Policy Statement Concerning Assistance, 23247-23251 [2013-09165]
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Federal Register / Vol. 78, No. 75 / Thursday, April 18, 2013 / Notices
Amendments to the Resource
Conservation and Recovery Act, has
been granted to BASF Corporation for
three Class I injection wells located at
Freeport, Texas. The company has
adequately demonstrated to the
satisfaction of the Environmental
Protection Agency by the petition
reissuance application and supporting
documentation that, to a reasonable
degree of certainty, there will be no
migration of hazardous constituents
from the injection zone for as long as the
waste remains hazardous. This final
decision allows the underground
injection by BASF, of the specific
restricted hazardous wastes identified in
this exemption, into Class I hazardous
waste injection wells WDW–51 and
WDW–99 and WDW–408 until
December 31, 2028, unless EPA moves
to terminate this exemption. Additional
conditions included in this final
decision may be reviewed by contacting
the Region 6 Ground Water/UIC Section.
A public notice was issued December
27, 2012. The public comment period
closed on February 15, 2013. No
comments were received. This decision
constitutes final Agency action and
there is no Administrative appeal. This
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compliance with the Administrative
Procedure Act.
DATES: This action is effective as of
February 21, 2013.
ADDRESSES: Copies of the petition for
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Quality Protection Division, Source
Water Protection Branch (6WQ–S), 1445
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FOR FURTHER INFORMATION CONTACT:
Philip Dellinger, Chief Ground Water/
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(214) 665–8324.
Dated: April 9, 2013.
William K. Honker,
Division Director, Water Quality Protection
Division.
[FR Doc. 2013–09158 Filed 4–17–13; 8:45 am]
BILLING CODE 6560–50–P
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FARM CREDIT SYSTEM INSURANCE
CORPORATION
Policy Statement Concerning
Assistance
Farm Credit System Insurance
Corporation.
ACTION: Policy statement.
AGENCY:
The Farm Credit System
Insurance Corporation (Corporation or
SUMMARY:
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FCSIC) announces that it has given final
approval to a new ‘‘Policy Statement
Concerning Assistance,’’ which replaces
the Corporation’s existing ‘‘Policy
Statement Concerning Stand-Alone
Assistance.’’ The new policy statement
provides additional transparency
concerning the Corporation’s authority
to provide assistance and how the leastcost test might be performed. This
policy statement also includes enhanced
criteria of what is to be included in
assistance proposals, and a new section
discussing assistance agreements.
DATES: Effective Date: The policy
statement is effective on April 11, 2013.
FOR FURTHER INFORMATION CONTACT:
Wade Wynn, Senior Risk Analyst, and
James M. Morris, General Counsel, Farm
Credit System Insurance Corporation,
1501 Farm Credit Drive, McLean,
Virginia 22102, (703) 883–4380, TDD
(703) 883–4390.
SUPPLEMENTARY INFORMATION:
I. Background
The Corporation, in its sole
discretion, is authorized under section
5.61(a) of the Farm Credit Act of 1971,
as amended (Act),1 to provide assistance
to a stand-alone Farm Credit System
(System) institution or to facilitate a
merger or consolidation of a System
institution with another System
institution,2 provided it meets the
statutory least-cost test.3 If the
Corporation receives a request to assist
a troubled System institution, it must
compare the cost of liquidation to the
cost of providing assistance to
determine the least costly alternative to
the Farm Credit Insurance Fund
(Insurance Fund). In making this
discretionary determination, the
Corporation is authorized under section
5.59(b) of the Act 4 to gather any
information necessary from the troubled
System institution or any other System
1 12
U.S.C. 2277a–10.
5.61(a) of the Act uses the terms
‘‘insured System bank’’ and ‘‘bank’’ but the Act also
specifies under section 5.61(e), 12 U.S.C. 2277a–
10(e), that such terms also include production
credit associations and other associations making
direct loans under the authority provided under
section 7.6 of the Act, 12 U.S.C. 2279b.
Consequently, the terms ‘‘troubled System
institution,’’ ‘‘troubled System bank,’’ or ‘‘troubled
System association’’ are used to refer to those
institutions specified in sections 5.61(a) and 5.61(e)
of the Act, 12 U.S.C. 2277a–10(a) and 2277a–10(e).
3 The least-cost test is the means of determining
the least-cost resolution. Section 5.61(a)(3)(A)
states, ‘‘Assistance may not be provided…unless the
means of providing the assistance is the least costly
means of providing the assistance by the Farm
Credit Insurance Fund of all possible alternatives
available to the Corporation, including liquidation
of the bank (including paying the insured
obligations issued on behalf of the bank).’’ See Act,
section 5.61(a)(3), 12 U.S.C. 2277a–10(a)(3).
4 12 U.S.C. 2277a–8(b).
2 Section
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23247
institution to perform the least-cost test.
After gathering pertinent information,
the Corporation must: (1) Evaluate
alternatives on a present-value basis,
using a reasonable discount rate, (2)
document the evaluation and the
assumptions on which the evaluation is
based, and (3) retain the documentation
for not less than 5 years.
The Corporation’s ‘‘Policy Statement
Concerning Stand-Alone Assistance’’ is,
for the most part, a summary of the
powers of the Corporation under section
5.61(a) of the Act to provide assistance
to a troubled System institution,
including the timing and steps for
making the least-cost test.5 For example,
the policy specifies that the
Corporation’s Board of Directors must
determine that providing assistance is
the least costly means of all possible
alternatives available to the Corporation,
including liquidation of the troubled
System institution, and lists the steps
for conducting the statutory least-cost
test. The existing policy statement also
provides a list of criteria of what the
Corporation expects to receive in
assistance proposals to help the
Corporation conduct the least-cost test.
II. Comments on the Draft Policy
Statement
On June 21, 2012, the Corporation
published for comment a draft ‘‘Policy
Statement Concerning Assistance to
Troubled Farm Credit System
Institutions’’ to replace the
Corporation’s existing ‘‘Policy
Statement Concerning Stand-Alone
Assistance.’’ 6 The Corporation received
two comment letters on the draft policy
statement. In brief, both commenters are
concerned that the Corporation will not
consider a request for assistance until
after all other resolution alternatives are
exhausted, including resolution
alternatives available to the Farm Credit
Administration (FCA). Both also
commented on the least-cost test as it
relates to the cost of liquidating a
troubled System institution. Each of
these areas is addressed below.
A. Resolution Alternatives
In the first sentence of the draft policy
statement, the Corporation stated that,
in general, it would consider a request
for assistance after other resolution
alternatives have been exhausted such
as voluntary assistance provided from
within the System, voluntary merger
with one or more System institutions, or
involuntary merger with one or
5 12
U.S.C. 2277a–10.
77 FR 37399 (June 21, 2012). On July 26,
2012, the Corporation extended the comment
period 90 days in response to several commenter
requests. See 77 FR 45606 (August 1, 2012).
6 See
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more System institutions as determined
by the FCA.7 Both commenters agree
that it is reasonable to expect System
institutions to engage in self-help
mechanisms before requesting
assistance from the Corporation,
particularly within a district that is
experiencing financial stress. They also
note that the FCA has authority to
resolve troubled System institutions
either through involuntary mergers or
direct transfer of funds of capital among
System institutions.8 They express
concern that the Corporation will not
consider a request for assistance until
after the FCA has exercised its authority
to resolve troubled System institutions.9
In response to these comments, the
Corporation is removing the language on
‘‘other resolution alternatives’’ that the
commenters found troubling. To clarify,
FCA action is not a necessary
precondition for the Corporation to
consider a request for assistance to a
troubled System institution. The
essential precondition for the
Corporation to consider providing
assistance is the receipt of a request for
assistance and an assistance proposal.
As explained in the final policy
statement, a request for assistance can
be initiated either directly from a
troubled System institution or from
other System institutions seeking to
acquire or assist a troubled System
institution. If the Corporation
determines it is appropriate based on
the facts and circumstances surrounding
the request, the Corporation will
provide System institutions the
opportunity to submit information
related to the request.
7 The Act provides authority for Farm Credit
banks to merge with other Farm Credit banks and
Farm Credit associations to merge with other Farm
Credit associations. See Act, Title VII.
8 Under section 4.12(a) of the Act, 12 U.S.C.
2183(a), FCA has authority to require that a System
association merge with another association if it has
failed to meet its outstanding obligations or failed
to conduct its operations in accordance with the
Act. Under section 5.17(a) of the Act, 12 U.S.C.
2252(a), FCA has authority to require two or more
System banks to merge if the FCA determines that
one of the banks has failed to meet its outstanding
obligations. The commenters also referred to 12
CFR 611.1130 which states, ‘‘Section 5.17(a)(6) of
the Act authorizes the FCA to regulate the
borrowing, repayment, and transfer of funds and
equities between institutions of the System,
including banks, associations, and service
organizations organized under the Act.’’
9 For example, the commenters state that the draft
policy statement ‘‘appears to establish a vague
expectation for the exhaustion of resolution
alternatives in a manner that essentially forces other
System institutions to provide involuntary
assistance through FCA regulatory action,’’ which
may result in ‘‘a de-facto joint and several financial
call’’ from other System institutions.
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B. Least-Cost Test
In the draft policy statement, the
Corporation stated that it would
conduct a least-cost test to determine
whether the cost of providing assistance
to a troubled System institution is less
costly to the Insurance Fund than a
liquidation of the institution. In brief,
the Corporation would review the
assistance proposal and gather any
additional information necessary to
estimate the cost of liquidation. Once
this estimate has been computed, the
Corporation would determine the cost
and type of assistance. The Corporation
would then compare the cost of
providing assistance to the cost of
liquidation to make its least-cost
determination.
The draft policy statement also
describes the complexity of conducting
a least-cost test. For example, the
Corporation describes a scenario where
a sizable association is failing. The
liquidation of the large association
might not have an immediate impact on
the funding bank’s ability to continue
meeting its insured obligations, but the
effect of the liquidation could create
significant disruption through a district
that could threaten the bank’s ability to
continue as a going concern. Without
assistance from the Corporation, the
bank might eventually fail, creating
greater losses to the Insurance Fund.
The Corporation received two
comments on the least-cost test
discussion. Both commenters generally
agree with the principles behind the
least-cost determination, specifically the
discussion of considering the full
impact on the Insurance Fund over
time. However, the commenters also
reference a separate document titled a
‘‘Least-Cost Test Example’’ that the
Corporation shared publicly as an
example of how the least-cost test might
be performed if the troubled System
institution was an association. In
general, the commenters believed the
assumptions used in this example were
too optimistic.10
In response to these comments, it
appears the commenters misunderstood
the purpose of the Least-Cost Test
Example. The Corporation created this
example as part of its fact-gathering
process in the development phase of the
draft policy statement; the example
itself is not a part of the draft policy
statement.11 It also appears the
10 For example, the commenters believed that
some of the recovery levels employed in the
example were too high and that the example did not
entirely reflect all the costs associated with a
receivership.
11 The commenters recognized this distinction
but appeared to want the Corporation to consider
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commenters misunderstand the ‘‘cost of
liquidation’’ as it relates to the
Insurance Fund. For example, the
commenters identify certain ‘‘indirect
costs’’ that may result from placing a
troubled System institution into
receivership. While these indirect costs
may adversely affect other System
institutions or the System as a whole, it
is unclear that these costs would create
losses to the Insurance Fund. For the
Corporation to approve assistance, there
must be a reasonable basis to conclude
that the assistance would prevent a
more costly loss to the Insurance Fund
as a result of indirect losses.
In view of the comments received, the
Corporation is substantially revising the
least-cost test discussion of the final
‘‘Policy Statement Concerning
Assistance’’ to provide greater clarity
concerning the ‘‘cost of liquidation’’ as
it relates to the Insurance Fund. Since
the Insurance Fund’s primary purpose is
to insure the timely payment of
principal and interest on System bank
insured debt obligations, it is clear that
a loss to the Insurance Fund occurs
when a System bank defaults on an
insured debt obligation, and the
Corporation must use the Insurance
Fund to pay the obligation. In making
the least-cost determination, the
Corporation must be able to reasonably
estimate whether the troubled System
institution’s failure will impair a bank’s
ability to pay its insured debt
obligations, creating losses to the
Insurance Fund. The final policy
statement provides guidance for how
the Corporation might reasonably
estimate costs to either resolve a
troubled System institution or stem
financial contagion within the System.
After considering all comments
received, the Corporation has given final
approval to the ‘‘Policy Statement
Concerning Assistance,’’ with changes.
The existing ‘‘Policy Statement
Concerning Stand-Alone Assistance’’ is
withdrawn. The text of the final ‘‘Policy
more least-cost test examples. The Corporation
agrees with the commenters that the example was
not complicated and may not have exhaustively
considered all possibilities and costs associated
with liquidating a troubled System association. The
Corporation could have created a more complex
example but this was not necessary to advance the
discussion and gather general information to update
its policy statement. In reality, the value of assets
and costs associated with a receivership could
widely fluctuate based on numerous factors at the
time of liquidation such as the condition of the
agricultural sector and general economy, the
condition of the System institution being
liquidated, the condition and extent to which other
System institutions could provide their own
assistance to the troubled System association, the
unique characteristics of the asset portfolio, the
potential pool of bidders at the time of liquidation,
and so forth.
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Statement Concerning Assistance’’ is set
out below in its entirety:
Farm Credit System Insurance
Corporation
Policy Statement Concerning Assistance
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Background
The Farm Credit System Insurance
Corporation (Corporation), in its sole
discretion, is authorized under section
5.61(a) of the Farm Credit Act of 1971,
as amended (Act), 12 U.S.C. 2277a–
10(a), to provide, on such terms and
conditions as the Corporation’s Board of
Directors may prescribe: (1) Stand-alone
assistance in the form of loans, asset or
debt security purchases, assumption of
liabilities, or contributions: (a) To
prevent the placing of the institution 12
into receivership, (b) to restore the
institution to normal operation, or (c) to
reduce the risk to the Corporation posed
by the institution when severe financial
conditions threaten the stability of a
significant number of other System
institutions or System institutions
possessing significant financial
resources; or (2) Assistance to facilitate
a merger or consolidation of a
‘‘qualifying’’ 13 troubled System
institution with another System
institution through loans, loan
guarantees, asset or debt security
purchases, assumption of liabilities,
contributions, or any combination
thereof.14
If the Corporation receives a request
for assistance, it must compare the cost
of liquidation to the cost of providing
assistance to determine the least costly
alternative to the Insurance Fund.15 In
12 Section 5.61(a) of the Act uses the terms
‘‘insured System bank’’ and ‘‘bank’’ but the Act also
specifies under section 5.61(e), 12 U.S.C. 2277a–
10(e), that such terms also include production
credit associations and other associations making
direct loans under the authority provided under
section 7.6 of the Act, 12 U.S.C. 2279b.
Consequently, the terms ‘‘troubled System
institution,’’ ‘‘troubled System bank,’’ or ‘‘troubled
System association’’ are used to refer to those
institutions specified in sections 5.61(a) and 5.61(e)
of the Act, 12 U.S.C. 2277a–10(a) and 2277a–10(e).
13 ‘‘Qualifying’’ means the troubled System
institution is: (1) In receivership, (2) in danger of
being placed in receivership, or (3) an institution
that, when severe financial conditions exist that
threaten the stability of a significant number of
System institutions or of System institutions
possessing significant financial resources, requires
assistance to lessen the risk to the Corporation
posed by such System institution under such threat
of instability. See Act, section 5.61(a)(2)(B), 12
U.S.C. 2277a–10(a)(2)(B).
14 The Corporation is not authorized to purchase
voting stock from the troubled System institution.
See Act, section 5.61(a)(3)(F), 12 U.S.C. 2277a–
10(a)(3)(F).
15 The cost of liquidation shall be made as of the
earliest of: (I) The date on which a conservator is
appointed for the institution, (II) the date on which
a receiver is appointed for the institution, or (III) the
date on which the Corporation makes any
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making this discretionary
determination, the Corporation is
authorized to gather any information
necessary to perform the least-cost
test.16 After gathering all pertinent
information, the Corporation must: (1)
Evaluate alternatives on a present-value
basis, using a reasonable discount rate,
(2) document the evaluation and the
assumptions on which the evaluation is
based, and (3) retain the documentation
for not less than 5 years.17
Policy Statement
The Corporation will consider a
request for assistance to a troubled
System institution under section 5.61(a)
of the Act, 12 U.S.C. 2277a–10(a), upon
receipt of an assistance proposal. An
assistance proposal can be submitted
either directly from a troubled System
institution, from other System
institutions seeking to acquire or assist
a troubled System institution, or from
the System banks to stem a liquidity
crisis. Upon receipt of an assistance
proposal, if the Corporation determines
it is appropriate based on the facts and
circumstances surrounding the request,
the Corporation will provide System
institutions the opportunity to submit
any information, including information
on the cost to the Farm Credit Insurance
Fund (Insurance Fund) of a
liquidation.18 The Corporation will then
conduct a least-cost test to determine
whether the cost of providing assistance
is less costly to the Insurance Fund than
the cost of liquidating a System
institution. If the cost of providing
assistance is less than the cost of
liquidation to the Insurance Fund, and
the Corporation, in its sole discretion,
approves assistance, the Corporation
will enter into an agreement with the
System institution receiving assistance.
determination to provide assistance to the
institution. See Act, section 5.61(a)(3)(C), 12 U.S.C.
2277a–10(a)(3)(C).
16 See Act, sections 5.58(8) and 5.59, 12 U.S.C.
2277a–7(8) and 2277a–8. The Corporation will
accord such other System institutions as the
Corporation determines to be appropriate the
opportunity to submit information relating to the
determination. See Act, section 5.61(a)(3)(A), 12
U.S.C. 2277a–10(a)(3)(A).
17 See Act, section 5.61(a)(3)(B), 12 U.S.C. 2277a–
10(a)(3)(B). In addition, in regards to requests for
stand-alone assistance, the Corporation must
evaluate the adequacy of managerial resources of
the troubled System institution. The Corporation is
authorized to determine the continued service of
any director or senior ranking officer who serves in
a policymaking role for the assisted System
institution as a condition of approving assistance.
See Act, section 5.61(a)(3)(D), 12 U.S.C. 2277a–
10(a)(3)(D).
18 The Corporation will determine which System
institutions will provide this information.
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Assistance Proposals
A System institution requesting
assistance must submit a proposal to the
Corporation. If the proposal is for standalone assistance, the proposal must
provide justification for the assistance,
including a detailed analysis of how
such assistance will return the troubled
System institution to a financially
viable, self-sustaining operation. If the
proposed assistance is to facilitate a
merger, the proposal must demonstrate
that the continuing System institution
can safely and soundly absorb the
financial and operational impact that
will result from the merger. Moreover,
the Corporation would consider FCA’s
preliminary approval of the proposed
merger, pending the least-cost
determination to provide assistance. If a
System institution or group of System
institutions submits an assistance
proposal to resolve a troubled System
institution or stem a liquidity crisis or
financial contagion within the System,
the proposal must contain sufficient
information to demonstrate how the
Corporation’s assistance would be less
costly to the Insurance Fund than
liquidating the troubled System
institution(s).
Assistance proposals must contain
information to help the Corporation
compare the cost of providing assistance
to the cost of liquidating the troubled
System institution as part of its leastcost determination. Assistance
proposals can include requests for
loans, loan guarantees, loss-sharing
arrangements, asset or debt security
purchases, assumption of liabilities, or
cash contributions. The Corporation
will consider the nature of the financial
assistance requested on a case-by-case
basis and may alter the form or amount
of assistance as part of its
determination. The Corporation has
identified the following minimum
criteria to be included in a request for
assistance and assistance proposals:
(1) Financial condition and
performance criteria to better
understand the problem that caused the
need for assistance, including the
rationale for seeking assistance;
(2) The type and amount of assistance
needed, as well as a reasonable
repayment plan. Assistance proposals
must include fee arrangements with
attorneys, accountants, consultants, and
other parties incident to the request for
assistance (or projected costs for these
arrangements). The Corporation would
not acquire or service assets without a
strong justification;
(3) Reasonable projections to assess
the future viability of the institution
after assistance has been provided. This
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would include earnings projections and
a capital restoration plan to achieve
adequate capitalization. Earnings
projections and the capital restoration
plan must include the impact of
repayment of assistance;
(4) A business plan that would
implement written policies and
procedures designed to guide operations
safely and soundly and to correct the
problems that caused the need for
assistance. The plan must include an
internal control system to monitor
ongoing performance with measurable
criteria. The plan must also include an
operating budget, including
compensation arrangements covering
directors and senior officers. Plans to
continue the service and compensation
of directors and senior officers must be
pre-approved by the Corporation before
it provides assistance and until
assistance is repaid; and
(5) Analysis of the effect of assistance
on shareholders, uninsured creditors
(e.g., impairment on subordinated debt),
other System institutions and the
financial markets. If the troubled System
institution is an association, the analysis
must include the impact on its funding
bank’s ability to continue meeting its
insured obligations.
The Corporation reserves the right to
request additional information as
needed to conduct the least-cost test.
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The Least-Cost Test
The Corporation will conduct a leastcost test to determine whether providing
assistance to a troubled System
institution is less costly to the Insurance
Fund than liquidating the institution.
The first step of the least-cost test is to
determine the estimated liquidation
value of the troubled System
institution.19 In making this
determination, the Corporation shall use
its examination authority under section
5.59(b) of the Act, 12 U.S.C. 2277a–8(b),
to collect information from the troubled
System institution to calculate the
estimated liquidation value of the
troubled System institution.20 This
information shall, at a minimum,
include specific data elements as
determined by Corporation staff to
conduct a present-value analysis of the
troubled System institution’s assets,
using a reasonable discount rate. As
required by the Act, the troubled System
institution must provide the
19 This value is computed by subtracting the
present-value of the institution’s liabilities from its
assets. Liabilities include estimated resolution
expenses.
20 The Corporation will request that FCA
examiners collect the information.
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Corporation all information necessary to
perform a least-cost determination.
The second step of the least-cost test
is for the Corporation to reasonably
estimate whether the liquidation of the
troubled System institution(s) creates a
loss to the Insurance Fund. Since the
Insurance Fund has been primarily
established to insure the timely
payment of principal and interest on
System bank insured debt obligations,21
a loss to the Insurance Fund occurs
when a System bank defaults on an
insured obligation, and the Corporation
must use the Insurance Fund to pay the
obligation.22 Accordingly, to meet the
least-cost test, the Corporation must be
able to reasonably estimate whether the
troubled System institution’s failure
will impair a bank’s ability to pay its
insured debt obligations.
A loss to the Insurance Fund may
result from direct and/or indirect losses.
Direct losses include the estimated
losses to the Insurance Fund from the
liquidation of a troubled System
institution. Indirect losses to the
Insurance Fund include the consequent
effects of liquidating a troubled System
institution. For example, if the troubled
System institution is a bank, there is a
direct loss to the Insurance Fund if the
Corporation reasonably estimates that
the net present value of the bank’s
assets 23 is less than its insured debt
obligations.24 If the Corporation can
reasonably estimate that the liquidation
of a troubled System bank subsequently
causes one or more of the remaining
System banks to default on insured debt
obligations, there is an indirect loss to
the Insurance Fund. Direct losses to the
Insurance Fund can be reasonably
estimated by the Corporation, but
indirect losses to the Insurance Fund
may be difficult for the Corporation to
reasonably estimate. Consequently, it
will be incumbent upon the remaining
System banks to provide the
Corporation with sufficient information
and analysis to demonstrate that
indirect losses to the Insurance Fund
21 See section 5.60(c)(1) of the Act, 12 U.S.C.
2277a–9(c)(1), which states, in part, ‘‘The
Corporation shall expend amounts in the Insurance
Fund to the extent necessary to insure the timely
payment of interest and principal on insured
obligations.’’
22 This assumes that no other System institution
is willing to voluntarily assist the defaulting bank
to avoid a payout from the Insurance Fund.
23 The net present value of bank assets is the
estimated present value of bank assets at liquidation
less estimated payments to creditors with a higher
priority of claims than insured debt obligations and
estimated resolution expenses.
24 Conversely, there is no direct loss to the
Insurance Fund if the Corporation reasonably
estimates that the net present value of the bank’s
assets at liquidation is greater than its insured debt
obligations.
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will result from the bank liquidation.
For example, when a severe financial
crisis exists, a System bank liquidation
might cause the remaining System
banks to be shut out of the debt
market.25 In a less extreme scenario, a
System bank liquidation might
substantially increase the cost of funds
to the remaining System banks. In either
scenario, for indirect costs to be
considered, the Corporation must have
sufficient information so that it can
reasonably estimate the indirect loss
associated with the bank liquidation. If
indirect losses can be reasonably
estimated, the Corporation may consider
such losses in its least-cost test and
assistance determination.
If the troubled System institution is
an association, the Corporation must be
able to reasonably estimate that the
troubled System association’s failure
causes a loss to the Insurance Fund for
there to be a basis for providing
assistance. The funding bank would
need to provide the Corporation with
information to support the association
request for assistance. If the Corporation
reasonably estimates that the net present
value of the association’s assets 26 is less
than the amount of its direct note with
its funding bank, there would be a loss
to the bank. If the Corporation
reasonably estimates that the funding
bank can sufficiently absorb this loss,
there would be no loss to the Insurance
Fund and, consequently, no basis for the
Corporation to provide assistance to the
troubled System association. However,
if the Corporation reasonably estimates
that the loss on the direct note is
significant enough that the funding bank
may default on its insured debt
obligations, the Corporation may
provide assistance to the troubled
System association.
Moreover, if a sizable System
association fails, or several smaller
System associations fail, it is also
possible that indirect losses to the
Insurance Fund may result from
association liquidations. For example,
the liquidation of a considerable amount
of agricultural loans in a relatively short
period of time may cause a general
decline in loan and collateral values
throughout the district, creating higher
25 In a liquidity crisis situation, the Corporation
would work with the System banks to ensure the
Insurance Fund was used to protect investors in
insured debt obligations.
26 The net present value of association assets is
the estimated present value of association assets at
liquidation less estimated payments to creditors
with higher priority of claims than the funding bank
and estimated resolution expenses. In most cases,
receivership expenses will be paid out of the
receivership estate, so there would be no
administrative cost to the Insurance Fund from the
liquidation of the association.
E:\FR\FM\18APN1.SGM
18APN1
Federal Register / Vol. 78, No. 75 / Thursday, April 18, 2013 / Notices
levels of risk in the remaining
association direct notes. Moreover,
because the bank loses a significant
source of revenue and capital, it might
not be able to increase the cost of funds
to the remaining associations to make
up for lost revenue while
simultaneously increasing their
investment requirement to remain
adequately capitalized. Without
providing assistance to the sizable
troubled association to prevent financial
contagion, other associations could fail
or the bank itself could fail, potentially
creating losses to the Insurance Fund. A
similar scenario could result with the
failure of several smaller associations
during a period of severe stress in
agriculture. A temporary cash infusion
to the bank could counteract the effects
of financial contagion, stabilize the
district, and help avoid a bank failure.
The Corporation would consider
structuring assistance so that it would
recoup the cost associated with
providing assistance. Therefore, if
indirect losses can be reasonably
estimated, the Corporation may consider
such losses in its least-cost test and
assistance determination.
The third step of the least-cost test is
to determine the type and amount of
assistance. The cost of providing
assistance will depend upon the
structure of the assistance. For example,
the Corporation’s purchase of distressed
assets from a troubled System
institution may cost the Insurance Fund
more than providing the institution a
loan with a repayment plan.27
Moreover, if other System institutions
are willing to contribute some of their
funds to the troubled System institution
to reduce the cost of providing
assistance, the Corporation will factor
this amount into its least-cost test and
assistance determination.
The final step in the least-cost test is
to compare the cost of liquidation to the
cost of providing assistance. If the cost
of providing assistance from the
Insurance Fund is less than the cost of
liquidating a troubled System
institution (to the Insurance Fund), the
Corporation’s Board of Directors, in its
discretion, may approve assistance to
the troubled System institution. As
required by statute, the Corporation
shall use the information it receives
during its least-cost determination to
evaluate the alternatives, document the
evaluation and the assumptions on
which the evaluation is based, and
retain the documentation for not less
than 5 years.
Matters concerning participation in civil
actions or proceedings or arbitration
Internal personnel rules and procedures
or matters affecting a particular
employee
*
*
*
*
*
PERSON TO CONTACT FOR INFORMATION:
Judith Ingram, Press Officer. Telephone:
(202) 694–1220.
Assistance Agreements
Shelley E. Garr,
Deputy Secretary of the Commission.
If the Corporation provides assistance,
it will enter into an agreement with the
System institution receiving assistance.
The terms and conditions of the
agreement will be determined on a caseby-case basis and may include limits on
(or prior approval of) the types or
amounts of activities the institution can
engage in while assistance is
outstanding. For example, assistance
agreements might include repayment
terms and limits on concentration risk,
patronage and dividend payments,
executive compensation, and certain
types of expenses. Assistance
agreements may also provide the
Corporation the right to have a
representative attend the institution’s
board meetings. Each assistance
agreement will be subject to the
Corporation’s Board of Directors’
approval. While assistance agreements
are outstanding, the Corporation will
use its examination authority to ensure
compliance with the agreement.
Moreover, the Corporation will require
the System institution receiving
assistance to certify and publicly
disclose compliance with the agreement
requirements, including the disclosure
of any instances of material
noncompliance with the agreement.
Dated: April 12, 2013.
Mary Alice Donner,
Acting Secretary to the Board, Farm Credit
System Insurance Corporation.
[FR Doc. 2013–09165 Filed 4–17–13; 8:45 am]
BILLING CODE 6710–01–P
FEDERAL ELECTION COMMISSION
Sunshine Act Meeting
Federal Election Commission.
& TIME: Tuesday, April 23, 2013 at
10:00 a.m.
PLACE: 999 E Street NW., Washington,
DC.
STATUS: This meeting will be closed to
the public.
ITEMS TO BE DISCUSSED:
Compliance matters pursuant to 2
U.S.C. 437g
Audits conducted pursuant to 2 U.S.C.
437g, 438(b), and Title 26, U.S.C.
AGENCY:
sroberts on DSK5SPTVN1PROD with NOTICES
27 In
the event the Corporation exercises its
discretion to provide assistance, in most cases
assistance would be provided to the funding bank,
regardless of whether the troubled System
institution is a bank or an association. For example,
the Corporation may provide the funding bank a
collateralized loan, purchase subordinated debt
from the funding bank, or enter into a loss-sharing
agreement with the funding bank to either restore
the funding bank or its affiliated association (or
both) to normal operations. If the assistance can be
structured with a repayment feature, it is likely to
be the least costly means of providing assistance of
all possible alternatives available to the
Corporation.
VerDate Mar<15>2010
18:54 Apr 17, 2013
Jkt 229001
23251
DATE
PO 00000
Frm 00048
Fmt 4703
Sfmt 4703
[FR Doc. 2013–09245 Filed 4–16–13; 4:15 pm]
BILLING CODE P
FEDERAL MARITIME COMMISSION
Notice of Agreements Filed
The Commission hereby gives notice
of the filing of the following agreements
under the Shipping Act of 1984.
Interested parties may submit comments
on the agreements to the Secretary,
Federal Maritime Commission,
Washington, DC 20573, within ten days
of the date this notice appears in the
Federal Register. Copies of the
agreements are available through the
Commission’s Web site (www.fmc.gov)
or by contacting the Office of
Agreements at (202)–523–5793 or
tradeanalysis@fmc.gov.
Agreement No.: 010979–054.
Title: Caribbean Shipowners
Association.
Parties: CMA CGM, S.A.; Seaboard
Marine, Ltd.; Seafreight Line, Ltd.;
Tropical Shipping and Construction
Company Limited; and Zim Integrated
Shipping Services, Ltd.
Filing Party: Wayne R. Rohde, Esq.;
Cozen O’Connor, 1627 I Street NW.,
Washington, DC 20006.
Synopsis: The amendment would add
King Ocean Services Limited as a party
to the agreement.
Agreement No.: 012204.
Title: ELJSA/Hanjin Shipping Slot
Exchange Agreement.
Parties: Evergreen Line Joint Service
Agreement and Hanjin Shipping.
Filing Party: Paul M. Keane, Esq.;
Cichanowicz, Callan, Keane, Vengrow &
Textor, LLP; 61 Broadway, Suite 3000,
New York, NY 10006–2802
Synopsis: The agreement authorizes
the parties to exchange space on each
other’s services in the trade between
China, Taiwan, and Vietnam, on the one
hand, and the U.S. West Coast, on the
other hand.
Agreement No.: 012205.
Title: ELJSA/COSCON Slot Exchange
Agreement.
Parties: Evergreen Line Joint Service
Agreement and Cosco Container Lines
Company Limited.
E:\FR\FM\18APN1.SGM
18APN1
]]>Agencies
[Federal Register Volume 78, Number 75 (Thursday, April 18, 2013)]
[Notices]
[Pages 23247-23251]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-09165]
=======================================================================
-----------------------------------------------------------------------
FARM CREDIT SYSTEM INSURANCE CORPORATION
Policy Statement Concerning Assistance
AGENCY: Farm Credit System Insurance Corporation.
ACTION: Policy statement.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit System Insurance Corporation (Corporation or
FCSIC) announces that it has given final approval to a new ``Policy
Statement Concerning Assistance,'' which replaces the Corporation's
existing ``Policy Statement Concerning Stand-Alone Assistance.'' The
new policy statement provides additional transparency concerning the
Corporation's authority to provide assistance and how the least-cost
test might be performed. This policy statement also includes enhanced
criteria of what is to be included in assistance proposals, and a new
section discussing assistance agreements.
DATES: Effective Date: The policy statement is effective on April 11,
2013.
FOR FURTHER INFORMATION CONTACT: Wade Wynn, Senior Risk Analyst, and
James M. Morris, General Counsel, Farm Credit System Insurance
Corporation, 1501 Farm Credit Drive, McLean, Virginia 22102, (703) 883-
4380, TDD (703) 883-4390.
SUPPLEMENTARY INFORMATION:
I. Background
The Corporation, in its sole discretion, is authorized under
section 5.61(a) of the Farm Credit Act of 1971, as amended (Act),\1\ to
provide assistance to a stand-alone Farm Credit System (System)
institution or to facilitate a merger or consolidation of a System
institution with another System institution,\2\ provided it meets the
statutory least-cost test.\3\ If the Corporation receives a request to
assist a troubled System institution, it must compare the cost of
liquidation to the cost of providing assistance to determine the least
costly alternative to the Farm Credit Insurance Fund (Insurance Fund).
In making this discretionary determination, the Corporation is
authorized under section 5.59(b) of the Act \4\ to gather any
information necessary from the troubled System institution or any other
System institution to perform the least-cost test. After gathering
pertinent information, the Corporation must: (1) Evaluate alternatives
on a present-value basis, using a reasonable discount rate, (2)
document the evaluation and the assumptions on which the evaluation is
based, and (3) retain the documentation for not less than 5 years.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 2277a-10.
\2\ Section 5.61(a) of the Act uses the terms ``insured System
bank'' and ``bank'' but the Act also specifies under section
5.61(e), 12 U.S.C. 2277a-10(e), that such terms also include
production credit associations and other associations making direct
loans under the authority provided under section 7.6 of the Act, 12
U.S.C. 2279b. Consequently, the terms ``troubled System
institution,'' ``troubled System bank,'' or ``troubled System
association'' are used to refer to those institutions specified in
sections 5.61(a) and 5.61(e) of the Act, 12 U.S.C. 2277a-10(a) and
2277a-10(e).
\3\ The least-cost test is the means of determining the least-
cost resolution. Section 5.61(a)(3)(A) states, ``Assistance may not
be provided[hellip]unless the means of providing the assistance is
the least costly means of providing the assistance by the Farm
Credit Insurance Fund of all possible alternatives available to the
Corporation, including liquidation of the bank (including paying the
insured obligations issued on behalf of the bank).'' See Act,
section 5.61(a)(3), 12 U.S.C. 2277a-10(a)(3).
\4\ 12 U.S.C. 2277a-8(b).
---------------------------------------------------------------------------
The Corporation's ``Policy Statement Concerning Stand-Alone
Assistance'' is, for the most part, a summary of the powers of the
Corporation under section 5.61(a) of the Act to provide assistance to a
troubled System institution, including the timing and steps for making
the least-cost test.\5\ For example, the policy specifies that the
Corporation's Board of Directors must determine that providing
assistance is the least costly means of all possible alternatives
available to the Corporation, including liquidation of the troubled
System institution, and lists the steps for conducting the statutory
least-cost test. The existing policy statement also provides a list of
criteria of what the Corporation expects to receive in assistance
proposals to help the Corporation conduct the least-cost test.
---------------------------------------------------------------------------
\5\ 12 U.S.C. 2277a-10.
---------------------------------------------------------------------------
II. Comments on the Draft Policy Statement
On June 21, 2012, the Corporation published for comment a draft
``Policy Statement Concerning Assistance to Troubled Farm Credit System
Institutions'' to replace the Corporation's existing ``Policy Statement
Concerning Stand-Alone Assistance.'' \6\ The Corporation received two
comment letters on the draft policy statement. In brief, both
commenters are concerned that the Corporation will not consider a
request for assistance until after all other resolution alternatives
are exhausted, including resolution alternatives available to the Farm
Credit Administration (FCA). Both also commented on the least-cost test
as it relates to the cost of liquidating a troubled System institution.
Each of these areas is addressed below.
---------------------------------------------------------------------------
\6\ See 77 FR 37399 (June 21, 2012). On July 26, 2012, the
Corporation extended the comment period 90 days in response to
several commenter requests. See 77 FR 45606 (August 1, 2012).
---------------------------------------------------------------------------
A. Resolution Alternatives
In the first sentence of the draft policy statement, the
Corporation stated that, in general, it would consider a request for
assistance after other resolution alternatives have been exhausted such
as voluntary assistance provided from within the System, voluntary
merger with one or more System institutions, or involuntary merger with
one or
[[Page 23248]]
more System institutions as determined by the FCA.\7\ Both commenters
agree that it is reasonable to expect System institutions to engage in
self-help mechanisms before requesting assistance from the Corporation,
particularly within a district that is experiencing financial stress.
They also note that the FCA has authority to resolve troubled System
institutions either through involuntary mergers or direct transfer of
funds of capital among System institutions.\8\ They express concern
that the Corporation will not consider a request for assistance until
after the FCA has exercised its authority to resolve troubled System
institutions.\9\
---------------------------------------------------------------------------
\7\ The Act provides authority for Farm Credit banks to merge
with other Farm Credit banks and Farm Credit associations to merge
with other Farm Credit associations. See Act, Title VII.
\8\ Under section 4.12(a) of the Act, 12 U.S.C. 2183(a), FCA has
authority to require that a System association merge with another
association if it has failed to meet its outstanding obligations or
failed to conduct its operations in accordance with the Act. Under
section 5.17(a) of the Act, 12 U.S.C. 2252(a), FCA has authority to
require two or more System banks to merge if the FCA determines that
one of the banks has failed to meet its outstanding obligations. The
commenters also referred to 12 CFR 611.1130 which states, ``Section
5.17(a)(6) of the Act authorizes the FCA to regulate the borrowing,
repayment, and transfer of funds and equities between institutions
of the System, including banks, associations, and service
organizations organized under the Act.''
\9\ For example, the commenters state that the draft policy
statement ``appears to establish a vague expectation for the
exhaustion of resolution alternatives in a manner that essentially
forces other System institutions to provide involuntary assistance
through FCA regulatory action,'' which may result in ``a de-facto
joint and several financial call'' from other System institutions.
---------------------------------------------------------------------------
In response to these comments, the Corporation is removing the
language on ``other resolution alternatives'' that the commenters found
troubling. To clarify, FCA action is not a necessary precondition for
the Corporation to consider a request for assistance to a troubled
System institution. The essential precondition for the Corporation to
consider providing assistance is the receipt of a request for
assistance and an assistance proposal. As explained in the final policy
statement, a request for assistance can be initiated either directly
from a troubled System institution or from other System institutions
seeking to acquire or assist a troubled System institution. If the
Corporation determines it is appropriate based on the facts and
circumstances surrounding the request, the Corporation will provide
System institutions the opportunity to submit information related to
the request.
B. Least-Cost Test
In the draft policy statement, the Corporation stated that it would
conduct a least-cost test to determine whether the cost of providing
assistance to a troubled System institution is less costly to the
Insurance Fund than a liquidation of the institution. In brief, the
Corporation would review the assistance proposal and gather any
additional information necessary to estimate the cost of liquidation.
Once this estimate has been computed, the Corporation would determine
the cost and type of assistance. The Corporation would then compare the
cost of providing assistance to the cost of liquidation to make its
least-cost determination.
The draft policy statement also describes the complexity of
conducting a least-cost test. For example, the Corporation describes a
scenario where a sizable association is failing. The liquidation of the
large association might not have an immediate impact on the funding
bank's ability to continue meeting its insured obligations, but the
effect of the liquidation could create significant disruption through a
district that could threaten the bank's ability to continue as a going
concern. Without assistance from the Corporation, the bank might
eventually fail, creating greater losses to the Insurance Fund.
The Corporation received two comments on the least-cost test
discussion. Both commenters generally agree with the principles behind
the least-cost determination, specifically the discussion of
considering the full impact on the Insurance Fund over time. However,
the commenters also reference a separate document titled a ``Least-Cost
Test Example'' that the Corporation shared publicly as an example of
how the least-cost test might be performed if the troubled System
institution was an association. In general, the commenters believed the
assumptions used in this example were too optimistic.\10\
---------------------------------------------------------------------------
\10\ For example, the commenters believed that some of the
recovery levels employed in the example were too high and that the
example did not entirely reflect all the costs associated with a
receivership.
---------------------------------------------------------------------------
In response to these comments, it appears the commenters
misunderstood the purpose of the Least-Cost Test Example. The
Corporation created this example as part of its fact-gathering process
in the development phase of the draft policy statement; the example
itself is not a part of the draft policy statement.\11\ It also appears
the commenters misunderstand the ``cost of liquidation'' as it relates
to the Insurance Fund. For example, the commenters identify certain
``indirect costs'' that may result from placing a troubled System
institution into receivership. While these indirect costs may adversely
affect other System institutions or the System as a whole, it is
unclear that these costs would create losses to the Insurance Fund. For
the Corporation to approve assistance, there must be a reasonable basis
to conclude that the assistance would prevent a more costly loss to the
Insurance Fund as a result of indirect losses.
---------------------------------------------------------------------------
\11\ The commenters recognized this distinction but appeared to
want the Corporation to consider more least-cost test examples. The
Corporation agrees with the commenters that the example was not
complicated and may not have exhaustively considered all
possibilities and costs associated with liquidating a troubled
System association. The Corporation could have created a more
complex example but this was not necessary to advance the discussion
and gather general information to update its policy statement. In
reality, the value of assets and costs associated with a
receivership could widely fluctuate based on numerous factors at the
time of liquidation such as the condition of the agricultural sector
and general economy, the condition of the System institution being
liquidated, the condition and extent to which other System
institutions could provide their own assistance to the troubled
System association, the unique characteristics of the asset
portfolio, the potential pool of bidders at the time of liquidation,
and so forth.
---------------------------------------------------------------------------
In view of the comments received, the Corporation is substantially
revising the least-cost test discussion of the final ``Policy Statement
Concerning Assistance'' to provide greater clarity concerning the
``cost of liquidation'' as it relates to the Insurance Fund. Since the
Insurance Fund's primary purpose is to insure the timely payment of
principal and interest on System bank insured debt obligations, it is
clear that a loss to the Insurance Fund occurs when a System bank
defaults on an insured debt obligation, and the Corporation must use
the Insurance Fund to pay the obligation. In making the least-cost
determination, the Corporation must be able to reasonably estimate
whether the troubled System institution's failure will impair a bank's
ability to pay its insured debt obligations, creating losses to the
Insurance Fund. The final policy statement provides guidance for how
the Corporation might reasonably estimate costs to either resolve a
troubled System institution or stem financial contagion within the
System.
After considering all comments received, the Corporation has given
final approval to the ``Policy Statement Concerning Assistance,'' with
changes. The existing ``Policy Statement Concerning Stand-Alone
Assistance'' is withdrawn. The text of the final ``Policy
[[Page 23249]]
Statement Concerning Assistance'' is set out below in its entirety:
Farm Credit System Insurance Corporation
Policy Statement Concerning Assistance
Background
The Farm Credit System Insurance Corporation (Corporation), in its
sole discretion, is authorized under section 5.61(a) of the Farm Credit
Act of 1971, as amended (Act), 12 U.S.C. 2277a-10(a), to provide, on
such terms and conditions as the Corporation's Board of Directors may
prescribe: (1) Stand-alone assistance in the form of loans, asset or
debt security purchases, assumption of liabilities, or contributions:
(a) To prevent the placing of the institution \12\ into receivership,
(b) to restore the institution to normal operation, or (c) to reduce
the risk to the Corporation posed by the institution when severe
financial conditions threaten the stability of a significant number of
other System institutions or System institutions possessing significant
financial resources; or (2) Assistance to facilitate a merger or
consolidation of a ``qualifying'' \13\ troubled System institution with
another System institution through loans, loan guarantees, asset or
debt security purchases, assumption of liabilities, contributions, or
any combination thereof.\14\
---------------------------------------------------------------------------
\12\ Section 5.61(a) of the Act uses the terms ``insured System
bank'' and ``bank'' but the Act also specifies under section
5.61(e), 12 U.S.C. 2277a-10(e), that such terms also include
production credit associations and other associations making direct
loans under the authority provided under section 7.6 of the Act, 12
U.S.C. 2279b. Consequently, the terms ``troubled System
institution,'' ``troubled System bank,'' or ``troubled System
association'' are used to refer to those institutions specified in
sections 5.61(a) and 5.61(e) of the Act, 12 U.S.C. 2277a-10(a) and
2277a-10(e).
\13\ ``Qualifying'' means the troubled System institution is:
(1) In receivership, (2) in danger of being placed in receivership,
or (3) an institution that, when severe financial conditions exist
that threaten the stability of a significant number of System
institutions or of System institutions possessing significant
financial resources, requires assistance to lessen the risk to the
Corporation posed by such System institution under such threat of
instability. See Act, section 5.61(a)(2)(B), 12 U.S.C. 2277a-
10(a)(2)(B).
\14\ The Corporation is not authorized to purchase voting stock
from the troubled System institution. See Act, section
5.61(a)(3)(F), 12 U.S.C. 2277a-10(a)(3)(F).
---------------------------------------------------------------------------
If the Corporation receives a request for assistance, it must
compare the cost of liquidation to the cost of providing assistance to
determine the least costly alternative to the Insurance Fund.\15\ In
making this discretionary determination, the Corporation is authorized
to gather any information necessary to perform the least-cost test.\16\
After gathering all pertinent information, the Corporation must: (1)
Evaluate alternatives on a present-value basis, using a reasonable
discount rate, (2) document the evaluation and the assumptions on which
the evaluation is based, and (3) retain the documentation for not less
than 5 years.\17\
---------------------------------------------------------------------------
\15\ The cost of liquidation shall be made as of the earliest
of: (I) The date on which a conservator is appointed for the
institution, (II) the date on which a receiver is appointed for the
institution, or (III) the date on which the Corporation makes any
determination to provide assistance to the institution. See Act,
section 5.61(a)(3)(C), 12 U.S.C. 2277a-10(a)(3)(C).
\16\ See Act, sections 5.58(8) and 5.59, 12 U.S.C. 2277a-7(8)
and 2277a-8. The Corporation will accord such other System
institutions as the Corporation determines to be appropriate the
opportunity to submit information relating to the determination. See
Act, section 5.61(a)(3)(A), 12 U.S.C. 2277a-10(a)(3)(A).
\17\ See Act, section 5.61(a)(3)(B), 12 U.S.C. 2277a-
10(a)(3)(B). In addition, in regards to requests for stand-alone
assistance, the Corporation must evaluate the adequacy of managerial
resources of the troubled System institution. The Corporation is
authorized to determine the continued service of any director or
senior ranking officer who serves in a policymaking role for the
assisted System institution as a condition of approving assistance.
See Act, section 5.61(a)(3)(D), 12 U.S.C. 2277a-10(a)(3)(D).
---------------------------------------------------------------------------
Policy Statement
The Corporation will consider a request for assistance to a
troubled System institution under section 5.61(a) of the Act, 12 U.S.C.
2277a-10(a), upon receipt of an assistance proposal. An assistance
proposal can be submitted either directly from a troubled System
institution, from other System institutions seeking to acquire or
assist a troubled System institution, or from the System banks to stem
a liquidity crisis. Upon receipt of an assistance proposal, if the
Corporation determines it is appropriate based on the facts and
circumstances surrounding the request, the Corporation will provide
System institutions the opportunity to submit any information,
including information on the cost to the Farm Credit Insurance Fund
(Insurance Fund) of a liquidation.\18\ The Corporation will then
conduct a least-cost test to determine whether the cost of providing
assistance is less costly to the Insurance Fund than the cost of
liquidating a System institution. If the cost of providing assistance
is less than the cost of liquidation to the Insurance Fund, and the
Corporation, in its sole discretion, approves assistance, the
Corporation will enter into an agreement with the System institution
receiving assistance.
---------------------------------------------------------------------------
\18\ The Corporation will determine which System institutions
will provide this information.
---------------------------------------------------------------------------
Assistance Proposals
A System institution requesting assistance must submit a proposal
to the Corporation. If the proposal is for stand-alone assistance, the
proposal must provide justification for the assistance, including a
detailed analysis of how such assistance will return the troubled
System institution to a financially viable, self-sustaining operation.
If the proposed assistance is to facilitate a merger, the proposal must
demonstrate that the continuing System institution can safely and
soundly absorb the financial and operational impact that will result
from the merger. Moreover, the Corporation would consider FCA's
preliminary approval of the proposed merger, pending the least-cost
determination to provide assistance. If a System institution or group
of System institutions submits an assistance proposal to resolve a
troubled System institution or stem a liquidity crisis or financial
contagion within the System, the proposal must contain sufficient
information to demonstrate how the Corporation's assistance would be
less costly to the Insurance Fund than liquidating the troubled System
institution(s).
Assistance proposals must contain information to help the
Corporation compare the cost of providing assistance to the cost of
liquidating the troubled System institution as part of its least-cost
determination. Assistance proposals can include requests for loans,
loan guarantees, loss-sharing arrangements, asset or debt security
purchases, assumption of liabilities, or cash contributions. The
Corporation will consider the nature of the financial assistance
requested on a case-by-case basis and may alter the form or amount of
assistance as part of its determination. The Corporation has identified
the following minimum criteria to be included in a request for
assistance and assistance proposals:
(1) Financial condition and performance criteria to better
understand the problem that caused the need for assistance, including
the rationale for seeking assistance;
(2) The type and amount of assistance needed, as well as a
reasonable repayment plan. Assistance proposals must include fee
arrangements with attorneys, accountants, consultants, and other
parties incident to the request for assistance (or projected costs for
these arrangements). The Corporation would not acquire or service
assets without a strong justification;
(3) Reasonable projections to assess the future viability of the
institution after assistance has been provided. This
[[Page 23250]]
would include earnings projections and a capital restoration plan to
achieve adequate capitalization. Earnings projections and the capital
restoration plan must include the impact of repayment of assistance;
(4) A business plan that would implement written policies and
procedures designed to guide operations safely and soundly and to
correct the problems that caused the need for assistance. The plan must
include an internal control system to monitor ongoing performance with
measurable criteria. The plan must also include an operating budget,
including compensation arrangements covering directors and senior
officers. Plans to continue the service and compensation of directors
and senior officers must be pre-approved by the Corporation before it
provides assistance and until assistance is repaid; and
(5) Analysis of the effect of assistance on shareholders, uninsured
creditors (e.g., impairment on subordinated debt), other System
institutions and the financial markets. If the troubled System
institution is an association, the analysis must include the impact on
its funding bank's ability to continue meeting its insured obligations.
The Corporation reserves the right to request additional
information as needed to conduct the least-cost test.
The Least-Cost Test
The Corporation will conduct a least-cost test to determine whether
providing assistance to a troubled System institution is less costly to
the Insurance Fund than liquidating the institution. The first step of
the least-cost test is to determine the estimated liquidation value of
the troubled System institution.\19\ In making this determination, the
Corporation shall use its examination authority under section 5.59(b)
of the Act, 12 U.S.C. 2277a-8(b), to collect information from the
troubled System institution to calculate the estimated liquidation
value of the troubled System institution.\20\ This information shall,
at a minimum, include specific data elements as determined by
Corporation staff to conduct a present-value analysis of the troubled
System institution's assets, using a reasonable discount rate. As
required by the Act, the troubled System institution must provide the
Corporation all information necessary to perform a least-cost
determination.
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\19\ This value is computed by subtracting the present-value of
the institution's liabilities from its assets. Liabilities include
estimated resolution expenses.
\20\ The Corporation will request that FCA examiners collect the
information.
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The second step of the least-cost test is for the Corporation to
reasonably estimate whether the liquidation of the troubled System
institution(s) creates a loss to the Insurance Fund. Since the
Insurance Fund has been primarily established to insure the timely
payment of principal and interest on System bank insured debt
obligations,\21\ a loss to the Insurance Fund occurs when a System bank
defaults on an insured obligation, and the Corporation must use the
Insurance Fund to pay the obligation.\22\ Accordingly, to meet the
least-cost test, the Corporation must be able to reasonably estimate
whether the troubled System institution's failure will impair a bank's
ability to pay its insured debt obligations.
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\21\ See section 5.60(c)(1) of the Act, 12 U.S.C. 2277a-9(c)(1),
which states, in part, ``The Corporation shall expend amounts in the
Insurance Fund to the extent necessary to insure the timely payment
of interest and principal on insured obligations.''
\22\ This assumes that no other System institution is willing to
voluntarily assist the defaulting bank to avoid a payout from the
Insurance Fund.
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A loss to the Insurance Fund may result from direct and/or indirect
losses. Direct losses include the estimated losses to the Insurance
Fund from the liquidation of a troubled System institution. Indirect
losses to the Insurance Fund include the consequent effects of
liquidating a troubled System institution. For example, if the troubled
System institution is a bank, there is a direct loss to the Insurance
Fund if the Corporation reasonably estimates that the net present value
of the bank's assets \23\ is less than its insured debt
obligations.\24\ If the Corporation can reasonably estimate that the
liquidation of a troubled System bank subsequently causes one or more
of the remaining System banks to default on insured debt obligations,
there is an indirect loss to the Insurance Fund. Direct losses to the
Insurance Fund can be reasonably estimated by the Corporation, but
indirect losses to the Insurance Fund may be difficult for the
Corporation to reasonably estimate. Consequently, it will be incumbent
upon the remaining System banks to provide the Corporation with
sufficient information and analysis to demonstrate that indirect losses
to the Insurance Fund will result from the bank liquidation. For
example, when a severe financial crisis exists, a System bank
liquidation might cause the remaining System banks to be shut out of
the debt market.\25\ In a less extreme scenario, a System bank
liquidation might substantially increase the cost of funds to the
remaining System banks. In either scenario, for indirect costs to be
considered, the Corporation must have sufficient information so that it
can reasonably estimate the indirect loss associated with the bank
liquidation. If indirect losses can be reasonably estimated, the
Corporation may consider such losses in its least-cost test and
assistance determination.
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\23\ The net present value of bank assets is the estimated
present value of bank assets at liquidation less estimated payments
to creditors with a higher priority of claims than insured debt
obligations and estimated resolution expenses.
\24\ Conversely, there is no direct loss to the Insurance Fund
if the Corporation reasonably estimates that the net present value
of the bank's assets at liquidation is greater than its insured debt
obligations.
\25\ In a liquidity crisis situation, the Corporation would work
with the System banks to ensure the Insurance Fund was used to
protect investors in insured debt obligations.
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If the troubled System institution is an association, the
Corporation must be able to reasonably estimate that the troubled
System association's failure causes a loss to the Insurance Fund for
there to be a basis for providing assistance. The funding bank would
need to provide the Corporation with information to support the
association request for assistance. If the Corporation reasonably
estimates that the net present value of the association's assets \26\
is less than the amount of its direct note with its funding bank, there
would be a loss to the bank. If the Corporation reasonably estimates
that the funding bank can sufficiently absorb this loss, there would be
no loss to the Insurance Fund and, consequently, no basis for the
Corporation to provide assistance to the troubled System association.
However, if the Corporation reasonably estimates that the loss on the
direct note is significant enough that the funding bank may default on
its insured debt obligations, the Corporation may provide assistance to
the troubled System association.
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\26\ The net present value of association assets is the
estimated present value of association assets at liquidation less
estimated payments to creditors with higher priority of claims than
the funding bank and estimated resolution expenses. In most cases,
receivership expenses will be paid out of the receivership estate,
so there would be no administrative cost to the Insurance Fund from
the liquidation of the association.
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Moreover, if a sizable System association fails, or several smaller
System associations fail, it is also possible that indirect losses to
the Insurance Fund may result from association liquidations. For
example, the liquidation of a considerable amount of agricultural loans
in a relatively short period of time may cause a general decline in
loan and collateral values throughout the district, creating higher
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levels of risk in the remaining association direct notes. Moreover,
because the bank loses a significant source of revenue and capital, it
might not be able to increase the cost of funds to the remaining
associations to make up for lost revenue while simultaneously
increasing their investment requirement to remain adequately
capitalized. Without providing assistance to the sizable troubled
association to prevent financial contagion, other associations could
fail or the bank itself could fail, potentially creating losses to the
Insurance Fund. A similar scenario could result with the failure of
several smaller associations during a period of severe stress in
agriculture. A temporary cash infusion to the bank could counteract the
effects of financial contagion, stabilize the district, and help avoid
a bank failure. The Corporation would consider structuring assistance
so that it would recoup the cost associated with providing assistance.
Therefore, if indirect losses can be reasonably estimated, the
Corporation may consider such losses in its least-cost test and
assistance determination.
The third step of the least-cost test is to determine the type and
amount of assistance. The cost of providing assistance will depend upon
the structure of the assistance. For example, the Corporation's
purchase of distressed assets from a troubled System institution may
cost the Insurance Fund more than providing the institution a loan with
a repayment plan.\27\ Moreover, if other System institutions are
willing to contribute some of their funds to the troubled System
institution to reduce the cost of providing assistance, the Corporation
will factor this amount into its least-cost test and assistance
determination.
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\27\ In the event the Corporation exercises its discretion to
provide assistance, in most cases assistance would be provided to
the funding bank, regardless of whether the troubled System
institution is a bank or an association. For example, the
Corporation may provide the funding bank a collateralized loan,
purchase subordinated debt from the funding bank, or enter into a
loss-sharing agreement with the funding bank to either restore the
funding bank or its affiliated association (or both) to normal
operations. If the assistance can be structured with a repayment
feature, it is likely to be the least costly means of providing
assistance of all possible alternatives available to the
Corporation.
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The final step in the least-cost test is to compare the cost of
liquidation to the cost of providing assistance. If the cost of
providing assistance from the Insurance Fund is less than the cost of
liquidating a troubled System institution (to the Insurance Fund), the
Corporation's Board of Directors, in its discretion, may approve
assistance to the troubled System institution. As required by statute,
the Corporation shall use the information it receives during its least-
cost determination to evaluate the alternatives, document the
evaluation and the assumptions on which the evaluation is based, and
retain the documentation for not less than 5 years.
Assistance Agreements
If the Corporation provides assistance, it will enter into an
agreement with the System institution receiving assistance. The terms
and conditions of the agreement will be determined on a case-by-case
basis and may include limits on (or prior approval of) the types or
amounts of activities the institution can engage in while assistance is
outstanding. For example, assistance agreements might include repayment
terms and limits on concentration risk, patronage and dividend
payments, executive compensation, and certain types of expenses.
Assistance agreements may also provide the Corporation the right to
have a representative attend the institution's board meetings. Each
assistance agreement will be subject to the Corporation's Board of
Directors' approval. While assistance agreements are outstanding, the
Corporation will use its examination authority to ensure compliance
with the agreement. Moreover, the Corporation will require the System
institution receiving assistance to certify and publicly disclose
compliance with the agreement requirements, including the disclosure of
any instances of material noncompliance with the agreement.
Dated: April 12, 2013.
Mary Alice Donner,
Acting Secretary to the Board, Farm Credit System Insurance
Corporation.
[FR Doc. 2013-09165 Filed 4-17-13; 8:45 am]
BILLING CODE 6710-01-P
