Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39219

1Section 1.2(a) of the Farm Credit Act of 1971,

as amended, (Act) identifies System institutions as

Farm Credit Banks, banks for cooperatives,

production credit associations, Federal land bank

associations, and ‘‘such other institutions as may be

made a part of the System, all of which shall be

chartered by and subject to regulation by the Farm

Credit Administration.’’ Such additional

institutions would include agricultural credit

banks, agricultural credit associations, Federal land

credit associations, and service corporations

chartered under section 4.25 of the Act. For

purposes of the requirements of § 615.5182, the

Federal Agricultural Mortgage Corporation is not

included in the discussion of System institutions.

2Regulations affecting the Federal Agricultural

Mortgage Corporation will be issued separately.

3The Office of the Comptroller of the Currency,

the Federal Deposit Insurance Corporation, and the

Federal Reserve Board.

FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 615, 620 and 627

RIN 3052–AB58

Organization; Funding and Fiscal

Affairs, Loan Policies and Operations,

and Funding Operations; Disclosure to

Shareholders; Title V Conservators

and Receivers; Capital Provisions

AGENCY: Farm Credit Administration.

ACTION: Final rule.

SUMMARY: The Farm Credit

Administration (FCA or Agency),

through the FCA Board (Board), adopts

a final rule to amend its capital

adequacy and related regulations to

address: interest rate risk; the grounds

for appointing a conservator or receiver;

capital and bylaw requirements for

service corporations; and various

computational issues and other issues

involving the capital regulations. The

rule adds safety and soundness

requirements deferred from prior

rulemakings, provides greater

consistency with capital requirements of

other financial regulators, and makes

technical corrections.

EFFECTIVE DATE: This regulation shall

become effective 30 days after

publication in the Federal Register

during which either or both houses of

Congress are in session. Notice of the

effective date will be published in the

Federal Register.

FOR FURTHER INFORMATION CONTACT:

Dennis K. Carpenter, Senior Policy

Analyst, Office of Policy and

Analysis, Farm Credit Administration,

McLean, VA 22102–5090, (703) 883–

4498, TDD (703) 883–4444,

or

Rebecca S. Orlich, Senior Attorney,

Office of General Counsel, Farm

Credit Administration, McLean, VA

22102–5090, (703) 883–4020, TDD

(703) 883–4444.

SUPPLEMENTARY INFORMATION:

I. General

The Agency proposed amendments to

its capital regulations on September 23,

1997 (62 FR 49623). The purpose of the

proposed regulations was to build on

previous regulatory efforts by

addressing discrete issues related to

capital that were deferred during

consideration of the capital adequacy

regulations that became effective in

March 1997. The issues addressed in the

proposed rule were:

• Interest rate risk as it pertains to

Farm Credit System (System or FCS)

institutions;

• The definition of insolvency and of

‘‘an unsafe or unsound condition to

transact business’’ for the purpose of

appointing a conservator or receiver;

• The establishment of capital and

bylaw requirements for System service

corporations;

• Changes to risk-weighting

categories of assets;

• The retirement of certain allocated

equities included in core surplus;

• Deferred-tax assets;

• The treatment of intra-System

investments for capital computation

purposes;

• Various other computational issues;

and

• Other technical issues.

As described more fully below, the

FCA Board has made revisions to the

proposed regulations on interest rate

risk management programs, the

enumerated circumstances in which the

FCA could consider an institution to be

in an unsafe or unsound condition for

purposes of appointing a conservator or

receiver, and the proposal regarding the

treatment of ‘‘other comprehensive

income’’ in calculating regulatory

capital. The remaining regulations are

adopted substantially as proposed.

Comments were received on the

proposed regulations from the System’s

Presidents’ Finance Committee, which

reflected the views of the System’s

banks and associations (System joint

comment); two Farm Credit banks; and

a jointly managed production credit

association (PCA) and Federal land

credit association (FLCA). In addition, a

third Farm Credit bank submitted a

sample computation of the proposed

rule’s deferred-tax asset exclusion and

asked the Agency to determine whether

it had been calculated properly. The

respondents did not comment generally

on the overall thrust of the proposed

rule; rather, their comments addressed

specific issues as described below. All

of the comments were carefully

considered in the formulation of the

final rule.

II. Interest Rate Risk

New §§ 615.5180 and 615.5181 are

added to the investment regulations to

require each System bank to establish an

interest rate risk management program

and to charge the bank’s board of

directors and senior management with

responsibility for maintaining effective

oversight. In addition, new § 615.5182

imposes the same requirements on all

other System institutions 1 (excluding

the Federal Agricultural Mortgage

Corporation) 2 with interest rate risk

exposure.

The language in § 615.5182 has been

revised from the proposed rule to clarify

that the board and management of each

System institution have a duty to

identify and manage interest rate risk

exposure at their institution. The new

regulation requires institutions other

than banks to establish interest rate risk

management programs for all interest

rate risk, including risk that is being

managed by the bank. The board of

directors of an institution is accountable

for all interest rate risk exposure of the

institution regardless of whether the

institution has contracted with the

funding bank to manage certain interest

rate risks. Although the funding bank

may manage the interest rate risk, the

institution’s board is still accountable

for ensuring that risk exposures are

appropriately identified and managed.

In those cases where an institution has

interest rate risk exposure in excess of

any exposure covered by the bank, the

institution will also be expected to

establish additional management

requirements commensurate with the

level of such exposure.

To supplement these new regulations,

which are general in nature, the FCA

Board recently adopted and published

for comment a proposed interest rate

risk management policy. See 63 FR

27962, May 21, 1998. The policy

statement provides guidance to System

institutions on prudent interest rate risk

management principles, as well as the

criteria the FCA will use to evaluate the

adequacy and effectiveness of a System

institution’s interest rate risk

management. The proposed guidelines

are similar in approach to the interest

rate risk guidelines issued by other

Federal financial institution regulatory

agencies.3

The new interest rate risk regulations

and policy statement will improve FCA

oversight of the System by

supplementing existing capital

regulations, which specifically address

only credit risk. The regulations and

policy statement will better inform

System institutions of the Agency’s

expectations for the management of
39220 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations

interest rate risk exposure. The

potentially adverse effect that interest

rate risk may have on net interest

income and the market value of an

institution’s equity is of particular

concern to the FCA. Unless properly

measured and managed, interest rate

changes can have significant adverse

effects on System institutions’ ability to

generate future earnings, build net

worth, and maintain liquidity. The

combined effect of the final regulation

and provisions of the policy statement

is to ensure sound interest rate risk

management by all System institutions.

With the publication for comment of

the proposed interest rate risk

management policy, the FCA has

addressed the one comment it received

on the proposed interest rate provisions.

The System joint comment included a

request that the Agency continue its

practice of following the approaches

taken by other Federal financial

institution regulatory agencies and that

the System be provided with an

opportunity to comment on any

proposed policy statement prior to final

issuance.

III. Definition of Insolvency and

‘‘Unsafe or Unsound Condition to

Transact Business’’

The FCA Board adopts several

changes to § 627.2710, which sets forth

the grounds for appointing a conservator

or receiver for a System institution.

First, the definition of ‘‘insolvency’’ as

a ground for appointing a conservator or

receiver in paragraph (b)(1) is amended

to clarify that any stock or allocated

equities held by current or former

borrowers are not ‘‘obligations to

members.’’ There is no change in the

treatment of obligations to members

such as investment bonds and

uninsured accounts. Second, the

Agency revises paragraph (b)(3), which

currently provides that a conservator or

receiver may be appointed if ‘‘[t]he

institution is in an unsafe or unsound

condition to transact business.’’ The

revision adds that ‘‘having insufficient

capital or otherwise’’ is a circumstance

that the FCA could consider to be an

unsafe and unsound condition. The

amendment also identifies capital and

collateral thresholds below which an

institution could be considered to be

operating unsafely, as well as other

conditions. The thresholds and

conditions are:

1. For banks, a net collateral ratio (as

defined by § 615.5301(d)) below 102

percent.

2. For associations, a default by the

association of one or more terms of its

general financing agreement (GFA) with

its affiliated bank that the FCA

determines to be material.

3. For all institutions, permanent

capital (as defined in § 615.5201) of less

than one-half the minimum required

level for the institution.

4. For all institutions, a total surplus

(as defined by § 615.5301(i)) ratio of less

than 2 percent.

5. For associations, stock impairment.

The final rule contains a revision in

item 2 above, which as proposed

pertained to collateral that is

insufficient to enable an association to

meet the requirements of its GFA with

its affiliated bank. The FCA Board

changed the provision in response to the

System’s joint comment that the term

‘‘insufficient collateral’’ in the second

threshold was too imprecise. The

System joint comment stated that some

GFAs might have a more ‘‘strident’’

collateral test that could result in a

technical default that could be cured in

a number of ways. The System joint

comment recommended instead that a

‘‘continuing and material default under

the terms of the association’s [GFA]’’ be

considered to be an unsafe and unsound

condition to transact business; it stated

that the materiality standard would

eliminate minor matters, and the

requirement that the default be

continuing would eliminate defaults

that could be cured. The jointly

managed PCA/FLCA commented that it

supported the revision proposed in the

System joint comment.

The FCA Board agrees in part with the

suggestion in the System joint comment.

It is appropriate to provide that a

material default of the GFA would be

considered an unsafe and unsound

condition for transacting business and,

consequently, a ground for appointing a

conservator or receiver. However, a

provision that the default must be

continuing is too restrictive, since a

material default can indicate severe

problems even when the default might

be cured by, or is waived by action of

the affiliated bank. The FCA Board

further believes that the Agency, not the

bank nor the association, should be

responsible for determining, as a ground

for appointing a conservator or receiver,

what constitutes a material default of

the GFA. Therefore, the final rule is

revised by removing the reference to

‘‘insufficient collateral’’ in the proposed

rule and providing instead that an

unsafe or unsound condition for

transacting business includes an

association’s default under the terms of

its GFA, where such default is

determined by the Agency to be

material.

While no other comments were

received on the remaining standards

and conditions, the FCA Board has

made some minor adjustments in the

final rule for clarity and conformity.

As was noted in the preamble to the

proposed regulations, the thresholds

and conditions are intended to be

examples of what the Agency considers

to be an unsafe or unsound condition to

transact business for the purpose of

appointing a conservator or receiver but

are not exclusive. The FCA will

continue to have the discretion to

determine if an institution is in an

unsafe or unsound condition to transact

business based on other activities or

circumstances that are not enumerated

in the regulation. The FCA also retains

the discretion to not appoint a

conservator or receiver even when any

of the enumerated circumstances exists.

The Agency will evaluate the totality of

circumstances before deciding what

action, if any, to take.

The Board notes further that the

delineation of the ‘‘unsafe or unsound’’

thresholds in this regulation does not

mean that an institution is conclusively

presumed to be operating safely and

soundly if it is above all of the

enumerated thresholds. The FCA may

still consider an institution operating

below minimum capital standards to be

operating unsafely and unsoundly, and

take appropriate supervisory action

accordingly.

IV. Service Corporations

A. Capital Requirements for Service

Corporations

The FCA Board amends § 611.1135(c)

to provide that minimum capital

requirements may be imposed on a

service corporation as a condition of

approval of the service corporation’s

charter. The Agency will monitor a

service corporation’s compliance with

individually established capital

standards through the examination

process. No comments were received on

the proposed revision, and the FCA

Board adopts the rule as proposed.

B. Application of Bylaw Regulations to

Service Corporations

Section 615.5220 is amended by

adding a new paragraph (b) requiring

each service corporation to have

relevant capitalization provisions in its

bylaws. A conforming amendment to

§ 611.1135(b)(4) is also adopted. No

comments were received on these

provisions, and they are adopted as

proposed.

V. Deferred-Tax Assets

The FCA amends § 615.5210 to add a

new paragraph (e)(11) establishing a

requirement to exclude certain deferred-
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39221

4Associations may include routinely distributed

allocated equities in core surplus if such equities

are not scheduled for retirement in the next 3 years.

5Consequently, a commercial bank or thrift that

fails to meet its Tier 1 minimum standard will also

fail to meet its overall (Tier 1 plus Tier 2) risk-based

standard, no matter how much capital it may have

that meets the definition of Tier 2 capital.

tax assets in capital calculations.

Section 615.5201 is also amended to

add new paragraph (d) to define

deferred-tax assets that are dependent

on future income or future events. These

amendments are adopted without

change from the proposal.

Under this rule, when an institution

computes its required capital ratios, it is

not required to exclude deferred-tax

assets that can be realized through

carrybacks to taxes paid on income

earned in prior periods. However, the

rule excludes a portion of the deferredtax assets: (1) That an institution can

realize only if it earns sufficient taxable

income in the future; or (2) that are

dependent on the occurrence of other

future events for realization. The

portion of deferred-tax assets that must

be excluded is the greater of:

(1) The deferred-tax assets in excess of

the amount that the institution expects

to realize within 1 year of the most

recent calendar quarter-end date, based

on the institution’s financial projections

of taxable income and other events for

that year; or

(2) The deferred-tax assets in excess of

10 percent of core surplus capital

existing before the deduction of any

disallowed tax assets.

An institution must deduct the

excluded deferred-tax assets from

capital and from assets when calculating

capital ratios.

The Agency received one comment

and a sample computation regarding its

proposal. The System joint comment

objected to the FCA’s statement, in the

preamble to the proposed regulation,

that the proposed exclusion was

consistent with requirements

implemented by the other Federal

financial institution regulatory agencies.

The other agencies provide that

commercial banks and thrifts must

deduct deferred-tax assets in excess of

10 percent of their Tier 1 capital or in

excess of the amount expected to be

realized within 1 year (whichever is

greater). The System joint comment

asserted that the FCA’s use of core

surplus as the basis for the 10-percent

limitation was not consistent with the

other agencies’ approach. Rather, the

System contended, the 10-percent

limitation in the calculation should be

10 percent of permanent capital, not

core surplus, because permanent capital

was ‘‘a conservative equivalent of Tier

1 capital’’ for commercial banks and

thrifts.

The Agency disagrees with the

characterization of permanent capital as

a ‘‘conservative equivalent’’ of a

commercial bank’s Tier 1 capital. The

components of Tier 1 capital are

generally more stable than many

components of permanent capital. It is

true that common stockholders’ equity,

which is included in permanent capital

but not core surplus, is a component of

a commercial bank or thrift’s Tier 1

capital. However, a commercial bank or

thrift does not routinely retire its

common stock. By contrast, most Farm

Credit institutions routinely retire

common stock and distribute allocated

surplus. The Agency implemented a

core surplus requirement to ensure that

institutions have an amount of stable

capital that is not generally subject to

routine retirements or distributions for

at least the next 3 years.4 Furthermore,

other components of permanent capital

such as term stock are not included by

commercial banks in Tier 1 capital and

may be included in Tier 2 capital only

up to an amount that equals the amount

of the commercial bank’s Tier 1 capital.5

There are no such restrictions on a Farm

Credit institution’s permanent capital—

nearly all capital is included without

limit, except equity holdings between

FCS institutions. Because of these

significant functional differences,

permanent capital and Tier 1 capital are

not equivalent. The FCA Board

continues to believe that core surplus is

a more appropriate basis on which to

limit the inclusion of deferred-tax assets

and, therefore, adopts the regulation as

proposed.

VI. Computational Issues

The FCA Board adopts technical

corrections to the existing capital

adequacy regulations, primarily

involving the computation of the total

surplus and core surplus capital

requirements, as described below.

A. Average Daily Balance Requirement

The FCA Board adopts § 615.5330(c)

to require computation of the total

surplus, core surplus, and risk-adjusted

asset base using average daily balances

for the most recent 3 months, in the

same way they are used for the

calculation of permanent capital. Under

the existing regulations, the total and

core surplus ratios have been calculated

using month-end balances. The change

is made in response to requests from a

number of institutions who commented

that using month-end balances results in

significant variability in the ratios due

simply to seasonal lending trends.

One comment was received regarding

proposed § 615.5330(c). The commenter

supported the change on the ground that

basing the calculations on point-in-time

assets could lead to a distorted view of

the capital position of an institution

lending to agriculture due to its cyclical

nature.

B. Maintenance of Core Surplus and

Total Surplus Ratios

The FCA Board adopts several

changes to its requirements that

institutions maintain core surplus and

total surplus ratios. Paragraphs (a) and

(b) of § 615.5330 are amended to add the

phrase ‘‘at all times’’ to the requirement

that institutions must maintain core

surplus and total surplus ratios of at

least the minimum required level. The

amendatory language clarifies that

institutions must have the capability to

calculate capital ratios every day, so that

management decisions relative to loans

in excess of the institution’s loan limits,

stock retirements, and other matters

related to capital levels are made with

knowledge of the institution’s current

capital ratios. For example, the

institution must be able to calculate

capital ratios on any date stock is

retired, to ensure that minimum capital

levels will be maintained after the

retirement.

Section 615.5335 is also amended to

expressly require banks to achieve and

maintain at all times a net collateral

ratio at or above the regulatory

minimum, as well as to have the

capability to calculate the net collateral

ratio at any time using the balances

outstanding at the computation date. No

comments were received on these

revisions, and they are adopted without

change from the proposed rule.

C. Treatment of Intra-System

Investments and Other Adjustments

1. Reciprocal Investments

The FCA amends § 615.5210(e)(1) to

clarify the treatment of reciprocal

holdings between two System

institutions in the capital calculations.

Institutions must eliminate reciprocal

holdings before making the other

required adjustments relating to intraSystem investments. The Agency makes

this clarification because some

institutions have incorrectly made other

required adjustments for intra-System

investments before eliminating the

reciprocal investments when calculating

capital positions. The Agency intended

that elimination of investments by one

System institution in another institution

be applied on a net basis after

eliminating reciprocal holdings. See 53

FR 16956, May 12, 1988. This ‘‘netting
39222 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations

effect’’ ensures that System institutions

eliminate cross-capital investments

prior to other adjustments required by

the capital regulations.

A System bank, which presently has

investments in several of its affiliated

associations, recommended that the

Agency eliminate the reciprocal

investment provisions from the

regulations for the following reasons: (1)

The FCA currently has prior approval

authority over investments by Farm

Credit banks in associations and could,

therefore, control where the investment

counts in the capital calculations; (2)

the recently added capital ratios are

more comprehensive and preclude the

need for the reciprocal investment

provisions; and (3) it is illogical for the

bank to count its investment in the

association in the bank’s net collateral

ratio, since the bank does not have

access to the investment.

The FCA disagrees with the

commenter’s rationale for how

reciprocal investments should be

counted. Reciprocal investments must

be eliminated from the capital

calculations because the exchange of

reciprocal stock creates no tangible

worth or resources to absorb loss. This

is a characteristic of all reciprocal

investments, irrespective of the reasons

why the reciprocal investment was

made. It is not appropriate for any

institution to be exempted from this

treatment, as the commenter implies.

Placing the requirement in the capital

regulations ensures that all institutions

calculate their capital in the same way,

and that the Agency, investors, and

others are then able to make meaningful

comparisons of one institution’s capital

ratios with another institution’s ratios.

The approach suggested by the

commenter would add unnecessary and

inappropriate inconsistencies in the

capital calculations of institutions.

The FCA Board also disagrees with

the commenter’s assertion that the

newly added capital ratios make

unnecessary the elimination of

reciprocal investments in the permanent

capital calculation. On the contrary, the

new ratios have not diminished the

importance of the permanent capital

ratio as a reasonable indication of an

institution’s available permanent

capital. The permanent capital ratio

continues to be a key measurement in

several important respects. An

institution’s lending limit is based on its

level of permanent capital and specifies

how large a loan or loans the institution

can make to a single borrower. The

institution is statutorily prohibited from

retiring stock when its permanent

capital is below the required minimum.

Finally, with the adoption of this rule,

if an institution’s permanent capital

falls below a level equal to one-half of

the required minimum, a regulatory

ground for appointing a conservator or

receiver exists.

The commenter’s assumption that a

bank’s investment in an association is

included in the bank’s net collateral is

incorrect. Section 615.5301(c) of the

regulations provides that net collateral

is the value of a bank’s collateral as

defined by § 615.5050, less an amount

equal to the bank’s allocations to

associations that are not counted as

permanent capital by the bank. Section

615.5050 does not include a bank’s

investment in an association in bank

collateral, but does include the

following:

• Notes and other obligations

representing loans made under the Act;

• Real or personal property acquired

in connection with loans made under

the Act;

• Obligations of the United States or

an agency thereof;

• Other bank assets (including

marketable securities) approved by the

FCA; and

• Cash or cash equivalents.

The Agency notes that the commenter

may have assumed that, because its

investments in its associations were

approved by the FCA pursuant to

§ 615.5171, they qualify for inclusion in

collateral as ‘‘other bank assets . . .

approved by the Farm Credit

Administration.’’ This is an incorrect

interpretation of the collateral

definition, which covers only bank

assets that have been approved by the

Agency specifically for inclusion as

collateral. As is clear from the list of

assets that may count as collateral, only

highly liquid investments qualify. A

bank’s investment in an affiliated

association is not liquid: there is no

market for the stock, and—as the

commenter points out—the bank does

not have access to the investment.

Consequently, it would be inappropriate

to include the bank’s investment in its

associations in the net collateral.

2. Computation of Total and Core

Surplus Ratios

The FCA Board clarifies the treatment

of intra-System equity investments and

other deductions in the computations of

total and core surplus. For the

calculation of total surplus,

§ 615.5301(i)(7) is amended to more

clearly require the same deductions as

those made in the computation of

permanent capital. In addition,

paragraphs (a)(2) and (a)(3) of

§ 615.5330, which specify how a bank

and an association treat an association’s

investment in its bank in the calculation

of total surplus, are eliminated because

the treatment is now covered by revised

§ 615.5301(i)(7). No comments were

received on the proposed amendments

to the total surplus calculation, and they

are adopted without change.

With respect to core surplus,

§ 615.5301(b)(4) is amended to require

the deduction of most intra-System

investments in the computation of the

core surplus of both the investing and

the issuing institutions. However,

investments to capitalize loan

participations are not deducted from the

investing institution’s core surplus. In

the preamble to the proposed rule, the

FCA invited comment on this approach

and an alternative approach of

eliminating intra-System investments

relating to loan participations from the

core surplus of the investing institution.

No comments were received on this

issue, and the FCA Board finds no

reason to revise its earlier proposal;

thus, the amendment is adopted as

proposed.

The core surplus computation in

existing § 615.5301(b)(3) is amended to

require institutions to make adjustments

for loss-sharing agreements and for

deferred-tax assets, as well as for

investments in the Farm Credit Services

Leasing Corporation (Leasing

Corporation) and for goodwill. No

comments were received on this

proposal, and the proposal is adopted

without change.

3. Investments in Service Corporations

The FCA Board amends

§ 615.5210(e)(6) to require an institution

to deduct its investments in service

corporations from total capital for

purposes of computing permanent

capital. This is an expansion of the

existing regulation, which requires an

institution to deduct only its investment

in the Leasing Corporation. The change

conforms to the Agency’s view that such

capital investments are committed to

support risks at the service corporation

level and that such capital investments

must be available to meet any capital

needs of the service corporation. The

investing institution must also deduct

the investments when calculating its

core and total surplus. The FCA

received no comments on the proposed

provision and adopts it with only minor

technical changes.

D. Farm Credit System Financial

Assistance Corporation (FAC)

Obligations

The FCA amends 615.5210(a) to

provide that Farm Credit institutions

shall exclude FAC obligations from their

balance sheets only if such obligations

were issued to pay capital preservation
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39223

6Agreed to by the Committee on Banking

Regulations and Supervisory Practices, under the

auspices of the Bank for International Settlements

in Basle, Switzerland. Under this agreement the

other Federal financial institution regulatory

agencies that are signatories to the Accord are

bound to consider such direction and revise their

regulations accordingly. The FCA, for consistency

purposes, also chooses to consider and revise its

regulations, as appropriate to the System.

and loss-sharing agreements. This

amendment conforms the regulation to

the language of section 6.9(e)(3)(E) of

the Act and narrows the existing

regulation, which excludes all FAC

obligations from institutions’ balance

sheets. The Agency received no

comments on this provision and adopts

it as proposed.

E. Risk-Weighting Categories and Credit

Conversion Factors for Calculating RiskAdjusted Assets

The FCA Board adopts modifications

to the risk-weighting categories for onand off-balance-sheet assets in

§ 615.5210(f) and adds related

definitions in § 615.5201. The

modifications provide a more accurate

weighting of assets relative to their risk

and incorporate recent changes to the

Basle Accord,6 as well as provide

consistency with the requirements of

the other Federal financial institution

regulatory agencies. No comments were

received on the proposed revisions, and

the FCA Board adopts without change

the following revisions:

• The elimination of the 10-percent

category in § 615.5210(f)(2)(ii);

• The 20-percent risk-weighting

category that includes conditional

guarantees and Government-sponsored

agency securities not backed by the full

faith and credit of the U.S. Government;

• Language distinguishing the

Organization for Economic Cooperation

and Development (OECD)-based group

of countries from non-OECD-based

countries; and

Credit conversion factors for

derivative transactions.

Additionally, in new

§ 615.5201(m)(2), which defines

‘‘qualifying bilateral netting contract,’’ a

definition of the term ‘‘walkaway

clause’’ has been added.

The FCA Board also adopts an

amendment to change the risk weighting

for unused commitments with an

original maturity of less than 14 months

to zero percent. Under the existing

regulation, the zero-percent category

applies to loan commitments of up to

only 12 months. One commenter

supported the proposed change but

recommended that unused loan

commitments with an original maturity

of 14 to 25 months be risk-weighted at

10 percent and that those of longer

original maturity be risk-weighted at 20

percent; currently, any unused

commitments in excess of 12 months are

risk-weighted at 50 percent. The

commenter stated that such changes

would not be material in terms of risk

and would allow Farm Credit

institutions to offer more timely service

at a lower cost to the institutions. The

FCA agrees with the commenter that

lowering the risk weighting of loans or

other assets could potentially lower the

costs of institutions that do not

presently have capital well in excess of

their minimum requirements. However,

the Agency disagrees with the

commenter’s assertion that such

changes would not be material in terms

of risk. On the contrary, the changes

would enable Farm Credit institutions

to increase loan commitments by two to

five times without a corresponding

increase in the amount of capital

required to be held. Thus, the final rule

does not reduce the 50-percent risk

weighting on loan commitments with an

original maturity of greater than 14

months.

As stated in the preamble to the

proposed regulations, the FCA intends

to make the risk-weighting requirements

of its regulations consistent with the

requirements of the other Federal

financial institution regulatory agencies,

to the extent appropriate to the System.

In this case, the FCA Board believes it

is appropriate to extend the zero-percent

risk-weighting category to loans with an

original maturity of 14 months, even

though this is a deviation from the 12-

month zero-percent risk-weighting

category of the other regulators. Farm

Credit institutions are more directly

affected by the seasonal cycles of

agriculture than are most commercial

banks and thrifts because of the

System’s agriculture-specific charter.

Extending the zero-percent category by

2 months will not increase materially

the risk in System institutions’

portfolios. A 14-month category for

zero-percent risk weighting takes into

consideration the fact that many Farm

Credit institutions make loans on an

annual renewal cycle. The practice of

these institutions is to perform the

credit review and subsequent

commitment 30 to 60 days prior to the

end of the current loan commitment in

order to have loan commitments in

place at the beginning of each annual

cycle. The revision adopted by the FCA

Board will enable institutions to riskweight these annual loan commitments

at zero percent without substantially

raising the associated risk.

The System’s joint comment

recommended that the FCA adopt, as

final, a risk-weighting change proposed

by the other Federal financial institution

regulatory agencies in November 1997.

The other agencies proposed to revise

the risk-based capital treatment of

recourse obligations, direct credit

substitutes, and securitized transactions.

One proposed revision of the other

regulators would lower the risk

weighting for AAA-rated asset-backed

securities from 100 percent to 20

percent. The System asked in its joint

comment that the Agency incorporate

this change when it adopts these capital

regulations in final form, asserting that

it is unlikely that the amendment

proposed by the other agencies will be

challenged. FCA staff’s discussions with

the other regulators indicated no final

decisions are imminent as to what the

other agencies’ final rule will address

and when it will be adopted. The FCA

Board believes that a change to FCA’s

current risk weighting of such assets is

not appropriate at this time. However,

the Agency will continue to monitor the

efforts of the other regulatory agencies

and evaluate the appropriateness of

FCA’s capital requirements should the

other regulatory agencies implement a

20-percent risk weighting for AAA-rated

asset-backed securities.

VII. Other Issues

A. Retirement of Certain Allocated

Equities Included in Core Surplus

The FCA Board amends

§ 615.5301(b)(2) to generally disallow

certain allocated equities from treatment

as association core surplus in the event

of partial retirements of similar equities

allocated in the same year. However, the

revised regulation allows certain

allocated equities to remain a part of

core surplus when: (1) Partial

retirements are required by section

4.14B of the Act, (2) an equityholder has

defaulted on a loan, or (3) an

equityholder whose loan has been

repaid has died, and the institution’s

capital plan provides for retirement in

that circumstance.

Previously, the regulation did not

specifically address partial retirements

of the type of allocated equities that

associations may include in core

surplus pursuant to § 615.5301(b)(2). By

this change, treatment of such allocated

equities is consistent with the treatment

in § 615.5301(b)(1)(ii) of nonqualified

allocated equities not distributed

according to a plan or practice. The

Agency had intended to treat partial

retirements of all allocated equities in

the same way. The change makes the

consistent treatment clear for all types

of allocated equities. The Agency

received no comments on this provision

and adopts it as proposed.
39224 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations

B. Ensuring Two Nominees for Each

Bank Director’s Position and Ensuring

Representation on the Board of All

Types of Agriculture in the District

Pursuant to section 4.15 of the Act, a

new § 615.5230(b)(5) is added to require

banks to make a good faith effort to

locate at least two nominees for each

director position and to try to assure

representation on the board that is

reflective of the bank’s territory. The

Agency proposed these changes to

implement the statutory requirement to

adopt regulations assuring a choice for

bank director positions and board

diversity. The regulation requires

written documentation of the effort a

bank makes in the event it is unable to

find at least two nominees for each

position. The bank must also keep a

record of the type of agriculture engaged

in by each director on its board. In

addition, a reference is added in

§ 611.350, the subpart on director

elections, to the cooperative principles

set forth in § 615.5230 that apply to

such elections.

One commenter asserted that the new

regulations should not apply to

situations where directors are

nominated by shareholders rather than

by a nominating committee. (The Act

requires only associations to utilize a

nominating committee, but other

institutions may also choose to do so.)

A Farm Credit bank submitted a

comment in which it described its

nominating process: the bank sends

ballots to all eligible shareholders to

solicit nominations for director

positions, and the two individuals

receiving the highest number of votes

become the nominees. In the event that

one of the nominees withdraws from the

election, the bank asks the candidate

with the third-highest number of votes

to run, but the bank is sometimes

unsuccessful. Consequently, only one

candidate remains for the office.

The Agency is not persuaded by the

Farm Credit bank’s assertion that,

because the bank uses a shareholder

nomination process rather than a

nominating committee, it should not

have to document in writing its attempts

to assure at least two nominees for each

director position. Section 4.15 of the Act

states in pertinent part that FCA

regulations on the election of bank

directors shall ‘‘assure a choice of two

nominees for each elective office to be

filled;’’ the Act makes no reference to

nominating committees. Institutions

must make good faith efforts to assure

at least two candidates, but the Agency

does not intend or expect the written

documentation of these efforts to be

burdensome. The bank needs merely to

provide a brief but reasonable

description of its efforts to seek a second

nominee for inclusion in its records.

This regulation does not require two

nominees for each position. Instead, it

requires documentation of the bank’s

efforts to secure at least two nominees.

The FCA Board adopts the regulation

without change from the proposal.

C. Statement of Financial Accounting

Standards (SFAS) No. 130, Reporting

Comprehensive Income

Sections 615.5210(e)(10),

615.5301(b)(5), and 615.5301(i)(4) are

amended to extend the exclusion

currently applicable to unrealized gains

or losses on available-for-sale securities

to all transactions covered by the

definition of ‘‘accumulated other

comprehensive income’’ contained in

the Financial Accounting Standards

Board’s (FASB) recently issued SFAS

No. 130, Reporting Comprehensive

Income. SFAS No. 130 sets forth

standards for reporting and displaying

comprehensive income in a full set of

financial statements for fiscal years

beginning after December 15, 1997.

Transactions covered by this new

statement will be reported as a separate

component of the equity (capital)

section in the statement of financial

position.

The amendments are adopted in

response to a suggestion made in the

System’s joint comment. The Agency

did not propose any changes to the

regulations in the proposed rule, on the

ground that it saw no compelling

reasons to limit the impact of SFAS No.

130. But in the preamble to the

proposed rule, the FCA Board invited

comment on what effect, if any, SFAS

No. 130 should have on the current

capital standards.

The System, in its joint comment,

recommended that the Agency amend

the capital regulations to extend the

exclusion currently applicable to

unrealized gains or losses on availablefor-sale securities to all transactions

defined by SFAS No. 130 as

‘‘accumulated other comprehensive

income.’’ The commenter pointed out

that the current capital regulations at

§ 615.5210(e)(10) exclude the net impact

of unrealized gains or losses on

available-for-sale securities from the

computation of permanent capital. The

commenter observed that the items

included in the category of ‘‘other

comprehensive income’’ pursuant to

SFAS No. 130 are similar in nature to

such unrealized gains or losses and that

it would be appropriate to treat them in

the same way.

The FCA Board is persuaded by the

System’s joint comment and adopts the

System’s suggested change. The Agency

agrees that it is generally more

appropriate to treat components of

capital with comparable characteristics

and terms in a like manner under the

capital standards. However, in the event

that the FCA determines that an

individual component, entry, or account

has characteristics or terms that

diminish its contribution to an

institution’s ability to absorb losses,

§§ 615.5301(b)(6) and 615.5301(f)(6) of

the current regulations provide the

Agency with sufficient flexibility to

require the deduction of all or a portion

of such a component, entry, or account

from core surplus or total surplus.

D. Conforming Amendments

The FCA Board adopts several other

clarifying changes to wording of the

total surplus and core surplus

definitions. Paragraphs (b)(1)(ii) and

(iii), (b)(2), and (i)(2) and (3) of

§ 615.5301 are amended to provide

additional clarity to the definitions.

Paragraph (b)(1)(ii) is amended to clarify

that the term ‘‘allocated equities’’

includes allocated stock. The FCA is

concerned that some institutions may

otherwise interpret the regulation as

permitting institutions to treat allocated

stock either as allocated equities (as

described in paragraphs (b)(1)(ii) and

(b)(2)) or as perpetual stock (as

described in paragraphs (b)(1)(iii) and

(i)(3)) when calculating core and total

surplus. In fact, the allocated stock must

be treated as allocated equities in the

calculations. The FCA is also changing

§ 615.5301(b)(2) to clarify that, for

purposes of the capital ratio

calculations, ‘‘revolvement’’ of allocated

equities means any retirement of those

equities, whether or not the institution

has a formal revolvement plan. This

change is made to avoid the implication

that revolvement means something

other than retirement.

Furthermore, in § 615.5301(b)(2)(ii),

the phrase ‘‘if subject to revolvement,

are not scheduled for revolvement

during the next 3 years’’ is replaced

with the phrase ‘‘if subject to a plan or

practice of revolvement or retirement,

are not scheduled or intended to be

revolved or retired during the next 3

years’’ in order to parallel more closely

the language in paragraphs (b)(1)(ii) and

(iii) of § 615.5301. A parallel change is

made to § 615.5301(i)(2) by replacing

the phrase ‘‘ which, if subject to

revolvement of retirement, have an

original planned revolvement or

retirement date of not less than 5 years’’

with the phrase ‘‘that are not subject to

a plan or practice of revolvement or

retirement of 5 years or less.’’ These

changes clarify that ‘‘subject to
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39225

revolvement’’ has the same meaning as

the other references to a plan or practice

of revolvement or retirement in the core

surplus and total surplus definitions.

The Agency amends § 620.5 to require

institutions to disclose information on

their surplus and collateral ratios in the

annual report to shareholders.

Conforming, nonsubstantive changes are

also adopted in § 615.5201(h) to replace

‘‘allocation’’ with ‘‘allotment’’ and in

§§ 615.5210(b) and 615.5260(a)(3)(ii) to

remove obsolete language. These

amendments are adopted without

change from the proposed rule.

List of Subjects

12 CFR Part 611

Agriculture, Banks, banking, Rural

areas.

12 CFR Part 615

Accounting, Agriculture, Banks,

banking, Government securities,

Investments, Rural areas.

12 CFR Part 620

Accounting, Agriculture, Banks,

banking, Reporting and recordkeeping

requirements, Rural areas.

12 CFR Part 627

Agriculture, Banks, banking, Claims,

Rural areas.

For the reasons stated in the

preamble, parts 611, 615, 620, and 627

of chapter VI, title 12 of the Code of

Federal Regulations are amended to

read as follows:

PART 611—ORGANIZATION

1. The authority citation for part 611

continues to read as follows:

Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0,

3.21, 4.12, 4.15, 4.21, 5.9, 5.10, 5.17, 7.0–

7.13, 8.5(e) of the Farm Credit Act (12 U.S.C.

2011, 2021, 2071, 2091, 2121, 2142, 2183,

2203, 2209, 2243, 2244, 2252, 2279a–2279f–

1, 2279aa–5(e)); secs. 411 and 412 of Pub. L.

100–233, 101 Stat. 1568, 1638; secs. 409 and

414 of Pub. L. 100–399, 102 Stat. 989, 1003,

and 1004.

Subpart C—Election of Directors

2. Section 611.350 is added to read as

follows:

§ 611.350 Application of cooperative

principles to the election of directors.

In the election of directors, each

System institution shall comply with

the applicable cooperative principles set

forth in § 615.5230 of this chapter.

Subpart I—Service Organizations

3. Section 611.1135 is amended by

revising paragraphs (b)(4) and (c) to read

as follows:

§ 611.1135 Incorporation of service

organizations.

* * * * *

(b) * * *

(4) The proposed bylaws, which shall

include the provisions required by

§ 615.5220(b) of this chapter.

* * * * *

(c) Approval. The Farm Credit

Administration may condition the

issuance of a charter, including

imposing minimum capital

requirements, as it deems appropriate.

For good cause, the Farm Credit

Administration may deny the

application. Upon approval by the Farm

Credit Administration of a completed

application, which shall be kept on file

at the Farm Credit Administration, the

Agency shall issue a charter for the

service corporation which shall

thereupon become a corporate body and

a Federal instrumentality.

* * * * *

PART 615—FUNDING AND FISCAL

AFFAIRS, LOAN POLICIES AND

OPERATIONS, AND FUNDING

OPERATIONS

4. The authority citation for part 615

continues to read as follows:

Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12,

2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3,

4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20, 6.26,

8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the

Farm Credit Act (12 U.S.C. 2013, 2015, 2018,

2019, 2020, 2073, 2074, 2075, 2076, 2093,

2122, 2128, 2132, 2146, 2154, 2154a, 2160,

2202b, 2211, 2243, 2252, 2278b, 2278b–6,

2279aa, 2279aa–3, 2279aa–4, 2279aa–6,

2279aa–7, 2279aa–8, 2279aa–10, 2279aa–12);

sec. 301(a) of Pub. L. 100–233, 101 Stat. 1568,

1608.

Subpart E—Investment Management

5. Section 615.5135 is amended by

removing the first sentence of the

introductory paragraph and adding two

sentences in its place to read as follows:

§ 615.5135 Management of interest rate

risk.

The board of directors of each Farm

Credit Bank, bank for cooperatives, and

agricultural credit bank shall develop

and implement an interest rate risk

management program as set forth in

subpart G of this part. The board of

directors shall adopt an interest rate risk

management section of an asset/liability

management policy which establishes

interest rate risk exposure limits as well

as the criteria to determine compliance

with these limits. * * *

* * * * *

6. A new subpart G is added to read

as follows:

Subpart G—Risk Assessment and

Management

Sec.

615.5180 Interest rate risk management by

banks—general.

615.5181 Bank interest rate risk

management program.

615.5182 Interest rate risk management by

associations and other Farm Credit

System institutions other than banks.

Subpart G—Risk Assessment and

Management

§ 615.5180 Interest rate risk management

by banks—general.

The board of directors of each Farm

Credit Bank, bank for cooperatives, and

agricultural credit bank shall develop

and implement an interest rate risk

management program tailored to the

needs of the institution and consistent

with the requirements set forth in

§ 615.5135 of this part. The program

shall establish a risk management

process that effectively identifies,

measures, monitors, and controls

interest rate risk.

§ 615.5181 Bank interest rate risk

management program.

(a) The board of directors of each

Farm Credit Bank, bank for

cooperatives, and agricultural credit

bank is responsible for providing

effective oversight to the interest rate

risk management program and must be

knowledgeable of the nature and level of

interest rate risk taken by the

institution.

(b) Senior management is responsible

for ensuring that interest rate risk is

properly managed on both a long-range

and a day-to-day basis.

§ 615.5182 Interest rate risk management

by associations and other Farm Credit

System institutions other than banks.

Any association or other Farm Credit

System institution other than banks,

excluding the Federal Agricultural

Mortgage Corporation, with interest rate

risk that could lead to significant

declines in net income or in the market

value of capital shall comply with the

requirements of §§ 615.5180 and

615.5181. The interest rate risk

management program required under

§ 615.5181 shall be commensurate with

the level of interest rate risk of the

institution.

Subpart H—Capital Adequacy

§ 615.5201 [Amended]

7. Section 615.5201 is amended by

removing the word ‘‘allocation’’ and

adding in its place, the word

‘‘allotment’’ in paragraph (h);

redesignating paragraphs (d), (e), (f), (g),
39226 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations

(h), (i), (j), (k), (l), (m), and (n) as

paragraphs (e), (f), (g), (h), (i), (k), (l), (n),

(o), (p), and (q) respectively; and adding

new paragraphs (d), (j), and (m) to read

as follows:

§ 615.5201 Definitions.

* * * * *

(d) Deferred-tax assets that are

dependent on future income or future

events means:

(1) Deferred-tax assets arising from

deductible temporary differences

dependent upon future income that

exceed the amount of taxes previously

paid that could be recovered through

loss carrybacks if existing temporary

differences (both deductible and taxable

and regardless of where the related taxdeferred effects are recorded on the

institution’s balance sheet) fully reverse;

(2) Deferred-tax assets dependent

upon future income arising from

operating loss and tax carryforwards; or

(3) Deferred-tax assets arising from

temporary differences that could be

recovered if existing temporary

differences that are dependent upon

other future events (both deductible and

taxable and regardless of where the

related tax-deferred effects are recorded

on the institution’s balance sheet) fully

reverse.

* * * * *

(j) OECD means the group of countries

that are full members of the

Organization for Economic Cooperation

and Development, regardless of entry

date, as well as countries that have

concluded special lending arrangements

with the International Monetary Fund’s

General Arrangement to Borrow,

excluding any country that has

rescheduled its external sovereign debt

within the previous 5 years.

* * * * *

(m) Qualifying bilateral netting

contract means a bilateral netting

contract that meets at least the following

conditions:

(1) The contract is in writing;

(2) The contract is not subject to a

walkaway clause, defined as a provision

that permits a non-defaulting

counterparty to make lower payments

than it would make otherwise under the

contract, or no payment at all, to a

defaulter or to the estate of a defaulter,

even if the defaulter or the estate of the

defaulter is a net creditor under the

contract;

(3) The contract creates a single

obligation either to pay or to receive the

net amount of the sum of positive and

negative mark-to-market values for all

derivative contracts subject to the

qualifying bilateral netting contract;

(4) The institution receives a legal

opinion that represents, to a high degree

of certainty, that in the event of legal

challenge the relevant court and

administrative authorities would find

the institution’s exposure to be the net

amount;

(5) The institution establishes a

procedure to monitor relevant law and

to ensure that the contracts continue to

satisfy the requirements of this section;

and

(6) The institution maintains in its

files adequate documentation to support

the netting of a derivatives contract.

* * * * *

8. Section 615.5210 is amended by

adding new paragraph (e)(11); removing

paragraph (f)(2)(v); and revising

paragraphs (a), (b), (e) introductory text,

(e)(1), (e)(6), (e)(10), (f)(2)(i), (f)(2)(ii),

heading of (f)(2)(iii), (f)(2)(iv),

(f)(3)(ii)(A), and (f)(3)(iii) to read as

follows:

§ 615.5210 Computation of the permanent

capital ratio.

(a) The institution’s permanent capital

ratio shall be determined on the basis of

the financial statements of the

institution prepared in accordance with

generally accepted accounting

principles except that the obligations of

the Farm Credit System Financial

Assistance Corporation issued to repay

banks in connection with the capital

preservation and loss-sharing

agreements described in section

6.9(e)(1) of the Act shall not be

considered obligations of any institution

subject to this regulation prior to their

maturity.

(b) The institution’s asset base and

permanent capital shall be computed

using average daily balances for the

most recent 3 months.

* * * * *

(e) For the purpose of computing the

institution’s permanent capital ratio, the

following adjustments shall be made

prior to assigning assets to risk-weight

categories and computing the ratio:

(1) Where two Farm Credit System

institutions have stock investments in

each other, such reciprocal holdings

shall be eliminated to the extent of the

offset. If the investments are equal in

amount, each institution shall deduct

from its assets and its total capital an

amount equal to the investment. If the

investments are not equal in amount,

each institution shall deduct from its

total capital and its assets an amount

equal to the smaller investment. The

elimination of reciprocal holdings

required by this paragraph shall be

made prior to making the other

adjustments required by this section.

* * * * *

(6) The double-counting of capital by

a service corporation chartered under

section 4.25 of the Act and its

stockholder institutions shall be

eliminated by deducting an amount

equal to the institution’s investment in

the service corporation from its total

capital.

* * * * *

(10) The permanent capital of an

institution shall exclude the net effect of

all transactions covered by the

definition of ‘‘accumulated other

comprehensive income’’ contained in

the Statement of Financial Accounting

Standards No. 130, as promulgated by

the Financial Accounting Standards

Board.

(11) For purposes of calculating

capital ratios under this part, deferredtax assets are subject to the conditions,

limitations, and restrictions described in

this paragraph.

(i) Each institution shall deduct an

amount of deferred-tax assets, net of any

valuation allowance, from its assets and

its total capital that is equal to the

greater of:

(A) The amount of deferred-tax assets

that are dependent on future income or

future events in excess of the amount

that is reasonably expected to be

realized within 1 year of the most recent

calendar quarter-end date, based on

financial projections for that year, or

(B) The amount of deferred-tax assets

that are dependent on future income or

future events in excess of ten (10)

percent of the amount of core surplus

that exists before the deduction of any

deferred-tax assets.

(ii) For purposes of this calculation:

(A) The amount of deferred-tax assets

that can be realized from taxes paid in

prior carryback years and from the

reversal of existing taxable temporary

differences shall not be deducted from

assets and from equity capital.

(B) All existing temporary differences

should be assumed to fully reverse at

the calculation date.

(C) Projected future taxable income

should not include net operating loss

carryforwards to be used within 1 year

or the amount of existing temporary

differences expected to reverse within

that year.

(D) Financial projections shall include

the estimated effect of tax-planning

strategies that are expected to be

implemented to minimize tax liabilities

and realize tax benefits. Financial

projections for the current fiscal year

(adjusted for any significant changes

that have occurred or are expected to

occur) may be used when applying the

capital limit at an interim date within

the fiscal year.

(E) The deferred tax effects of any

unrealized holding gains and losses on
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39227

available-for-sale debt securities may be

excluded from the determination of the

amount of deferred-tax assets that are

dependent upon future taxable income

and the calculation of the maximum

allowable amount of such assets. If these

deferred-tax effects are excluded, this

treatment must be followed consistently

over time.

(f) * * *

(2) * * *

(i) Category 1: 0 Percent.

(A) Cash on hand and demand

balances held in domestic or foreign

banks.

(B) Claims on Federal Reserve Banks.

(C) Goodwill.

(D) Direct claims on and portions of

claims unconditionally guaranteed by

the United States Treasury, United

States Government agencies, or central

governments in other OECD countries.

A United States Government agency is

defined as an instrumentality of the

United States Government whose

obligations are fully and explicitly

guaranteed as to the timely repayment

of principal and interest by the full faith

and credit of the United States

Government.

(ii) Category 2: 20 Percent.

(A) Portions of loans and other assets

collateralized by United States

Government-sponsored agency

securities. A United States Governmentsponsored agency is defined as an

agency originally chartered or

established to serve public purposes

specified by the United States Congress

but whose obligations are not explicitly

guaranteed by the full faith and credit

of the United States Government.

(B) Portions of loans and other assets

conditionally guaranteed by the United

States Government or its agencies.

(C) Portions of loans and other assets

collateralized by securities issued or

guaranteed (fully or partially) by the

United States Government or its

agencies (but only to the extent

guaranteed).

(D) Claims on domestic banks

(exclusive of demand balances).

(E) Claims on, or guarantees by, OECD

banks.

(F) Claims on non-OECD banks with

a remaining maturity of 1 year or less.

(G) Investments in State and local

government obligations backed by the

‘‘full faith and credit of State or local

government.’’ Other claims (including

loans) and portions of claims guaranteed

by the full faith and credit of a State

government (but only to the extent

guaranteed).

(H) Claims on official multinational

lending institutions or regional

development institutions in which the

United States Government is a

shareholder or contributor.

(I) Loans and other obligations of and

investments in Farm Credit institutions.

(J) Local currency claims on foreign

central governments to the extent that

the Farm Credit institution has local

liabilities in that country.

(K) Cash items in the process of

collection.

(iii) Category 3: 50 Percent.

* * * * *

(iv) Category 4: 100 Percent.

(A) All other claims on private

obligors.

(B) Claims on non-OECD banks with

a remaining maturity greater than 1

year.

(C) All other assets not specified

above, including but not limited to,

leases, fixed assets, and receivables.

(D) All non-local currency claims on

foreign central governments, as well as

local currency claims on foreign central

governments that are not included in

Category 2(J).

(3) * * *

(ii) * * *

(A) 0 Percent.

(1) Unused commitments with an

original maturity of 14 months or less;

or

(2) Unused commitments with an

original maturity of greater than 14

months if:

* * * * *

(iii) Credit equivalents of interest rate

contracts and foreign contracts.

(A) Credit equivalents of interest rate

contracts and foreign exchange contracts

(except single currency floating/floating

interest rate swaps) shall be determined

by adding the replacement cost (markto-market value, if positive) to the

potential future credit exposure,

determined by multiplying the notional

principal amount by the following

credit conversion factors as appropriate.

CONVERSION FACTOR MATRIX

[In Percent]

Remaining maturity Interest rate Exchange

rate Commodity

1 year or less ........................................................................................................................................... 0.0 1.0 10.0

Over 1 to 5 years ..................................................................................................................................... 0.5 5.0 12.0

Over 5 years ............................................................................................................................................. 1.5 7.5 15.0

(B) For any derivative contract that

does not fall within one of the categories

in the above table, the potential future

credit exposure shall be calculated

using the commodity conversion factors.

The net current exposure for multiple

derivative contracts with a single

counterparty and subject to a qualifying

bilateral netting contract shall be the net

sum of all positive and negative markto-market values for each derivative

contract. The positive sum of the net

current exposure shall be added to the

adjusted potential future credit

exposure for the same multiple

contracts with a single counterparty.

The adjusted potential future credit

exposure shall be computed as

Anet = (0.4 × Agross) + 0.6 (NGR × Agross)

where:

(1) Anet is the adjusted potential future

credit exposure;

(2) Agross is the sum of potential future

credit exposures determined by

multiplying the notional principal

amount by the appropriate credit

conversion factor; and

(3) NGR is the ratio of the net current

credit exposure divided by the gross

current credit exposure determined as

the sum of only the positive mark-tomarkets for each derivative contract

with the single counterparty.

* * * * *

Subpart I—Issuance of Equities

9. Section 615.5220 is amended by

redesignating paragraphs (a) through (h)

as paragraphs (1) through (8)

consecutively; by adding the paragraph

designation ‘‘(a)’’ to the introductory

text; and by adding a new paragraph (b)

to read as follows:

§ 615.5220 Capitalization bylaws.

* * * * *

(b) The board of directors of each

service corporation (including the Farm

Credit Leasing Services Corporation)

shall adopt capitalization bylaws,

subject to the approval of its voting

shareholders, that set forth the
39228 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations

requirements of paragraphs (a)(1), (a)(2),

and (a)(3) of this section to the extent

applicable. Such bylaws shall also set

forth the manner in which equities will

be retired and the manner in which

earnings will be distributed.

10. Section 615.5230 is amended by

adding a new paragraph (b)(5) to read as

follows:

§ 615.5230 Implementation of cooperative

principles.

* * * * *

(b) * * *

(5) Each bank shall endeavor to assure

that there is a choice of at least two

nominees for each elective office to be

filled and that the board represents as

nearly as possible all types of

agriculture in the district. If fewer than

two nominees for each position are

named, the efforts of the bank to locate

two willing nominees shall be

documented in the records of the bank.

The bank shall also maintain a list of the

type or types of agriculture engaged in

by each director on its board.

Subpart J—Retirement of Equities

11. Section 615.5260 is amended by

revising paragraph (a)(3)(ii) to read as

follows:

§ 615.5260 Retirement of eligible borrower

stock.

(a) * * *

(3) * * *

(ii) In the case of participation

certificates and other equities, face or

equivalent value; or

* * * * *

Subpart K—Surplus and Collateral

Requirements

12. Section 615.5301 is amended by

revising paragraphs (a), (b)(1)(ii),

(b)(1)(iii), (b)(2)(ii), (b)(3), (b)(4), (b)(5),

(i)(2), (i)(3), (i)(4), and (i)(7) to read as

follows:

§ 615.5301 Definitions.

* * * * *

(a) The terms deferred-tax assets that

are dependent on future income or

future events, institution, permanent

capital, and total capital shall have the

meanings set forth in § 615.5201.

(b) * * *

(1) * * *

(ii) Nonqualified allocated equities

(including stock) that are not distributed

according to an established plan or

practice, provided that, in the event that

a nonqualified patronage allocation is

distributed, other than as required by

section 4.14B of the Act, or in

connection with a loan default or the

death of an equityholder whose loan has

been repaid (to the extent provided for

in the institution’s capital adequacy

plan), any remaining nonqualified

allocations that were allocated in the

same year will be excluded from core

surplus.

(iii) Perpetual common or

noncumulative perpetual preferred

stock (other than allocated stock) that is

not retired according to an established

plan or practice, provided that, in the

event that stock held by a borrower is

retired, other than as required by section

4.14B of the Act or in connection with

a loan default to the extent provided for

in the institution’s capital plan, the

remaining perpetual stock of the same

class or series shall be excluded from

core surplus;

* * * * *

(2) * * *

(ii) The allocated equities, if subject to

a plan or practice of revolvement or

retirement, are not scheduled or

intended to be revolved or retired

during the next 3 years, provided that,

in the event that such allocated equities

included in core surplus are retired,

other than as required by section 4.14B

of the Act, or in connection with a loan

default or the death of an equityholder

whose loan has been repaid (to the

extent provided for in the institution’s

capital adequacy plan), any remaining

such allocated equities that were

allocated in the same year will be

excluded from core surplus.

(3) The deductions required to be

made by an institution in the

computation of its permanent capital

pursuant to § 615.5210(e) (6), (7), (9),

and (11) shall also be made in the

computation of its core surplus.

Deductions required by § 615.5210(e)(1)

shall also be made to the extent that

they do not duplicate deductions

calculated pursuant to this section and

required by § 615.5330(b)(2).

(4) Equities issued by System

institutions and held by other System

institutions shall not be included in the

core surplus of the issuing institution or

of the holder, unless approved pursuant

to paragraph (b)(1)(iv) of this section,

except that equities held in connection

with a loan participation shall not be

excluded by the holder. This paragraph

shall not apply to investments by an

association in its affiliated bank, which

are governed by § 615.5301(b)(1)(i).

(5) The core surplus of an institution

shall exclude the net effect of all

transactions covered by the definition of

‘‘accumulated other comprehensive

income’’ contained in the Statement of

Financial Accounting Standards No.

130, as promulgated by the Financial

Accounting Standards Board.

* * * * *

(i) * * *

(2) Allocated equities, including

allocated surplus and stock, that are not

subject to a plan or practice of

revolvement or retirement of 5 years or

less and are eligible to be included in

permanent capital pursuant to

§ 615.5201(j)(4)(iv); and

(3) Stock (other than allocated stock)

that is not purchased or held as a

condition of obtaining a loan, provided

that it is either perpetual stock or term

stock with an original maturity of at

least 5 years, and provided that the

institution has no established plan or

practice of retiring such perpetual stock

or of retiring such term stock prior to its

stated maturity. The amount of term

stock that is eligible to be included in

total surplus shall be reduced by 20

percent (net of redemptions) at the

beginning of each of the last 5 years of

the term of the instrument.

(4) The total surplus of an institution

shall exclude the net effect of all

transactions covered by the definition of

‘‘accumulated other comprehensive

income’’ contained in the Statement of

Financial Accounting Standards No.

130, as promulgated by the Financial

Accounting Standards Board.

* * * * *

(7) Any deductions made by an

institution in the computation of its

permanent capital pursuant to

§ 615.5210(e) shall also be made in the

computation of its total surplus.

13. Section 615.5330 is revised to read

as follows:

§ 615.5330 Minimum surplus ratios.

(a) Total surplus. (1) Each institution

shall achieve and at all times maintain

a ratio of a least 7 percent of total

surplus to the risk-adjusted asset base.

(2) The risk-adjusted asset base is the

total dollar amount of the institution’s

assets adjusted in accordance with

§ 615.5301(i)(7) and weighted on the

basis of risk in accordance with

§ 615.5210(f).

(b) Core surplus. (1) Each institution

shall achieve and at all times maintain

a ratio of core surplus to the riskadjusted asset base of a least 3.5 percent,

of which no more than 2 percentage

points may consist of allocated equities

otherwise includible pursuant to

§ 615.5301(b).

(2) Each association shall compute its

core surplus ratio by deducting an

amount equal to the net investment in

the bank from its core surplus.

(3) The risk-adjusted asset base is the

total dollar amount of the institution’s
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 /Rules and Regulations 39229

assets adjusted in accordance with

§§ 615.5301(b)(3) and 615.5330(b)(2),

and weighted on the basis of risk in

accordance with § 615.5210(f).

(c) An institution shall compute its

risk-adjusted asset base, total surplus,

and core surplus ratios using average

daily balances for the most recent 3

months.

14. Section 615.5335 is revised to read

as follows:

§ 615.5335 Bank net collateral ratio.

(a) Each bank shall achieve and at all

times maintain a net collateral ratio of

at least 103 percent.

(b) At a minimum, a bank shall

compute its net collateral ratio as of the

end of each month. A bank shall have

the capability to compute its net

collateral ratio a day after the close of

a business day using the daily balances

outstanding for assets and liabilities for

that date.

Subpart L—Establishment of Minimum

Capital Ratios for an Individual

Institution

15. Section 615.5350 is amended by

adding a new paragraph (b)(7) to read as

follows:

§ 615.5350 General—Applicability.

* * * * *

(b) * * *

(7) An institution with significant

exposures to declines in net income or

in the market value of its capital due to

a change in interest rates and/or the

exercising of embedded or explicit

options.

Subpart M—Issuance of a Capital

Directive

16. Section 615.5355 is amended by

revising paragraph (a)(4) to read as

follows:

§ 615.5355 Purpose and scope.

(a) * * *

(4) Take other action, such as

reduction of assets or the rate of growth

of assets, restrictions on the payment of

dividends or patronage, or restrictions

on the retirement of stock, to achieve

the applicable capital ratios, or reduce

levels of interest rate and other risk

exposures, or strengthen management

expertise, or improve management

information and measurement systems;

or

* * * * *

PART 620—DISCLOSURE TO

SHAREHOLDERS

17. The authority citation for part 620

continues to read as follows:

Authority: Secs. 5.17, 5.19, 8.11 of the

Farm Credit Act (12 U.S.C. 2252, 2254,

2279aa–11); sec. 424 of Pub. L. 100–233, 101

Stat. 1568, 1656.

Subpart A—General

§ 620.1 [Amended]

18. Section 620.1 is amended by

removing the reference ‘‘§ 615.5201(j)’’

and adding in its place, the reference

‘‘§ 615.5201(l)’’ in paragraph (j).

Subpart B—Annual Report to

Shareholders

§ 620.5 [Amended]

19. Section 620.5 is amended by

removing the word ‘‘permanent’’ from

paragraphs (d)(2), (g)(4)(v), and

(g)(4)(vi); by revising paragraph (f)(3);

and by adding paragraph (f)(4) to read

as follows:

§ 620.5 Contents of the annual report to

shareholders.

* * * * *

(f) * * *

(3) For all banks (on a bank-only

basis):

(i) Permanent capital ratio.

(ii) Total surplus ratio.

(iii) Core surplus ratio.

(iv) Net collateral ratio.

(4) For all associations:

(i) Permanent capital ratio.

(ii) Total surplus ratio.

(iii) Core surplus ratio.

* * * * *

PART 627—TITLE V CONSERVATORS

AND RECEIVERS

20. The authority citation for part 627

continues to read as follows:

Authority: Secs. 4.2, 5.9, 5.10, 5.17, 5.51,

5.58 of the Farm Credit Act (12 U.S.C. 2183,

2243, 2244, 2252, 2277a, 2277a–7).

Subpart A—General

21. Section 627.2710 is amended by

revising paragraphs (b)(1) and (b)(3) to

read as follows:

§ 627.2710 Grounds for appointment of

conservators and receivers.

* * * * *

(b) * * *

(1) The institution is insolvent, in that

the assets of the institution are less than

its obligations to creditors and others,

including its members. For purposes of

determining insolvency, ‘‘obligations to

members’’ shall not include stock or

allocated equities held by current or

former borrowers.

* * * * *

(3) The institution is in an unsafe or

unsound condition to transact business,

including having insufficient capital or

otherwise. For purposes of this

regulation, ‘‘unsafe or unsound

condition’’ shall include, but shall not

be limited to, the following conditions:

(i) For banks, a net collateral ratio

below 102 percent.

(ii) For associations, a default by the

association of one or more terms of its

general financing agreement with its

affiliated bank that the Farm Credit

Administration determines to be a

material default.

(iii) For all institutions, permanent

capital of less than one-half the

minimum required level for the

institution.

(iv) For all institutions, a total surplus

ratio of less than 2 percent.

(v) For associations, stock

impairment.

* * * * *

Dated: July 15, 1998.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 98–19394 Filed 7–21–98; 8:45 am]

BILLING CODE 6705–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 98–CE–31–AD; Amendment 39–

10671; AD 98–15–20]

RIN 2120–AA64

Airworthiness Directives; Glaser-Dirks

Flugzeugbau GmbH Model DG–500M

Gliders

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Final rule.

SUMMARY: This amendment adopts a

new airworthiness directive (AD) that

applies to all Glaser-Dirks Flugzeugbau

GmbH (Glaser-Dirks) Model DG–500M

gliders. This AD requires inspecting the

center of gravity (C.G.) tow release cable

pulley for correct positioning, and

replacing the C.G. tow release cable

pulley with one made of aluminum

either immediately or eventually

depending on the results of the

inspection. This AD is the result of

mandatory continuing airworthiness

information (MCAI) issued by the

airworthiness authority for Germany.

The actions specified by this AD are

intended to prevent the C.G. tow release

cable from coming off the pulley

because of incorrect positioning, which

could result in the pilot being unable to

release from tow operations.

DATES: Effective September 9, 1998.