[Federal Register: June 17, 2005 (Volume 70, Number 116)]
[Rules and Regulations]
[Page 35335-35357]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17jn05-7]
[[Page 35335]]
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Part II
Farm Credit Administration
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12 CFR Parts 607, 614, 615, and 620
Assessment and Apportionment of Administrative Expenses; Loan Policies
and Operations; Funding and Fiscal Affairs, Loan Policies and
Operations, and Funding Operations; Disclosure to Shareholders; Capital
Adequacy Risk-Weighting Revisions; Final Rule
[[Page 35336]]
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FARM CREDIT ADMINISTRATION
12 CFR Parts 607, 614, 615, and 620
RIN 3052-AC09
Assessment and Apportionment of Administrative Expenses; Loan
Policies and Operations; Funding and Fiscal Affairs, Loan Policies and
Operations, and Funding Operations; Disclosure to Shareholders; Capital
Adequacy Risk-Weighting Revisions
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA, we, our) issues this
final rule changing our regulatory capital standards on recourse
obligations, direct credit substitutes, residual interests, asset- and
mortgage-backed securities, claims on securities firms, and certain
residential loans. We are modifying our risk-based capital requirements
to more closely match a Farm Credit System (FCS or System)
institution's relative risk of loss on these credit exposures to its
capital requirements. In doing so, our rule risk-weights recourse
obligations, direct credit substitutes, residual interests, asset- and
mortgage-backed securities, and claims on securities firms based on
external credit ratings from nationally recognized statistical rating
organizations (NRSROs). In addition, our rule will make our regulatory
capital treatment more consistent with that of the other financial
regulatory agencies for transactions and assets involving similar risk
and address financial structures and transactions developed by the
market since our last update. We also make a number of nonsubstantive
changes to our regulations to make them easier to use.
DATES: Effective Date: This regulation will be effective 30 days after
publication in the Federal Register during which either or both Houses
of Congress are in session. We will publish a notice of the effective
date in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Robert Donnelly, Senior Accountant,
Office of Policy and Analysis, Farm Credit Administration, McLean, VA
22102-5090, (703) 883-4498; TTY (703) 883-4434; or Jennifer A. Cohn,
Senior Attorney, Office of General Counsel, Farm Credit Administration,
McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-4020.
SUPPLEMENTARY INFORMATION:
I. Objectives
The objectives of this rule are to:
Ensure FCS institutions maintain capital levels
commensurate with their relative exposure to credit risk;
Help achieve a more consistent regulatory capital
treatment with the other financial regulatory agencies \1\ for
transactions involving similar risk; and
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\1\ We refer collectively to the Office of the Comptroller of
the Currency (OCC), the Board of Governors of the Federal Reserve
System (Federal Reserve Board), the Federal Deposit Insurance
Corporation (FDIC), and the Office of Thrift Supervision (OTS) as
the ``other financial regulatory agencies.''
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Allow FCS institutions' capital to be used more
efficiently in serving agriculture and rural America and supporting
other System mission activities.
II. Background
A. Rulemaking History
The FCA published a proposed rule implementing a ratings-based
approach for risk-weighting certain FCS assets on August 6, 2004.\2\
The proposal incorporated an interim final rule the FCA published on
March 28, 2003 that had implemented a ratings-based approach for
investments in non-agency asset-backed securities (ABS) and mortgage-
backed securities (MBS).\3\ The proposal also incorporated a final rule
the FCA published on May 26, 2004, that implemented a ratings-based
approach for loans to other financing institutions (OFIs).\4\
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\2\ 69 FR 47984.
\3\ 68 FR 15045.
\4\ 69 FR 29852.
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We received 12 letters commenting on this proposal. Ten of these
letters were from individual FCS institutions (including the Federal
Agricultural Mortgage Corporation (Farmer Mac)) and one was from the
Farm Credit Council, trade association for the System banks and
associations. The final letter was from a commercial bank. All
commenters generally applauded our overall effort to implement capital
treatment that is more consistent with that of the other financial
regulatory agencies but opposed one or more specific provisions of the
proposed regulation. We discuss these comments, and our responses,
later in this preamble.\5\
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\5\ We also received a letter from CoBank. That letter did not
comment on the proposed regulation. Rather, it suggested a
coordinated System/FCA effort to jointly explore further
implications and appropriateness of Basel II and volunteered CoBank
as a testing bank for a possible ``Quantitative Impact Study.'' We
note that, separately from this regulation, FCA staff is currently
evaluating the implementation of Basel II and will assess CoBank's
suggestions as part of that evaluation.
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B. Basis of Risk-Based Capital Rules
Since the late 1980s, the regulatory capital requirements
applicable to federally regulated financial institutions, including FCS
institutions, have been based, in part, on the risk-based capital
framework developed by the Basel Committee on Banking Supervision
(Basel Committee).\6\ We first adopted risk-weighting categories for
System assets as part of the 1988 regulatory capital revisions \7\
required by the Agricultural Credit Act of 1987 \8\ and made minor
revisions to these categories in 1998.\9\ Risk-weighting is used to
assign appropriate capital requirements to on- and off-balance sheet
positions and to compute the risk-adjusted asset base for FCS banks'
and associations' permanent capital, core surplus, and total surplus
ratios. These previous risk-weighting categories were similar to those
outlined in the Accord on International Convergence of Capital
Measurement and Capital Standards (1988, as amended in 1998) (Basel
Accord) and were also adopted by the other financial regulatory
agencies. Our risk-based capital requirements are contained in subparts
H and K of part 615 of our regulations.
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\6\ The Basel Committee is a committee reporting to the central
banks and bank supervisors/regulators from the major industrialized
countries that formulates standards and guidelines related to
banking and recommends them for adoption by member countries and
others. The Basel Committee has no formal supranational supervisory
authority and its recommendations have no legal force.
\7\ See 53 FR 39229 (October 6, 1988).
\8\ Pub. L. 100-233 (January 6, 1988).
\9\ See 63 FR 39219 (July 22, 1998).
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C. Subsequent Capital Developments
Since the FCA adopted its previous risk-weighting regulations, much
has occurred in the area of capital and credit risk. The Basel
Committee has for a number of years been developing a new accord to
reflect advances in risk management practices, technology, and banking
markets. In June 2004, the Basel Committee released its document
``International Convergence of Capital Measurement and Capital
Standards: A Revised Framework.'' The Basel Committee intends for its
new framework (known as Basel II) to be available for implementation as
of year-end 2006, with the most advanced approaches to risk measurement
available for implementation as of year-end 2007.\10\
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\10\ See the Basel Committee's Web site at http://www.bis.org
for extensive information about Basel II.
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In January 2005, the other financial regulatory agencies announced
that they planned to publish a proposed rule and guidance implementing
Basel II in mid-
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year 2005 and that their final regulations would be effective in
January 2008.\11\ However, on April 29, 2005, these agencies announced
that additional analysis was needed before they could publish a
proposed rule.\12\ The agencies emphasized that, although they are
delaying their timeline, they remain committed to implementing Basel
II.\13\
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\11\ See Interagency Statement--U.S. Implementation of Basel II
Framework: Qualification Process--IRB and AMA (Jan. 27, 2005).
\12\ See Joint Press Release, Banking Agencies to Perform
Additional Analysis Before Issuing Notice of Proposed Rulemaking
Related to Basel II (April 29, 2005).
\13\ Id.
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Basel II is very complex. In the United States, only a very small
number of large, internationally active banking organizations will be
subject to the entire, advanced Basel II framework, but some of the
principles of Basel II will apply to all banking organizations. One
such principle is a reliance on external credit ratings by NRSROs as a
basis for determining counterparty risk. The other financial regulatory
agencies have stated that they also expect to consider possible changes
to their risk-based capital regulations for banking organizations not
subject to the advanced Basel II framework. They expect that these
changes would become effective at the same time as the framework-based
regulations.\14\
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\14\ See Interagency Statement--U.S. Implementation of Basel II
Framework: Qualification Process--IRB and AMA (January 27, 2005).
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Since 2001, even before Basel II was finalized, the other financial
regulatory agencies have amended their risk-based capital regulations
consistent with the ratings-based approach of Basel II. Most relevant
to our final rule, in November 2001 the other financial regulatory
agencies published a rule \15\ that bases the capital requirements for
positions that banking organizations \16\ hold in recourse obligations,
direct credit substitutes, residual interests, and asset- and mortgage-
backed securities \17\ on the relative credit exposure of these
positions, as measured by external credit ratings received from an
NRSRO.\18\ Similarly, in April 2002, the other financial regulatory
agencies published a rule \19\ that bases the capital requirements for
claims on or guaranteed by securities firms on their relative risk
exposure as measured by external credit ratings from NRSROs. The other
financial regulatory agencies have also applied the ratings-based
approach to other credit exposures, consistent with the approach of
Basel II.
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\15\ 66 FR 59614 (November 29, 2001).
\16\ Banking organizations include banks, bank holding
companies, and thrifts. See 66 FR 59614 (November 29, 2001).
\17\ See 66 FR 59614 (November 29, 2001.)
\18\ An NRSRO is a rating organization that the Securities and
Exchange Commission recognizes as an NRSRO. See new FCA regulation
12 CFR 615.5201.
\19\ 67 FR 16971 (April 9, 2002).
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D. Scope of FCA's Rulemaking
Just as the other financial regulatory agencies have adopted risk-
based rules, consistent with the approach of Basel II, that are
relevant for the banking organizations that they regulate, the FCA has
proposed and adopted rules tailored to activities of the FCS. Our
intention is to align our risk-based capital framework with the rules
of the other financial regulatory agencies where appropriate, but also
to recognize areas where differences are warranted. For example, this
rule places emphasis on capital treatment of investments in ABS and MBS
held for liquidity. In contrast, the rules of the other financial
regulatory agencies focus on traditional securitization activities,
where a banking organization sells assets or credit exposures to
increase its liquidity and manage credit risk.
As the other financial regulatory agencies have done, we are making
explicit our existing authority to modify a specified risk weight if it
does not accurately reflect the actual risk.
III. Overview
A. General Approach
These revisions to our capital rules implement a ratings-based
approach for risk-weighting positions in recourse obligations, residual
interests (other than credit-enhancing interest-only strips), direct
credit substitutes, and asset- and mortgage-backed securities. Highly
rated positions will receive a favorable (less than 100-percent) risk
weighting. Positions that are rated below investment grade \20\ will
receive a less favorable risk weighting. The FCA will apply this
approach to positions based on their inherent risks rather than how
they might be characterized or labeled.
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\20\ Investment grade means a credit rating of AAA, AA, A or BBB
or equivalent by an NRSRO.
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As noted, this ratings-based approach provides risk weightings for
a variety of assets that have a wide range of credit ratings. We
provide risk weightings for investments that are rated below investment
grade, although they are not eligible investments under our current
investment regulations.\21\ This rule does not, however, expand the
scope of eligible investments. It merely explains how to risk weight an
investment that was eligible when purchased if its credit rating
subsequently deteriorates. Such investments must still be disposed of
in accordance with Sec. 615.5143.\22\
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\21\ See Sec. 615.5140.
\22\ Section 615.5143 provides that an institution must dispose
of an ineligible investment within 6 months unless FCA approves, in
writing, a plan that authorizes divestiture over a longer period of
time. An institution must dispose of an ineligible investment as
quickly as possible without substantial financial loss.
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B. Asset Securitization
Understanding this rule requires an understanding of asset
securitization and other structured transactions that are used as tools
to manage and transfer credit risk. Therefore, we have included the
following background explanation to aid our readers.
Asset securitization is the process by which loans or other credit
exposures are pooled and reconstituted into securities, with one or
more classes or positions that may then be sold. Securitization
provides an efficient mechanism for institutions to sell loan assets or
credit exposures and thereby to increase the institution's liquidity.
Securitizations typically carve up the risk of credit losses from
the underlying assets and distribute it to different parties. The
``first dollar,'' or most subordinate, loss position is first to absorb
credit losses; the most ``senior'' investor position is last to absorb
losses; and there may be one or more loss positions in between
(``second dollar'' loss positions). Each loss position functions as a
credit enhancement for the more senior positions in the structure.
Recourse, in connection with sales of whole loans or loan
participations, is now frequently associated with asset
securitizations. Depending on the type of securitization, the sponsor
of a securitization may provide a portion of the total credit
enhancement internally, as part of the securitization structure,
through the use of excess spread accounts, overcollateralization,
retained subordinated interests, or other similar on-balance sheet
assets. When these or other on-balance sheet internal enhancements are
provided, the enhancements are ``residual interests'' for regulatory
capital purposes.
A seller may also arrange for a third party to provide credit
enhancement \23\ in an asset securitization. If another financial
institution provides the third-party enhancement, then that institution
assumes some portion of the assets' credit risk. In this proposed rule,
all
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forms of third-party enhancements, i.e., all arrangements in which an
FCS institution assumes credit risk from third-party assets or other
claims that it has not transferred, are referred to as ``direct credit
substitutes.''
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\23\ The terms ``credit enhancement'' and ``enhancement'' refer
to both recourse arrangements (including residual interests) and
direct credit substitutes.
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Many asset securitizations use a combination of recourse and third-
party enhancements to protect investors from credit risk. When third-
party enhancements are not provided, the institution ordinarily retains
virtually all of the credit risk on the assets.
C. Risk Management
While asset securitization can enhance both credit availability and
profitability, managing the risks associated with this activity poses
significant challenges. While not new to FCS institutions, these risks
may be less obvious and more complex than traditional lending
activities. Specifically, securitization can involve credit, liquidity,
operational, legal, and reputation risks that may not be fully
recognized by management or adequately incorporated into risk
management systems. The capital treatment required by this proposed
rule addresses credit risk associated with securitizations and other
credit risk mitigation techniques. Therefore, it is essential that an
institution's compliance with capital standards be complemented by
effective risk management practices and strategies.
Similar to the other financial regulatory agencies, the FCA expects
FCS institutions to identify, measure, monitor, and control
securitization risks and explicitly incorporate the full range of those
risks into their risk management systems. The board and management are
responsible for adequate policies and procedures that address the
economic substance of their activities and fully recognize and ensure
appropriate management of related risks. Additionally, FCS institutions
must be able to measure and manage their risk exposure from securitized
positions, either retained or acquired. The formality and
sophistication with which the risks of these activities are
incorporated into an institution's risk management system should be
commensurate with the nature and volume of its securitization
activities.\24\
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\24\ This rule does not grant any new authorities to System
institutions. It merely provides risk weightings for investments and
transactions that are otherwise authorized.
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IV. The Ratings-Based Approach for Government-Sponsored Agencies and
OECD Banks
Under our proposal, beginning 18 months after the effective date of
the final rule, the ratings-based approach would have applied to assets
covered by credit protection provided by Government-sponsored agencies
and OECD banks, including credit derivatives (e.g., credit default
swaps), loss purchase commitments, guarantees and other similar
arrangements. In addition, the ratings-based approach would have
applied to unrated positions in recourse obligations, direct credit
substitutes, residual interests (other than credit-enhancing interest-
only strips) and asset- or mortgage-backed securities that are
guaranteed by Government-sponsored agencies beginning 18 months after
the final rule's effective date.
As we noted in the preamble to our proposed rule, the other
financial regulatory agencies have not yet implemented the ratings-
based approach for assets covered by credit protection provided by
Government-sponsored agencies or OECD banks or for positions in
securitizations guaranteed by Government-sponsored agencies. However,
we proposed these provisions as a limited implementation of the Basel
II framework. Further, we cited because of our concern that claims of
this nature on any counterparties that are not highly rated or are
unrated, including Government-sponsored agencies and OECD banks, may
pose significant risks to FCS institutions. In particular, we expressed
our concern about the unique structural and operational risks that
these types of claims may present.
In addition, we noted in the preamble to the proposed rule that the
United States General Accounting Office (GAO) \25\ recently recommended
that the FCA ``[c]reate a plan to implement actions currently under
consideration to reduce potential safety and soundness issues that may
arise from capital arbitrage activities of Farmer Mac and FCS
institutions.'' \26\ Our proposal stated that the rule would help
ensure that FCS institutions could not alter their capital requirements
simply by using different structures, arrangements, or counterparties
without changing the nature of the risks they assume or retain.
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\25\ This agency has been renamed the Government Accountability
Office.
\26\ United States General Accounting Office, Farmer Mac: Some
Progress Made, but Greater Attention to Risk Management, Mission,
and Corporate Governance Is Needed, GAO-04-116, at page 59 (2003).
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We received letters opposing these provisions from nine commenters.
In brief, the commenters made the following points:
The other financial regulatory agencies have not
implemented the ratings-based approach for their regulated financial
institutions for claims of this nature on Government-sponsored agency
counterparties, and therefore the FCA's requirements would put System
institutions at a competitive disadvantage.
Applying the ratings-based approach to claims of this
nature on Government-sponsored agencies would discourage System
institutions from using such agencies as a tool to enhance safety and
soundness and to manage risk. In particular, it would discourage the
use of Farmer Mac programs, which could hinder both the System's and
Farmer Mac's ability to further their mission to serve agriculture and
could jeopardize the financial viability of Farmer Mac.
The proposed regulation, which would permit a 20-percent
risk weighting for a claim of this nature on a Government-sponsored
agency or OECD bank counterparty only if the agency or bank has an AAA
or AA issuer credit rating, is inconsistent with other FCA regulations,
including its rule governing other financing institutions (OFIs) and
its proposed rule governing Investments in Farmers' Notes.\27\ In
addition, under the proposed rule, investments in debt obligations of a
Government-sponsored agency would be risk weighted at 20 percent
regardless of issuer credit rating, even though these investments are
not backed by mortgages, unlike the investments that would be subject
to the ratings-based approach.
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\27\ Both the OFI rule and the proposed Farmers' Notes rule
permit a 20-percent risk weighting if the counterparty is an OECD
bank, regardless of issuer credit rating, or if the counterparty has
at least an A credit rating. See 69 FR 29852 (May 26, 2004); 69 FR
55362 (Sept. 14, 2004).
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The proposed rule is an ad hoc implementation of Basel II;
FCA should wait to see what approach the other Federal financial
regulators are going to adopt before implementing any components of
Basel II.
FCA could better achieve its purpose of limiting
counterparty risk by establishing counterparty exposure limits.
We have removed these provisions related to Government-sponsored
agencies and OECD banks from the final rule. We believe it is prudent
to wait for the other financial regulatory agencies to announce the
approach they plan to take so that any competitive disadvantage due to
inconsistent risk-weighting requirements can be avoided. We are
continuing to evaluate the progress of the other financial regulatory
agencies toward implementing Basel II and to determine the appropriate
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implementation for the System. As Basel II is implemented throughout
the banking world, we expect to revisit our approach to risk weighting.
Thus, System institutions should anticipate additional regulatory
capital amendments, consistent with Basel II, over the next few years.
In the meantime, when appropriate, as we have emphasized, we will
exercise our reservation of authority to modify the risk-weighting
requirements (which could result in a higher or lower risk weight) for
any asset or off-balance sheet item when its capital treatment does not
accurately reflect its associated risk.
As we have also emphasized, transactions or arrangements involving
credit protection such as credit derivatives, loss purchase
commitments, guarantees and the like often contain a number of
structural complexities and may impose additional operational and
counterparty risk on FCS institutions that enter into them.
Accordingly, FCS institutions should ensure their counterparties are
sophisticated, financially strong, and well capitalized. Moreover, FCS
institutions must fully understand the risks transferred, retained, or
assumed through these arrangements. We expect FCS institutions to take
appropriate measures to manage the additional operational risks that
may be created by these arrangements. FCS institutions should
thoroughly review and understand all the legal definitions and
parameters of these instruments, including credit events that
constitute default, as well as representations and warranties, to
determine how well the contract will perform under a variety of
economic conditions. We also advise FCS institutions to review FCA's
Informational Memorandum dated October 21, 2003, in which the Agency
suggested items for consideration in managing counterparty risk.
V. Section-by-Section Analysis of Rule
The following discussion provides explanations, where necessary, of
the more complex changes this rule makes. Most of the changes are
necessary to align our rules more closely with those of the other
financial regulatory agencies and to recognize relative risk exposure.
As mentioned above, we have also made a number of organizational and
plain language changes to make our rules easier to follow. These
changes are discussed later in this preamble.
A. Section 615.5201--Definitions
Because this rule implements a new risk-weighting approach for
recourse obligations, residual interests, direct credit substitutes,
and other securitization arrangements, we are amending Sec. 615.5201
to add a number of new definitions relating to these activities. We are
updating certain other definitions as warranted. For the most part, to
achieve consistency with the other financial regulatory agencies, we
are adopting the same definitions as the other agencies.
1. Credit Derivative
We define ``credit derivative'' as a contract that allows one party
(the protection purchaser) to transfer the credit risk of an asset or
off-balance sheet credit exposure to another party (the protection
provider). The value of a credit derivative is dependent, at least in
part, on the credit performance of a ``reference asset.''
The definitions of ``recourse'' and ``direct credit substitute''
cover credit derivatives to the extent that an institution's credit
risk exposure exceeds its pro rata interest in the underlying
obligation. The ratings-based approach therefore applies to rated
instruments such as credit-linked notes issued as part of a synthetic
securitization.
Credit derivatives can have a variety of structures. Therefore, we
will continue to evaluate the risk weighting of credit derivatives on a
case-by-case basis. Furthermore, we will continue to use the November
1999 and December 1999 guidance on synthetic securitizations issued by
the Federal Reserve Board and the OCC as a guide for determining
appropriate capital requirements for FCS institutions and continue to
apply the structural and risk management requirements outlined in the
1999 guidance.\28\
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\28\ See Banking Bulletin 99-43, December 1999 (OCC);
Supervision and Regulation Letter 99-32, Capital Treatment for
Synthetic Collateralized Loan Obligations, November 15, 1999
(Federal Reserve Board).
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2. Credit-Enhancing Interest-Only Strip
We define the term ``credit-enhancing interest-only strip'' as an
on-balance sheet asset that, in form or in substance, (1) Represents
the contractual right to receive some or all of the interest due on
transferred assets; and (2) exposes the institution to credit risk
directly or indirectly associated with the transferred assets that
exceeds its pro rata claim on the assets, whether through subordination
provisions or other credit enhancement techniques. FCA reserves the
right to identify other cash flows or related interests as credit-
enhancing interest-only strips based on the economic substance of the
transaction.
Credit-enhancing interest-only strips include any balance sheet
asset that represents the contractual right to receive some or all of
the remaining interest cash flow generated from assets that have been
transferred into a trust (or other special purpose entity), after
taking into account trustee and other administrative expenses, interest
payments to investors, servicing fees, and reimbursements to investors
for losses attributable to the beneficial interests they hold, as well
as reinvestment income and ancillary revenues \29\ on the transferred
assets.
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\29\ Under Statement of Financial Accounting Standards No. 140,
ancillary revenues include late charges on transferred assets.
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Credit-enhancing interest-only strips are generally carried on the
balance sheet at the present value of the reasonably expected net cash
flow, adjusted for some level of prepayments if relevant, and
discounted at an appropriate market interest rate. As mentioned
earlier, FCA will look to the economic substance of the transaction and
reserves the right to identify other cash flows or spread-related
assets as credit-enhancing interest-only strips on a case-by-case
basis. For example, including some principal payments with interest and
fee cash flows will not otherwise negate the regulatory capital
treatment of that asset as a credit-enhancing interest-only strip.
Credit-enhancing interest-only strips include both purchased and
retained interest-only strips that serve in a credit-enhancing
capacity, even though purchased interest-only strips generally do not
result in the creation of capital on the purchaser's balance sheet.
3. Credit-Enhancing Representations and Warranties
When an institution transfers or purchases assets, including
servicing rights, it customarily makes or receives representations and
warranties concerning those assets. These representations and
warranties give certain rights to other parties and impose obligations
upon the seller or servicer of those assets. To the extent such
representations and warranties function as credit enhancements to
protect asset purchasers or investors from credit risk, the rule treats
them as recourse or direct credit substitutes.
More specifically, ``credit-enhancing representations and
warranties'' are defined as representations and warranties that: (1)
Are made or assumed in connection with a transfer of assets (including
loan-servicing assets); and (2) obligate an institution to protect
investors from losses arising
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from credit risk in the assets transferred or loans serviced. The term
includes promises to protect a party from losses resulting from the
default or nonperformance of another party or from an insufficiency in
the value of collateral.
This definition is consistent with the other financial regulatory
agencies' long-standing recourse treatment of representations and
warranties that effectively guarantee performance or credit quality of
transferred loans. However, a number of factual warranties unrelated to
ongoing performance or credit quality are typically made. These
warranties entail operational risk, as opposed to credit risk inherent
in a financial guaranty, and are excluded from the definitions of
recourse and direct credit substitute. Warranties that create
operational risk include warranties that assets have been underwritten
or collateral appraised in conformity with identified standards and
warranties that permit the return of assets in instances of incomplete
documentation, misrepresentation, or fraud. FCA expects FCS
institutions to be able to demonstrate effective management of
operational risks created by warranties.
Warranties or assurances that are treated as recourse or direct
credit substitutes include warranties on the actual value of asset
collateral or that ensure the market value corresponds to appraised
value or the appraised value will be realized in the event of
foreclosure and sale. Also, premium refund clauses, which can be
triggered by defaults, are generally credit enhancements. A premium
refund clause is a warranty that obligates the seller who has sold a
loan at a price in excess of par, i.e., at a premium, to refund the
premium, either in whole or in part, if the loan defaults or is prepaid
within a certain period of time. However, certain premium refund
clauses are not considered credit enhancements, including:
(1) Premium refund clauses covering loans for a period not to
exceed 120 days from the date of transfer. These warranties may cover
only those loans that were originated within 1 year of the date of the
transfer; and
(2) Premium refund clauses covering assets guaranteed, in whole or
in part, by the United States Government, a United States Government
agency, or a United States Government-sponsored agency, provided the
premium refund clause is for a period not to exceed 120 days from the
date of transfer.
Clean-up calls, an option that permits a servicer or its affiliate
to take investors out of their positions prior to repayment of all
loans, are also generally treated as credit enhancements. A clean-up
call is not considered recourse or a direct credit substitute only if
the agreement to repurchase is limited to 10 percent or less of the
original pool balance. Repurchase of any loans 30 days or more past due
would invalidate this exemption.
Similarly, a loan-servicing arrangement is considered as recourse
or a direct credit substitute if the institution, as servicer, is
responsible for credit losses associated with the serviced loans.
However, a cash advance made by a servicer to ensure an uninterrupted
flow of payments to investors or the timely collection of the loans is
specifically excluded from the definitions of recourse and direct
credit substitute, provided that the servicer is entitled to
reimbursement for any significant advances and this reimbursement is
not subordinate to other claims. To be excluded from recourse and
direct credit substitute treatment, an independent credit assessment of
the likelihood of repayment of the servicer's cash advance should be
made prior to advancing funds, and the institution should only make
such an advance if prudent lending standards are met.
4. Direct Credit Substitute
The definition of ``direct credit substitute'' complements the
definition of ``recourse.'' The term ``direct credit substitute''
refers to an arrangement in which an institution assumes, in form or in
substance, credit risk directly or indirectly associated with an on- or
off-balance sheet asset or exposure that was not previously owned by
the institution (third-party asset) and the risk assumed by the
institution exceeds the pro rata share of the institution's interest in
the third-party asset. If the institution has no claim on the third-
party asset, then the institution's assumption of any credit risk is a
direct credit substitute. The term explicitly includes items such as
the following:
Financial standby letters of credit that support financial
claims on a third party that exceed an institution's pro rata share in
the financial claim;
Guarantees, surety arrangements, credit derivatives, and
similar instruments backing financial claims that exceed an
institution's pro rata share in the financial claim;
Purchased subordinated interests that absorb more than
their pro rata share of losses from the underlying assets;
Credit derivative contracts under which the institution
assumes more than its pro rata share of credit risk on a third-party
asset or exposure;
Loans or lines of credit that provide credit enhancement
for the financial obligations of a third party;
Purchased loan-servicing assets if the servicer is
responsible for credit losses or if the servicer makes or assumes
credit-enhancing representations and warranties with respect to the
loans serviced (servicer cash advances are not direct credit
substitutes); and
Clean-up calls on third-party assets. However, clean-up
calls that are 10 percent or less of the original pool balance and that
are exercisable at the option of the institution are not direct credit
substitutes.
5. Externally Rated
The rule defines ``externally rated'' to mean that an instrument or
obligation has received a credit rating from at least one NRSRO. The
use of external credit ratings provides a way to determine credit
quality relied upon by investors and other market participants to
differentiate the regulatory capital treatment for loss positions
representing different gradations of risk. This use permits more
equitable treatment of transactions and structures in administering the
risk-based capital requirements.
6. Financial Standby Letter of Credit
Section 615.5201(o) of our regulations previously defined the term
``standby letter of credit.'' We are changing the term to ``financial
standby letter of credit'' to conform our term to that used by the
other financial regulatory agencies. We are making no substantive
changes to the definition.
7. Government Agency
The term ``Government agency'' was defined in two places in our
previous capital regulations: Sec. 615.5201(f), the definitions
section, and Sec. 615.5210(f)(2)(i)(D), which was the section on
computing the permanent capital ratio. We have modified the previous
Sec. 615.5201(f) definition by replacing it with the definition of
Government agency previously in Sec. 615.5210(f)(2)(i)(D) and have
deleted the definition in previous Sec. 615.5210(f)(2)(i)(D). We
believe these changes streamline the regulation. We do not intend to
change the meaning of this term.
8. Government-Sponsored Agency
The term ``Government-sponsored agency'' was also defined in two
places in our previous capital regulations (Sec. 615.5201(g), the
definitions section,
[[Page 35341]]
and Sec. 615.5210(f)(2)(ii)(A), the former section on computing the
permanent capital ratio). We have modified the previous definition in
Sec. 615.5201(g) by replacing it with the previous Sec.
615.5210(f)(2)(ii)(A) definition of Government-sponsored agency
(amended slightly for clarity, as discussed below) and have deleted the
redundant definition in previous Sec. 615.5210(f)(2)(ii)(A). This
change simply streamlines our regulations and does not change the
meaning of the term.
``Government-sponsored agency'' is defined as an agency,
instrumentality, or corporation chartered or established to serve
public purposes specified by the United States Congress but whose
obligations are not explicitly guaranteed by the full faith and credit
of the United States Government, including but not limited to any
Government-sponsored enterprise (GSE). This definition includes GSEs
such as Fannie Mae and Farmer Mac, as well as Federal agencies, such as
the Tennessee Valley Authority, that issue obligations that are not
explicitly guaranteed by the United States' full faith and credit. This
definition is slightly different from that in our proposal, although
the meaning is the same; we have clarified that the term includes
corporations, as well as agencies or instrumentalities, that are
chartered or established to serve public purposes specified by
Congress, and also that the term includes GSEs. This information was
provided in the preamble to the proposed rule but was not explicitly
stated in the rule itself.
9. Nationally Recognized Statistical Rating Organization
We define ``nationally recognized statistical rating organization''
(NRSRO) as a rating organization that the Securities and Exchange
Commission (SEC) recognizes as an NRSRO. This definition is identical
to the definition in Sec. 615.5131(j) of our regulations.
10. Non-OECD Bank
We define ``non-OECD bank'' as a bank and its branches (foreign and
domestic) organized under the laws of a country that does not belong to
the OECD group of countries.\30\
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\30\ OECD stands for the Organization for Economic Cooperation
and Development. The OECD is an international organization of
countries that are committed to democratic government and the market
economy. For purposes of our capital regulations, as well as those
of the other financial regulatory agencies and the Basel Accord,
OECD countries are those countries that are full members of the OECD
or that have concluded special lending arrangements associated with
the International Monetary Fund's General Arrangements to Borrow,
excluding any country that has rescheduled its external sovereign
debt within the previous 5 years. The OECD currently has 30 member
countries. An up-to-date listing of member countries is available at
http://www.oecd.org or www.oecdwash.org..
---------------------------------------------------------------------------
11. OECD Bank
We define ``OECD bank'' as a bank and its branches (foreign and
domestic) organized under the laws of a country that belongs to the
OECD group of countries. For purposes of our capital regulations, this
term includes U.S. depository institutions.
12. Permanent Capital
We add language to clarify that permanent capital is subject to
adjustments such as dollar-for-dollar reduction of capital for residual
interests or other high-risk assets as described in new Sec. 615.5207.
We made no other changes.
13. Recourse
The rule defines the term ``recourse'' to mean an arrangement in
which an institution retains, in form or in substance, any credit risk
directly or indirectly associated with an asset it has sold (in
accordance with generally accepted accounting principles (GAAP)) that
exceeds a pro rata share of the institution's claim on the asset. If an
institution has no claim on an asset it has sold, then the retention of
any credit risk is recourse. A recourse obligation typically arises
when an institution transfers assets in a sale and retains an explicit
obligation to repurchase assets or to absorb losses due to a default on
the payment of principal or interest or any other deficiency in the
performance of the underlying obligor or some other party. Recourse may
also exist implicitly if an institution provides credit enhancement
beyond any contractual obligation to support assets it has sold.
Our definition of recourse is consistent with the other regulators'
long-standing use of this term and incorporates existing practices
regarding retention of risk in asset sales. The other financial
regulatory agencies have noted that third-party enhancements, such as
insurance protection, purchased by the originator of a securitization
for the benefit of investors, do not constitute recourse. The purchase
of enhancements for a securitization or other structured transaction
where the institution is completely removed from any credit risk will
not, in most instances, constitute recourse. However, if the purchase
or premium price is paid over time and the size of the payment is a
function of the third party's loss experience on the portfolio, such an
arrangement indicates an assumption of credit risk and would be
considered recourse.
14. Residual Interest
The rule defines ``residual interest'' as any on-balance sheet
asset that: (1) Represents an interest (including a beneficial
interest) created by a transfer that qualifies as a sale (in accordance
with GAAP) of financial assets, whether through a securitization or
otherwise; and (2) exposes an institution to credit risk directly or
indirectly associated with the transferred asset that exceeds a pro
rata share of that institution's claim on the asset, whether through
subordination provisions or other credit enhancement techniques.
Residual interests generally include credit-enhancing interest-only
strips, spread accounts, cash collateral accounts, retained
subordinated interests (and other forms of overcollateralization), and
similar assets that function as a credit enhancement. Residual
interests generally do not include interests purchased from a third
party. However, a purchased credit-enhancing interest-only strip is a
residual interest because of its similar risk profile.
This functional definition reflects the fact that financial
structures vary in the way they use certain assets as credit
enhancements. Therefore, residual interests include any retained on-
balance sheet asset that functions as a credit enhancement in a
securitization or other structured transaction, regardless of its
characterization in financial or regulatory reports.
15. Rural Business Investment Company
The rule adds a definition for ``Rural Business Investment
Company'' (RBIC). Section 6029 of the Farm Security and Rural
Investment Act of 2002 \31\ amended the Consolidated Farm and Rural
Development Act, as amended (7 U.S.C. 1921 et seq.) by adding a new
subtitle H, establishing a new ``Rural Business Investment Program.''
The new subtitle permits FCS institutions to establish or invest in
RBICs, subject to specified limitations. We define RBICs by referring
to the statutory definition codified in 7 U.S.C. 2009cc(14). That
provision defines RBIC as ``a company that (A) has been granted final
approval by the Secretary [of Agriculture] * * * and; (B) has entered
into a participation agreement with the Secretary [of Agriculture].''
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\31\ Pub. L. 107-171.
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16. Securitization
The rule defines ``securitization'' as the pooling and repackaging
by a special
[[Page 35342]]
purpose entity or trust of assets or other credit exposures that can be
sold to investors. Securitization includes transactions that create
stratified credit risk positions whose performance is dependent upon an
underlying pool of credit exposures, including loans and commitments.
17. Other Terms
We also add definitions for the following terms:
Bank.
Face Amount.
Financial Asset.
Qualified Residential Loan.
Qualifying Securities Firm.
Risk Participation.
Servicer Cash Advance.
Traded Position.
U.S. Depository Institution.
Finally, we carry over the remaining definitions from the previous
rule without substantive change.
B. Sections 615.5210 and 615.5211--Ratings-Based Approach for Positions
in Securitizations
1. Sections 615.5210 and 615.5211--General
As described in the overview section of this preamble, each loss
position in an asset securitization structure functions as a credit
enhancement for the more senior loss positions in the structure.
Historically, neither our risk-based capital standards nor those of the
other financial regulatory agencies varied the capital requirements for
different credit enhancements or loss positions to reflect differences
in the relative credit risks represented by the positions. To address
this issue, the other financial regulatory agencies implemented a
multilevel, ratings-based approach to assess capital requirements on
recourse obligations, residual interests (except credit-enhancing
interest-only strips), direct credit substitutes, and senior and
subordinated positions in asset-backed securities and mortgage-backed
securities based on their relative exposure to credit risk. The
approach uses credit ratings from NRSROs to measure relative exposure
to credit risk and determine the associated risk-based capital
requirement.
With this rule, we are adopting similar requirements. These changes
bring our regulations into close alignment with those of the other
financial regulatory agencies for externally rated positions in
securitizations with similar risks.
Additionally, new Sec. 615.5210(f) of the regulation makes
explicit FCA's authority to override the use of certain ratings or the
ratings on certain instruments, either on a case-by-case basis or
through broader supervisory policy, if necessary or appropriate to
address the risk that an instrument poses to FCS institutions.
2. Section 615.5210(b)--Positions that Qualify for the Ratings-Based
Approach
Under new Sec. 615.5210(b) of our rule, certain positions in
securitizations qualify for the ratings-based approach. These positions
in securitizations are eligible for the ratings-based approach,
provided the positions have favorable external ratings (as explained
below) by at least one NRSRO.
More specifically, the following positions in securitizations
qualify for the ratings-based approach if they satisfy the criteria set
forth below:
Recourse obligations;
Direct credit substitutes;
Residual interests (other than credit-enhancing interest-
only strips);\32\ and
Asset- and mortgage-backed securities.
3. Section 615.5210(b)--Application of the Ratings-Based Approach
Under new Sec. 615.5210, the capital requirement for a position
that qualifies for the ratings-based approach is computed by
multiplying the face amount of the position by the appropriate risk
weight as determined by the position's external credit rating.
Under new Sec. 615.5210(b), a position that is traded and
externally rated qualifies for the ratings-based approach if its long-
term external rating is one grade below investment grade or better
(e.g., BB or better) or its short-term external rating is investment
grade or better (e.g., A-3, P-3).\33\ If the position receives more
than one external rating, the lowest rating would apply. This
requirement eliminates the potential for rating shopping.
A position that is externally rated but not traded qualifies for
the ratings-based approach if it satisfies the following criteria:
---------------------------------------------------------------------------
\32\ We exclude credit-enhancing interest-only strips from the
ratings-based approach because of their high-risk profile, as
discussed under section V.C.1. of this preamble.
\33\ These ratings are examples only. Different NRSROs may have
different ratings for the same grade.
---------------------------------------------------------------------------
It must be externally rated by more than one NRSRO;
Its long-term external rating must be one grade below
investment grade or better (e.g., BB or better) or its short-term
external rating must be investment grade or better (e.g., A-3, P-3). If
the position receives more than one external rating, the lowest rating
would apply;
The ratings must be publicly available; and
The ratings must be based on the same criteria used to
rate traded positions.
Under the ratings-based approach, the capital requirement for a
position that qualifies for the ratings-based approach is computed by
multiplying the face amount of the position by the appropriate risk
weight determined in accordance with the following tables: \34\
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\34\ See paragraphs (b)(13), (c)(3), (d)(6), and (e) of new
Sec. 615.5211.
\35\ These ratings are examples only. Different NRSROs may have
different ratings for the same grade. Further, ratings are often
modified by either a plus or minus sign to show relative standing
within a major rating category. Under the proposed rule, ratings
refer to the major rating category without regard to modifiers. For
example, an investment with a long-term rating of ``A-'' would be
risk weighted at 50 percent.
Risk-Based Capital Requirements for Long-Term Issue or Issuer Ratings
------------------------------------------------------------------------
Rating examples Risk weight (in
Rating category \35\ percent)
------------------------------------------------------------------------
Highest or second highest AAA or AA......... 20
investment grade.
Third highest investment grade.. A................. 50
Lowest investment grade......... BBB............... 100
One category below investment BB................ 200
grade.
More than one category below B or below or Not eligible for
investment grade, or unrated. Unrated. the ratings-based
approach.
------------------------------------------------------------------------
[[Page 35343]]
Risk-Based Capital Requirements for Short-Term Issue Ratings
------------------------------------------------------------------------
Risk weight (in
Short-term rating category Rating examples percent)
------------------------------------------------------------------------
Highest investment grade........ A-1, P-1.......... 20
Second highest investment grade. A-2, P-2.......... 50
Lowest investment grade......... A-3, P-3.......... 100
Below investment grade, or B or lower (Not Not eligible for
unrated. Prime). the ratings-based
approach.
------------------------------------------------------------------------
The charts for long-term and short-term ratings are not identical
because rating agencies use different methodologies. Each short-term
rating category covers a range of longer-term rating categories. For
example, a P-1 rating could map to a long-term rating as high as Aaa or
as low as A3.
These amendments do not change the risk-weight requirement that FCA
adopted in its interim final rule for non-agency asset- and mortgage-
backed securities that are highly rated.\36\ These amendments simply
make our rule language more consistent with that used by the other
financial regulatory agencies for these types of transactions.
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\36\ See 68 FR 15045 (March 28, 2003).
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C. Section 615.5210(c)--Treatment of Positions in Securitizations That
Do Not Qualify for the Ratings-Based Approach
1. Section 615.5210(c)(1), (c)(2), and (c)(3)--Positions Subject to
Dollar-for-Dollar Capital Treatment
This rule subjects certain positions in asset securitizations that
do not qualify for the ratings-based approach to dollar-for-dollar
capital treatment. As set forth in new paragraphs 615.5210(c)(1),
(c)(2), and (c)(3), these positions include:
Residual interests that are not externally rated;
Credit-enhancing interest-only strips; and
Positions that have long-term external ratings that are
two grades below investment grade or lower (e.g., B or lower) or short-
term external ratings that are one grade below investment grade or
lower (e.g., B or lower, Not Prime).
Under the dollar-for-dollar treatment, an FCS institution must
deduct from capital and assets the face amount of the position. This
means, in effect, one dollar in total capital must be held against
every dollar held in these positions, even if this capital requirement
exceeds the full risk-based capital charge.
We adopt the dollar-for-dollar treatment for the credit-enhancing
and highly subordinated positions listed above because these positions
raise a number of supervisory concerns that the other financial
regulatory agencies also share.\37\ The level of credit risk exposure
associated with deeply subordinated assets, particularly subinvestment
grade and unrated residual interests, is extremely high. They are
generally subordinated to all other positions, and these assets are
subject to valuation concerns that might lead to loss as explained
further below. Additionally, the lack of an active market makes these
assets difficult to independently value and relatively illiquid.
---------------------------------------------------------------------------
\37\ See 66 FR 59614 (November 29, 2001).
---------------------------------------------------------------------------
In particular, there are a number of concerns regarding residual
interests. A banking organization can inappropriately generate ``paper
profits'' (or mask actual losses) through incorrect cash flow modeling,
flawed loss assumptions, inaccurate prepayment estimates, and
inappropriate discount rates. Such practices often lead to an inflation
of capital, falsely making the banking organization appear more
financially sound. Also, embedded within residual interests, including
credit-enhancing interest-only strips, is a significant level of credit
and prepayment risk that make their valuation extremely sensitive to
changes in underlying assumptions. For these reasons we, like the other
financial regulatory agencies, concluded that a higher capital
requirement is warranted for unrated residual interests and all credit-
enhancing interest-only strips. Furthermore, the ``low-level exposure
rule,'' discussed below, does not apply to these positions in
securitizations. For example, if an FCS institution holds a non-
externally rated 10-percent residual interest in $100 million of loans
sold into a securitization, the institution's capital charge would be
$10 million. If an FCS institution purchases a $25 million position in
an ABS that is subsequently downgraded to B or lower, its capital
charge would be $25 million, the full amount of the position.
We note that the final rules adopted by the other financial
regulatory agencies impose both a dollar-for-dollar risk weighting for
residual interests that do not qualify for the ratings-based approach
and a concentration limit on a subset of those residual interests--
credit-enhancing interest-only strips--for the purpose of calculating a
bank's leverage ratio. Under their combined approach, credit-enhancing
interest-only strips are limited to 25 percent of a banking
organization's Tier 1 capital. Everything above that amount is deducted
from Tier 1 capital. Generally, under the other financial regulatory
agencies' rules, all other residual interests that do not qualify for
the ratings-based approach (including any credit-enhancing interest-
only strips that were not deducted from Tier 1 capital) are subject to
a dollar-for-dollar risk weighting. The combined capital charge is
limited to the face amount of a banking organization's residual
interests.
As indicated previously, we are adopting a one-step approach for
these positions in securitizations. This requires FCS institutions to
deduct from capital and assets the face amount of their position. The
resulting total capital charge is virtually the same under both
approaches. However, we found that the one-step approach is easier to
apply to FCS institutions because the way they compute their regulatory
capital standards differs from the way other banking organizations
compute their standards.
2. Section 615.5210(c)(4)--Unrated Recourse Obligations and Direct
Credit Substitutes
As discussed in the definitions section, the contractual retention
of credit risk by an FCS institution associated with assets it has sold
generally constitutes recourse.\38\ The definitions of recourse and
direct credit substitute complement each other, and there are many
types of recourse arrangements and direct credit substitutes that can
be assumed through either on- or off-balance sheet credit exposures
that are not externally rated.
[[Page 35344]]
Under new Sec. 615.5210(c)(4), FCS institutions are required to hold
capital against the entire outstanding amount of assets supported
(e.g., all more senior positions) by an on-balance sheet recourse
obligation or direct credit substitute that is unrated. This treatment
parallels our approach for off-balance sheet recourse obligations and
direct credit substitutes, as discussed later under the computation of
credit equivalent amounts. For example, if an FCS institution retains
an on-balance sheet first-loss position through a recourse arrangement
or direct credit substitute in a pool of rural housing loans that
qualify for a 50-percent risk weight, the FCS institution would include
the full amount of the assets in the pool, risk weighted at 50 percent,
in its risk-weighted assets for purposes of determining its risk-based
capital ratios. The low-level exposure rule \39\ provides that the
dollar amount of risk-based capital required for assets transferred
with recourse should not exceed the maximum dollar amount for which an
FCS institution is contractually liable.
---------------------------------------------------------------------------
\38\ As previously discussed, this rule defines the term
``recourse'' to mean an arrangement in which an institution retains,
in form or in substance, any credit risk directly or indirectly
associated with an asset it has sold, if the credit risk exceeds a
pro rata share of the institution's claim on the asset. If an
institution has no claim on an asset that it has sold, then the
retention of any credit risk is recourse.
\39\ See new Sec. 615.5210(e).
---------------------------------------------------------------------------
The other financial regulatory agencies currently permit their
banking organizations to use three alternative approaches (i.e.,
internal ratings, program ratings, and computer programs) for
determining the capital requirements for certain unrated direct credit
substitutes and recourse obligations in asset-backed commercial paper
programs. As discussed in the preamble to our proposed rule, the FCA
has decided not to address the capital requirements for asset-backed
commercial paper programs at this time due to the limited involvement
FCS institutions presently have in these programs. FCA will continue to
determine the capital requirements for such programs on a case-by-case
basis.
3. Sections 615.5210(c)(5) and 615.5211(d)(7)--Stripped Mortgage-Backed
Securities (SMBS)
Under new Sec. Sec. 615.5210(c)(5) and 615.5211(d)(7), SMBS and
similar instruments, such as interest-only strips that are not credit-
enhancing or principal-only strips (including such instruments
guaranteed by Government-sponsored agencies), are assigned to the 100-
percent risk-weight category. Even if highly rated, these securities do
not receive the more favorable capital treatment available to other
mortgage securities because of their higher market risk profile.
Typically, SMBS contain a higher degree of price volatility associated
with mortgage prepayments.\40\
---------------------------------------------------------------------------
\40\ As indicated previously, credit-enhancing positions in
securitizations are subject to dollar-for-dollar capital treatment.
---------------------------------------------------------------------------
4. Section 615.5211(d)(12)--Unrated Positions in Asset-Backed
Securities and Mortgage-Backed Securities
Unrated positions in mortgage- and asset-backed securities that do
not qualify for the ratings-based approach are generally assigned to
the 100-percent risk-weight category under this rule.
The FCA recognizes that these risk-based capital requirements can
provide a more favorable treatment for certain unrated positions in
asset- and mortgage-backed securities than those rated below investment
grade. For this reason, FCA will look to the substance of the
transaction to determine whether a higher capital requirement is
warranted based on the risk characteristics of the position.
Additionally, because of the many advantages, including pricing,
liquidity, and favorable capital treatment on highly rated positions in
asset- and mortgage-backed securities, we believe this overall
regulatory approach does not provide a disincentive for participants to
obtain external ratings.
D. Section 615.5210(d)--Senior Positions Not Externally Rated
For senior positions not externally rated, the following capital
treatment applies under new Sec. 615.5210(d). If an FCS institution
retains an unrated position that is senior or preferred in all respects
(including collateral and maturity) to a rated position that is traded,
the position is treated as if it had the same rating assigned to the
rated position. These senior unrated positions qualify for the risk
weighting of the subordinated rated positions as long as the
subordinate rated position is traded and remains outstanding for the
entire life of the unrated position, thus providing full credit support
for the term of the unrated position.
E. Section 615.5210(e)--Low-Level Exposure Rule
New section 615.5210(e) limits the maximum risk-based capital
requirement to the lesser of the maximum contractual exposure or the
full capital charge against the outstanding amount of assets
transferred with recourse. When the low-level exposure rule applies, an
institution will generally hold capital dollar-for-dollar against the
amount of its maximum contractual exposure. Thus, if the maximum
contractual exposure to loss retained or assumed in connection with
recourse obligation or a direct credit substitute is less than the full
risk-based capital requirement for the assets enhanced, the risk-based
capital requirement is limited to the maximum contractual exposure.
In the absence of any other recourse provisions, the on-balance
sheet amount of assets retained or assumed in connection with a
recourse obligation or direct credit substitute represents the maximum
contractual exposure. For example, assume that $100 million in loans
are sold and an FCS institution provides a $5 million credit
enhancement through a recourse obligation. Instead of holding 7 percent
or $7 million of capital, the low-level exposure limits the risk-based
requirement to the $5 million maximum contractual loss exposure, with
$5 million held dollar-for-dollar against capital.
F. Section 615.5211--Risk Categories--Balance Sheet Assets
1. Section 615.5211(b)(6)--Securities and Other Claims on, and Portions
of Claims Guaranteed by, Government-Sponsored Agencies
Under new Sec. 615.5211(b)(6), securities and other claims on, and
portions of claims guaranteed by, Government-sponsored agencies are
assigned to the 20-percent risk-weight category. This category
includes, for example, debt securities and asset- or mortgage-backed
securities \41\ guaranteed by Government-sponsored agencies. The
category also includes assets covered by credit protection provided by
Government-sponsored agencies through credit derivatives (e.g., credit
default swaps), loss purchase commitments, guarantees, and other
similar arrangements.
---------------------------------------------------------------------------
\41\ Stripped mortgage-backed securities, as discussed above,
are assigned to the 100-percent risk-weighting category.
---------------------------------------------------------------------------
2. Section 615.5211(a)(5), (b)(14), and (b)(15)--Treatment of Claims on
Qualifying Securities Firms
We are adding claims on qualifying securities firms to the current
risk-based capital requirements.\42\
---------------------------------------------------------------------------
\42\ Under revised Sec. 615.201, ``qualifying securities firm''
means: (1) A securities firm incorporated in the United States that
is a broker-dealer that is registered with the SEC and that complies
with the SEC's net capital regulatiions; and (2) a securities firm
incorporated in any other OECD-based country, if the institution is
subject to supervision and regulation comparable to that imposed on
depository institutions in OECD countries.
---------------------------------------------------------------------------
Specifically, we are adopting a 0-percent risk weight for claims
on, or guaranteed by, qualifying securities firms that are
collateralized by cash held
[[Page 35345]]
by the institution or by securities issued or guaranteed by the United
States or OECD central governments, provided that a positive margin of
collateral is required to be maintained on such a claim on a daily
basis, taking into account any change in the institution's exposure to
the obligor or counterparty under the claim in relation to the market
value of the collateral held in support of the claim.\43\
---------------------------------------------------------------------------
\43\ Proposed Sec. 615.5211(a)(5).
---------------------------------------------------------------------------
We are also reducing from 100 percent to 20 percent the risk
weighting applied to all other claims on and claims guaranteed by
qualifying securities firms that satisfy specified external rating
requirements.\44\ Specifically, we are adopting a 20-percent risk
weighting for all claims on and claims guaranteed by a qualifying
securities firm that has a long-term issuer credit rating in one of the
two highest investment-grade rating categories from an NRSRO, or if the
claim is guaranteed by the qualifying securities firm's parent company
with such a rating.\45\
---------------------------------------------------------------------------
\44\ Proposed Sec. 615.5211(b)(15).
\45\ If ratings are available from more than one NRSRO, the
lowest rating will be used to determine whether the rating standard
has been met.
---------------------------------------------------------------------------
Finally, we adopt a 20-percent risk weight for certain
collateralized claims on qualifying securities firms without regard to
satisfaction of the rating standard, provided the claim arises under a
contract that:
Is a reverse repurchase/repurchase agreement or securities
lending/borrowing transaction executed under standard industry
documentation;
Is collateralized by liquid and readily marketable debt or
equity securities;
Is marked-to-market daily;
Is subject to a daily margin maintenance requirement under
the standard documentation; and
Can be liquidated, terminated, or accelerated immediately
in bankruptcy or similar proceeding, and the security or collateral
agreement will not be stayed or voided, under applicable law of the
relevant country.\46\
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\46\ See new Sec. 615.5211(b)(16).
---------------------------------------------------------------------------
3. Section 615.5211(c)(2)--Treatment of Qualified Residential Loans
Existing Sec. 613.3030 authorizes System institutions to provide
financing to rural homeowners for the purpose of buying, remodeling,
improving, and repairing rural homes. ``Rural homeowner'' is defined as
an individual who resides in a rural area and is not a bona fide
farmer, rancher, or producer or harvester of aquatic products. ``Rural
home'' means a single-family moderately priced dwelling located in a
rural area that will be owned and occupied as the rural homeowner's
principal residence. ``Rural area'' means open country within a state
or the Commonwealth of Puerto Rico, which may include a town or village
that has a population of not more than 2,500 persons.
Previous Sec. 615.5210(f)(2)(iii)(B) assigned these rural home
loans, provided they were secured by first lien mortgages or deeds of
trust, to the 50-percent risk-weight category.\47\ However, residential
loans to bona fide farmers, ranchers, and producers and harvesters of
aquatic products have formerly been considered to be agricultural loans
and have been risk weighted at 100 percent under previous Sec.
615.5210(f)(2)(iv).
---------------------------------------------------------------------------
\47\ This risk weighting has been retained in the new rule. See
Sec. Sec. 615.5201 and 615.5211(c)(2).
---------------------------------------------------------------------------
New Sec. 615.5211(c)(2) assigns a 50-percent risk weight to all
qualified residential loans, as defined in revised Sec. 615.5201. To
be a qualified residential loan, a loan must be either: (i) A rural
home loan, as authorized by Sec. 613.3030,\48\ or (ii) a single-family
residential loan to a bona fide farmer, rancher, or producer or
harvester of aquatic products.\49\ A qualified residential loan must be
secured by a first lien mortgage or deed of trust on the residential
property only (not on any adjoining agricultural property or any other
nonresidential property), must have been approved in accordance with
prudent underwriting standards, must not be past due 90 days or more or
carried in nonaccrual status, and must have a monthly amortization
schedule. In addition, the mortgage or deed of trust securing the
residential property must be written and recorded in accordance with
all state and local requirements governing its enforceability as a
first lien. Finally, the secured residential property must have a
permanent right-of-way access.
---------------------------------------------------------------------------
\48\ As discussed above, these loans have previously been
included in the 50-percent risk-weight category.
\49\ As discussed above, these loans have previously received a
100-percent risk weighting.
---------------------------------------------------------------------------
The reason we are providing for a 50-percent risk weighting for
residential loans to farmers, ranchers, and aquatic producers and
harvesters that meet the standards set forth in the definition of
qualified residential loan is because the risk weighting is
commensurate with the level of risk, which is similar to the level of
risk posed by residential loans to non-farmers that meet the same
standards. Such residential loans generally carry lower risk than do
loans secured by agricultural property.
This view is consistent with that of the other financial regulatory
agencies. Under their rules, a loan that is fully secured by a first
lien on a one- to four-family residential property is assigned to the
50-percent risk-weight category as long as the loan has been approved
in accordance with prudent underwriting standards and is not past due
90 days or more or carried in nonaccrual status.\50\ The other
financial regulatory agencies do not distinguish among types of
borrowers.
---------------------------------------------------------------------------
\50\ See, e.g., FDIC regualtions at 12 CFR Part 325, Appendix A,
II.C., Category 3.
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Consistent with the position of the other financial regulatory
agencies, any residential loan that does not meet the definition of a
qualified residential loan must be assigned to the 100-percent risk-
weight category.
The other financial regulatory agencies have issued guidance that
addresses their concerns about the appropriate risk weighting for
residential loans with high loan-to-value (LTV) ratios. Unlike the
lenders that these other agencies regulate, however, System
institutions are limited by statute, except in limited circumstances,
to an 85-percent LTV ratio on real estate (including residential real
estate).\51\ Therefore, this regulation does not contain specific LTV
requirements. Assigning risk weighting based on specific risk factors
with greater granularity (including LTV) is consistent with the
underlying framework of Basel II. We expect to review these risk
factors as we consider future rulemakings regarding Basel II.
---------------------------------------------------------------------------
\51\ Section 1.10 of the Act.
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We made one non-substantive change to the final rule. We added
language to clarify that the first lien mortgage or deed of trust must
be on the residential property only, not on any other property.\52\
---------------------------------------------------------------------------
\52\ This requirement does not preclude an institution, in an
abundance of caution, from taking other property as additional
collateral.
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The Farm Credit Council and six System institutions commented on
this proposal. All commenters appreciated FCA's proposed reduction of
the risk weighting for residential loans to farmers. Six of the seven
commenters, however, stated that the proposed rule's requirement for a
separate residential deed would be burdensome for the institution and
costly for the borrower and that a separate survey or legal description
could be used instead. One commenter stated that competitors make loans
on residential property using legal descriptions but not recorded deeds
and that the deed requirement is an additional cost and time
requirement that would prevent it from competing
[[Page 35346]]
for these loans. Another commenter stated that the requirement for a
separate residential deed penalizes farmers who own existing sites that
were acquired as part of larger parcels from obtaining loans with 50-
percent risk weighting to remodel or repair their homes. All of these
commenters requested that we delete the requirement for a separate
deed. Another commenter suggested, if the deed requirement could not be
eliminated, that the regulation set a maximum acreage limitation, such
as 50 or 100 acres, that could be included in the residential site.
In response to these comments, we have deleted the proposed rule's
requirement that, for a residential loan to receive a 50-percent risk
weighting, the secured residential property have a separate deed. We
recognize that some states and localities may permit a lender to record
and enforce a valid mortgage or deed of trust on property that is part
of a larger deed, as long as the mortgage or deed of trust is written
and recorded in accordance with all applicable requirements governing
its enforceability as a first lien. Other states or localities,
however, require that the mortgage or deed of trust may be recorded or
enforced only if its property description is identical to that
contained in the deed.
The final regulation, therefore, provides that, for a residential
loan to receive a 50-percent risk weighting, the mortgage or deed of
trust securing the residential property must be written and recorded in
accordance with all state and local requirements governing its
enforceability as a first lien. In those states or localities where the
description of property in the deed must match the description in the
mortgage or deed of trust, the deed must cover the residential property
only. In those states or localities where the description of property
in the deed need not match the description in the mortgage or deed of
trust, a separate deed on the residential property only is not
required. In all situations, to receive the 50-percent risk weighting,
institutions must follow state and local recordation requirements
governing enforceability of the mortgage or deed of trust as a first
lien.
Using risk-based examination principles, FCA examiners will review
these loans as part of their examination process to determine whether
they have been categorized appropriately. As part of this review, the
examiners will review the institution's underwriting standards for
qualified residential loans and appropriate application of those
standards. Their review will focus on ensuring the underwriting
standards contain appropriate criteria, including that a loan is
secured by a first lien on residential property alone (not on any
adjoining agricultural property or any other nonresidential property).
The examiners may also review other factors that indicate whether
the loan is a bona fide residential mortgage loan. The factors may
include, but are not limited to:
The marketability of the property as residential property
with a marketable dwelling;
The zoning and planning requirements that enable the
property to be marketable as a residential property; and
Whether the characteristics and market value of the
property are commensurate with those of residential properties in the
local market area.
We chose not to set a specific acreage limitation because size does
not necessarily determine the residential nature of property. Rather,
we expect each institution to adopt underwriting standards that would
ensure the collateral is characteristic of comparable residential
property. If FCA examiners find that the collateral is not
characteristic of residential property or that any loan was
inappropriately classified as a qualified residential loan, the Agency
will require the loan to be risk weighted at 100 percent.
4. Section 615.5211(d)(8)--Treatment of Investments in Rural Business
Investment Companies
As previously discussed, the Farm Security and Rural Investment Act
(Pub. L. 107-171) amended the Consolidated Farm and Rural Development
Act, 7 U.S.C. 1921 et seq., to permit FCS institutions to establish or
invest in RBICs subject to certain limitations. A RBIC has a similar
mission and objectives to serve rural entrepreneurs as a Small Business
Investment Company (SBIC) does to serve qualifying small businesses.
Currently, the other financial regulatory agencies risk weight
investments in SBICs at 100 percent and deduct from capital an
escalating percentage of SBIC investments that exceed 15 percent of
capital.\53\ In this rule, FCA risk weights investments in RBICs at 100
percent.\54\ FCA is not limiting the amount of RBIC investments that
can receive the 100-percent risk weight because a System institution is
precluded by statute from making an investment in a RBIC in excess of 5
percent of the capital and surplus of the institution.\55\ This
statutory limitation imposes adequate controls on risk from these
investments.
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\53\ See 67 FR 3784, January 25, 2002.
\54\ See new Sec. 615.5211(d)(8).
\55\ 7 U.S.C. 2009cc-9(b).
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G. Section 615.5212(b)(4)(i)--Computation of Credit-Equivalent Amounts
for Direct Credit Substitutes and Recourse Obligations
The final rule modifies our methodology for determining the credit
equivalent amount of off-balance sheet direct credit substitutes and
adds a similar provision for recourse obligations. Under the new rule,
the credit equivalent amount for a direct credit substitute or recourse
obligation is the full amount of the credit-enhanced assets for which
an institution directly or indirectly retains or assumes credit risk
multiplied by a 100-percent conversion factor.\56\ To determine the
institution's risk-weighted assets for an off-balance sheet recourse
obligation or a direct credit substitute, the credit equivalent amount
is assigned to the risk-weight category appropriate to the obligor in
the underlying transaction, after considering any associated guarantees
or collateral.
---------------------------------------------------------------------------
\56\ See new Sec. 615.5212(b)(4)(i).
---------------------------------------------------------------------------
The rule eliminates the previous anomalies between direct credit
substitutes and recourse arrangements that expose an institution to the
same amount of risk but had different capital requirements. These
changes will also provide consistent risk-based capital treatment for
positions with similar risk exposures regardless of whether they are
structured as on-or off-balance sheet transactions. For example, as
noted previously, for a direct credit substitute that is an on-balance
sheet asset, e.g., a purchased subordinated security, an institution
must also calculate risk-weighted assets using the amount of the direct
credit substitute and the full amount of the assets it supports,
meaning all the more senior positions in the structure. This is another
change necessary to make our rules consistent with the current rules
established by the other financial regulatory agencies.
H. Section 615.5210(f)--Reservation of Authority
Financial institutions are developing novel transactions that do
not fit into the conventional risk-weight categories or credit
conversion factors in the current standards. Financial institutions are
also devising novel instruments that nominally fit into a particular
category but impose levels of risk on the financial institutions that
are not commensurate with the risk-weight category for the asset,
exposure, or instrument. Accordingly, new Sec. 615.5210(f) of the rule
more explicitly
[[Page 35347]]
indicates that FCA, on a case-by-case basis, may determine the
appropriate risk weight for any asset or credit equivalent amount and
the appropriate credit conversion factor for any off-balance sheet item
in these circumstances. Exercise of this authority may result in a
higher or lower risk weight or credit equivalent amount for these
assets or off-balance sheet items. This reservation of authority
explicitly recognizes the retention of sufficient discretion to ensure
that novel financial assets, exposures, and instruments will be treated
appropriately under the regulatory capital standards.
VI. Other Changes
In addition to the changes detailed above, we also make a number of
other changes. We make most of these changes for clarity or plain
language purposes or to eliminate obsolete references. These changes
are described below.
A. Section 615.5211--Changes to Listing of Balance Sheet Assets
We clarify the listing of balance sheet assets identified in each
risk-weight category in new Sec. 615.5211 to more closely align the
regulatory language with our long-standing policy positions. This new
regulatory language also mirrors the language used by the other
financial regulatory agencies to the extent applicable to System
institutions. Over the years, we have generally interpreted our risk-
weighting categories consistently with the other financial regulatory
agencies. In some instances, however, the listing of assets included in
each category is not as specific or clear as that of the other
financial regulatory agencies. We make these amendments for the purpose
of clarity and consistency with the other financial regulatory
agencies.
1. Section 615.5211(a)-- 0-Percent Category
We have reorganized the order of the assets listed in the 0-percent
risk-weight category.\57\ We have added a listing for portions of local
currency claims on, or unconditionally guaranteed by, non-OECD central
governments (including non-OECD central banks), to the extent the
institution has liabilities booked in that currency (Sec.
615.5211(a)(4)). We have also revised the language in Sec.
615.5211(a)(1), (a)(2), and (a)(3).\58\ Finally, we have deleted
previous Sec. 615.5210(f)(2)(i)(C), which put goodwill in the 0-
percent category. New Sec. 615.5207(g) (which carried over without
substantive change from previous Sec. 615.5210(e)(7)) provides that an
institution must deduct from total capital an amount equal to all
goodwill before it assigns assets to the risk-weighting categories.
Thus, it is unnecessary to assign goodwill to a risk-weighting
category.
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\57\ Except where otherwise indicated, all references are to the
new regulation.
\58\ See previous Sec. 615.5210(f)(2)(i)(A), (f)(2)(i)(B), and
(f)(2)(i)(C).
---------------------------------------------------------------------------
2. Section 615.5211(b)--20-Percent Category
We have reorganized the order of the assets listed in the 20-
percent risk-weight category.\59\ We have added the following assets in
addition to the changes previously discussed:
---------------------------------------------------------------------------
\59\ Except where otherwise indicated, all references are to the
new regulation.
---------------------------------------------------------------------------
Portions of loans and other claims collateralized by cash
on deposit (Sec. 615.5211(b)(8));
Portions of claims collateralized by securities issued by
official multinational lending institutions or regional development
institutions in which the United States Government is a shareholder or
contributing member (Sec. 615.5211(b)(11)); and
Investments in shares of mutual funds whose portfolios are
permitted to hold only assets that qualify for the zero or 20-percent
risk-weight categories (Sec. 615.5211(b)(12)).
We have revised the language in Sec. 615.5211(b)(3),\60\
(b)(4),\61\ (b)(5),\62\ (b)(7),\63\ (b)(9),\64\ and (b)(10) \65\ to
make these provisions easier to read. In addition, we added the
language in Sec. 615.5211(b)(6) to clarify our policy position and to
conform to the language used by for the other financial regulatory
agencies.
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\60\ Consolidated from previous Sec. 615.5210(f)(2)(ii)(D) and
(f)(2)(ii)(E).
\61\ Previous Sec. 615.5210(f)(2)(ii)(F).
\62\ Consolidated from previous Sec. 615.4210(f)(2)(ii)(B) and
(f)(2)(ii)(J).
\63\ Consolidated from previous Sec. 615.5210(f)(2)(ii)(A) and
(f)(2)(ii)(C).
\64\ See previous Sec. 615.5210(f)(2)(ii)(G).
\65\ See previous Sec. 615.5210(f)(2)(ii)(H).
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3. Section 615.5211(c)-- 50-Percent Category
In the 50-percent risk-weight category, we added a listing for
revenue bonds or similar obligations, including loans and leases, that
are obligations of a state or political subdivisions of the United
States or other OECD countries but for which the government entity is
committed to repay the debt only out of revenue from the specific
projects financed.\66\ We are making these revisions to further
distinguish the varying degrees of risk associated with investments in
different types of revenue bonds. This change also parallels the rules
of the other financial regulatory agencies. We also made plain language
changes to Sec. 615.5211(c)(1).\67\
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\66\ New Sec. 615.5211(c)(4). This provision was not contained
in previous FCA regulations.
\67\ See previous Sec. 615.5210(f)(2)(iii)(A).
---------------------------------------------------------------------------
4. Section 615.5211(d)--100-Percent Category
The previous 100-percent risk-weight category listed only four
assets, including a catch-all: All other assets not specified in the
other risk-weight categories, including, but not limited to, leases,
fixed assets, and receivables. Consistent with the other financial
regulatory agencies, and to provide clearer guidance, we have itemized
many of the assets that were previously included within the catch-all,
including:
Claims on, or portions of claims guaranteed by, non-OECD
central governments (except such claims that are included in other
risk-weighting categories), and all claims on non-OECD state and local
governments (Sec. 615.5211(d)(3));
Industrial development bonds and similar obligations
issued under the auspices of states or political subdivisions of the
OECD-based group of countries for the benefit of a private party or
enterprise where that party or enterprise, not the government entity,
is obligated to pay the principal and interest (Sec. 615.5211(d)(4));
Premises, plant, and equipment; other fixed assets; and
other real estate owned (Sec. 615.5211(d)(5));
If they have not already been deducted from capital,
investments in unconsolidated companies, joint ventures, or associated
companies; deferred-tax assets; and servicing assets (Sec.
615.5211(d)(9)); and
All other assets not specified, including, but not limited
to, leases and receivables (Sec. 615.5211(d)(12)).
B. Other Nonsubstantive Changes
We have changed the heading of Sec. 615.5200 from ``General'' to
``Capital planning'' to better reflect the content of this section. We
have made no other changes to this section.
We have broken up previous Sec. 615.5210, which was cumbersome to
use because of its length, into seven separate regulatory sections. The
newly redesignated sections are:
Sec. 615.5206--Permanent capital ratio computation.
Sec. 615.5207--Capital adjustments and associated
reductions to assets.
Sec. 615.5208--Allotment of allocated investments.
Sec. 615.5209--Deferred-tax assets.
Sec. 615.5210--Risk-adjusted assets.
Sec. 615.5211--Risk categories--balance sheet assets.
[[Page 35348]]
Sec. 615.5212--Credit conversion factors--off-balance
sheet items.
This reorganization should make these provisions easier to use. We
do not intend to make any substantive changes with this reorganization.
We have deleted an obsolete reference to the Farm Credit System
Financial Assistance Corporation in Sec. 615.5201.
We have added paragraph (k) to newly redesignated Sec. 615.5207
for clarity.
We have made minor, nonsubstantive, plain language, and
organizational changes throughout the revised regulation.
Because we have reorganized this regulation, references to the
regulation in other FCA regulations need to be updated. Accordingly, we
have made conforming reference updates in parts 607, 614, and 620 of
this chapter.
VII. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), the FCA hereby certifies that the final rule will
not have a significant impact on a substantial number of small
entities. Each of the banks in the 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, System
institutions are not ``small entities'' as defined in the Regulatory
Flexibility Act.
List of Subjects
12 CFR Part 607
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 614
Agriculture, Banks, banking, Flood insurance, 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.
0
For the reasons stated in the preamble, we amend parts 607, 614, 615,
and 620 of chapter VI, title 12 of the Code of Federal Regulations as
follows:
PART 607--ASSESSMENT AND APPORTIONMENT OF ADMINISTRATIVE EXPENSES
0
1. The authority citation for part 607 continues to read as follows:
Authority: Secs. 5.15, 5.17 of the Farm Credit Act (12 U.S.C.
2250, 2252) and 12 U.S.C. 3025.
Sec. 607.2 [Amended]
0
2. Amend Sec. 607.2(b) introductory text by removing the reference
``Sec. 615.5210(f)'' and adding in its place ``Sec. 615.5210.''
PART 614--LOAN POLICIES AND OPERATIONS
0
3. The authority citation for part 614 continues to read as follows:
Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs.
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12,
2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A,
4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19, 4.25,
4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.8,
7.12, 7.13, 8.0, 8.5, of the Farm Credit Act (12 U.S.C. 2011, 2013,
2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093,
2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183,
2184, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a, 2207,
2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252, 2279a,
2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413
of Pub. L. 100-233, 101 Stat. 1568, 1639.
Subpart J--Lending and Leasing Limits
0
4. Revise Sec. 614.4351 (a) introductory text to 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 permanent capital of the
institution, as defined in Sec. 615.5201 of this chapter, with
adjustments applicable to the institution provided for in Sec.
615.5207 of this chapter, and with the following further adjustments:
* * * * *
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
0
5. The authority citation for part 615 continues 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,
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm
Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074,
2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b,
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4,
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of
Pub. L. 100-233, 101 Stat. 1568, 1608.
Subpart H--Capital Adequacy
0
6. Revise the heading of Sec. 615.5200 to read as follows:
Sec. 615.5200 Capital planning.
* * * * *
0
7. Revise Sec. 615.5201 to read as follows:
Sec. 615.5201 Definitions.
For the purpose of this subpart, the following definitions apply:
Allocated investment means earnings allocated but not paid in cash
by a System bank to an association or other recipient.
Bank means an institution that:
(1) Engages in the business of banking;
(2) Is recognized as a bank by the bank supervisory or monetary
authority of the country of its organization or principal banking
operations;
(3) Receives deposits to a substantial extent in the regular course
of business; and
(4) Has the power to accept demand deposits.
Commitment means any arrangement that legally obligates an
institution to:
(1) Purchase loans or securities;
(2) Participate in loans or leases;
(3) Extend credit in the form of loans or leases;
(4) Pay the obligation of another;
(5) Provide overdraft, revolving credit, or underwriting
facilities; or
(6) Participate in similar transactions.
Credit conversion factor means that number by which an off-balance
sheet item is multiplied to obtain a credit equivalent before placing
the item in a risk-weight category.
Credit derivative means a contract that allows one party (the
protection purchaser) to transfer the credit risk of an asset or off-
balance sheet credit exposure to another party (the protection
provider). The value of a credit derivative is dependent, at least in
part, on the credit performance of a ``reference asset.''
Credit-enhancing interest-only strip--
(1) The term credit-enhancing interest-only strip means an on-
balance sheet asset that, in form or in substance:
(i) Represents the contractual right to receive some or all of the
interest due on transferred assets; and
(ii) Exposes the institution to credit risk directly or indirectly
associated with the transferred assets that exceeds its pro rata claim
on the assets, whether through subordination provisions or other credit
enhancement techniques.
(2) FCA reserves the right to identify other cash flows or related
interests as credit-enhancing interest-only strips. In determining
whether a particular
[[Page 35349]]
interest cash flow functions as a credit-enhancing interest-only strip,
FCA will consider the economic substance of the transaction.
Credit-enhancing representations and warranties--
(1) The term credit-enhancing representations and warranties means
representations and warranties that:
(i) Are made or assumed in connection with a transfer of assets
(including loan-servicing assets), and
(ii) Obligate an institution to protect investors from losses
arising from credit risk in the assets transferred or loans serviced.
(2) Credit-enhancing representations and warranties include
promises to protect a party from losses resulting from the default or
nonperformance of another party or from an insufficiency in the value
of the collateral.
(3) Credit-enhancing representations and warranties do not include:
(i) Early-default clauses and similar warranties that permit the
return of, or premium refund clauses covering, loans for a period not
to exceed 120 days from the date of transfer. These warranties may
cover only those loans that were originated within 1 year of the date
of the transfer;
(ii) Premium refund clauses covering assets guaranteed, in whole or
in part, by the United States Government, a United States Government
agency, or a United States Government-sponsored agency, provided the
premium refund clause is for a period not to exceed 120 days from the
date of transfer;
(iii) Warranties that permit the return of assets in instances of
fraud, misrepresentation, or incomplete documentation; or
(iv) Clean-up calls if the agreements to repurchase are limited to
10 percent or less of the original pool balance (except where loans 30
days or more past due are repurchased).
Deferred-tax assets that are dependent on future income or future
events means:
(1) Deferred-tax assets arising from deductible temporary
differences dependent upon future income that exceed the amount of
taxes previously paid that could be recovered through loss carrybacks
if existing temporary differences (both deductible and taxable and
regardless of where the related tax-deferred effects are recorded on
the institution's balance sheet) fully reverse;
(2) Deferred-tax assets dependent upon future income arising from
operating loss and tax carryforwards;
(3) Deferred-tax assets arising from temporary differences that
could be recovered if existing temporary differences that are dependent
upon other future events (both deductible and taxable and regardless of
where the related tax-deferred effects are recorded on the
institution's balance sheet) fully reverse.
Direct credit substitute means an arrangement in which an
institution assumes, in form or in substance, credit risk directly or
indirectly associated with an on-or off-balance sheet asset or exposure
that was not previously owned by the institution (third-party asset)
and the risk assumed by the institution exceeds the pro rata share of
the institution's interest in the third-party asset. If the institution
has no claim on the third-party asset, then the institution's
assumption of any credit risk is a direct credit substitute. Direct
credit substitutes include, but are not limited to:
(1) Financial standby letters of credit that support financial
claims on a third party that exceed an institution's pro rata share in
the financial claim;
(2) Guarantees, surety arrangements, credit derivatives, and
similar instruments backing financial claims that exceed an
institution's pro rata share in the financial claim;
(3) Purchased subordinated interests that absorb more than their
pro rata share of losses from the underlying assets;
(4) Credit derivative contracts under which the institution assumes
more than its pro rata share of credit risk on a third-party asset or
exposure;
(5) Loans or lines of credit that provide credit enhancement for
the financial obligations of a third party;
(6) Purchased loan-servicing assets if the servicer is responsible
for credit losses or if the servicer makes or assumes credit-enhancing
representations and warranties with respect to the loans serviced.
Servicer cash advances as defined in this section are not direct credit
substitutes; and,
(7) Clean-up calls on third-party assets. However, clean-up calls
that are 10 percent or less of the original pool balance and that are
exercisable at the option of the institution are not direct credit
substitutes.
Direct lender institution means an institution that extends credit
in the form of loans or leases to eligible borrowers in its own right
and carries such loan or lease assets on its books.
Externally rated means that an instrument or obligation has
received a credit rating from at least one NRSRO.
Face amount means:
(1) The notional principal, or face value, amount of an off-balance
sheet item;
(2) The amortized cost of an asset not held for trading purposes;
and
(3) The fair value of a trading asset.
Financial asset means cash or other monetary instrument, evidence
of debt, evidence of an ownership interest in an entity, or a contract
that conveys a right to receive from or exchange cash or another
financial instrument with another party.
Financial standby letter of credit means a letter of credit or
similar arrangement that represents an irrevocable obligation to a
third-party beneficiary:
(1) To repay money borrowed by, or advanced to, or for the account
of, a second party (the account party); or
(2) To make payment on behalf of the account party, in the event
that the account party fails to fulfill its obligation to the
beneficiary.
Government agency means an agency or instrumentality of the United
States Government whose obligations are fully and explicitly guaranteed
as to the timely repayment of principal and interest by the full faith
and credit of the United States Government.
Government-sponsored agency means an agency, instrumentality, or
corporation chartered or established to serve public purposes specified
by the United States Congress but whose obligations are not explicitly
guaranteed by the full faith and credit of the United States
Government, including but not limited to any Government-sponsored
enterprise.
Institution means a Farm Credit Bank, Federal land bank
association, Federal land credit association, production credit
association, agricultural credit association, Farm Credit Leasing
Services Corporation, bank for cooperatives, agricultural credit bank,
and their successors.
Nationally recognized statistical rating organization (NRSRO) means
a rating organization that the Securities and Exchange Commission
recognizes as an NRSRO.
Non-OECD bank means a bank and its branches (foreign and domestic)
organized under the laws of a country that does not belong to the OECD
group of countries.
Nonagreeing association means an association that does not have an
allotment agreement in effect with a Farm Credit Bank or agricultural
credit bank pursuant to Sec. 615.5207(b)(2).
OECD means the group of countries that are full members of the
Organization for Economic Cooperation and Development, regardless of
entry date, as well as countries that have concluded special lending
arrangements with the International Monetary Fund's General Arrangement
to Borrow, excluding any country that has
[[Page 35350]]
rescheduled its external sovereign debt within the previous 5 years.
OECD bank means a bank and its branches (foreign and domestic)
organized under the laws of a country that belongs to the OECD group of
countries. For purposes of this subpart, this term includes U.S.
depository institutions.
Performance-based standby letter of credit means any letter of
credit, or similar arrangement, however named or described, that
represents an irrevocable obligation to the beneficiary on the part of
the issuer to make payment as a result of any default by a third party
in the performance of a nonfinancial or commercial obligation.
Permanent capital, subject to adjustments as described in Sec.
615.5207, includes:
(1) Current year retained earnings;
(2) Allocated and unallocated earnings (which, in the case of
earnings allocated in any form by a System bank to any association or
other recipient and retained by the bank, must be considered, in whole
or in part, permanent capital of the bank or of any such association or
other recipient as provided under an agreement between the bank and
each such association or other recipient);
(3) All surplus;
(4) Stock issued by a System institution, except:
(i) Stock that may be retired by the holder of the stock on
repayment of the holder's loan, or otherwise at the option or request
of the holder;
(ii) Stock that is protected under section 4.9A of the Act or is
otherwise not at risk;
(iii) Farm Credit Bank equities required to be purchased by Federal
land bank associations in connection with stock issued to borrowers
that is protected under section 4.9A of the Act;
(iv) Capital subject to revolvement, unless:
(A) The bylaws of the institution clearly provide that there is no
express or implied right for such capital to be retired at the end of
the revolvement cycle or at any other time; and
(B) The institution clearly states in the notice of allocation that
such capital may only be retired at the sole discretion of the board of
directors in accordance with statutory and regulatory requirements and
that no express or implied right to have such capital retired at the
end of the revolvement cycle or at any other time is thereby granted;
(5) Term preferred stock with an original maturity of at least 5
years and on which, if cumulative, the board of directors has the
option to defer dividends, provided that, at the beginning of each of
the last 5 years of the term of the stock, the amount that is eligible
to be counted as permanent capital is reduced by 20 percent of the
original amount of the stock (net of redemptions);
(6) Financial assistance provided by the Farm Credit System
Insurance Corporation that the FCA determines appropriate to be
considered permanent capital; and
(7) Any other debt or equity instruments or other accounts the FCA
has determined are appropriate to be considered permanent capital. The
FCA may permit one or more institutions to include all or a portion of
such instrument, entry, or account as permanent capital, permanently or
on a temporary basis, for purposes of this part.
Qualified residential loan--
(1) The term qualified residential loan means:
(i) A rural home loan, as authorized by Sec. 613.3030, and
(ii) A single-family residential loan to a bona fide farmer,
rancher, or producer or harvester of aquatic products.
(2) A qualified residential loan must be secured by a separate
first lien mortgage or deed of trust on the residential property alone
(not on any adjoining agricultural property or any other nonresidential
property), must have been approved in accordance with prudent
underwriting standards suitable for residential property, must not be
past due 90 days or more or carried in nonaccrual status, and must have
a monthly amortization schedule. In addition, the mortgage or deed of
trust securing the residential property must be written and recorded in
accordance with all state and local requirements governing its
enforceability as a first lien and the secured residential property
must have a permanent right-of-way access.
Qualifying bilateral netting contract means a bilateral netting
contract that meets at least the following conditions:
(1) The contract is in writing;
(2) The contract is not subject to a walkaway clause, defined as a
provision that permits a non-defaulting counterparty to make lower
payments than it would make otherwise under the contract, or no payment
at all, to a defaulter or to the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
contract;
(3) The contract creates a single obligation either to pay or
receive the net amount of the sum of positive and negative mark-to-
market values for all derivative contracts subject to the qualifying
bilateral netting contract;
(4) The institution receives a legal opinion that represents, to a
high degree of certainty, that in the event of legal challenge the
relevant court and administrative authorities would find the
institution's exposure to be the net amount;
(5) The institution establishes a procedure to monitor relevant law
and to ensure that the contracts continue to satisfy the requirements
of this section; and
(6) The institution maintains in its files adequate documentation
to support the netting of a derivatives contract.
Qualifying securities firm means:
(1) A securities firm incorporated in the United States that is a
broker-dealer that is registered with the Securities and Exchange
Commission (SEC) and that complies with the SEC's net capital
regulations (17 CFR 240.15c3-1); and
(2) A securities firm incorporated in any other OECD-based country,
if the institution is able to demonstrate that the securities firm is
subject to supervision and regulation (covering its direct and indirect
subsidiaries, but not necessarily its parent organizations) comparable
to that imposed on depository institutions in OECD countries. Such
regulation must include risk-based capital requirements comparable to
those imposed on depository institutions under the Accord on
International Convergence of Capital Measurement and Capital Standards
(1988, as amended in 1998) (Basel Accord).
Recourse means an institution's retention, in form or in substance,
of any credit risk directly or indirectly associated with an asset it
has sold (in accordance with GAAP) that exceeds a pro rata share of the
institution's claim on the asset. If an institution has no claim on an
asset it has sold, then the retention of any credit risk is recourse. A
recourse obligation typically arises when an institution transfers
assets in a sale and retains an explicit obligation to repurchase
assets or to absorb losses due to a default on the payment of principal
or interest or any other deficiency in the performance of the
underlying obligor or some other party. Recourse may also exist
implicitly if an institution provides credit enhancement beyond any
contractual obligation to support assets it has sold. Recourse
obligations include, but are not limited to:
(1) Credit-enhancing representations and warranties made on
transferred assets;
(2) Loan-servicing assets retained pursuant to an agreement under
which the institution will be responsible for
[[Page 35351]]
losses associated with the loans serviced. Servicer cash advances as
defined in this section are not recourse obligations;
(3) Retained subordinated interests that absorb more than their pro
rata share of losses from the underlying assets;
(4) Assets sold under an agreement to repurchase, if the assets are
not already included on the balance sheet;
(5) Loan strips sold without contractual recourse where the
maturity of the transferred portion of the loan is shorter than the
maturity of the commitment under which the loan is drawn;
(6) Credit derivatives issued that absorb more than the
institution's pro rata share of losses from the transferred assets; and
(7) Clean-up call on assets the institution has sold. However,
clean-up calls that are 10 percent or less of the original pool balance
and that are exercisable at the option of the institution are not
recourse arrangements.
Residual interest--
(1) The term residual interest means any on-balance sheet asset
that:
(i) Represents an interest (including a beneficial interest)
created by a transfer that qualifies as a sale (in accordance with
generally accepted accounting principles) of financial assets, whether
through a securitization or otherwise; and
(ii) Exposes an institution to credit risk directly or indirectly
associated with the transferred asset that exceeds a pro rata share of
the institution's claim on the asset, whether through subordination
provisions or other credit enhancement techniques.
(2) Residual interests generally include credit-enhancing interest-
only strips, spread accounts, cash collateral accounts, retained
subordinated interests (and other forms of overcollateralization), and
similar assets that function as a credit enhancement.
(3) Residual interests further include those exposures that, in
substance, cause the institution to retain the credit risk of an asset
or exposure that had qualified as a residual interest before it was
sold.
(4) Residual interests generally do not include interests purchased
from a third party. However, purchased credit-enhancing interest-only
strips are residual interests.
Risk-adjusted asset base means the total dollar amount of the
institution's assets adjusted in accordance with Sec. 615.5207 and
weighted on the basis of risk in accordance with Sec. Sec. 615.5211
and 615.5212.
Risk participation means a participation in which the originating
party remains liable to the beneficiary for the full amount of an
obligation (e.g., a direct credit substitute) notwithstanding that
another party has acquired a participation in that obligation.
Rural Business Investment Company has the definition given in 7
U.S.C. 2009cc(14).
Securitization means the pooling and repackaging by a special
purpose entity or trust of assets or other credit exposures that can be
sold to investors. Securitization includes transactions that create
stratified credit risk positions whose performance is dependent upon an
underlying pool of credit exposures, including loans and commitments.
Servicer cash advance means funds that a mortgage servicer advances
to ensure an uninterrupted flow of payments, including advances made to
cover foreclosure costs or other expenses to facilitate the timely
collection of the loan. A servicer cash advance is not a recourse
obligation or a direct credit substitute if:
(1) The servicer is entitled to full reimbursement and this right
is not subordinated to other claims on the cash flows from the
underlying asset pool; or
(2) For any one loan, the servicer's obligation to make
nonreimbursable advances is contractually limited to an insignificant
amount of the outstanding principal amount on that loan.
Stock means stock and participation certificates.
Total capital means assets minus liabilities, valued in accordance
with generally accepted accounting principles, except that liabilities
do not include obligations to retire stock protected under section 4.9A
of the Act.
Traded position means a position retained, assumed, or issued that
is externally rated, where there is a reasonable expectation that, in
the near future, the rating will be relied upon by:
(1) Unaffiliated investors to purchase the position; or
(2) An unaffiliated third party to enter into a transaction
involving the position, such as a purchase, loan, or repurchase
agreement.
U.S. depository institution means branches (foreign and domestic)
of federally insured banks and depository institutions chartered and
headquartered in the 50 states of the United States, the District of
Columbia, Puerto Rico, and United States territories and possessions.
The definition encompasses banks, mutual or stock savings banks,
savings or building and loan associations, cooperative banks, credit
unions, international banking facilities of domestic depository
institutions, and U.S.-chartered depository institutions owned by
foreigners. The definition excludes branches and agencies of foreign
banks located in the U.S. and bank holding companies.
Sec. 615.5210 [Removed]
0
8. Remove existing Sec. 615.5210.
0
9. Add new Sec. Sec. 615.5206 through 615.5212 to read as follows:
Sec. 615.5206 Permanent capital ratio computation.
(a) The institution's permanent capital ratio is determined on the
basis of the financial statements of the institution prepared in
accordance with generally accepted accounting principles except that
the obligations of the Farm Credit System Financial Assistance
Corporation issued to repay banks in connection with the capital
preservation and loss-sharing agreements described in section 6.9(e)(1)
of the Act shall not be considered obligations of any institution
subject to this regulation prior to their maturity.
(b) The institution's asset base and permanent capital are computed
using average daily balances for the most recent 3 months.
(c) The institution's permanent capital ratio is calculated by
dividing the institution's permanent capital, adjusted in accordance
with Sec. 615.5207 (the numerator), by the risk-adjusted asset base
(the denominator) as determined in Sec. 615.5210, to derive a ratio
expressed as a percentage.
(d) Until September 27, 2002, payments of assessments to the Farm
Credit System Financial Assistance Corporation, and any part of the
obligation to pay future assessments to the Farm Credit System
Financial Assistance Corporation that is recognized as an expense on
the books of a bank or association, shall be included in the capital of
such bank or association for the purpose of determining its compliance
with regulatory capital requirements, to the extent allowed by section
6.26(c)(5)(G) of the Act. If the bank directly or indirectly passes on
all or part of the payments to its affiliated associations pursuant to
section 6.26(c)(5)(D) of the Act, such amounts shall be included in the
capital of the associations and shall not be included in the capital of
the bank. After September 27, 2002, no payments of assessments or
obligations to pay future assessments may be included in the capital of
the bank or association.
[[Page 35352]]
Sec. 615.5207 Capital adjustments and associated reductions to
assets.
For the purpose of computing the institution's permanent capital
ratio, the following adjustments must be made prior to assigning assets
to risk-weight categories and computing the ratio:
(a) Where two Farm Credit System institutions have stock
investments in each other, such reciprocal holdings must be eliminated
to the extent of the offset. If the investments are equal in amount,
each institution must deduct from its assets and its total capital an
amount equal to the investment. If the investments are not equal in
amount, each institution must deduct from its total capital and its
assets an amount equal to the smaller investment. The elimination of
reciprocal holdings required by this paragraph must be made prior to
making the other adjustments required by this section.
(b) Where a Farm Credit Bank or an agricultural credit bank is
owned by one or more Farm Credit System institutions, the double
counting of capital is eliminated in the following manner:
(1) All equities of a Farm Credit Bank or agricultural credit bank
that have been purchased by other Farm Credit institutions are
considered to be permanent capital of the Farm Credit Bank or
agricultural credit bank.
(2) Each Farm Credit Bank or agricultural credit bank and each of
its affiliated associations may enter into an agreement that specifies,
for the purpose of computing permanent capital only, a dollar amount
and/or percentage allotment of the association's allocated investment
between the bank and the association. Section 615.5208 provides
conditions for allotment agreements or defines allotments in the
absence of such agreements.
(c) A Farm Credit Bank or agricultural credit bank and a recipient,
other than an association, of allocated earnings from such bank may
enter into an agreement specifying a dollar amount and/or percentage
allotment of the recipient's allocated earnings in the bank between the
bank and the recipient. Such agreement must comply with the provisions
of paragraph (b) of this section, except that, in the absence of an
agreement, the allocated investment must be allotted 100 percent to the
allocating bank and 0 percent to the recipient. All equities of the
bank that are purchased by a recipient are considered as permanent
capital of the issuing bank.
(d) A bank for cooperatives and a recipient of allocated earnings
from such bank may enter into an agreement specifying a dollar amount
and/or percentage allotment of the recipient's allocated earnings in
the bank between the bank and the recipient. Such agreement must comply
with the provisions of paragraph (b) of this section, except that, in
the absence of an agreement, the allocated investment must be allotted
100 percent to the allocating bank and 0 percent to the recipient. All
equities of a bank that are purchased by a recipient shall be
considered as permanent capital of the issuing bank.
(e) Where a bank or association invests in an association to
capitalize a loan participation interest, the investing institution
must deduct from its total capital an amount equal to its investment in
the participating institution.
(f) The double counting of capital by a service corporation
chartered under section 4.25 of the Act and its stockholder
institutions must be eliminated by deducting an amount equal to the
institution's investment in the service corporation from its total
capital.
(g) Each institution must deduct from its total capital an amount
equal to all goodwill, whenever acquired.
(h) To the extent an institution has deducted its investment in
another Farm Credit institution from its total capital, the investment
may be eliminated from its asset base.
(i) Where a Farm Credit Bank and an association have an enforceable
written agreement to share losses on specifically identified assets on
a predetermined quantifiable basis, such assets must be counted in each
institution's risk-adjusted asset base in the same proportion as the
institutions have agreed to share the loss.
(j) The permanent capital of an institution must exclude the net
effect of all transactions covered by the definition of ``accumulated
other comprehensive income'' contained in the Statement of Financial
Accounting Standards No. 130, as promulgated by the Financial
Accounting Standards Board.
(k) For purposes of calculating capital ratios under this part,
deferred-tax assets are subject to the conditions, limitations, and
restrictions described in Sec. 615.5209.
(l) Capital may also need to be reduced for potential loss exposure
on any recourse obligations, direct credit substitutes, residual
interests, and credit-enhancing interest-only-strips in accordance with
Sec. 615.5210.
Sec. 615.5208 Allotment of allocated investments.
(a) The following conditions apply to agreements that a Farm Credit
Bank or agricultural credit bank enters into with an affiliated
association pursuant to Sec. 615.5207(b)(2):
(1) The agreement must be for a term of 1 year or longer.
(2) The agreement must be entered into on or before its effective
date.
(3) The agreement may be amended according to its terms, but no
more frequently than annually except in the event that a party to the
agreement is merged or reorganized.
(4) On or before the effective date of the agreement, a certified
copy of the agreement, and any amendments thereto, must be sent to the
field office of the Farm Credit Administration responsible for
examining the institution. A copy must also be sent within 30 calendar
days of adoption to the bank's other affiliated associations.
(5) Unless the parties otherwise agree, if the bank and the
association have not entered into a new agreement on or before the
expiration of an existing agreement, the existing agreement will
automatically be extended for another 12 months, unless either party
notifies the Farm Credit Administration in writing of its objection to
the extension prior to the expiration of the existing agreement.
(b) In the absence of an agreement between a Farm Credit Bank or an
agricultural credit bank and one or more associations, or in the event
that an agreement expires and at least one party has timely objected to
the continuation of the terms of its agreement, the following formula
applies with respect to the allocated investments held by those
associations with which there is no agreement (nonagreeing
associations), and does not apply to the allocated investments held by
those associations with which the bank has an agreement (agreeing
associations):
(1) The allotment formula must be calculated annually.
(2) The permanent capital ratio of the Farm Credit Bank or
agricultural credit bank must be computed as of the date that the
existing agreement terminates, using a 3-month average daily balance,
excluding the allocated investment from nonagreeing associations but
including any allocated investments of agreeing associations that are
allotted to the bank under applicable allocation agreements. The
permanent capital ratio of each nonagreeing association must be
computed as of the same date using a 3-month average daily balance, and
must be computed excluding its allocated investment in the bank.
[[Page 35353]]
(3) If the permanent capital ratio for the Farm Credit Bank or
agricultural credit bank calculated in accordance with Sec.
615.5208(b)(2) is 7 percent or above, the allocated investment of each
nonagreeing association whose permanent capital ratio calculated in
accordance with Sec. 615.5208(b)(2) is 7 percent or above must be
allotted 50 percent to the bank and 50 percent to the association.
(4) If the permanent capital ratio of the Farm Credit Bank or
agricultural credit bank calculated in accordance with Sec.
615.5208(b)(2) is 7 percent or above, the allocated investment of each
nonagreeing association whose capital ratio is below 7 percent must be
allotted to the association until the association's capital ratio
reaches 7 percent or until all of the investment is allotted to the
association, whichever occurs first. Any remaining unallotted allocated
investment must be allotted 50 percent to the bank and 50 percent to
the association.
(5) If the permanent capital ratio of the Farm Credit Bank or
agricultural credit bank calculated in accordance with Sec.
615.5208(b)(2) is less than 7 percent, the amount of additional capital
needed by the bank to reach a permanent capital ratio of 7 percent must
be determined, and an amount of the allocated investment of each
nonagreeing association must be allotted to the Farm Credit Bank or
agricultural credit bank, as follows:
(i) If the total of the allocated investments of all nonagreeing
associations is greater than the additional capital needed by the bank,
the allocated investment of each nonagreeing association must be
multiplied by a fraction whose numerator is the amount of capital
needed by the bank and whose denominator is the total amount of
allocated investments of the nonagreeing associations, and such amount
must be allotted to the bank. Next, if the permanent capital ratio of
any nonagreeing association is less than 7 percent, a sufficient amount
of unallotted allocated investment must then be allotted to each
nonagreeing association, as necessary, to increase its permanent
capital ratio to 7 percent, or until all such remaining investment is
allotted to the association, whichever occurs first. Any unallotted
allocated investment still remaining must be allotted 50 percent to the
bank and 50 percent to the nonagreeing association.
(ii) If the additional capital needed by the bank is greater than
the total of the allocated investments of the nonagreeing associations,
all of the remaining allocated investments of the nonagreeing
associations must be allotted to the bank.
(c) If a payment or part of a payment to the Farm Credit System
Financial Assistance Corporation pursuant to section 6.9(e)(3)(D)(ii)
of the Act would cause a bank to fall below its minimum permanent
capital requirement, the bank and one or more associations shall amend
their allocation agreements to increase the allotment of the allocated
investment to the bank sufficiently to enable the bank to make the
payment to the Farm Credit System Financial Assistance Corporation,
provided that the associations would continue to meet their minimum
permanent capital requirement. In the case of a nonagreeing
association, the Farm Credit Administration may require a revision of
the allotment sufficient to enable the bank to make the payment to the
Farm Credit System Financial Assistance Corporation, provided that the
association would continue to meet its minimum permanent capital
requirement. The Farm Credit Administration may, at the request of one
or more of the institutions affected, waive the requirements of this
paragraph if the FCA deems it is in the overall best interest of the
institutions affected.
Sec. 615.5209 Deferred-tax assets.
For purposes of calculating capital ratios under this part,
deferred-tax assets are subject to the conditions, limitations, and
restrictions described in this section.
(a) Each institution must deduct an amount of deferred-tax assets,
net of any valuation allowance, from its assets and its total capital
that is equal to the greater of:
(1) The amount of deferred-tax assets that is dependent on future
income or future events in excess of the amount that is reasonably
expected to be realized within 1 year of the most recent calendar
quarter-end date, based on financial projections for that year, or
(2) The amount of deferred-tax assets that is dependent on future
income or future events in excess of 10 percent of the amount of core
surplus that exists before the deduction of any deferred-tax assets.
(b) For purposes of this calculation:
(1) The amount of deferred-tax assets that can be realized from
taxes paid in prior carryback years and from the reversal of existing
taxable temporary differences may not be deducted from assets and from
equity capital.
(2) All existing temporary differences should be assumed to fully
reverse at the calculation date.
(3) Projected future taxable income should not include net
operating loss carryforwards to be used within 1 year or the amount of
existing temporary differences expected to reverse within that year.
(4) Financial projections must include the estimated effect of tax-
planning strategies that are expected to be implemented to minimize tax
liabilities and realize tax benefits. Financial projections for the
current fiscal year (adjusted for any significant changes that have
occurred or are expected to occur) may be used when applying the
capital limit at an interim date within the fiscal year.
(5) The deferred tax effects of any unrealized holding gains and
losses on available-for-sale debt securities may be excluded from the
determination of the amount of deferred-tax assets that are dependent
upon future taxable income and the calculation of the maximum allowable
amount of such assets. If these deferred-tax effects are excluded, this
treatment must be followed consistently over time.
Sec. 615.5210 Risk-adjusted assets.
(a) Computation. Each asset on the institution's balance sheet and
each off-balance-sheet item, adjusted by the appropriate credit
conversion factor in Sec. 615.5212, is assigned to one of the risk
categories specified in Sec. 615.5211. The aggregate dollar value of
the assets in each category is multiplied by the percentage weight
assigned to that category. The sum of the weighted dollar values from
each of the risk categories comprises ``risk-adjusted assets,'' the
denominator for computation of the permanent capital ratio.
(b) Ratings-based approach. (1) Under the ratings-based approach, a
rated position in a securitization (provided it satisfies the criteria
specified in paragraph (b)(3) of this section) is assigned to the
appropriate risk-weight category based on its external rating.
(2) Provided they satisfy the criteria specified in paragraph
(b)(3) of this section, the following positions qualify for the
ratings-based approach:
(i) Recourse obligations;
(ii) Direct credit substitutes;
(iii) Residual interests (other than credit-enhancing interest-only
strips); and
(iv) Asset-or mortgage-backed securities.
(3) A position specified in paragraph (b)(2) of this section
qualifies for a ratings-based approach provided it satisfies the
following criteria:
(i) If the position is traded and externally rated, its long-term
external
[[Page 35354]]
rating must be one grade below investment grade or better (e.g., BB or
better) or its short-term external rating must be investment grade or
better (e.g., A-3, P-3). If the position receives more than one
external rating, the lowest rating applies.
(ii) If the position is not traded and is externally rated,
(A) It must be externally rated by more than one NRSRO;
(B) Its long-term external rating must be one grade below
investment grade or better (e.g., BB or better) or its short-term
external rating must be investment grade or better (e.g., A-3, P-3 or
better). If the ratings are different, the lowest rating applies;
(C) The ratings must be publicly available; and
(D) The ratings must be based on the same criteria used to rate
traded positions.
(c) Positions in securitizations that do not qualify for a ratings-
based approach.
The following positions in securitizations do not qualify for a
ratings-based approach. They are treated as indicated.
(1) For any residual interest that is not externally rated, the
institution must deduct from capital and assets the face amount of the
position (dollar-for-dollar reduction).
(2) For any credit-enhancing interest-only strip, the institution
must deduct from capital and assets the face amount of the position
(dollar-for-dollar reduction).
(3) For any position that has a long-term external rating that is
two grades below investment grade or lower (e.g., B or lower) or a
short-term external rating that is one grade below investment grade or
lower (e.g., B or lower, Not Prime), the institution must deduct from
capital and assets the face amount of the position (dollar-for-dollar
reduction).
(4) Any recourse obligation or direct credit substitute (e.g., a
purchased subordinated security) that is not externally rated is risk
weighted using the amount of the recourse obligation or direct credit
substitute and the full amount of the assets it supports, i.e., all the
more senior positions in the structure. This treatment is subject to
the low-level exposure rule set forth in paragraph (e) of this section.
This amount is then placed into a risk-weight category according to the
obligor or, if relevant, the guarantor or the nature of the collateral.
(5) Any stripped mortgage-backed security or similar instrument,
such as an interest-only strip that is not credit-enhancing or a
principal-only strip (including such instruments guaranteed by
Government-sponsored agencies), is assigned to the 100-percent risk-
weight category described in Sec. 615.5211(d)(7).
(d) Senior positions not externally rated. For a position in a
securitization that is not externally rated but is senior in all
features to a traded position (including collateralization and
maturity), an institution may apply a risk weight to the face amount of
the senior position based on the traded position's external rating.
This section will apply only if the traded position provides
substantial credit support for the entire life of the unrated position.
(e) Low-level exposure rule. If the maximum contractual exposure to
loss retained or assumed by an institution in connection with a
recourse obligation or a direct credit substitute is less than the
effective risk-based capital requirement for the credit-enhanced
assets, the risk-based capital required under paragraph (c)(4) of this
section is limited to the institution's maximum contractual exposure,
less any recourse liability account established in accordance with
generally accepted accounting principles. This limitation does not
apply when an institution provides credit enhancement beyond any
contractual obligation to support assets it has sold.
(f) Reservation of authority. The FCA may, on a case-by-case basis,
determine the appropriate risk weight for any asset or credit
equivalent amount that does not fit wholly within one of the risk
categories set forth in Sec. 615.5211 or that imposes risks that are
not commensurate with the risk weight otherwise specified in Sec.
615.5211 for the asset or credit equivalent. In addition, the FCA may,
on a case-by-case basis, determine the appropriate credit conversion
factor for any off-balance sheet item that does not fit wholly within
one of the credit conversion factors set forth in Sec. 615.5212 or
that imposes risks that are not commensurate with the credit conversion
factor otherwise specified in Sec. 615.5212 for the item. In making
this determination, the FCA will consider the similarity of the asset
or off-balance sheet item to assets or off-balance sheet items
explicitly treated in Sec. Sec. 615.5211 or 615.5212, as well as other
relevant factors.
Sec. 615.5211 Risk categories--balance sheet assets.
Section 615.5210(c) specifies certain balance sheet assets that are
not assigned to the risk categories set forth below. All other balance
sheet assets are assigned to the percentage risk categories as follows:
(a) Category 1: 0 Percent.
(1) Cash (domestic and foreign).
(2) Balances due from Federal Reserve Banks and central banks in
other OECD countries.
(3) Direct claims on, and portions of claims unconditionally
guaranteed by, the U.S. Treasury, government agencies, or central
governments in other OECD countries.
(4) Portions of local currency claims on, or unconditionally
guaranteed by, non-OECD central governments (including non-OECD central
banks), to the extent the institution has liabilities booked in that
currency.
(5) Claims on, or guaranteed by, qualifying securities firms that
are collateralized by cash held by the institution or by securities
issued or guaranteed by the United States (including U.S. Government
agencies) or OECD central governments, provided that a positive margin
of collateral is required to be maintained on such a claim on a daily
basis, taking into account any change in the institution's exposure to
the obligor or counterparty under the claim in relation to the market
value of the collateral held in support of the claim.
(b) Category 2: 20 Percent.
(1) Cash items in the process of collection.
(2) Loans and other obligations of and investments in Farm Credit
institutions.
(3) All claims (long- and short-term) on, and portions of claims
(long- and short-term) guaranteed by, OECD banks.
(4) Short-term (remaining maturity of 1 year or less) claims on,
and portions of short-term claims guaranteed by, non-OECD banks.
(5) Portions of loans and other claims conditionally guaranteed by
the U.S. Treasury, government agencies, or central governments in other
OECD countries and portions of local currency claims conditionally
guaranteed by non-OECD central governments to the extent that the
institution has liabilities booked in that currency.
(6) All securities and other claims on, and portions of claims
guaranteed by, Government-sponsored agencies.
(7) Portions of loans and other claims (including repurchase
agreements) collateralized by securities issued or guaranteed by the
U.S. Treasury, government agencies, Government-sponsored agencies or
central governments in other OECD countries.
(8) Portions of loans and other claims collateralized by cash held
by the institution or its funding bank.
(9) General obligation claims on, and portions of claims guaranteed
by, the full faith and credit of states or other political subdivisions
or OECD
[[Page 35355]]
countries, including U.S. state and local governments.
(10) Claims on, and portions of claims guaranteed by, official
multinational lending institutions or regional development institutions
in which the U.S. Government is a shareholder or a contributing member.
(11) Portions of claims collateralized by securities issued by
official multilateral lending institutions or regional development
institutions in which the U.S. Government is a shareholder or
contributing member.
(12) Investments in shares of mutual funds whose portfolios are
permitted to hold only assets that qualify for the zero or 20-percent
risk categories.
(13) Recourse obligations, direct credit substitutes, residual
interests (other than credit-enhancing interest-only strips) and asset-
or mortgage-backed securities that are externally rated in the highest
or second highest investment grade category, e.g., AAA, AA, in the case
of long-term ratings, or the highest rating category, e.g., A-1, P-1,
in the case of short-term ratings.
(14) Claims on, and claims guaranteed by, qualifying securities
firms provided that:
(i) The qualifying securities firm, or at least one issue of its
long-term debt, has a rating in one of the highest two investment grade
rating categories from an NRSRO (if the securities firm or debt has
more than one NRSRO rating the lowest rating applies); or
(ii) The claim is guaranteed by a qualifying securities firm's
parent company with such a rating.
(15) Certain collateralized claims on qualifying securities firms
without regard to satisfaction of the rating standard, provided that
the claim arises under a contract that:
(i) Is a reverse repurchase/repurchase agreement or securities
lending/borrowing transaction executed under standard industry
documentation;
(ii) Is collateralized by liquid and readily marketable debt or
equity securities;
(iii) Is marked-to-market daily;
(iv) Is subject to a daily margin maintenance requirement under the
standard documentation; and
(v) Can be liquidated, terminated, or accelerated immediately in
bankruptcy or similar proceedings, and the security or collateral
agreement will not be stayed or avoided, under applicable law of the
relevant country.
(16) Claims on other financing institutions provided that:
(i) The other financing institution qualifies as an OECD bank or it
is owned and controlled by an OECD bank that guarantees the claim, or
(ii) The other financing institution has a rating in one of the
highest three investment-grade rating categories from a NRSRO or the
claim is guaranteed by a parent company with such a rating, and
(iii) The other financing institution has endorsed all obligations
it pledges to its funding Farm Credit bank with full recourse.
(c) Category 3: 50 Percent.
(1) All other investment securities with remaining maturities under
1 year, if the securities are not eligible for the ratings-based
approach or subject to the dollar-for-dollar capital treatment.
(2) Qualified residential loans.
(3) Recourse obligations, direct credit substitutes, residual
interests (other than credit-enhancing interest-only strips) and asset-
or mortgage-backed securities that are rated in the third highest
investment grade category, e.g., A, in the case of long-term ratings,
or the second highest rating category, e.g., A-2, P-2, in the case of
short-term ratings.
(4) Revenue bonds or similar obligations, including loans and
leases, that are obligations of state or political subdivisions of the
United States or other OECD countries but for which the government
entity is committed to repay the debt only out of revenue from the
specific projects financed.
(5) Claims on other financing institutions that:
(i) Are not covered by the provisions of paragraph (b)(17) of this
section, but otherwise meet similar capital, risk identification and
control, and operational standards, or
(ii) Carry an investment-grade or higher NRSRO rating or the claim
is guaranteed by a parent company with such a rating, and
(iii) The other financing institution has endorsed all obligations
it pledges to its funding Farm Credit bank with full recourse.
(d) Category 4: 100 Percent. This category includes all assets not
specified in the categories above or below nor deducted dollar-for-
dollar from capital and assets as discussed in Sec. 615.5210(c). This
category comprises standard risk assets such as those typically found
in a loan or lease portfolio and includes:
(1) All other claims on private obligors.
(2) Claims on, or portions of claims guaranteed by, non-OECD banks
with a remaining maturity exceeding 1 year.
(3) Claims on, or portions of claims guaranteed by, non-OECD
central governments that are not included in paragraphs (a)(4) or
(b)(4) of this section, and all claims on non-OECD state and local
governments.
(4) Industrial-development bonds and similar obligations issued
under the auspices of states or political subdivisions of the OECD-
based group of countries for the benefit of a private party or
enterprise where that party or enterprise, not the government entity,
is obligated to pay the principal and interest.
(5) Premises, plant, and equipment; other fixed assets; and other
real estate owned.
(6) Recourse obligations, direct credit substitutes, residual
interests (other than credit-enhancing interest-only strips) and asset-
or mortgage-backed securities that are rated in the lowest investment
grade category, e.g., BBB, in the case of long-term ratings, or the
third highest rating category, e.g., A-3, P-3, in the case of short-
term ratings.
(7) Stripped mortgage-backed securities and similar instruments,
such as interest-only strips that are not credit-enhancing and
principal-only strips (including such instruments guaranteed by
Government-sponsored agencies).
(8) Investments in Rural Business Investment Companies.
(9) If they have not already been deducted from capital:
(i) Investments in unconsolidated companies, joint ventures, or
associated companies.
(ii) Deferred-tax assets.
(iii) Servicing assets.
(10) All non-local currency claims on foreign central governments,
as well as local currency claims on foreign central governments that
are not included in any other category.
(11) Claims on other financing institutions that do not otherwise
qualify for a lower risk-weight category under this section; and
(12) All other assets not specified above, including but not
limited to leases and receivables.
(e) Category 5: 200 Percent. Recourse obligations, direct credit
substitutes, residual interests (other than credit-enhancing interest-
only strips) and asset-or mortgage-backed securities that are rated one
category below the lowest investment grade category, e.g., BB.
Sec. 615.5212 Credit conversion factors--off-balance sheet items.
(a) The face amount of an off-balance sheet item is generally
incorporated into risk-weighted assets in two steps. For most off-
balance sheet items, the face amount is first multiplied by a credit
conversion factor. (In the case of direct credit substitutes and
recourse obligations the full amount of the assets enhanced are
multiplied by a credit conversion factor). The resultant credit
equivalent amount is assigned to the
[[Page 35356]]
appropriate risk-weight category described in Sec. 615.5211 according
to the obligor or, if relevant, the guarantor or the collateral.
(b) Conversion factors for various types of off-balance sheet items
are as follows:
(1) 0 Percent.
(i) Unused commitments with an original maturity of 14 months or
less;
(ii) Unused commitments with an original maturity greater than 14
months if:
(A) They are unconditionally cancellable by the institution; and
(B) The institution has the contractual right to, and in fact does,
make a separate credit decision based upon the borrower's current
financial condition before each drawing under the lending arrangement.
(2) 20 Percent. Short-term, self-liquidating, trade-related
contingencies, including but not limited to commercial letters of
credit.
(3) 50 Percent.
(i) Transaction-related contingencies (e.g., bid bonds, performance
bonds, warranties, and performance-based standby letters of credit
related to a particular transaction).
(ii) Unused loan commitments with an original maturity greater than
14 months, including underwriting commitments and commercial credit
lines.
(iii) Revolving underwriting facilities (RUFs), note issuance
facilities (NIFs) and other similar arrangements pursuant to which the
institution's customer can issue short-term debt obligations in its own
name, but for which the institution has a legally binding commitment to
either:
(A) Purchase the obligations its customer is unable to sell by a
stated date; or
(B) Advance funds to its customer if the obligations cannot be
sold.
(4) 100 Percent.
(i) The full amount of the assets supported by direct credit
substitutes and recourse obligations for which an institution directly
or indirectly retains or assumes credit risk. For risk participations
in such arrangements acquired by the institution, the full amount of
assets supported by the main obligation multiplied by the acquiring
institution's percentage share of the risk participation. The capital
requirement under this paragraph is limited to the institution's
maximum contractual exposure, less any recourse liability account
established under generally accepted accounting principles.
(ii) Acquisitions of risk participations in bankers acceptances.
(iii) Sale and repurchase agreements, if not already included on
the balance sheet.
(iv) Forward agreements (i.e., contractual obligations) to purchase
assets, including financing facilities with certain drawdown.
(c) Credit equivalents of interest rate contracts and foreign
exchange contracts. (1) Credit equivalents of interest rate contracts
and foreign exchange contracts (except single-currency floating/
floating interest rate swaps) are determined by adding the replacement
cost (mark-to-market value, if positive) to the potential future credit
exposure, determined by multiplying the notional principal amount by
the following credit conversion factors as appropriate.
Conversion Factor Matrix
(In percent)
------------------------------------------------------------------------
Interest Exchange
Remaining maturity rate rate Commodity
------------------------------------------------------------------------
1 year or less...................... 0.0 1.0 10.0
Over 1 to 5 years................... 0.5 5.0 12.0
Over 5 years........................ 1.5 7.5 15.0
------------------------------------------------------------------------
(2) For any derivative contract that does not fall within one of
the categories in the above table, the potential future credit exposure
is to be calculated using the commodity conversion factors. The net
current exposure for multiple derivative contracts with a single
counterparty and subject to a qualifying bilateral netting contract is
the net sum of all positive and negative mark-to-market values for each
derivative contract. The positive sum of the net current exposure is
added to the adjusted potential future credit exposure for the same
multiple contracts with a single counterparty. The adjusted potential
future credit exposure is computed as Anet = (0.4 x
Agross) + 0.6 (NGR x Agross) where:
(i) Anet is the adjusted potential future credit
exposure;
(ii) Agross is the sum of potential future credit
exposures determined by multiplying the notional principal amount by
the appropriate credit conversion factor; and
(iii) NGR is the ratio of the net current credit exposure divided
by the gross current credit exposure determined as the sum of only the
positive mark-to-markets for each derivative contract with the single
counterparty.
(3) Credit equivalents of single-currency floating/floating
interest rate swaps are determined by their replacement cost (mark-to-
market).
Subpart K--Surplus and Collateral Requirements
0
10. Amend Sec. 615.5301 by revising paragraphs (b)(3), (i)(2), and
(i)(8) to read as follows:
Sec. 615.5301 Definitions.
* * * * *
(b) * * *
(3) The deductions that must be made by an institution in the
computation of its permanent capital pursuant to Sec. 615.5207(f),
(g), (i), and (k) shall also be made in the computation of its core
surplus. Deductions required by Sec. 615.5207(a) shall also be made to
the extent that they do not duplicate deductions calculated pursuant to
this section and required by Sec. 615.5330(b)(2).
* * * * *
(i) * * *
(2) Allocated equities, including allocated surplus and stock, that
are not subject to a plan or practice of revolvement or retirement of 5
years or less and are eligible to be included in permanent capital
pursuant to paragraph(4)(iv) of the definition of permanent capital in
Sec. 615.5201; and
* * * * *
(8) Any deductions made by an institution in the computation of its
permanent capital pursuant to Sec. 615.5207 shall also be made in the
computation of its total surplus.
* * * * *
Sec. 615.5330 [Amended]
0
11. Amend Sec. 615.5330 by removing the reference ``Sec.
615.5210(f)'' and adding in its place ``Sec. 615.5210'' in paragraphs
(a)(2) and (b)(3).
[[Page 35357]]
PART 620--DISCLOSURE TO SHAREHOLDERS
0
12. The authority citation for part 620 continues to read as follows:
Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12
U.S.C. 2252, 2254, 2279aa-11); secs. 424 of Pub. L. 100-233, 101
Stat. 1568, 1656.
Subpart A--General
Sec. 620.1 [Amended]
0
13. Amend Sec. 620.1(j) by removing the reference ``Sec.
615.5201(l)'' and adding in its place ``Sec. 615.5201.''
Dated: June 9, 2005.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 05-11801 Filed 6-16-05; 8:45 am]
BILLING CODE 6705-01-P