Federal Agricultural Mortgage Corporation Funding and Fiscal Affairs; Farmer Mac Capital Planning, 5320-5325 [2013-01500]
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5320
Proposed Rules
Federal Register
Vol. 78, No. 17
Friday, January 25, 2013
This section of the FEDERAL REGISTER
contains notices to the public of the proposed
issuance of rules and regulations. The
purpose of these notices is to give interested
persons an opportunity to participate in the
rule making prior to the adoption of the final
rules.
FARM CREDIT ADMINISTRATION
12 CFR Part 652
RIN 3052–AC80
Federal Agricultural Mortgage
Corporation Funding and Fiscal
Affairs; Farmer Mac Capital Planning
Farm Credit Administration
(FCA or Agency).
ACTION: Proposed rule.
AGENCY:
The FCA, through the Office
of Secondary Market Oversight (OSMO),
is proposing regulations to require the
Federal Agricultural Mortgage
Corporation (Farmer Mac) to submit a
capital plan to OSMO on an annual
basis and to require Farmer Mac to
notify OSMO under certain
circumstances before making a capital
distribution. The proposed rule would
revise the current capital adequacy
planning requirements to increase our
regulatory focus on the quality and level
of Farmer Mac’s capital base and
promote best practices for capital
adequacy planning and stress testing.
We view high quality capital as the
fundamental resource available to cover
unexpected losses and ensure long-term
financial flexibility and viability.
DATES: Please submit comments before
March 26, 2013.
ADDRESSES: Commenters are encouraged
to submit comments by email or through
the FCA’s Web site. As facsimiles (faxes)
are difficult for us to process and
achieve compliance with section 508 of
the Rehabilitation Act, we no longer
accept comments submitted by fax.
Regardless of the method you use,
please do not submit your comments
multiple times via different methods.
You may submit comments by any of
the following methods:
• Email: Send an email to regcomm@fca.gov.
• FCA Web site: https://www.fca.gov.
Select ‘‘Public Commenters,’’ then
‘‘Public Comments,’’ and follow the
directions for ‘‘Submitting a Comment.’’
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SUMMARY:
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• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Mail: Laurie A. Rea, Director, 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, including any
supporting data provided, but for
technical reasons we may omit items
such as logos and special characters.
Identifying information that you
provide, such as phone numbers and
addresses, will be publicly available.
However, we will attempt to remove
email addresses to help reduce Internet
spam.
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 Rebecca S. Orlich, Senior
Counsel, Office of 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 improve the long-term safety and
soundness and continuity of Farmer
Mac operations so that Farmer Mac may
better fulfill its public mission under a
range of economic conditions. To
achieve this, FCA is proposing to revise
operational and strategic business
planning requirements to enhance
capital adequacy planning. The
proposed rule is designed to (i) establish
minimum supervisory standards for the
capital planning process, including
stress testing, (ii) describe how the
Farmer Mac board of directors (board)
and senior management should
implement the process and strategies,
and (iii) provide FCA with notification
of Farmer Mac’s proposed capital
distributions before they occur.
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II. Background
Farmer Mac is an institution of the
Farm Credit System, regulated by FCA
through its Office of Secondary Market
Oversight. Farmer Mac was established
and chartered by Congress to create a
secondary market for agricultural real
estate mortgage loans, rural housing
mortgage loans, and rural utilities loans,
and it is a stockholder-owned
instrumentality of the United States.
Title VIII of the Farm Credit Act of 1971,
as amended (Act), governs Farmer Mac.1
Farmer Mac Programs
Under the Farmer Mac I program,
Farmer Mac guarantees prompt payment
of principal and interest on securities
representing interests in, or obligations
backed by, mortgage loans secured by
first liens on agricultural real estate or
rural housing. It also purchases, or
commits to purchase, qualified loans or
securities backed by qualified loans
directly from lenders. Under the Farmer
Mac II program, Farmer Mac purchases
and securitizes portions of certain loans
guaranteed by the U.S. Department of
Agriculture, including farm ownership
and operating loans and rural business
and community development loans.
Farmer Mac also guarantees the timely
payment of principal and interest on the
securities created from these loans. In
2008, Congress authorized Farmer Mac
to purchase and guarantee securities
backed by loans to rural electric and
telephone utility cooperatives.
III. Need for Enhanced Capital
Planning
The fundamental purpose of bank
capital is to provide a cushion to absorb
unexpected losses and improve an
institution’s long-term resilience. The
recent global financial crisis
underscored the importance of capital
adequacy planning, including
maintaining high quality capital. In
response to the crisis, the Basel
Committee on Banking Supervision
(BCBS) proposed the Basel III
framework, which expands and clarifies
international standards on regulatory
capital with the intent to raise the
quality, quantity, and transparency of
regulatory capital.2 The Basel III
1 The Act is set forth at 12 U.S.C. 2001 et seq.
Title VIII is in 12 U.S.C. 2279aa–2279cc.
2 Bank for International Settlements, Basel
Committee on Banking Supervision, Basel III, A
Global Regulatory Framework for More Resilient
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framework also requires banks to run
stress tests to ensure they are able to
sustain financial soundness under
adverse market conditions. In the U.S.,
the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank
Act) was enacted in July 2010 to
strengthen regulation of the financial
sector. Section 165 of the Dodd-Frank
Act requires certain financial companies
whose total consolidated assets are in
excess of $10 billion to conduct annual
stress tests. The U.S. banking agencies
(the Federal Reserve System (FRS),
Federal Deposit Insurance Corporation
(FDIC), the Office of the Comptroller of
the Currency (OCC)) and the Federal
Housing Finance Agency (FHFA) have
issued proposed, and in some cases,
final rules and guidance to enhance
capital standards and stress testing.3
This proposed rule reflects our general
agreement with the rulemaking actions
of other banking supervision authorities,
both domestic and international, which
emphasize high quality capital
maintenance, robust planning, and
stress testing as adding value to the
existing regulatory framework for
capital adequacy and capital planning.
Farmer Mac’s statutory capital
standards were enacted in 1991 4 and
have not been updated since 1996.5
Under the Act, Farmer Mac must
operate at or above a minimum ‘‘core
capital’’ level and a minimum
‘‘regulatory capital’’ level. ‘‘Core
capital’’ is defined in section 8.31(2) of
the Act as the par value of outstanding
common and preferred stock, paid-in
capital, and retained earnings. Farmer
Mac’s minimum core capital
requirement is an amount equal to the
sum of 2.75 percent of on-balance-sheet
assets and 0.75 percent of off-balancesheet obligations. ‘‘Regulatory capital’’
is defined in section 8.31(5) as core
capital plus an allowance for losses and
guarantee claims (ALL). Farmer Mac’s
minimum risk-based capital
Banks and Banking Systems, December 2010
(revised June 2011), https://www.bis.org/publ/
bcbs189.pdf. The United States is a member of the
BCBS.
3 See, e.g., the FRS’s final rule, Capital Plans, 76
FR 74631 (December 1, 2011); the FRS’s proposed
rule, Enhanced Prudential Standards and Early
Remediation Requirements for Covered Companies,
77 FR 594 (January 5, 2012); the U.S. banking
agencies’ joint proposed rule, Regulatory Capital
Rules; Advanced Approaches Risk-Based Capital
Rule; Market Risk Capital Rule, 77 FR 52978
(August 30, 2012); the FDIC’s proposed rule,
Annual Stress Test, 77 FR 3166 (December 23,
2012); the OCC’s proposed rule, Annual Stress Test,
77 FR 3408 (January 24, 2012); and the FHFA’s
proposed rule, Stress Testing of Regulated Entities,
77 FR 60948 (October 5, 2012).
4 Public Law 102–237, Title V, December 13,
1991.
5 Public Law 104–105, Title I, February 10, 1996.
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requirement is the amount of regulatory
capital for interest rate and credit risk
determined by applying a risk-based
capital stress test (RBCST) as defined in
section 8.32(a) of the Act, plus an
additional 30 percent of that amount for
management and operations risk.
The regulatory requirements of the
RBCST were implemented in FCA’s
regulations at 12 CFR part 652, subpart
B in 2002 and have been revised several
times. While the RBCST provides a
valuable alternative perspective as a risk
index of Farmer Mac’s operations from
quarter to quarter, the Act prescribes
several components of the model’s
design that constrain its usefulness as
the only approach to calculating riskbased capital required by regulation.
Under certain conditions, the Act’s
provisions do not impose a significant
level of stress; for example, the Act’s
interest rate stress provisions do not
impose a stressful scenario of interest
rate shock in very low interest rate
environments such as the current one.6
Moreover, there are a number of areas of
the statutory design requirements in the
RBCST that may no longer reflect best
practices in economic capital modeling,
which has advanced considerably since
the provisions were enacted. We believe
applying current best practices for
comprehensive and robust stress testing
approaches is prudent and warranted
for capital planning.
In addition, the Act’s minimum
regulatory capital standards do not
necessarily ensure that Farmer Mac
holds a sufficient amount of high
quality capital—primarily common
equity and retained earnings—to survive
periods of high financial stress. The
statutory definition of ‘‘core capital’’
broadly defines the types of capital
instruments that may be included
without distinguishing the quality of the
capital instruments. More recent views
of capital, including the Basel III
framework for stock corporations, make
much finer distinctions between, for
example, different structures of
preferred stock on the basis of the terms
of their underlying contractual
provisions. These finer distinctions
include how much incentive is built
into preferred stock terms for the issuer
to redeem the shares. An example of
such an incentive would be significant
step-ups in dividend rates over time.
Such provisions create greater
uncertainty around the relative
6 Section 8.32(a)(2) requires interest rate shocks to
be specified as the lesser of: (a) 50 percent of the
12-month average rates on 10-year Treasury
obligations; or (b) 600 basis points. In the current
interest rate environment, this requirement
translates into an interest rate shock of just slightly
more than 100 basis points.
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permanence of that capital and,
therefore, how available it will be to
cover unexpected losses in the future.
Consistent with the view that high
quality capital is the fundamental
resource available to cover unexpected
losses and ensure long-term financial
flexibility and viability, we propose to
revise the current capital adequacy
planning requirements to increase our
regulatory focus on the quality and level
of capital and advance best practices for
capital adequacy planning and stress
testing at Farmer Mac.
IV. Proposed Revisions
We propose to revise our regulation
on Corporation Board Guidelines by
deleting the provisions related to the
capital adequacy plan that is part of the
operational and strategic business plan
requirement in existing § 652.60(b)(5)
and (c) and creating a new § 652.61 with
revised and expanded guidance on
capital planning. In § 652.60(a), we
propose to add the requirement that
Farmer Mac’s capital be sufficient to
meet goals and objectives in a newly
proposed element (in § 652.61(c)) of its
operational and strategic business plan.
We further propose to require Farmer
Mac to notify the OSMO within 10
calendar days of determining that
capital is not sufficient to meet this new
requirement. In § 652.60(b), we propose
to add several items that Farmer Mac
must address in its business plan. These
include a business and organizational
overview and an assessment of
management capabilities; an assessment
of Farmer Mac’s strengths and
weaknesses; strategies for achieving
mission, financial, and business goals
and objectives; and a marketing plan.
We propose to add to the required
review of internal and external factors
likely to affect Farmer Mac during the
business planning period a required
discussion of how factors might impact
Farmer Mac’s current financial position
and business goals.
In new § 652.61, we propose to
require Farmer Mac to develop and
maintain an annual capital plan and to
submit the plan for FCA review. The
revisions generally refer to a required
capital plan rather than the existing
rule’s references to capital adequacy
planning, and the proposed
requirements, while more specific and
detailed, are very similar in their overall
objective. As described more fully
below, Farmer Mac would be required
to calculate a high quality capital ratio
as well as the ratios described in the Act
and existing regulations. In proposed
§ 652.62, we would require Farmer Mac
to notify the FCA prior to making a
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capital distribution under certain
circumstances.
A. Annual Capital Planning
Requirement
We propose to define a capital plan as
a written presentation of Farmer Mac’s
capital planning strategies and capital
adequacy process that includes certain
mandatory elements. The proposed
capital plan would be organized into
four main components, each with
specified mandatory elements. The four
mandatory elements are:
(1) An assessment of the expected
uses and sources of capital over the
planning horizon (at least 12 quarters,
beginning with the quarter preceding
the quarter in which Farmer Mac
submits its capital plan) that reflects
Farmer Mac’s size, complexity, risk
profile and scope of operations,
assuming both expected and stressful
conditions;
(2) A detailed description of Farmer
Mac’s process for assessing capital
adequacy;
(3) Farmer Mac’s capital policy; and
(4) A discussion of any expected
changes to Farmer Mac’s business plan
that are likely to have a material impact
on its capital adequacy or liquidity.
The first mandatory element, the
assessment of uses and sources of
capital, must contain the following
components: (i) Estimates of projected
revenues, losses, reserves, and pro
forma capital levels, including any
minimum statutory or regulatory capital
ratio, a high-quality Tier 1 ratio as
described below, and any additional
capital measures deemed relevant by
Farmer Mac, over the planning horizon
under expected conditions and under a
range of stressed scenarios, including
any scenarios provided by FCA and at
least two stressed scenarios developed
by Farmer Mac appropriate to its
business model and portfolios; such
scenarios could include agricultural and
general economic conditions that cause
increases in delinquency rates caused
by any variety of factors (e.g.,
widespread, weather-related crop
losses), interest rate spikes that could
impact historically high cropland values
and the cost of debt funding, changes in
laws that affect plant-based renewable
fuels subsidies, as well as liquidityrelated stress such as reduced access to
debt markets; and (ii) a description of all
planned capital actions over the
planning horizon. We propose to define
a capital action as any issuance of a debt
or equity capital instrument, a capital
distribution, or any similar action that
the FCA determines could impact
Farmer Mac’s capital. A capital
distribution would include a
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redemption or repurchase of any debt or
equity capital instrument, a dividend
payment, a payment that may be
temporarily or permanently suspended
by Farmer Mac on any instrument that
is eligible for inclusion in total equity
(as reported in accordance with GAAP),
and any similar transaction that the
Agency determines to be in substance a
distribution of capital.
The second mandatory element of the
capital plan, the process for assessing
capital adequacy, must contain the
following components: (i) A discussion
of how Farmer Mac will, under normal
and stressful conditions, be able to
maintain capital commensurate with its
risks, maintain capital above the
minimum statutory and regulatory
capital ratios and above a Tier 1 ratio set
in accordance with the board’s clearly
articulated risk tolerance policy; and (ii)
a discussion of how Farmer Mac will,
under both normal and stressful
conditions, maintain sufficient capital
to continue its operations by
maintaining ready access to funding,
meeting its obligations to creditors and
other counterparties, and continuing to
serve as secondary market for qualifying
rural markets; and (iii) a discussion of
the results of any stress test required by
law or regulation, including the RBCST,
and an explanation of how the capital
plan takes these results into account.
We do not propose to establish a new
regulatory minimum capital
requirement in this rule. Rather, we
propose to require Farmer Mac to
establish an internal minimum standard
in accordance with widely recognized
approaches as a part of board policy on
capital. To comply with the proposed
requirements of the Tier 1 ratio, Farmer
Mac must utilize an approach that is in
accordance with an appropriate Basel
framework (or frameworks), or
comparable U.S. regulatory frameworks
in effect (e.g., Standardized or advanced
internal ratings based (Advanced)
approaches, or both).7 The approach
selected to calculate risk-weighted
assets must be appropriate given Farmer
Mac’s business activities and must be
consistent with broadly accepted
banking practices and standards (e.g.,
Basel accords or similar U.S.
regulations, including those applied by
Farm Credit System banks and
associations under part 615 of the FCA’s
regulations). The OSMO strongly
7 Publications by the BCBS explaining these
approaches include: (1) International Convergence
of Capital Measurement and Capital Standards, A
Revised Framework Comprehensive Version, June
2006; (2) Enhancements to the Basel II framework
July 2009; and (3) Basel III, A Global Regulatory
Framework for More Resilient Banks and Banking
Systems, December 2010 (revised June 2011).
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recommends that, for capital planning
purposes, Farmer Mac calculate and
report in its business plan the ratio of
Tier 1 capital to risk-weighted assets
using both the Basel Standardized
approach and the Advanced approach to
provide alternative perspectives on the
Farmer Mac’s risk-bearing capacity.
The third mandatory element of the
capital plan, the capital policy, is a
written assessment of the principles and
guidelines used for capital planning,
capital issuance, usage and
distributions, including internal capital
goals, the quantitative or qualitative
guidelines for dividend and stock
repurchases, the strategies for
addressing potential capital shortfalls,
and the internal governance procedures
around capital policy principles and
guidelines.
Finally, the fourth mandatory element
of Farmer Mac’s capital plan is a
discussion of any expected changes to
Farmer Mac’s business plan that are
likely to have a material impact on
capital adequacy or liquidity. For
example, the capital plan should reflect
any expected material effects of new
lines of business or activities on Farmer
Mac’s capital adequacy or liquidity,
including revenue and losses.
We propose to require the board, at
least annually, to review the robustness
of the process for assessing capital
adequacy, ensure that any deficiencies
in the process for assessing capital
adequacy are appropriately remedied,
and approve the capital plan. The
robustness of Farmer Mac’s capital
adequacy process should be evaluated
based on the following elements:
(i) A sound risk management
infrastructure that supports the
identification, measurement, and
assessment of all material risks arising
from the business activities of Farmer
Mac;
(ii) An effective process for translating
risk measures into estimates of potential
loss over a range of adverse scenarios
and for aggregating those estimated
losses across Farmer Mac;
(iii) A clear definition of available
capital resources and an effective
process for forecasting available capital
resources over the same range of adverse
scenarios used for loss forecasting;
(iv) A process for considering the
impact of loss estimates on capital
adequacy consistent with Farmer Mac’s
stated goals for the level and
composition of capital and for taking
into account any limitations of the
company’s capital adequacy process and
its components;
(v) A process, supported by Farmer
Mac’s capital policy, to use its
assessments of the impact of loss and
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resource estimates on capital adequacy
to make key decisions regarding the
current level and composition of capital,
specific capital actions, and capital
contingency plans as they affect capital
adequacy;
(vi) Sound internal controls governing
the capital adequacy process, including
sufficient documentation, model
validation and independent review, and
audit testing; and
(vii) Effective board and senior
management oversight of Farmer Mac’s
capital adequacy process, including
periodic review of capital goals,
assessment of the appropriateness of
adverse scenarios considered in capital
planning, regular review of any
limitations and uncertainties in the
process, and approval of planned capital
actions.
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B. FCA’s Review of Capital Plans
FCA expects to consider the following
factors in reviewing Farmer Mac’s
capital plan: (1) The comprehensiveness
of the capital plan, including the extent
to which the analysis underlying the
capital plan captures and addresses
potential risks stemming from activities
across Farmer Mac’s operations and its
capital policy; (2) the reasonableness of
its assumptions and analysis underlying
the capital plan and its methodologies
for reviewing the robustness of its
capital adequacy process; and (3) its
ability to maintain capital above the
board-established minimum Tier 1
Capital to risk-weighted assets ratio on
a pro forma basis under both normal
and stressful conditions throughout the
planning horizon, including but not
limited to any stressed scenarios
required under this rule.
The FCA would also consider the
following information in reviewing
Farmer Mac’s capital plan:
(i) Relevant supervisory information
about Farmer Mac and its subsidiaries;
(ii) Farmer Mac’s regulatory and
financial reports, as well as supporting
data that will allow for an analysis of
the loss, revenue, and reserve
projections;
(iii) Compliance with statutory and
regulatory minimum capital standards;
(iv) As applicable, the FCA’s own pro
forma estimates of Farmer Mac’s
potential losses, revenues, reserves, and
resulting capital adequacy under both
normal and stressful conditions,
including but not limited to any stressed
scenarios required under the final rule,
as well as the results of any stress tests
conducted by Farmer Mac or the FCA;
and
(v) Other information requested or
required by the FCA, as well as any
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other information relevant to Farmer
Mac’s capital adequacy.
C. FCA Action on a Capital Plan
OSMO would review the capital plan
and provide an assessment to Farmer
Mac of the capital adequacy and
planning process through its normal
examination and oversight program. In
determining whether a capital plan or
proposed capital distributions would
constitute an unsafe or unsound
practice, the FCA will consider whether
Farmer Mac is and will remain in sound
financial condition after giving effect to
the capital plan and proposed capital
distributions.
OSMO may require Farmer Mac to
submit additional data about planning
assumptions, stress test strategies, and
other qualitative and quantitative
information. OSMO may also require
Farmer Mac to revise and re-submit its
capital plan.
D. Farmer Mac’s Response to OSMO’s
Review
We propose to require Farmer Mac to
take into account the results of the stress
tests conducted under the requirements
of this section, as well as OSMO’s
assessment, in making changes as
appropriate to Farmer Mac’s capital
structure (including the level and
composition of capital); its exposures,
concentrations, and risk positions; any
plans for recovery and resolution; and
overall risk management. In addition,
Farmer Mac must document in writing
any changes it makes to its capital
structure such as issuance or retirement
of equity securities, as well as decisions
not to make such changes with respect
to any shortcomings noted in OSMO’s
assessment.
V. Prior Notice Requirements
A. Notice to OSMO of Capital
Distributions
We believe an enhanced level of
dialogue between the Agency and
Farmer Mac in advance of capital
distributions will improve the level of
FCA’s oversight of, and communication
with, regulated entity. Such enhanced
dialogue would provide the board with
valuable external perspective on such
decisions from both a safety and
soundness and mission achievement
points of view. In new § 652.62, we
propose to require Farmer Mac to
provide OSMO with notice 15 calendar
days prior to a board action to declare
a capital distribution. We expect such
notice to include a description of the
capital distribution including, for
redemptions or repurchases of
securities, the gross consideration to be
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paid and the terms and sources of
funding for the transaction, and for
dividends, the amount of the dividend,
as well as any additional information
requested by OSMO (which could
include, among other things, an
assessment of Farmer Mac’s capital
adequacy under a stress scenario
specified by OSMO.) There would be an
exception to the notice requirement for
dividends on common and preferred
stock when there is no change from the
amount of the dividends paid in the
previous period.
VI. Regulatory Flexibility Act
Farmer Mac has assets and annual
income in excess of the amounts that
would qualify it as a small entity.
Therefore, Farmer Mac is not a ‘‘small
entity’’ as defined in the Regulatory
Flexibility Act. Pursuant to section
605(b) of the Regulatory Flexibility Act
(5 U.S.C. 601 et seq.), the FCA hereby
certifies that the proposed rule will not
have a significant economic impact on
a substantial number of small entities.
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.
■
2. Revise § 652.60 to read as follows:
§ 652.60
Corporate business planning.
(a) Your board of directors is
responsible for ensuring that you
maintain capital at a level that is
sufficient to ensure continued financial
viability and provide for growth. In
addition, your capital must be sufficient
to meet statutory and regulatory
requirements as well as the goals and
objectives in the required element of
your capital plan in § 652.61(c)(2)(i)(B).
You must notify the OSMO within 10
calendar days of determining that
capital is not sufficient to meet those
goals and objectives.
(b) No later than 65 days after the end
of each calendar year, your board of
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directors must adopt an operational and
strategic business plan for at least the
next 3 years. The plan must include:
(1) A mission statement;
(2) A business and organizational
overview and an assessment of
management capabilities;
(3) An assessment of Farmer Mac’s
strengths and weaknesses;
(4) A review of the internal and
external factors that are likely to affect
you during the planning period;
(5) Measurable goals and objectives;
(6) A discussion of how these factors
might impact Farmer Mac’s current
financial position and business goals;
(7) Forecasted income, expense, and
balance sheet statements for each year of
the plan;
(8) A marketing plan, and
(9) A capital plan in accordance with
§ 652.61.
3. Add new §§ 652.61 and 652.62 to
read as follows:
sroberts on DSK5SPTVN1PROD with
§ 652.61
Capital planning.
(a) Purpose. This section establishes
capital planning requirements for
Farmer Mac.
(b) Definitions. For purposes of this
section and § 652.62, the following
definitions apply:
Basel III means the Basel Committee
on Banking Supervision’s document
‘‘Basel III: A Global Regulatory
Framework for More Resilient Banks
and Banking Systems,’’ June 2011 and
as it may be updated from time to time.
Capital action means any issuance of
a debt or equity capital instrument, and
any capital distribution, as well as any
similar action that OSMO determines
could impact Farmer Mac’s
consolidated capital.
Capital distribution means a
redemption or repurchase of any debt or
equity capital instrument, a payment of
common or preferred stock dividends, a
payment that may be temporarily or
permanently suspended by the issuer on
any instrument that is eligible for
inclusion in the numerator of any
minimum capital ratio, and any similar
transaction that OSMO determines to be
in substance a distribution of capital.
Capital plan means a written
presentation of Farmer Mac’s capital
planning strategies and capital adequacy
process that includes the mandatory
elements set forth in paragraph (c)(2) of
this section.
Capital policy means Farmer Mac’s
written assessment of the principles and
guidelines used for capital planning,
capital issuance, usage and
distributions, including internal capital
goals; the quantitative or qualitative
guidelines for dividend and stock
repurchases; the strategies for
VerDate Mar<15>2010
17:46 Jan 24, 2013
Jkt 229001
addressing potential capital shortfalls;
and the internal governance procedures
around capital policy principles and
guidelines.
Planning horizon means the period of
at least 12 quarters, beginning with the
quarter preceding the quarter in which
Farmer Mac submits its capital plan,
over which the relevant projections
extend.
Tier 1 Capital means the components
meeting the criteria of Common Equity
Tier 1 Capital and Additional Tier 1
Capital and the regulatory adjustments
as set forth in Basel III, or Tier 1 Capital
as defined in regulations of the Office of
the Comptroller of the Currency, the
Board of Governors of the Federal
Reserve, or the Federal Deposit
Insurance Corporation, as revised from
time to time; or another capital standard
to measure high quality capital as
approved for use under this regulation
by the Director of OSMO.
Tier 1 ratio means the ratio of Farmer
Mac’s Tier 1 Capital to Total RiskWeighted Assets.
Total Risk-Weighted Assets means a
risk-weighting approach that is
appropriate given Farmer Mac’s
business activities and consistent with
broadly accepted banking practices and
standards (e.g., one of the frameworks of
the Basel Committee on Banking
Supervision or similar U.S. regulations).
(c) General requirements.
(1) Annual capital planning.
(i) Farmer Mac must develop and
maintain a capital plan each year.
(ii) Farmer Mac must submit its
complete annual capital plan to OSMO
by March 1 or such later date as directed
by OSMO, after consultation with the
FCA Board.
(iii) Prior to submission of the capital
plan under paragraph (c)(1)(ii) of this
section, Farmer Mac’s board of directors
must:
(A) Review the robustness of Farmer
Mac’s process for assessing capital
adequacy,
(B) Ensure that any deficiencies in
Farmer Mac’s process for assessing
capital adequacy are appropriately
remedied; and
(C) Approve Farmer Mac’s capital
plan.
(2) Mandatory elements of capital
plan. The capital plan must contain at
least the following elements:
(i) An assessment of the expected uses
and sources of capital over the planning
horizon that reflects Farmer Mac’s size,
complexity, risk profile, and scope of
operations, assuming both expected and
stressful conditions, including:
(A) Projected revenues, losses,
reserves, and pro forma capital levels,
including the core capital and
PO 00000
Frm 00005
Fmt 4702
Sfmt 4702
regulatory capital ratios required by
sections 8.32 and 8.33 of the Act, the
Tier 1 ratio as defined in this section,
and any additional capital measures
deemed relevant by Farmer Mac, over
the planning horizon under expected
conditions and under a range of at least
two progressively severe stress scenarios
developed by Farmer Mac appropriate
to its business model and portfolios, as
well as any scenarios provided by the
Director of OSMO. At least 15 calendar
days prior to this stress testing, Farmer
Mac must provide to OSMO a
description of the expected and stressed
scenarios that Farmer Mac intends to
use to conduct its annual stress test
under this section.
(B) A description of all planned
capital actions over the planning
horizon.
(ii) A detailed description of Farmer
Mac’s process for assessing capital
adequacy, including:
(A) A discussion of how Farmer Mac
will, under expected and stressed
conditions, maintain capital
commensurate with its risks, maintain
capital above the minimum core capital
and regulatory capital ratios and above
the Tier 1 ratio set in accordance with
a well-articulated risk tolerance policy
established by the board of directors;
(B) A discussion of how Farmer Mac
will, under expected and stressed
conditions, maintain sufficient capital
to continue its operations by
maintaining ready access to funding,
meeting its obligations to creditors and
other counterparties, and continuing to
serve its statutory purposes; and
(C) A discussion of the results of the
risk-based stress test required by section
8.32 of the Act and the stress tests
required by this section, as well as any
other stress test required by law or
regulation, and an explanation of how
the capital plan takes these results into
account.
(iii) Farmer Mac’s capital policy; and
(iv) A discussion of any expected
changes to Farmer Mac’s business plan
that are likely to have a material impact
on the Corporation’s capital adequacy or
liquidity.
(d) Review of capital plan by OSMO.
(1) OSMO will consider the following
factors in reviewing Farmer Mac’s
capital plan:
(i) The comprehensiveness of the
capital plan, including the extent to
which the analysis underlying the
capital plan captures and addresses
risks stemming from activities across
Farmer Mac’s operations;
(ii) The reasonableness of Farmer
Mac’s assumptions and analysis
underlying the capital plan and its
methodologies for reviewing the
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25JAP1
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Federal Register / Vol. 78, No. 17 / Friday, January 25, 2013 / Proposed Rules
robustness of its capital adequacy
process; and
(iii) Farmer Mac’s ability to maintain
capital above the minimum core capital
and regulatory capital ratios and above
a Tier 1 ratio set in accordance with a
well-articulated risk tolerance policy
established by the board of directors on
a pro forma basis under expected and
stressful conditions throughout the
planning horizon, including but not
limited to any stressed scenarios
required under paragraph (c)(2)(i)(A)
and (c)(2)(ii) of this section.
(iv) All supervisory information about
Farmer Mac and its subsidiaries;
(v) Farmer Mac’s regulatory and
financial reports, as well as supporting
data that would allow for an analysis of
its loss, revenue, and projections;
(vi) As applicable, OSMO’s own pro
forma estimates of Farmer Mac’s
potential losses, revenues, and resulting
capital adequacy measurements under
expected and stressful conditions,
including but not limited to any stressed
scenarios required under paragraphs
(c)(2)(i)(A) and (c)(2)(ii) of this section,
as well as the results of any other stress
tests conducted by Farmer Mac or
OSMO; and
(vii) Other information requested or
required by OSMO, as well as any other
information relevant to Farmer Mac’s
capital adequacy.
(e) OSMO action on a capital plan.
(1) OSMO will review the capital plan
and provide an assessment to Farmer
Mac of the capital adequacy and
planning process through its ongoing
examination and oversight process.
(2) Upon a request by OSMO, Farmer
Mac must provide OSMO with
sufficient information regarding its
planning assumptions, stress test
strategies and results and any other
relevant qualitative or quantitative
information requested by OSMO to
facilitate review of Farmer Mac’s capital
plan under this section.
(3) OSMO may require Farmer Mac to
revise and re-submit its capital plan.
(f) Farmer Mac response to OSMO’s
assessment. Regardless of whether resubmission is required, Farmer Mac
must take the results of the stress tests
conducted under paragraph (c)(2)(i)(A)
and (c)(2)(ii) of this section (including
any revisions required under paragraph
(e)(3) of this section) as well as OSMO’s
assessment into account in making
changes, as appropriate, to Farmer
Mac’s capital structure (including the
level and composition of capital); its
exposures, concentrations, and risk
positions; any plans for recovery and
resolution; and to improve overall risk
management. Farmer Mac must
document in writing its actions in
VerDate Mar<15>2010
17:46 Jan 24, 2013
Jkt 229001
response to the stress tests and
assessment, as well as decisions not to
take actions in response to any issues
raised in the assessment.
§ 652.62 Notice to OSMO of capital
distributions.
(a) Farmer Mac must provide OSMO
with notice 15 calendar days prior to a
board consideration of a declaration of
a capital distribution or any material
changes in capital distributions policies.
(b) Notice under paragraph (a) of this
section is not required with respect to
a regular periodic payment of dividends
on common stock and preferred stock
when there is no change in the amount
of payment per share from the previous
period.
Dated: January 18, 2013.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2013–01500 Filed 1–24–13; 8:45 am]
BILLING CODE 6705–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 71
[Docket No. FAA–2012–0853; Airspace
Docket No. 12–ANM–23]
Proposed Amendment of Class E
Airspace; Astoria, OR
Federal Aviation
Administration (FAA), DOT.
ACTION: Supplemental notice of
proposed rulemaking (SNPRM).
AGENCY:
The FAA is issuing a SNPRM
for the notice of proposed rulemaking
(NPRM) published on October 9, 2012,
in order to elicit comments addressing
the proposed airspace modification west
of the airport to accommodate aircraft
using Area Navigation (RNAV) Global
Positioning System (GPS) standard
instrument approach procedures. The
FAA has reassessed the NPRM and finds
that extension of the Class E airspace
area west of the airport to within 11
miles north of the airport 268° degree
bearing is necessary for the safety and
management of instrument flight rules
(IFR) operations in the Astoria, OR, area.
DATES: Comments must be received on
or before March 11, 2013.
ADDRESSES: Send comments on this
proposal to the U.S. Department of
Transportation, Docket Operations, M–
30, West Building Ground Floor, Room
W12–140, 1200 New Jersey Avenue SE.,
Washington, DC 20590; telephone (202)
366–9826. You must identify FAA
Docket No. FAA–2012–0853; Airspace
SUMMARY:
PO 00000
Frm 00006
Fmt 4702
Sfmt 4702
5325
Docket No. 12–ANM–23, at the
beginning of your comments. You may
also submit comments through the
Internet at
https://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
Eldon Taylor, Federal Aviation
Administration, Operations Support
Group, Western Service Center, 1601
Lind Avenue SW., Renton, WA 98057;
telephone (425) 203–4537.
SUPPLEMENTARY INFORMATION:
History
On October 9, 2012, the FAA
published a NPRM to modify Class E
airspace, extending upward from 700
feet or more above the surface, at
Astoria Regional Airport, Astoria, OR
(77 FR 61306). The comment period
closed November 23, 2012. No
comments were received. Subsequent to
publication, the Western Flight
Procedures Office reassessed the
proposal and modified the north
extension west of the airport from
within 6 miles north to within 11 miles
north of the airport 268° degree bearing.
The airspace extension would
accommodate missed approach holding
for RNAV (GPS) standard instrument
approach procedures.
Comments Invited
Interested parties are invited to
participate in this proposed rulemaking
by submitting such written data, views,
or arguments, as they may desire.
Comments that provide the factual basis
supporting the views and suggestions
presented are particularly helpful in
developing reasoned regulatory
decisions on the proposal. Comments
are specifically invited on the overall
regulatory, aeronautical, economic,
environmental, and energy-related
aspects of the proposal.
Communications should identify both
docket numbers (FAA Docket No. FAA
2012–0853 and Airspace Docket No. 12–
ANM–23) and be submitted in triplicate
to the Docket Management System (see
ADDRESSES section for address and
phone number). You may also submit
comments through the Internet at https://
www.regulations.gov.
Commenters wishing the FAA to
acknowledge receipt of their comments
on this action must submit with those
comments a self-addressed stamped
postcard on which the following
statement is made: ‘‘Comments to FAA
Docket No. FAA–2012–0853 and
Airspace Docket No. 12–ANM–23’’. The
postcard will be date/time stamped and
returned to the commenter.
All communications received on or
before the specified closing date for
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Agencies
[Federal Register Volume 78, Number 17 (Friday, January 25, 2013)]
[Proposed Rules]
[Pages 5320-5325]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01500]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
Federal Register / Vol. 78, No. 17 / Friday, January 25, 2013 /
Proposed Rules
[[Page 5320]]
FARM CREDIT ADMINISTRATION
12 CFR Part 652
RIN 3052-AC80
Federal Agricultural Mortgage Corporation Funding and Fiscal
Affairs; Farmer Mac Capital Planning
AGENCY: Farm Credit Administration (FCA or Agency).
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The FCA, through the Office of Secondary Market Oversight
(OSMO), is proposing regulations to require the Federal Agricultural
Mortgage Corporation (Farmer Mac) to submit a capital plan to OSMO on
an annual basis and to require Farmer Mac to notify OSMO under certain
circumstances before making a capital distribution. The proposed rule
would revise the current capital adequacy planning requirements to
increase our regulatory focus on the quality and level of Farmer Mac's
capital base and promote best practices for capital adequacy planning
and stress testing. We view high quality capital as the fundamental
resource available to cover unexpected losses and ensure long-term
financial flexibility and viability.
DATES: Please submit comments before March 26, 2013.
ADDRESSES: Commenters are encouraged to submit comments by email or
through the FCA's Web site. As facsimiles (faxes) are difficult for us
to process and achieve compliance with section 508 of the
Rehabilitation Act, we no longer accept comments submitted by fax.
Regardless of the method you use, please do not submit your comments
multiple times via different methods. You may submit comments by any of
the following methods:
Email: Send an email to 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: Laurie A. Rea, Director, 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, including any
supporting data provided, but for technical reasons we may omit items
such as logos and special characters. Identifying information that you
provide, such as phone numbers and addresses, will be publicly
available. However, we will attempt to remove email addresses to help
reduce Internet spam.
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 Rebecca S. Orlich, Senior Counsel, Office of 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 improve the long-term
safety and soundness and continuity of Farmer Mac operations so that
Farmer Mac may better fulfill its public mission under a range of
economic conditions. To achieve this, FCA is proposing to revise
operational and strategic business planning requirements to enhance
capital adequacy planning. The proposed rule is designed to (i)
establish minimum supervisory standards for the capital planning
process, including stress testing, (ii) describe how the Farmer Mac
board of directors (board) and senior management should implement the
process and strategies, and (iii) provide FCA with notification of
Farmer Mac's proposed capital distributions before they occur.
II. Background
Farmer Mac is an institution of the Farm Credit System, regulated
by FCA through its Office of Secondary Market Oversight. Farmer Mac was
established and chartered by Congress to create a secondary market for
agricultural real estate mortgage loans, rural housing mortgage loans,
and rural utilities loans, and it is a stockholder-owned
instrumentality of the United States. Title VIII of the Farm Credit Act
of 1971, as amended (Act), governs Farmer Mac.\1\
---------------------------------------------------------------------------
\1\ The Act is set forth at 12 U.S.C. 2001 et seq. Title VIII is
in 12 U.S.C. 2279aa-2279cc.
---------------------------------------------------------------------------
Farmer Mac Programs
Under the Farmer Mac I program, Farmer Mac guarantees prompt
payment of principal and interest on securities representing interests
in, or obligations backed by, mortgage loans secured by first liens on
agricultural real estate or rural housing. It also purchases, or
commits to purchase, qualified loans or securities backed by qualified
loans directly from lenders. Under the Farmer Mac II program, Farmer
Mac purchases and securitizes portions of certain loans guaranteed by
the U.S. Department of Agriculture, including farm ownership and
operating loans and rural business and community development loans.
Farmer Mac also guarantees the timely payment of principal and interest
on the securities created from these loans. In 2008, Congress
authorized Farmer Mac to purchase and guarantee securities backed by
loans to rural electric and telephone utility cooperatives.
III. Need for Enhanced Capital Planning
The fundamental purpose of bank capital is to provide a cushion to
absorb unexpected losses and improve an institution's long-term
resilience. The recent global financial crisis underscored the
importance of capital adequacy planning, including maintaining high
quality capital. In response to the crisis, the Basel Committee on
Banking Supervision (BCBS) proposed the Basel III framework, which
expands and clarifies international standards on regulatory capital
with the intent to raise the quality, quantity, and transparency of
regulatory capital.\2\ The Basel III
[[Page 5321]]
framework also requires banks to run stress tests to ensure they are
able to sustain financial soundness under adverse market conditions. In
the U.S., the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) was enacted in July 2010 to strengthen regulation of
the financial sector. Section 165 of the Dodd-Frank Act requires
certain financial companies whose total consolidated assets are in
excess of $10 billion to conduct annual stress tests. The U.S. banking
agencies (the Federal Reserve System (FRS), Federal Deposit Insurance
Corporation (FDIC), the Office of the Comptroller of the Currency
(OCC)) and the Federal Housing Finance Agency (FHFA) have issued
proposed, and in some cases, final rules and guidance to enhance
capital standards and stress testing.\3\ This proposed rule reflects
our general agreement with the rulemaking actions of other banking
supervision authorities, both domestic and international, which
emphasize high quality capital maintenance, robust planning, and stress
testing as adding value to the existing regulatory framework for
capital adequacy and capital planning.
---------------------------------------------------------------------------
\2\ Bank for International Settlements, Basel Committee on
Banking Supervision, Basel III, A Global Regulatory Framework for
More Resilient Banks and Banking Systems, December 2010 (revised
June 2011), https://www.bis.org/publ/bcbs189.pdf. The United States
is a member of the BCBS.
\3\ See, e.g., the FRS's final rule, Capital Plans, 76 FR 74631
(December 1, 2011); the FRS's proposed rule, Enhanced Prudential
Standards and Early Remediation Requirements for Covered Companies,
77 FR 594 (January 5, 2012); the U.S. banking agencies' joint
proposed rule, Regulatory Capital Rules; Advanced Approaches Risk-
Based Capital Rule; Market Risk Capital Rule, 77 FR 52978 (August
30, 2012); the FDIC's proposed rule, Annual Stress Test, 77 FR 3166
(December 23, 2012); the OCC's proposed rule, Annual Stress Test, 77
FR 3408 (January 24, 2012); and the FHFA's proposed rule, Stress
Testing of Regulated Entities, 77 FR 60948 (October 5, 2012).
---------------------------------------------------------------------------
Farmer Mac's statutory capital standards were enacted in 1991 \4\
and have not been updated since 1996.\5\ Under the Act, Farmer Mac must
operate at or above a minimum ``core capital'' level and a minimum
``regulatory capital'' level. ``Core capital'' is defined in section
8.31(2) of the Act as the par value of outstanding common and preferred
stock, paid-in capital, and retained earnings. Farmer Mac's minimum
core capital requirement is an amount equal to the sum of 2.75 percent
of on-balance-sheet assets and 0.75 percent of off-balance-sheet
obligations. ``Regulatory capital'' is defined in section 8.31(5) as
core capital plus an allowance for losses and guarantee claims (ALL).
Farmer Mac's minimum risk-based capital requirement is the amount of
regulatory capital for interest rate and credit risk determined by
applying a risk-based capital stress test (RBCST) as defined in section
8.32(a) of the Act, plus an additional 30 percent of that amount for
management and operations risk.
---------------------------------------------------------------------------
\4\ Public Law 102-237, Title V, December 13, 1991.
\5\ Public Law 104-105, Title I, February 10, 1996.
---------------------------------------------------------------------------
The regulatory requirements of the RBCST were implemented in FCA's
regulations at 12 CFR part 652, subpart B in 2002 and have been revised
several times. While the RBCST provides a valuable alternative
perspective as a risk index of Farmer Mac's operations from quarter to
quarter, the Act prescribes several components of the model's design
that constrain its usefulness as the only approach to calculating risk-
based capital required by regulation. Under certain conditions, the
Act's provisions do not impose a significant level of stress; for
example, the Act's interest rate stress provisions do not impose a
stressful scenario of interest rate shock in very low interest rate
environments such as the current one.\6\ Moreover, there are a number
of areas of the statutory design requirements in the RBCST that may no
longer reflect best practices in economic capital modeling, which has
advanced considerably since the provisions were enacted. We believe
applying current best practices for comprehensive and robust stress
testing approaches is prudent and warranted for capital planning.
---------------------------------------------------------------------------
\6\ Section 8.32(a)(2) requires interest rate shocks to be
specified as the lesser of: (a) 50 percent of the 12-month average
rates on 10-year Treasury obligations; or (b) 600 basis points. In
the current interest rate environment, this requirement translates
into an interest rate shock of just slightly more than 100 basis
points.
---------------------------------------------------------------------------
In addition, the Act's minimum regulatory capital standards do not
necessarily ensure that Farmer Mac holds a sufficient amount of high
quality capital--primarily common equity and retained earnings--to
survive periods of high financial stress. The statutory definition of
``core capital'' broadly defines the types of capital instruments that
may be included without distinguishing the quality of the capital
instruments. More recent views of capital, including the Basel III
framework for stock corporations, make much finer distinctions between,
for example, different structures of preferred stock on the basis of
the terms of their underlying contractual provisions. These finer
distinctions include how much incentive is built into preferred stock
terms for the issuer to redeem the shares. An example of such an
incentive would be significant step-ups in dividend rates over time.
Such provisions create greater uncertainty around the relative
permanence of that capital and, therefore, how available it will be to
cover unexpected losses in the future.
Consistent with the view that high quality capital is the
fundamental resource available to cover unexpected losses and ensure
long-term financial flexibility and viability, we propose to revise the
current capital adequacy planning requirements to increase our
regulatory focus on the quality and level of capital and advance best
practices for capital adequacy planning and stress testing at Farmer
Mac.
IV. Proposed Revisions
We propose to revise our regulation on Corporation Board Guidelines
by deleting the provisions related to the capital adequacy plan that is
part of the operational and strategic business plan requirement in
existing Sec. 652.60(b)(5) and (c) and creating a new Sec. 652.61
with revised and expanded guidance on capital planning. In Sec.
652.60(a), we propose to add the requirement that Farmer Mac's capital
be sufficient to meet goals and objectives in a newly proposed element
(in Sec. 652.61(c)) of its operational and strategic business plan. We
further propose to require Farmer Mac to notify the OSMO within 10
calendar days of determining that capital is not sufficient to meet
this new requirement. In Sec. 652.60(b), we propose to add several
items that Farmer Mac must address in its business plan. These include
a business and organizational overview and an assessment of management
capabilities; an assessment of Farmer Mac's strengths and weaknesses;
strategies for achieving mission, financial, and business goals and
objectives; and a marketing plan. We propose to add to the required
review of internal and external factors likely to affect Farmer Mac
during the business planning period a required discussion of how
factors might impact Farmer Mac's current financial position and
business goals.
In new Sec. 652.61, we propose to require Farmer Mac to develop
and maintain an annual capital plan and to submit the plan for FCA
review. The revisions generally refer to a required capital plan rather
than the existing rule's references to capital adequacy planning, and
the proposed requirements, while more specific and detailed, are very
similar in their overall objective. As described more fully below,
Farmer Mac would be required to calculate a high quality capital ratio
as well as the ratios described in the Act and existing regulations. In
proposed Sec. 652.62, we would require Farmer Mac to notify the FCA
prior to making a
[[Page 5322]]
capital distribution under certain circumstances.
A. Annual Capital Planning Requirement
We propose to define a capital plan as a written presentation of
Farmer Mac's capital planning strategies and capital adequacy process
that includes certain mandatory elements. The proposed capital plan
would be organized into four main components, each with specified
mandatory elements. The four mandatory elements are:
(1) An assessment of the expected uses and sources of capital over
the planning horizon (at least 12 quarters, beginning with the quarter
preceding the quarter in which Farmer Mac submits its capital plan)
that reflects Farmer Mac's size, complexity, risk profile and scope of
operations, assuming both expected and stressful conditions;
(2) A detailed description of Farmer Mac's process for assessing
capital adequacy;
(3) Farmer Mac's capital policy; and
(4) A discussion of any expected changes to Farmer Mac's business
plan that are likely to have a material impact on its capital adequacy
or liquidity.
The first mandatory element, the assessment of uses and sources of
capital, must contain the following components: (i) Estimates of
projected revenues, losses, reserves, and pro forma capital levels,
including any minimum statutory or regulatory capital ratio, a high-
quality Tier 1 ratio as described below, and any additional capital
measures deemed relevant by Farmer Mac, over the planning horizon under
expected conditions and under a range of stressed scenarios, including
any scenarios provided by FCA and at least two stressed scenarios
developed by Farmer Mac appropriate to its business model and
portfolios; such scenarios could include agricultural and general
economic conditions that cause increases in delinquency rates caused by
any variety of factors (e.g., widespread, weather-related crop losses),
interest rate spikes that could impact historically high cropland
values and the cost of debt funding, changes in laws that affect plant-
based renewable fuels subsidies, as well as liquidity-related stress
such as reduced access to debt markets; and (ii) a description of all
planned capital actions over the planning horizon. We propose to define
a capital action as any issuance of a debt or equity capital
instrument, a capital distribution, or any similar action that the FCA
determines could impact Farmer Mac's capital. A capital distribution
would include a redemption or repurchase of any debt or equity capital
instrument, a dividend payment, a payment that may be temporarily or
permanently suspended by Farmer Mac on any instrument that is eligible
for inclusion in total equity (as reported in accordance with GAAP),
and any similar transaction that the Agency determines to be in
substance a distribution of capital.
The second mandatory element of the capital plan, the process for
assessing capital adequacy, must contain the following components: (i)
A discussion of how Farmer Mac will, under normal and stressful
conditions, be able to maintain capital commensurate with its risks,
maintain capital above the minimum statutory and regulatory capital
ratios and above a Tier 1 ratio set in accordance with the board's
clearly articulated risk tolerance policy; and (ii) a discussion of how
Farmer Mac will, under both normal and stressful conditions, maintain
sufficient capital to continue its operations by maintaining ready
access to funding, meeting its obligations to creditors and other
counterparties, and continuing to serve as secondary market for
qualifying rural markets; and (iii) a discussion of the results of any
stress test required by law or regulation, including the RBCST, and an
explanation of how the capital plan takes these results into account.
We do not propose to establish a new regulatory minimum capital
requirement in this rule. Rather, we propose to require Farmer Mac to
establish an internal minimum standard in accordance with widely
recognized approaches as a part of board policy on capital. To comply
with the proposed requirements of the Tier 1 ratio, Farmer Mac must
utilize an approach that is in accordance with an appropriate Basel
framework (or frameworks), or comparable U.S. regulatory frameworks in
effect (e.g., Standardized or advanced internal ratings based
(Advanced) approaches, or both).\7\ The approach selected to calculate
risk-weighted assets must be appropriate given Farmer Mac's business
activities and must be consistent with broadly accepted banking
practices and standards (e.g., Basel accords or similar U.S.
regulations, including those applied by Farm Credit System banks and
associations under part 615 of the FCA's regulations). The OSMO
strongly recommends that, for capital planning purposes, Farmer Mac
calculate and report in its business plan the ratio of Tier 1 capital
to risk-weighted assets using both the Basel Standardized approach and
the Advanced approach to provide alternative perspectives on the Farmer
Mac's risk-bearing capacity.
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\7\ Publications by the BCBS explaining these approaches
include: (1) International Convergence of Capital Measurement and
Capital Standards, A Revised Framework Comprehensive Version, June
2006; (2) Enhancements to the Basel II framework July 2009; and (3)
Basel III, A Global Regulatory Framework for More Resilient Banks
and Banking Systems, December 2010 (revised June 2011).
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The third mandatory element of the capital plan, the capital
policy, is a written assessment of the principles and guidelines used
for capital planning, capital issuance, usage and distributions,
including internal capital goals, the quantitative or qualitative
guidelines for dividend and stock repurchases, the strategies for
addressing potential capital shortfalls, and the internal governance
procedures around capital policy principles and guidelines.
Finally, the fourth mandatory element of Farmer Mac's capital plan
is a discussion of any expected changes to Farmer Mac's business plan
that are likely to have a material impact on capital adequacy or
liquidity. For example, the capital plan should reflect any expected
material effects of new lines of business or activities on Farmer Mac's
capital adequacy or liquidity, including revenue and losses.
We propose to require the board, at least annually, to review the
robustness of the process for assessing capital adequacy, ensure that
any deficiencies in the process for assessing capital adequacy are
appropriately remedied, and approve the capital plan. The robustness of
Farmer Mac's capital adequacy process should be evaluated based on the
following elements:
(i) A sound risk management infrastructure that supports the
identification, measurement, and assessment of all material risks
arising from the business activities of Farmer Mac;
(ii) An effective process for translating risk measures into
estimates of potential loss over a range of adverse scenarios and for
aggregating those estimated losses across Farmer Mac;
(iii) A clear definition of available capital resources and an
effective process for forecasting available capital resources over the
same range of adverse scenarios used for loss forecasting;
(iv) A process for considering the impact of loss estimates on
capital adequacy consistent with Farmer Mac's stated goals for the
level and composition of capital and for taking into account any
limitations of the company's capital adequacy process and its
components;
(v) A process, supported by Farmer Mac's capital policy, to use its
assessments of the impact of loss and
[[Page 5323]]
resource estimates on capital adequacy to make key decisions regarding
the current level and composition of capital, specific capital actions,
and capital contingency plans as they affect capital adequacy;
(vi) Sound internal controls governing the capital adequacy
process, including sufficient documentation, model validation and
independent review, and audit testing; and
(vii) Effective board and senior management oversight of Farmer
Mac's capital adequacy process, including periodic review of capital
goals, assessment of the appropriateness of adverse scenarios
considered in capital planning, regular review of any limitations and
uncertainties in the process, and approval of planned capital actions.
B. FCA's Review of Capital Plans
FCA expects to consider the following factors in reviewing Farmer
Mac's capital plan: (1) The comprehensiveness of the capital plan,
including the extent to which the analysis underlying the capital plan
captures and addresses potential risks stemming from activities across
Farmer Mac's operations and its capital policy; (2) the reasonableness
of its assumptions and analysis underlying the capital plan and its
methodologies for reviewing the robustness of its capital adequacy
process; and (3) its ability to maintain capital above the board-
established minimum Tier 1 Capital to risk-weighted assets ratio on a
pro forma basis under both normal and stressful conditions throughout
the planning horizon, including but not limited to any stressed
scenarios required under this rule.
The FCA would also consider the following information in reviewing
Farmer Mac's capital plan:
(i) Relevant supervisory information about Farmer Mac and its
subsidiaries;
(ii) Farmer Mac's regulatory and financial reports, as well as
supporting data that will allow for an analysis of the loss, revenue,
and reserve projections;
(iii) Compliance with statutory and regulatory minimum capital
standards;
(iv) As applicable, the FCA's own pro forma estimates of Farmer
Mac's potential losses, revenues, reserves, and resulting capital
adequacy under both normal and stressful conditions, including but not
limited to any stressed scenarios required under the final rule, as
well as the results of any stress tests conducted by Farmer Mac or the
FCA; and
(v) Other information requested or required by the FCA, as well as
any other information relevant to Farmer Mac's capital adequacy.
C. FCA Action on a Capital Plan
OSMO would review the capital plan and provide an assessment to
Farmer Mac of the capital adequacy and planning process through its
normal examination and oversight program. In determining whether a
capital plan or proposed capital distributions would constitute an
unsafe or unsound practice, the FCA will consider whether Farmer Mac is
and will remain in sound financial condition after giving effect to the
capital plan and proposed capital distributions.
OSMO may require Farmer Mac to submit additional data about
planning assumptions, stress test strategies, and other qualitative and
quantitative information. OSMO may also require Farmer Mac to revise
and re-submit its capital plan.
D. Farmer Mac's Response to OSMO's Review
We propose to require Farmer Mac to take into account the results
of the stress tests conducted under the requirements of this section,
as well as OSMO's assessment, in making changes as appropriate to
Farmer Mac's capital structure (including the level and composition of
capital); its exposures, concentrations, and risk positions; any plans
for recovery and resolution; and overall risk management. In addition,
Farmer Mac must document in writing any changes it makes to its capital
structure such as issuance or retirement of equity securities, as well
as decisions not to make such changes with respect to any shortcomings
noted in OSMO's assessment.
V. Prior Notice Requirements
A. Notice to OSMO of Capital Distributions
We believe an enhanced level of dialogue between the Agency and
Farmer Mac in advance of capital distributions will improve the level
of FCA's oversight of, and communication with, regulated entity. Such
enhanced dialogue would provide the board with valuable external
perspective on such decisions from both a safety and soundness and
mission achievement points of view. In new Sec. 652.62, we propose to
require Farmer Mac to provide OSMO with notice 15 calendar days prior
to a board action to declare a capital distribution. We expect such
notice to include a description of the capital distribution including,
for redemptions or repurchases of securities, the gross consideration
to be paid and the terms and sources of funding for the transaction,
and for dividends, the amount of the dividend, as well as any
additional information requested by OSMO (which could include, among
other things, an assessment of Farmer Mac's capital adequacy under a
stress scenario specified by OSMO.) There would be an exception to the
notice requirement for dividends on common and preferred stock when
there is no change from the amount of the dividends paid in the
previous period.
VI. Regulatory Flexibility Act
Farmer Mac has assets and annual income in excess of the amounts
that would qualify it as a small entity. Therefore, Farmer Mac is not a
``small entity'' as defined in the Regulatory Flexibility Act. Pursuant
to section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.), the FCA hereby certifies that the proposed rule will not have a
significant economic impact on a substantial number of small entities.
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
0
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.
0
2. Revise Sec. 652.60 to read as follows:
Sec. 652.60 Corporate business planning.
(a) Your board of directors is responsible for ensuring that you
maintain capital at a level that is sufficient to ensure continued
financial viability and provide for growth. In addition, your capital
must be sufficient to meet statutory and regulatory requirements as
well as the goals and objectives in the required element of your
capital plan in Sec. 652.61(c)(2)(i)(B). You must notify the OSMO
within 10 calendar days of determining that capital is not sufficient
to meet those goals and objectives.
(b) No later than 65 days after the end of each calendar year, your
board of
[[Page 5324]]
directors must adopt an operational and strategic business plan for at
least the next 3 years. The plan must include:
(1) A mission statement;
(2) A business and organizational overview and an assessment of
management capabilities;
(3) An assessment of Farmer Mac's strengths and weaknesses;
(4) A review of the internal and external factors that are likely
to affect you during the planning period;
(5) Measurable goals and objectives;
(6) A discussion of how these factors might impact Farmer Mac's
current financial position and business goals;
(7) Forecasted income, expense, and balance sheet statements for
each year of the plan;
(8) A marketing plan, and
(9) A capital plan in accordance with Sec. 652.61.
3. Add new Sec. Sec. 652.61 and 652.62 to read as follows:
Sec. 652.61 Capital planning.
(a) Purpose. This section establishes capital planning requirements
for Farmer Mac.
(b) Definitions. For purposes of this section and Sec. 652.62, the
following definitions apply:
Basel III means the Basel Committee on Banking Supervision's
document ``Basel III: A Global Regulatory Framework for More Resilient
Banks and Banking Systems,'' June 2011 and as it may be updated from
time to time.
Capital action means any issuance of a debt or equity capital
instrument, and any capital distribution, as well as any similar action
that OSMO determines could impact Farmer Mac's consolidated capital.
Capital distribution means a redemption or repurchase of any debt
or equity capital instrument, a payment of common or preferred stock
dividends, a payment that may be temporarily or permanently suspended
by the issuer on any instrument that is eligible for inclusion in the
numerator of any minimum capital ratio, and any similar transaction
that OSMO determines to be in substance a distribution of capital.
Capital plan means a written presentation of Farmer Mac's capital
planning strategies and capital adequacy process that includes the
mandatory elements set forth in paragraph (c)(2) of this section.
Capital policy means Farmer Mac's written assessment of the
principles and guidelines used for capital planning, capital issuance,
usage and distributions, including internal capital goals; the
quantitative or qualitative guidelines for dividend and stock
repurchases; the strategies for addressing potential capital
shortfalls; and the internal governance procedures around capital
policy principles and guidelines.
Planning horizon means the period of at least 12 quarters,
beginning with the quarter preceding the quarter in which Farmer Mac
submits its capital plan, over which the relevant projections extend.
Tier 1 Capital means the components meeting the criteria of Common
Equity Tier 1 Capital and Additional Tier 1 Capital and the regulatory
adjustments as set forth in Basel III, or Tier 1 Capital as defined in
regulations of the Office of the Comptroller of the Currency, the Board
of Governors of the Federal Reserve, or the Federal Deposit Insurance
Corporation, as revised from time to time; or another capital standard
to measure high quality capital as approved for use under this
regulation by the Director of OSMO.
Tier 1 ratio means the ratio of Farmer Mac's Tier 1 Capital to
Total Risk-Weighted Assets.
Total Risk-Weighted Assets means a risk-weighting approach that is
appropriate given Farmer Mac's business activities and consistent with
broadly accepted banking practices and standards (e.g., one of the
frameworks of the Basel Committee on Banking Supervision or similar
U.S. regulations).
(c) General requirements.
(1) Annual capital planning.
(i) Farmer Mac must develop and maintain a capital plan each year.
(ii) Farmer Mac must submit its complete annual capital plan to
OSMO by March 1 or such later date as directed by OSMO, after
consultation with the FCA Board.
(iii) Prior to submission of the capital plan under paragraph
(c)(1)(ii) of this section, Farmer Mac's board of directors must:
(A) Review the robustness of Farmer Mac's process for assessing
capital adequacy,
(B) Ensure that any deficiencies in Farmer Mac's process for
assessing capital adequacy are appropriately remedied; and
(C) Approve Farmer Mac's capital plan.
(2) Mandatory elements of capital plan. The capital plan must
contain at least the following elements:
(i) An assessment of the expected uses and sources of capital over
the planning horizon that reflects Farmer Mac's size, complexity, risk
profile, and scope of operations, assuming both expected and stressful
conditions, including:
(A) Projected revenues, losses, reserves, and pro forma capital
levels, including the core capital and regulatory capital ratios
required by sections 8.32 and 8.33 of the Act, the Tier 1 ratio as
defined in this section, and any additional capital measures deemed
relevant by Farmer Mac, over the planning horizon under expected
conditions and under a range of at least two progressively severe
stress scenarios developed by Farmer Mac appropriate to its business
model and portfolios, as well as any scenarios provided by the Director
of OSMO. At least 15 calendar days prior to this stress testing, Farmer
Mac must provide to OSMO a description of the expected and stressed
scenarios that Farmer Mac intends to use to conduct its annual stress
test under this section.
(B) A description of all planned capital actions over the planning
horizon.
(ii) A detailed description of Farmer Mac's process for assessing
capital adequacy, including:
(A) A discussion of how Farmer Mac will, under expected and
stressed conditions, maintain capital commensurate with its risks,
maintain capital above the minimum core capital and regulatory capital
ratios and above the Tier 1 ratio set in accordance with a well-
articulated risk tolerance policy established by the board of
directors;
(B) A discussion of how Farmer Mac will, under expected and
stressed conditions, maintain sufficient capital to continue its
operations by maintaining ready access to funding, meeting its
obligations to creditors and other counterparties, and continuing to
serve its statutory purposes; and
(C) A discussion of the results of the risk-based stress test
required by section 8.32 of the Act and the stress tests required by
this section, as well as any other stress test required by law or
regulation, and an explanation of how the capital plan takes these
results into account.
(iii) Farmer Mac's capital policy; and
(iv) A discussion of any expected changes to Farmer Mac's business
plan that are likely to have a material impact on the Corporation's
capital adequacy or liquidity.
(d) Review of capital plan by OSMO.
(1) OSMO will consider the following factors in reviewing Farmer
Mac's capital plan:
(i) The comprehensiveness of the capital plan, including the extent
to which the analysis underlying the capital plan captures and
addresses risks stemming from activities across Farmer Mac's
operations;
(ii) The reasonableness of Farmer Mac's assumptions and analysis
underlying the capital plan and its methodologies for reviewing the
[[Page 5325]]
robustness of its capital adequacy process; and
(iii) Farmer Mac's ability to maintain capital above the minimum
core capital and regulatory capital ratios and above a Tier 1 ratio set
in accordance with a well-articulated risk tolerance policy established
by the board of directors on a pro forma basis under expected and
stressful conditions throughout the planning horizon, including but not
limited to any stressed scenarios required under paragraph (c)(2)(i)(A)
and (c)(2)(ii) of this section.
(iv) All supervisory information about Farmer Mac and its
subsidiaries;
(v) Farmer Mac's regulatory and financial reports, as well as
supporting data that would allow for an analysis of its loss, revenue,
and projections;
(vi) As applicable, OSMO's own pro forma estimates of Farmer Mac's
potential losses, revenues, and resulting capital adequacy measurements
under expected and stressful conditions, including but not limited to
any stressed scenarios required under paragraphs (c)(2)(i)(A) and
(c)(2)(ii) of this section, as well as the results of any other stress
tests conducted by Farmer Mac or OSMO; and
(vii) Other information requested or required by OSMO, as well as
any other information relevant to Farmer Mac's capital adequacy.
(e) OSMO action on a capital plan.
(1) OSMO will review the capital plan and provide an assessment to
Farmer Mac of the capital adequacy and planning process through its
ongoing examination and oversight process.
(2) Upon a request by OSMO, Farmer Mac must provide OSMO with
sufficient information regarding its planning assumptions, stress test
strategies and results and any other relevant qualitative or
quantitative information requested by OSMO to facilitate review of
Farmer Mac's capital plan under this section.
(3) OSMO may require Farmer Mac to revise and re-submit its capital
plan.
(f) Farmer Mac response to OSMO's assessment. Regardless of whether
re-submission is required, Farmer Mac must take the results of the
stress tests conducted under paragraph (c)(2)(i)(A) and (c)(2)(ii) of
this section (including any revisions required under paragraph (e)(3)
of this section) as well as OSMO's assessment into account in making
changes, as appropriate, to Farmer Mac's capital structure (including
the level and composition of capital); its exposures, concentrations,
and risk positions; any plans for recovery and resolution; and to
improve overall risk management. Farmer Mac must document in writing
its actions in response to the stress tests and assessment, as well as
decisions not to take actions in response to any issues raised in the
assessment.
Sec. 652.62 Notice to OSMO of capital distributions.
(a) Farmer Mac must provide OSMO with notice 15 calendar days prior
to a board consideration of a declaration of a capital distribution or
any material changes in capital distributions policies.
(b) Notice under paragraph (a) of this section is not required with
respect to a regular periodic payment of dividends on common stock and
preferred stock when there is no change in the amount of payment per
share from the previous period.
Dated: January 18, 2013.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2013-01500 Filed 1-24-13; 8:45 am]
BILLING CODE 6705-01-P