Federal Agricultural Mortgage Corporation Funding and Fiscal Affairs; Risk-Based Capital Requirements, 4107-4111 [2023-01042]
Download as PDF
<![CDATA[
Federal Register / Vol. 88, No. 15 / Tuesday, January 24, 2023 / Proposed Rules
500 form letters per PDF or as one form
letter with a list of supporters’ names
compiled into one or more PDFs. This
reduces comment processing and
posting time.
Confidential Business Information.
According to 10 CFR 1004.11, any
person submitting information that he
or she believes to be confidential and
exempt by law from public disclosure
should submit via email two wellmarked copies: one copy of the
document marked confidential
including all the information believed to
be confidential, and one copy of the
document marked ‘‘non-confidential’’
with the information believed to be
confidential deleted. DOE will make its
own determination about the
confidential status of the information
and treat it according to its
determination.
It is DOE’s policy that all comments
may be included in the public docket,
without change and as received,
including any personal information
provided in the comments (except
information deemed to be exempt from
public disclosure).
DOE considers public participation to
be a very important part of the process
for developing test procedures and
energy conservation standards. DOE
actively encourages the participation
and interaction of the public during the
comment period in each stage of this
process. Interactions with and between
members of the public provide a
balanced discussion of the issues and
assist DOE in the process. Anyone who
wishes to be added to the DOE mailing
list to receive future notices and
information about this process should
contact Appliance and Equipment
Standards Program staff at (202) 287–
1445 or via email at
ApplianceStandardsQuestions@
ee.doe.gov.
tkelley on DSK125TN23PROD with PROPOSALS
Signing Authority
This document of the Department of
Energy was signed on January 12, 2023,
by Francisco Alejandro Moreno, Acting
Assistant Secretary for Energy Efficiency
and Renewable Energy, pursuant to
delegated authority from the Secretary
of Energy. That document with the
original signature and date is
maintained by DOE. For administrative
purposes only, and in compliance with
requirements of the Office of the Federal
Register, the undersigned DOE Federal
Register Liaison Officer has been
authorized to sign and submit the
document in electronic format for
publication, as an official document of
the Department of Energy. This
administrative process in no way alters
VerDate Sep<11>2014
16:51 Jan 23, 2023
Jkt 259001
the legal effect of this document upon
publication in the Federal Register.
Signed in Washington, DC, on January 12,
2023.
Treena V. Garrett,
Federal Register Liaison Officer, U.S.
Department of Energy.
[FR Doc. 2023–00942 Filed 1–23–23; 8:45 am]
BILLING CODE 6450–01–P
FARM CREDIT ADMINISTRATION
12 CFR Part 652
RIN 3052–AD51
Federal Agricultural Mortgage
Corporation Funding and Fiscal
Affairs; Risk-Based Capital
Requirements
Farm Credit Administration.
Advance notice of proposed
rulemaking.
AGENCY:
ACTION:
The Farm Credit
Administration (FCA) is considering
updating its regulatory capital
framework for the Federal Agricultural
Mortgage Corporation (Farmer Mac) to
enhance safety and soundness during
periods of financial and economic
stress. With this Advance Notice of
Proposed Rulemaking (ANPRM), FCA is
seeking comments from the public on
whether and how to amend and
strengthen the regulatory capital
framework in furtherance of Farmer
Mac’s safe and sound operations and its
role in promoting affordable and
sustainable access to credit in
agricultural and rural communities,
which it carries out by providing
liquidity and credit protection tools to
rural lenders.
DATES: You may send comments on or
before March 27, 2023.
ADDRESSES: For accuracy and efficiency
reasons, FCA encourages commenters to
submit comments by email or through
the FCA’s website. As facsimiles (fax)
are difficult to process and achieve
compliance with section 508 of the
Rehabilitation Act, comments submitted
by fax are not accepted. Regardless of
the method used, please do not submit
comments multiple times via different
methods. Comments may be submitted
by any of the following methods:
• Email: Send an email to reg-comm@
fca.gov.
• FCA Website: https://www.fca.gov.
Click inside the ‘‘I want to . . .’’ field
near the top of the page; select
‘‘comment on a pending regulation’’
from the dropdown menu; and click
‘‘Go.’’ This takes you to an electronic
public comment form.
SUMMARY:
PO 00000
Frm 00017
Fmt 4702
Sfmt 4702
4107
• Mail: Joseph T. Connor, Acting
Director, Office of Secondary Market
Oversight, Farm Credit Administration,
1501 Farm Credit Drive, McLean, VA
22102–5090.
FCA posts all comments on the FCA
website. FCA shows comments as
submitted, including any supporting
data provided, but for technical reasons
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, FCA will
attempt to remove email addresses to
help reduce internet spam.
Copies of all comments received may
be reviewed on the FCA website at
https://www.fca.gov. Once on the
website, click inside the ‘‘I want to
. . .’’ field near the top of the page;
select ‘‘find comments on a pending
regulation’’ from the dropdown menu;
and click ‘‘Go.’’ This will take you to the
Comment Letters page where you can
select the regulation for which you
would like to read the public comments.
You may also review comments at the
FCA office in McLean, Virginia. Please
call us at (703)883–4056 or email us at
reg-comm@fca.gov to make an
appointment.
FOR FURTHER INFORMATION CONTACT:
Joseph T. Connor, connorj@fca.gov,
Acting Director, Office of Secondary
Market Oversight, Farm Credit
Administration, McLean, VA 22102–
5090, (703) 883–4280, TTY (703) 883–
4056, or
Andra Grossman, grossmana@fca.gov,
Attorney Advisor, or Jennifer Cohn,
cohnj@fca.gov, Assistant General
Counsel, Office of the General Counsel,
Farm Credit Administration, McLean,
VA 22102–5090, (703) 883–4020, TTY
(703) 883–4056.
SUPPLEMENTARY INFORMATION:
I. Objective
The objective of this ANPRM is to
gather public input to:
• Promote Farmer Mac’s safe and
sound operations through the ongoing
maintenance of sufficient capital and
reserves to absorb unexpected losses
and support the growth and continued
fulfillment of its role.
• Ensure that Farmer Mac operates
under a clear, comprehensive, and
transparent capital framework.
• Assess whether and how the FCA
should further incorporate elements of
other established and emerging
regulatory frameworks governing capital
to enhance the regulatory capital
framework for Farmer Mac and
determine whether the application of
those frameworks to Farmer Mac would
E:\FR\FM\24JAP1.SGM
24JAP1
4108
Federal Register / Vol. 88, No. 15 / Tuesday, January 24, 2023 / Proposed Rules
require modifications to suit Farmer
Mac’s non-bank, rural-focused,
secondary market business model, and
if so what modifications would be
needed.
• Analyze the costs and benefits of
updating FCA’s capital regulations for
Farmer Mac, including the costs of
potential unintended consequences, if
any. Responses to this ANPRM will help
FCA evaluate whether and how it
should adopt a capital framework
similar to other recognized frameworks
to enhance the safety and soundness of
Farmer Mac, with adjustments as
appropriate, that would take into
consideration Farmer Mac’s status as a
secondary market financial institution
focused on agricultural and rural utility
markets.1
tkelley on DSK125TN23PROD with PROPOSALS
II. Introduction
Farmer Mac is an institution of the
Farm Credit System (System), regulated
by FCA through its Office of Secondary
Market Oversight (OSMO).2 Governed
by Title VIII of the Act, Farmer Mac was
established in 1988 to create a
secondary market for agricultural real
estate mortgage loans and rural housing
mortgage loans; rural utilities loans
were later added. The Act established
Farmer Mac as a stockholder-owned
instrumentality of the United States
government, a structure commonly
referred to as a government-sponsored
enterprise (GSE). Farmer Mac’s role in
the secondary market for agriculture and
rural infrastructure loans is comparable
to the roles of the Federal National
Mortgage Association (Fannie Mae) and
the Federal Home Loan Mortgage
Corporation (Freddie Mac) (collectively,
the housing GSEs) in the secondary
market for U.S. housing mortgages. The
housing GSEs’ Federal regulator is the
Federal Housing Finance Agency
(FHFA).
The purpose of the legislation creating
Farmer Mac was to provide a secondary
market for agricultural real estate
mortgages, to increase the availability of
long-term credit to farmers and
ranchers, to provide greater liquidity
and lending capacity to primary lenders
as they extend credit to farmers and
ranchers, to provide an arrangement for
new lending to facilitate capital market
investments in long-term agricultural
funding, and to enhance the ability of
1 This ANPRM seeks comment only on Farmer
Mac’s regulatory capital framework, not on the
regulatory capital framework applicable to System
banks and associations. Farmer Mac is governed by
different statutory and regulatory capital
requirements than those that apply to System banks
and associations.
2 Sections 8.1 and 8.11 of the Farm Credit Act of
1971, as amended (Act), 12 U.S.C. 2279aa–1 and
2279aa–11.
VerDate Sep<11>2014
16:51 Jan 23, 2023
Jkt 259001
individuals in small rural communities
to obtain financing for moderate-priced
houses.3 The FCA, through OSMO, is
responsible for the oversight and
supervision of Farmer Mac’s safe and
sound operations in furtherance of its
role to facilitate an efficient,
competitive, and resilient secondary
market for agriculture and rural
communities.
Sufficient capital is crucial to the
resiliency and effective operations of all
financial institutions, serving functions
such as absorbing losses, promoting
public confidence, helping restrict
excessive asset growth, and providing
protection to debt investors. Capital’s
loss-absorbing capacity allows financial
institutions to continue operating as
going concerns during periods of
unexpected operating losses or other
adverse financial conditions. Financial
institution regulators, both
internationally and in the United States,
have increasingly recognized the value
of globally adopted standards and
measurements that, among other things,
provide more transparency to an
institution’s capital adequacy and make
institutions’ financial strength more
readily comparable.
After the worldwide financial crisis of
2007–2009, the Basel Committee on
Banking Supervision (BCBS) issued in
2010, subsequently revised, and issued
additional documents related to, a
framework known as Basel III.4 Basel III
was an internationally agreed upon set
of measures developed in response to
the financial crisis with the goal of
strengthening the regulation,
supervision, and risk management of
banks. Since that time, the BCBS has
revised, updated, and integrated the
Basel III reforms into a consolidated
Basel Framework (Basel Framework),
which comprises all of the current and
forthcoming BCBS standards.5 Three
U.S. Federal banking regulatory
agencies are represented on the BCBS:
the Office of the Comptroller of the
Currency (OCC), the Board of Governors
of the Federal Reserve System (FRB),
and the Federal Deposit Insurance
3 See Section 701 of the Agricultural Credit Act
of 1987, Public Law 100–233, 101 Stat. 1568, 1686
(Jan. 6, 1988) (12 U.S.C. 2279aa note).
4 See ‘‘Basel III: A global regulatory framework for
more resilient banks and banking systems,’’ revised
version June 2011, and other Basel III documents
at https://www.bis.org/bcbs/basel3.htm?m=2572.
5 Id. The Basel Framework can be found at https://
www.bis.org/basel_framework/index.htm, and the
BCBS continues to update it as indicated on the
website. While the Basel Framework includes
liquidity and other provisions in addition to capital
provisions, this ANPRM addresses only its capital
provisions.
PO 00000
Frm 00018
Fmt 4702
Sfmt 4702
Corporation (FDIC) (collectively, the
FBRAs).6
The Basel Framework is intended to
improve both the quality and quantity of
banking organizations’ capital, as well
as to strengthen various aspects of the
international capital standards
governing regulatory capital. Enhanced
comparability and disclosure
requirements also improve market
discipline, the positive externality
provided by the response of capital
markets to disclosed information. The
Basel Framework has two main
approaches to calculating risk-weighted
assets for credit risk—the internal
ratings-based (IRB) approach and the
standardized approach.7 In turn, the IRB
approach has two approaches—the
advanced IRB approach (A–IRB)
approach and the foundation IRB
approach. While this ANPRM focuses
more on the A–IRB than the foundation
IRB approach, we invite comments on
both.
Under the Basel Framework’s IRB
approach, an institution calculates risk
weights using its internal risk rating
assignments, probabilities of default,
and other inputs derived from its
internal models.8 In general, under the
standardized approach, an institution’s
regulator assigns fixed risk weights to
exposures based on their relative risk
characteristics.9
In 2013 and 2014, the FBRAs adopted
the Basel III framework to apply to the
U.S. banking organizations they regulate
(U.S. rule).10 The U.S. rule applies the
A–IRB approach to the largest,
internationally active bank
organizations—in general, those with
assets of $700 billion or more—and the
standardized approach to smaller
banks.11 In addition, the U.S. rule
requires the A–IRB approach banks to
6 Neither the FBRAs nor any other U.S. regulator
is required by law to adopt the Basel Framework
but, as discussed below, the FRBAs, the FCA (for
System banks and associations), and FHFA have all
issued Basel-based capital rules.
7 Basel Framework at CRE20.1 and CRE20.2
(version effective as of 1/1/2023). The Basel
Framework’s IRB approach also addresses the
calculation of risk-weighted assets for market risk
and operational risk (see MAR and OPE sections of
the Basel Framework), but these risks are not the
focus of this ANPRM.
8 See Basel Framework at CRE 30 through CRE 36.
9 Basel Framework at CRE 20.
10 78 FR 62018 (Oct. 11, 2013) (FRB and OCC);
79 FR 20754 (Apr. 14, 2014) (FDIC). This
rulemaking refers to the FBRAs’ capital regulations,
including amendments after their initial adoption,
as the U.S. rule. The U.S. rule reflects Basel III as
well as other BCBS standards, and the provisions
of the U.S. rule that are not specifically included
in the Basel III framework are generally consistent
with the goal of the framework. The U.S. rule is
codified at 12 CFR part 3 (OCC), 12 CFR part 217
(FRB), and 12 CFR part 324 (FDIC).
11 12 CFR 3.1(c)(3) (OCC), 12 CFR 217.1(c)(4)
(FRB), 12 CFR 324.1(c)(3) (FDIC).
E:\FR\FM\24JAP1.SGM
24JAP1
Federal Register / Vol. 88, No. 15 / Tuesday, January 24, 2023 / Proposed Rules
also calculate their capital ratios under
the standardized approach and provides
that their capital ratios are whichever
approach yields the lower ratios. In
other words, A–IRB approach banks are
required to comply with whichever
approach requires the bank to hold more
capital.12
In 2016, FCA adopted a rule
governing System banks and
associations that is comparable to the
standardized approach of the U.S. rule
to the extent appropriate for the
System’s cooperative structure and
status as a GSE with a mission to
provide a dependable source of credit
and related services for agriculture and
rural America.13 Consistent with the
U.S. rule, the FCA’s rule for banks and
associations incorporates key aspects of
the Basel III framework.
The FHFA issued several final capital
rules between 2020 and 2022 that apply
aspects of the Basel Framework to the
housing GSEs (FHFA capital rule).14
Like the U.S. rule, the FHFA capital rule
requires the housing GSEs to calculate
their risk-weighted assets under both
the standardized and A–IRB approaches
with the greater of the two used to
determine compliance with risk-based
capital requirements.15
The FHFA capital rule is particularly
relevant to Farmer Mac in several
respects. As discussed earlier, the
housing GSEs, like Farmer Mac, are
secondary market GSEs. Like the
housing GSEs, Farmer Mac has a
countercyclical role, meaning that while
it is an important resource for liquidity
in normal operating conditions, it
tkelley on DSK125TN23PROD with PROPOSALS
12 The
FBRAs’ A–IRB approach rules are at 12
CFR part 3 (OCC), 12 CFR part 217 (FRB), and 12
CFR part 324 (FDIC). The regulatory requirements
to hold capital in accordance with whichever
approach requires holding the greater amount of
capital are set forth at 12 CFR 3.10(d) (OCC), 12 CFR
217.10(d) (FRB), and 12 CFR 324.10(d) (FDIC). The
U.S. rule includes market risk (as appropriate) and
operational risk, as well as credit risk, in its
calculation of risk-weighted assets under the A–IRB
approach. See definition of ‘‘advanced approaches
total risk-weighted assets’’ in 12 CFR 3.2 (OCC), 12
CFR 217.2 (FRB), and 12 CFR 324.2 (FDIC). As
stated above, this ANPRM is focused on credit risk
only.
13 81 FR 49720 (Jul. 28, 2016). FCA made
revisions to the rule in 2021; see 86 FR 54347 (Oct.
1, 2021). These rules are part 628 of FCA
regulations. FCA did not adopt IRB approaches or
market or operational risk provisions.
14 85 FR 82150 (Dec. 17, 2020); 87 FR 14764 (Mar.
16, 2022). These rules have been codified at 12 CFR
part 1240. As discussed below, the housing GSEs
have been in conservatorship since 2008. They will
not be subject to FHFA’s capital rules until after
they exit conservatorship (see 12 CFR 1240.4(d)(1)
and (d)(2)). Like the FBRAs, the FHFA did not
adopt the foundation IRB approach and includes
market risk (as appropriate) and operational risk, as
well as credit risk, in its calculation of riskweighted assets under the A–IRB approach (see 12
CFR 1240 Subpart E and 12 CFR 1240 Subpart F).
15 12 CFR 1240.10.
VerDate Sep<11>2014
16:51 Jan 23, 2023
Jkt 259001
becomes an even more important
resource for primary lenders under
stressful conditions.
The financial crisis of 2007–2009
demonstrated the inadequacy of the
capital requirements that governed the
housing GSEs at the time. On September
6, 2008, ‘‘in response to a substantial
deterioration in the housing markets
that severely damaged [the housing
GSEs’] financial condition and left both
of them unable to fulfill their missions
without government intervention,’’ 16
the FHFA placed the housing GSEs into
conservatorship (where they remain as
of the date the FCA Board adopted this
ANPRM). While the housing GSEs are
not subject to the FHFA capital rule
while they are in conservatorship, the
FHFA adopted the FHFA capital rule in
anticipation of the eventual termination
of the conservatorships.
For Farmer Mac, a strong capital
position promotes market confidence in
the Corporation’s ability and readiness
to provide rural lenders with a
reasonably priced source of liquidity
and credit. That service, in turn, helps
lenders provide uninterrupted credit
services to agricultural and rural utility
borrowers.
In 2013, FCA adopted regulations
governing Farmer Mac (the capital
planning rule) that included provisions
based on the Basel III framework.17 The
capital planning rule focuses on the
capital planning process, board
responsibilities for approving that
process, and the mandatory elements of
the capital plan, among other things. In
addition, the capital planning rule
requires Farmer Mac’s capital plan to
include a Basel-based tier 1 ratio using
tier 1 capital comprised of components
that meet the criteria established in
definitions set forth in the Basel III
Framework or the U.S. rule, and using
a risk-weighted assets approach that is
appropriate given Farmer Mac’s
business activities and consistent with
broadly accepted banking practices and
standards.18 In accordance with the
rule, Farmer Mac reports other capital
measures to FCA in agreed-upon call
report schedules.
Although the capital planning rule
does not require Farmer Mac to disclose
its tier 1 capital ratio, Farmer Mac
16 See ‘‘History of Fannie Mae and Freddie Mac
Conservatorships,’’ at https://www.fhfa.gov/
Conservatorship/Pages/History-of-Fannie-Mae-Freddie-Conservatorships.aspx
#:∼:text=History%20of%20Fannie
%20Mae%20and%20Freddie%20Mac
%20Conservatorships,its
%20authorities%20to%20place%20each
%20Enterprise%20into%20conservatorship.
17 78 FR 65145 (Oct. 31, 2013). This rule is set
forth at 12 CFR 652 Subpart B.
18 12 CFR 652.61(b), definition of ‘‘Tier 1 ratio.’’
PO 00000
Frm 00019
Fmt 4702
Sfmt 4702
4109
voluntarily discloses the ratio in its
Securities and Exchange Commission
(SEC) filings its tier 1 ratio as calculated
under the A–IRB approach.19 In
addition, Farmer Mac voluntarily
discloses in its SEC filings that its board
has adopted a capital policy which
includes a 2.5% buffer over its internal
minimum tier 1 capital ratio.20
Since FCA’s adoption of the 2013
capital planning rule, the scale and
complexity of Farmer Mac’s operations
and secondary market activities have
both increased substantially.
Outstanding program volume was $23.6
billion as of December 31, 2021, up from
$14.0 billion at yearend 2013. Farmer
Mac’s agricultural finance operations
include an increased focus on
participations in, and syndications of,
large commercial loans. Further, the
scope of its rural infrastructure finance
operations has expanded to include
renewable energy project finance and
telecommunications finance focused on
broadband services. Because of Farmer
Mac’s growth and the increasing
complexity of its operations, and in
light of enhancements other U.S.
regulators have made to their capital
requirements since Farmer Mac’s capital
planning requirements were adopted in
2013, FCA believes it is appropriate to
consider whether and how Farmer
Mac’s capital requirements should be
enhanced to strengthen its safe and
sound operations.
III. Discussion of Farmer Mac’s
Business and Current Capital
Requirements
A. Farmer Mac’s Business Operations
Under Farmer Mac’s agricultural
finance activities, it purchases eligible
loans directly from lenders, provides
advances against eligible loans by
purchasing obligations secured by those
loans or assets that qualify as eligible
agricultural real estate collateral,
securitizes assets and guarantees the
resulting securities, and issues longterm standby purchase commitments for
eligible loans. Securities guaranteed by
Farmer Mac may be held either by the
originator of the underlying assets or by
Farmer Mac, or they may be sold to
third-party investors.
Under its rural infrastructure
financing activities, Farmer Mac
purchases, or commits to purchase, and
guarantees, qualified rural electric and
19 See, e.g., Farmer Mac Form 10–Q for the
quarterly period ended June 30, 2022, page 111, at
https://www.sec.gov/ix?doc=/Archives/edgar/data/
845877/000084587722000163/agm-20220630.htm.
20 See, e.g., Farmer Mac’s Form 10–K for the
period ending December 31, 2021, page 32 at
https://www.sec.gov/ix?doc=/Archives/edgar/data/
845877/000084587722000022/agm-20211231.htm.
E:\FR\FM\24JAP1.SGM
24JAP1
4110
Federal Register / Vol. 88, No. 15 / Tuesday, January 24, 2023 / Proposed Rules
telephone utility loans, or securities
backed by such loans, directly from
cooperative lenders. Congress granted
Farmer Mac the authority for this
activity as program business in 2008.21
Farmer Mac’s total program business
volume was $23.6 billion which equates
to 20-year compound average growth of
9.0 percent since yearend 2001. Of that
$23.6 billion in total outstanding
program business volume, 75 percent is
in agricultural finance and 25 percent in
rural infrastructure finance.22
tkelley on DSK125TN23PROD with PROPOSALS
B. Farmer Mac’s Current Capital
Requirements
Section 8.11 of the Act authorizes
FCA to provide for the general
supervision of the safe and sound
performance of the powers, functions,
and duties of Farmer Mac.
Section 8.32 of the Act requires FCA
to establish a risk-based capital test to
determine the amount of regulatory
capital 23 that would be sufficient for
Farmer Mac to maintain positive capital
during a 10-year period under certain
specified circumstances. FCA first
issued regulations governing Farmer
Mac capital to implement the
requirements for the Risk-based Capital
Stress Test (RBCST) in 2001. These
regulations have been updated three
times, most recently in 2011.24 FCA is
not requesting comment on potential
changes to the RBCST in this ANPRM.25
Section 8.33 of the Act established
minimum core capital 26 (leverage)
ratios, for which FCA also published
21 See Section 5406 of Public Law 110–246, 122
Stat. 1651, 1920, June 18, 2008 (codified at section
8.0(9) of the Act).
22 Farmer Mac is authorized to invest in eligible
non-program investments. In this activity, Farmer
Mac purchases eligible securities for the purposes
of enterprise risk management, including
complying with its interest rate risk requirements,
complying with its liquidity risk requirements,
managing surplus short-term funds, and
complementing program business activities. See 12
CFR 652.15. These investments also contribute to
total risk-weighted assets for capital purposes.
23 ‘‘Regulatory capital’’ is defined in section
8.31(5) of the Act as core capital ‘‘plus an allowance
for losses and guarantee claims, as determined in
accordance with generally accepted accounting
principles [GAAP].’’
24 These regulations are set forth at 12 CFR part
652 Subpart B. The regulations were published at
66 FR 19048 (Apr. 12, 2001); 71 FR 77247 (Dec. 26,
2006); 73 FR 31937 (Jun. 5, 2008); and 76 FR 23459
(Apr. 27, 2011).
25 FCA notes that at the time the housing GSEs
entered conservatorship in 2008, their regulator had
in place a similar RBCST-type requirement
pursuant to the housing GSEs’ authorizing statute.
This statute also imposed minimum leverage ratio
requirements similar to, though lower than, the
leverage ratio requirements imposed on Farmer Mac
by the Act.
26 ‘‘Core capital’’is defined as the sum of the
following as determined in accordance with GAAP:
the par value of outstanding common and preferred
stock, paid-in capital, and retained earnings.
VerDate Sep<11>2014
16:51 Jan 23, 2023
Jkt 259001
regulations in 2001.27 FCA is also not
seeking comment on potential changes
to these regulations.
As discussed above, FCA’s capital
planning rule requires Farmer Mac
calculate and include in its capital plan
a Basel-based tier 1 ratio as defined by
established standards or regulations.28
The capital planning rule incorporates
by reference Basel capital-related
terms 29 that are also in the U.S. rule.
The capital planning rule requires
Farmer Mac’s board of directors to
review the robustness of its process for
assessing capital adequacy, to correct
any deficiencies in that process, and to
approve the annual capital plan.30 The
rule also established an annual
assessment by FCA of Farmer Mac’s
capital plan.31 The rule requires Farmer
Mac to consider the results of its stress
tests and FCA’s assessment of the plan
in its capital planning process,
including specific stress scenarios
required by FCA.32
IV. Request for Comments
FCA solicits comments on the
following questions. Comments should
be supported with relevant data or
examples when available. These
questions refer collectively to the Basel
Framework, the U.S. rule, FCA’s capital
regulations governing System banks and
associations, and the FHFA’s capital
regulations as the ‘‘existing capital
frameworks.’’
A. General
1. What core principles are most
important in FCA’s consideration of
whether capital regulations governing
Farmer Mac should be more closely
aligned with any of the existing capital
frameworks?
2. What unintended consequences, if
any, could result from the application of
any of the existing capital frameworks to
Farmer Mac?
B. Risk-Based Approaches and Buffers
3. FCA’s existing regulations do not
specify whether Farmer Mac must use
the standardized approach, an IRB
approach, or both to calculate credit
risk-weighted assets. As discussed
above, Farmer Mac reports its capital
measures to FCA in agreed-upon call
report schedules and voluntarily makes
certain public disclosures regarding its
use of the A–IRB approach. The IRB
27 66 FR 19048 (Apr. 12, 2001), originally codified
at 12 CFR 650.25(c), and later moved to 12 CFR
652.75(c).
28 12 CFR 652.61(b), definition of ‘‘Tier 1 ratio.’’
29 Id.
30 12 CFR 652.61(c).
31 12 CFR 652.61(d) and (e).
32 12 CFR 652.61(c)(1)(iii)(A), (c)(2)(i)(A).
PO 00000
Frm 00020
Fmt 4702
Sfmt 4702
approach was intended to apply to
large, international lenders and include
fundamental assumptions consistent
with their size and the scope of their
business profiles.
The U.S. rule and the FHFA capital
rule require regulated entities that use
the A–IRB approach to also calculate
credit risk-weighted assets using the
standardized approach, and the binding
capital minimum requirements are
based on the greater of the risk-weighted
asset calculations under the two
approaches.
(a) Should FCA consider requiring
Farmer Mac to comply with the
standardized approach, the IRB
approach, or both? If so, which
approach or approaches should Farmer
Mac be required to comply with, and
why?
(b) What adjustments, if any, should
FCA consider to tailor either the
standardized approach or an IRB
approach to take account of Farmer
Mac’s smaller size, more limited
financing authorities, or other unique
aspects of its business model?
(c) If FCA were to require Farmer Mac
to use both the standardized and an IRB
approach to calculate its credit riskweighted assets, how should differences
between the two approaches’ results be
treated with respect to capital
requirements? For example, the U.S.
rule and FHFA both require the use of
the greater of the two risk-weighed
assets calculation.
4. The BCBS’ summary of 2017 postcrisis reforms notes that the financial
crisis of 2007–2009 highlighted
shortcomings in the internally modeled
approaches for regulatory capital,
including the IRB approach to credit
risk.33 The shortcomings included
excessive complexity of the IRB
approach, the lack of comparability in
banks’ internally modeled IRB capital
requirements, and the lack of robustness
in modeling certain asset classes.34
The BCBS noted that internal models
should allow for more accurate risk
measurement than the standardized
approach. It cautioned, however, that
internal modeling, when used to set
minimum capital requirements, can
create incentives to minimize risk
weights. The BCBS stated that ‘‘certain
types of asset, such as low-default
exposures, cannot be modelled reliably
or robustly.’’ 35
33 BCBS, ‘‘High-level summary of Basel III
reforms,’’ December 2017, at 5. https://www.bis.org/
bcbs/publ/d424_hlsummary.pdf.
34 Id.
35 BCBS, ‘‘Finalising Basel III, In brief’’, December
2017, page 1. https://www.bis.org/bcbs/publ/d424_
inbrief.pdf.
E:\FR\FM\24JAP1.SGM
24JAP1
Federal Register / Vol. 88, No. 15 / Tuesday, January 24, 2023 / Proposed Rules
tkelley on DSK125TN23PROD with PROPOSALS
The existing capital frameworks—
particularly the A–IRB approach—have
expanded the use of floors to address
these shortcomings in modeling. These
frameworks impose floors on
measures—such as probability of default
(PD), loss given default (LGD), and riskweights—that apply to certain
exposures. These floors prevent the
measures from falling below specified
levels, even if the modeling would
otherwise result in lower levels. The
existing capital frameworks include
both input floors, for measures such as
PD and LGD,36 and output floors (i.e.,
risk-weight floors to be applied when
model outputs are lower than the floor)
for different exposures.
If FCA adopts Basel Framework-based
requirements, should it establish floors
similar to those in the existing capital
frameworks? If so, what should those
floors be and why? Given the
differences among the risk-weight floors
established in the other capital
frameworks, is there a policy among
them that should be considered the
most readily transferrable to a Farmer
Mac capital framework, or should FCA
develop Farmer Mac-specific riskweight floors?
5. The existing capital frameworks
require entities to hold capital over the
minimum requirements—referred to as
‘‘buffers’’—to avoid restrictions on
dividend payouts and discretionary
bonuses. The existing capital
frameworks include different types of
buffers including, but not limited to, a
capital conservation buffer and a
countercyclical buffer.37 Should capital
buffers be required for Farmer Mac and,
if so, what type should FCA consider?
6. The existing capital frameworks
require certain entities to make capitalrelated public disclosures to improve
market discipline and transparency.38
36 For example, see Basel Framework at CRE32.4
for PD floor and CRE 32.16 for LGD floor (version
effective as of January 1, 2023). For examples of the
U.S. rule PD and LGD floors see 12 CFR 3.131
(OCC); 12 CFR 217.131 (FRB); and 12 CFR 324.131
(FDIC).
37 See buffer requirements at section RBC30 of the
Basel Framework; 12 CFR 3.11 (OCC); 12 CFR
217.11 (FRB); and 12 CFR 324.11 (FDIC) of the U.S.
rule; 12 CFR 628.11 of the FCA banks and
associations capital rule; and 12 CFR 1240.11 of the
FHFA capital rule. A conservation buffer is
designed to ensure that banks build up capital
buffers outside periods of stress which can be
drawn down as losses are incurred. Under a
countercyclical buffer regime, the regulator
monitors credit growth and other indicators for
signs of elevated system-wide risk; based on this
assessment the regulator may put in place a
countercyclical buffer requirement when
circumstances warrant and then remove that buffer
when credit risk returns to more normal levels.
Other types of buffers also exist.
38 See Basel Framework section DIS10; 12 CFR
3.61–3.63 (OCC); 12 CFR 217.61–217.63 (FRB); 12
VerDate Sep<11>2014
16:51 Jan 23, 2023
Jkt 259001
4111
The nature of these disclosures varies
depending on whether the entities
follow the standardized or an IRB
approach. Currently, as discussed
above, within a Basel-based context,
Farmer Mac voluntarily discloses its tier
1 ratio as calculated under the A–IRB
approach, as well as its adoption of a
buffer over its internal minimum tier 1
capital ratio. What disclosures, if any,
should FCA consider requiring for
Farmer Mac?
DEPARTMENT OF TRANSPORTATION
C. Leverage Ratio and Leverage Buffer
AGENCY:
7. The Basel Framework requires a
minimum leverage ratio (i.e., a non-riskbased ratio) of three percent.39 The U.S.
rule requires a minimum leverage ratio
of four percent to be considered
adequately capitalized and an
additional supplementary leverage ratio
of three percent for A–IRB approach
users.40 FCA regulations governing
System banks and associations require a
four percent leverage ratio with a
leverage buffer of one percent.41 The
FHFA capital rule requires a 2.5 percent
minimum tier 1 leverage ratio plus a
leverage buffer that adjusts based on the
entity’s market share.42 FCA regulations
do not require Farmer Mac to calculate
a leverage ratio or buffer.
Should FCA consider leverage ratio
requirements for Farmer Mac? If so,
what leverage ratio requirements should
FCA consider? Should FCA consider a
leverage buffer for Farmer Mac? If so,
what type and structure should FCA
consider?
D. Other
8. What other approaches, risk
categories (e.g., market risk and
operations risk, including model risk),
or methodologies not discussed above
should FCA consider in updating its
regulatory capital framework for Farmer
Mac?
Dated: January 17, 2023.
Ashley Waldron,
Secretary, Farm Credit Administration Board.
[FR Doc. 2023–01042 Filed 1–23–23; 8:45 am]
BILLING CODE 6705–01–P
CFR 324.61–324.63 (FDIC) (U.S. rule standardized
approach entities with total consolidated of $50
billion or more); 12 CFR 3.171–3.173 (OCC); 12 CFR
217.171–217.173 (FRB); 12 CFR 324.171–324.173
(FDIC) (U.S. rule A–IRB approach entities); 12 CFR
628.61–628.63 (FCA rule for System banks); 12 CFR
1240.61–1240.63 (FHFA).
39 Basel Framework at LEV20.6.
40 See 12 CFR 217.10 (FRB); 12 CFR 3.10 (OCC);
12 CFR 324.10 (FDIC).
41 See 12 CFR 628.11.
42 See 12 CFR 1240.10(f) and 12 CFR 1240.11,
respectively.
PO 00000
Frm 00021
Fmt 4702
Sfmt 4702
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2023–0022; Project
Identifier MCAI–2022–00564–E]
RIN 2120–AA64
Airworthiness Directives; Pratt &
Whitney Canada Corporation
Turboprop Engines
Federal Aviation
Administration (FAA), DOT.
ACTION: Notice of proposed rulemaking
(NPRM).
The FAA proposes to adopt a
new airworthiness directive (AD) for
certain Pratt & Whitney Canada
Corporation (P&WC) PW308A and
PW308C model turbofan engines. This
proposed AD was prompted by a
manufacturer’s design review which
identified that the combustion chamber
outer case (CCOC) to rear compressor
case (RCC) flange bolt low cycle fatigue
life was inadequate and that those
flange bolts may develop cracks
resulting in flange bolt fracture. This
proposed AD would require replacing
all CCOC flange bolts and modifying the
CCOC and inner bypass ducts. This
proposed AD would also prohibit
installation of certain flange bolts on
any affected engine, as specified in a
Transport Canada AD, which is
proposed for incorporation by reference
(IBR). The FAA is proposing this AD to
address the unsafe condition on these
products.
SUMMARY:
The FAA must receive comments
on this NPRM by March 10, 2023.
ADDRESSES: You may send comments,
using the procedures found in 14 CFR
11.43 and 11.45, by any of the following
methods:
• Federal eRulemaking Portal: Go to
regulations.gov. Follow the instructions
for submitting comments.
• Fax: (202) 493–2251.
• Mail: U.S. Department of
Transportation, Docket Operations, M–
30, West Building Ground Floor, Room
W12–140, 1200 New Jersey Avenue SE,
Washington, DC 20590.
• Hand Delivery: Deliver to Mail
address above between 9 a.m. and 5
p.m., Monday through Friday, except
Federal holidays.
AD Docket: You may examine the AD
docket at regulations.gov under Docket
No. FAA–2023–0022; or in person at
Docket Operations between 9 a.m. and
5 p.m., Monday through Friday, except
Federal holidays. The AD docket
contains this NPRM, the mandatory
DATES:
E:\FR\FM\24JAP1.SGM
24JAP1
]]>Agencies
[Federal Register Volume 88, Number 15 (Tuesday, January 24, 2023)]
[Proposed Rules]
[Pages 4107-4111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-01042]
=======================================================================
-----------------------------------------------------------------------
FARM CREDIT ADMINISTRATION
12 CFR Part 652
RIN 3052-AD51
Federal Agricultural Mortgage Corporation Funding and Fiscal
Affairs; Risk-Based Capital Requirements
AGENCY: Farm Credit Administration.
ACTION: Advance notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA) is considering updating
its regulatory capital framework for the Federal Agricultural Mortgage
Corporation (Farmer Mac) to enhance safety and soundness during periods
of financial and economic stress. With this Advance Notice of Proposed
Rulemaking (ANPRM), FCA is seeking comments from the public on whether
and how to amend and strengthen the regulatory capital framework in
furtherance of Farmer Mac's safe and sound operations and its role in
promoting affordable and sustainable access to credit in agricultural
and rural communities, which it carries out by providing liquidity and
credit protection tools to rural lenders.
DATES: You may send comments on or before March 27, 2023.
ADDRESSES: For accuracy and efficiency reasons, FCA encourages
commenters to submit comments by email or through the FCA's website. As
facsimiles (fax) are difficult to process and achieve compliance with
section 508 of the Rehabilitation Act, comments submitted by fax are
not accepted. Regardless of the method used, please do not submit
comments multiple times via different methods. Comments may be
submitted by any of the following methods:
Email: Send an email to [email protected].
FCA Website: https://www.fca.gov. Click inside the ``I want
to . . .'' field near the top of the page; select ``comment on a
pending regulation'' from the dropdown menu; and click ``Go.'' This
takes you to an electronic public comment form.
Mail: Joseph T. Connor, Acting Director, Office of
Secondary Market Oversight, Farm Credit Administration, 1501 Farm
Credit Drive, McLean, VA 22102-5090.
FCA posts all comments on the FCA website. FCA shows comments as
submitted, including any supporting data provided, but for technical
reasons 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, FCA will attempt to
remove email addresses to help reduce internet spam.
Copies of all comments received may be reviewed on the FCA website
at https://www.fca.gov. Once on the website, click inside the ``I want
to . . .'' field near the top of the page; select ``find comments on a
pending regulation'' from the dropdown menu; and click ``Go.'' This
will take you to the Comment Letters page where you can select the
regulation for which you would like to read the public comments. You
may also review comments at the FCA office in McLean, Virginia. Please
call us at (703)883-4056 or email us at [email protected] to make an
appointment.
FOR FURTHER INFORMATION CONTACT:
Joseph T. Connor, [email protected], Acting Director, Office of
Secondary Market Oversight, Farm Credit Administration, McLean, VA
22102-5090, (703) 883-4280, TTY (703) 883-4056, or
Andra Grossman, [email protected], Attorney Advisor, or Jennifer
Cohn, [email protected], Assistant General Counsel, Office of the General
Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4020, TTY (703) 883-4056.
SUPPLEMENTARY INFORMATION:
I. Objective
The objective of this ANPRM is to gather public input to:
Promote Farmer Mac's safe and sound operations through the
ongoing maintenance of sufficient capital and reserves to absorb
unexpected losses and support the growth and continued fulfillment of
its role.
Ensure that Farmer Mac operates under a clear,
comprehensive, and transparent capital framework.
Assess whether and how the FCA should further incorporate
elements of other established and emerging regulatory frameworks
governing capital to enhance the regulatory capital framework for
Farmer Mac and determine whether the application of those frameworks to
Farmer Mac would
[[Page 4108]]
require modifications to suit Farmer Mac's non-bank, rural-focused,
secondary market business model, and if so what modifications would be
needed.
Analyze the costs and benefits of updating FCA's capital
regulations for Farmer Mac, including the costs of potential unintended
consequences, if any. Responses to this ANPRM will help FCA evaluate
whether and how it should adopt a capital framework similar to other
recognized frameworks to enhance the safety and soundness of Farmer
Mac, with adjustments as appropriate, that would take into
consideration Farmer Mac's status as a secondary market financial
institution focused on agricultural and rural utility markets.\1\
---------------------------------------------------------------------------
\1\ This ANPRM seeks comment only on Farmer Mac's regulatory
capital framework, not on the regulatory capital framework
applicable to System banks and associations. Farmer Mac is governed
by different statutory and regulatory capital requirements than
those that apply to System banks and associations.
---------------------------------------------------------------------------
II. Introduction
Farmer Mac is an institution of the Farm Credit System (System),
regulated by FCA through its Office of Secondary Market Oversight
(OSMO).\2\ Governed by Title VIII of the Act, Farmer Mac was
established in 1988 to create a secondary market for agricultural real
estate mortgage loans and rural housing mortgage loans; rural utilities
loans were later added. The Act established Farmer Mac as a
stockholder-owned instrumentality of the United States government, a
structure commonly referred to as a government-sponsored enterprise
(GSE). Farmer Mac's role in the secondary market for agriculture and
rural infrastructure loans is comparable to the roles of the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac) (collectively, the housing GSEs) in
the secondary market for U.S. housing mortgages. The housing GSEs'
Federal regulator is the Federal Housing Finance Agency (FHFA).
---------------------------------------------------------------------------
\2\ Sections 8.1 and 8.11 of the Farm Credit Act of 1971, as
amended (Act), 12 U.S.C. 2279aa-1 and 2279aa-11.
---------------------------------------------------------------------------
The purpose of the legislation creating Farmer Mac was to provide a
secondary market for agricultural real estate mortgages, to increase
the availability of long-term credit to farmers and ranchers, to
provide greater liquidity and lending capacity to primary lenders as
they extend credit to farmers and ranchers, to provide an arrangement
for new lending to facilitate capital market investments in long-term
agricultural funding, and to enhance the ability of individuals in
small rural communities to obtain financing for moderate-priced
houses.\3\ The FCA, through OSMO, is responsible for the oversight and
supervision of Farmer Mac's safe and sound operations in furtherance of
its role to facilitate an efficient, competitive, and resilient
secondary market for agriculture and rural communities.
---------------------------------------------------------------------------
\3\ See Section 701 of the Agricultural Credit Act of 1987,
Public Law 100-233, 101 Stat. 1568, 1686 (Jan. 6, 1988) (12 U.S.C.
2279aa note).
---------------------------------------------------------------------------
Sufficient capital is crucial to the resiliency and effective
operations of all financial institutions, serving functions such as
absorbing losses, promoting public confidence, helping restrict
excessive asset growth, and providing protection to debt investors.
Capital's loss-absorbing capacity allows financial institutions to
continue operating as going concerns during periods of unexpected
operating losses or other adverse financial conditions. Financial
institution regulators, both internationally and in the United States,
have increasingly recognized the value of globally adopted standards
and measurements that, among other things, provide more transparency to
an institution's capital adequacy and make institutions' financial
strength more readily comparable.
After the worldwide financial crisis of 2007-2009, the Basel
Committee on Banking Supervision (BCBS) issued in 2010, subsequently
revised, and issued additional documents related to, a framework known
as Basel III.\4\ Basel III was an internationally agreed upon set of
measures developed in response to the financial crisis with the goal of
strengthening the regulation, supervision, and risk management of
banks. Since that time, the BCBS has revised, updated, and integrated
the Basel III reforms into a consolidated Basel Framework (Basel
Framework), which comprises all of the current and forthcoming BCBS
standards.\5\ Three U.S. Federal banking regulatory agencies are
represented on the BCBS: the Office of the Comptroller of the Currency
(OCC), the Board of Governors of the Federal Reserve System (FRB), and
the Federal Deposit Insurance Corporation (FDIC) (collectively, the
FBRAs).\6\
---------------------------------------------------------------------------
\4\ See ``Basel III: A global regulatory framework for more
resilient banks and banking systems,'' revised version June 2011,
and other Basel III documents at https://www.bis.org/bcbs/basel3.htm?m=2572.
\5\ Id. The Basel Framework can be found at https://www.bis.org/basel_framework/index.htm, and the BCBS continues to update it as
indicated on the website. While the Basel Framework includes
liquidity and other provisions in addition to capital provisions,
this ANPRM addresses only its capital provisions.
\6\ Neither the FBRAs nor any other U.S. regulator is required
by law to adopt the Basel Framework but, as discussed below, the
FRBAs, the FCA (for System banks and associations), and FHFA have
all issued Basel-based capital rules.
---------------------------------------------------------------------------
The Basel Framework is intended to improve both the quality and
quantity of banking organizations' capital, as well as to strengthen
various aspects of the international capital standards governing
regulatory capital. Enhanced comparability and disclosure requirements
also improve market discipline, the positive externality provided by
the response of capital markets to disclosed information. The Basel
Framework has two main approaches to calculating risk-weighted assets
for credit risk--the internal ratings-based (IRB) approach and the
standardized approach.\7\ In turn, the IRB approach has two
approaches--the advanced IRB approach (A-IRB) approach and the
foundation IRB approach. While this ANPRM focuses more on the A-IRB
than the foundation IRB approach, we invite comments on both.
---------------------------------------------------------------------------
\7\ Basel Framework at CRE20.1 and CRE20.2 (version effective as
of 1/1/2023). The Basel Framework's IRB approach also addresses the
calculation of risk-weighted assets for market risk and operational
risk (see MAR and OPE sections of the Basel Framework), but these
risks are not the focus of this ANPRM.
---------------------------------------------------------------------------
Under the Basel Framework's IRB approach, an institution calculates
risk weights using its internal risk rating assignments, probabilities
of default, and other inputs derived from its internal models.\8\ In
general, under the standardized approach, an institution's regulator
assigns fixed risk weights to exposures based on their relative risk
characteristics.\9\
---------------------------------------------------------------------------
\8\ See Basel Framework at CRE 30 through CRE 36.
\9\ Basel Framework at CRE 20.
---------------------------------------------------------------------------
In 2013 and 2014, the FBRAs adopted the Basel III framework to
apply to the U.S. banking organizations they regulate (U.S. rule).\10\
The U.S. rule applies the A-IRB approach to the largest,
internationally active bank organizations--in general, those with
assets of $700 billion or more--and the standardized approach to
smaller banks.\11\ In addition, the U.S. rule requires the A-IRB
approach banks to
[[Page 4109]]
also calculate their capital ratios under the standardized approach and
provides that their capital ratios are whichever approach yields the
lower ratios. In other words, A-IRB approach banks are required to
comply with whichever approach requires the bank to hold more
capital.\12\
---------------------------------------------------------------------------
\10\ 78 FR 62018 (Oct. 11, 2013) (FRB and OCC); 79 FR 20754
(Apr. 14, 2014) (FDIC). This rulemaking refers to the FBRAs' capital
regulations, including amendments after their initial adoption, as
the U.S. rule. The U.S. rule reflects Basel III as well as other
BCBS standards, and the provisions of the U.S. rule that are not
specifically included in the Basel III framework are generally
consistent with the goal of the framework. The U.S. rule is codified
at 12 CFR part 3 (OCC), 12 CFR part 217 (FRB), and 12 CFR part 324
(FDIC).
\11\ 12 CFR 3.1(c)(3) (OCC), 12 CFR 217.1(c)(4) (FRB), 12 CFR
324.1(c)(3) (FDIC).
\12\ The FBRAs' A-IRB approach rules are at 12 CFR part 3 (OCC),
12 CFR part 217 (FRB), and 12 CFR part 324 (FDIC). The regulatory
requirements to hold capital in accordance with whichever approach
requires holding the greater amount of capital are set forth at 12
CFR 3.10(d) (OCC), 12 CFR 217.10(d) (FRB), and 12 CFR 324.10(d)
(FDIC). The U.S. rule includes market risk (as appropriate) and
operational risk, as well as credit risk, in its calculation of
risk-weighted assets under the A-IRB approach. See definition of
``advanced approaches total risk-weighted assets'' in 12 CFR 3.2
(OCC), 12 CFR 217.2 (FRB), and 12 CFR 324.2 (FDIC). As stated above,
this ANPRM is focused on credit risk only.
---------------------------------------------------------------------------
In 2016, FCA adopted a rule governing System banks and associations
that is comparable to the standardized approach of the U.S. rule to the
extent appropriate for the System's cooperative structure and status as
a GSE with a mission to provide a dependable source of credit and
related services for agriculture and rural America.\13\ Consistent with
the U.S. rule, the FCA's rule for banks and associations incorporates
key aspects of the Basel III framework.
---------------------------------------------------------------------------
\13\ 81 FR 49720 (Jul. 28, 2016). FCA made revisions to the rule
in 2021; see 86 FR 54347 (Oct. 1, 2021). These rules are part 628 of
FCA regulations. FCA did not adopt IRB approaches or market or
operational risk provisions.
---------------------------------------------------------------------------
The FHFA issued several final capital rules between 2020 and 2022
that apply aspects of the Basel Framework to the housing GSEs (FHFA
capital rule).\14\ Like the U.S. rule, the FHFA capital rule requires
the housing GSEs to calculate their risk-weighted assets under both the
standardized and A-IRB approaches with the greater of the two used to
determine compliance with risk-based capital requirements.\15\
---------------------------------------------------------------------------
\14\ 85 FR 82150 (Dec. 17, 2020); 87 FR 14764 (Mar. 16, 2022).
These rules have been codified at 12 CFR part 1240. As discussed
below, the housing GSEs have been in conservatorship since 2008.
They will not be subject to FHFA's capital rules until after they
exit conservatorship (see 12 CFR 1240.4(d)(1) and (d)(2)). Like the
FBRAs, the FHFA did not adopt the foundation IRB approach and
includes market risk (as appropriate) and operational risk, as well
as credit risk, in its calculation of risk-weighted assets under the
A-IRB approach (see 12 CFR 1240 Subpart E and 12 CFR 1240 Subpart
F).
\15\ 12 CFR 1240.10.
---------------------------------------------------------------------------
The FHFA capital rule is particularly relevant to Farmer Mac in
several respects. As discussed earlier, the housing GSEs, like Farmer
Mac, are secondary market GSEs. Like the housing GSEs, Farmer Mac has a
countercyclical role, meaning that while it is an important resource
for liquidity in normal operating conditions, it becomes an even more
important resource for primary lenders under stressful conditions.
The financial crisis of 2007-2009 demonstrated the inadequacy of
the capital requirements that governed the housing GSEs at the time. On
September 6, 2008, ``in response to a substantial deterioration in the
housing markets that severely damaged [the housing GSEs'] financial
condition and left both of them unable to fulfill their missions
without government intervention,'' \16\ the FHFA placed the housing
GSEs into conservatorship (where they remain as of the date the FCA
Board adopted this ANPRM). While the housing GSEs are not subject to
the FHFA capital rule while they are in conservatorship, the FHFA
adopted the FHFA capital rule in anticipation of the eventual
termination of the conservatorships.
---------------------------------------------------------------------------
\16\ See ``History of Fannie Mae and Freddie Mac
Conservatorships,'' at https://www.fhfa.gov/Conservatorship/Pages/
History-of-Fannie-Mae_Freddie-
Conservatorships.aspx#:~:text=History%20of%20Fannie%20Mae%20and%20Fre
ddie%20Mac%20Conservatorships,its%20authorities%20to%20place%20each%2
0Enterprise%20into%20conservatorship.
---------------------------------------------------------------------------
For Farmer Mac, a strong capital position promotes market
confidence in the Corporation's ability and readiness to provide rural
lenders with a reasonably priced source of liquidity and credit. That
service, in turn, helps lenders provide uninterrupted credit services
to agricultural and rural utility borrowers.
In 2013, FCA adopted regulations governing Farmer Mac (the capital
planning rule) that included provisions based on the Basel III
framework.\17\ The capital planning rule focuses on the capital
planning process, board responsibilities for approving that process,
and the mandatory elements of the capital plan, among other things. In
addition, the capital planning rule requires Farmer Mac's capital plan
to include a Basel-based tier 1 ratio using tier 1 capital comprised of
components that meet the criteria established in definitions set forth
in the Basel III Framework or the U.S. rule, and using a risk-weighted
assets approach that is appropriate given Farmer Mac's business
activities and consistent with broadly accepted banking practices and
standards.\18\ In accordance with the rule, Farmer Mac reports other
capital measures to FCA in agreed-upon call report schedules.
---------------------------------------------------------------------------
\17\ 78 FR 65145 (Oct. 31, 2013). This rule is set forth at 12
CFR 652 Subpart B.
\18\ 12 CFR 652.61(b), definition of ``Tier 1 ratio.''
---------------------------------------------------------------------------
Although the capital planning rule does not require Farmer Mac to
disclose its tier 1 capital ratio, Farmer Mac voluntarily discloses the
ratio in its Securities and Exchange Commission (SEC) filings its tier
1 ratio as calculated under the A-IRB approach.\19\ In addition, Farmer
Mac voluntarily discloses in its SEC filings that its board has adopted
a capital policy which includes a 2.5% buffer over its internal minimum
tier 1 capital ratio.\20\
---------------------------------------------------------------------------
\19\ See, e.g., Farmer Mac Form 10-Q for the quarterly period
ended June 30, 2022, page 111, at https://www.sec.gov/ix?doc=/Archives/edgar/data/845877/000084587722000163/agm-20220630.htm.
\20\ See, e.g., Farmer Mac's Form 10-K for the period ending
December 31, 2021, page 32 at https://www.sec.gov/ix?doc=/Archives/edgar/data/845877/000084587722000022/agm-20211231.htm.
---------------------------------------------------------------------------
Since FCA's adoption of the 2013 capital planning rule, the scale
and complexity of Farmer Mac's operations and secondary market
activities have both increased substantially. Outstanding program
volume was $23.6 billion as of December 31, 2021, up from $14.0 billion
at yearend 2013. Farmer Mac's agricultural finance operations include
an increased focus on participations in, and syndications of, large
commercial loans. Further, the scope of its rural infrastructure
finance operations has expanded to include renewable energy project
finance and telecommunications finance focused on broadband services.
Because of Farmer Mac's growth and the increasing complexity of its
operations, and in light of enhancements other U.S. regulators have
made to their capital requirements since Farmer Mac's capital planning
requirements were adopted in 2013, FCA believes it is appropriate to
consider whether and how Farmer Mac's capital requirements should be
enhanced to strengthen its safe and sound operations.
III. Discussion of Farmer Mac's Business and Current Capital
Requirements
A. Farmer Mac's Business Operations
Under Farmer Mac's agricultural finance activities, it purchases
eligible loans directly from lenders, provides advances against
eligible loans by purchasing obligations secured by those loans or
assets that qualify as eligible agricultural real estate collateral,
securitizes assets and guarantees the resulting securities, and issues
long-term standby purchase commitments for eligible loans. Securities
guaranteed by Farmer Mac may be held either by the originator of the
underlying assets or by Farmer Mac, or they may be sold to third-party
investors.
Under its rural infrastructure financing activities, Farmer Mac
purchases, or commits to purchase, and guarantees, qualified rural
electric and
[[Page 4110]]
telephone utility loans, or securities backed by such loans, directly
from cooperative lenders. Congress granted Farmer Mac the authority for
this activity as program business in 2008.\21\
---------------------------------------------------------------------------
\21\ See Section 5406 of Public Law 110-246, 122 Stat. 1651,
1920, June 18, 2008 (codified at section 8.0(9) of the Act).
---------------------------------------------------------------------------
Farmer Mac's total program business volume was $23.6 billion which
equates to 20-year compound average growth of 9.0 percent since yearend
2001. Of that $23.6 billion in total outstanding program business
volume, 75 percent is in agricultural finance and 25 percent in rural
infrastructure finance.\22\
---------------------------------------------------------------------------
\22\ Farmer Mac is authorized to invest in eligible non-program
investments. In this activity, Farmer Mac purchases eligible
securities for the purposes of enterprise risk management, including
complying with its interest rate risk requirements, complying with
its liquidity risk requirements, managing surplus short-term funds,
and complementing program business activities. See 12 CFR 652.15.
These investments also contribute to total risk-weighted assets for
capital purposes.
---------------------------------------------------------------------------
B. Farmer Mac's Current Capital Requirements
Section 8.11 of the Act authorizes FCA to provide for the general
supervision of the safe and sound performance of the powers, functions,
and duties of Farmer Mac.
Section 8.32 of the Act requires FCA to establish a risk-based
capital test to determine the amount of regulatory capital \23\ that
would be sufficient for Farmer Mac to maintain positive capital during
a 10-year period under certain specified circumstances. FCA first
issued regulations governing Farmer Mac capital to implement the
requirements for the Risk-based Capital Stress Test (RBCST) in 2001.
These regulations have been updated three times, most recently in
2011.\24\ FCA is not requesting comment on potential changes to the
RBCST in this ANPRM.\25\
---------------------------------------------------------------------------
\23\ ``Regulatory capital'' is defined in section 8.31(5) of the
Act as core capital ``plus an allowance for losses and guarantee
claims, as determined in accordance with generally accepted
accounting principles [GAAP].''
\24\ These regulations are set forth at 12 CFR part 652 Subpart
B. The regulations were published at 66 FR 19048 (Apr. 12, 2001); 71
FR 77247 (Dec. 26, 2006); 73 FR 31937 (Jun. 5, 2008); and 76 FR
23459 (Apr. 27, 2011).
\25\ FCA notes that at the time the housing GSEs entered
conservatorship in 2008, their regulator had in place a similar
RBCST-type requirement pursuant to the housing GSEs' authorizing
statute. This statute also imposed minimum leverage ratio
requirements similar to, though lower than, the leverage ratio
requirements imposed on Farmer Mac by the Act.
---------------------------------------------------------------------------
Section 8.33 of the Act established minimum core capital \26\
(leverage) ratios, for which FCA also published regulations in
2001.\27\ FCA is also not seeking comment on potential changes to these
regulations.
---------------------------------------------------------------------------
\26\ ``Core capital''is defined as the sum of the following as
determined in accordance with GAAP: the par value of outstanding
common and preferred stock, paid-in capital, and retained earnings.
\27\ 66 FR 19048 (Apr. 12, 2001), originally codified at 12 CFR
650.25(c), and later moved to 12 CFR 652.75(c).
---------------------------------------------------------------------------
As discussed above, FCA's capital planning rule requires Farmer Mac
calculate and include in its capital plan a Basel-based tier 1 ratio as
defined by established standards or regulations.\28\ The capital
planning rule incorporates by reference Basel capital-related terms
\29\ that are also in the U.S. rule.
---------------------------------------------------------------------------
\28\ 12 CFR 652.61(b), definition of ``Tier 1 ratio.''
\29\ Id.
---------------------------------------------------------------------------
The capital planning rule requires Farmer Mac's board of directors
to review the robustness of its process for assessing capital adequacy,
to correct any deficiencies in that process, and to approve the annual
capital plan.\30\ The rule also established an annual assessment by FCA
of Farmer Mac's capital plan.\31\ The rule requires Farmer Mac to
consider the results of its stress tests and FCA's assessment of the
plan in its capital planning process, including specific stress
scenarios required by FCA.\32\
---------------------------------------------------------------------------
\30\ 12 CFR 652.61(c).
\31\ 12 CFR 652.61(d) and (e).
\32\ 12 CFR 652.61(c)(1)(iii)(A), (c)(2)(i)(A).
---------------------------------------------------------------------------
IV. Request for Comments
FCA solicits comments on the following questions. Comments should
be supported with relevant data or examples when available. These
questions refer collectively to the Basel Framework, the U.S. rule,
FCA's capital regulations governing System banks and associations, and
the FHFA's capital regulations as the ``existing capital frameworks.''
A. General
1. What core principles are most important in FCA's consideration
of whether capital regulations governing Farmer Mac should be more
closely aligned with any of the existing capital frameworks?
2. What unintended consequences, if any, could result from the
application of any of the existing capital frameworks to Farmer Mac?
B. Risk-Based Approaches and Buffers
3. FCA's existing regulations do not specify whether Farmer Mac
must use the standardized approach, an IRB approach, or both to
calculate credit risk-weighted assets. As discussed above, Farmer Mac
reports its capital measures to FCA in agreed-upon call report
schedules and voluntarily makes certain public disclosures regarding
its use of the A-IRB approach. The IRB approach was intended to apply
to large, international lenders and include fundamental assumptions
consistent with their size and the scope of their business profiles.
The U.S. rule and the FHFA capital rule require regulated entities
that use the A-IRB approach to also calculate credit risk-weighted
assets using the standardized approach, and the binding capital minimum
requirements are based on the greater of the risk-weighted asset
calculations under the two approaches.
(a) Should FCA consider requiring Farmer Mac to comply with the
standardized approach, the IRB approach, or both? If so, which approach
or approaches should Farmer Mac be required to comply with, and why?
(b) What adjustments, if any, should FCA consider to tailor either
the standardized approach or an IRB approach to take account of Farmer
Mac's smaller size, more limited financing authorities, or other unique
aspects of its business model?
(c) If FCA were to require Farmer Mac to use both the standardized
and an IRB approach to calculate its credit risk-weighted assets, how
should differences between the two approaches' results be treated with
respect to capital requirements? For example, the U.S. rule and FHFA
both require the use of the greater of the two risk-weighed assets
calculation.
4. The BCBS' summary of 2017 post-crisis reforms notes that the
financial crisis of 2007-2009 highlighted shortcomings in the
internally modeled approaches for regulatory capital, including the IRB
approach to credit risk.\33\ The shortcomings included excessive
complexity of the IRB approach, the lack of comparability in banks'
internally modeled IRB capital requirements, and the lack of robustness
in modeling certain asset classes.\34\
---------------------------------------------------------------------------
\33\ BCBS, ``High-level summary of Basel III reforms,'' December
2017, at 5. https://www.bis.org/bcbs/publ/d424_hlsummary.pdf.
\34\ Id.
---------------------------------------------------------------------------
The BCBS noted that internal models should allow for more accurate
risk measurement than the standardized approach. It cautioned, however,
that internal modeling, when used to set minimum capital requirements,
can create incentives to minimize risk weights. The BCBS stated that
``certain types of asset, such as low-default exposures, cannot be
modelled reliably or robustly.'' \35\
---------------------------------------------------------------------------
\35\ BCBS, ``Finalising Basel III, In brief'', December 2017,
page 1. https://www.bis.org/bcbs/publ/d424_inbrief.pdf.
---------------------------------------------------------------------------
[[Page 4111]]
The existing capital frameworks--particularly the A-IRB approach--
have expanded the use of floors to address these shortcomings in
modeling. These frameworks impose floors on measures--such as
probability of default (PD), loss given default (LGD), and risk-
weights--that apply to certain exposures. These floors prevent the
measures from falling below specified levels, even if the modeling
would otherwise result in lower levels. The existing capital frameworks
include both input floors, for measures such as PD and LGD,\36\ and
output floors (i.e., risk-weight floors to be applied when model
outputs are lower than the floor) for different exposures.
---------------------------------------------------------------------------
\36\ For example, see Basel Framework at CRE32.4 for PD floor
and CRE 32.16 for LGD floor (version effective as of January 1,
2023). For examples of the U.S. rule PD and LGD floors see 12 CFR
3.131 (OCC); 12 CFR 217.131 (FRB); and 12 CFR 324.131 (FDIC).
---------------------------------------------------------------------------
If FCA adopts Basel Framework-based requirements, should it
establish floors similar to those in the existing capital frameworks?
If so, what should those floors be and why? Given the differences among
the risk-weight floors established in the other capital frameworks, is
there a policy among them that should be considered the most readily
transferrable to a Farmer Mac capital framework, or should FCA develop
Farmer Mac-specific risk-weight floors?
5. The existing capital frameworks require entities to hold capital
over the minimum requirements--referred to as ``buffers''--to avoid
restrictions on dividend payouts and discretionary bonuses. The
existing capital frameworks include different types of buffers
including, but not limited to, a capital conservation buffer and a
countercyclical buffer.\37\ Should capital buffers be required for
Farmer Mac and, if so, what type should FCA consider?
---------------------------------------------------------------------------
\37\ See buffer requirements at section RBC30 of the Basel
Framework; 12 CFR 3.11 (OCC); 12 CFR 217.11 (FRB); and 12 CFR 324.11
(FDIC) of the U.S. rule; 12 CFR 628.11 of the FCA banks and
associations capital rule; and 12 CFR 1240.11 of the FHFA capital
rule. A conservation buffer is designed to ensure that banks build
up capital buffers outside periods of stress which can be drawn down
as losses are incurred. Under a countercyclical buffer regime, the
regulator monitors credit growth and other indicators for signs of
elevated system-wide risk; based on this assessment the regulator
may put in place a countercyclical buffer requirement when
circumstances warrant and then remove that buffer when credit risk
returns to more normal levels. Other types of buffers also exist.
---------------------------------------------------------------------------
6. The existing capital frameworks require certain entities to make
capital-related public disclosures to improve market discipline and
transparency.\38\ The nature of these disclosures varies depending on
whether the entities follow the standardized or an IRB approach.
Currently, as discussed above, within a Basel-based context, Farmer Mac
voluntarily discloses its tier 1 ratio as calculated under the A-IRB
approach, as well as its adoption of a buffer over its internal minimum
tier 1 capital ratio. What disclosures, if any, should FCA consider
requiring for Farmer Mac?
---------------------------------------------------------------------------
\38\ See Basel Framework section DIS10; 12 CFR 3.61-3.63 (OCC);
12 CFR 217.61-217.63 (FRB); 12 CFR 324.61-324.63 (FDIC) (U.S. rule
standardized approach entities with total consolidated of $50
billion or more); 12 CFR 3.171-3.173 (OCC); 12 CFR 217.171-217.173
(FRB); 12 CFR 324.171-324.173 (FDIC) (U.S. rule A-IRB approach
entities); 12 CFR 628.61-628.63 (FCA rule for System banks); 12 CFR
1240.61-1240.63 (FHFA).
---------------------------------------------------------------------------
C. Leverage Ratio and Leverage Buffer
7. The Basel Framework requires a minimum leverage ratio (i.e., a
non-risk-based ratio) of three percent.\39\ The U.S. rule requires a
minimum leverage ratio of four percent to be considered adequately
capitalized and an additional supplementary leverage ratio of three
percent for A-IRB approach users.\40\ FCA regulations governing System
banks and associations require a four percent leverage ratio with a
leverage buffer of one percent.\41\ The FHFA capital rule requires a
2.5 percent minimum tier 1 leverage ratio plus a leverage buffer that
adjusts based on the entity's market share.\42\ FCA regulations do not
require Farmer Mac to calculate a leverage ratio or buffer.
---------------------------------------------------------------------------
\39\ Basel Framework at LEV20.6.
\40\ See 12 CFR 217.10 (FRB); 12 CFR 3.10 (OCC); 12 CFR 324.10
(FDIC).
\41\ See 12 CFR 628.11.
\42\ See 12 CFR 1240.10(f) and 12 CFR 1240.11, respectively.
---------------------------------------------------------------------------
Should FCA consider leverage ratio requirements for Farmer Mac? If
so, what leverage ratio requirements should FCA consider? Should FCA
consider a leverage buffer for Farmer Mac? If so, what type and
structure should FCA consider?
D. Other
8. What other approaches, risk categories (e.g., market risk and
operations risk, including model risk), or methodologies not discussed
above should FCA consider in updating its regulatory capital framework
for Farmer Mac?
Dated: January 17, 2023.
Ashley Waldron,
Secretary, Farm Credit Administration Board.
[FR Doc. 2023-01042 Filed 1-23-23; 8:45 am]
BILLING CODE 6705-01-P
