection from a 
counterparty that is not a securitization special purpose entity (SPE), 
the System institution must determine the risk weight for the exposure 
according to general risk weights under Sec.  628.32.
    (B) If the System institution purchases the credit protection from 
a counterparty that is a securitization SPE, the System institution 
must determine the risk weight for the exposure according to this 
section, including paragraph (a)(4) of this section for a credit 
derivative that has a first priority claim on the cash flows from the 
underlying exposures of the securitization SPE (notwithstanding amounts 
due under interest rate or currency derivative contracts, fees due, or 
other similar payments).


Sec.  628.43  Simplified supervisory formula approach (SSFA) and the 
gross-up approach.

    (a) General requirements for the SSFA. To use the SSFA to determine 
the

[[Page 49804]]

risk weight for a securitization exposure, a System institution must 
have data that enables it to assign accurately the parameters described 
in paragraph (b) of this section. Data used to assign the parameters 
described in paragraph (b) of this section must be the most currently 
available data; if the contract governing the underlying exposures of 
the securitization require payment on a monthly or quarterly basis, the 
data used to assign the parameters described in paragraph (b) of this 
section must be no more than 91 calendar days old. A System institution 
that does not have the appropriate data to assign the parameters 
described in paragraph (b) of this section must assign a risk weight of 
1,250 percent to the exposure.
    (b) SSFA parameters. To calculate the risk weight for a 
securitization exposure using the SSFA, a System institution must have 
accurate information on the following five inputs to the SSFA 
calculation:
    (1) KG is the weighted-average (with unpaid principal used as the 
weight for each exposure) total capital requirement of the underlying 
exposures calculated using this subpart. KG is expressed as a decimal 
value between 0 and 1 (that is, an average risk weight of 100 percent 
represents a value of KG equal to .08).
    (2) Parameter W is expressed as a decimal value between 0 and 1. 
Parameter W is the ratio of the sum of the dollar amounts of any 
underlying exposures within the securitized pool that meet any of the 
criteria as set forth in paragraphs (b)(2)(i) through (vi) of this 
section to the balance, measured in dollars, of underlying exposures:
    (i) Ninety (90) days or more past due;
    (ii) Subject to a bankruptcy or insolvency proceeding;
    (iii) In the process of foreclosure;
    (iv) Held as real estate owned;
    (v) Has contractually deferred interest payments for 90 days or 
more, other than principal or interest payments deferred on:
    (A) Federally guaranteed student loans, in accordance with the 
terms of those guarantee programs; or
    (B) Consumer loans, including non-federally guaranteed student 
loans, provided that such payments are deferred pursuant to provisions 
included in the contract at the time funds are disbursed that provide 
for periods(s) of deferral that are not initiated based on changes in 
the creditworthiness of the borrower; or
    (vi) Is in default.
    (3) Parameter A is the attachment point for the exposure, which 
represents the threshold at which credit losses will first be allocated 
to the exposure. Except as provided in Sec.  628.42(i) for nth-to-
default credit derivatives, parameter A equals the ratio of the current 
dollar amount of underlying exposures that are subordinated to the 
exposure of the System institution to the current dollar amount of 
underlying exposures. Any reserve account funded by the accumulated 
cash flows from the underlying exposures that is subordinated to the 
System institution's securitization exposure may be included in the 
calculation of parameter A to the extent that cash is present in the 
account. Parameter A is expressed as a decimal value between 0 and 1.
    (4) Parameter D is the detachment point for the exposure, which 
represents the threshold at which credit losses of principal allocated 
to the exposure would result in a total loss of principal. Except as 
provided in Sec.  628.42(i) for nth-to-default credit derivatives, 
parameter D equals parameter A plus the ratio of the current dollar 
amount of the securitization exposures that are pari passu with the 
exposure (that is, have equal seniority with respect to credit risk) to 
the current dollar amount of the underlying exposures. Parameter D is 
expressed as a decimal value between 0 and 1.
    (5) A supervisory calibration parameter, p, is equal to 0.5 for 
securitization exposures that are not resecuritization exposures and 
equal to 1.5 for resecuritization exposures.
    (c) Mechanics of the SSFA. KG and W are used to calculate KA, the 
augmented value of KG, which reflects the observed credit quality of 
the underlying pool of exposures. KA is defined in paragraph (d) of 
this section. The values of parameters A and D, relative to KA 
determine the risk weight assigned to a securitization exposure as 
described in paragraph (d) of this section. The risk weight assigned to 
a securitization exposure, or portion of a securitization exposure, as 
appropriate, is the larger of the risk weight determined in accordance 
with this paragraph (d) of this section and a risk weight of 20 
percent.
    (1) When the detachment point, parameter D, for a securitization 
exposure is less than or equal to KA, the exposure must be assigned a 
risk weight of 1,250 percent.
    (2) When the attachment point, parameter A, for a securitization 
exposure is greater than or equal to KA, the System institution must 
calculate the risk weight in accordance with paragraph (d) of this 
section.
    (3) When A is less than KA and D is greater than KA, the risk 
weight is a weighted average of 1,250 percent and 1,250 percent times 
KSSFA calculated in accordance with paragraph (d) of this section. For 
the purpose of this weighted-average calculation:
    (i) The weight assigned to 1,250 percent equals:
    [GRAPHIC] [TIFF OMITTED] TR28JY16.003
    
    (ii) The weight assigned to 1,250 percent times KSSFA equals:
    [GRAPHIC] [TIFF OMITTED] TR28JY16.004
    
    (iii) The risk weight will be set equal to:
    [GRAPHIC] [TIFF OMITTED] TR28JY16.005
    
    (d) SSFA equation. (1) The System institution must define the 
following parameters:

KA = (1 - W) x KG x (0.5 x W)

    (2) Then the System institution must calculate KSSFA according to 
the following equation:


[[Page 49805]]


[GRAPHIC] [TIFF OMITTED] TR28JY16.006

    (3) The risk weight for the exposure (expressed as a percent) is 
equal to KSSFA x 1,250.
    (e) Gross-up approach--(1) Applicability. A System institution may 
apply the gross-up approach set forth in this section instead of the 
SSFA to determine the risk weight of its securitization exposures, 
provided that it applies the gross-up approach to all of its 
securitization exposures, except as otherwise provided for certain 
securitization exposures in Sec. Sec.  628.44 and 628.45.
    (2) To use the gross-up approach, a System institution must 
calculate the following four inputs:
    (i) Pro rata share A, which is the par value of the System 
institution's securitization exposure X as a percent of the par value 
of the tranche in which the securitization exposure resides Y:
[GRAPHIC] [TIFF OMITTED] TR28JY16.007

    (ii) Enhanced amount B, which is the value of tranches that are 
more senior to the tranche in which the System institution's 
securitization resides;
    (iii) Exposure amount (carrying value) C of the System 
institution's securitization exposure calculated under Sec.  628.42(c); 
and
    (iv) Risk weight (RW), which is the weighted-average risk weight of 
underlying exposures in the securitization pool as calculated under 
this subpart. For example, RW for an asset-backed security with 
underlying car loans would be 100 percent.
    (3) Credit equivalent amount (CEA). The CEA of a securitization 
exposure under this section equals the sum of:
    (i) The exposure amount C of the System institution's 
securitization exposure; plus
    (ii) The pro rata share A multiplied by the enhanced amount B, each 
calculated in accordance with paragraph (e)(2) of this section:

CEA = C + (A x B)

    (4) Risk-weighted assets (RWA). To calculate RWA for a 
securitization exposure under the gross-up approach, a System 
institution must apply the RW calculated under paragraph (e)(2) of this 
section to the CEA calculated in paragraph (e)(3) of this section:

RWA = RW x CEA

    (f) Limitations. Notwithstanding any other provision of this 
section, a System institution must assign a risk weight of not less 
than 20 percent to a securitization exposure.


Sec.  628.44  Securitization exposures to which the SSFA and gross-up 
approach do not apply.

    (a) General requirement. A System institution must assign a 1,250-
percent risk weight to all securitization exposures to which the System 
institution does not apply the SSFA or the gross up approach under 
Sec.  628.43.
    (b) [Reserved]


Sec.  628.45  Recognition of credit risk mitigants for securitization 
exposures.

    (a) General. (1) An originating System institution that has 
obtained a credit risk mitigant to hedge its exposure to a synthetic or 
traditional securitization that satisfies the operational criteria 
provided in Sec.  628.41 may recognize the credit risk mitigant under 
Sec.  628.36 or Sec.  628.37, but only as provided in this section.
    (2) An investing System institution that has obtained a credit risk 
mitigant to hedge a securitization exposure may recognize the credit 
risk mitigant under Sec.  628.36 or Sec.  628.37, but only as provided 
in this section.
    (b) Mismatches. A System institution must make any applicable 
adjustment to the protection amount of an eligible guarantee or credit 
derivative as required in Sec.  628.36(d), (e), and (f) for any hedged 
securitization exposure. In the context of a synthetic securitization, 
when an eligible guarantee or eligible credit derivative covers 
multiple hedged exposures that have different residual maturities, the 
System institution must use the longest residual maturity of any of the 
hedged exposures as the residual maturity of all hedged exposures.


Sec. Sec.  628.46 through 628.50   [Reserved]

Risk-Weighted Assets for Equity Exposures


Sec.  628.51  Introduction and exposure measurement.

    (a) General. (1) To calculate its risk-weighted asset amounts for 
equity exposures that are not equity exposures to an investment fund, a 
System institution must use the Simple Risk-Weight Approach (SRWA) 
provided in Sec.  628.52. A System institution must use the look-
through approaches provided in Sec.  628.53 to calculate its risk-
weighted asset amounts for equity exposures to investment funds. Equity 
investments

[[Page 49806]]

(including preferred stock investments) in other System institutions, 
service corporations, and the Funding Corporation do not receive a risk 
weight, because they are deducted from capital in accordance with Sec.  
628.22.
    (2) [Reserved]
    (3) [Reserved]
    (b) Adjusted carrying value. For purposes of Sec. Sec.  628.51 
through 628.53, the adjusted carrying value of an equity exposure is:
    (1) For the on-balance sheet component of an equity exposure (other 
than an equity exposure that is classified as available-for-sale), the 
System institution's carrying value of the exposure;
    (2) For the on-balance sheet component of an equity exposure that 
is classified as available-for-sale, the System institution's carrying 
value of the exposure less any net unrealized gains on the exposure 
that are reflected in such carrying value but excluded from the System 
institution's regulatory capital components;
    (3) For the off-balance sheet component of an equity exposure that 
is not an equity commitment, the effective notional principal amount of 
the exposure, the size of which is equivalent to a hypothetical on-
balance sheet position in the underlying equity instrument that would 
evidence the same change in fair value (measured in dollars) given a 
small change in the price of the underlying equity instrument, minus 
the adjusted carrying value of the on-balance sheet component of the 
exposure as calculated in paragraph (b)(1) of this section; and
    (4) For a commitment to acquire an equity exposure (an equity 
commitment), the effective notional principal amount of the exposure is 
multiplied by the following conversion factors (CFs):
    (i) Conditional equity commitments with an original maturity of 14 
months or less receive a CF of 20 percent.
    (ii) Conditional equity commitments with an original maturity of 
over 14 months receive a CF of 50 percent.
    (iii) Unconditional equity commitments receive a CF of 100 percent.


Sec.  628.52  Simple risk-weight approach (SRWA).

    (a) General. Under the SRWA, a System institution's total risk-
weighted assets for equity exposures equals the sum of the risk-
weighted asset amounts for each of the System institution's individual 
equity exposures (other than equity exposures to an investment fund) as 
determined under this section and the risk-weighted asset amounts for 
each of the System institution's individual equity exposures to an 
investment fund as determined under Sec.  628.53.
    (b) SRWA computation for individual equity exposures. A System 
institution must determine the risk-weighted asset amount for an 
individual equity exposure (other than an equity exposure to an 
investment fund) by multiplying the adjusted carrying value of the 
equity exposure or the effective portion and ineffective portion of a 
hedge pair (as defined in paragraph (c) of this section) by the lowest 
applicable risk weight in this paragraph.
    (1) Zero-percent (0%) risk weight equity exposures. An equity 
exposure to a sovereign, the Bank for International Settlements, the 
European Central Bank, the European Commission, the International 
Monetary Fund, an MDB, and any other entity whose credit exposures 
receive a 0-percent risk weight under Sec.  628.32 may be assigned a 0-
percent risk weight.
    (2) Twenty-percent (20%) risk weight equity exposures. An equity 
exposure to a PSE or the Federal Agricultural Mortgage Corporation 
(Farmer Mac) must be assigned a 20-percent risk weight.
    (3) One hundred-percent (100%) risk weight equity exposures. The 
equity exposures set forth in this paragraph (b)(3) must be assigned a 
100-percent risk weight:
    (i) [Reserved]
    (ii) Effective portion of hedge pairs. The effective portion of a 
hedge pair.
    (iii) Non-significant equity exposures. Equity exposures, excluding 
exposures to an investment firm that would meet the definition of a 
traditional securitization in Sec.  628.2 were it not for the 
application of paragraph (8) of that definition and has greater than 
immaterial leverage, to the extent that aggregate adjusted carrying 
value of the exposures does not exceed 10 percent of the System 
institution's total capital.
    (A) Equity exposures subject to paragraph (b)(3)(iii) of this 
section include:
    (1) Equity exposures to unconsolidated unincorporated business 
entities and equity exposures held through consolidated unincorporated 
business entities, as authorized by subpart J of part 611 of this 
chapter; and
    (2) [Reserved]
    (3) Equity exposures to an unconsolidated rural business investment 
company and equity exposures held through a consolidated rural business 
investment company described in 7 U.S.C. 2009cc et seq.
    (B) To compute the aggregate adjusted carrying value of a System 
institution's equity exposures for purposes of this section, the System 
institution may exclude equity exposures described in paragraphs (b)(1) 
and (2) and (b)(3)(ii) of this section, the equity exposure in a hedge 
pair with the smaller adjusted carrying value, and a proportion of each 
equity exposure to an investment fund equal to the proportion of the 
assets of the investment fund that are not equity exposures or that 
meet the criterion of paragraph (b)(3)(i) of this section. If a System 
institution does not know the actual holdings of the investment fund, 
the System institution may calculate the proportion of the assets of 
the fund that are not equity exposures based on the terms of the 
prospectus, partnership agreement, or similar contract that defines the 
fund's permissible investments. If the sum of the investment limits for 
all exposure classes within the fund exceeds 100 percent, the System 
institution must assume for purposes of this section that the 
investment fund invests to the maximum extent possible in equity 
exposures.
    (C) When determining which of a System institution's equity 
exposures qualify for a 100-percent risk weight under this paragraph, a 
System institution first must include equity exposures to 
unconsolidated rural business investment companies or held through 
consolidated rural business investment companies described in 7 U.S.C. 
2009cc et seq.; then must include equity exposures to unconsolidated 
unincorporated business entities and equity exposures held through 
consolidated unincorporated business entities, as authorized by subpart 
J of part 611 of this chapter; then must include publicly traded equity 
exposures (including those held indirectly through investment funds); 
and then must include non-publicly traded equity exposures (including 
those held indirectly through investment funds).
    (4) Other equity exposures. The risk weight for any equity exposure 
that does not qualify for a risk weight under paragraph (b)(1), (2), 
(3), or (7) of this section will be determined by the FCA.
    (5) [Reserved]
    (6) [Reserved]
    (7) Six hundred-percent (600%) risk weight equity exposures. An 
equity exposure to an investment firm must be assigned a 600-percent 
risk weight, provided that the investment firm:
    (i) Would meet the definition of a traditional securitization in 
Sec.  628.2 were it not for the application of paragraph (8) of that 
definition; and

[[Page 49807]]

    (ii) Has greater than immaterial leverage.
    (c) Hedge transactions--(1) Hedge pair. A hedge pair is two equity 
exposures that form an effective hedge so long as each equity exposure 
is publicly traded or has a return that is primarily based on a 
publicly traded equity exposure.
    (2) Effective hedge. Two equity exposures form an effective hedge 
if the exposures either have the same remaining maturity or each has a 
remaining maturity of at least 3 months; the hedge relationship is 
formally documented in a prospective manner (that is, before the System 
institution acquires at least one of the equity exposures); the 
documentation specifies the measure of effectiveness (E) the System 
institution will use for the hedge relationship throughout the life of 
the transaction; and the hedge relationship has an E greater than or 
equal to 0.8. A System institution must measure E at least quarterly 
and must use one of three alternative measures of E as set forth in 
this paragraph (c):
    (i) Under the dollar-offset method of measuring effectiveness, the 
System institution must determine the ratio of value change (RVC). The 
RVC is the ratio of the cumulative sum of the changes in value of one 
equity exposure to the cumulative sum of the changes in the value of 
the other equity exposure. If RVC is positive, the hedge is not 
effective and E equals 0. If RVC is negative and greater than or equal 
to -1 (that is, less than 0 and greater than or equal to -1), then E 
equals the absolute value of RVC. If RVC is negative and less than -1, 
then E equals 2 plus RVC.
    (ii) Under the variability-reduction method of measuring 
effectiveness:
[GRAPHIC] [TIFF OMITTED] TR28JY16.008

Where:

Xt = At x Bt;
At = the value at time t of one exposure in a hedge pair; and
Bt = the value at time t of the other exposure in a hedge pair.

    (iii) Under the regression method of measuring effectiveness, E 
equals the coefficient of determination of a regression in which the 
change in value of one exposure in a hedge pair is the dependent 
variable and the change in value of the other exposure in a hedge pair 
is the independent variable. However, if the estimated regression 
coefficient is positive, then E equals 0.
    (3) The effective portion of a hedge pair is E multiplied by the 
greater of the adjusted carrying values of the equity exposures forming 
a hedge pair.
    (4) The ineffective portion of a hedge pair is (1-E) multiplied by 
the greater of the adjusted carrying values of the equity exposures 
forming a hedge pair.


Sec.  628.53  Equity exposures to investment funds.

    (a) Available approaches. (1) A System institution must determine 
the risk-weighted asset amount of an equity exposure to an investment 
fund under the full look-through approach described in paragraph (b) of 
this section, the simple modified look-through approach described in 
paragraph (c) of this section, or the alterative modified look-through 
approach described paragraph (d) of this section, provided, however, 
that the minimum risk weight that may be assigned to an equity exposure 
under this section is 20 percent.
    (2) [Reserved]
    (3) If an equity exposure to an investment fund is part of a hedge 
pair and the System institution does not use the full look-through 
approach, the System institution must use the ineffective portion of 
the hedge pair as determined under Sec.  628.52(c) as the adjusted 
carrying value for the equity exposure to the investment fund. The 
risk-weighted asset amount of the effective portion of the hedge pair 
is equal to its adjusted carrying value.
    (b) Full look-through approach. A System institution that is able 
to calculate a risk-weighted asset amount for its proportional 
ownership share of each exposure held by the investment fund (as 
calculated under this subpart as if the proportional ownership share of 
the adjusted carrying value of each exposure were held directly by the 
System institution) may set the risk-weighted asset amount of the 
System institution's exposure to the fund equal to the product of:
    (1) The aggregate risk-weighted asset amounts of the exposures held 
by the fund as if they were held directly by the System institution; 
and
    (2) The System institution's proportional ownership share of the 
fund.
    (c) Simple modified look-through approach. Under the simple 
modified look-through approach, the risk-weighted asset amount for a 
System institution's equity exposure to an investment fund equals the 
adjusted carrying value of the equity exposure multiplied by the 
highest risk weight that applies to any exposure the fund is permitted 
to hold under the prospectus, partnership agreement, or similar 
agreement that defines the fund's permissible investments (excluding 
derivative contracts that are used for hedging rather than speculative 
purposes and that do not constitute a material portion of the fund's 
exposures).
    (d) Alternative modified look-through approach. Under the 
alternative modified look-through approach, a System institution may 
assign the adjusted carrying value of an equity exposure to an 
investment fund on a pro rata basis to different risk weight categories 
under this subpart based on the investment limits in the fund's 
prospectus, partnership agreement, or similar contract that defines the 
fund's permissible investments. The risk-weighted asset amount for the 
System institution's equity exposure to the investment fund equals the 
sum of each portion of the adjusted carrying value assigned to an 
exposure type multiplied by the applicable risk weight under this 
subpart. If the sum of the investment limits for all exposure types 
within the fund exceeds 100 percent, the System institution must assume 
that the fund invests to the maximum extent permitted under its 
investment limits in the exposure type with the highest applicable risk 
weight under this subpart and continues to make investments in order of 
the exposure type with the next highest applicable risk weight under 
this subpart until the maximum total investment level is reached. If 
more than one exposure type applies to an exposure, the System 
institution must use the highest applicable risk weight. A System 
institution may exclude derivative contracts held by the fund that are 
used for hedging rather than for speculative

[[Page 49808]]

purposes and do not constitute a material portion of the fund's 
exposures.


Sec. Sec.  628.54 through 628.60   [Reserved]

Disclosures


Sec.  628.61  Purpose and scope.

    Sections 628.62 and 628.63 establish public disclosure requirements 
for each System bank related to the capital requirements contained in 
this part.


Sec.  628.62  Disclosure requirements.

    (a) A System bank must provide timely public disclosures each 
calendar quarter of the information in the applicable tables in Sec.  
628.63. The System bank must make these disclosures in its quarterly 
and annual reports to shareholders required in part 620 of this 
chapter. The System bank need not make these disclosures in the format 
set out in the applicable tables or all in the same location in a 
report, as long as a summary table specifically indicating the 
location(s) of all such disclosures is provided. If a significant 
change occurs, such that the most recent reported amounts are no longer 
reflective of the System bank's capital adequacy and risk profile, then 
a brief discussion of this change and its likely impact must be 
disclosed as soon as practicable thereafter. This disclosure 
requirement may be satisfied by providing a notice under Sec.  620.15 
of this chapter. Qualitative disclosures that typically do not change 
each quarter (for example, a general summary of the System bank's risk 
management objectives and policies, reporting system, and definitions) 
may be disclosed annually after the end of the 4th calendar quarter, 
provided that any significant changes are disclosed in the interim.
    (b) A System bank must have a formal disclosure policy approved by 
the board of directors that addresses its approach for determining the 
disclosures it makes. The policy must address the associated internal 
controls and disclosure controls and procedures. The board of directors 
and senior management are responsible for establishing and maintaining 
an effective internal control structure over financial reporting, 
including the disclosures required by this subpart, and must ensure 
that appropriate review of the disclosures takes place. The chief 
executive officer, the chief financial officer, and a designated board 
member must attest that the disclosures meet the requirements of this 
subpart.
    (c) If a System bank concludes that disclosure of specific 
proprietary or confidential commercial or financial information that it 
would otherwise be required to disclose under this section would 
compromise its position, then the System bank is not required to 
disclose that specific information pursuant to this section, but must 
disclose more general information about the subject matter of the 
requirement, together with the fact that, and the reason why, the 
specific items of information have not been disclosed.


Sec.  628.63  Disclosures.

    (a) Except as provided in Sec.  628.62, a System bank must make the 
disclosures described in Tables 1 through 10 of this section. The 
System bank must make these disclosures publicly available for each of 
the last 3 years (that is, 12 quarters) or such shorter period 
beginning on January 1, 2017.
    (b) A System bank must publicly disclose each quarter the 
following:
    (1) CET1 capital, tier 1 capital, and total capital ratios, 
including all the regulatory capital elements and all the regulatory 
adjustments and deductions needed to calculate the numerator of such 
ratios;
    (2) Total risk-weighted assets, including the different regulatory 
adjustments and deductions needed to calculate total risk-weighted 
assets;
    (3) Regulatory capital ratios during the transition period, 
including a description of all the regulatory capital elements and all 
regulatory adjustments and deductions needed to calculate the numerator 
and denominator of each capital ratio during the transition period; and
    (4) A reconciliation of regulatory capital elements as they relate 
to its balance sheet in any audited consolidated financial statements.

                                 Table 1 to Sec.   628.63--Scope of Application
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures..........................................  (a) The name of the top corporate entity in
                                                                    the group to which this subpart applies.\1\
                                                                   (b) A brief description of the differences in
                                                                    the basis for consolidating entities \2\ for
                                                                    accounting and regulatory purposes, with a
                                                                    description of those entities:
                                                                      (1) That are fully consolidated;
                                                                      (2) That are deconsolidated and deducted
                                                                       from total capital;
                                                                      (3) For which the total capital
                                                                       requirement is deducted; and
                                                                      (4) That are neither consolidated nor
                                                                       deducted (for example, where the
                                                                       investment in the entity is assigned a
                                                                       risk weight in accordance with this
                                                                       subpart).
                                                                   (c) Any restrictions, or other major
                                                                    impediments, on transfer of funds or total
                                                                    capital within the group.
Quantitative Disclosures.........................................  (d) [Reserved]
                                                                   (e) The aggregate amount by which actual
                                                                    total capital is less than the minimum total
                                                                    capital requirement in all subsidiaries,
                                                                    with total capital requirements and the
                                                                    name(s) of the subsidiaries with such
                                                                    deficiencies.
----------------------------------------------------------------------------------------------------------------
\1\ The System bank is the top corporate entity.
\2\ Entities include any subsidiaries authorized by the FCA, including operating subsidiaries, service
  corporations, and unincorporated business entities.


                                   Table 2 to Sec.   628.63--Capital Structure
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures..........................................  (a) Summary information on the terms and
                                                                    conditions of the main features of all
                                                                    regulatory capital instruments.
Quantitative Disclosures.........................................  (b) The amount of common equity tier 1
                                                                    capital, with separate disclosure of:
                                                                      (1) Common cooperative equities
                                                                        a. Statutory minimum purchased borrower
                                                                         stock;
                                                                        b. Other required member purchased
                                                                         stock;
                                                                        c. Allocated equities (stock or
                                                                         surplus):
                                                                          1. Qualified allocated equities
                                                                           subject to retirement;
                                                                          2. Nonqualified allocated equities
                                                                           subject to retirement;
                                                                          3. Nonqualified allocated equities not
                                                                           subject to retirement;
                                                                      (2) Unallocated retained earnings (URE);

[[Page 49809]]

 
                                                                      (3) Paid-in capital; and
                                                                      (4) Regulatory adjustments and deductions
                                                                       made to common equity tier 1 capital.
                                                                   (c) The amount of tier 1 capital, with
                                                                    separate disclosure of:
                                                                      (1) Additional tier 1 capital elements;
                                                                       and
                                                                      (2) Regulatory adjustments and deductions
                                                                       made to tier 1 capital.
                                                                   (d) The amount of total capital, with
                                                                    separate disclosure of:
                                                                      (1) Common cooperative equities not
                                                                       included in common equity tier 1 capital;
                                                                      (2) Tier 2 capital elements, including
                                                                       tier 2 capital instruments; and
                                                                      (3) Regulatory adjustments and deductions
                                                                       made to total capital, including
                                                                       deductions of third-party capital under
                                                                       Sec.   628.23.
----------------------------------------------------------------------------------------------------------------


                                   Table 3 to Sec.   628.63--Capital Adequacy
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative disclosures..........................................  (a) A summary discussion of the System bank's
                                                                    approach to assessing the adequacy of its
                                                                    capital to support current and future
                                                                    activities.
Quantitative disclosures.........................................  (b) Risk-weighted assets for:
                                                                      (1) Exposures to sovereign entities;
                                                                      (2) Exposures to certain supranational
                                                                       entities and MDBs;
                                                                      (3) Exposures to GSEs;
                                                                      (4) Exposures to depository institutions,
                                                                       foreign banks, and credit unions,
                                                                       including OFI exposures that are risk
                                                                       weighted as exposures to U.S. depository
                                                                       institutions and credit unions;
                                                                      (5) Exposures to PSEs;
                                                                      (6) Corporate exposures, including
                                                                       borrower loans (including agricultural
                                                                       and consumer loans) and OFI exposures
                                                                       that are not risk weighted as exposures
                                                                       to U.S. depository institutions and
                                                                       credit unions;
                                                                      (7) Residential mortgage exposures;
                                                                      (8) [Reserved]
                                                                      (9) Past due and nonaccrual exposures;
                                                                      (10) Exposures to other assets;
                                                                      (11) Cleared transactions;
                                                                      (12) Unsettled transactions;
                                                                      (13) Securitization exposures; and
                                                                      (14) Equity exposures.
                                                                   (c) [Reserved]
                                                                   (d) Common equity tier 1, tier 1 and total
                                                                    risk-based capital ratios for the System
                                                                    bank.
                                                                   (e) Total standardized risk-weighted assets.
----------------------------------------------------------------------------------------------------------------


                                    Table 4 to Sec.   628.63--Capital Buffers
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Quantitative Disclosures.........................................  (a) At least quarterly, the System bank must
                                                                    calculate and publicly disclose the capital
                                                                    conservation buffer and leverage buffer as
                                                                    described under Sec.   628.11.
                                                                   (b) At least quarterly, the System bank must
                                                                    calculate and publicly disclose the eligible
                                                                    retained income of the System bank, as
                                                                    described under Sec.   628.11.
                                                                   (c) At least quarterly, the System bank must
                                                                    calculate and publicly disclose any
                                                                    limitations it has on distributions and
                                                                    discretionary bonus payments resulting from
                                                                    the buffer framework described under Sec.
                                                                    628.11, including the maximum payout amount
                                                                    and/or maximum leverage payout amount for
                                                                    the quarter.
----------------------------------------------------------------------------------------------------------------

    (c) General qualitative disclosure requirement. For each separate 
risk area described in Tables 5 through 10 of this section, the System 
bank must describe its risk management objectives and policies, 
including: Strategies and processes; the structure and organization of 
the relevant risk management function; the scope and nature of risk 
reporting and/or measurement systems; policies for hedging and/or 
mitigating risk and strategies and processes for monitoring the 
continuing effectiveness of hedges/mitigants.

                         Table 5 to Sec.   628.63 \1\--Credit Risk: General Disclosures
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures..........................................  (a) The general qualitative disclosure
                                                                    requirement with respect to credit risk
                                                                    (excluding counterparty credit risk
                                                                    disclosed in accordance with Table 6 of this
                                                                    section), including the:
                                                                      (1) Policy for determining past due or
                                                                       delinquency status;
                                                                      (2) Policy for placing loans in nonaccrual
                                                                       status;
                                                                      (3) Policy for returning loans to accrual
                                                                       status;
                                                                      (4) Definition of and policy for
                                                                       identifying impaired loans (for financial
                                                                       accounting purposes);
                                                                      (5) Description of the methodology that
                                                                       the System bank uses to estimate its
                                                                       allowance for loan losses, including
                                                                       statistical methods used where
                                                                       applicable;
                                                                      (6) Policy for charging-off uncollectible
                                                                       amounts; and
                                                                      (7) Discussion of the System bank's credit
                                                                       risk management policy.

[[Page 49810]]

 
Quantitative Disclosures.........................................  (b) Total credit risk exposures and average
                                                                    credit risk exposures, after accounting
                                                                    offsets in accordance with GAAP, without
                                                                    taking into account the effects of credit
                                                                    risk mitigation techniques (for example,
                                                                    collateral and netting not permitted under
                                                                    GAAP), over the period categorized by major
                                                                    types of credit exposure. For example,
                                                                    System banks could use categories similar to
                                                                    that used for financial statement purposes.
                                                                    Such categories might include, for instance:
                                                                      (1) Loans, off-balance sheet commitments,
                                                                       and other non-derivative off-balance
                                                                       sheet exposures;
                                                                      (2) Debt securities; and
                                                                      (3) OTC derivatives.\2\
                                                                   (c) Geographic distribution of exposures,
                                                                    categorized in significant areas by major
                                                                    types of credit exposure.\3\
                                                                   (d) Industry or counterparty type
                                                                    distribution of exposures, categorized by
                                                                    major types of credit exposure.
                                                                   (e) By major industry or counterparty type:
                                                                      (1) Amount of impaired loans for which
                                                                       there was a related allowance under GAAP;
                                                                      (2) Amount of impaired loans for which
                                                                       there was no related allowance under
                                                                       GAAP;
                                                                      (3) Amount of loans past due 90 days and
                                                                       in nonaccrual status;
                                                                      (4) Amount of loans past due 90 days and
                                                                       still accruing; \4\
                                                                      (5) The balance in the allowance for loan
                                                                       losses at the end of each period
                                                                       according to GAAP; and
                                                                      (6) Charge-offs during the period.
                                                                   (f) Amount of impaired loans and, if
                                                                    available, the amount of past due loans
                                                                    categorized by significant geographic areas
                                                                    including, if practical, the amounts of
                                                                    allowances related to each geographical
                                                                    area,\5\ further categorized as required by
                                                                    GAAP.
                                                                   (g) Reconciliation of changes in allowances
                                                                    for loan losses.\6\
                                                                   (h) Remaining contractual maturity
                                                                    delineation (for example, one year or less)
                                                                    of the whole portfolio, categorized by
                                                                    credit exposure.
----------------------------------------------------------------------------------------------------------------
\1\ This Table 5 does not cover equity exposures, which should be reported in Table 9 of this section.
\2\ See, for example, ASC Topic 815-10 and 210, as they may be amended from time to time.
\3\ A System bank can satisfy this requirement by describing the geographic distribution of its loan portfolio
  by State or other significant geographic division, if any.
\4\ A System bank is encouraged also to provide an analysis of the aging of past-due loans.
\5\ The portion of the general allowance that is not allocated to a geographical area should be disclosed
  separately.
\6\ The reconciliation should include the following: A description of the allowance; the opening balance of the
  allowance; charge-offs taken against the allowance during the period; amounts provided (or reversed) for
  estimated probable loan losses during the period; any other adjustments (for example, exchange rate
  differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between
  allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded
  directly to the income statement should be disclosed separately.


           Table 6 to Sec.   628.63--General Disclosure for Counterparty Credit Risk-Related Exposures
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures..........................................  (a) The general qualitative disclosure
                                                                    requirement with respect to OTC derivatives,
                                                                    eligible margin loans, and repo-style
                                                                    transactions, including a discussion of:
                                                                      (1) The methodology used to assign credit
                                                                       limits for counterparty credit exposures;
                                                                      Policies for securing collateral, valuing
                                                                       and managing collateral, and establishing
                                                                       credit reserves;
                                                                      (3) The primary types of collateral taken;
                                                                       and
                                                                      (4) The impact of the amount of collateral
                                                                       the System bank would have to provide
                                                                       given deterioration in the System bank's
                                                                       own creditworthiness.
Quantitative Disclosures.........................................  (b) Gross positive fair value of contracts,
                                                                    collateral held (including type, for
                                                                    example, cash, government securities), and
                                                                    net unsecured credit exposure.\1\ A System
                                                                    bank also must disclose the notional value
                                                                    of credit derivative hedges purchased for
                                                                    counterparty credit risk protection and the
                                                                    distribution of current credit exposure by
                                                                    exposure type.\2\
                                                                   (c) Notional amount of purchased credit
                                                                    derivatives used for the System bank's own
                                                                    credit portfolio.
----------------------------------------------------------------------------------------------------------------
\1\ Net unsecured credit exposure is the credit exposure after considering both the benefits from legally
  enforceable netting agreements and collateral arrangements without taking into account haircuts for price
  volatility, liquidity, etc.
\2\ This may include interest rate derivative contracts, foreign exchange derivative contracts, equity
  derivative contracts, credit derivatives, commodity or other derivative contracts, repo-style transactions,
  and eligible margin loans.


                              Table 7 to Sec.   628.63--Credit Risk Mitigation 1 2
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures..........................................  (a) The general qualitative disclosure
                                                                    requirement with respect to credit risk
                                                                    mitigation, including:
                                                                      (1) Policies and processes for collateral
                                                                       valuation and management;
                                                                      (2) A description of the main types of
                                                                       collateral taken by the System bank;
                                                                      (3) The main types of guarantors/credit
                                                                       derivative counterparties and their
                                                                       creditworthiness; and
                                                                      (4) Information about (market or credit)
                                                                       risk concentrations with respect to
                                                                       credit risk mitigation.
Quantitative Disclosures.........................................  (b) For each separately disclosed credit risk
                                                                    portfolio, the total exposure that is
                                                                    covered by eligible financial collateral,
                                                                    and after the application of haircuts.
                                                                   (c) For each separately disclosed portfolio,
                                                                    the total exposure that is covered by
                                                                    guarantees/credit derivatives and the risk-
                                                                    weighted asset amount associated with that
                                                                    exposure.
----------------------------------------------------------------------------------------------------------------
\1\ At a minimum, a System bank must provide the disclosures in this Table 7 in relation to credit risk
  mitigation that has been recognized for the purposes of reducing capital requirements under this subpart.
  Where relevant, System banks are encouraged to give further information about mitigants that have not been
  recognized for that purpose.

[[Page 49811]]

 
\2\ Credit derivatives that are treated, for the purposes of this subpart, as synthetic securitization exposures
  should be excluded from the credit risk mitigation disclosures and included within those relating to
  securitization (Table 8 of this section).


                                  Table 8 to Sec.   628.63--Securitization \1\
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures..........................................  (a) The general qualitative disclosure
                                                                    requirement with respect to a securitization
                                                                    (including synthetic securitizations),
                                                                    including a discussion of:
                                                                      (1) The System bank's objectives for
                                                                       securitizing assets, including the extent
                                                                       to which these activities transfer credit
                                                                       risk of the underlying exposures away
                                                                       from the System bank to other entities
                                                                       and including the type of risks assumed
                                                                       and retained with resecuritization
                                                                       activity; \2\
                                                                      (2) The nature of the risks (e.g.
                                                                       liquidity risk) inherent in the
                                                                       securitized assets;
                                                                      (3) The roles played by the System bank in
                                                                       the securitization process \3\ and an
                                                                       indication of the extent of the System
                                                                       bank's involvement in each of them;
                                                                      (4) The processes in place to monitor
                                                                       changes in the credit and market risk of
                                                                       securitization exposures including how
                                                                       those processes differ for
                                                                       resecuritization exposures;
                                                                      (5) The System bank's policy for
                                                                       mitigating the credit risk retained
                                                                       through securitization and
                                                                       resecuritization exposures; and
                                                                      (6) The risk-based capital approaches that
                                                                       the System bank follows for its
                                                                       securitization exposures including the
                                                                       type of securitization exposure to which
                                                                       each approach applies.
                                                                   (b) [Reserved]
                                                                   (c) Summary of the System bank's accounting
                                                                    policies for securitization activities,
                                                                    including:
                                                                      (1) Whether the transactions are treated
                                                                       as sales or financings;
                                                                      (2) Recognition of gain-on-sale;
                                                                      (3) Methods and key assumptions applied in
                                                                       valuing retained or purchased interests;
                                                                      (4) Changes in methods and key assumptions
                                                                       from the previous period for valuing
                                                                       retained interests and impact of the
                                                                       changes;
                                                                      (5) Treatment of synthetic
                                                                       securitizations;
                                                                      (6) How exposures intended to be
                                                                       securitized are valued and whether they
                                                                       are recorded under subpart D of this
                                                                       part; and
                                                                      (7) Policies for recognizing liabilities
                                                                       on the balance sheet for arrangements
                                                                       that could require the System bank to
                                                                       provide financial support for securitized
                                                                       assets.
                                                                   (d) An explanation of significant changes to
                                                                    any quantitative information since the last
                                                                    reporting period.
Quantitative Disclosures.........................................  (e) The total outstanding exposures
                                                                    securitized by the System bank in
                                                                    securitizations that meet the operational
                                                                    criteria provided in Sec.   628.41
                                                                    (categorized into traditional and synthetic
                                                                    securitizations), by exposure type.\4\
                                                                   (f) For exposures securitized by the System
                                                                    bank in securitizations that meet the
                                                                    operational criteria in Sec.   628.41:
                                                                      (1) Amount of securitized assets that are
                                                                       impaired/past due categorized by exposure
                                                                       type; \5\ and
                                                                      (2) Losses recognized by the System bank
                                                                       during the current period categorized by
                                                                       exposure type.\6\
                                                                   (g) The total amount of outstanding exposures
                                                                    intended to be securitized categorized by
                                                                    exposure type.
                                                                   (h) Aggregate amount of:
                                                                      (1) On-balance sheet securitization
                                                                       exposures retained or purchased
                                                                       categorized by exposure type; and
                                                                      (2) Off-balance sheet securitization
                                                                       exposures categorized by exposure type.
                                                                   (i) (1) Aggregate amount of securitization
                                                                    exposures retained or purchased and the
                                                                    associated capital requirements for these
                                                                    exposures, categorized between
                                                                    securitization and resecuritization
                                                                    exposures, further categorized into a
                                                                    meaningful number of risk weight bands and
                                                                    by risk-based capital approach (e.g., SSFA);
                                                                    and
                                                                      (2) Exposures that have been deducted
                                                                       entirely from tier 1 capital, CEIOs
                                                                       deducted from total capital (as described
                                                                       in Sec.   628.42(a)(1)), and other
                                                                       exposures deducted from total capital
                                                                       should be disclosed separately by
                                                                       exposure type.
                                                                   (j) Summary of current year's securitization
                                                                    activity, including the amount of exposures
                                                                    securitized (by exposure type), and
                                                                    recognized gain or loss on sale by exposure
                                                                    type.
                                                                   (k) Aggregate amount of resecuritization
                                                                    exposures retained or purchased categorized
                                                                    according to:
                                                                      (1) Exposures to which credit risk
                                                                       mitigation is applied and those not
                                                                       applied; and
                                                                      (2) Exposures to guarantors categorized
                                                                       according to guarantor creditworthiness
                                                                       categories or guarantor name.
----------------------------------------------------------------------------------------------------------------
\1\ A System bank is not authorized to perform every role in a securitization, and nothing in these capital
  rules authorizes a System bank to engage in activities relating to securitizations that are not otherwise
  authorized.
\2\ The System bank should describe the structure of resecuritizations in which it participates; this
  description should be provided for the main categories of resecuritization products in which the System bank
  is active.
\3\ Roles in securitizations generally could include originator, investor, servicer, provider of credit
  enhancement, sponsor, liquidity provider, or swap provider. As noted in footnote 1 of this table, however, a
  System bank is not authorized to perform all of these roles.
\4\ ``Exposures securitized'' include underlying exposures originated by the System bank, whether generated by
  them or purchased, and recognized in the balance sheet, from third parties, and third-party exposures included
  in sponsored transactions. Securitization transactions (including underlying exposures originally on the
  System bank's balance sheet and underlying exposures acquired by the System bank from third-party entities) in
  which the originating System bank (as an originating System institution) does not retain any securitization
  exposure should be shown separately but need only be reported for the year of inception. System banks are
  required to disclose exposures regardless of whether there is a capital charge under this part.
\5\ Include credit-related other than temporary impairment (OTTI).
\6\ For example, charge-offs/allowances (if the assets remain on the System bank's balance sheet) or credit-
  related OTTI of interest-only strips and other retained residual interests, as well as recognition of
  liabilities for probable future financial support required of the System bank with respect to securitized
  assets.


[[Page 49812]]


                                       Table 9 to Sec.   628.63--Equities
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative Disclosures..........................................  (a) The general qualitative disclosure
                                                                    requirement with respect to equity risk:
                                                                      (1) Differentiation between holdings on
                                                                       which capital gains are expected and
                                                                       those taken under other objectives
                                                                       including for relationship and strategic
                                                                       reasons; and
                                                                      (2) Discussion of important policies
                                                                       covering the valuation of and accounting
                                                                       for equity. This includes the accounting
                                                                       techniques and valuation methodologies
                                                                       used, including key assumptions and
                                                                       practices affecting valuation as well as
                                                                       significant changes in these practices.
Quantitative Disclosures.........................................  (b) Value disclosed on the balance sheet of
                                                                    investments, as well as the fair value of
                                                                    those investments; for securities that are
                                                                    publicly traded, a comparison to publicly
                                                                    quoted share values where the share price is
                                                                    materially different from fair value.
                                                                   (c) The types and nature of investments,
                                                                    including the amount that is:
                                                                      (1) Publicly traded; and
                                                                      (2) Non-publicly traded.
                                                                   (d) The cumulative realized gains (losses)
                                                                    arising from sales and liquidations in the
                                                                    reporting period.
                                                                   (e) (1) Total unrealized gains (losses).\1\
                                                                      (2) Total latent revaluation gains
                                                                       (losses).\2\
                                                                      (3) Any amounts of the above included in
                                                                       tier 1 or tier 2 capital.
                                                                   (f) [Reserved]
----------------------------------------------------------------------------------------------------------------
\1\ Unrealized gains (losses) recognized on the balance sheet but not through earnings.
\2\ Unrealized gains (losses) not recognized either on the balance sheet or through earnings.


                    Table 10 to Sec.   628.63--Interest Rate Risk for Non-Trading Activities
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Qualitative disclosures..........................................  (a) The general qualitative disclosure
                                                                    requirement, including the nature of
                                                                    interest rate risk for non-trading
                                                                    activities and key assumptions, including
                                                                    assumptions regarding loan prepayments and
                                                                    behavior of non-maturity deposits, and
                                                                    frequency of measurement of interest rate
                                                                    risk for non-trading activities.
Quantitative disclosures.........................................  (b) The increase (decline) in earnings or
                                                                    economic value (or market value of equity or
                                                                    other relevant measure used by management)
                                                                    for upward and downward rate shocks
                                                                    according to management's method for
                                                                    measuring interest rate risk for non-trading
                                                                    activities, categorized by currency (as
                                                                    appropriate).
----------------------------------------------------------------------------------------------------------------

Sec. Sec.  628.64 through 628.99  [Reserved]

Subpart E--[Reserved]

Subpart F--[Reserved]

Subpart G--Transition Provisions


Sec.  628.300  Transitions.

    (a) Capital conservation buffer. (1) [Reserved]
    (2) Beginning January 1, 2017 through December 31, 2019 a System 
institution's maximum capital conservation buffer payout ratio must be 
determined as set forth in Table 1 to Sec.  628.300.

                                            Table 1 to Sec.   628.300
----------------------------------------------------------------------------------------------------------------
                                                                                 Maximum  payout ratio  (as a
            Transition Period                 Capital conservation buffer      percentage of eligible retained
                                                                                           income)
----------------------------------------------------------------------------------------------------------------
Calendar year 2017.......................  >0.625 percent..................  No limitation.
                                           <=0.625 percent, and >0.469       60 percent.
                                            percent.
                                           <=0.469 percent, and >0.313       40 percent.
                                            percent.
                                           <=0.313 percent, and >0.156       20 percent.
                                            percent.
                                           <=0.156 percent.................  0 percent.
Calendar year 2018.......................  >1.25 percent...................  No limitation.
                                           <=1.25 percent, and >0.938        60 percent.
                                            percent.
                                           <=0.938 percent, and >0.625       40 percent.
                                            percent.
                                           <=0.625 percent, and >0.313       20 percent.
                                            percent.
                                           <=0.313 percent.................  0 percent.
Calendar year 2019.......................  >1.875 percent..................  No limitation.
                                           <=1.875 percent, and >1.406       60 percent.
                                            percent.
                                           <=1.406 percent, and >0.938       40 percent.
                                            percent.
                                           <=0.938 percent, and >0.469       20 percent.
                                            percent.
                                           <=0.469 percent.................  0 percent.
----------------------------------------------------------------------------------------------------------------


[[Page 49813]]

    (b) through (e) [Reserved]


Sec.  628.301  Initial compliance and reporting requirements.

    (a) A System institution that fails to satisfy one or more of its 
minimum applicable CET1, tier 1, or total risk-based capital ratios or 
its tier 1 leverage ratio at the end of the quarter in which these 
regulations become effective shall report its initial noncompliance to 
the FCA within 20 days following such quarterend and shall also submit 
a capital restoration plan for achieving and maintaining the standards, 
demonstrating appropriate annual progress toward meeting the goal, to 
the FCA within 60 days following such quarterend. If the capital 
restoration plan is not approved by the FCA, the FCA will inform the 
institution of the reasons for disapproval, and the institution shall 
submit a revised capital restoration plan within the time specified by 
the FCA.
    (b) Approval of compliance plans. In determining whether to approve 
a capital restoration plan submitted under this section, the FCA shall 
consider the following factors, as applicable:
    (1) The conditions or circumstances leading to the institution's 
falling below minimum levels, the exigency of those circumstances, and 
whether or not they were caused by actions of the institution or were 
beyond the institution's control;
    (2) The overall condition, management strength, and future 
prospects of the institution and, if applicable, affiliated System 
institutions;
    (3) The institution's capital, adverse assets (including nonaccrual 
and nonperforming loans), ALL, and other ratios compared to the ratios 
of its peers or industry norms;
    (4) How far an institution's ratios are below the minimum 
requirements;
    (5) The estimated rate at which the institution can reasonably be 
expected to generate additional earnings;
    (6) The effect of the business changes required to increase 
capital;
    (7) The institution's previous compliance practices, as 
appropriate;
    (8) The views of the institution's directors and senior management 
regarding the plan; and
    (9) Any other facts or circumstances that the FCA deems relevant.
    (c) An institution shall be deemed to be in compliance with the 
regulatory capital requirements of this subpart if it is in compliance 
with a capital restoration plan that is approved by the FCA within 180 
days following the end of the quarter in which these regulations become 
effective.

    Dated: May 17, 2016.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2016-12072 Filed 7-27-16; 8:45 am]
 BILLING CODE 6705-01-P