Policy Statement Concerning Adjustments to the Insurance Premiums and Policy Statement on the Secure Base Amount and Allocated Insurance Reserves Accounts, 38389-38395 [2011-16371]

Agencies

• Farm Credit System Insurance Corporation

[Federal Register Volume 76, Number 126 (Thursday, June 30, 2011)]
[Notices]
[Pages 38389-38395]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-16371]


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FARM CREDIT SYSTEM INSURANCE CORPORATION


Policy Statement Concerning Adjustments to the Insurance Premiums 
and Policy Statement on the Secure Base Amount and Allocated Insurance 
Reserves Accounts

AGENCY: Farm Credit System Insurance Corporation.

ACTION: Policy statements; request for comments.

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SUMMARY: The Farm Credit System Insurance Corporation (Corporation or 
FCSIC) announces that it is publishing for comment a revised draft 
Policy Statement Concerning Adjustments to the Insurance Premiums and a 
revised draft Policy Statement on the Secure Base Amount and Allocated 
Insurance Reserves Accounts (AIRAs). The revisions to these two policy 
statements reflect amendments to the Farm Credit Act made by the Food, 
Conservation, and Energy Act of 2008, and other changed conditions. The 
policy statement concerning premiums maintains the Corporation's 
semiannual review process as a basis for the Corporation's exercise of 
its discretion to adjust premiums in response to changing conditions. 
The policy statement concerning the secure base amount and AIRAs 
maintains the Corporation's general approach to questions concerning 
the computation of the secure base amount and allocation and payment of 
Allocated Insurance Reserves Accounts (AIRAs), with modifications to 
reflect the legislation and the Corporation's recent AIRAs payments.

DATES: Written comments must be submitted on or before August 1, 2011.

ADDRESSES: Comments should be mailed or delivered to James M. Morris, 
General Counsel, Farm Credit System Insurance Corporation, McLean, 
Virginia 22102. Copies of all comments will be available for 
examination by interested parties in the offices of the Farm Credit 
System Insurance Corporation.

FOR FURTHER INFORMATION CONTACT: James M. Morris, General Counsel, Farm 
Credit System Insurance Corporation, 1501 Farm Credit Drive, McLean, 
Virginia 22102, (703) 883-4380, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: The Farm Credit System Insurance Corporation 
(FCSIC or Corporation) insures the timely payment of principal and 
interest on insured debt obligations issued by Farm Credit System banks 
under the Farm Credit Act of 1971, as amended (Act). The Corporation 
collects premiums from Farm Credit System (FCS) institutions to fund 
the Farm Credit Insurance Fund (Fund).
    On March 23, 2007, the Corporation's Board of Directors (Board) 
adopted a legislative proposal requesting that the Congress amend the 
Act to, inter alia, base premiums on the outstanding insured debt 
obligations instead of loans, and permit the Corporation to collect a 
broader range of premiums on insured debt. The legislative proposal 
reflected the Corporation's concern that, despite generally collecting 
premiums at the maximum statutory rates, the Fund was trending away 
from the ``secure base amount,'' the Corporation's target for the Fund. 
Provisions incorporating the Corporation's legislative proposal became 
a part of versions of proposed Farm Bills in the House and Senate. 
Ultimately, enactment of the Food, Conservation, and Energy Act of 2008 
(FCE Act) in 2008 amended the provisions of the Farm Credit Act of 1971 
that govern FCSIC premiums to include the Corporation's proposed 
changes.
    The Corporation took action to ensure that the amended provisions 
of the Act were implemented promptly and that there was a measured and 
structured transition to the new premium structure. In June 2008, the 
Corporation's Board of Directors took action to implement the 
amendments of the Act's premium provisions. The Board implemented 
(effective on July 1, 2008) the new premium rates and calculation 
method and adjusted the premiums pursuant to the Corporation's 
authority under section 5.55 of the Act, as amended by the FCE Act. The 
Corporation also took action to amend its long-standing regulations 
concerning premiums. See 12 CFR part 1410. The Corporation amended its 
regulations, effective June 9, 2009, to withdraw regulations that were 
inconsistent with the FCE Act and clarify the effect of the premium 
provisions of the Act as amended by the FCE Act. See 74 FR 28156 (June 
15, 2009); 74 FR 17371 (April 15, 2009).\1\
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    \1\ In 2009, the Corporation generally limited its amendments of 
its premium regulations to changes that were necessary in order to 
eliminate provisions that were obsolete or inconsistent with the FCE 
Act, and did not add new regulatory definitions. While two new 
terms, ``investment'' and ``other than temporarily impaired,'' were 
added by the FCE Act, the Corporation continues to believe that 
those terms can be interpreted as accounting terms. Definitions will 
be added if experience under the new statutory provisions and the 
regulations leads the Corporation to believe that those two terms, 
or other terms, should be defined.
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    The Corporation is now publishing for comment a revised ``Policy 
Statement Concerning Adjustments to the Insurance Premiums.'' As 
revised, the policy statement will reflect the FCE Act amendments of 
the Farm Credit Act. However, the policy statement will maintain the 
existing semiannual consideration of premium rates and the five policy 
factors that are contained in the present policy. In addition, the 
Corporation is now publishing for comment a revised ``Policy Statement

[[Page 38390]]

on the Secure Base Amount and Allocated Insurance Reserves Accounts.'' 
As revised, this policy statement will reflect the FCE Act amendments 
of the Farm Credit Act that affect the secure base amount and Allocated 
Insurance Reserves Accounts and will clarify how the policy will apply 
under the new statutory provisions.
    As amended, the Act's provisions assess premiums that are generally 
based on each bank's pro rata share of outstanding insured debt 
obligations (rather than on loans), aligning premiums with the 
obligations that FCSIC insures. The amendments reduce the total insured 
debt obligations on which premiums are assessed by 90 percent of 
Federal government-guaranteed loans and investments and 80 percent of 
State government-guaranteed loans and investments, and deduct similar 
percentages of such guaranteed loans and investments when calculating 
the ``secure base amount.'' If the Farm Credit Insurance Fund is below 
the secure base amount, the amended Act requires that each insured Farm 
Credit System bank pay FCSIC the premium due from the bank, which shall 
be equal to (a) The adjusted average outstanding insured obligations 
multiplied by 0.0020; and (b) the average principal outstanding on 
loans in nonaccrual status and average amount outstanding of other than 
temporarily impaired investments multiplied by 0.0010; subject to 
FCSIC's power to reduce the premium in its sole discretion.
    In addition to changes concerning premiums and the secure base 
amount, the FCE Act amended the Act to simplify provisions concerning 
allocation of amounts to AIRAs, and payment of amounts from AIRAs to 
accountholders. At year-end 2009, the Insurance Fund was $165.4 million 
above the SBA. This amount was allocated to the six Allocated Insurance 
Reserves Accounts (AIRAs). In January 2010, the Board of Directors 
authorized payment of $39.9 million from the AIRAs to the 
accountholders. This amount had been transferred into the AIRAs at 
year-end 2003. In March, the Board authorized the payment of the $165.4 
million transferred into the AIRAs at year-end 2009 to the 
accountholders. During 2010, a total of $20.5 million was paid to the 
former FAC stockholders.
    We note that the two policy statements published today largely 
maintain the interpretations that the Corporation adopted when it 
approved the earlier policy statements, with changes necessary to 
reflect the changes in the statute. Thus, much of the discussion 
contained in the Federal Register publication of the predecessor policy 
statement concerning adjustments in premiums, see 61 FR 16788, (April 
17, 1996); 61 FR 39453 (July 29, 1996), and the Federal Register 
publication of the predecessor policy statement concerning AIRAs, see 
65 FR 5340 (February 3, 2000); 63 FR 53423, (October 5, 1998), 
continues to apply.
    The text of the ``Policy Statement Concerning Adjustments to the 
Insurance Premiums'' is set out below:

Farm Credit System Insurance Corporation Policy Statement Concerning 
Adjustments to the Insurance Premiums
    Background:
    The Farm Credit Act of 1971, as amended (Act) established the Farm 
Credit System Insurance Corporation (FCSIC or Corporation) to, among 
other things, insure the timely payment of principal and interest on 
Farm Credit System obligations.\2\ Section 5.55 of the Act mandates 
that the Corporation build and manage the Farm Credit Insurance Fund 
(Insurance Fund) to attain and maintain a secure base amount (SBA), 
defined as 2 percent of the aggregate outstanding insured obligations 
of all insured System banks (excluding a percentage of State and 
Federally guaranteed loans and investments) or such other percentage of 
the aggregate amount as the Corporation in its sole discretion 
determines is actuarially sound. The Farm Credit System Reform Act of 
1996,\3\ amended section 5.55 of the Act to establish in the Insurance 
Fund an Allocated Insurance Reserves Account (AIRA) for the benefit of 
each insured System bank and an AIRA for the Farm Credit System 
Financial Assistance Corporation (FAC) stockholders; allocate any 
excess balances above the SBA to these AIRAs; and make partial 
distributions of the excess funds in the AIRAs. Congress, by enactment 
of the Food, Conservation, and Energy Act of 2008 (FCE Act),\4\ amended 
the provisions of the Act that govern FCSIC premiums, the SBA, and 
AIRAs to incorporate the Corporation's recommendations concerning 
calculation of premiums and the SBA, and the simplification of the 
provisions governing AIRAs. In 2009 the Corporation adopted final 
regulations implementing the amended provisions of the Act governing 
FCSIC premiums, the SBA and AIRAs.
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    \2\ The Agricultural Credit Act of 1987, Public Law 100-233 
(1988), amended the Farm Credit Act of 1971 to establish the Farm 
Credit System Insurance Corporation. (12 U.S.C. 2277a-1 et seq.)
    \3\ Public Law 104-105, 110 Stat. 162 (1996).
    \4\ Public Law 110-234, Public Law 110-246, 122 Stat. 1651 
(2008).
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    Applicability:
    This policy statement will govern adjustments to premiums in 
response to changing conditions.
    Policy Statement:
    The Corporation's Board of Directors (Board) will review the 
premium assessment schedule at least semiannually in order to determine 
whether to exercise its discretion to adjust the premium assessments in 
response to changing conditions. The Board may reduce the premiums when 
the Farm Credit System demonstrates good health and sound risk 
management and other conditions warrant, and raise premiums to the 
statutory level if, for example, the amount of insured obligations 
increases, or the Insurance Fund suffers a significant loss or if bank 
capital or collateral decreases significantly before the secure base 
amount is achieved.
    As a basis for its decision the Board will consider the following:
    1. The current level of the Insurance Fund and the amount of money 
and time needed to reach the secure base amount in light of potential 
growth;
    2. The likelihood and probable amount of any losses to the 
Insurance Fund;
    3. The overall condition of the Farm Credit System, including the 
level and quality of capital, earnings, asset growth, asset quality, 
loss allowance levels, asset liability management, as well as the 
collateral ratios of the five banks;
    4. The health and prospects for the agricultural economy, including 
the potential impact of governmental farm policy and the effect of the 
globalization of agriculture on opportunities and competition for U.S. 
producers; and
    5. The risks in the financial environment that may cause a problem, 
even when there is no imminent threat, such as volatility in the level 
of interest rates, the use of sophisticated investment securities and 
derivative instruments, and increasing competition from non-System 
financial institutions.
    In its review of the premium assessments, the Board will consider 
multiple scenarios that reflect the impact of potential growth in Farm 
Credit System debt levels on the time required to achieve the secure 
base amount. The secure base amount should be achieved while the Farm 
Credit System is in good health with very few problem institutions. 
Thus, the premium on adjusted average outstanding insured obligations 
will be set between zero and the statutory rate of 20 basis points. The 
Board will not

[[Page 38391]]

reduce the 10 basis points premium on the average principal outstanding 
on loans in nonaccrual status and the average amount outstanding of 
other than temporarily impaired investments, to continue providing an 
incentive for sound credit extension and administration and sound 
investment policy.
    The text of the ``Policy Statement on the Secure Base Amount and 
Allocated Insurance Reserves Accounts'' is set out below:

Farm Credit System Insurance Corporation Policy Statement on the Secure 
Base Amount and Allocated Insurance Reserves Accounts
    Background:
    The Farm Credit Act of 1971, as amended (Act) established the Farm 
Credit System Insurance Corporation (FCSIC or Corporation) to, among 
other things, insure the timely payment of principal and interest on 
Farm Credit System obligations.\5\ Section 5.55 of the Act mandates 
that the Corporation build and manage the Farm Credit Insurance Fund 
(Insurance Fund) to attain and maintain a secure base amount (SBA), 
defined as 2 percent of the aggregate outstanding insured obligations 
of all insured System banks (excluding a percentage of State and 
Federally guaranteed loans and investments) or such other percentage of 
the aggregate amount as the Corporation in its sole discretion 
determines is actuarially sound. The Farm Credit System Reform Act of 
1996,\6\ amended section 5.55 of the Act to establish in the Insurance 
Fund an Allocated Insurance Reserves Account (AIRA) for the benefit of 
each insured System bank and an AIRA for the Farm Credit System 
Financial Assistance Corporation (FAC) stockholders; allocate any 
excess balances above the SBA to these AIRAs; and make partial 
distributions of the excess funds in the AIRAs. Congress, by enactment 
of the Food, Conservation, and Energy Act of 2008 (FCE Act),\7\ amended 
the provisions of the Act that govern FCSIC premiums, the SBA, and 
AIRAs to incorporate the Corporation's recommendations concerning 
calculation of premiums and the SBA, and the simplification of the 
provisions governing AIRAs. In 2009, the Corporation adopted final 
regulations implementing the amended provisions of the Act governing 
FCSIC premiums, the SBA and AIRAs.
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    \5\ The Agricultural Credit Act of 1987, Public Law 100-233 
(1988), amended the Farm Credit Act of 1971 to establish the Farm 
Credit System Insurance Corporation. (12 U.S.C. 2277a-1 et seq.)
    \6\ Public Law 104-105, 110 Stat. 162 (1996).
    \7\ Public Law 110-234, Public Law 110-246, 122 Stat. 1651 
(2008).
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    Applicability:
    This policy statement will govern the calculation of the secure 
base amount, the determination of any excess above the SBA, the method 
for allocating any excess to the AIRAs, and the method for making 
payments from the AIRAs to accountholders.
    Policy Statement:

I. Secure Base Amount Determination

    As stated in the Corporation's Policy Statement Concerning 
Adjustments to the Insurance Premiums, the Corporation's Board of 
Directors (Board) will review the premium assessments at least 
semiannually to determine whether to adjust premiums in response to 
changing conditions. The Board continues to engage in this review even 
after the Insurance Fund achieves the SBA because the law requires the 
Corporation to maintain the SBA. Thus, the Corporation must ensure that 
as the Farm Credit System's insured debt grows, or if the Insurance 
Fund suffers a significant loss, the Insurance Fund builds back to the 
SBA.
    The Farm Credit System Reform Act of 1996 established a process for 
making partial distributions of the Insurance Fund's balance above the 
SBA. On March 23, 2007, the Corporation's Board of Directors adopted a 
legislative proposal requesting that the Congress amend the Act to, 
inter alia, base premiums on the outstanding insured debt obligations 
instead of loans, permit the Corporation to collect a broader range of 
premiums on insured debt, and simplify the provisions concerning 
allocation of funds to the AIRAs and the payment of funds from the 
AIRAs to accountholders. Ultimately, enactment of the FCE Act in 2008 
amended the provisions of the Farm Credit Act of 1971 that govern FCSIC 
premiums to include the Corporation's proposed changes.
    As amended, the Act's provisions also reduce the total insured debt 
obligations on which premiums are assessed by 90 percent of Federal 
government-guaranteed loans and investments and 80 percent of State 
government-guaranteed loans and investments, and deduct similar 
percentages of such guaranteed loans and investments when calculating 
the secure base amount. The amendments also simplified the method of 
paying out AIRAs, prescribing that, if the aggregate of the amounts in 
the Farm Credit Insurance Fund exceeds the secure base amount at the 
end of any calendar year, the Corporation shall allocate to the AIRAs 
the excess amount less the amount that the Corporation, in its sole 
discretion, maintains for estimated operating expenses and estimated 
insurance obligations of the Corporation for the following calendar 
year.
    To begin the process, the Corporation must define the aggregate 
outstanding insured obligations of all the System banks. Then it must 
follow the steps in the statute to determine the SBA. Finally, at the 
end of any calendar year in which the Insurance Fund attains the secure 
base amount, the Corporation must determine whether any excess funds 
exist for allocation to the AIRAs.
    The principal calculation for determining whether the Insurance 
Fund is at the SBA amount will be 2 percent of the aggregate adjusted 
insured obligations defined as follows:
    (1) ``Insured obligation'' means any note, bond, debenture, or 
other obligation issued under subsection (c) or (d) of section 4.2 of 
the Farm Credit Act on or before January 5, 1989, on behalf of any 
System bank; and after such date which, when issued, is issued on 
behalf of any insured System bank and is outstanding at the quarter-
end. The balance outstanding at the quarter-end shall include principal 
and accrued interest payable as reported by the banks in the call 
reports submitted to the Farm Credit Administration.
    (2) The aggregate outstanding insured obligations of all insured 
System banks determined under paragraph (1) Of Section I shall be 
adjusted downward to exclude an amount equal to the sum of (as 
determined by the Corporation):
    (A) Ninety (90) percent of each of
    (i) The guaranteed portions of principal outstanding on Federal 
government-guaranteed loans in accrual status made by the banks; and
    (ii) The guaranteed portions of the amount of Federal government-
guaranteed investments made by the banks that are not permanently 
impaired; and
    (B) Eighty (80) percent of each of
    (i) The guaranteed portions of principal outstanding on State 
government-guaranteed loans in accrual status made by the banks; and
    (ii) The guaranteed portions of the amount of State government-
guaranteed investments made by the
    For the purpose of this paragraph (2), the principal outstanding on 
all loans made by an insured System bank, and the amount outstanding on 
all investments made by an insured System bank, shall be determined 
based on
    (a) All loans or investments made by any production credit 
association, or any other association making direct loans under 
authority provided under section 7.6 of the Act, that is able to

[[Page 38392]]

make such loans or investments because such association is receiving, 
or has received, funds provided through the insured System bank;
    (b) All loans or investments made by any bank, company, 
institution, corporation, union, or association described in section 
1.7(b)(1)(B) of the Act, that is able to make such loans or investments 
because such entity is receiving, or has received, funds provided 
through the insured System bank; and
    (c) All loans or investments made by such insured System bank 
(other than loans made to any party described in paragraph (a) or (b)).
    At the end of any calendar year when the Insurance Fund balance 
exceeds the SBA, calculated using December 31, balances, the 
Corporation will determine whether any excess funds exist for 
allocation to the AIRAs.

II. Allocated Insurance Reserves Accounts

Determination of Excess Insurance Fund Balances

    An AIRA shall be established in the Insurance Fund for each insured 
System bank and for FAC stockholders. Amounts representing excess 
Insurance Fund balances will be allocated to the AIRAs. The AIRAs 
remain a part of the Insurance Fund and are available to the 
Corporation.
(a) Authorized Deductions
    If, at the end of any calendar year, the aggregate of the amounts 
in the Farm Credit Insurance Fund exceeds the secure base amount, the 
Corporation shall allocate to the AIRAs the excess amount less the 
amount that the Corporation, in its sole discretion, determines to be 
the sum of the estimated operating expenses and estimated insurance 
obligations of the Corporation for the immediately succeeding calendar 
year. The Corporation will budget for the next calendar year operating 
expenses and it will deduct the operating expenses it expects to incur. 
When determining estimated insurance obligations, the Corporation will 
include all anticipated allowances for insurance losses, claims, and 
other potential statutory uses of the Insurance Fund.
    The excess Fund balance shall be allocated to the accounts of each 
insured System bank and to the FAC stockholders. The AIRA balances will 
be fixed at year-end until paid to account holders or used under 
paragraph (c). The Act provides that, not later than 60 days after 
receipt of a payment from the AIRAs established for the insured System 
banks, each insured System bank, in consultation with affiliated 
associations of the insured System bank, and taking into account the 
direct or indirect payment of insurance premiums by the associations, 
shall develop and implement an equitable plan to distribute payments 
received among the bank and associations of the bank. The Corporation 
will request that each insured System bank promptly transmit to the 
Corporation a copy of the plan that the institution develops for the 
distribution of such AIRA payments.\8\
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    \8\ See, Act, section 5.55(e)(6)(D), 12 U.S.C. 2277a-4(e)(6)(D).
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(b) Allocation Formula When Excess Funds Are Available
    (1) Ten (10) percent of the excess Insurance Fund balance shall be 
credited to the AIRAs for all holders, in the aggregate, of FAC stock. 
The total amount that may be allocated to this AIRA is limited to $35.5 
million ($56 million less the $20.5 million that was paid out in 2010).
    (2) The remaining amount of the excess Insurance Fund balance shall 
be credited to the AIRA for each insured System bank. There shall be 
credited to the AIRA of each insured system bank an amount that bears 
the same ratio to the total amount (less any amount credited under 
paragraph (b)(1) of this Section II) as--
    (i) The average principal outstanding for the calendar year on 
insured obligations issued by the bank (after deducting from the 
principal the percentages of the guaranteed portions of loans and 
investments described in paragraph (2) of Section I above); bears to
    (ii) The average principal outstanding for the calendar year on 
insured obligations issued by all insured System banks (after deducting 
from the principal the percentages of the guaranteed portions of loans 
and investments described in paragraph (2) of Section I above).
    (3) An example of the allocation formula is shown in the attached 
Exhibit 1.
(c) Use of Funds in AIRAs When Reductions Are Required
    To the extent that the sum of the operating expenses of the 
Corporation and the insurance obligations of the Corporation for a 
calendar year exceeds the sum of operating expenses and insurance 
obligations determined under paragraph (a) Of this Section II for the 
calendar year, the Corporation shall cover the expenses and obligations 
by reducing each AIRA by the same proportion, and expending the amounts 
so obtained before expending other amounts in the Fund.
    When the Corporation's actual operating expenses and insurance 
obligations exceed the estimated amounts used to determine any year's 
AIRA balances, the Act requires AIRA balances to absorb such excess 
expenses before using other amounts in the Insurance Fund.\9\ To the 
extent reductions are made in AIRA balances to absorb Corporation 
expenses and actual insurance obligations, each AIRA will be reduced by 
its proportional amount in accordance with the statute. The same 
formula used to make allocations of excess Insurance Fund balances 
shall be used to reduce AIRA balances when necessary. Ten (10) percent 
of any necessary AIRA reduction will be applied to the FAC stockholder 
AIRA. The remaining 90 percent will be applied to the System insured 
banks' AIRAs on the basis of the ratio of described in paragraph (b)(2) 
of this Section II.
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    \9\ See, Act, section 5.55(e)(5), 12 U.S.C. 2277a-4(e)(5).
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BILLING CODE 6710-01-P

[[Page 38393]]

[GRAPHIC] [TIFF OMITTED] TN30JN11.010


[[Page 38394]]


[GRAPHIC] [TIFF OMITTED] TN30JN11.011

    Each of the revised policy statements has been approved for 
publication by the Board of Directors of the Corporation. After 
considering any comments received on each of these policy statements, 
the Board of Directors

[[Page 38395]]

will decide whether to give final approval to, modify, or withdraw, 
each of the revised policy statements.

    Dated: June 24, 2011.
Mary Alice Donner,
Acting Secretary to the Board, Farm Credit System Insurance 
Corporation.
[FR Doc. 2011-16371 Filed 6-29-11; 8:45 am]
BILLING CODE 6710-01-C