-moreFact Sheet Farm Credit Administration

1501 Farm Credit Drive

McLean, Virginia 22102-5090

March 10, 2016 Contact: Michael Stokke or Christine Quinn,

703-883-4056

E-mail: info-line@fca.gov

Website: www.fca.gov

Fact Sheet on Tier 1/Tier 2 Regulatory Capital Framework

Final Rulemaking

Today the Farm Credit Administration Board adopted a final rule that will add a new part 628 to 

FCA’s regulations and amend part 615 and other FCA regulations to modify the regulatory 

capital requirements for Farm Credit System (System) banks and associations (institutions).

FCA’s objectives in adopting this final rule are as follows:

To modernize capital requirements while ensuring that System institutions continue to 

hold sufficient regulatory capital to fulfill the System's mission as a governmentsponsored enterprise. 

To ensure that the System’s capital requirements are comparable to the Basel III 

framework and the standardized approach that the federal banking regulatory agencies 

have adopted, but also to ensure that the rules recognize the cooperative structure and 

the organization of the System. 

To make System regulatory capital requirements more transparent.

To meet the requirements of section 939A of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act. 

Summary of Final Rule

The final rule replaces existing core surplus and total surplus requirements with common equity 

tier 1 (CET1), tier 1, and total capital (tier 1 plus tier 2) risk-based capital ratio requirements. The 

final rule also adds a tier 1 leverage ratio for all System institutions, which replaces the existing 

net collateral ratio for System banks.

In addition, the final rule establishes a capital conservation buffer and a leverage buffer;

enhances the sensitivity of risk weightings; and, for System banks only, requires additional 

public disclosure requirements. The revisions to the risk weightings include alternatives to the 
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-moreuse of credit ratings, as required by section 939A of the Dodd-Frank Act. The final rule will 

become effective on Jan. 1, 2017.

§ 628.1 – Purpose, applicability, and reservations of authority: This provision explains the 

purpose of the final rule, its applicability, and FCA’s reservations of authority.

§ 628.2 – Definitions: This provision defines the terms that are used in the final rule.

§ 628.3 – Operational requirements for certain exposures: This provision establishes 

operational requirements for calculating risk-weighted assets for certain exposures.

§ 628.10 – Minimum Capital Requirements: This provision sets the following minimum riskbased requirements:

A CET1 capital ratio of 4.5 percent.

A tier 1 capital ratio (CET1 capital plus additional tier 1 capital) of 6 percent.

A total capital ratio (tier 1 plus tier 2) of 8 percent.

This provision also sets a minimum tier 1 leverage ratio (tier 1 divided by total assets) of 4

percent, of which at least 1.5 percent must consist of unallocated retained earnings (URE) and 

URE equivalents, which are nonqualified allocated equities with certain characteristics of URE.

§ 628.11 – Capital Buffer Amounts: This provision establishes a capital cushion (capital 

conservation buffer) of 2.5 percent above the risk-based CET1, tier 1, and total capital 

requirements. This provision also establishes a leverage capital cushion (leverage buffer) of 1 

percent above the tier 1 leverage ratio requirements. If capital ratios fall below these buffer 

amounts, capital distributions (equity redemptions, dividends, and patronage) and discretionary 

senior executive bonuses are restricted or prohibited without prior FCA approval.

§ 628.20 – Capital Components and Eligibility Criteria for Regulatory Capital Instruments:

This provision sets forth the criteria an institution must meet to be able to include capital 

instruments in CET1 capital, additional tier 1 capital, and tier 2 capital. The criteria are as 

follows:

CET1 Capital consists of unallocated retained earnings plus common cooperative 

equities (purchased member stock, purchased participation certificates, and allocated 

equities). These equities are unchanged from the proposed rule except as specified 

below and must meet the following criteria (among others):

o Equities are perpetual and represent claims in liquidation subordinated to all 

preferred stock, subordinated debt, and liabilities of the institution.

o Equities subject to redemption or revolvement are not retired for at least 7 years after 

issuance. This is a change from the proposed rule’s minimum redemption or 

revolvement period of 10 years. An exception to this minimum period is that an 

institution may redeem a member-borrower's statutory minimum stock requirement 

(the lesser of $1,000 or 2 percent of the loan) when the loan is repaid.
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-moreo Equities can be redeemed or revolved only with FCA prior approval (unless it is the 

statutory minimum borrower stock requirement or unless the distribution meets “safe 

harbor” standards described below).

o A System institution must adopt a capitalization bylaw or annual board resolution 

providing it will seek prior FCA approval before redeeming or revolving any equities 

(other than the statutory minimum borrower stock) it includes in CET1 before the end 

of the 7-year period. This is a change from the proposed rule, which required a 

capitalization bylaw and did not permit compliance through an annual board 

resolution. 

Additional Tier 1 Capital consists of equities other than common cooperative equities 

that meet most of the CET1 criteria but represent a claim that ranks senior to all 

common cooperative equities in a receivership, liquidation, or similar proceeding.

Additional Tier 1 capital consists primarily of noncumulative perpetual preferred stock 

that has been issued primarily by System banks to investors outside of the System.

Tier 2 Capital consists of equities, which may be either common cooperative equities or 

equities held by third parties, that do not meet the tier 1 capital criteria, as well as 

qualifying subordinated debt and limited-life preferred stock. These equities are 

unchanged from the proposed rule except as specified below and must meet the 

following criteria:

o The instruments are perpetual or have an original maturity of at least 5 years. 

o Instruments subject to redemption or revolvement are not retired for at least 5 years 

after issuance.

o The instruments may not be redeemed or revolved prior to maturity or the end of the 

stated revolvement period without FCA prior approval.

o A System institution must adopt a capitalization bylaw or annual board resolution

providing it will seek prior FCA approval before retiring any instruments it includes in 

tier 2 before the end of the 5-year period. This is a change from the proposed rule, 

which required a capitalization bylaw and did not permit compliance through an 

annual board resolution. 

This provision contains procedural requirements for a System institution to request approval for 

patronage and equity redemptions, as well as dividends and cash patronage. It also contains a 

safe harbor for cash redemptions, dividends, and patronage under certain conditions. The safe 

harbor permits cash payments for dividends, patronage, and redemptions and revolvements of 

equities, provided that the equities have been outstanding for at least the minimum holding 

periods and, after the cash payments, the dollar amount of CET1 capital equals or exceeds the 

dollar amount of CET1 capital on the same date in the previous year. In the final rule, FCA has

provided exceptions from the minimum holding periods for equities mandated to be retired by 

court order, equities held by the estate of a deceased former borrower, and equities required to 

be canceled under § 615.5290.

§ 628.22 – Regulatory Capital Adjustments and Deductions: This provision requires a 

System institution to deduct the following from CET1 capital:
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-moreGoodwill, intangible assets, gains-on-sale in connection with a securitization exposure, 

and defined benefit pension fund net assets, all of which are net of associated deferred 

tax liabilities

A System institution’s allocated equity investments in another System institution

Accumulated other comprehensive income (loss)

This provision also applies a corresponding deduction approach to a System institution’s 

purchased investment in another System institution. This means that a System institution makes 

deductions from the component of capital for which the underlying instrument would qualify if it 

were issued by the System institution itself.

§ 628.23 – Limits on Third-Party Capital: This provision caps the amount of stock issued to 

third-party investors that a System institution can include in regulatory capital. The limits would 

be the lesser of the following: 40 percent of total capital or 100 percent of CET1 capital.

§§ 628.30–628.53 – Risk-Weighted Assets – Standardized Approach: These provisions 

establish the risk weights and related capital treatment for the following asset exposures:

General exposures, including exposures to 

o the United States and foreign sovereigns;

o supranational entities and multilateral development banks;

o government-sponsored enterprises;

o depository institutions or credit unions, including those that are “other financing 

institutions” (OFIs);

o public sector entities such as states and municipalities;

o corporate entities (including exposures to agricultural borrowers and OFIs that are 

not affiliated with depository institutions or credit unions);

o residential mortgage borrowers;

o past-due and nonaccrual exposures;

o servicing assets; and

o deferred tax assets

Off-balance-sheet exposures

Over-the-counter derivative contracts

Cleared transactions

Guarantees and credit derivatives

Collateralized transactions

Unsettled transactions

Securitization exposures

Equity exposures

Changes in capital treatment between existing regulations and the final rule include the 

following:
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As required by the Dodd-Frank Act, credit ratings are no longer used to determine 

creditworthiness of an exposure. Instead, other risk-sensitive approaches are used.

Currently, risk weights do not increase when an exposure becomes past-due or 

nonaccrual, except for residential mortgage exposures. Under the final rule, all past-due 

or nonaccrual exposures are risk-weighted at 150 percent, except for any portion that is 

guaranteed or secured by financial collateral (real estate and chattel are not financial 

collateral).

The credit conversion factor applied to unused commitment exposures from System 

banks to fund direct loans to associations and OFIs is 20 percent, regardless of maturity.

The credit conversion factor applied to other unused commitment exposures increases 

from zero percent to 20 percent if the commitment has a short-term maturity (14 months 

or less). (The credit conversion factor applied to other unused commitment exposures 

remains at 50 percent if the commitment has a longer-term maturity.)

The net effect of these changes on an institution’s risk-adjusted asset base should be small.

The risk weighting for many System assets, such as agricultural loans and direct loans, will 

remain unchanged.

§§ 628.61–628.63 – Disclosures: These provisions require System banks to make public 

disclosures comparable to those required of banking organizations that have over $50 billion in 

assets and are regulated by the federal banking regulatory agencies. Meaningful public 

disclosures encourage market discipline and aid market participants in their assessments.

Disclosure requirements are appropriate for all System banks — even those with less than $50 

billion in assets — because of their joint and several liability for the Systemwide debt obligations 

that they issue. To avoid duplicating other reporting requirements, the rule would give System 

banks discretion in how they present the required disclosures.

§ 628.300 – Transitions: This provision would establish a three-year phase-in of the capital 

conservation buffer, beginning Jan. 1, 2017. There will be no phase-in of the leverage buffer.

§ 628.301 – Initial Compliance and Reporting Requirements: This provision would require a 

System institution not meeting all minimum regulatory capital requirements on the effective date 

of the rule to notify FCA of its noncompliance and to submit a capital restoration plan. If FCA 

approves the plan and the institution complies with the plan, FCA would consider the institution 

to be in compliance with the regulatory capital requirements.

Other Regulatory Provisions: As required by the Farm Credit Act of 1971, as amended, the 

regulatory provisions in subpart H of part 615 pertaining to the permanent capital ratio would be 

retained for the numerator, but the denominator would be calculated using the risk weighting in 

part 628. Numerous technical and conforming changes are made throughout part 615 and in 

other FCA regulations. 

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