Federal Agricultural Mortgage Corporation Funding and Fiscal Affairs; Farmer Mac Capital Planning, 65145-65151 [2013-25892]

Agencies

• Farm Credit Administration

[Federal Register Volume 78, Number 211 (Thursday, October 31, 2013)]
[Rules and Regulations]
[Pages 65145-65151]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-25892]



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Federal Register / Vol. 78, No. 211 / Thursday, October 31, 2013 / 
Rules and Regulations

[[Page 65145]]



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.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA or we) adopts a final rule 
that amends regulations governing operational and strategic planning of 
the Federal Agricultural Mortgage Corporation (Farmer Mac). Among other 
things, the final rule requires Farmer Mac to submit a capital plan to 
the Office of Secondary Market Oversight (OSMO) on an annual basis and 
requires Farmer Mac to notify OSMO under certain circumstances before 
making a capital distribution. The final rule revises the current 
capital adequacy planning requirements to place more emphasis 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 primary resource that must be available to 
cover unexpected losses and ensure long-term financial flexibility and 
viability.

DATES: This regulation will be effective 30 days after publication in 
the Federal Register during which either or both Houses of Congress are 
in session. We will publish a notice of the effective date in the 
Federal Register.

FOR FURTHER INFORMATION CONTACT:
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) 883-4056; or
Rebecca S. Orlich, Senior Counsel, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-4056.

SUPPLEMENTARY INFORMATION:

I. Objective

    The objective of this rulemaking is to improve Farmer Mac's long-
term safety and soundness and continuity of Farmer Mac operations so 
that Farmer Mac will be better positioned to fulfill its public mission 
under a range of economic conditions. We published a notice of proposed 
rulemaking (NPRM) on January 25, 2013.\1\ The final rule (i) 
establishes minimum supervisory standards for the capital planning 
process, including stress testing, (ii) describes how the Farmer Mac 
board of directors (board) and senior management should implement the 
process, and (iii) requires Farmer Mac to notify FCA of certain capital 
distributions before making them.
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    \1\ 78 FR 5320.
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II. Background

A. Farmer Mac

    Farmer Mac is an institution of the Farm Credit System (System), 
regulated by the FCA through the OSMO. Congress established Farmer Mac 
in 1988 to create a secondary market for agricultural real estate 
mortgage loans, rural housing mortgage loans, and rural utilities 
loans, and it is an instrumentality of the United States. Title VIII of 
the Farm Credit Act of 1971, as amended (Act), governs Farmer Mac.\2\ 
To cover any obligations of Farmer Mac on the loan guarantees it has 
issued, Farmer Mac has a $1.5 billion line of credit with the U.S. 
Treasury; however, Farmer Mac has never needed to draw on this line of 
credit.
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    \2\ The Act is set forth at 12 U.S.C. 2001 et seq. Title VIII is 
in 12 U.S.C. 2277aa-2279cc.
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    Other institutions of the System are the Farm Credit Banks (AgFirst 
Farm Credit Bank, AgriBank Farm Credit Bank, the Farm Credit Bank of 
Texas), the Agricultural Credit Bank (CoBank, ACB), the banks' 
affiliated associations, and their related service organizations.\3\ 
Farmer Mac is financially separate from the other System entities.
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    \3\ The System associations make retail loans to the 
agricultural sector and to rural homeowners that are funded by their 
affiliated Farm Credit banks, and those banks obtain funds primarily 
by issuing System-wide obligations on which the banks are jointly 
and severally liable. The System-wide obligations are insured by the 
Farm Credit System Insurance Corporation (FCSIC). These other System 
institutions are examined and regulated by the FCA. They do not have 
authority to borrow from the U.S. Treasury to meet their 
obligations. Farmer Mac is not liable for the debt of the other 
System entities, nor are the other System entities liable for Farmer 
Mac's debt. Moreover, the FCSIC does not insure any debt issued by 
Farmer Mac.
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    However, only the other System institutions are entitled to own, 
and do own, Class B voting common stock in Farmer Mac and, thus, have 
the right to elect five directors to the Farmer Mac board. The other 
class of voting stock, Class A, may be held only by insurance 
companies, banks, and financial entities that are not part of the 
System, and they also have the right to elect five directors to the 
Farmer Mac board. The remaining five board members are appointed by the 
President.

B. Capital Planning

    The purpose of bank capital generally is to provide a cushion to 
absorb unexpected losses and improve an institution's long-term 
resilience throughout all phases of business and economic cycles. 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.\4\ The 
Basel III 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

[[Page 65146]]

Housing Finance Agency (FHFA) have issued rules and guidance to enhance 
capital standards and stress testing.\5\ This final 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.
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    \4\ 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.
    \5\ 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), and joint final rule adopted in July 2013; the FDIC's 
final rule, Annual Stress Test, 77 FR 62417 (October 15, 2012); the 
OCC's final rule, Annual Stress Test, 77 FR 61238 (October 12, 
2012); and the FHFA's proposed rule, Stress Testing of Regulated 
Entities, 77 FR 60948 (October 5, 2012).
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    Farmer Mac's statutory capital standards were enacted in 1991 \6\ 
and have not been updated since 1996.\7\ 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.
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    \6\ Public Law 102-237, Title V, December 13, 1991.
    \7\ Public Law 104-105, Title I, February 10, 1996.
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    The regulatory requirements of the RBCST were implemented in FCA's 
regulations at 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 robustness 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 
significantly stressful scenario of interest rate shock in very low 
interest rate environments such as the current one.\8\ 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.
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    \8\ 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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    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 sufficient distinctions based on the quality of 
the capital components. 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. The 
final rule revises 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.

III. Comment Letters

    We received two comment letters, one from Farmer Mac and one from 
the Farm Credit Council. Both commenters generally acknowledge the 
value of sound capital planning practices to enable the regulated 
entity to fulfill its statutory mission over the long term.
    Farmer Mac generally supported the NPRM's emphasis on capital 
planning best practices as well as its focus on quality of capital 
standards as being consistent with a greater ability to absorb 
unexpected losses and maintain safe and sound operations. The Farm 
Credit Council is a trade association that represents the interests of 
the Farm Credit banks, the banks' affiliated associations, and related 
service organizations. The Farm Credit Council does not represent 
Farmer Mac and, in its comment letter, stated that it was ``extremely 
concerned with the continuing lack of transparency regarding Farmer 
Mac's somewhat limited status as an institution of the [Farm Credit 
System].'' We are unsure what the Farm Credit Council means by Farmer 
Mac's status as an institution of the System being ``limited,'' but we 
refer readers of this rule to the Background section of this preamble 
for a delineation of the relationships between Farmer Mac and the other 
System institutions.\9\
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    \9\ The Farm Credit Council also asserted that the Farm Credit 
Act ``specifically makes clear that Farmer Mac is a separate GSE,'' 
or Government-Sponsored Enterprise. A GSE is a descriptive term that 
has generally been used to refer to a number of government-
sponsored, privately owned and operated corporations with a public 
mission to enhance the availability of mortgage, agricultural, or 
other types of credit in the U.S. Sometimes Farmer Mac has been 
treated as a separate GSE in financial reports and other documents, 
such as Government Accountability Office Reports. However, no 
provision of the Act makes mention of the term ``Government-
Sponsored Enterprise.'' Consequently, we believe the assertion by 
the Farm Credit Council that Farmer Mac is a separate GSE is 
unsettled from a legal standpoint.
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    In its comment letter, the Farm Credit Council made a number of 
recommendations for revisions to the proposed rule that are not 
permitted by the provisions of the Farm Credit Act that pertain to 
Farmer Mac. For example, the Farm Credit Council recommended that FCA 
include binding capital adequacy requirements through the capital plan 
and further require the Farmer Mac board to set capital levels 
consistent with all Basel III standards and at or above the levels 
required by regulators and financial authorities worldwide in the 
aftermath of the 2008 financial crisis. The Farm Credit Council further 
recommended that the rule limit the discretion of Farmer Mac's board so 
that the standard established is never less than the minimum amount 
required by the Basel III framework after inclusion of the conservation 
buffer. While the FCA has the authority and discretion to take 
supervisory and enforcement actions to address unsafe and unsound 
conditions and practices, sections 8.31 to 8.38 of the Act already

[[Page 65147]]

specify minimum statutory and regulatory capital requirements for 
Farmer Mac that differ from the Farm Credit Council's recommendations.
    The Farm Credit Council also recommended strengthening the rule to 
ensure that all business risks, capital quality and leverage are 
reflected, to impose specific capital measurements on Farmer Mac rather 
than allowing Farmer Mac some flexibility to choose what capital 
measurements to apply, and to eliminate risk arising from capital 
arbitrage. We believe this new rule, with its focus on capital planning 
and capital adequacy, already requires Farmer Mac to address all 
business risks because adverse outcomes in any risk area impact capital 
levels either directly (e.g., fair value changes in available-for-sale 
investments) or indirectly (e.g., increased provision expense reduces 
net income closed out to retained earnings). We expect Farmer Mac to 
consider stress scenarios that reflect all business risks in its stress 
testing operations. We believe that capital quality and risks 
associated with capital structure (i.e., leverage) should also be 
considered in stress testing, and the proposed rule specifically 
incorporated capital adequacy ratios that require an evaluation of 
capital quality through its definition of Tier 1 equity. Regarding the 
recommendation that the rule specify the use of Basel III Tier 1 equity 
definitions, we believe the proposal appropriately makes reference to 
Basel III Tier 1 equity as indicative of the type of high quality 
capital measure FCA expects Farmer Mac to establish while, also 
appropriately, allowing sufficient flexibility to consider adjustment 
of that definition where it is justified. For example, adjustments may 
be appropriate to take into consideration Farmer Mac's status as a GSE 
and the specialized nature of its business providing a secondary market 
for agricultural mortgages and rural utility loans.
    The Farm Credit Council commented that the rule should be 
strengthened to eliminate the risk arising from capital arbitrage. FCA 
expects Farmer Mac to hold adequate capital in relation to risk at all 
times and not merely in relation to regulatory minimum requirements. 
The precise level of risk in each agricultural mortgage differs and, 
therefore, so would the precisely adequate capital allocation to that 
loan. As a practical matter, such an ideal level of precision in 
capital allocation (and regulation) is difficult to achieve. For that 
reason, FCA closely monitors Farmer Mac's loan administration 
processes, including the risk ratings it allocates internally to its 
loans--which ratings have a direct impact on capital-to-risk weighted 
assets ratios and assessments of Farmer Mac's capital adequacy.
    Finally, the Farm Credit Council commented that the rule should 
include binding capital adequacy requirements. This rulemaking makes 
clear the Agency's position that capital must not be managed solely in 
relation to the requirements set forth in the Act. Rather, the 
requirements in the Act should be weighed in the context of other 
perspectives on capital adequacy, including those set forth in this 
rulemaking.

IV. Section-by-Section Comments and Agency Responses

A. Section 652.60--Corporate Business Planning

    The Farm Credit Council commented that our reference to ``goals and 
objectives'' in paragraph (a) was not clear because the cited section 
has no specific reference to ``goals and objectives.'' We intended the 
citation to refer to ``measurable goals and objectives'' required in 
Sec.  652.60(b)(5) rather than to Sec.  652.61(c)(2)(i)(B) and to 
provide a specific example found--the newly required minimum Tier 1 
ratio found at Sec.  652.61(c)(2)(ii)(A). We have corrected this in the 
final rule. The Farm Credit Council also stated that Sec.  652.60 
appears to limit board accountability as written. We believe that such 
an interpretation largely stems from the incorrect citation and that 
the correction of that citation makes much clearer the board's 
responsibility and accountability for setting capital adequacy 
requirements, including specific goals and objectives, and establishing 
a comprehensive capital plan.
    The Farm Credit Council commented that the proposed rule should 
have included the same diversity and inclusion in Farmer Mac's human 
capital plan as are currently required in similar plans of System banks 
and associations. Because such provisions were not in the proposed 
rule, the Agency is not including such provisions in this final rule. 
The Agency has a rulemaking pending on this topic for which an Advance 
Notice of Proposed Rule Making was issued in 2011,\10\ and we will take 
this comment into consideration as we continue our review in that 
rulemaking process.
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    \10\ 76 FR 35158, June 16, 2011.
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    The Farm Credit Council commented that capital plan requirements in 
the proposed rule do not match those that apply to System banks and 
associations (Sec.  615.5200). While we view most if not all of these 
elements as appropriate for inclusion in an operational and strategic 
plan for Farmer Mac, we believe they are included either specifically 
or in substance through other regulatory requirements and supervisory 
processes. For example, the sufficiency of liquid funds is required in 
Sec.  652.35, the capability of management is covered in the proposed 
rule in Sec.  652.60(b)(2). With the improved clarity provided by the 
corrected reference, we otherwise adopt these provisions as proposed.
    The Farm Credit Council commented that Farmer Mac should be 
required ``beyond stress testing'' to review its existing business 
practices for ``accumulation of future risks'' and gives the example of 
accumulating agricultural mortgages without creating an actively 
trading secondary market in agricultural mortgage-backed securities 
which the Farm Credit Council believes to be a part of Farmer Mac's 
``stated mission.'' We believe that the proposed rule's requirements 
consider not only existing practices and conditions but also potential 
future practices under Sec.  652.61(c)(2)(i) scope of operations. That 
element requires 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 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.
    We believe that excessive program asset growth, or the 
``accumulation of risks,'' could raise a concern related to adequate 
capital regardless of whether it is held on-balance sheet or off-
balance sheet. However, The Farm Credit Council's comment did not 
include a citation to support its view that Farmer Mac's stated mission 
is to create an actively trading secondary market for agricultural 
mortgages or mortgage-backed securities; so we are unable to address 
that assertion.
    The Farm Credit Council made a number of comments regarding the 
risks on Farmer Mac's balance sheet and the use of short-term funding 
and derivatives as related to Farmer Mac's mission. We note that re-
funding risk management is being addressed by FCA under a separate 
rulemaking in the proposed Liability Maturity Management Plan (LMMP) 
proposed in the currently pending rulemaking

[[Page 65148]]

governing liquidity management.\11\ For these reasons, we adopt these 
provisions as proposed.
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    \11\ 76 FR 71798 (November 18, 2011).
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B. Section 652.61--Capital Planning

    Farmer Mac commented that the definition of ``Capital Action'' 
(Sec.  652.61(b)) includes issuance of debt or equity as well as any 
similar action that OSMO determines could impact Farmer Mac's 
consolidated capital. Farmer Mac believes this provision, combined with 
the provision requiring the inclusion in the capital plan of all 
planned capital actions over the planning horizon (Sec.  652.61(b)), 
could be unduly burdensome because the nature, volume, and timing of 
debt or equity transactions will vary, making it difficult to apply 
OSMO guidance received from past transactions. In response we clarify 
that the requirement to include planned capital actions in the capital 
plan does not prohibit unplanned capital actions over the planning 
horizon and would not prevent Farmer Mac from acting on advantageous 
developments in the markets that might motivate an unplanned capital 
action. We further clarify that our reference to debt in this context 
was intended to refer to debt that can impact consolidated capital, 
such as certain subordinated debt.
    We did not intend to include normal debt issuance operations in the 
definition of ``capital action.'' Most of the debt routinely issued by 
Farmer Mac does not affect its consolidated capital; so it would not be 
included in this definition. To eliminate confusion, we have deleted 
the reference to debt in the final rule. Should Farmer Mac issue debt 
that does affect its consolidated capital, the FCA has authority to 
determine to treat it as a capital action.
    The Farm Credit Council asked FCA to remove OSMO's discretion to 
approve an alternative definition of Tier 1 Capital that Farmer Mac 
might submit and instead require it to select from the analogous 
definitions established by Basel III, the Office of the Controller of 
the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), 
or the Federal Reserve. It further requested that our regulations 
follow specifically Basel III and establish definitions for Common 
Equity Tier 1 (CET1), as well as Tier 2 capital ratios and that those 
be set in the regulations no lower than the levels applied to ``other 
regulated lenders.'' The Notice of Proposed Rule Making proposed a Tier 
1 capital definition (and Additional Tier 1 capital) which stipulated 
the selected approach must be as set forth in Basel III or as defined 
by the OCC, FDIC or the Federal Reserve. This provision is generally 
consistent with what the Farm Credit Council is requesting but includes 
additional flexibility for OSMO to consider a submitted alternative 
measure of high quality capital. The added flexibility to consider an 
alternative (but similar) approach is appropriate because we do not 
share the Farm Credit Council's view that an international standard is 
quickly solidifying (e.g. Basel III and Federal regulators' approaches 
are not exactly the same). We finalize this definition as proposed but 
note that OSMO will base its approval on whether any submitted 
alternative approach is both justified on the basis of Farmer Mac's 
relatively unique business model and sufficiently consistent with and 
as strong as the approaches adopted by other regulators.
    The Farm Credit Council expressed concern that the proposed rule 
contains no indication of consequences for receiving an unfavorable 
OSMO review of a capital plan, while other System institutions would 
receive a capital directive ``if their capital ratios are unmet.'' It 
further states that FCA has not clearly identified its intent with 
respect to enforcing the proposed rule requirements. We clarify here 
that a deficient plan would result in heightened oversight and 
supervision as it would with any other FCA regulated entity--along with 
potential changes in Farmer Mac's assigned Financial Institution Rating 
System ratings, as well as any other enforcement tool at our disposal. 
We also note that Sec.  615.5355(a), which describes the purpose of a 
capital directive and the scope of its issuance, does not provide for 
the issuance of a capital directive to a System bank or association for 
failure to meet the minimum capital levels the institution sets for 
itself under the capital planning regulation in Sec.  615.5200, that 
applies to System institutions other than Farmer Mac. Likewise, the FCA 
does not anticipate issuing a capital directive to Farmer Mac for 
failure to achieve the minimum capital ratios it sets in its capital 
plan.
    The Farm Credit Council stated its belief that it would be prudent 
for the FCA to notify the authorizing congressional committees if 
Farmer Mac submits a deficient plan to OSMO. In response, we note that 
such notification would be an option for FCA regardless of whether it 
is required by the regulations.
    The Farm Credit Council expressed concern that the proposed rule 
does not require Farmer Mac to make public its capital plan and its 
ongoing compliance with internal board-established minimum capital 
levels. The Farm Credit Council asked FCA to require Farmer Mac to 
publish a summary of its capital plan including internal board-set 
minimum capital ratios and to disclose immediately to shareholders when 
it fails to comply with the plan. We believe that such a revision in 
the final rule is not necessary to achieve the purposes of the rule; so 
we are not adopting the Farm Credit Council's suggestion at this time. 
However, we will take this suggestion into consideration in future 
rulemakings.

C. Section 652.62--Notice to OSMO of Capital Distributions

    Farmer Mac commented that the 15-day notice required in advance of 
board consideration of a capital distribution is likely to be 
impractical and burdensome as applied to debt instruments. As described 
above, in the final rule we are revising the definition of ``capital 
distribution'' generally to limit its application to equity instruments 
only. Therefore, a 15-day notice will not be required for issuances of 
debt unless the FCA makes a determination to treat a particular debt 
instrument as equity because it affects Farmer Mac's consolidated 
capital.
    Farmer Mac also commented that redemptions of equity that are ``an 
inherent component'' of the instrument, such as dividend rate step-ups 
in preferred stock issuances, may be impractical for timing-related 
reasons. Farmer Mac stated that such transactions might only be raised 
as an item for board consideration just prior to the Board's meeting, 
rather than a period of more than 15 days. We believe that, despite the 
fact that step-ups can be thought of as making redemption an inherent 
component of some issuances, they are infrequent and important enough 
that planning for board consideration of such transactions should 
always be done in the context of strategic planning that is long term 
or at least intermediate term, rather than over a period that is very 
short term. We believe that boards should be provided ample time to 
deliberate over such requests and that management should be prepared to 
present and justify such requests well in advance of 15 days of the 
board's consideration. As we stated in the preamble to the proposed 
rule, 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, the regulated entity. 
Such enhanced dialogue will also provide the board with valuable 
external perspective on such decisions from both safety and soundness 
and

[[Page 65149]]

mission achievement points of view. For all of these reasons, we do not 
view the proposed notification timeframe as impractical, and we adopt 
as final the provision as proposed with respect to the advance 
notification.
    However, we believe the comment has merit as it pertains to capital 
distributions that the board has already been informed of through the 
capital planning process. A shorter time allotted for final board 
deliberation on planned capital distributions is appropriately left to 
the discretion of board's guidance to management because the board has 
already approved the capital plan and with it the anticipated 
distribution in accordance with its strategic vision and broader 
operational planning process. Therefore, we revise this section to 
eliminate the notification requirement for capital distributions set 
forth in the capital plan (i.e., specifically scheduled as to amount 
and timing along with a discussion of the planned distribution) 
submitted to FCA. This new exception to the notification requirement in 
the final rule would not apply in the event that OSMO determines a 
capital plan has not adequately taken into account OSMO's assessment as 
required under Sec.  652.61(f) in accordance with newly added Sec.  
652.62(c).
    The Farm Credit Council commented that the capital distribution 
notice requirement lacks specificity regarding supervisory action and 
should include detail on when OSMO would prohibit a distribution. The 
Farm Credit Council stated its belief that FCA should not allow Farmer 
Mac to pay any dividends if it is not in compliance with its capital 
plan and there should not be standing authority for Farmer Mac to pay 
dividends if the amount per share is unchanged from prior period. The 
Farm Credit Council points to the fact that the Agency has consistently 
taken the position that System banks and associations are not permitted 
to pay patronage unless the institution can demonstrate compliance with 
regulatory capital standards. The Farm Credit Council asks that FCA be 
consistent in its policy on capital distributions with System banks and 
associations and other banking regulators.
    We believe that Farmer Mac would effectively be held to the same 
standard the Farm Credit Council points to in its comment. That is, if 
Farmer Mac were unable to demonstrate compliance with its regulatory 
capital standards, the Agency could bring an enforcement action which 
would likely put an end to common dividend payments and possibly 
preferred dividends as well. However, to address the Farm Credit 
Council's concerns in the final rule, Sec.  652.62(c) is revised to 
eliminate the standing authority for Farmer Mac to pay dividends if the 
amount per share is unchanged from prior period (as well as planned 
distributions regardless of change from prior periods) if OSMO 
determines a Farmer Mac capital plan has not adequately taken into 
account OSMO's assessment as required under Sec.  652.61(f).
    Farmer Mac asked us to clarify whether the requirement in proposed 
Sec.  652.61(c)(1)(iii) that the Farmer Mac board review the capital 
plan can be delegated to a committee and whether FCA expects the board 
to receive a written report that addresses all of the considerations 
specified in the proposed rule. The FCA confirms that the rule requires 
the entire board of Farmer Mac to review and approve the written 
capital plan before submission to the FCA, and such review is not 
delegable to a committee.

V. 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 final 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 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.

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2. Revise Sec.  652.60 to read as follows:


Sec.  652.60  Corporate business planning.

    (a) Farmer Mac's board of directors is responsible for ensuring 
that Farmer Mac maintain capital at a level that is sufficient to 
ensure continued financial viability and provide for growth. In 
addition, Farmer Mac's capital must be sufficient to meet statutory and 
regulatory requirements as well as the goals and objectives required by 
paragraph (b)(5) of this section, including the Tier 1 ratio required 
in Sec.  652.61(c)(2)(ii)(A). Farmer Mac 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, 
Farmer Mac's board of 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 Farmer Mac 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.

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3. Add 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 an 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 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.

[[Page 65150]]

    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 measure of 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 business 
lines and operations;
    (ii) The reasonableness of Farmer Mac's assumptions and analysis 
underlying the capital plan and its methodologies for reviewing the 
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 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 paragraphs (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

[[Page 65151]]

must take the results of the stress tests conducted under paragraphs 
(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) Except as provided in paragraph (c), notice under paragraph (a) 
of this section is not required with respect to capital distributions 
set forth (i.e., specifically scheduled as to amount and timing along 
with a discussion of the planned distribution) in the capital plan or 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.
    (c) In the event that OSMO determines a capital plan has not 
adequately taken into account OSMO's assessment as required under Sec.  
652.61(f), the exception described in paragraph (b) of this section 
shall not apply, and Farmer Mac must provide notification of any and 
all capital distributions as set forth in paragraph (a) of this 
section.

    Dated: October 25, 2013.
Mary Alice Donner,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 2013-25892 Filed 10-30-13; 8:45 am]
BILLING CODE 6705-01-P