-moreFact Sheet Farm Credit Administration

1501 Farm Credit Drive

McLean, Virginia 22102-5090

November 18, 2011 Contact: Michael Stokke or Christine Quinn,

703-883-4056

E-mail: info-line@fca.gov

Website: www.fca.gov

Fact Sheet on Liquidity Management Proposed Rule 

Financial institutions experienced varying degrees of difficulty in their ability to access funding in 

the credit markets when the global financial turmoil erupted in 2008. At the same time, financial 

institutions faced the dilemma of being unable to easily convert investments held for liquidity into 

cash to help mitigate the effects of the difficulty in accessing the credit markets.

In response, the banking regulators issued guidance to their regulated institutions to address 

liquidity risk management. Although Farm Credit System (FCS) institutions were able to 

continually access short-term funding during that crisis, the Farm Credit Administration (FCA)

recognized the need to strengthen its liquidity reserve regulation. The proposed liquidity and 

funding rule provides for that by meeting the following six objectives:

• Improving the capacity of FCS banks to pay their obligations when they fall due

• Strengthening liquidity management

• Enhancing the marketability of assets relied upon for liquidity

• Requiring cash and highly liquid assets solely to compose the first 30 days of the 90-day 

liquidity reserve as well as even more stringent requirements for the first 15 days

• Establishing a supplemental liquidity buffer for longer-term market disruption and 

contingency planning purposes

• Strengthening contingency funding plans

The proposed regulation implements these objectives as follows:

615.5134(a) Liquidity Policy: The proposed rule would require FCS bank boards, for the first 

time, to address specific issues pertaining to liquidity risk management in their policies. Under 

the proposed rule, board policies must establish appropriate strategies, policies, procedures, 

and limits that will enable the bank to monitor, measure, manage, and mitigate liquidity risk.

Additionally, proposed § 615.5134(a) would strengthen internal controls at FCS banks by 

bolstering board direction to, and oversight of, management. 

615.5134(b) Liquidity Reserve Requirement: The purpose of this paragraph is to better 

prepare FCS banks so they can withstand future liquidity crises. This paragraph addresses 

vulnerabilities identified during recent crises by building upon and strengthening existing core 
concepts, principles, and requirements governing the liquidity reserve and supplemental liquidity 

buffer. In addition, proposed § 615.5134(b) would repeal the provisions in existing

§ 615.5134(a) that impose specific credit ratings on investments that FCS banks hold in their 

liquidity reserves.

615.5134(c) Unencumbered: The proposed rule would expand upon a provision in the existing 

regulation that requires all investments that an FCS bank holds in its liquidity reserve to be free 

of lien. The proposed rule, for the first time, would expressly prohibit FCS banks from holding 

assets in their liquidity reserve that are explicitly or implicitly pledged to secure, collateralize, or 

enhance the credit of any transaction. 

615.5134(d) Marketable: This proposal would require FCS banks to hold only marketable 

investments in their liquidity reserve. Proposed § 615.5134(d) specifies additional criteria and 

attributes that determine whether investments are marketable for the purposes of this 

regulation.

615.5134(e) Composition of Liquidity Reserve: The existing regulation already requires every 

FCS bank to maintain a sufficient stock of liquid assets to fund its maturing obligations and other 

borrowings for at least 90 days. The proposed rule would divide the liquidity reserve into two 

levels. FCA’s proposal would require each FCS bank to maintain a sufficient quantity of highly 

liquid assets in the first level of its liquidity reserve so it could continue normal operations for 30 

days if System access to the markets is impeded. Cash and securities that mature in three

years or less must compose 15 days of the first level of the liquidity reserve. The second level of 

the liquidity reserve would consist of liquid assets that are sufficient to fund the banks’ 

operations for the next 60 days during a prolonged stress scenario. 

615.5134(f) Supplemental Liquidity Buffer: The proposed rule introduces a new concept into 

FCA’s liquidity regulation by requiring all FCS banks to establish and maintain a supplemental 

liquidity buffer that would provide a longer-term, stable source of funding beyond the 90-day 

minimum liquidity reserve. During a significant stress event, FCS banks could also draw upon 

the supplemental liquidity buffer to meet potential short-term liquidity needs.

615.5134(g) Discounts: This paragraph of the proposed rule would amend the provision in the 

existing rule that pertains to the discounts that FCS banks must apply to assets in their liquidity 

reserves. The revised provision on discounts is more appropriate to the new regulatory 

structure, which splits the liquidity reserve into two levels, establishes a supplemental liquidity 

buffer, and greatly strengthens contingency funding planning at FCS banks.

615.5134(h) Contingency Funding Plan: The proposed rule would strengthen contingency 

planning at FCS banks by amending the applicable provisions of the liquidity regulation. These 

amendments should reinforce the wherewithal of FCS banks to withstand future crises.

615.5134(i) Reservation of Authority: This paragraph of the proposed rule would strengthen 

FCA’s supervisory and regulatory oversight of liquidity management at FCS banks. Under this 

reservation of authority, FCA expressly reaffirms its authority to require FCS banks, either 

individually or jointly, to adjust their treatment of instruments (assets) in their liquidity reserves 

so they have liquidity that is sufficient and commensurate with the risks they face.

The proposed rule asks a number of questions and solicits input from the public about unfunded 

commitments and the best way to measure the creditworthiness of investments. 

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