Federal Agricultural Mortgage Corporation Funding and Fiscal Affairs; Risk-Based Capital Requirements, 3647-3656 [2010-1205]

Agencies

• Farm Credit Administration

[Federal Register Volume 75, Number 14 (Friday, January 22, 2010)]
[Proposed Rules]
[Pages 3647-3656]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-1205]


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FARM CREDIT ADMINISTRATION

12 CFR Part 652

RIN 3052-AC51


Federal Agricultural Mortgage Corporation Funding and Fiscal 
Affairs; Risk-Based Capital Requirements

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, Agency, us, or we) 
proposes to amend our regulations on the Risk-Based Capital Stress Test 
(RBCST or model) used by the Federal Agricultural Mortgage Corporation 
(Farmer Mac or the Corporation). We propose to update the model to 
address recent additions to Farmer Mac's program authorities, 
specifically the authority for Farmer Mac to finance rural utility 
loans. We are also proposing to revise the existing treatment of risk 
mitigations of general obligations for the AgVantage Plus program and 
related structures, as established in Version 3.0 of the model. 
Finally, we propose revising the treatment of counterparty risk on non-
program investments in the model by adjusting the haircuts applied to 
those investments to keep the model consistent with statutory 
requirements for calculating Farmer Mac's regulatory minimum capital 
level.

DATES: You may send us comments by March 8, 2010.

ADDRESSES: We offer a variety of methods for you to submit comments on 
this proposed rule. For accuracy and efficiency reasons, commenters are 
encouraged to submit comments by e-mail or through the Agency's Web 
site. As facsimiles (fax) are difficult for us to process and achieve 
compliance with section 508 of the Rehabilitation Act, we are no longer 
accepting comments submitted by fax. Regardless of the method you use, 
please do not submit your comment multiple times via different methods. 
You may submit comments by any of the following methods:

[[Page 3648]]

     E-mail: Send us an e-mail at reg-comm@fca.gov.
     FCA Web site: https://www.fca.gov. Select ``Public 
Commenters,'' then ``Public Comments,'' and follow the directions for 
``Submitting a Comment.''
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Joseph T. Connor, Associate Director for Policy and 
Analysis, Office of Secondary Market Oversight, Farm Credit 
Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.
    You may review copies of all comments we receive at our office in 
McLean, Virginia, or on our Web site at https://www.fca.gov. Once you 
are in the Web site, select ``Public Commenters,'' then ``Public 
Comments,'' and follow the directions for ``Reading Submitted Public 
Comments.'' We will show your comments as submitted, but for technical 
reasons we may omit items such as logos and special characters. 
Identifying information that you provide, such as phone numbers and 
addresses, will be publicly available. However, we will attempt to 
remove e-mail addresses to help reduce Internet spam.

FOR FURTHER INFORMATION CONTACT:

Joseph T. Connor, Associate Director for Policy and Analysis, Office of 
Secondary Market Oversight, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4280, TTY (703) 883-4434; or
Laura McFarland, Senior Counsel, Office of the General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-4020.

SUPPLEMENTARY INFORMATION:

I. Objective

    The objective of this proposed rule is to ensure that the RBCST for 
Farmer Mac continues to determine regulatory capital requirements in a 
manner that remains consistent with statutory requirements.

II. Background

    Farmer Mac is a stockholder-owned instrumentality of the United 
States, chartered by Congress to establish a secondary market for 
agricultural real estate, rural housing mortgage loans, and rural 
utility loans as well as to facilitate capital markets funding for 
USDA-guaranteed farm program and rural development loans. Farmer Mac's 
Class C non-voting and Class A voting common stocks are listed on the 
New York Stock Exchange under the symbols AGM and AGM.A, respectively. 
FCA, an independent agency in the executive branch of the Federal 
Government, is the safety and soundness regulator of Farmer Mac. FCA 
regulates Farmer Mac through the Office of Secondary Market Oversight 
(OSMO).
    Section 5406 of the Food, Conservation and Energy Act of 2008 (2008 
Farm Bill) \1\ amended the definition of ``qualified loan'' in Title 
VIII of the Farm Credit Act of 1971, as amended, (Act) \2\ to include 
rural utility loans. This change gave Farmer Mac the authority to 
purchase and guarantee securities backed by loans to rural electric and 
telephone utility cooperatives as program business. The 2008 Farm Bill 
further directed FCA to estimate the credit risk on the portfolio 
covered by this new authority at a rate of default and severity 
reasonably related to the risks in rural electric and telephone 
facility loans.
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    \1\ Pub. L. 110-246, 122 Stat. 1651 (June 18, 2008) (repealing 
and replacing Pub. L. 110-234).
    \2\ Public Law 92-181, 85 Stat. 583 (December 10, 1971).
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    The existing RBCST (Version 3.0) for Farmer Mac is contained in 
subpart B of part 652,\3\ and is used to determine the minimum level of 
regulatory capital Farmer Mac must hold to maintain positive capital 
during a 10-year period, as characterized by stressful credit and 
interest rate conditions. Version 3.0 of the RBCST was developed 
according to the provisions of section 8.32 of the Act before Farmer 
Mac was given rural utility authority and thus lacks a component to 
directly recognize the credit risk on such loans.\4\ At the time of the 
Farm Bill's enactment, Farmer Mac held approximately $1.3 billion of 
such loans in its non-program investment portfolio. At the end of the 
first quarter 2009, Farmer Mac held $1.4 billion in loans to rural 
electric cooperatives in its program loan portfolio.
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    \3\ 73 FR 31937 (June 5, 2008).
    \4\ FCA currently treats Farmer Mac's portfolio investments in 
rural utility loans as non-program investments.
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    Based on the provisions of the 2008 Farm Bill, we are proposing to 
amend the RBCST (Version 3.0) to account for Farmer Mac's new authority 
to finance rural electric and telephone utility cooperatives. We are 
also proposing to address the existing adjustment factors for 
recognizing the risk-mitigating effects of an issuer's general 
obligation to Farmer Mac by applying increases (or ``haircuts'') to the 
historical default rates by whole-letter credit rating. In our rule 
published in June 2008, we established a method to recognize the risk-
mitigating effects of the issuer's general obligation to Farmer Mac 
under the product referred to as ``AgVantage Plus.'' \5\ RBCST Version 
3.0 recognized the risk mitigation provided by the general obligation 
by reducing the age-adjusted dollar losses estimated on the subject 
loans by a General Obligation Adjustment (GOA) factor derived from 
average historical default rates of corporate bond issuers with similar 
whole-letter credit ratings as reported by a nationally recognized 
statistical rating organization (NRSRO).\6\ We now propose to apply 
stress generally to the current GOA factors and to further discount 
them to recognize the level of concentration risk associated with an 
individual counterparty's general obligation.
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    \5\ AgVantage Plus is a program created by Farmer Mac in 2006 to 
provide guarantees on timely repayment of principal and interest on 
notes issued by the counterparty. The notes are secured by 
obligations of issuer, which obligations are, in turn, backed by 
Farmer Mac eligible loan assets.
    \6\ Emery, K., Ou. S., Tennant, J., Matos, A., Cantor, R. 
``Corporate Default and Recovery Rates, 1920-2008,'' published by 
Moody's Investors Service, February 2009; Default Rates, page 31, 
Recovery Rates (Severity Rate--1 minus Senior Unsecured Average 
Recovery Rate), page 26.
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    We are also proposing conforming changes to the haircuts on non-
program investments. Our existing rule applies a method to account for 
counterparty risk on non-program investments by applying a discount (or 
``haircut'') to the yields of non-program investments, scaled according 
to average credit ratings, with a 10-year phase-in. We are proposing 
modifications to the haircut levels applied to non-program investments 
to increase the severity of the haircuts.

III. Section-by-Section Analysis

    The purpose of this proposed rule is to revise the risk-based 
capital regulations that apply to Farmer Mac to reflect changes in 
Farmer Mac's financing authorities, operations, and business practices. 
The issues addressed in this proposed rule include: (1) Treatment of 
program loan volume in the rural utility cooperative sector; (2) 
modification of the GOA factors (initially established in RBCST Version 
3.0) to reflect greater prudence in the assumptions regarding the 
relationship between risk and pricing of Farmer Mac's exposure to 
certain structures known as ``AgVantage Plus'' and other similar 
arrangements that may arise in the future; and (3) modification of 
haircuts on non-program investments to retain consistency with the risk 
levels recognized by whole-letter rating category in the proposed 
modifications to GOA factors discussed in item ``2'' above. We refer to 
the version of the model proposed here as ``Version 4.0 (proposed).''

[[Page 3649]]

A. Credit Loss Estimation on Rural Utility Loans [Sec. Sec.  652.50 and 
652.65(b); Appendix A to Part 652]

1. Guarantee Fee
    We propose to amend Sec.  652.50 by adding a definition for 
guarantee fees charged on rural utility loans to distinguish treatment 
of these fees from those assessed against all other loans guaranteed by 
Farmer Mac. Guarantee fees are made up of Farmer Mac's estimate of 
likely long-term average annual losses on the investment, plus fee 
loads to cover operating costs and return-on-equity requirements. 
Section 8.10 of the Act establishes a limit on the guarantee fees 
Farmer Mac may charge, but the 2008 Farm Bill, when establishing the 
authority for Farmer Mac to deal in rural utility loans as program 
business, stated that this authority be handled in a manner reasonably 
related to the risks specific to rural utility loans. Based on this, we 
propose adding a ``rural utility guarantee fee'' definition to Sec.  
652.50 to clarify that rural utility guarantee fees are distinguished 
from those guarantee fees discussed in section 8.10 of the Act. Unlike 
all other fees under section 8.10 of the Act, we propose that the model 
use rural utility guarantee fees as a component of its loss estimation 
calculation. We also propose that the definition differentiate between 
on-balance sheet and off-balance sheet rural utility volume to 
recognize that on-balance sheet guarantee fee rates may need to be 
imputed from Farmer Mac's earnings spread, while off-balance sheet 
guarantee fee rates would always be contractually explicit. In each 
case, the intent is to isolate the earnings rate on the volume. In 
structuring the definition in this manner, we want to be clear that 
whether that earnings rate an explicitly set guarantee fee in a 
contract or not, we would apply the proposed credit risk multiple to 
Farmer Mac's net cash flow rate, i.e., either the contractual guarantee 
fee rate (in the case of off-balance sheet rural utility exposure) or 
Farmer Mac's earnings spread (in the case of on-balance sheet rural 
utility exposure). The earnings spread is the in-coming cash flow rate 
(as a percent of outstanding principal) minus Farmer Mac's total 
funding rate on that volume.
    As a conforming technical change, we propose amending sections 
1.0.a., 4.1.b., 4.2.b.(2), and 4.2.b.(3) of the model in Appendix A of 
part 652 to add rural utility guarantee fees.
2. Credit Risk
    We propose to amend the model in Appendix A of part 652 to include 
rural utility program volume. We propose clarifying the applicability 
of individual sections of the model to the rural utility portfolio. We 
also propose adding new sections 2.6, 4.1.e., and 4.3.e. to calculate 
losses for rural utility loans. This proposed rule applies a stylized 
approach to characterizing credit risk for rural utility program volume 
by multiplying the dollar-weighted average rural utility guarantee fee 
by a factor of two to characterize average annual loss rates. A data 
set suitable to build a reliable default probability loss function was 
not available due to the fact that historical losses in the electric 
cooperative sub-sector of the utilities industry have been extremely 
rare.\7\ The industry is characterized by low frequency of default and 
instances of default appear largely unrelated to specific underwriting 
decisions. Further, even among that small proportion of historical 
instances of nonperforming loans in the data we obtained, restructured 
credit defaults have in many instances become more profitable with 
deferred obligations carried at accumulating rates higher than the loan 
interest rates. For that reason, an empirical frequency-based analog 
for estimating credit risk, as was used to arrive at the model's 
approach to estimating agricultural loan risks, is not feasible.\8\
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    \7\ In evaluating the suitability of empirical data sources, we 
examined historical loan performance data of the U.S. Department of 
Agriculture's (USDA) loan programs and interviewed market 
participants including the National Rural Utility Cooperative 
Financing Corporation, CoBank, and USDA's Rural Utility Service.
    \8\ For a detailed explanation of the empirical frequency-based 
approach, see 64 FR 61740 (November 12, 1999) and 66 FR 19048 (April 
12, 2001).
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    If there were no alternative but to use the available data set, 
rural utility loans' unique features (e.g., few loans, very large loan 
sizes, often with unique individual project features) would compel us 
to adjust for extreme value possibilities.\9\ Extreme value theory 
(EVT) employs methods to assign probability to possible outcomes in 
ranges beyond those included in the data. EVT provides a means to limit 
the relative probability assigned to sample outcomes and the 
probability assigned to ranges beyond the most extreme observed values. 
In such cases, simply relying on the empirical maximum loss value is 
not acceptable. For example, EVT is often applied by hydrologists who, 
when designing levees, are not satisfied with building protection 
against historical high-water marks when the maximum severity of water 
level in the historical data is not an acceptable level of protection 
to attain. Rather, they must protect against more severe high-water 
scenarios. However, in an EVT context, the wide divergence in the 
character of rural utility losses in the available data may have 
resulted in an even less reliable estimate of the ``worst case'' 
through a constructed limit under EVT theory. Therefore, we also 
rejected the EVT approach.
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    \9\ For a summary of the foundations of extreme value theory, 
see: Embrechts, P., Resnick, S., Samorodnitsky, G., ``Extreme Value 
Theory as a Risk Management Tool'', Cornell University, 1996.
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    We next considered a cash-flow divergence (CFD) approach. A CFD 
approach would focus on losses related to the stress associated with 
delayed receipts of cash flows expected under the original amortization 
schedule. Even if the loan is ultimately profitable due to a 
restructuring, the CFD model would reflect the stress associated with 
funding the loan during the workout period. However, CFD models did not 
offer a reliable measure of loss experience that was significantly 
correlated with observable differences in loan underwriting 
characteristics in the data set.
    Rather than basing the estimate of credit risk on data deemed 
unsuitable for reasons stated above, we propose to base a credit risk 
characterization on rural utility guarantee fees charged by Farmer Mac. 
We believe that the Farmer Mac rural utility guarantee fee represents 
the best available reference point, or benchmark, for quantifying 
credit risk because an alternative approach deemed acceptable for 
depicting the probability measures associated with default was not 
available. Version 4.0 (proposed) would impose stressed annual credit 
loss rates on loans in the rural utility portfolio by multiplying the 
dollar-weighted average rural utility guarantee fee by a factor of two. 
We discuss the rationale behind the selection of a factor of two in 
section III.C. of this preamble.
    Farmer Mac bases its fees on an evaluation of credit-related 
variables associated with the loans and the interrelations among those 
variables, as well as the counterparties' access to alternative forms 
of liquidity through the capital markets (i.e., an analysis of return 
opportunities related to what the market will bear). Among the credit-
related variables are the modified debt service coverage ratios, long-
term, debt-to-net utility plant ratio, debt-to-equity ratio, guaranteed 
supply contracts in place (if any), the level of discretion the 
borrower has to set electric rates, and the level of diversification in 
the borrower's customer base. The guarantee fee is, in part, Farmer 
Mac's estimate of the long-term average annual credit losses, i.e., its 
assessment of

[[Page 3650]]

average net credit risk embedded in those variables.
    We propose a multiple of two be applied to the rural utility 
guarantee fees to represent stressed rural utility loan losses and to 
place the amount generally in the tail of the distribution (discussed 
more fully in section III.C. of this preamble). The multiple of two in 
this case is less than the value chosen to apply stress in the case of 
modifications to the GOA factors for general obligation risk mitigation 
on AgVantage Plus counterparties because in the case of the GOA factors 
we have good information on the historical average default rates--which 
we do not have in the case of rural utility loans. We propose using a 
multiple of the Farmer Mac rural utility guarantee fee as a proxy for 
loss rates because of the unsuitability of the data as discussed above. 
We recognize that the use of this loss rate proxy results in a 
different factor than in the case of the GOA factors. Our intent is to 
stress rural utility loss rates only and, since the proportion of the 
guarantee fees attributable to expected average annual losses will vary 
due to the necessarily coarse level of precision targeted in this 
treatment, we elected not to propose some portion of the guarantee fee 
as the assumed average credit risk coverage component. Such an approach 
would have added a level of calculation complexity that is 
disproportionate to the coarse level of precision achievable given data 
limitations. Therefore, we reduced the multiple we would have applied 
to a more precise average credit loss component of the guarantee fee 
(i.e., some percentage of the total fee times three) down to two times 
the entire guarantee fee. We believe the proposed approach is 
consistent with the statutory credit risk target for agricultural loans 
since it targets a range meant to approximate a reasonable but stylized 
worst-case scenario.
    By basing the loss estimate on a factor that Farmer Mac controls 
(rural utility guarantee fee), Farmer Mac could manipulate its minimum 
capital requirement through its guarantee fee pricing. However, the 
natural alignment of incentives to build capital and grow earnings 
renders the scenario implausible. If Farmer Mac were capital 
constrained, the incentive to take on large volumes of significantly 
underpriced rural utility loan exposure is more than offset by 
counterbalancing pressures from the continuing level of the proposed 
loss proxy relative to any guarantee fee regardless of whether it is 
abnormally low (i.e., double that rate). For this reason, we view as 
extremely unlikely the scenario where Farmer Mac would reduce its 
guarantee fee below a level that might be appropriate for purposes of 
pricing the risk Farmer Mac assumes in the transaction in order to 
reduce the regulatory capital minimum requirement calculated on that 
volume. Further, additional offsetting pressures to this scenario can 
be found in the statutory leverage maximum requirements and ongoing 
oversight and supervisory risk monitoring by FCA, as well as Farmer 
Mac's internal control structures (also monitored by FCA).
    Additionally, we note that while no new regulatory language is 
necessary, implicit in section 2.4 of the Appendix, is the proposal 
that if the contractual terms of an AgVantage Plus rural utility 
investment include overcollateral, it be treated in a manner consistent 
with the model's current treatment of such overcollateral in AgVantage 
Plus structures. Also consistent with current RBCST treatment, we 
propose that when rural utility loan pools submitted to Farmer Mac 
include overcollateral that is not contractually required, all 
submitted loans be modeled and the total pool loss estimate factored 
down proportionately. We further propose to apply no age adjustment to 
rural utility loss estimates because, unlike other credit loss 
estimates in the RBCST, rural utility loss rates are already 
characterized as average annual loss rates, not lifetime loss rates. 
Therefore, any aging affects are considered to be subsumed into that 
annual average. Finally, consistent with the proposed revisions to the 
GOA factors discussed below, we propose those GOA factors applied to 
rural utility AgVantage Plus volume be revised to reflect the relative 
concentration of rural utility loans in the portfolio of the issuer.
    The proposed amendments to the model in Appendix A of part 652 
discussed above includes amending the table of contents and section 
headings 2.1, 2.2, 2.3 and 2.5; adding new sections 2.6, 4.1.e., and 
4.3.e.; and amending the contents of sections 2.0 and 4.2.b.(1)(A) to 
reflect the treatment of the rural utility authority. As conforming 
technical changes, we propose redesignating existing paragraphs (b)(5) 
and (b)(6) as (b)(6) and (b)(7) and adding a new paragraph (b)(5) to 
Sec.  652.65 to indicate that the model in Appendix A of part 652 is to 
be used to calculate credit loss rates for rural utility loans.

B. Modification of the Treatment of Loans Backed by an Obligation of 
the Counterparty and Loans for Which Pledged Loan Collateral Volume 
Exceeds Farmer Mac-Guaranteed Volume [Sec. Sec.  652.50 and 652.65(d); 
Appendix A to Part 652]

    We propose to amend sections 2.4.b.3, 2.4.b.4, 4.1.f., and 4.2.b. 
of the model in Appendix A of part 652 to increase the GOA factors, 
address counterparty concentration risks, and ensure AgVantage Plus 
volume maturities are recognized in the model.
1. GOA Factors--Treatment of Loan Volume
    In Version 3.0 of the RBCST, we established a treatment for program 
loan volume backed by the obligation of a counterparty under a general 
obligation (e.g., AgVantage Plus). The derivation and application of 
the GOA factors in the current version of the RBCST can be summarized 
as follows: (1) Five levels of credit ratings from ``AAA'' to ``below 
BBB and unrated'' that are mapped to the various NRSRO rating 
categories, which include pluses (``+'') and minuses (``-'') to the 
whole-letter categories; (2) apply default rate factors equal to the 
average cumulative issuer-weighted 10-year corporate default rates by 
whole letter category from 1920 through the most recent year, as 
published by Moody's Investor Services; (3) apply a factor equal to the 
10-year corporate default rates on Speculative-Grade bonds published in 
the same report for issuers that are rated below BBB or are unrated; 
\10\ (4) adjust the rate to obtain an estimated loss rate related to a 
general obligation of the AgVantage Plus counterparty, with a given 
credit rating by considering the loss-severity rate as implied by 
senior unsecured bond recovery rates published in the same annual 
Moody's report (i.e., 1 minus recovery rate).
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    \10\ Emery, K., Ou. S., Tennant, J., Matos, A., Cantor R., 
``Corporate Default and Recovery Rates, 1920-2008,'' published by 
Moody's Investors Service, February 2009; Default Rates, page 31, 
Recovery Rates (Severity Rate = 1 minus Senior Unsecured Average 
Recovery Rate, page 24).
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    We now propose revising the GOA factors by stressing the historical 
corporate bond loss rates to levels intended to represent stressed 
conditions instead of average conditions. The proposed rule would 
modify the adjustment factors through the application of increases (or 
``haircuts'') to the estimated historical loss rates by whole-letter 
credit rating category. Currently, Version 3.0 effectively assumes that 
there is no relationship between agricultural stress

[[Page 3651]]

and major stress on the issuer's overall financial condition (i.e., in 
industry sectors unrelated to agriculture to which the issuer also has 
significant exposure). Thus, the average corporate bond default and 
recovery rates are currently assumed to represent an appropriate degree 
of stress to that component of the model.
    While we remain convinced of the appropriateness of the existing 
overall approach, we believe using the average default and recovery 
rates is not sufficiently conservative. A conclusion that, while not 
driven by it, is nevertheless underscored by the recent crisis in the 
financial services sector. Our proposed revisions to the GOA factor 
would change existing assumptions in Version 3.0 to recognize the 
potential scenario that agricultural stress and major stress on the 
issuer's overall financial condition could occur at the same time. That 
is, the proposed changes to the GOA factors would assume a degree of 
positive correlation between the financial strength of the issuer and 
the loans underlying AgVantage Plus issuance. A resulting assumption 
would be that an individual firm's default and recovery experience 
likely differs from the average experience of similarly rated firms 
across average historic conditions. The result would be a model 
representing a stressed loss scenario, not an average loss scenario.
    The proposed treatment is consistent with a scenario under which 
Farmer Mac's risk increases as the value of the issuer's general 
obligation declines simultaneously with the value of the underlying 
loan collateral. The revised factors and their components are set forth 
in the table below:

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                                                                                    GOA factor     Proposed GOA
               Whole letter rating                 Default rate    Severity rate     ver. 3.0         factor
                                                     (percent)       (percent)       (percent)       (percent)
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AAA.............................................            0.86           54.51            0.47            1.41
AA..............................................            2.27           54.51            1.23            3.70
A...............................................            3.13           54.51            1.71            5.13
BBB.............................................            7.02           54.51            3.83           11.48
Below BBB and unrated...........................           27.23           54.51           14.84           44.52
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    As the table illustrates, we propose to increase the historical 
loss rates by a factor of three. As in the current RBCST version, these 
figures would be updated annually, or as an updated version of the 
Moody's report on Default and Recovery Rates of Corporate Bond Issuers 
becomes available. We discuss the rationale behind the selection of the 
factor in section III.C. of this preamble.
2. GOA Factors--Concentration Ratios
    We also propose modifying GOA factors to recognize the risk 
associated with a counterparty's (also referred to as the AgVantage 
Plus issuer) loan portfolio concentration in the industry sector used 
in an AgVantage Plus issuance. We believe we should recognize a 
reduction in the risk-mitigating value of a counterparty's general 
obligation due specifically to its loan portfolio concentration in the 
same industry sector as the loans underlying an AgVantage Plus pool. We 
are proposing to estimate that by reducing the value of the GOA factors 
proportionate to the counterparty's exposure to that sector in its 
total portfolio. The proposed revision would recognize conditions that 
stress the underlying assets, as well as the counterparty's financial 
position generally. The proposed change is expected to simultaneously 
reduce the risk-mitigating value of both the underlying portfolio and 
the general obligation.
    We further propose that the Director of OSMO (Director) make final 
determinations of concentration ratios on a case-by-case basis. These 
determinations would define industry sectors broadly when there is 
limited availability of concentration data of a given counterparty. 
Specifically, we propose modifying section 2.4.b.3.A. of Appendix A to 
allow the Director to make final determinations of concentration ratios 
on a case-by-case basis by using publicly reported data on counterparty 
portfolios, nonpublic data submitted and certified by Farmer Mac as 
part of its RBCST submissions, and generally recognizing two rural 
utility sectors-rural electric cooperatives and rural telephone 
cooperatives. The following are two illustrative examples of how the 
Director would generally arrive at such determinations. First, if the 
underlying AgVantage Plus portfolio were rural electric utility 
cooperative loans and the counterparty's loan and lease portfolio were 
publicly reported to contain 25-percent electric utility loans, the 
Director would likely determine the concentration ratio at 25 percent, 
absent any other unique aspects of the counterparty's business. Second, 
if an AgVantage Plus underlying portfolio of agricultural loans has a 
counterparty whose portion of agricultural loans is not disaggregated 
from some larger portfolio segment in its publicly available 
disclosures, the Director would use the most appropriate publicly 
disclosed aggregated portfolio data to set the concentration ratio. In 
this final example, Farmer Mac could obtain the disaggregated portfolio 
information and certify to its accuracy in its quarterly RBCST 
submission in lieu of the Director relying on publicly disclosed 
aggregated portfolio data.
    This proposed approach would continue to accept that the GOA 
factors should recognize that there are two levels of risk mitigation 
provided to Farmer Mac by the AgVantage Plus structure: the issuer's 
general obligation to Farmer Mac and the value of the underlying loan 
collateral. The revised approach would further recognize the relative 
difference in an induced correlation between the parent obligor and the 
underlying collateral that is likely to arise through portfolio 
concentrations. It would also scale the GAO factors for counterparty 
portfolio concentrations to reflect the Agency's view that the 
correlation between a significant decline in a highly concentrated 
issuer's overall financial condition and the underlying AgVantage Plus 
loan portfolio is likely to be high relative to a more diversified 
counterparty.
3. Technical Changes
    We propose to amend Sec.  652.50 by adding a definition for 
``AgVantage Plus'' to clarify that, while ``AgVantage Plus'' is a 
product name used by Farmer Mac, we propose applying it throughout this 
subpart to refer both specifically to AgVantage Plus volume currently 
in Farmer Mac's portfolio as well as other similarly structured program 
volume that Farmer Mac might finance in the future under other names. 
We also propose conforming changes to the model at Appendix A of part 
652 to replace the term ``Off-Balance Sheet AgVantage'' with 
``AgVantage Plus.''
    Since the introduction of the AgVantage product, volume has

[[Page 3652]]

accumulated through a few very large individual deals as opposed to a 
constant, steady deal-flow. However, we do not believe it is reasonable 
to assume that such volume would backfill on a steady-state basis 
because there has not been sufficient historical experience 
demonstrating the incidence of AgVantage Plus volume renewing into 
similar structures at the termination of existing deals. Therefore, as 
additional clarifying changes, we propose adding to paragraph (d)(2) of 
Sec.  652.65 a statement that AgVantage Plus volume is not replaced 
when it matures. We also propose explaining in the parenthetical of 
section 4.2.b. of the Appendix A that, while the stress test is run as 
a ``steady state,'' AgVantage Plus volume maturities will be recognized 
by the model.

C. Using Two Different Multiples of Externally Referenced Benchmarks To 
Represent Stressed Default Risk

    In two of the proposed revisions, we use multiples of external 
points of reference (or ``benchmark measurements'') of average expected 
loss. Those revisions are: (1) Establishing a representation of rural 
utility credit losses, and (2) adjusting the GOA factors by stressing 
the historical corporate bond loss rates to levels intended to 
represent worst-case stress conditions. In both cases, the multiples 
were selected on the basis of the availability of historical 
information related to credit losses (or lack thereof in the case of 
rural utility loans) and the Agency's overarching intent to represent 
losses in a reasonable worst-case context. We refer to that targeted 
worst-case scenario as the level of loss ``in the tail'' of any given 
probability distribution. The statistical vernacular ``in the tail'' 
represents a level of loss severity sufficiently extreme that it would 
be a very low probability event. Targeting a low probability loss event 
(i.e., a scenario of very high losses, relatively) can be equivalently 
thought of as a high probability of capital adequacy (i.e., Farmer 
Mac's solvency) even under severe loss conditions. While the relative 
terms ``high'' and ``low'' remain unquantified targets thus far in the 
discussion, we now provide a generalized probabilistic description of 
the Agency's view of capital adequacy for purposes of these proposed 
revisions.
    The proposed revisions reflect the Agency's targeting a high 
confidence level (i.e., it has been noted that AA ratings often are 
used interchangeably with concepts like a 99.7 percent confidence 
level, or the level of probability below which an insolvency scenario 
would not be expected to occur).\11\ We refer to this description as 
``generalized'' because the calculation of the relevant probabilities 
is entirely dependent on the amount of information and data available 
to the Agency, and overreliance on a highly variable measure can induce 
unintended modeling variability and error. When the information and 
data are insufficient to draw specific inferences from the data, we can 
still use statistical theory to make generalized statements about 
probability if certain conditions are met. In the present context, the 
proposed multiples are used with the intent to target loss events that 
could be reasonably viewed as being ``in the tail'' of the 
distribution, without providing a false sense of accuracy based on data 
whose characteristics could be overly sensitive to small changes in 
experiences or assumptions. We believe our approach places the post-
haircut corporate bond loss estimate in a range that provides a 
meaningfully stressful representation, consistent with possibly limited 
data, and reflects generally accepted statistical principles and 
relationships. If, for example, the coefficient of variation were equal 
to one, placement of the haircut loss rate estimate would be at a point 
on the distribution that generally corresponds to three standard 
deviations from the mean, which also corresponds to the 99.7-percent 
confidence level. Targeting the placement in this range is meant to be 
consistent with the Act's credit risk targets for agricultural loans, 
which directs us to focus on not less than a 2-year worst-case 
historical loss experience in agricultural lending.\12\
---------------------------------------------------------------------------

    \11\ The selected target confidence level is based on the 
Central Limit Theorem of statistics which holds that, if the 
distribution is approximately normal, about 99.7 percent of the 
values will fall within three standard deviations of the mean. The 
selection of this confidence level is supported by similar targets 
used by regulated entities of the Farm Credit System in their 
research and development work on economic capital which is being 
done with significant oversight by FCA, as well as in the literature 
of other regulatory entities including the Bank of International 
Settlements' Basel Committee on Banking Supervision (BCBS). See, 
BCBS working paper Basel II: International Convergence of Capital 
Measurement and Capital Standards: a Revised Framework, June 2004, 
pages 73 (paragraph 156), 107 (paragraph 527(a) and (j) page 109.
    \12\ See section 8.32(a)(1) of the Act.
---------------------------------------------------------------------------

    Mathematical identification and reliability issues limit our 
ability to make specific statements regarding how to represent the loss 
probability. However, we can place some limits on the probability 
distances in any loss distribution through statistical relationships 
such as Chebychev's theorem--which holds that the proportion of 
observations within some number of standard deviations from the mean 
must be at least some specific percentage, regardless of the shape of 
the distribution. This allows us to draw conclusions (though at a 
fairly coarse level) about the probability of events, even when we do 
not know the mean or the level of variation around the mean (or both) 
of the event we are trying to model.
    The multiple of three was selected for the GOA factors based on the 
recognition that the average historical default and recovery rates 
within each whole-letter rating category as reported by Moody's provide 
a measure of central tendency that summarizes the varied individual 
experiences of investors who purchased bonds within each rating 
category at each point in time. If we were to apply a multiple using 
implications of Chebchev's theorem to the GOA factor, the specific 
quantitative proportions involved in Chebychev's theorem would require 
a multiple of 19 or perhaps even higher in order to achieve the 
targeted confidence level (99.7 percent). We deemed this approach too 
conservative. However, if we assume the distribution is normal with a 
ceofficient of variation of 1, then a multiple of 3 is required to 
achieve the targeted confidence level. While we cannot directly observe 
the variation of default rates within each rating category (or recovery 
rates among senior secured borrowers within each year), the 
coefficients of variation of the time series of annual default rates in 
Moody's 2008 report vary from roughly two to three within the range of 
ratings AA to the speculative grade group through time. Like 
Chebychev's theorem, we can also reasonably assume that the time series 
variation provides a lower bound on the cross sectional variation, were 
it observable, and that the proposed multiple is therefore not 
particularly aggressive.

D. Revise Haircuts on Non-Program Investments [Appendix A to Part 652]

    We propose changing the haircut levels for non-program investments 
in existing section 4.1.e. of Appendix A, renumbering the section as 
4.1.f. Specifically, we propose revising these haircut levels to the 
same loss rate adjustment factors proposed for application on loans 
underlying guaranteed notes (i.e., AgVantage Plus) as discussed in 
section III.B.1 of this preamble. The proposed investment haircuts to 
recognize counterparty risk are as follows:

[[Page 3653]]



------------------------------------------------------------------------
                                                                Haircut
                 Whole letter credit rating                    (percent)
------------------------------------------------------------------------
AAA.........................................................        1.41
AA..........................................................        3.70
A...........................................................        5.13
BBB.........................................................       11.48
Below BBB and Unrated.......................................       44.52
------------------------------------------------------------------------

    We likewise propose to update these figures annually, or as an 
updated version of the Moody's report on Default and Recovery Rates of 
Corporate Bond Issuers becomes available, just as we proposed for loss 
rate adjustment factors on loans underlying guaranteed notes.

IV. Impact of the Proposed Revisions on Required Capital

    We have evaluated the impact of the proposed changes to Version 3.0 
of the model. Our review indicates that changes related to the 
reclassification of rural utility volume as program business and the 
associated required application of worst-case credit risk, along with 
the recognition of more limited risk-mitigation in the counterparty's 
general obligation, would have the most significant impact on risk-
based capital calculated by the model. The table below provides an 
indication of the impacts of the revisions in the quarter ended March 
31, 2009.

            Calculated Regulatory Minimum Capital, 3/31/2009
                            [$ in thousands]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
0...................  RBCST Version 3.0           40,061  ..............
                       (calculated as of
                       3/31/2009).
1...................  Revised Haircuts            40,505             444
                       on Non-Program
                       Investments.
2...................  Tripling of                 40,201             140
                       Version 3.0 GOA
                       Factors.
3...................  Credit Risk on              60,999          20,938
                       Rural Utility
                       Loans &
                       Concentration
                       Risk.
                      All Version 4.0             62,937          22,876
                       Proposed Effects.
------------------------------------------------------------------------

    As the table shows, the individual estimated impacts do not have an 
additive relationship to the total impact on the model output. This is 
due to the interrelationship of the changes with one another when they 
are combined in Version 4.0 (proposed). It is worth noting that the 
marginal effects are also not constant rate effects, but depend on the 
starting conditions and earnings spread of Farmer Mac and the magnitude 
of the effect considered. For example, as the volume in the rural 
utility category is increased, the rate of increase in the marginal 
minimum risk-based capital requirement begins to increase as the 
downward-pressure on that rate exerted by earnings from other 
activities are further diluted as those earnings become increasingly 
smaller in proportion to total estimated losses. The same effect is 
evident in other ways as risk increases and the offsetting effect of 
earnings is diminished relative to increased risk. For example, this 
effect would be observed, all else equal, with lower initial earnings 
spreads or higher AgVantage Plus counterparty concentrations, updated 
(and higher) Moody's base corporate bond default rates, or ratings 
downgrades. Thus, the values in the table above are illustrative of the 
relative effects of the proposals in this rulemaking, given the 
conditions at March 2009, but can be materially affected by changes in 
starting conditions or risk compositions through time.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies the proposed rule will not 
have a significant economic impact on a substantial number of small 
entities. Farmer Mac has assets and annual income over the amounts that 
would qualify it as a small entity. Therefore, Farmer Mac is not 
considered a ``small entity'' as defined in the Regulatory Flexibility 
Act.

List of Subjects in 12 CFR Part 652

    Agriculture, Banks, Banking, Capital, Investments, Rural areas.

    For the reasons stated in the preamble, part 652 of chapter VI, 
title 12 of the Code of Federal Regulations is proposed to be amended 
as follows:

PART 652--FEDERAL AGRICULTURAL MORTGAGE CORPORATION FUNDING AND 
FISCAL AFFAIRS

    1. The authority citation for part 652 continues to read as 
follows:

    Authority: Secs. 4.12, 5.9, 5.17, 8.11, 8.31, 8.32, 8.33, 8.34, 
8.35, 8.36, 8.37, 8.41 of the Farm Credit Act (12 U.S.C. 2183, 2243, 
2252, 2279aa-11, 2279bb, 2279bb-1, 2279bb-2, 2279bb-3, 2279bb-4, 
2279bb-5, 2279bb-6, 2279cc); sec. 514 of Pub. L. 102-552, 106 Stat. 
4102; sec. 118 of Pub. L. 104-105, 110 Stat. 168.

Subpart B--Risk-Based Capital Requirements

    2. Amend Sec.  652.50 by adding alphabetically the following 
definitions:


Sec.  652.50  Definitions.

* * * * *
    AgVantage Plus means both the product by that name used by Farmer 
Mac and other similarly structured program volume that Farmer Mac might 
finance in the future under other names.
* * * * *
    Rural utility guarantee fee means the actual guarantee fee charged 
for off-balance sheet volume and the earnings spread over Farmer Mac's 
funding costs for on-balance sheet volume on rural utility loans.
    3. Amend Sec.  652.65 by:
    a. Redesignating paragraphs (b)(5) and (b)(6) as paragraphs (b)(6) 
and (b)(7);
    b. Adding a new paragraph (b)(5);
    c. Revising newly redesignated paragraph (b)(6) and paragraph 
(d)(2) to read as follows:


Sec.  652.65  Risk-based capital stress test.

* * * * *
    (b) * * *
    (5) You will calculate loss rates on rural utility loans as further 
described in Appendix A.
    (6) You will further adjust losses for loans that collateralize the 
general obligation of AgVantage Plus volume, and for loans where the 
program loan counterparty retains a subordinated interest in accordance 
with Appendix A to this subpart.
* * * * *
    (d) * * *
    (2) You must use model assumptions to generate financial statements 
over the 10-year stress period. The major assumption is that cashflows 
generated by the risk-based capital stress test are based on a steady-
state scenario. To implement a steady-state scenario, when on- and off-
balance sheet assets and liabilities amortize or are paid down, you 
must replace them with similar assets and liabilities (AgVantage Plus 
volume is not replaced when it matures). Replace amortized assets from 
discontinued loan programs with current loan programs. In general, keep 
assets with small balances in constant proportions to key program 
assets.
* * * * *
    4. Amend Appendix A of subpart B, part 652 by:
    a. Revising the table of contents;

[[Page 3654]]

    b. Revising the last sentence of section 1.0.a.;
    c. Adding a new fourth sentence to section 2.0;
    d. Adding the words ``for All Types of Loans, Except Rural Utility 
Loans'' at the end of each heading for sections 2.1, 2.2, 2.3, and 2.5;
    e. Revising section 2.4.b.3, b.3.A., and b.4;
    f. Adding a new section 2.6;
    g. Renumbering the footnote in section 3.0 from ``15'' to ``16'';
    h. Redesignating section 4.1.e. as new section 4.1.f., adding a new 
section 4.1.e., and revising section 4.1.b. and newly redesignated 
section 4.1.f.;
    i. Revising section 4.2.b. introductory paragraph, paragraphs 
b.(1)(A)(v), b.(1)(A)(vi), the last sentence of paragraph b.(1)(B), the 
first sentence of paragraph b.(2), the last sentence of paragraph b.(3) 
and adding a new paragraph b.(1)(A)(vii);
    j. Adding a new section 4.3.e.; and,
    k. Revising the second sentence of section 4.4.
    The revisions and additions read as follows:

Appendix A--Subpart B of Part 652--Risk-Based Capital Stress Test

1.0 Introduction.
2.0 Credit Risk.
2.1 Loss-Frequency and Loss-Severity Models for All Types of Loans, 
Except Rural Utility Loans.
2.2 Loan-Seasoning Adjustment for All Types of Loans, Except Rural 
Utility Loans.
2.3 Example Calculation of Dollar Loss on One Loan for All Types of 
Loans, Except Rural Utility Loans.
2.4 Treatment of Loans Backed by an Obligation of the Counterparty 
and Loans for Which Pledged Loan Collateral Volume Exceeds Farmer 
Mac-Guaranteed Volume.
2.5 Calculation of Loss Rates for Use in the Stress Test for All 
Types of Loans, Except Rural Utility Loans.
2.6 Calculation of Loss Rates on Rural Utility Volume for Use in the 
Stress Test.
3.0 Interest Rate Risk.
3.1 Process for Calculating the Interest Rate Movement.
4.0 Elements Used in Generating Cashflows.
4.1 Data Inputs.
4.2 Assumptions and Relationships.
4.3 Risk Measures.
4.4 Loan and Cashflow Accounts.
4.5 Income Statements.
4.6 Balance Sheets.
4.7 Capital.
5.0 Capital Calculations.
5.1 Method of Calculation.
* * * * *
1.0 Introduction

    a. * * * The stress test also uses historic agricultural real 
estate mortgage performance data, rural utility guarantee fees, 
relevant economic variables, and other inputs in its calculations of 
Farmer Mac's capital needs over a 10-year period.
* * * * *
2.0 Credit Risk

    * * * Loss rates discussed in this section apply to all loans, 
unless otherwise indicated. * * *
* * * * *
2.4 Treatment of Loans Backed by an Obligation of the Counterparty, 
and Loans for which Pledged Loan Collateral Volume Exceeds Farmer 
Mac-Guaranteed Volume
* * * * *
    b. * * *
    3. Loans with a positive loss estimate remaining after 
adjustments in ``1.'' and ``2.'' above are further adjusted for the 
security provided by the general obligation of the counterparty. To 
make this adjustment in our example, multiply the estimated dollar 
losses remaining after adjustments in ``1.'' and ``2.'' above by the 
appropriate general obligation adjustment (GOA) factor based on the 
counterparty's whole-letter issuer credit rating by a nationally 
recognized statistical rating organization (NRSRO) and the ratio of 
the counterparty's concentration of risk in the same industry sector 
as the loans backing the AgVantage Plus volume, as determined by the 
Director.
    A. The Director will make final determinations of concentration 
ratios on a case-by-case basis by using publicly reported data on 
counterparty portfolios, nonpublic data submitted and certified by 
Farmer Mac as part of its RBCST submissions, and will generally 
recognize rural electric cooperatives and rural telephone 
cooperatives as separate rural utility sectors. The following table 
sets forth the GOA factors and their components by whole-letter 
credit rating (Adjustment Factor = Default Rate x Severity Rate x 
3), which may be further adjusted for industry sector concentration 
by the Director.\15\
---------------------------------------------------------------------------

    \15\ Emery, K., Ou S., Tennant, J., Kim F., Cantor R., 
``Corporate Default and Recovery Rates, 1920-2007,'' published by 
Moody's Investors Service, February 2008--the most recent edition as 
of March 2008; Default Rates, page 24, Recovery Rates (Severity Rate 
= 1 minus Senior Unsecured Average Recovery Rate) page 20.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Factor with
                                                                                                  V4.0 GOA factors    Concentration      concentration
          Whole-letter rating              Default rate      Severity rate     V3.0 GOA factor        (D x 3)       ratio (e.g., 25%)  adjustment 1- ((1-
                                            (percent)          (percent)          (percent)          (percent)           (percent)        E) x (1-F))
                                                                                                                                           (percent)
A                                                       B                  C                  F                  E                  F                  G
--------------------------------------------------------------------------------------------------------------------------------------------------------
AAA...................................              0.897                 54               0.48               1.41              25.00              26.06
AA....................................              2.294                 54               1.24               3.70              25.00              27.78
A.....................................              2.901                 54               1.57               5.13              25.00              28.84
BBB...................................              7.061                 54               3.82              11.48              25.00              33.61
Below BBB and Unrated.................             26.827                 54              14.50              44.52              25.00              58.39
--------------------------------------------------------------------------------------------------------------------------------------------------------

* * * * *
    4. Continuing the previous example, the pool contains two loans 
on which Farmer Mac is guaranteeing a total of $2 million and with 
total submitted collateral of 110 percent of the guaranteed amount. 
Of the 10-percent total overcollateral, 5 percent is contractually 
required under the terms of the transaction. The pool consists of 
two loans of slightly over $1 million. Total overcollateral is 
$200,000 of which $100,000 is contractually required. The 
counterparty has a single ``A'' credit rating, a 25-percent 
concentration ratio, and after adjusting for contractually required 
overcollateral, estimated losses are greater than zero. The net loss 
rate is calculated as described in the steps in the table below.

------------------------------------------------------------------------
                                              Loan A          Loan B
------------------------------------------------------------------------
1................  Guaranteed Volume....            $2,000,000
                                         -------------------------------
2................  Origination Balance        $1,080,000      $1,120,000
                    of 2-Loan Portfolio.

[[Page 3655]]

 
3................  Age-Adjusted Loss                  7%              5%
                    Rate.
4................  Estimated Age-                $75,600         $56,000
                    Adjusted Losses.
5................  Guarantee Volume               90.91%          90.91%
                    Scaling Factor.
6................  Losses Adjusted for           $68,727         $50,909
                    Total Overcollateral.
                                         -------------------------------
7................  Contractually                        $100,000
                    Required
                    Overcollateral on
                    Pool (5%).
8................  Net Losses on Pool                    $19,636
                    Adjusted for
                    Contractually
                    Required
                    Overcollateral.
9................  GOA Factor for ``A''                   28.84%
                    Issuer with 25%
                    Concentration Ratio.
10...............  Losses Adjusted for                     $5664
                    ``A'' General
                    Obligation.
11...............  Loss Rate Input in                      0.28%
                    the RBCST for this
                    Pool.
------------------------------------------------------------------------

* * * * *
2.6 Calculation of Loss Rates on Rural Utility Volume for Use in the 
Stress Test

    You must submit the outstanding principal, maturity date of the 
loan, maturity date of the AgVantage Plus contract (if applicable), 
and the rural utility guarantee fee percentage for each loan in 
Farmer Mac's rural utility loan portfolio on the date at which the 
stress test is conducted. You must multiply the rural utility 
guarantee fee by two to calculate the loss rate on rural utility 
loans under stressful economic conditions and then multiply the loss 
rate by the total outstanding principal. To arrive at the net rural 
utility loan losses, you must next apply the steps ``5'' through 
``11'' of section 2.4.b.4 of this Appendix. For loans under an 
AgVantage Plus-type structure, the calculated losses are distributed 
over time on a straight-line basis. For loans that are not part of 
an AgVantage Plus-type structure, losses are distributed over the 
10-year modeling horizon, consistent with other non-AgVantage Plus 
loan volume.
* * * * *
4.1 Data Inputs
* * * * *
    b. Cashflow Data for Asset and Liability Account Categories. The 
necessary cashflow data for the spreadsheet-based stress test are 
book value, weighted average yield, weighted average maturity, 
conditional prepayment rate, weighted average amortization, and 
weighted average guarantee fees and rural utility guarantee fees. 
The spreadsheet uses this cashflow information to generate starting 
and ending account balances, interest earnings, guarantee fees, 
rural utility guarantee fees, and interest expense. Each asset and 
liability account category identified in this data requirement is 
discussed in section 4.2 ``Assumptions and Relationships.''
* * * * *
    e. Loan-Level Data for All Rural Utility Program Volume. The 
stress test requires loan-level data for all rural utility program 
volume. The specific loan data fields required for calculating the 
credit risk are outstanding principal, maturity date of the loan, 
maturity date of the AgVantage Plus contract (if applicable), and 
the rural utility guarantee fee percentage for each loan in Farmer 
Mac's rural utility loan portfolio on the date at which the stress 
test is conducted.
    f. Weighted Haircuts for Non-Program Investments. For non-
program investments, the stress test adjusts the weighted average 
yield data referenced in section 4.1.b. to reflect counterparty 
risk. Non-program investments are defined in Sec.  652.5. The 
Corporation must calculate the haircut to be applied to each 
investment based on the lowest whole-letter credit rating the 
investment received from an NRSRO using the haircut levels in effect 
at the time. Haircut levels shall be the same amounts calculated for 
the GOA factor in section 2.4.b.3 above. The first table provides 
the mappings of NRSRO ratings to whole-letter ratings for purposes 
of applying haircuts. Any ``+'' or ``-'' signs appended to NRSRO 
ratings that are not shown in the table should be ignored for 
purposes of mapping NRSRO ratings to FCA whole-letter ratings. The 
second table provides the haircut levels by whole-letter rating 
category.

                                         FCA Whole-Letter Credit Ratings Mapped to Rating Agency Credit Ratings
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
FCA Ratings Category..............  AAA..................  AA...................  A....................  BBB.................  Below BBB and Unrated.
Standard & Poor's Long-Term.......  AAA..................  AA...................  A....................  BBB.................  Below BBB and Unrated.
Fitch Long-Term...................  AAA..................  AA...................  A....................  BBB.................  Below BBB and Unrated.
Standard & Poor's Short-Term......  A-1+SP-1+............  A-1, SP-1............  A-2, SP-2............  A-3.................  SP-3, B, or Below and
                                                                                                                                Unrated.
Fitch Short-Term..................  F-1+.................  F-1..................  F-2..................  F-3.................  Below F-3 and Unrated.
Moody's...........................  .....................  Prime- MIG12 VMIg1...  Prime-2 MIG2 VMIG2...  Prime-3 MIG3 VMIG3..  Not Prime, SG and
                                                                                                                                Unrated.
Fitch Bank Ratings................  A....................  B, A/B...............  C, B/C...............  D, C/D..............  E, D/E.
Moody's Bank Financial Strength     A....................  B....................  C....................  D...................  E.
 Rating.
--------------------------------------------------------------------------------------------------------------------------------------------------------


       Farmer Mac RBCST Maximum Haircut by Ratings Classification
------------------------------------------------------------------------
                                                          Non-program
                                                           investment
                                                         counterparties
                Ratings classification                     (excluding
                                                          derivatives)
                                                           (percent)
------------------------------------------------------------------------
Cash.................................................               0.00
AAA..................................................               1.41
AA...................................................               3.70
A....................................................               5.13
BBB..................................................              11.48
Below BBB or Unrated.................................              44.52
------------------------------------------------------------------------

* * * * *
4.2 Assumptions and Relationships
* * * * *
    b. From the data and assumptions, the stress test computes pro 
forma financial statements for 10 years. The stress test must be run 
as a ``steady state'' with regard to program balances (with the 
exception of AgVantage Plus volume, in which case maturities are 
recognized by the model), and where possible, will use information 
gleaned from recent financial statements and other data supplied by 
Farmer Mac to establish earnings and cost relationships on major 
program assets that are applied forward in time. As documented in 
the str