[Federal Register Volume 86, Number 123 (Wednesday, June 30, 2021)]
[Proposed Rules]
[Pages 34645-34653]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-13556]
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FARM CREDIT ADMINISTRATION
12 CFR Part 615
RIN 3052-AD44
Bank Liquidity Reserve
AGENCY: Farm Credit Administration.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: The Farm Credit Administration (FCA, we, our) is contemplating
revising its liquidity regulations so Farm Credit System (FCS or
System) banks can better withstand crises that adversely impact
liquidity and pose a risk to their viability. FCA is considering
whether to amend our existing liquidity regulatory framework. We are
seeking comments from the public on how to amend or restructure our
liquidity regulations.
DATES: Please send us your comments on or before September 28, 2021.
ADDRESSES: For accuracy and efficiency reasons, please submit comments
by email or through FCA's website. We do not accept comments submitted
by facsimiles (fax), as faxes are difficult for us to process and
achieve 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: Kevin J. Kramp, Director, Office of Regulatory
Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA
22102-5090.
You may review copies of comments we receive 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. You may also review comments at our office in McLean,
Virginia. Please call us at (703) 883-4056 or email us at [email protected] to make an appointment.
FOR FURTHER INFORMATION CONTACT:
Technical information: Ryan Leist, [email protected], Senior
Accountant, or Jeremy R. Edelstein, [email protected], Associate
Director, Finance and Capital Markets Team, Office of Regulatory
Policy, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4414, TTY (703) 883-4056, or [email protected];
or
Legal information: Richard Katz, [email protected], Senior Counsel,
Office of General Counsel, Farm Credit Administration, McLean, VA
22102-5090, (703) 883-4020, TTY (703) 883-4056.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Objectives of the Advance Notice of Proposed Rulemaking
B. Background on System Liquidity
II. Recent Updates to System Liquidity Regulations
III. Potential Areas for Improvement
IV. Request for Comments
A. Existing FCA Liquidity Regulations
B. Applicability of the Liquidity Coverage Ratio and Net Stable
Funding Ratio
C. Other Comments Requested
I. Introduction
A. Objectives of the Advance Notice of Proposed Rulemaking
FCA's purpose in this Advance Notice of Proposed Rulemaking is to
gather public input to:
Ensure that each FCS bank operates under a comprehensive
liquidity framework, so it consistently maintains adequate liquidity to
cover all of its potential obligations, including unfunded commitments
and other material contingent liabilities, under stressful conditions;
Assess if, and to what extent, the Basel III International
framework for liquidity risk measurement, standards and monitoring
(hereafter ``Basel III Liquidity Framework''), issued by the Basel
Committee on Banking Supervision (BCBS), and regulations of the Federal
banking regulatory agencies (FRBAs) implementing this framework for
banking organizations should influence revisions to FCA's existing
liquidity framework; \1\
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\1\ The Federal banking regulatory agencies include the Office
of the Comptroller of the Currency, Board of Governors of the
Federal Reserve System (hereafter Federal Reserve Board), and the
Federal Deposit Insurance Corporation. See ``Liquidity Coverage
Ratio: Liquidity Risk Measurement Standards,'' 79 FR 61440 (October
10, 2014) and ``Net Stable Funding Ratio: Liquidity Risk Measurement
Standards and Disclosure Requirements,'' 86 FR 9120 (February 11,
2021).
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Determine if the Basel III Liquidity Framework is
appropriate for FCS banks, and evaluate the impacts of augmenting FCA's
existing liquidity framework to incorporate appropriate aspects of the
Basel III Liquidity Framework and the FBRAs' implementation of the
framework; \2\ and
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\2\ Basel III was published in December 2010 and revised in June
2011. The text is available at http://www.bis.org/publ/bcbs189.htm.
The BCBS was established in 1974 by central banks with bank
supervisory authorities in major industrial countries. The BCBS
develops banking guidelines and recommends them for adoption by
member countries and others. BCBS documents are available at https://www.bis.org/. The FCA does not have representation on the Basel
Committee, as do the FBRAs, and is not required by law to follow the
Basel standards. The Basel III Liquidity Coverage Ratio and
liquidity risk monitoring tools document was published in January
2013 and the Net stable funding ratio document was published in
October 2014.
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Determine the respective costs and benefits of updating
FCA's liquidity framework for FCS banks.
B. Background on System Liquidity
In 1916, Congress created the System to provide permanent, stable,
affordable,
[[Page 34646]]
and reliable sources of credit and related services to American
agricultural and aquatic producers. The System currently consists of 3
Farm Credit Banks, 1 agricultural credit bank, 66 agricultural credit
associations, 1 Federal land credit association, service corporations,
and the Federal Farm Credit Banks Funding Corporation (Funding
Corporation).\3\ 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,\4\ which enable the System to extend short-, intermediate-
, and long-term credit and related services to farmers, ranchers,
aquatic producers and harvesters, their cooperatives, rural utilities,
exporters of agricultural commodities products, and capital equipment,
farm-related businesses, and certain rural homeowners.\5\ The System's
enabling statute is the Farm Credit Act of 1971, as amended (Act).\6\
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\3\ Number of institutions as of January 1, 2021. 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 liquidity regulations that apply to Farmer Mac. This Advance
Notice of Proposed Rulemaking does not affect Farmer Mac, and the
use of the term ``System institution'' in this preamble does not
include Farmer Mac.
\4\ The Funding Corporation is established pursuant to section
4.9 of the Farm Credit Act of 1971, as amended, and is owned by all
Farm Credit banks.
\5\ The agricultural credit bank lends to, and provides other
financial services to farmer-owned cooperatives, rural utilities
(electric and telecommunications), 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.
\6\ 12 U.S.C. 2001-2279cc. The Act is available at www.fca.gov
under ``Laws and regulations,'' and ``Statutes.''
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In many respects, the FCS is different from other lenders. In
contrast to most commercial banks and other financial institutions, the
System lends primarily to agriculture and other eligible borrowers in
rural areas. Unlike most other lenders, FCS banks and associations are
cooperatives that are owned and controlled by their member-borrowers.
Their common equity is not publicly traded. The System also funds its
operations differently than most commercial lenders. FCS banks and
associations are not depository institutions, and for this reason,
System-wide debt securities, not deposits, are the System's primary
source for funding loans to agricultural producers, their cooperatives,
and other eligible borrowers. Although section 4.2(a) of the Act
authorizes FCS banks to borrow from commercial banks and other lending
institutions, lines of credit with such lenders are only used as a
secondary source of liquidity.
As a government-sponsored enterprise (GSE), the System depends on
continuing access to the capital markets to obtain the funds necessary
to extend credit to agriculture, aquaculture, rural utilities, and
rural housing in both good and bad economic times. If access to the
capital markets becomes impeded for any reason, FCS banks must have
enough readily available funds and assets that can be quickly converted
into cash to continue operations and pay maturing obligations. Unlike
commercial banks, the System does not have a lender of last resort and
does not have a guaranteed line of credit from the U.S. Treasury or the
Federal Reserve.
As part of our ongoing efforts to ensure the FCS banks have
sufficient liquidity to fund operations in the event of market
disruptions, and in light of updated guidance and regulations published
by the BCBS and FBRAs, we are soliciting comments on the best ways to
enhance FCA's existing liquidity framework.
II. Recent Updates to System Liquidity Regulations
FCA regulations governing System banks' liquidity were last
substantially updated in 2013 in response to the 2008 financial
crisis.\7\ FCA proposed amendments to its liquidity requirements in
2011 to improve the quality of liquidity and bolster the ability of the
System banks to fund their operations during times of economic,
financial, or market adversity.\8\ At the time, FCA considered the
Basel III Liquidity Framework that was published in September 2008 and
December 2010,\9\ but decided not to adopt the Basel III liquidity
ratios. The final rule incorporated the liquidity coverage principles
of Basel III as appropriate to the System, improved the System's
ability to withstand market disruptions by strengthening liquidity
management practices at Farm Credit banks, and enhanced the liquidity
of assets in their liquidity reserves. The objectives of our 2013
liquidity final rule \10\ were to:
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\7\ See 78 FR 23438 (April 18, 2013), as corrected by 78 FR
26701 (May 8, 2013). In addition, technical, non-substantive
revisions to the terms ``Government-sponsored enterprise (GSE)'' and
``U.S. Government agency'' were made in 2018 (83 FR 27486 (June 12,
2018)).
\8\ See 76 FR 80817 (December 27, 2011).
\9\ See ``Principles for Sound Liquidity Risk Management and
Supervision.'' September 2008; and ``Basel III: International
framework for liquidity risk measurement, standards and
monitoring.'' December 2010.
\10\ See supra footnote 7.
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Improve the capacity of FCS banks to pay their obligations
and fund their operations by maintaining adequate liquidity to
withstand various market disruptions and adverse economic or financial
conditions;
Strengthen liquidity management at all FCS banks;
Enhance the liquidity of assets that System banks hold in
their liquidity reserves;
Require FCS banks to maintain a three-tiered liquidity
reserve. The first tier of the liquidity reserve must consist of a
sufficient amount of cash and cash-like instruments to cover each
bank's financial obligations for 15 days. The second and third tiers of
the liquidity reserve must contain cash and highly liquid instruments
that are sufficient to cover the bank's obligations for the next 15 and
subsequent 60 days, respectively;
Establish a supplemental liquidity buffer that a bank can
draw upon during an emergency and is sufficient to cover the bank's
liquidity needs beyond 90 days; and
Strengthen each bank's Contingency Funding Plan (CFP).
As explained in the preamble to the 2013 final rule, the amendments
to Sec. 615.5134 incorporated many of the principles that the BCBS and
the FBRAs have articulated on liquidity management because many of
these fundamental concepts apply to all financial institutions,
including FCS banks. The comprehensive supervisory approach developed
by the BCBS and the FBRAs effectively strengthens both the liquidity
reserves and the liquidity risk management practices at regulated
financial institutions.
FCA's update created three levels of liquid assets (levels 1, 2,
and 3) which are similar to, but not exactly the same as, the three
levels of high-quality liquid assets (HQLA) established in the Basel
III Liquidity Framework (levels 1, 2a, and 2b) and used in the
Liquidity Coverage Ratio (LCR).\11\ In addition, FCA's framework
adopted core concepts of the FBRA's rules, including the supplemental
liquidity buffer, specific policies and internal controls that combat
liquidity risk, and CFPs based in part on the results of liquidity
stress tests.
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\11\ See 79 FR 61440 (October 10, 2014).
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The Basel III Liquidity Framework is not the only basis for the
existing liquidity regulation. The regulation was also based upon the
System's own initiatives to improve liquidity
[[Page 34647]]
management as well as the FCA's experiences from examining liquidity
risk management at Farm Credit banks and the Funding Corporation. In
this context, the regulation implemented the best practices available
for liquidity management at FCS banks at the time.
The Farm Credit System Insurance Corporation (FCSIC) may use its
Insurance Fund as a backup source of liquidity for System banks through
its assistance authorities.\12\ Additionally, subsequent to FCA
adopting the rule, FCSIC entered into an agreement with the Federal
Financing Bank (FFB) for a $10 billion line of credit.\13\ Pursuant to
this agreement, the FFB may advance funds to FCSIC when exigent market
circumstances \14\ make it extremely doubtful that: The Funding
Corporation can issue new System-wide debt obligations to repay
maturing obligations; and one or more insured System banks will be able
to pay maturing debt obligations without selling available liquidity
reserve assets at a material loss. If necessary, FCSIC would use the
funds advanced by the FFB to increase amounts in its Insurance Fund to
provide assistance to the System banks until market conditions
improve.\15\
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\12\ See 12 U.S.C. 2277a-10(a)(1); Section 5.61(a)(1) of the
Act.
\13\ On September 24, 2013, FCSIC entered into an agreement with
the FFB, a U.S. government corporation subject to the supervision
and direction of the U.S. Treasury.
\14\ An ``exigent market circumstance'' is a broad disruption
across U.S. credit markets that originates external to and
independent of the Farm Credit System.
\15\ The agreement provides for a short-term revolving credit
facility of up to $10 billion, is renewable annually and terminates
on September 30, 2021, unless otherwise further extended.
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The decision whether to provide assistance, including seeking funds
from the FFB, is at the discretion of FCSIC, and each funding
obligation of the FFB is subject to various terms and conditions and,
as a result, there can be no assurance that funding would be available
if needed by the System. This FCSIC-FFB revolving credit facility is
subject to annual renewal. Additionally, the agreement only applies
during exigent market circumstances, and can only be used if the amount
needed to repay maturing System-wide insured debt obligations will
exceed available Insurance Fund reserves. As such, FCA does not
consider potential FCSIC assistance, including additional amounts
available through its agreement with the FFB, when determining
liquidity requirements or completing examinations of liquidity and
related management practices at FCS institutions.
FCA has closely monitored how the FBRAs have adjusted Basel III and
applied it to the institutions they supervise since 2013. In response
to these developments and more recent adverse market conditions, FCA
believes it is appropriate to consider updates to the existing FCA
liquidity framework.\16\
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\16\ The FCA has broad authority under various provisions of the
Act to supervise and regulate liquidity management at FCS banks.
Section 5.17(a) of the Act authorizes the FCA to: (1) Approve the
issuance of FCS debt securities under section 4.2(c) and (d) of the
Act; (2) establish standards regarding loan security requirements at
FCS institutions, and regulate the borrowing, repayment, and
transfer of funds between System institutions; (3) prescribe rules
and regulations necessary or appropriate for carrying out the Act;
and (4) exercise its statutory enforcement powers for the purpose of
ensuring the safety and soundness of System institutions.
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III. Potential Areas for Improvement
Our current liquidity regulation Sec. 615.5134, which we finalized
in 2013, responded to the 2008 financial crisis. More specifically,
this regulation improves the System's liquidity management and bolsters
the ability of the System banks to fund their operations during times
of economic, financial, or market adversity. At the time, FCA
considered the Basel III Liquidity Framework and how to tailor it to
the unique circumstances of System banks. The FBRAs had not yet enacted
regulations that implemented Basel III, and we decided it would be
premature for FCA to adopt the LCR and the Net Stable Funding Ratio
(NSFR) for System banks. FCA's existing regulation has achieved FCA's
objectives by ensuring that System banks have a satisfactory liquidity
framework. Yet, the time has come for FCA to revisit these issues and
decide how best to strengthen and update Sec. 615.5134 so System banks
are in a better position to respond to emerging risks and constantly
changing market conditions.
Between 2013 and 2020, the BCBS and FBRAs issued new guidance and
regulations to improve the liquidity framework for the banking sector.
The new regulations included the LCR that was finalized in 2014 \17\
and the NSFR, which was proposed in 2016 \18\ and finalized in November
2020.\19\ The LCR \20\ focuses on short-term liquidity risk from severe
market stresses and the NSFR \21\ promotes stable funding structures
over a one-year horizon. The NSFR is designed to act as a complement to
the LCR to mitigate the risks of banking organizations supporting their
assets with insufficiently stable funding. The LCR applies to large
banking organizations and does not apply to community banking and
savings associations. When the final NSFR rule becomes effective on
July 1, 2021, it too will apply to large banking organizations, but not
community banks and small saving associations.
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\17\ See 79 FR 61440 (October 10, 2014).
\18\ See 81 FR 35124 (June 1, 2016).
\19\ See 86 FR 9120 (February 11, 2021). The final rule will
become effective on July 1, 2021.
\20\ See BCBS, ``Basel III: The Liquidity Coverage Ratio and
liquidity risk monitoring tools'' (January 2013).
\21\ See BCBS, ``Basel III: The net stable funding ratio''
(October 2014).
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The Basel III Liquidity Framework encourages regulated entities to
account for unfunded commitments and other contingent obligations in
their liquidity reserve calculations, and for this reason, its concepts
are relevant to this rulemaking and the maintenance of adequate
liquidity at FCS banks. After careful consideration of the comments
received on the 2011 liquidity proposed rule, FCA decided not to
incorporate unfunded commitments into the existing regulation, however,
FCA stated it may address unfunded commitments at a later time. As a
result, FCA's liquidity reserve requirement does not capture funds held
or unfunded commitments on retail loans or on the direct note. While
these unfunded commitments are generally captured as part of the
liquidity stress tests incorporated into a bank's CFP, the CFP in the
existing rule gives System banks considerable discretion to determine
the cash flow assumptions and discount factors used to determine the
amount of liquidity reserves they should hold for these potential cash
outflows.
Modifying FCA's liquidity reserve requirement to capture unfunded
commitments or adopting an LCR/NSFR framework may promote stronger
liquidity profiles at System banks by improving how liquidity is
measured and reported. Furthermore, this modification would help ensure
that a System bank has enough liquidity to meet its unfunded
commitments during a liquidity crisis.
The containment measures adopted in early 2020 in response to
COVID-19 slowed economic activity in the United States.\22\ Financial
conditions tightened markedly in March and April 2020 and sudden
disruptions in financial markets put increasing liquidity pressure on
certain credit markets. In response to the pandemic, the Federal
Reserve Board established a number of funding, credit, liquidity, and
loan facilities to provide liquidity to the financial
[[Page 34648]]
system.\23\ One of these programs, the Paycheck Protection Program
(PPP) Liquidity Facility, was directly available to System
institutions, while other facilities indirectly increased the liquidity
of System institutions' assets held in their liquidity reserves.\24\
FCA provided System institutions with guidance to manage the challenges
associated with the COVID-19 pandemic, including certain regulatory
capital relief for PPP loans and PPP loans pledged to the PPP Liquidity
Facility.\25\ Throughout the market turbulence in early 2020, System
banks maintained satisfactory liquidity reserves, however; the market
conditions caused by COVID-19 provided FCA the opportunity to observe
the existing liquidity framework under adverse market conditions.
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\22\ See Proclamation 9994, ``Declaring a National Emergency
Concerning the Novel Coronavirus Disease COVID-19 Outbreak,'' 85 FR
15337 (March 18, 2020).
\23\ Section 1101 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act amended section 13(3) of the Federal Reserve
Act, 12 U.S.C. 343(3), to allow the Federal Reserve Board, in
consultation with the Secretary of the Treasury, to establish by
regulation, policies and procedures that would govern emergency
lending under a program or facility for the purpose of providing
liquidity to the financial system. Under section 13(3) of the
Federal Reserve Act, as amended, the Federal Reserve Board must
establish procedures that prohibit insolvent and failing entities
from borrowing under the emergency program or facility.
See Public Law 11-203, title XI, sec. 1101(a), 124 Stat. 2113
(Jul. 21, 2010).
\24\ To provide liquidity to small business lenders and the
broader credit markets and to help stabilize the financial system,
the Federal Reserve Board has created the PPP Liquidity Facility
using its authority under section 13(3) of the Federal Reserve Act.
\25\ See FCA's Supplement to the January 5, 2021, FCA
Informational Memorandum: Guidance for System Institutions Affected
by the COVID-19 Pandemic: Regulatory Capital Requirements for PPP
Loans.
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Based on these developments, FCA is considering whether changes to
our liquidity regulations are appropriate or needed.
IV. Request for Comments
We request and encourage any interested person(s) to submit
comments on the following questions and ask that you support your
comments with relevant data, analysis, or other information. We remind
commenters that comments, data, and other information submitted in
support of a comment, will be available to the public through our
website.
We have organized our questions into the following categories: (A)
Existing FCA Liquidity Regulations and (B) Applicability of the LCR and
NSFR.
A. Existing FCA Liquidity Regulations
Unfunded Commitments of FCS Banks
Each FCS bank has its own unique circumstances and risk profile
and, therefore, exposure to unfunded commitments and other contingent
obligations varies within the FCS. As part of each System bank's
general financing agreement (GFA) with its affiliated associations,
System banks have an unfunded commitment to each affiliated association
that is a possible outflow of liquidity. The unfunded commitment amount
is the difference between the association's maximum credit limit with
the System bank under the GFA or promissory note \26\ and the amount
the association has borrowed from the System bank.
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\26\ See Sec. 614.4125(d).
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The GFA permits a System bank to terminate an association's loan or
to refuse to make additional disbursements in the event of default. The
Act prohibits an association from borrowing from commercial banks or
other financial institutions without its funding bank's approval.\27\
We believe there may be merit in incorporating these possible outflows
for the bank's unfunded commitment to its affiliated associations into
the existing liquidity reserve requirement because the associations are
fully dependent on the bank for funding its operations so it can
fulfill its mission.
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\27\ Under section 2.2(12) of the Act, direct lender
associations may borrow money from their affiliated Farm Credit
bank, and with the approval of their funding banks, may borrow from
and issue notes or other obligations to any commercial bank or
financial institution.
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System banks also have unfunded commitments or other material
contingent liabilities to other financing institutions (OFIs) that
increase liquidity risk.\28\ System banks are required to provide
funding, or provide similar financial assistance to any creditworthy
OFI that meets certain requirements.\29\ Although the GFAs with OFIs
may permit a System bank to refuse to make additional disbursements in
the event of default, a System bank would likely be required to give
prior notice to cancel unfunded commitments to OFIs. As part of their
GFA with OFIs, System banks can be legally obligated to fund these
commitments. These types of outflows may include retail funding,
contractual settlements related to derivative transactions, pledging
collateral, or other off-balance sheet commitments.
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\28\ OFI means any entity referred to in section 1.7(b)(1)(B) of
the Act.
\29\ See Sec. 614.4540(b) which specifies the criteria for
assured access for certain OFIs.
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FCS banks may also have outstanding lines of credit to retail
borrowers who may draw funds to meet their seasonal, business, or
liquidity needs. A line of credit may be used as a liquidity facility
to function as an undrawn backup that would be utilized to refinance
debt obligations of a borrower in situations where the borrower is
unable to rollover that debt in financial markets. Alternatively,
credit facilities provide a line of credit for borrower's general
corporate or working capital purposes. These lines of credit to retail
borrowers may or may not be unconditionally cancellable. A sudden surge
in borrower demand for funds under these lines may increase demands on
the bank's liquidity at a time when market access is becoming impeded.
These unfunded commitments potentially expose both FCS banks and
associations to significant safety and soundness risks.\30\
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\30\ The Tier 1/Tier 2 Capital framework regulation requires
that System banks hold capital against this unfunded wholesale
commitment due to the risk presented. See Sec. 628.33 and preamble
discussion--81 FR 49737 (July 28, 2016).
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To incorporate consideration of these unfunded commitments, the
liquidity rules of the FBRAs apply a multiplier or ``factor'' to the
gross notional amount to reflect assumptions on how exposures will
result in ``cash outflows.'' These factors are multiplied by the total
amount of each outflow item to determine the regulatory outflow amount.
The factor applied is dependent on the type of exposure, and is
consistent with the Basel III Liquidity Framework and the FBRAs'
evaluation of relevant supervisory information. The factors applied
consider the potential impact of idiosyncratic and market-wide
shocks.\31\
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\31\ See 79 FR 61440, 61444 (October 10, 2014). Examples include
those shocks that would result in: (1) A partial loss of unsecured
wholesale funding capacity; (2) a partial loss of secured, short-
term financing with certain collateral and counterparties; (3)
losses from derivative positions and the collateral supporting those
positions; (4) unscheduled draws on committed credit and liquidity
facilities that a covered company has provided to its customers; and
(5) other shocks that affect outflows linked to structured financing
transactions and mortgages.
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While unfunded commitments at System banks should be analyzed in
the CFP, banks have significant discretion about the assumptions (i.e.,
factor) applied. For example, to reflect varying drawdown assumptions
System banks may apply a factor, similar to the factors applied in the
FBRAs' rules, to notional amounts outstanding. A higher factor reflects
a higher drawdown potential of the undrawn portion of these commitments
and results in a higher liquidity requirement in the CFP. For example,
a $10 billion exposure at a 10 percent factor would add only $1 billion
to the discounted outflows, while a 40 percent factor would add $4
billion to the outflows.
[[Page 34649]]
To evaluate this further, we are seeking comment to determine if we
should incorporate unfunded commitments into the existing FCA liquidity
framework and what type of factor would be appropriate to capture the
drawdown risks.
1. How should FCA incorporate the liquidity risk of unfunded
commitments on affiliated associations' direct notes into the System
banks' liquidity reserve requirement?
a. Should drawdown factors be applied to unfunded commitments?
b. If so, what would be an appropriate factor to apply to the
direct note unfunded commitments?
2. How should FCA incorporate the liquidity risk of unfunded
commitments to OFIs into the System banks' liquidity reserve
requirement?
a. Should drawdown factors be applied to unfunded commitments?
b. If so, what would be an appropriate factor to apply to OFI
unfunded commitments?
c. Does the liquidity risk of unfunded commitments to OFIs pose a
different risk than unfunded commitments to affiliated associations'
direct notes? If so, how should FCA incorporate this risk into the
liquidity reserve requirement?
3. How should FCA incorporate the liquidity risk of unfunded
commitments to bank retail borrowers into the System banks' liquidity
reserve requirement?
a. What would be an appropriate factor to apply to retail borrower
unfunded commitments?
b. Should unfunded commitments to retail borrowers that are not
unconditionally cancellable be treated differently from those that are
unconditionally cancellable? Please explain why.
c. Should we consider applying different factors to differentiate
the risk between retail credit and liquidity facilities for such retail
borrowers?
Association Lines of Credit to Retail Borrowers
FCS associations often have outstanding lines of credit to retail
borrowers who may draw funds to meet their seasonal or other business
needs. Associations can be legally obligated to fund these commitments
and would generally rely on their System bank for funding under the
GFA. A sudden surge in borrower demand for funds under these lines may
increase demands on the bank's liquidity at a time when market access
is becoming impeded. More specifically, during periods of economic or
market uncertainty, retail borrowers may desire to increase their cash
holdings to cover operating and business expenses and accordingly, draw
from their operating lines. As System banks are ultimately responsible
to fund associations, we are seeking comment to determine if a revised
liquidity requirement should ``look-through'' System banks to consider
each association's unfunded commitment to retail borrowers as a
potential outflow item.
4. How should FCA incorporate the risk of unfunded commitments from
association retail borrowers for the funding banks' liquidity reserve
requirement?
a. What would be an appropriate factor for System banks to apply to
association unfunded commitments?
b. Should unfunded commitments at associations that are not
unconditionally cancellable be treated differently from those that are
unconditionally cancellable? Please explain why.
c. If so, should we consider applying a different factor to
differentiate the risk between credit and liquidity facilities for
association retail borrowers?
d. Should FCA incorporate the liquidity risk of unfunded
commitments to association retail borrowers through a ``look through''
approach or using the direct note unfunded commitment amount?
Voluntary Advance Conditional Payment Accounts
Section 614.4175 allows member-borrowers to make voluntary advance
conditional payments (VACP) on their loans and allows institutions to
set up involuntary payment accounts for funds held to be used for
insurance premiums, taxes, and other reasons.\32\ VACP (where the
advanced payment is not compulsory) accounts have the potential to
expose the System to additional liquidity risk in a crisis. More
specifically, some VACP accounts may be structured so that System
member-borrowers may withdraw funds at their request (although prior
notice for withdrawals may be required). A sudden surge in member-
borrower draws from VACP accounts held at associations would increase
the funding required from the bank to the association. This sudden
increase in funding may increase demands on the bank's liquidity at a
time when market access is becoming impeded. To evaluate this further,
we are seeking comment on how we should mitigate the risk VACP accounts
pose to the liquidity of System banks.
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\32\ Sections 1.5(6) and 2.2(13) of the Act authorize
institutions to accept advance payments.
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5. How should FCA incorporate the liquidity risk of VACP accounts
at associations into the funding banks' liquidity reserve requirement?
a. What would be an appropriate factor to apply to these VACP
accounts?
b. If different factors should apply to different types of VACP
accounts, please specify.
Continuously Redeemable Perpetual Preferred Stock
Some System associations have issued continuously redeemable
perpetual preferred stock (typically called Harvest Stock or H Stock)
to their members who wish to invest and participate in their
cooperative beyond the minimum member-borrower stock purchase. H Stock
is an at-risk investment; it is issued without a stated maturity and is
retireable only at the discretion of the institution's board. A common
feature of H stock is that the issuing association will redeem it upon
the request of the holder only if the association is in compliance with
its regulatory capital requirements. Because of this feature, FCA
considers the stock to be continuously redeemable. Some associations
reduce the operational hurdles to redeeming H stock by delegating the
board's authority to retire such 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. A sudden surge in member-
borrower redemptions of H Stock held at associations would increase the
funding from System bank to its associations. This sudden increase in
funding may increase demands on the bank's liquidity at a time when
market access is becoming impeded. To evaluate this further, we are
seeking comment on how we should mitigate the risk H Stock poses to the
liquidity of System banks.
6. How should FCA incorporate the liquidity risk of H Stock
redemptions at associations into the funding banks' liquidity reserve
requirement? What would be an appropriate factor to apply to H Stock?
Cash Inflows
As discussed above, modifying FCA's liquidity reserve requirement
to capture potential cash outflows, including unfunded commitments, may
promote a stronger liquidity profile at System banks. To improve how
liquidity is measured and reported, we are also considering
incorporating cash inflows into the liquidity reserve requirement.
FCA's existing liquidity regulation,
[[Page 34650]]
Sec. 615.5134, does not consider how expected cash inflows would
affect the bank's liquidity reserve requirement. Outside of CFP stress
analysis (discussed below), FCA's existing liquidity framework views
the discounted market value of assets held in the liquidity reserve and
supplemental buffer as the only source of liquidity during a liquidity
event.\33\
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\33\ The discounts applied to the assets held for liquidity in
FCA's regulations approximate the cost of liquidating investments
over a short period of time during adverse situations. The mechanism
of discounting assets is designed to accurately reflect true market
conditions. For example, FCA regulations assign only a minimal
discount to investments that are less sensitive to interest rate
fluctuations because they are exposed to less price risk.
Conversely, the discount for long-term fixed rate instruments is
higher because they expose FCS banks to greater market risk.
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However, in a liquidity event, certain borrowers will still be
making payments on their loans, allowing money to flow into the
institution that can be used to support ongoing operations. Cash
inflows from sources other than the liquidity reserve typically include
payments from wholesale and retail borrowers and coupon and scheduled
principal payments from securities not included in the liquidity
reserve.\34\
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\34\ See FDIC's Liquidity Risk Management Standards. Inflow
amounts are defined at 12 CFR 329.33.
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The CFP requirement at Sec. 615.5134(f) allows System banks to
consider inflows when analyzing how much contingent liquidity they must
hold under a 30-day acute stress scenario. However, for the purposes of
the CFP, System banks have considerable discretion to determine the
assumptions pertaining to the amount of inflows that will offset
potential outflows. To evaluate this further, we are seeking comment to
determine if we should incorporate inflows into the existing FCA
liquidity framework.
7. How should FCA incorporate the uncertainty of cash inflows into
System banks' liquidity reserve requirements?
8. What would be an appropriate discount percentage to apply to the
different types of inflows (such as payments from wholesale and retail
borrowers, payments from securities not included in the liquidity
reserve)?
9. What type of operational changes (such as data elements, general
ledger requirements, and systems) would be required to accurately
capture inflow and outflow information to calculate liquidity ratios on
a daily or monthly basis?
Stability of a Bank's Balance Sheet
The amount of liquid assets that a bank must maintain is generally
a function of the stability of its funding structure, the risk
characteristics of the balance sheet, and the adequacy of its liquidity
risk measurement program. System banks provide funding to their
affiliated associations through the direct note which is a significant
portion of the bank's assets. The bank's direct note assets are
impacted by the funding and liquidity demands of their affiliated
associations. However, System banks directly control the mix of funding
for these assets, as well as the risk characteristics of other assets
acquired.
System banks issue System-wide debt securities as the primary
source for funding loans and investments. As part of the examination
process, FCA evaluates how each bank's debt structure helps limit
liquidity risks. For example, if a bank funds its balance sheet wholly
with short-term debt, the resulting large amounts of debt maturing each
week would cause the bank to be vulnerable to market disruptions and
liquidity risk. Therefore, debt maturities should be structured in a
manner that they are extended and align with the tenor and composition
of the bank's assets. In addition, debt maturities should ensure
longer-term stable funding.
FCA's existing liquidity framework does not directly address the
stability of a bank's balance sheet and does not require compliance
with specific debt structure ratios. To evaluate this further, we are
seeking comment to determine if we should add requirements regarding
the structure of a bank's balance sheet into the existing FCA liquidity
framework.
10. How should FCA amend its liquidity regulations to strengthen
the stability of the balance sheet structure at FCS banks?
11. Under what circumstances might it be appropriate for FCA's
liquidity framework to better address funding methods such as discount
notes and short funding?
Marketability of the Supplemental Liquidity Buffer
Currently, investments held in a bank's liquidity reserve must be
marketable in accordance with the criteria in Sec. 615.5134(d).
However, investments held in the supplemental liquidity buffer are not
subject to the same marketability standard.\35\ Thus, there is the
potential that the supplemental liquidity buffer may include
investments that are not marketable or liquid under certain
circumstances. To evaluate this further, we are seeking comment to
determine if we should hold investments in the supplemental liquidity
buffer to the same or similar marketability standards as assets in the
liquidity reserve.
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\35\ Assets held in the supplemental liquidity buffer are not
subject to the marketability standard in Sec. 615.5134(d). However,
a System bank must be able to liquidate any qualified eligible
investment in its supplemental liquidity buffer within the liquidity
policy timeframe established by the bank's liquidity policy at no
less than 80 percent of its book value. Assets having a market value
of less than 80 percent of their book value at any time must be
removed from the supplemental buffer. See Sec. 615.5134(e).
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12. Should FCA apply the criteria for ``marketable'' investments in
Sec. 615.5134(d) to assets that FCS banks hold in their supplemental
liquidity buffer? If yes, why? If no, what criteria should FCA adopt to
address its concerns about the liquidity and marketability of assets in
the supplemental liquidity buffers of FCS banks when access to the
markets are becoming impeded, and why?
Money Market Instruments and Diversified Investment Funds
The existing liquidity framework allows certain money market
instruments and diversified investment funds to be included as Level 1
reserves at Sec. 615.5134(b). The FBRAs decided not to include similar
instruments in the LCR's HQLA framework, such as mutual funds and money
market funds.\36\ The FBRAs stated that certain underlying investments
of the investment companies may include high-quality assets, however,
similar to securities issued by many companies in the financial sector,
shares of investment companies have been prone to lose value and become
less liquid during periods of severe market stress or an idiosyncratic
event involving the fund's sponsor. Additionally, Securities and
Exchange Commission (SEC) rules regarding money market funds may also
impose some barriers on investors' ability to withdraw all their funds
during a period of stress.\37\
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\36\ FCA defined money market instruments to include short-term
instruments such as (1) Federal funds, (2) negotiable certificates
of deposit, (3) bankers' acceptances, (4) commercial paper, (5) non-
callable term Federal funds (6) Eurodollar time deposits, (7) master
notes, and (8) repurchase agreements collateralized by eligible
investments as money market instruments. 83 FR 27486, 27489 (June
12, 2018). Of the seven items, the FBRAs only allow Federal funds to
be included in Level 1 HQLA. See supra footnote 1. Federal funds
represent a small amount of the System's cash and liquidity included
in Level 1 money market instruments.
\37\ See SEC, ``Money Market Fund Reform; Amendments to Form
PF,'' 79 FR 47736 (August 14, 2014).
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Certain money market instruments exhibited liquidity stress during
the 2008 financial crisis and the economic shock in March 2020 caused
by the
[[Page 34651]]
COVID-19 pandemic.\38\ For example, in March 2020, Commercial paper
(CP) and Certificate of deposit (CD) markets both became stressed.\39\
Under normal market conditions, secondary trading volume in CP and CD
markets is limited as most investors purchase and hold these short-
dated instruments to maturity. However, in March 2020, as some market
participants, including money market mutual funds and others, may have
sought secondary trading, they experienced a ``frozen market.'' For
liquidity purposes, both secondary trading and new issuances of CP and
CD halted for a period of time during the pandemic.\40\
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\38\ See 79 FR 61440, 61465 (October 10, 2014) and Financial
Stability Board's ``COVID-19 Pandemic: Financial Stability Impact
and Policy Responses; Report submitted to the G20.'' November 17,
2020.
\39\ Both CP and CD are included in FCA's definition of money
market instruments.
\40\ See SEC's Division of Economic and Risk Analysis ``U.S.
Credit Markets Interconnectedness and the Effects of the COVID-19
Economic Shock.'' October 2020.
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FCA's existing definition of ``marketable'' in Sec. 615.5134(d)
makes an exception for money market instruments. Specifically, Sec.
615.5134(d)(4) exempts money market instruments from the requirement
that investments in the liquidity reserve must be easily bought and
sold in active and sizeable markets without significantly affecting
prices. Additionally, money market instruments are not subject to FCA's
investment portfolio diversification requirements and are not limited
in the liquidity reserve requirement.\41\ To evaluate the type of
instruments and definitions allowed under the FCA liquidity framework,
we are seeking comment to determine if we should align the instruments
in FCA's liquidity reserve requirement with the FBRAs HQLA framework.
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\41\ See Sec. 615.5133(f)(3)(iii).
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13. Given the risks of money market instruments and diversified
investment funds and that the FBRAs do not consider these instruments
to be high quality liquid assets, why should FCA continue to permit
these instruments to be included in an FCS bank's liquidity reserve? If
you believe that we should continue to allow money market instruments
and diversified investment funds in the liquidity reserve requirement,
how could FCA mitigate the risks they pose?
14. What factors should FCA consider in evaluating the risk of
money market instruments and diversified investment funds in the
context of the total liquidity reserve requirement?
15. Should FCA consider limiting money market instruments and
diversified investment funds included in specific levels in the
liquidity reserve to mitigate concentration risk? Please explain your
reasoning.
FCA's Liquidity Reserve and High-Quality Liquid Assets in Liquidity
Coverage Ratio
The FBRAs' HQLA allowed in the LCR differ from liquid assets
allowed in FCA's liquidity regulation. FCA's regulation allows certain
instruments to qualify as liquid assets even though they are excluded
from the LCR, such as investment company shares (mutual funds and money
market funds). However, the LCR allows certain instruments to be
included in HQLA that are excluded from FCA's liquidity regulation,
such as municipal obligations and certain corporate bonds.\42\ There
are also certain instruments in HQLA that System banks do not have the
authority to purchase.\43\ FCA's regulation also differentiates liquid
assets by tenor while the LCR does not. Additionally, the LCR applies
more substantial discounts or ``haircuts'' to HQLA than FCA's liquidity
regulation applies to the same assets. The FRBAs also limit certain
assets to a percentage of the total eligible HQLA amount, whereas FCA
does not. To evaluate this further, we are seeking comment to determine
if we should consider aligning FCA's existing requirements for liquid
assets with the LCR's HQLA.
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\42\ System banks can purchase certain municipal securities and
corporate bonds under Sec. 615.5140(a)(1)(ii)(A)--non-convertible
senior debt securities.
\43\ Investments such as publicly traded common equity, certain
corporate debt securities, and certain other securities are included
in the LCR but are not eligible investments under Sec. 615.5140.
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16. Should FCA consider expanding the instruments eligible under
the liquidity reserve to more closely align with the HQLA framework of
the FBRAs? If so, which instruments should be considered and how would
including the instruments add strength to the existing liquidity
framework?
17. Should FCA consider reviewing tenor requirements in its
existing liquidity regulations? If so, which instruments should be
considered and how would the requirements add strength to the existing
liquidity framework?
18. Should FCA consider changing discount values assigned to assets
held for liquidity to more closely align with those applied under the
LCR's HQLA framework?
19. Should FCA consider limiting certain assets included in the
liquidity reserve to mitigate concentration risk? If so, what assets
should be limited and what percent should they be allowed to count
towards the reserve requirement?
Liquidity and COVID-19
FCS banks withstood the recent economic and financial turmoil from
COVID-19 with their liquidity intact. However, both the FCA and FCS
continue to gain insights into the effects that sudden and severe
stress have on liquidity at individual FCS institutions and in the
entire financial system. For example, in March of 2020, financial
markets experienced a ``flight to cash'' where demand for cash and the
highest quality cash like instruments dramatically increased, while
demand (and thus prices) for less liquid instruments declined.\44\
System banks are required to adopt a CFP to ensure sources of liquidity
are sufficient to fund normal operations under a variety of stress
events.\45\ Such stress events include, but are not limited to market
disruptions, rapid increase in loan demand, unexpected draws on
unfunded commitments, difficulties in renewing or replacing funding
with desired terms and structures, requirements to pledge collateral
with counterparties, and reduced market access.
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\44\ See Bank for International Settlements Bulletin No 14 ``US
dollar funding markets during the Covid-19 crisis--the money market
fund turmoil.'' May 12, 2020.
\45\ See Sec. 615.5134(f).
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As addressed above, we are reviewing our regulatory and supervisory
approaches towards liquidity so that System institutions are in a
better position to withstand whatever future crises may arise. As part
of our ongoing efforts to limit the adverse effect of rapidly changing
economic, financial, and market conditions on the liquidity of any FCS
bank, we are seeking comment to determine if we should make updates to
our regulations to better prepare for future liquidity crises.
20. How should FCA further incorporate the demand for cash and
highly liquid U.S. Treasury securities during times of crisis into the
System banks liquidity reserve requirement?
21. What type of updates should FCA consider to the CFP
requirements in Sec. 615.5134(f)?
B. Applicability of the Liquidity Coverage Ratio and Net Stable Funding
Ratio
System Banks and the LCR and NSFR
For the reasons discussed above, the FCA is exploring whether, and
to what extent, the LCR and NSFR should apply to System banks now that
the FBRAs
[[Page 34652]]
issued final rules implementing the Basel III Liquidity Framework in
the United States. More specifically, we are evaluating whether it is
feasible to adjust the LCR and NSFR to the System's cooperative and
non-depository structures and its mission as a GSE, and we are seeking
your input. In the alternative, we are considering whether to
incorporate specific elements of the LCR and NSFR into our liquidity
regulation, and we are interested in your ideas about how to do so.
22. What core principles would be most important in FCA's
consideration of the Basel III Liquidity Framework? How relevant is the
Basel III Liquidity Framework to the cooperative and non-depository
structure of the FCS?
23. To what extent should FCA propose a similar rule to the FBRA's
LCR and NSFR?
a. Should FCA completely replace its existing liquidity regulations
with an LCR and NSFR framework or only augment existing regulations
with certain elements of the LCR and NSFR framework? If so, please
explain.
b. What specific modifications, if any, should FCA consider making
to the LCR and NSFR ratios for application to System banks, and why?
c. If FCA proposed to incorporate the LCR and NSFR ratios as part
of the CFP requirement in Sec. 615.5134(f), what types of
modifications would be necessary to include elements of the ratios,
without being redundant or overly burdensome?
24. If the FCA closely aligned the LCR and NSFR to the FBRA's
regulations, and made only narrow modification to accommodate the
System's unique structure, would the results enable FCS banks to better
withstand liquidity crises, or in the alternative, prove too costly or
burdensome? Please explain.
25. How would the implementation of an LCR and NSFR impact the
System's funding structure, lending activities, or use of discount
notes?
Outflows to Credit Facilities
The LCR requires covered institutions to hold liquidity against the
undrawn amount of a committed credit facility to a borrower. The
outflow factor applied to this undrawn amount depends on the type of
credit facility (credit or liquidity facility) \46\ and the type of
borrower (financial sector entity or non-financial sector entity). The
direct notes from System banks to System associations under the GFAs
are credit facilities, not liquidity facilities. Unfunded commitments
on a credit facility to a financial sector entity have a 40 percent
factor, while the same commitment to a non-financial sector entity only
have a 10 percent factor. Financial sector entities typically have
shorter-term funding structures and higher correlations of drawing down
commitments during times of stress which support a higher factor when
compared to non-financial sector entities.\47\ A higher factor results
in a higher liquidity requirement under the LCR.
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\46\ Credit and liquidity facility are defined at 12 CFR 329.3.
A credit facility is a legally binding agreement to extend funds at
a future date and generally includes working capital facilities
(e.g., revolving line of credit used for general corporate or
working capital purposes). A liquidity facility is a legally binding
agreement to extend funds for purposes of refinancing the debt of a
counterparty when it is unable to obtain a primary or anticipated
source of funding. If a facility has characteristics of both credit
and liquidity facilities, the facility must be classified as a
liquidity facility.
\47\ See 79 FR 61440, 61485 (October 10, 2014).
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The FBRAs' LCR regulation defines a financial sector entity to
include a regulated financial company, but specifically excludes GSEs.
The FCS is a cooperative system of financial institutions that the FCA
charters and regulates in accordance with the Act. System associations
lend directly to and provide certain financially-related services to
eligible borrowers. The System's lending activities to retail
borrowers, and its structure are different than the activities and
structure of other GSEs excluded from the FBRAs' definition of a
financial sector entity.\48\ Unlike the other GSEs, most FCS
institutions lend directly to retail borrowers in a manner that is
substantially similar to lenders that the FBRAs define as financial
sector entities. To evaluate this further, we are seeking comment to
determine if we propose an LCR, should FCA treat System institutions as
financial sector entities and apply the relevant factor under the
FBRAs' definition.
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\48\ Other GSEs currently include the Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Association, and the
Federal Home Loan Bank System. As noted in footnote 3, supra, Farmer
Mac is a GSE that has a charter to operate a secondary market for
certain types of loans originated by retail lenders. Farmer Mac is
not a cooperative. Instead, it is a stockholder-owned, federally
chartered corporation.
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26. If FCA proposes an LCR, should FCA treat System institutions as
financial sector entities and apply a 40 percent factor to the unfunded
portion of the associations' direct note commitments?
a. If so, what supports FCA treating System institutions as
financial sector entities and applying a 40 percent factor on the
unfunded commitments System banks have to associations?
b. If not, what supports FCA treating System institutions as non-
financial sector entities and applying a 10 percent factor on the
unfunded commitments System banks have to associations?
System Bank Member Investment Bonds
Two System banks offer investment bonds to their member-borrowers
and other specified individuals, such as bank employees (Member
Investment Bonds). Both programs are similar in that each bank offers
overnight or short-term, uninsured bonds to the bank's members and
other specified individuals. Member Investment Bonds are structured so
that holders may redeem funds at their request (although prior notice
for withdrawals may be required). Given their short maturity, a
holder's investment may be continuously rolled over until they provide
notice to redeem the investment, which may be at any time. Member
Investment Bonds present a liquidity demand similar to maturing System
bonds. Accordingly, FCA treats Member Investment Bonds and maturing
System bonds the same under the existing liquidity rules. Under the
LCR, there are several different outflow categories that Member
Investment Bonds could fall into. To evaluate this further, we are
seeking comment to determine if we propose an LCR, what the most
appropriate factor for these investment bonds would be.
27. If FCA proposes an LCR, what would be an appropriate factor to
apply to the Member Investment Bonds and why?
Voluntary Advance Conditional Payment Accounts
As discussed above, FCA regulation Sec. 614.4175 allows member-
borrowers to make VACP on their loans and allows institutions to set up
involuntary payment accounts for funds held to be used for insurance
premiums, taxes, and other reasons. A sudden surge in member-borrower
draws from VACP accounts held at associations would increase the
funding required from the System bank to the affiliated association at
a time when market access is becoming impeded. To evaluate this
further, we are seeking comment to determine if we propose an LCR, what
the most appropriate factor for these VACP accounts would be.
28. If FCA proposes an LCR, given the uniqueness of VACP accounts
and the ability of member-borrowers to withdraw certain VACP account
funds at their request, what would be an appropriate factor?
29. If different factors should apply to different VACP accounts,
please specify.
[[Page 34653]]
High Quality Liquid Assets in LCR
As discussed above, the FBRAs' HQLA allowed in the LCR differ from
liquid assets allowed in FCA's liquidity regulation. To evaluate this
further, we are seeking comment to determine if we propose an LCR,
should FCA consider aligning FCA's liquid assets with the LCR's HQLA.
30. If FCA proposes an LCR, should we replace the current list of
eligible instruments for the liquidity reserve with a list that is more
closely aligned to the FBRA's HQLA instrument list (excluding common
equities)? Please explain.
a. Should FCA's liquidity regulation continue to allow FCS banks to
hold in their liquidity reserve instruments that are currently excluded
from the FBRA's HLQA list? Which instruments and why?
b. Should FCA allow FCS banks to hold in their liquidity reserves
instruments that are included in the FBRAs HLQA list, but are currently
excluded from FCA's liquidity regulation? Which instruments and why?
Net Stable Funding Ratio Applicability
The BCBS introduced the NSFR to require banks to maintain a stable
funding profile to reduce the likelihood that disruptions in a bank's
regular sources of funding will erode its liquidity position that may
increase its risk of failure. Furthermore, during periods of financial
stress, financial institutions without stable funding sources may be
forced to monetize assets in order to meet their obligations, which may
drive down asset prices and compound liquidity issues. The NSFR
implements a standardized quantitative metric designed to limit
maturity mismatches and applies favorable factors to a commercial
bank's primary funding source--deposits. The NSFR requires a bank to
maintain an amount of available stable funding (ASF) that is not less
than the amount of its required stable funding (RSF) on an ongoing
basis. ASF and RSF are calculated based on the liquidity
characteristics of a bank's assets, derivative exposures, commitments,
liabilities, and equity over a one-year time horizon.
The NSFR and its corresponding factors adopted by the FBRAs were
established to measure and maintain the stability of the funding
profiles of banking organizations that rely primarily on deposits. In
contrast, FCS banks issue System-wide debt securities as the primary
source for funding its operations. The System would potentially need to
modify its funding structure to meet an NSFR by incorporating more
long-term debt issuances. To evaluate this further, we are seeking
comment to determine if the NSFR is applicable to the System's funding
structure, authorities, and mission.
31. What core principles would be most important in FCA's
consideration of the NSFR? How does the cooperative and non-depository
structure of the System relate to the NSFR?
32. How could NSFR metrics replace any existing regulations, to
ensure System banks have sufficiently stable liabilities (and
regulatory capital) to support their assets and commitments over a one-
year time horizon?
33. Is it beneficial or detrimental to replace existing regulations
with NSFR metrics and why?
Other Considerations
The BCBS developed the Basel NSFR standard as a longer-term balance
sheet funding metric to complement the Basel LCR standard's short-term
liquidity stress metric. In developing the Basel NSFR standard, the
FBRAs and their international counterparts in the BCBS considered a
number of possible funding metrics.\49\ The Basel guidance and FBRA's
NSFR regulation incorporated consideration of these and other funding
risks.\50\
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\49\ For example, the BCBS considered the traditional ``cash
capital'' measure, which compares the amount of a firm's long-term
and stable sources of funding to the amount of the firm's illiquid
assets. The BCBS found that this cash capital measure failed to
account for material funding risks, such as those related to off-
balance sheet commitments and certain on-balance sheet short-term
funding and lending mismatches.
\50\ See 86 FR 9120 (February 11, 2021). See supra footnote 19.
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34. What other approaches or methodologies to measuring and
regulating liquidity not discussed above should FCA consider and why?
C. Other Comments Requested
We welcome comments on every aspect of this advance notice of
proposed rulemaking. We encourage any interested person(s) to identify
and raise issues pertaining to other aspects of the liquidity framework
for FCS banks and associations that we did not address in this ANPRM.
Please designate such comments as ``Other Relevant Issues.''
* * * * *
Dated: June 10, 2021.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2021-13556 Filed 6-29-21; 8:45 am]
BILLING CODE 6705-01-P