[Federal Register Volume 85, Number 176 (Thursday, September 10, 2020)]
[Proposed Rules]
[Pages 55786-55801]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16052]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
Federal Register / Vol. 85, No. 176 / Thursday, September 10, 2020 /
Proposed Rules
[[Page 55786]]
FARM CREDIT ADMINISTRATION
12 CFR Parts 614, 615, 620 and 628
RIN 3052-AD27
Regulatory Capital Rules: Tier 1/Tier 2 Framework
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA or we) seeks comments on
this proposed rule that would amend regulatory capital requirements for
Farm Credit System (System) institutions and clarify certain provisions
in the Tier 1/Tier 2 Framework final rule that became effective in
2017. This proposed rule would incorporate, and further clarify, the
guidance provided in FCA Bookletter--BL-068--Tier 1/Tier 2 Capital
Framework Guidance. The proposal would also eliminate regulatory
capital requirements for the Farm Credit Services Leasing Corporation,
simplify the Safe Harbor Deemed Prior Approval calculation, revise the
board resolution requirement for certain equities to be included in
tier 1 or tier 2 capital, and amend the lending and leasing limit base
to use total capital instead of permanent capital and eliminate the
exceptional treatment of certain purchased stock. To maintain
comparability in our regulatory capital requirements, we propose to
amend certain definitions pertaining to qualified financial contracts
in conformity with changes adopted by the Federal banking regulatory
agencies.
DATES: Please send us your comments on or before November 9, 2020.
ADDRESSES: For accuracy and efficiency reasons, please submit comments
by email or through FCA's website. We do not accept comments submitted
by facsimile (fax), as faxes are difficult for us to process in
compliance with section 508 of the Rehabilitation Act of 1973. Please
do not submit your comment multiple times via different methods. You
may submit comments by any of the following methods:
Email: Send us an email at [email protected].
FCA website: http://www.fca.gov. Click inside the ``I want
to . . .'' field near the top of the page; select ``comment on a
pending regulation'' from the dropdown menu; and click ``Go.'' This
takes you to an electronic public comment form.
Mail: Jeremy R. Edelstein, Associate Director, Office of
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive,
McLean, VA 22102-5090.
You may review copies of all comments we receive at our office in
McLean, Virginia or on our website at http://www.fca.gov. Once you are
on the website, click inside the ``I want to . . .'' field near the top
of the page; select ``find comments on a pending regulation'' from the
dropdown menu; and click ``Go.'' This will take you to the Comment
Letters page where you can select the regulation for which you would
like to read the public comments.
We will show your comments as submitted, including any supporting
data provided, but for technical reasons we may omit items such as
logos and special characters. Identifying information that you provide,
such as phone numbers and addresses, will be publicly available.
However, we will attempt to remove email addresses to help reduce
internet spam.
FOR FURTHER INFORMATION CONTACT: Jeremy R. Edelstein, Associate
Director or Clayton D. Milburn, Senior Financial Analyst, Finance and
Capital Markets Team, Office of Regulatory Policy, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4414, TTY (703) 883-
4056; or
Mary Alice Donner, 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 Proposed Rule
B. Background
II. Proposed Revisions to the Capital Rule
A. Substantive Revisions to the Capital Rule
1. Safe Harbor Deemed Prior Approval
2. Capital Bylaw or Board Resolution to Include Equities in Tier
1 and Tier 2 Capital
3. Common Cooperative Equity Issuance Date
4. Farm Credit Leasing Services Corporation
5. Lending and Leasing Limit Base Calculation
6. Qualified Financial Contract (QFC) Related Definitions
7. Common Equity Tier 1 Capital Eligibility Requirements
B. Clarifying and Other Revisions to the Capital Rule
1. Capitalization Bylaw Adjustment
2. Annual Report to Shareholder Corrections
3. Appropriate Risk-Weighting of Cash
4. Securitization Formulas
5. Unallocated Retained Earnings and Equivalents Deductions and
Adjustments
6. Service Corporation Deductions and Adjustments
7. Adjustments for Accruing Patronage and Dividends
8. Bank Disclosures
9. Retirement of Statutory Borrower Stock
C. General Discussion
1. Continuously Redeemable Preferred Stock (H Stock)
2. Farm Credit Council Letter
3. Permanent Capital
III. Abbreviations
IV. Regulatory Flexibility Act
I. Introduction
A. Objectives of Proposed Rule
The FCA's objectives in proposing this rule are to:
Provide technical corrections, amendments and
clarification to certain provisions in the Tier 1/Tier 2 Capital
Framework; and
Ensure the System's capital requirements maintain
comparability with the standardized approach that the Federal banking
regulatory agencies have adopted.
B. Background
In 1916, Congress created the System to provide permanent, stable,
affordable, and reliable sources of credit and related services to
American agricultural and aquatic producers.\1\ The System consists of
3 Farm Credit Banks, 1
[[Page 55787]]
agricultural credit bank, 67 agricultural credit associations, 1
Federal land credit association, service corporations, and the Federal
Farm Credit Banks Funding Corporation (Funding Corporation). Farm
Credit banks (which include both the Farm Credit Banks and the
agricultural credit bank) issue System-wide consolidated debt
obligations in the capital markets through the Funding Corporation,
which enable associations to provide short-, intermediate-, and long-
term credit and related services to farmers, ranchers, producers and
harvesters of aquatic products, rural residents for housing, and farm-
related service businesses.\2\ The System's enabling statute is the
Farm Credit Act of 1971, as amended (Act).\3\
---------------------------------------------------------------------------
\1\ The Federal Agricultural Mortgage Corporation (Farmer Mac),
which is also a System institution, has authority to operate
secondary markets for agricultural real estate mortgage loans, rural
housing mortgage loans, and rural utility cooperative loans. The FCA
has a separate set of capital regulations that apply to Farmer Mac.
This rulemaking does not affect Farmer Mac, and the use of the term
``System institution'' in this preamble and proposed rule does not
include Farmer Mac.
\2\ The agricultural credit bank lends to, and provides other
financial services to farmer-owned cooperatives, rural utilities
(electric and telephone), and rural water and waste water disposal
systems. It also finances U.S. agricultural exports and imports, and
provides international banking services to cooperatives and other
eligible borrowers. The agricultural credit bank operates a Farm
Credit Bank subsidiary.
\3\ 12 U.S.C. 2001-2279cc. The Act is available at www.fca.gov
under ``Laws and regulations,'' and ``Statutes.''
---------------------------------------------------------------------------
FCA's Tier 1/Tier 2 Capital Framework final regulation (Capital
Rule) was published in the Federal Register in July 2016.\4\ The
objectives of the Capital Rule were:
---------------------------------------------------------------------------
\4\ 81 FR 49720 (July 28, 2016).
---------------------------------------------------------------------------
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).\5\
---------------------------------------------------------------------------
\5\ Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------
To date, the FCA believes the Capital Rule has met, and continues
to meet, these stated objectives.\6\
---------------------------------------------------------------------------
\6\ For a more comprehensive discussion of this rulemaking,
including a comprehensive discussion of all System capital
requirements, see 81 FR 49720 and Parts 615 and 628 of FCA
Regulations.
---------------------------------------------------------------------------
On December 22, 2016, the FCA Board adopted FCA Bookletter--BL-
068--Tier 1/Tier 2 Capital Framework Guidance (Capital BL).\7\ The
Capital BL provided additional guidance to ensure System institutions
had the necessary information to correctly implement the requirements
of the Capital Rule. The Capital BL included clarification and
technical fixes on 18 separate items. Furthermore, the Capital BL
stated: ``We intend to incorporate some of these items into the
regulation in a future rulemaking project.'' \8\ This proposed rule
would incorporate some of that guidance, with adjustments as discussed
below,\9\ into the capital regulation. Additionally, the proposed rule
would:
---------------------------------------------------------------------------
\7\ A copy of the Capital BL can be found at www.fca.gov, under
``Laws & Regulations'' and ``Bookletters.''
\8\ Id.
\9\ FCA made adjustments to some of the guidance provided in the
Capital BL to address concerns identified through ongoing monitoring
and examination of the requirements of the Capital Rule.
---------------------------------------------------------------------------
Eliminate the stand alone capital requirements for Farm
Credit Leasing Services Corporation (Farm Credit Leasing);
Change the computation of the lending and leasing limit
base in Sec. 614.4351, by using total capital instead of permanent
capital in the calculation; \10\
---------------------------------------------------------------------------
\10\ Total capital is defined at Sec. 628.2. Permanent capital
is defined at Sec. 615.5201.
---------------------------------------------------------------------------
Simplify ''Safe Harbor'' provisions that determine when
System institutions have ``deemed prior approval'' from FCA to
distribute cash payments;
Revise and clarify certain criteria that capital
instruments must meet to be included in common equity tier 1 (CET1) and
tier 2 capital;
Provide further clarification on when the ``holding
period'' starts for including certain Common Cooperative Equities in
CET1 or tier 2 capital; and
Amend the requirement to adopt an annual board resolution
with respect to prior approval requirements and the minimum redemption
and revolvement periods for certain equities included in CET1 or tier 2
capital.
Finally, we propose to amend the definitions of ``Collateral
agreement,'' ``Eligible margin loan,'' ``Qualifying master netting
agreement (QMNA),'' and ``Repo-style transaction'' to incorporate
amendments made to these definitions in the capital rules of the
Federal banking regulatory agencies.\11\
---------------------------------------------------------------------------
\11\ 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).
---------------------------------------------------------------------------
The above amendments, as well as technical changes and other
guidance on FCA's expectations for certain provisions of the Capital
Rule, are described in greater detail below. FCA believes the
additional proposed changes will address issues and concerns identified
since the Capital Rule's effective date of January 1, 2017, while
maintaining and supporting the objectives of the Capital Rule.
We welcome comments on every aspect of this proposed regulation,
but there are certain areas described below where we are specifically
seeking comment.
II. Proposed Revisions to the Capital Rule
A. Substantive Revisions to the Capital Rule
The amendments to the Capital Rule proposed and discussed in this
section are substantive issues that go beyond technical corrections or
incorporation of issues discussed in the Capital BL.
1. Safe Harbor Deemed Prior Approval
The proposal amends the ``Safe Harbor Deemed Prior Approval''
provisions under which System institutions are deemed to have prior
approval from FCA to distribute cash payments as long as certain
conditions are met. Existing Sec. 628.20(f) requires System
institutions to obtain prior approval from FCA before making any
distributions of capital included in tier 1 or tier 2 capital.\12\
Under the ``safe harbor'' provision in paragraphs (f)(5) and (6) of
existing Sec. 628.20, cash dividends, cash patronage, and cash
redemptions or revolvements of common cooperative equities are deemed
to have FCA prior approval, provided that:
---------------------------------------------------------------------------
\12\ Section 628.20(f) outlines the requirements for FCA prior
approval of capital redemptions and dividends.
---------------------------------------------------------------------------
(i) The equities meet applicable minimum holding period
requirements;
(ii) After such cash payments, the dollar amount of CET1 capital
equals or exceeds the dollar amount of CET1 capital on the same date in
the previous calendar year; and
(iii) The institution continues to comply with all regulatory
capital requirements and supervisory or enforcement actions.
Under the existing ''safe harbor,'' after the cash payment the
dollar amount of CET1 capital must not decline compared to the dollar
amount of CET1 capital on the same date in the previous calendar
year.\13\ FCA considers the date of the cash payment to be the date on
which the institution's board passes a binding resolution declaring an
amount it will make as a cashdividend or
[[Page 55788]]
patronage refund \14\ (declaration date). We consider this declaration
date to be the date in which the cash payment is made because it
results in a binding legal obligation to pay a dividend or patronage
refund to the institution's member-borrowers, the patronage amount is
calculable within a short-time frame, and it is paid within 8.5 months
of the close of the taxable year.
---------------------------------------------------------------------------
\13\ Section 628.20(f)(5)(ii).
\14\ This can either be a specified dollar amount or must
include language whereby an amount could be calculated.
---------------------------------------------------------------------------
In practice, it is difficult for FCA to monitor and enforce the
existing requirement to use the same date in the previous calendar year
because System institutions report regulatory capital quarterly, not
daily or monthly. Institutions can and do declare dividends or make
patronage payments on any date during a calendar quarter. We propose to
replace the requirement to use the exact calendar date on which the
cash payment is made with a requirement to use the date of the quarter-
end in which the System institution's board declares its dividend or
patronage.
Under the proposal, a System institution has ``deemed- prior
approval'' from FCA if, after making the cash payment, the dollar
amount of the CET1 capital at the quarter-end after the declaration
date, equals or exceeds the dollar amount of CET1 capital on the same
quarter-end in the previous calendar year. The following is an example
of our proposed deemed prior approval: A System institution's board
declares a cash patronage on December 16, 2020. To use the ``Safe
Harbor Deemed Prior Approval,'' the institution would need to ensure
that after such payment, its dollar amount of CET1 capital on December
31, 2020, equals or exceeds the dollar amount of CET1 capital on
December 31, 2019. As another example, a System institution's board
declares a cash patronage on January 15, 2021. To use the ``Safe Harbor
Deemed Prior Approval,'' the institution would need to ensure that
after such payment, its dollar amount of CET1 capital on March 31,
2021, equals or exceeds the dollar amount of CET1 capital on March 31,
2020.\15\ System institutions that declare patronage early in a quarter
need to ensure that they have developed and implemented appropriate
processes and controls to ensure compliance with these provisions.
---------------------------------------------------------------------------
\15\ In both these examples, to use the ``Safe Harbor Deemed
Prior Approval,'' the System institution would also need to ensure
that after such cash payment, it continues to comply with all
regulatory capital requirements and supervisory or enforcement
actions. These examples assume a cash patronage payment and not the
redemption or revolvement of common cooperative equities (CCEs).
CCEs must be held for the minimum required holding period described
in Sec. 628.20(f)(5)(i) for redemption to qualify for deemed prior
approval under the ``Safe Harbor.''
---------------------------------------------------------------------------
We believe that this proposed amendment to the ``Safe Harbor Deemed
Prior Approval'' would not increase or decrease the amount of cash
patronage System institutions can pay when compared to the existing
provision. As stated in the preamble to the final Tier 1/Tier 2 Capital
Framework regulation, we expect institution boards to give significant
thought to capital distribution decisions and how they impact the
overall capitalization of their institution, especially a cash payment
that exceeds net income over the past 12 months. Ordinarily, cash
payments or redemptions (revolvements) are made at very predictable
intervals, and we have not identified any situations where institutions
are likely to need to make unplanned, significant capital
distributions.\16\
---------------------------------------------------------------------------
\16\ See 81 FR 49735 (July 28, 2016).
---------------------------------------------------------------------------
2. Capital Bylaw or Board Resolution To Include Equities in Tier 1 and
Tier 2 Capital
The proposal would amend the requirement in Sec. 615.5200(d) that
a System institution board adopt a redemption and revolvement
resolution that it must re-affirm in its capital plan each year. It
would also add a sentence to Sec. 615.5200(b) with respect to capital
adequacy plans.
Currently, to include otherwise eligible purchased or allocated
equities in CET1 capital,\17\ a System institution must commit to
obtaining prior approval from FCA under Sec. 628.20(f) before
redeeming or revolving the equities less than 7 years after issuance or
allocation. For tier 2 purchased or allocated equities, the institution
must make a commitment not to call, redeem, or revolve the equities
less than 5 years after issuance or allocation without FCA approval.
Finally, boards must commit to obtaining prior approval from FCA before
taking other specified actions that could impact the institution's
capital quantity or quality.\18\ A System institution's board must
affirm these commitments by either adopting a capitalization bylaw or a
resolution that must be re-affirmed by the board annually.
---------------------------------------------------------------------------
\17\ Otherwise eligible purchased or allocated equities would be
equities that meet the criteria under Sec. 628.20(b)(1) for
inclusion in CET1 capital, such as allocated equities that will not
be redeemed or revolved for at least 7 years.
\18\ Existing Sec. 615.5200(d)(3) requires boards to obtain
prior approval before redesignating unallocated retained earning
(URE) equivalents as redeemable equities; removing equities from
regulatory capital (other than through repurchase, cancellation,
redemption, or liquidation); or redesignating equities from one
regulatory capital component to another. Section 615.5200(d)(4)
requires that URE equivalents will not be revolved, except under
very limited circumstances.
---------------------------------------------------------------------------
The proposal would move the existing requirements in Sec.
615.5200(d) to a new section, Sec. 628.21. Under proposed Sec.
628.21, a System institution's board must either adopt a capitalization
bylaw or adopt a binding resolution to obtain the FCA prior approval
that Sec. 628.20(f) requires. Under the proposed rule, to reduce
burden, an institution's board would no longer need to re-affirm this
resolution annually; instead, the System institution would be required
to expressly acknowledge the continuing and binding effect of these
resolutions annually in their capital adequacy plan. Proposed Sec.
615.5200(b) would add to the existing provisions a requirement that the
capital adequacy plan must expressly acknowledge the continuing and
binding effect of the board resolutions.\19\ Once the board adopts this
resolution, it would remain binding going forward. Modifying or
eliminating this binding resolution may impact an institution's ability
to include allocated or purchased equities in tier 1 or tier 2 capital,
if the change is not consistent with the requirements of proposed Sec.
628.21 and Sec. 628.20(b)(1)(xiv), (c)(1)(xiv), and (d)(1)(xi).
---------------------------------------------------------------------------
\19\ Specifically, Sec. 615.5200(b) would be amended to require
that the plan shall expressly acknowledge the continuing and binding
effect of all board resolutions adopted in accordance with sections
628.20(b)(1)(xiv), 628.20(c)(1)(xiv), 628.20(d)(1)(xi), and 628.21.
Conforming changes are being proposed to those sections to refer to
new Sec. 628.21 instead of Sec. 615.5200(d).
---------------------------------------------------------------------------
The capital adequacy plan acknowledgment would, at a minimum,
outline the existence of such a resolution and assure that any equities
issued, allocated, redeemed or revolved shall be done so in accordance
with the resolution. Consistent with the existing rule, any issuance or
allocation of equities that a System institution intends to include in
tier 1 or tier 2 capital, must be designated either CET1, AT1, or tier
2 at time of issuance or allocation.\20\ We note that, in these
proposed changes, our intent that institutions must establish the
permanence of their regulatory capital designations is unchanged, but
the means by which institutions do so should be less burdensome.
---------------------------------------------------------------------------
\20\ Under existing Sec. 615.5200(d)(3)(iii), which is proposed
to be redesignated as Sec. 628.21(c)(3), a System institution
cannot redesignate equities included in one component of regulatory
capital for inclusion in another without FCA prior approval.
Accordingly, the regulatory capital classification (i.e., CET1, AT1,
or tier 2) must be designated at issuance.
---------------------------------------------------------------------------
[[Page 55789]]
3. Common Cooperative Equity Issuance Date
The proposal adds a new definition to part 628 to provide
clarification and certainty to System institutions on the start of the
holding period to include certain common cooperative equities in CET1
or tier 2 capital and redeem them under the ``Safe Harbor Deemed Prior
Approval''. Proposed Sec. 628.21(e) states that the minimum redemption
and revolvement period for purchased and allocated equities starts on
the common cooperative equity issuance date, as defined in Sec. 628.2.
As discussed above, to include otherwise eligible purchased or
allocated equities in CET1 or tier 2 capital, a System institution must
commit to obtaining prior approval from FCA under Sec. 628.20(f)
before redeeming or revolving the equities in less than 7 or 5 years,
respectively, after issuance or allocation. In December 2016, FCA
provided guidance to the System on when the holding period starts for
purchased and allocated equities, as follows:
The minimum holding period starts on the issuance date, which is
the date the institution segregates its ``new'' allocated equities
(qualified and nonqualified) from its URE. This generally occurs
after the board adopts a resolution to make a patronage distribution
in cash and equity, and the institution makes accounting entries
that move the dollar amounts from URE to an appropriate payable
account and allocated equity.\21\
---------------------------------------------------------------------------
\21\ See Capital BL, item 7.
The proposed definition of ``common cooperative equity issuance
date'' is similar to the guidance previously provided by FCA; however,
as proposed the issuance date would be the quarter-end in which the
board has declared a patronage refund and the applicable accounting
treatment has taken place. As an example, a System institution board
adopts a resolution to make a patronage distribution in cash and equity
on December 15, 2020.\22\ On January 2, 2021, it makes a general ledger
entry that moves the dollar amounts from URE to an appropriate payable
account and allocated equity. The general ledger entry is made
effective December 31, 2020 and is reflected in the yearend 2020
financial statements. On April 5, 2021, dollar amounts are assigned to
each borrower. In this example, the ``Common cooperative equity
issuance date'' would be December 31, 2020. If the System institution
includes the equities in CET1 capital, they would need to hold the
equities for at least 7 years from December 31, 2020 (i.e., December
31, 2027) to meet the minimum holding period requirement.
---------------------------------------------------------------------------
\22\ As discussed elsewhere in this preamble, the board
declaration must include an amount it will pay in patronage or must
include language whereas an amount could be calculated because it
provides evidence of the board's intent to obligate the institution
to pay a specific patronage amount to its member-borrowers.
---------------------------------------------------------------------------
The holding period start date for purchased stock is slightly
different from the holding period start date for allocated equities.
Members purchase stock as a requirement of membership to borrow from
the institution and the institution's bylaws allow for such issuance.
Purchased stock would not result in a reallocation or reassignment of
URE, but would result in new equity for the System institution.
Accordingly, the holding period on purchased stock would be the
quarter-end in which the System institution recognizes the stock on its
financial statement.
We note that section 628.20(b)(1)(xiv)(B) allows for the statutory
minimum borrower stock requirement to count as CET1 capital without any
minimum holding period.\23\ The statutory minimum borrower stock
requirement under section 4.3A of the Act, is $1,000 or 2 percent of
the loan amount, whichever is less.
---------------------------------------------------------------------------
\23\ As discussed in greater detail under section 7--Common
Equity Tier 1 Capital Eligibility Requirements, statutory minimum
borrower stock ``funded'' through the creation of a non-interest-
bearing account receivable is not eligible for inclusion in CET1 or
tier 2 capital.
---------------------------------------------------------------------------
FCA believes this new approach to recognizing the start of the
holding period, when combined with other proposed ``Safe Harbor''
related changes, results in a simplified ``Safe Harbor'' framework.
More specifically, using the quarter-end date for the start of the
holding period aligns with the proposed changes to the ``Safe Harbor
Deemed Prior Approval,'' which we discuss above. As proposed, the
``Safe Harbor'' also would use a date that is the quarter-end after a
board has declared a patronage payment. Furthermore, we believe using a
quarter-end date reduces the burden for System institutions to track
and monitor the amount of time equities have been outstanding. It also
improves FCA's ability to monitor and enforce the ''Safe Harbor''
requirements.
Question 1: The FCA seeks comments on whether the new definition of
``Common cooperative equity issuance date'' creates a burden for System
institutions due to the changes in established controls and processes
that may be required. Please provide support for your position.
4. Farm Credit Leasing Services Corporation
The proposal removes Farm Credit Leasing from the list of
institutions defined as System institutions in Sec. Sec. 615.5201 and
628.2.\24\ Under the proposal, Farm Credit Leasing as a stand-alone
entity would no longer be required to meet minimum capital and related
regulatory requirements under part 615, subpart H, and part 628 of our
regulations because of its current ownership status, as discussed
below. If this ownership status were to change in the future, we would
reassess the need for Farm Credit Leasing to independently meet capital
requirements.\25\
---------------------------------------------------------------------------
\24\ Farm Credit Leasing is a service corporation chartered
under section 4.25 of the Act. A service corporation is a System
institution established by System banks or associations and
chartered by FCA, and it is subject to FCA regulation and
examination. See title IV, subpart E of the Act.
\25\ The definitions of ``System institution'' allows us to
include any FCA-chartered institution that we determine should be
included, even if it is not specifically referenced.
---------------------------------------------------------------------------
Farm Credit Leasing was previously owned by a group of System
institutions but is now a wholly owned subsidiary of CoBank.\26\ It is
a business unit of the bank; profits and losses of the entity are
accrued to the bank; and its assets and liabilities are consolidated
with the bank's for financial and regulatory reporting purposes.
CoBank's consolidation of Farm Credit Leasing ensures that minimum
capital is appropriately held against Farm Credit Leasing's assets. The
proposal would reduce the regulatory burden created by separately
applying the minimum capital requirements and relevant capital
regulations to Farm Credit Leasing on a stand-alone basis. The proposed
change is not intended to reduce the amount of capital that must be
held against Farm Credit Leasing and CoBank's combined assets.
---------------------------------------------------------------------------
\26\ In 1983, several System banks acquired an existing non-
System corporation in the lease financing business that became Farm
Credit Leasing. Farm Credit Leasing offers leasing services and
related products to agribusiness, agricultural producers, rural
infrastructure companies, and other related partners. As the System
consolidated, the number of bank owners of Farm Credit Leasing
declined. In 2004, CoBank acquired all Farm Credit Leasing stock
outstanding, making it a wholly-owned subsidiary of the bank.
---------------------------------------------------------------------------
Question 2: The FCA seeks comment on the appropriateness of
removing the specific reference to Farm Credit Leasing from these
provisions.
5. Lending and Leasing Limit Base Calculation
The proposal would amend Sec. 614.4351 to change the composition
and calculation of each System bank
[[Page 55790]]
and association's lending and leasing limit base. The existing lending
and leasing limit base is equal to the amount of a System institution's
permanent capital as adjusted for the calculation of the permanent
capital ratio in accordance with Sec. 615.5207, and with two
additional adjustments in Sec. 614.4351(a) that apply only to the
lending limit base. Section 614.4351(a)(1) provides that a System
institution may count in its lending limit base any stock it purchases
from another System institution in connection with the sale of a loan
participation interest, and the other institution must exclude such
stock from its lending limit base. Section 614.4351(a)(2) provides that
any otherwise eligible third-party capital instruments may be included
in the lending limit base of a System institution, irrespective of the
limits on third-party capital for the tier 1/tier 2 capital ratios as
outlined under Sec. 628.23.
We propose two amendments to Sec. 614.4351. First, instead of
using permanent capital to calculate the lending limit base,
institutions would use total capital as defined and adjusted in
Sec. Sec. 628.20 through 628.22 but including any otherwise eligible
third-party capital that would be excluded under Sec. 628.23. Second,
we would eliminate the exceptional treatment of stock purchased in
connection with a loan participation in Sec. 614.4351(a)(1).
Our proposal to eliminate the existing exceptional treatment of
stock purchased in connection with loan participations would align the
lending and leasing limit base with the Capital Rule's treatment of
investments in other System institutions. The Capital Rule requires
institutions to deduct their investments in another System institution
because it is the issuing institution, not the investing institution,
that has discretion whether or not to retire the investment. FCA
believes that equities should be counted in the regulatory capital and
the lending and leasing limit base of the institution that has control
of the equities. This is a more accurate reflection of where the
capital is available to absorb losses.
Our proposal would preserve the existing provision in Sec.
614.4351(a)(2) which allows the inclusion of all otherwise qualifying
third-party capital in the lending limit base, irrespective of limits
on the inclusion of such instruments in regulatory capital under Sec.
628.23. The requirements of Sec. 628.23 recognize and emphasize the
cooperative principles upon which System institutions operate by
limiting the amount of non-cooperative equities that may be included in
regulatory capital. Accordingly, we propose to continue to permit
institutions to include all otherwise qualifying third-party capital in
their lending limit base.
Our proposed changes to the calculation would result in modest
changes in System institutions' lending limits.\27\ Using total capital
as the base instead of permanent capital would increase the lending and
leasing limit for most System institutions due primarily to the
inclusion of at least a portion of the allowance for loan losses in
total capital.\28\ A small number of System institutions would see
their lending limit decline due to various factors.\29\ If both
amendments are adopted, we estimate that about 16 institutions' lending
limits would modestly decrease.\30\ We note that most institutions have
adopted policies that set significantly lower lending limits than the
current regulation allows.
---------------------------------------------------------------------------
\27\ Under Sec. 614.4360(b)(2), loans funded pursuant to a
commitment that was within the lending and leasing limit at the time
the commitment was made would not violate the lending and leasing
limit if the limit subsequently declines.
\28\ Under Sec. 628.20(d)(3), tier 2 capital (a component of
total capital) includes the allowance for loan losses up to 1.25
percent of the institution's total risk-weighted assets not
including any amount of the allowance.
\29\ As of September 30, 2019, the vast majority of System
institutions (banks and associations) would see their lending limit
increase by 2.8 percent on average, with increases ranging from 0.5
percent to 8.3 percent. Two system institutions would see an average
decrease of 2.2 percent.
\30\ Including both the switch from permanent capital and the
elimination of the loan participation-related treatment under Sec.
614.4351(a)(1), 56 institutions would see their lending limit
increase by 3.0 percent on average. The decrease at the remaining
institutions would average 1.6 percent.
---------------------------------------------------------------------------
We adopted the Capital Rule to improve the quality and quantity of
a System institution's capital, consistent with the objectives of the
Basel III framework and the standardized approach of the Federal
banking regulatory agencies (U.S. Rule). Accordingly, since 2017, FCA
has focused on regulatory tier 1 and tier 2 capital when evaluating the
safe and sound operation of a System institution rather than on
permanent capital.\31\ Similarly, we believe it is more appropriate to
base the lending and leasing limit on the regulatory total capital of
the institution and not on permanent capital.
---------------------------------------------------------------------------
\31\ Section 301 of the Agricultural Credit Act of 1987 directed
the FCA to adopt risk-based permanent capital regulations for System
institutions.
---------------------------------------------------------------------------
Question 3: The FCA seeks comment on the proposed change to the
lending base, and the continued appropriateness of the adjustment
required in Sec. 614.4351(a)(1), and whether its removal would have
any significant adverse impacts on any System institution.
6. Qualified Financial Contract (QFC) Related Definitions
We are proposing to amend the definitions of ``Collateral
agreement,'' ``Eligible margin loan,'' ``Qualifying master netting
agreement (QMNA),'' and ``Repo-style transaction'' to incorporate
amendments made to these definitions in the capital rules of the
Federal banking regulatory agencies. Furthermore, the proposed
amendment to the definition of ``QMNA'' will harmonize it with the
amended definition of ``Eligible master netting agreement (EMNA)'' in
FCA's Margin and Capital Requirements for Covered Swap Entities
regulation (Swap Margin Rule).\32\
---------------------------------------------------------------------------
\32\ See 83 FR 50805 (October 10, 2018).
---------------------------------------------------------------------------
As part of the broader regulatory reform effort following the
financial crisis, to increase the resolvability and resiliency of U.S.
global systemically important banking institutions (GSIBs), the Federal
banking regulatory agencies adopted final rules that establish
restrictions on, and requirements for, certain financial contracts of
GSIBs and their subsidiaries (QFC Rules).\33\ Generally, these QFC
Rules require covered qualified financial contracts \34\ of covered
entities (GSIBs and U.S. operations of foreign GSIBs) to contain
contractual provisions that opt into the ``temporary stay-and-transfer
treatment'' of the Federal Deposit Insurance Act (FDI Act) \35\ and
Title II of the Dodd-Frank Act, thereby reducing the risk that
[[Page 55791]]
the stay-and-transfer treatment would be challenged by a covered
entity's counterparty or a court in a foreign jurisdiction. The stay-
and-transfer treatment provides that the rights of a failed insured
depository institution's or financial company's counterparties to
terminate, liquidate, or net certain qualified financial contracts upon
the appointment of the FDIC as receiver are temporarily stayed to allow
for the transfer of the failed entities' qualified financial contracts
to a solvent party.\36\
---------------------------------------------------------------------------
\33\ See 82 FR 56630 (November 29, 2017) (OCC); 82 FR 50228
(October 30, 2017) (FDIC); and 82 FR 42882 (September 12, 2017)
(FRB).
\34\ Qualified financial contracts generally include financial
contracts for a derivative contract, repurchase agreement, reverse
purchase agreement, and securities lending and borrowing agreement.
When an entity goes into resolution under the U.S. Bankruptcy Code,
attempts by the debtor entity's creditors to enforce their debt
through any means other than participation in the bankruptcy
proceeding, such as seizing collateral, are generally blocked by the
imposition of an automatic stay (See 82 FR 42882, 42886 (September
12, 2017) citing 11 U.S.C. 362). However, the U.S. Bankruptcy Code
generally exempts QFC counterparties of the debtor from the
automatic stay through ``safe harbor'' provisions (See 11 U.S.C.
362(b)(6), (7), (17), (27), 362(o), 555, 556, 559, 560, 561. The
U.S. Bankruptcy Code specifies the types of parties to which the
safe harbor provisions apply). Under these provisions, any rights
that a QFC counterparty has to terminate the contract, set off
obligations, and liquidate collateral in response to a direct
default are not subject to the stay and may be exercised against the
debtor immediately upon default. We note that the Bankruptcy Code
does not use the term ``qualified financial contracts,'' but the set
of transactions covered by its safe harbor provisions closely tracks
the set of transactions that fall within the definition of
``qualified financial contract'' used in Title II of the Dodd-Frank
Act.
\35\ 12 U.S.C. 1811 et. seq.
\36\ 12 U.S.C. 1821(e)(10)(B), 5390(c)(10)(B).
---------------------------------------------------------------------------
As a result of the QFC Rules, the Federal banking regulatory
agencies amended the definition of QMNA in their capital rules to
prevent the QFC Rules from having a disruptive effect on the netting
sets of their supervised institutions. The amended definition of QMNA
is substantially similar to the previous definition and continues to
recognize that default rights may be stayed if the financial company is
in resolution under the Dodd-Frank Act or FDI Act, a substantially
similar law applicable to GSEs, or a substantially similar foreign law,
or where the agreement is subject by its terms to any of those
laws.\37\ However, the amended definition includes additional language
permitting a master netting agreement to meet the definition of QMNA to
the extent necessary to comply with the requirements of the QFC Rules
even if the agreement limits 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 of a
counterparty. We are proposing a parallel change.
---------------------------------------------------------------------------
\37\ Importantly, the Agriculture Improvement Act of 2018
amended section 5.61 of the Act to give the Farm Credit System
Insurance Corporation receivership authorities parallel to those of
the Federal banking regulatory agencies. Public Law 115-334, 132
Stat 4490 (2018).
---------------------------------------------------------------------------
Additionally, the Federal banking regulatory agencies amended the
definitions of ``Collateral agreement,'' ``Eligible margin loan,'' and
``Repo-style transaction'' to ensure that their supervised institutions
can continue to recognize the risk-mitigating effects of financial
collateral received in a secured lending transaction, repo-style
transaction, or eligible margin loan.\38\ The amendments to these
definitions include conforming changes to provide that a counterparty's
default rights may be limited as required by the QFC Rules.
---------------------------------------------------------------------------
\38\ See 82 FR 50228 (October 30, 2017) for further discussion.
---------------------------------------------------------------------------
In order to remain consistent, to the extent practical, with the
capital rules of the Federal banking regulatory agencies, as well as
aligning the definition of ``Qualifying master netting agreement'' with
the recent amendments to the definition of ``Eligible master netting
agreement'' in FCA's Swap Margin Rule, we propose to adopt parallel
amendments to the definitions of ``Collateral agreement,'' ``Eligible
margin loan,'' ``Qualifying master netting agreement,'' and ``Repo-
style transaction.'' While the QFC rules primarily apply to GSIBs
supervised by one of the Federal banking regulatory agencies, a System
institution, as a counterparty to a GSIB, may need to ensure its
qualified financial contracts include this new language recognizing the
close-out restrictions imposed by the QFC Rules.
Without the proposed definitional changes, System institutions
could potentially see higher capital charges imposed on certain
counterparty exposures. The current definitions in our Capital Rule do
not recognize the close-out restrictions on certain qualified financial
contracts newly imposed by the QFC Rules. If a System institution
incorporates these new close-out restrictions in contracts with an
entity subject to the QFC Rules (i.e., GSIBs), the contract may not
meet the existing definition of ``Collateral agreement,'' ``Eligible
margin loan,'' ``Qualifying master netting agreement,'' and ``Repo-
style transaction'' in FCA's Capital Rule. As a result, a System
institution may lose its ability to net offsetting exposures or
recognize the risk-mitigating effects of financial collateral, thus
resulting in a higher capital requirement for the System institution.
Moreover, a System institution engaging in a derivative transaction
that is subject to an EMNA, as defined in the Swap Margin Rule,\39\
would lose the ability to net offsetting exposures for capital
purposes. The proposed changes to the definitions of these terms would
avoid these issues.
---------------------------------------------------------------------------
\39\ See 83 FR 50805 (October 10, 2018).
---------------------------------------------------------------------------
The changes to these definitions do not result in System
institutions waiving or eliminating their ability to exercise their
rights against a defaulting party. Rather, consistent with other GSIB
counterparties, the System institution would not be able to immediately
exercise its rights against a defaulting party until the FDIC begins an
orderly resolution of the counterparty. If a System institution is not
transacting with an entity subject to the QFC Rules, these new
restrictions would not be applicable.
Question 4: To what extent would the QFC Rules impact System
institutions as counterparties to GSIBs or to U.S. operations of
foreign GSIBs? For example, if FCA did not amend these definitions,
what would be the result?
7. Common Equity Tier 1 Capital Eligibility Requirements
As discussed above, one of FCA's objectives in the Capital Rule is
to ensure that the System's capital requirements are comparable to the
Basel III framework and the U.S. Rule, taking into account the
cooperative structure of the System.\40\ The Basel III framework
specified the criteria that capital instruments must meet in order to
be included in the different capital measures. Among these criteria is
the requirement that an instrument be directly issued and paid-in.\41\
We are proposing to add the term ``paid-in'' to the eligibility
criteria for CET1 capital in Sec. 628.20(b)(1)(i), consistent with the
criteria set forth in the Basel III framework and the U.S Rule.\42\
Basel III defines paid-in capital as capital that (1) has been received
with finality by the institution, (2) is reliably valued, (3) is fully
under the institution's control, and (4) does not directly or
indirectly expose the institution to the credit risk of the
investor.\43\
---------------------------------------------------------------------------
\40\ See 81 FR 49720 (July 28, 2016).
\41\ See BCBS, Basel III: A Global Regulatory Framework for More
Resilient Banks and Banking Systems, December 2010 (as revised June
2011).
\42\ See 12 CFR 217.20(b)(1)(i) (FRB); 12 CFR 324.20(b)(1)(i)
(FDIC); 12 CFR 3.20(b)(1)(i) (OCC).
\43\ See BCBS, Basel III Definition of capital--Frequently Asked
Questions, September 2017 (update of FAQs published in December
2011).
---------------------------------------------------------------------------
When we promulgated the Capital Rule, we did not require CET1
instruments to be paid-in because we had interpreted the term to
exclude allocated equities. Allocated equities are the earnings of a
System institution that the institution has converted to stock or to
similar stock-like equities and allocated to member-borrowers.\44\ Farm
Credit banks routinely allocate equities to their affiliated
associations and (in CoBank's case) to retail borrowers, and many of
the associations routinely allocate equities to their retail borrowers.
We have reexamined the attributes of allocated equities and determined
that they fully meet the definition of paid-in capital: The allocated
equities are received with finality by the allocating System
institution when earned and issued; their value is reliably established
as the dollar value of institution net assets allocated; they are fully
under the institution's control because they can be revolved only at
the discretion of the System institution, with the prior
[[Page 55792]]
approval of the FCA; \45\ and the loss-absorbing capacity of the
allocated equities is not dependent on the creditworthiness of the
member-borrower. We do not expect the proposed clarification to have
any impact on System institution practices with respect to allocated
equities.
---------------------------------------------------------------------------
\44\ For a detailed discussion on allocated equities and its
stock-like characteristics, see 81 FR 49727 (July 28, 2016).
\45\ See Sec. Sec. 628.20(b)(1)(iii) and (d)(x).
---------------------------------------------------------------------------
FCA views the statutorily required borrower stock financed by the
System institution as part of an overall loan commitment as meeting the
Basel III criteria for paid-instruments.\46\ However, borrower stock is
not suitable for inclusion in CET1 if it is funded using non-interest-
bearing account receivables.\47\
---------------------------------------------------------------------------
\46\ For example, System institutions usually increase a
borrower's loan commitment by $1,000 in order to cover the stock or
participation certificate purchase. While the loan commitment will
increase by $1,000, those funds are not disbursed to the borrower
and are retained by the institution to cover the purchase. We note
that under FCA Regulation Sec. 628.20(b)(1)(x), statutory borrower
stock required under section 4.3A of the Act is not considered to be
``directly or indirectly'' funded as long as: (A) The purpose of the
loan is not the purchase of capital instruments of the System
institution providing the loan, and (B) the purchase of 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
institution. This approach follows the approach of the European
Banking Authority regarding the standards for CET1 instruments for
cooperatives. See 79 FR 52824 (September 4, 2014) for additional
discussion.
\47\ ``Stock'' funded in this manner has not been received with
finality by the System institution and exposes the System
institution to the credit risk of the borrower. On December 27,
2019, the FCA Board used its reservation of authority in Sec.
628.1(d)(2)(i) to determine that borrower stock funded through the
creation of a non-interest-bearing account receivable in the
borrower's name has characteristics and terms that diminish its
ability to absorb losses and is not suitable for inclusion in CET1
or tier 2 capital.
---------------------------------------------------------------------------
We also propose a conforming change in Sec. 628.20(d)(1)(i) to
clarify that all instruments included in tier 2 capital must be issued
and paid-in.
In addition, we are proposing minor changes to Sec.
628.20(b)(1)(i) and (b)(1)(ii) to align the language more closely to
the language in the U.S. Rule and at the same time to emphasize a
difference from the U.S. Rule. Specifically, the U.S. Rule requires
CET1 instruments to entitle the holder to a claim on residual assets
(after all senior claims have been satisfied) that is proportional to
the holder's share of issued capital. Our rule does not require the
equity holder's claim to be proportional. This is because, unlike
commercial banks and mutual associations that do not allocate equities,
System institutions may have liquidation bylaws that prioritize
residual payments among different classes of common cooperative
equityholders if there are assets remaining after all classes have
received par or face value of their equities. We believe these changes
to Sec. 628.20(b)(1) are not substantive.
B. Clarifying and Other Revisions to the Capital Rule
The proposed amendments to the Capital Rule discussed in this
section incorporate issues discussed in the Capital BL, with
appropriate adjustments. In addition, we propose to make other changes
to the Capital Rule that clarify Agency position.
1. Capitalization Bylaw Adjustment
Section 615.5220(a)(6) requires System institutions to include in
their capitalization bylaws 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 (615) and part 628 of
this chapter are met. We propose to amend this section by replacing the
reference to parts 615 and 628 with a general reference to FCA
regulations. A general reference to FCA's capital adequacy standards
would satisfy the requirement to reference parts 615 and 628 and would
incorporate all capital requirements of the FCA, as well as any future
capital requirements that could potentially be adopted under a new or
different part.
If a System institution has already amended its capitalization
bylaws to include a reference to both part 615 and 628, it would not
need to amend its capitalization bylaws to replace those references
with a general reference to capital adequacy standards established by
FCA. As discussed above, a reference to both part 615 and part 628
would satisfy the proposed requirement for an institution's
capitalization bylaws to include a general reference to capital
adequacy standards established by FCA. However, if the bylaws reference
only part 615 subpart H, or reference only part 628, this would not
satisfy the requirement we are proposing. In these instances, a System
institution would have to amend its capitalization bylaws to include a
general reference to capital adequacy standards established by FCA.
System institution changes to its bylaws to conform to this
regulatory requirement should not change any substantive rights of the
System institution or its member-borrowers. If the change is non-
substantive and does not alter, reduce, or increase the rights of any
member-borrowers, a System institution's board may choose to make a
conforming change to their capitalization bylaws to include a general
reference to regulatory capital adequacy standards without a vote by
its member-borrowers, assuming such bylaws allow for technical
amendments without a shareholder vote.
2. Annual Report to Shareholder Corrections
In existing Sec. 620.5, which lists the required contents of a
System institution's annual report, we propose technical revisions to
ensure institutions report financial data as we intended. System
associations must report their tier 1 leverage ratio in each annual
report for each of the last 5 fiscal years. This requirement was
inadvertently placed in paragraph (f)(4)(iv) of Sec. 620.5. We propose
to move the requirement from Sec. 620.5(f)(4)(iv) and place it in
proposed Sec. 620.5(f)(3)(v), as originally intended.
In addition, we propose to amend the requirement in Sec.
620.5(f)(4) that System institutions report core surplus, total
surplus, and the net collateral ratio (banks only) in a comparative
columnar form for each fiscal year ending in 2012 through 2016. System
institutions must currently report these ratios in each annual report
through 2021, in addition to reporting the capital ratios required
under Sec. 620(f)(2) and (3), resulting in System institutions
reporting capital ratios beyond the 5-year requirement established in
Sec. 620.5(f). Accordingly, we propose to revise Sec. 620.5(f)(4) to
require these disclosures in each annual report through 2021 but only
as long as these ratios are part of the previous 5 fiscal years for
which disclosures are required. For example, the fiscal year ending
2020 annual report to shareholders would report the permanent capital
ratio, CET1 capital ratio, tier 1 capital ratio, total capital ratio,
and tier 1 leverage ratio for the fiscal years ending in 2017-2020, and
the core surplus ratio, total surplus, ratio, and net collateral ratio
for the fiscal year ending in 2016 only.
3. Appropriate Risk-Weighting of Cash
Existing Sec. 628.32(l)(1) states, among other things, that a
System institution must assign a 0-percent risk-weight to cash held in
accounts at a depository institution. This provision may create
confusion about the proper risk-weight for deposits that exceed the
limit of FDIC deposit insurance coverage (currently set at $250,000).
Accordingly, we propose to delete this provision. It is unnecessary to
address in Sec. 628.32(l)(1) the risk-weight assigned to cash held in
depository institution accounts, because other provisions more
accurately address this risk-weight. Specifically, Sec.
628.32(a)(1)(i)(B) requires
[[Page 55793]]
a System institution to assign a 0-percent risk-weight to 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,
including a deposit or other exposure or the portion of a deposit or
other exposure that is insured or otherwise unconditionally guaranteed
by the FDIC or National Credit Union Administration. Section
628.32(d)(1) requires a System institution to assign a 20-percent risk-
weight to exposures to U.S. depository institutions and credit unions
that are not assigned a 0-percent risk-weight under Sec.
628.20(a)(1)(i)(B). We confirm that the 20-percent risk-weight applies,
for example, to a System institution's deposit with an FDIC-insured
bank of funds in excess of the deposit insurance coverage of $250,000.
Existing Sec. 628.32(l)(1) also states that System institutions
must assign a 0-percent risk-weight to cash held in accounts at a
Federal Reserve Bank. We propose to remove this provision because it is
redundant. Section 628.32(a)(1)(i)(A) assigns a 0-percent risk-weight
to an exposure to the central bank of the United States government,
which includes Federal Reserve Banks.
Finally, we propose to revise Sec. 628.32(l)(1) to add a provision
generally assigning a 0-percent risk-weight to gold bullion held in the
System institution's own vaults. The existing provision already
generally assigns a 0-percent risk-weight to gold bullion held in the
vaults of a depository institution.
4. Securitization Formulas
The proposed rule would correct 3 formulas used in the simplified
supervisory formula approach (SSFA) equation under Sec. 628.43(d) and
one formula used in the simple risk-weight approach (SRWA) under Sec.
628.52. These formulas were printed incorrectly in the Federal Register
version of the Tier 1/Tier 2 Capital Framework final rule. We
previously provided the correct formulas in our Capital BL. These are
technical corrections to ensure these approaches are calculated
correctly.
5. Unallocated Retained Earnings and Equivalents Deductions and
Adjustments
The proposed rule would clarify the calculation of the requirement
described in Sec. 628.10 that at least 1.5 percent of the 4 percent
tier 1 leverage ratio minimum must consist of URE and URE equivalents
(UREE). The Capital Rule did not specify how to calculate this
requirement. In our Capital BL, we provided guidance to System
institutions on the deductions to make when calculating this minimum
URE and UREE requirement.\48\ We stated: ``When calculating the URE and
URE equivalents requirement for the leverage ratio, a System
institution must deduct from the numerator an amount equal to all the
deductions required under Sec. 628.22(a). All deductions made to the
denominator when calculating the tier 1 leverage ratio must be made to
the denominator when calculating the URE and URE equivalents
requirement.'' \49\
---------------------------------------------------------------------------
\48\ See Capital BL, item 4.
\49\ Section 628.10(c)(4) requires the amounts deducted under
Sec. Sec. 628.22(a) and (c) and 628.23 to be deducted from tier 1
capital when calculating the tier 1 leverage ratio. However, the
deductions under Sec. Sec. 628.22(c) and 628.23 were not applied to
the numerator when calculating the URE and UREE requirement as they
do not increase the URE of a System institution.
---------------------------------------------------------------------------
We propose to add the Capital BL guidance to Sec. 628.10. We also
propose to require System institutions to deduct purchased equity
investments that are required to be deducted under the corresponding
deduction approach in Sec. 628.22(c). The URE and UREE measure,
because it is a component of the tier 1 leverage ratio, should have
similar deductions.\50\ While the URE and UREE measure represents only
a part of the numerator of the tier 1 leverage ratio, our previous
guidance to deduct such amounts only from Sec. 628.22(a) resulted in
the majority of System institution's URE and UREE measures being higher
than the tier 1 leverage ratio, which was not our intention. We believe
our proposed deduction of purchased stock under Sec. 628.22(c) will
have a minimal impact on System institutions and will not result in any
System institution's URE and UREE measure falling below the regulatory
minimum.\51\ In addition, when calculating the URE and UREE measure,
System institutions must continue to use the same denominator as the
tier 1 leverage ratio. The denominator is equal 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.\52\
---------------------------------------------------------------------------
\50\ We do not find it necessary to require the deductions under
Sec. 628.23 as third-party stock is not a component of URE, UREE,
or CET1 capital.
\51\ As of September 30, 2019, the inclusion of deductions under
Sec. 628.22(c) in the computation of the URE and UREE measure would
have decreased the ratio at System institutions by 1 percent on
average. With computations including the deductions under Sec.
628.22(c), all institutions remain well above the regulatory
minimum.
\52\ As of the date of this proposal, this would be total
average assets for leverage ratio on schedule RC-R.5, line 1.d.
---------------------------------------------------------------------------
Question 5: The FCA seeks comment on the appropriate deductions and
adjustments that should be made to URE and URE equivalents in
determining compliance with Sec. 628.10(b)(4).
6. Service Corporation Deductions and Adjustments
The proposed rule would expand the requirement under existing Sec.
628.22(a)(6) for a System institution to deduct any allocated equity
investment in another System institution, which is defined in part 628
to mean each System bank or association,\53\ by requiring a System
institution also to deduct any allocated equity investment in a System
service corporation.
---------------------------------------------------------------------------
\53\ ``System institution'' is defined in existing Sec. 628.2
as ``a System bank, an association of the Farm Credit System, . . .
and any other institution chartered by the FCA that the FCA
determines should be considered a System institution for the
purposes of this part.'' The FCA has not made any determinations to
include other institutions in this definition.
---------------------------------------------------------------------------
Although we do not know of any allocation of equities by a service
corporation to another institution in the System, a service
corporation's bylaws may permit it to allocate equities to another
System institution. The allocated equity is retained, controlled, and
at risk at the service corporation. Therefore, consistent with FCA's
stated position that equities should be counted in the regulatory
capital of the System institution that has control of the equities
rather than at the System institution that does not control them, these
allocated equities should be counted at the service corporation as
applicable, and deducted from the regulatory capital of the recipient
System institution.
Question 6: The FCA seeks comment on whether any System institution
has received an allocated equity investment from a service corporation.
7. Adjustments for Accruing Patronage and Dividends
We propose to amend the regulatory capital adjustment and deduction
requirements under Sec. 628.22 by including in proposed Sec.
628.22(b) the existing requirement to reverse any accruals of patronage
or dividend payables or receivables that occur prior to a board
declaration resolution.\54\ Under GAAP, institutions that make
patronage and dividend payments that can be reasonably estimated on a
regular and routine basis may accrue those payments as payables.
Similarly, institutions that receive patronage and dividend payments
that can be reasonably estimated on regular and
[[Page 55794]]
routine basis may accrue those payments as receivables. Many System
institutions accrue these payables or receivables on their balance
sheet prior to the board adopting a declaration resolution. For
regulatory capital purposes only, these institutions must adjust their
unallocated retained earnings as follows:
---------------------------------------------------------------------------
\54\ See existing Call Report instructions for Schedule RC-R.4,
Line item 3 at https://www.fca.gov/bank-oversight/fcs-call-reports.
---------------------------------------------------------------------------
If a System institution accrues a patronage or dividend
receivable prior to the date of the board declaration resolution by the
paying institution, then it must subtract this accrual from its URE.
If a System institution accrues a patronage or dividend
payable to either another institution or a borrower prior to the date
of its board declaration resolution, then it must add it back to URE.
If the System institution chooses not to accrue a payable or
receivable until it is declared by the board, then no adjustments to
regulatory capital are necessary. Any adjustment to accruals made
pursuant to this provision is applicable only to regulatory capital
measures as reported to FCA.
8. Bank Disclosures
The proposed rule would amend Sec. 628.63(b)(4) by requiring banks
to disclose a reconciliation of their regulatory capital elements as
they relate to their balance sheets in any audited consolidated
financial statements. We propose to add the word ``applicable'' before
``audited'' to clarify that this reconciliation requirement applies
only to current period financial statements that are audited. There is
no requirement to reconcile with audited financial statements from
previous quarters. Specifically, if a System bank audits only its year-
end financial statements, and not its quarterly financial statements
(as is the general practice of System banks), this requirement would
apply only to the bank's annual report to shareholders. The
reconciliation applies to quarterly shareholder reports only if the
reports are audited.
We also propose to require System banks to disclose the
reconciliation of regulatory capital elements using both point-in-time
and three-month average daily balance regulatory capital values.
Section 628.10(a) requires a System institution to compute its
regulatory capital ratios using average daily balances for the most
recent 3 months. Existing Sec. 628.63(b)(4) does not specify whether
to complete the reconciliation using point-in-time or average daily
balance regulatory capital values.
FCA has long required institutions to compute their capital ratios
using three-month average daily balances; so we believe it is
appropriate that the reconciliation to any applicable audited
consolidated financial statements also use the three-month average
daily balances. One of the primary purposes of this requirement is to
address the disconnect between the numbers used for the calculation of
regulatory capital and the numbers used in published financial
statements. Because FCA measures and monitors regulatory capital using
average daily balances, we believe the reconciliation using average
daily balances is the most accurate and beneficial way to disclose
differences between regulatory capital and audited consolidated
financial statements.
We believe it is also appropriate to include the reconciliation
using point-in-time values. The audited consolidated financial
statement uses point-in-time values; therefore, also completing the
reconciliation using point-in-time values allows for a comparison
between GAAP and regulatory capital using point-in-time numbers.
Disclosing the reconciliation using both average daily and point-in-
time values provides investors and stockholders with the most accurate,
complete, and transparent means to understanding differences between
regulatory capital and GAAP capital.
In addition, we propose to further clarify System disclosures as
follows: Existing Sec. 620.3 requires disclosures by institutions and
by employees, officers, directors, and institution director nominees to
be ``complete.'' Section 628.62(a) requires disclosures from System
banks as outlined in Sec. 628.63. Section 628.62(c) permits a System
bank, in certain situations, not to disclose certain information that
it would otherwise be required to disclose under Sec. 628.63 and to
instead disclose more limited information.
Specifically, Sec. 628.62(c) permits a System bank not to disclose
specific proprietary or confidential commercial or financial
information that it would otherwise be required to disclose if it
concludes that such disclosures would compromise its position, as long
as it discloses more general information about the subject matter,
together with the fact that, and the reasons why, the specific items of
information are not being disclosed.
To clarify that Sec. 620.3 does not require the disclosure of
information that banks may properly not disclose under Sec. 628.62(c),
we propose to revise Sec. 620.3 to state that unless otherwise
determined by FCA, the use of the authorized limited disclosure does
not create an incomplete disclosure. We also propose to revise Sec.
620.3 to permit the modification of the required statement that the
information provided is true, accurate, and complete to explain that
the completeness of the disclosure was determined in consideration of
Sec. 628.62(c).
We are also proposing a technical edit to remove and reserve Sec.
628.63(b)(3) because it is no longer applicable.
Question 7: The FCA seeks comment on the appropriateness and
usefulness to internal and/or external stakeholders of completing the
reconciliation using both point-in-time and average daily balance
values?
9. Retirement of Statutory Borrower Stock
Existing Sec. 628.20(b)(1)(xiv)(B) allows System institutions to
redeem the minimum statutory borrower stock described in Sec.
628.20(b)(1)(x) without prior FCA approval and without satisfying the
minimum holding period for common cooperative equities included in CET1
capital. We propose to add a provision expressly stating that an
institution may redeem such statutory borrower stock only provided
that, after such redemption, the institution continues to comply with
all minimum regulatory capital requirements.
Although the existing rule is silent on whether the institution
must maintain compliance with the regulatory capital standards,
institutions have been required to do so by the Act and FCA regulations
since 1988. Section 4.3A(c)(1)(I) of the Act and Sec. 615.5220(a)(6)
condition the retirement of stock on the institution meeting the
minimum capital adequacy standards established by FCA. The proposed
amendment to Sec. 628.(b)(1)(xiv)(B) would eliminate any possible
misinterpretation that an institution could retire the statutory
borrower stock if the institution were not meeting its regulatory
capital requirements both before and after the retirement.
Although we are not proposing additional changes to the treatment
of statutory borrower stock, we provide the following additional
clarifications:
For any statutory borrower stock that exceeds $1,000 or 2
percent of the loan amount, whichever is less, the minimum holding
periods apply (7 years for CET1 and 5 years for Tier 2) if an
institution plans to include the additional stock in tier 1 or tier 2
capital.
The minimum statutory borrower stock includible in CET1 is
the outstanding balance of the statutory minimum borrower stock. If a
loan is for $50,000 or more, the amount includible in CET1 capital
without a minimum
[[Page 55795]]
holding period is no more than $1,000 until such stock is retired. If a
loan is for less than $50,000 at origination, the amount includible in
CET1 capital is 2 percent of the originated loan amount until such
stock is retired. If a revolving line of credit is originated for
$50,000 or more and the amount of borrower stock is retired as the loan
pays down, the amount of stock remaining on the calculation date, up to
$1,000, is the amount includible in CET1 without a minimum holding
period. If a revolving line of credit is originated for less than
$50,000 and the amount of borrower stock is retired as the loan pays
down, the amount of stock remaining on the calculation date, up to 2
percent of the originated loan amount, is the amount includible in CET1
without a minimum holding period.
C. General Discussion
FCA is using this notice of proposed rulemaking to provide further
clarification and guidance to the System on continuously redeemable
preferred stock and to respond to a letter received from the Farm
Credit Council. We also seek comment on potential changes that may be
made to FCA's existing permanent capital regulations.
1. Continuously Redeemable Preferred Stock (H Stock)
Some System associations have issued continuously redeemable
perpetual preferred stock (typically called Harvest Stock or H Stock)
to their member-borrowers to invest and participate in their
cooperative beyond the minimum borrower stock purchase. H Stock is an
at-risk investment, issued without a stated maturity and retireable
only at the discretion of the institution's board. A feature of the
stock is the institution's intent to redeem it upon the request of the
holder as long as the institution is in compliance with its regulatory
capital requirements. Because of this feature, FCA considers the stock
to be continuously redeemable. Some of the institutions also lower the
operational hurdles to redemption by delegating the board's authority
to retire all member-borrower stock to management provided certain
board-approved minimum regulatory capital ratios are maintained. FCA
has determined that holders reasonably expect the institution to redeem
the stock shortly after they make a request and, therefore, the stock
does not meet the requirements of Sec. 628.20(b)(1)(iv), Sec.
628.20(c)(1)(xiv)(A) or Sec. 628.20(d)(1)(xi)(A) for inclusion in tier
1 or tier 2 capital. Even after the stock has been outstanding for 5
years or more, the continued policy of the institutions to redeem this
stock upon request and the continued expectations of holders disqualify
the stock for inclusion in tier 1 or tier 2 capital.
2. Farm Credit Council Letter
In addition, FCA has received a letter from the Farm Credit Council
on behalf of System banks and associations (System Letter) \55\
recommending changes to the risk-weighting of investments by System
institutions in service corporations and unincorporated business
entities (UBEs).
---------------------------------------------------------------------------
\55\ Letter dated November 22, 2016, from Charles Dana, General
Counsel, Farm Credit Council to Gary K. Van Meter, Director, Office
of Regulatory Policy. The Farm Credit Council is a trade association
representing the interests of System banks and associations. This
letter was received after the final Capital Rule had been adopted by
the FCA Board and communicates a request to change certain
provisions of the final Capital Rule, as discussed in this section.
---------------------------------------------------------------------------
The System Letter requests that a System institution's investment
in a service corporation be risk-weighted at 100 percent instead of
being deducted from CET1 capital. The stated basis for such treatment
is that investments in service corporations are approved by their
respective owners that closely control their activities, and the
service corporations do not possess lending authorities (i.e., they do
not assume exposure to credit risks).
The System Letter also recommended directing System institutions to
either risk-weight or deduct their investments in UBEs, depending on
the specific nature of the UBE.\56\ The letter suggests that
institutions with an equity investment in AgDirect, LLP should deduct
the investment from regulatory capital.
---------------------------------------------------------------------------
\56\ Under the existing rules, equity investments in UBEs are
generally included in risk-weighted assets in accordance with Sec.
628.52.
---------------------------------------------------------------------------
We have considered the request and have decided not to propose that
institutions risk-weight equity investments in service corporations
instead of deducting such investments. FCA continues to believe that
such capital investments are committed to support risks at the service
corporation level and that such capital investments must be available
to meet any capital needs of the service corporation.\57\
---------------------------------------------------------------------------
\57\ See 63 FR 39222 (July 22, 1998).
---------------------------------------------------------------------------
With respect to the treatment of UBEs, FCA may consider the
appropriate regulatory capital treatment of the UBE and apply such
treatment on a case-by-case determination, as appropriate.
FCA clarifies that the Farm Credit System Association Captive
Insurance Company (Captive Insurance Company) is not a System
institution as defined in Sec. 628.2. Accordingly, any System
institution with an equity investment in the Captive Insurance Company
must risk-weight that equity investment.
3. Permanent Capital
In 1988, Congress added a definition of ``permanent capital'' to
the Act and required the FCA to adopt risk-based permanent capital
standards for System institutions. The FCA adopted permanent capital
regulations in 1988.\58\
---------------------------------------------------------------------------
\58\ See 53 FR 39229 (October 6, 1988).
---------------------------------------------------------------------------
The Act defines permanent capital to include current earnings,
unallocated and allocated earnings,\59\ stock (other than stock
retireable on repayment of the holder's loan or at the discretion of
the holder, and certain stock issued before October 1988), surplus less
allowance for loan losses, and other debt or equity instruments that
the FCA determines appropriate to be considered permanent capital.
Allocated equities shared by a bank and each affiliated association--
that is, equities that a bank has allocated to an affiliated
association--appear on the books of both institutions but can be
counted in only one institution's permanent capital pursuant to a
capital allotment agreement between the two institutions.
---------------------------------------------------------------------------
\59\ In this preamble, ``unallocated and allocated earnings''
would be equivalent to ``unallocated retained earnings and allocated
equities.'' Additionally, ``surplus'' would be ``unallocated
retained earnings.''
---------------------------------------------------------------------------
By adopting and implementing the Tier 1/Tier 2 Capital Framework,
FCA has shifted its focus from permanent capital to total capital (tier
1 and tier 2). Because the Act defines permanent capital, FCA must
require reporting and monitoring of permanent capital. Moreover, FCA
has limited authority to change the components of permanent capital.
However, the FCA has full authority to implement appropriate deductions
to permanent capital in the numerator and set the risk-weights used in
risk-adjusted assets in the denominator of the permanent capital ratio.
FCA seeks to reduce the burden associated with permanent capital, and
we seek comment on the best way to do so consistent with statutory
mandates. We note that H Stock, in its current form, is included in
permanent capital and FCA does not seek to exclude H Stock from
permanent capital.
Question 8: What, if any, changes to the permanent capital
regulations (Sec. Sec. 615.5201, 615.5206, 615.5207, and 615.5208)
should be made to increase their clarity and understanding?
Question 9: Is calculating permanent capital burdensome for System
institutions? If so, are there any changes FCA could make to this
calculation that would reduce this burden, considering that the
definition of permanent capital
[[Page 55796]]
in the Act precludes us from changing the components of permanent
capital?
Question 10: Should FCA more closely align the permanent capital
calculation with the total capital (tier 1 and tier 2) calculations? If
so, how could FCA accomplish this, considering that for permanent
capital, the Act specifies deductions related to bank and association
allotment agreements?
III. Abbreviations
BCBS Basel Committee on Banking Supervision
CFR Code of Federal Regulations
CFTC Commodity Futures Trading Commission
EMNA Eligible Master Netting Agreement
FCA Farm Credit Administration
FDIC Federal Deposit Insurance Corporation
FDI Act Federal Deposit Insurance Corporation Improvement Act of
1991
FFIEC Federal Financial Institutions Examination Council
FR Federal Register
GAAP Generally Accepted Accounting Principles (U.S.)
GSE Government-Sponsored Enterprise
GSIB Global Systemically Important Bank
OCC Office of the Comptroller of the Currency
QFC Qualified Financial Contract
QMNA Qualified Master Netting Agreement
SEC Securities and Exchange Commission
SFA Supervisory Formula Approach
SRWA Simple Risk-Weight Approach
SSFA Simplified Supervisory Formula Approach
UBE Unincorporated Business Entity
URE Unallocated Retained Earnings
UREE Unallocated Retained Earnings Equivalents
U.S.C. United States Code
IV. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), FCA hereby certifies that this proposed 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.
Lists of Subjects
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 628
Accounting, Agriculture, Banks, Banking, Capital, Government
securities, Investments, Rural areas.
For the reasons stated in the preamble, the Farm Credit
Administration proposes to amend parts 614, 615, 620 and 628 of chapter
VI, title 12 of the Code of Federal Regulations as follows:
PART 614--LOAN POLICIES AND OPERATIONS
0
1. The authority citation for part 614 is revised to read as follows:
Authority: 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, 4.14D, 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, 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, as amended by
section 405 of Pub. L. 100-399, 102 Stat. 1000 (12 U.S.C. 2121
note); 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.
0
2. Amend Sec. 614.4351 by:
0
a. Revising paragraph (a);
0
b. Removing and reserving paragraph (a)(1); and
0
c. Revising paragraph (a)(2).
The revisions read as follows:
Sec. 614.4351 Computation of lending and leasing limit base.
(a) Lending and leasing limit base. An institution's lending and
leasing limit base is composed of the total capital (Tier 1 and Tier 2)
of the institution, as defined in Sec. 628.2 of this chapter, with
adjustments applicable to the institution provided for in Sec. 628.22
of this chapter, and with the following further adjustments:
(1) [Reserved]
(2) 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
3. 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, 4.3A, 4.9, 4.14B, 4.25, 5.9,
5.17, 8.0, 8.3, 8.4, 8.6, 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,
2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, 2279aa-10, 2279aa-
12); sec. 301(a), Pub. L. 100-233, 101 Stat. 1568, 1608 (12 U.S.C.
2154 note); sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15
U.S.C. 78o-7 note).
0
4. Amend Sec. 615.5200 by replacing the existing language with the
following language:
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 expressly
acknowledge the continuing and binding effect of all board resolutions
adopted in accordance with Sec. Sec. 628.20(b)(1)(xiv), (c)(1)(xiv),
(d)(1)(xi), and 628.21. 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
[[Page 55797]]
equities may be redeemed or revolved consistent with the System
institution's applicable bylaws or board of directors' resolutions.
(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.
0
5. Amend Sec. 615.5201 by revising the definition of ``System
institution'' to read as follows:
Sec. 615.5201 Definitions.
* * * * *
System institution means a System bank, an association of the Farm
Credit System, 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.
0
6. Amend Sec. 615.5220 by revising paragraph (a)(6) to read as
follows:
Sec. 615.5220 Capitalization bylaws.
(a) * * *
(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 by the
Farm Credit Administration, and the capital requirements established by
the board of directors of the System institution, are met;
* * * * *
PART 620--DISCLOSURE TO SHAREHOLDERS
0
7. 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
8. Amend Sec. 620.3 byadding in paragraphs (a) and (c)(3) a new last
sentence to read as follows.
Sec. 620.3 Accuracy of reports and assessment of internal control
over financial reporting.
(a) * * * Unless otherwise determined by FCA, the appropriate use
of the limited disclosure authorized by Sec. 628.62(c) does not create
an incomplete disclosure.
* * * * *
(c) * * *
(3) * * * If the report contains the limited disclosure authorized
by Sec. 628.62(c), the statement may be modified to explain that the
completeness of the report was determined in consideration of Sec.
628.62(c).
* * * * *
0
9. Amend Sec. 620.5 by:
0
a. Adding paragraph(f)(3)(v);
0
b. Revising (f)(4).
The addition and revision read as follows:
Sec. 620.5 Contents of the annual report to shareholders.
* * * * *
(f) * * *
(3) * * *
(v) Tier 1 leverage ratio.
(4) The following ratios shall be disclosed in comparative columnar
form in each annual report through fiscal year end 2021, only as long
as these ratios are part of the previous 5 fiscal years of financial
data required under Sec. 620.5(2) and (3):
(i) Core surplus ratio.
(ii) Total surplus ratio.
(iii) For banks only, net collateral ratio.
* * * * *
PART 628--CAPITAL ADEQUACY OF SYSTEM INSTITUTIONS
0
10. The authority citation for part 628 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, 4.3A, 4.9, 4.14B, 4.25, 5.9,
5.17, 8.0, 8.3, 8.4, 8.6, 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,
2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, 2279aa-10, 2279aa-
12); sec. 301(a), Pub. L. 100-233, 101 Stat. 1568, 1608 (12 U.S.C.
2154 note); sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15
U.S.C. 78o-7 note).
0
11. Amend Sec. 628.2 by:
0
a. Revising the definition of ``Collateral agreement'';
0
b. Adding in alphabetical order a definition for ``Common cooperative
equity issuance date'';
0
c. Revising the definition of ``Eligible margin loan'';
0
d. Revising the definition of ``Qualifying master netting agreement'';
0
e. Revising the definition of ``Repo-style transaction'';
0
f. Revising the definition of ``System institution''.
The revisions and addition read as follows:
Sec. 628.2 Definitions
* * * * *
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
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:
(1) 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 (1)(i) in order to facilitate the orderly
resolution of the defaulting counterparty;
(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (1)(i) of this
definition; or
(2) Other than to the extent necessary for the counterparty to
comply with the requirements of part 47, Subpart I of part 252 or part
382 of Title 12, as applicable.
* * * * *
Common cooperative equity issuance date means the date in which the
holding period for purchased stock (excluding statutory minimum
borrower stock and third-party stock) and allocated equities start:
(1)For allocated equities, the quarter-ending in which:
[[Page 55798]]
(i) The System institution's Board of Directors has passed a
resolution declaring a patronage refund; and
(ii) The System institution has completed the applicable accounting
treatment by segregating the new allocated equities from its
unallocated retained earnings.
(iii) For purchased stock (excluding statutory minimum borrower
stock and third-party stock), the quarter-ending in which the stock is
acquired by the holder and recognized on the institution's balance
sheet.
* * * * *
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:
(A) Any exercise of rights under the agreement will not 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,\60\ or laws of foreign
jurisdictions that are substantially similar to the U.S. laws
referenced in this paragraph (1)(iii)(A)(1) in order to facilitate the
orderly resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\60\ 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 or the
Federal Reserve Board's Regulation EE (12 CFR part 231).
---------------------------------------------------------------------------
(2) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (1)(iii)(A)(1) of
this definition; and
(B) The agreement may limit 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 of
the counterparty to the extent necessary for the counterparty to comply
with the requirements of part 47, subpart I of part 252 or part 382 of
Title 12, as applicable.
(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.
* * * * *
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:
(i) Any exercise of rights under the agreement will not be stayed
or avoided under applicable law in the relevant jurisdictions, other
than:
(A) 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)(A) in order to facilitate the
orderly resolution of the defaulting counterparty; or
(B) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this
definition; and
(ii) The agreement may limit 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 of
the counterparty to the extent necessary for the counterparty to comply
with the requirements of part 47, Subpart I of part 252 or part 382 of
Title 12, as applicable;
(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 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), a qualified financial contract under
section 11(e)(8) of the Federal Deposit Insurance Act, or a netting
contract between or among financial institutions under sections 401-407
of the Federal Deposit Insurance Corporation Improvement Act or the
Federal Reserve's Regulation EE (12 CFR part 231); 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:
(1) 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 (3)(ii)(A)(1)(i) in order to facilitate
the orderly resolution of the defaulting counterparty;
(ii) Where the agreement is subject by its terms to, or
incorporates, any of the
[[Page 55799]]
laws referenced in paragraph (3)(ii)(A)(1)(i) of this definition; and
(2) The agreement may limit 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 of
the counterparty to the extent necessary for the counterparty to comply
with the requirements of part 47, Subpart I of part 252 or part 382 of
Title 12, as applicable; 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
(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.
* * * * *
System institution means a System bank, an association of the Farm
Credit System, 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.
* * * * *
0
12. Amend Sec. 628.10 by revising paragraph (c)(4) to read as follows:
Sec. 628.10 Minimum capital requirements.
* * * * *
(c) * * *
(4) Tier 1 leverage ratio. (i) 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.
(ii) To calculate the measure of URE and URE equivalents described
in Sec. 628.10(b)(4), a System institution must deduct from URE and
URE equivalents an amount equal to all the deductions required under
Sec. 628.22(a) and (c), and must use the denominator of the tier 1
leverage ratio.
* * * * *
0
13. Amend Sec. 628.20 by revising paragraphs (b)(1)(i) through (ii),
(xiv), (c)(1)(xiv), (d)(1)(i), (1)(xi), and (f)(5)(ii).
The revisions read as follows:
Sec. 628.20 Capital components and eligibility criteria for tier 1
and tier 2 capital instruments.
* * * * *
(b) * * *
(1) * * *
(i) The instrument is paid-in, issued directly by the System
institution, and represents the most subordinated claim 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 after all senior claims have
been satisfied in a receivership, insolvency, liquidation, or similar
proceeding;
* * * * *
(xiv) The System institution's capitalization bylaws, or a
resolution adopted by its board of directors under Sec. 628.21,
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, as long as after the redemption, the System
institution continues to comply with all minimum regulatory capital
requirements.
* * * * *
(c) * * *
(1) * * *
(xiv) The System institution's capitalization bylaws, or a
resolution adopted by its board of directors under Sec. 628.21,
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).
* * * * *
(d) * * *
(1) * * *
(i) The instrument is issued and paid-in;
* * * * *
(xi) The System institution's capitalization bylaws, or a
resolution adopted by its board of directors under Sec. 628.21,
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).
* * * * *
(f) * * *
(5) * * *
(ii) After such cash payments have been declared and defined by
resolution of the board, the dollar amount of the System institution's
CET1 capital at quarter-end equals or exceeds the dollar amount of CET1
capital on the same quarter-end in the previous calendar year; and
* * * * *
0
14. Add new Sec. 628.21 to read as follows:
Sec. 628.21 Capital bylaw or board resolution to include equities in
tier 1 and tier 2 capital.
In order to include otherwise eligible purchased and allocated
equities in tier 1 capital and tier 2 capital, the System institution
must adopt a capitalization bylaw, or its board of directors must adopt
a binding resolution, which resolution must be acknowledged by the
board on an annual basis in the capital adequacy plan described in
Sec. 615.5200, in which the institution undertakes the following, as
applicable:
(a) The institution shall obtain prior FCA approval under Sec.
628.20(f) before:
(1) Redeeming or revolving the equities included in common equity
tier 1 (CET1) capital;
(2) Redeeming or calling the equities included in additional tier 1
capital; and
(3) Redeeming, revolving, or calling instruments included in tier 2
capital other than limited life preferred stock or subordinated debt on
the maturity date.
(b) The equities shall have a minimum redemption or revolvement
period as follows:
(1) 7 years for equities included in CET1 capital, except that the
minimum statutory borrower stock described in Sec. 628.20(b)(1)(x) may
be redeemed without a minimum holding period and that equities
designated as unallocated retained earnings (URE) equivalents cannot be
revolved without submitting a written request to the FCA for prior
approval;
(2) A minimum no-call, repurchase, or redemption period of 5 years
for additional tier 1 capital; and
(3) A minimum no-call, repurchase, redemption, or revolvement
period of 5 years for tier 2 capital.
(c) The institution shall submit to FCA a written request for prior
approval before:
(1) Redesignating URE equivalents as equities that the institution
may
[[Page 55800]]
exercise its discretion to redeem other than upon dissolution or
liquidation;
(2) Removing equities or other instruments from CET1, additional
tier 1, or tier 2 capital other than through repurchase, cancellation,
redemption or revolvement; and
(3) 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.
(d) 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.
(e) The minimum redemption and revolvement period (holding period)
for purchased and allocated equities starts on the common cooperative
equity issuance date, as defined in Sec. 628.2.
0
15. Amend Sec. 628.22 by revising paragraphs (a)(6) and (b) to read as
follows:
Sec. 628.22 Regulatory capital adjustments and deductions.
* * * * *
(a) * * *
(6) The System institution's allocated equity investment in another
System institution or service corporation; and
* * * * *
(b) Regulatory adjustments to common equity tier 1 capital. (1) Any
accrual of a patronage or dividend payable or receivable recognized in
the financial statements prior to a related board declaration
resolution must be reversed to or from unallocated retained earnings
for purposes of calculating common equity tier 1 capital.
* * * * *
0
16. Amend Sec. 628.32 by revising paragraph (l)(1) to read as follows:
Sec. 628.32 General risk weights.
* * * * *
(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 or in transit; to gold bullion held in the System
institution's own vaults or 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.
* * * * *
0
17. Amend Sec. 628.43 by revising paragraphs (d)(1) and(2) to read as
follows:
Sec. 628.43 Simplified supervisory formula approach (SSFA) and the
gross-up approach.
* * * * *
(d) * * *
(1) The System institution must define the following parameters:
KA = (1-W) x KG + (0.5 x W)
(2) Then the System institution must calculate KSSFA according to
the following equation:
[GRAPHIC] [TIFF OMITTED] TP10SE20.044
* * * * *
0
18. Amend Sec. 628.52 by revising paragraph (c)(2)(ii) to read as
follows:
Sec. 628.52 Simple risk-weight approach (SRWA).
* * * * *
(c) * * *
(2) * * *
(ii) Under the variability-reduction method of measuring
effectiveness:
[GRAPHIC] [TIFF OMITTED] TP10SE20.045
Where:
Xt = At-Bt;
At = the value at time t of one exposure in a hedge pair; and
[[Page 55801]]
Bt = the value at time t of the other exposure in a hedge pair.
* * * * *
0
19. Amend Sec. 628.63 by:
0
a. Removing and reserving paragraph (b)(3);
0
b. Revising paragraph (b)(4).
The revision reads as follows:
Sec. 628.63 Disclosures.
* * * * *
(b) * * *
(3) [Reserved]
(4) A reconciliation of regulatory capital elements using both
month-end and average daily balances as they relate to its balance
sheet in any applicable audited consolidated financial statements.
* * * * *
Dated: July 21, 2020.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2020-16052 Filed 9-9-20; 8:45 am]
BILLING CODE 6705-01-P