[Federal Register Volume 86, Number 188 (Friday, October 1, 2021)]
[Rules and Regulations]
[Pages 54347-54361]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-20433]


=======================================================================
-----------------------------------------------------------------------

FARM CREDIT ADMINISTRATION

12 CFR Parts 614, 615, 620, and 628

RIN 3052-AD27


Regulatory Capital Rules: Tier 1/Tier 2 Framework

AGENCY: Farm Credit Administration.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Farm Credit Administration (FCA or we) is adopting a final 
rule that amends the regulatory capital requirements for Farm Credit 
System (System or FCS) institutions. These amendments clarify certain 
provisions in the Tier 1/Tier 2 Capital Framework final rule that 
became effective in 2017 (2017 Capital Rule) and codify the guidance 
provided in FCA Bookletter--BL-068--Tier 1/Tier 2 Capital Framework 
Guidance. This final rule also includes revisions to the regulatory 
capital rules to reduce administrative burden for System institutions 
and the FCA. Lastly, to maintain comparability in our regulatory 
capital requirements, we are amending certain definitions pertaining to 
qualified financial contracts in conformity with changes adopted by the 
Federal banking regulatory agencies.

DATES: The regulation shall become effective January 1, 2022, or 30 
days after publication in the Federal Register during which either or 
both houses of Congress are in session, whichever is later. Pursuant to 
12 U.S.C. 2252(c)(1), FCA will publish notification of the effective 
date in the Federal Register.

FOR FURTHER INFORMATION CONTACT: 
    Technical information: Jeremy R. Edelstein, <a href="/cdn-cgi/l/email-protection#c580a1a0a9b6b1a0acab8f85a3a6a4eba2aab3"><span class="__cf_email__" data-cfemail="7c391819100f08191512363c1a1f1d521b130a">[email protected]</span></a>, 
Associate Director or Clayton D. Milburn, <a href="/cdn-cgi/l/email-protection#692400050b1c1b072a290f0a08470e061f"><span class="__cf_email__" data-cfemail="34795d585641465a77745257551a535b42">[email protected]</span></a>, Senior 
Financial Analyst, Finance and Capital Markets Team, Office of 
Regulatory Policy, Farm Credit Administration, McLean, VA 22102-5090, 
(703) 883-4414, TTY (703) 883-4056 or <a href="/cdn-cgi/l/email-protection#86c9d4d6cbe7efeae4e9fec6e0e5e7a8e1e9f0"><span class="__cf_email__" data-cfemail="95dac7c5d8f4fcf9f7faedd5f3f6f4bbf2fae3">[email protected]</span></a>;
or
    Legal information: Rebecca S. Orlich, <a href="/cdn-cgi/l/email-protection#501f223c39333822103633317e373f26"><span class="__cf_email__" data-cfemail="0748756b6e646f754761646629606871">[email protected]</span></a>, Senior 
Counsel, or Jennifer A. Cohn, <a href="/cdn-cgi/l/email-protection#04476b6c6a6e446267652a636b72"><span class="__cf_email__" data-cfemail="3f7c505751557f595c5e11585049">[email protected]</span></a>, Senior Counsel, Office of 
General Counsel, Farm Credit Administration, McLean, VA 22102-5090, 
(703) 883-4020, TTY (703) 883-4056.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Objectives of the Final Rule
    B. Background
    C. Summary of the Proposed Rule
    D. General Summary of Comments Received
II. Substantive Revisions to the Capital Rule
    A. Safe Harbor Deemed Prior Approval
    B. Capital Bylaw or Board Resolution To Include Equities in Tier 
1 and Tier 2 Capital
    C. Common Cooperative Equity Issuance Date
    D. Farm Credit Leasing Services Corporation
    E. Lending and Leasing Limit Base Calculation
    F. Qualified Financial Contract (QFC) Related Definitions
    G. Common Equity Tier 1 Capital Eligibility Requirements
III. Clarifying and Other Revisions to the Capital Rule
    A. Capitalization Bylaw Adjustment
    B. Annual Report to Shareholders Corrections
    C. Appropriate Risk-Weighting of Cash and Gold Bullion
    D. Securitization Formulas
    E. Unallocated Retained Earnings and Equivalents Deductions and 
Adjustments
    F. Service Corporation Deductions and Adjustments
    G. Adjustments for Accruing Patronage and Dividends
    H. Bank Disclosures
    I. Retirement of Statutory Borrower Stock
IV. Abbreviations
V. Regulatory Analysis
    A. Regulatory Flexibility Act
    B. Congressional Review Act

I. Introduction

A. Objectives of the Final Rule

    FCA's objectives in adopting this rule are to:
    <bullet> Provide technical corrections, amendments and 
clarification to certain provisions in the Tier 1/Tier 2 Capital 
Framework; and
    <bullet> Ensure the System's capital requirements maintain 
comparability with the standardized approach that the Federal banking 
regulatory agencies \1\ have adopted (U.S. Rule) while accommodating 
the cooperative structure and the organization of the System.
---------------------------------------------------------------------------

    \1\ The Federal banking regulatory agencies are the Office of 
the Comptroller of the Currency (OCC), the Federal Deposit Insurance 
Corporation (FDIC), and the Board of Governors of the Federal 
Reserve (FRB). See 12 CFR 3.20(b)(1)(i) (OCC), 12 CFR 
324.20(b)(1)(i) (FDIC); 12 CFR 217.20(b)(1)(i) (FRB).
---------------------------------------------------------------------------

B. Background

    In 1916, Congress created the System to provide permanent, stable, 
affordable, and reliable sources of credit and related services to 
American agricultural and aquatic producers.\2\ As of June 30, 2021, 
the System consists of 3 Farm Credit Banks, 1 agricultural credit bank, 
66 agricultural credit associations, 1 Federal land credit association, 
service corporations, and the Federal Farm Credit Banks Funding 
Corporation (Funding Corporation). Farm Credit banks (including both 
the Farm Credit Banks and the agricultural credit bank) issue System-
wide consolidated debt obligations in the capital markets through the 
Funding Corporation,\3\ which enable the System to extend short-, 
intermediate-, and long-term credit and related services to farmers, 
ranchers, aquatic producers and harvesters, their cooperatives, rural 
utilities, exporters of agricultural commodities products, farm-related 
businesses, and certain rural homeowners.\4\ The System's enabling 
statute is the Farm Credit Act of 1971, as amended (Act).\5\
---------------------------------------------------------------------------

    \2\ The Federal Agricultural Mortgage Corporation (Farmer Mac), 
which is also a System institution, has authority to operate 
secondary markets for agricultural real estate mortgage loans, rural 
housing mortgage loans, and rural utility cooperative loans. The FCA 
has a separate set of capital regulations that apply to Farmer Mac. 
This rulemaking does not affect Farmer Mac, and the use of the term 
``System institution'' in this preamble and rule does not include 
Farmer Mac.
    \3\ The Funding Corporation was established pursuant to section 
4.9 of the Farm Credit Act of 1971, as amended, and is owned by all 
Farm Credit banks.
    \4\ The agricultural credit bank lends to and provides other 
financial services to farmer-owned cooperatives, rural utilities 
(electric and telecommunications), and rural water and wastewater 
disposal systems. It also finances U.S. agricultural exports and 
imports and provides international banking services to cooperatives 
and other eligible borrowers. The agricultural credit bank operates 
a Farm Credit Bank subsidiary.
    \5\ 12 U.S.C. 2001-2279cc. The Act is available at www.fca.gov 
under ``Laws and regulations'' and ``Statutes.''
---------------------------------------------------------------------------

    FCA's Tier 1/Tier 2 Capital Framework, the 2017 Capital Rule, was 
published in the Federal Register in

[[Page 54348]]

July 2016.\6\ The objectives of the 2017 Capital Rule were:
---------------------------------------------------------------------------

    \6\ 81 FR 49720 (July 28, 2016). The rule was effective January 
1, 2017.
---------------------------------------------------------------------------

    <bullet> To modernize capital requirements while ensuring that 
institutions continue to hold enough regulatory capital to fulfill 
their mission as a Government-sponsored enterprise (GSE);
    <bullet> To ensure that the System's capital requirements are 
comparable to the Basel III framework and the standardized approach in 
the U.S. Rule, but also to ensure that the rules take into account the 
cooperative structure and the organization of the System;
    <bullet> To make System regulatory capital requirements more 
transparent; and
    <bullet> To meet the requirements of section 939A of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank 
Act).\7\
---------------------------------------------------------------------------

    \7\ Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------

    To date, FCA believes the 2017 Capital Rule has met, and continues 
to meet, these stated objectives.\8\
---------------------------------------------------------------------------

    \8\ For a comprehensive discussion of the 2017 Capital Rule, see 
81 FR 49720 (July 28, 2016). FCA's capital requirements can be found 
at Parts 615 and 628 of FCA Regulations.
---------------------------------------------------------------------------

    On December 22, 2016, the FCA Board adopted FCA Bookletter--BL-
068--Tier 1/Tier 2 Capital Framework Guidance (Capital Bookletter).\9\ 
The Capital Bookletter provided guidance to ensure System institutions 
had the necessary information to correctly implement the requirements 
of the 2017 Capital Rule. The Capital Bookletter included clarification 
and technical fixes on 18 separate items. The Capital Bookletter also 
stated our intention to incorporate some of these items into the 
regulation in a future rulemaking project.
---------------------------------------------------------------------------

    \9\ A copy of the Capital Bookletter can be found at 
www.fca.gov, under ``Laws & Regulations'' and ``Bookletters.''
---------------------------------------------------------------------------

C. Summary of the Proposed Rule

    On September 10, 2020,\10\ FCA published in the Federal Register a 
notice of proposed rulemaking seeking public comment on revisions to 
our regulatory capital requirements to incorporate some of the guidance 
in the Capital Bookletter, with various adjustments,\11\ as well as 
other revisions, as follows:
---------------------------------------------------------------------------

    \10\ See 85 FR 55786 (September 10, 2020).
    \11\ FCA adjusted some of the guidance provided in the Capital 
Bookletter to address concerns identified through ongoing monitoring 
and examination of the requirements of the 2017 Capital Rule. 
Specific elements of the Capital Bookletter as incorporated into the 
rule are detailed in the ``Substantive Revisions'' and the 
``Clarifying and Other Revisions'' sections of this preamble.
---------------------------------------------------------------------------

    <bullet> Eliminate the stand-alone capital requirements for Farm 
Credit Leasing Services Corporation (Farm Credit Leasing or FCL);
    <bullet> Change the computation of the lending and leasing limit 
base in Sec.  614.4351, by using total capital instead of permanent 
capital in the calculation \12\ and eliminating the exceptional 
treatment of certain purchased stock in Sec.  614.4351(a)(1);
---------------------------------------------------------------------------

    \12\ Total capital is defined at Sec.  628.2. Permanent capital 
is defined at Sec.  615.5201.
---------------------------------------------------------------------------

    <bullet> Simplify ''Safe Harbor'' provisions that determine when 
System institutions have ``deemed prior approval'' from FCA to 
distribute cash payments;
    <bullet> Revise and clarify certain criteria that capital 
instruments must meet to be included in common equity tier 1 (CET1) and 
tier 2 capital;
    <bullet> Further clarify when the holding period starts for certain 
Common Cooperative Equities included in CET1 or tier 2 capital; and
    <bullet> Amend the requirement to adopt an annual board resolution 
with respect to prior approval requirements and the minimum holding 
periods for certain equities included in CET1 or tier 2 capital.
    We additionally proposed technical revisions to:
    <bullet> Amend the definitions of ``Collateral agreement,'' 
``Eligible margin loan,'' ``Qualifying master netting agreement 
(QMNA),'' and ``Repo-style transaction'' to incorporate amendments made 
to these definitions in the U.S. Rule;
    <bullet> Amend Sec.  615.5220(a)(6) to replace references to parts 
615 and 628 with a general reference to FCA regulations;
    <bullet> Make certain amendments to Sec.  620.5 to ensure 
institutions report financial information as we intended;
    <bullet> Clarify the appropriate risk-weighting of cash and gold 
bullion held in a System institution's own vaults;
    <bullet> Correct securitization formulas as provided in the Capital 
Bookletter;
    <bullet> Specify the deductions and adjustments required for 
calculating the requirement in Sec.  628.10 that at least 1.5 percent 
of the 4 percent tier 1 leverage ratio minimum must consist of 
unallocated retained earnings (URE) and URE equivalents;
    <bullet> Revise the deductions required under existing Sec.  
628.22(a)(6) to include allocated equity investments in System service 
corporations;
    <bullet> Add to the regulation certain guidance in the call report 
instructions on the treatment of accruals of patronage or dividend 
payables or receivables recorded prior to the governing board 
declaration or resolution;
    <bullet> Clarify certain requirements for regulatory capital 
disclosures of System banks in Sec. Sec.  620.3, 628.62(c), and 
628.63(b)(4); and
    <bullet> Clarify that institutions may retire minimum amounts of 
statutory borrower stock without prior approval from FCA so long as, 
after the retirement, the institution continues to comply with all 
minimum regulatory capital requirements. The proposal also provided 
clarification and guidance on continuously redeemable preferred stock 
(or ``H Stock''), responded to a letter received from the Farm Credit 
Council addressing various capital related topics, and sought comment 
on potential changes to FCA's existing permanent capital regulations.

D. General Summary of Comments Received

    FCA received seven comment letters on the proposed rule.\13\ The 
Farm Credit Council, a trade association representing System 
institutions, submitted a letter on behalf of its membership after 
soliciting comments from all institutions (System Comment Letter).\14\ 
Two System banks \15\ and three System associations \16\ also submitted 
individual comment letters in support of the System Comment Letter. One 
System association, Compeer Financial, ACA (Compeer), raised additional 
concerns. The American Bankers Association (ABA), a trade association 
representing the U.S. banking industry, submitted the remaining comment 
letter.\17\ We address the comments in the preamble sections that 
follow.
---------------------------------------------------------------------------

    \13\ The comment letters for the proposed rule are available at 
www.fca.gov. Once you are on the website, click the ``I want to . . 
.'' field near the top of the page; select ``find comments on a 
pending regulation'' from the drop down menu; and click ``Go;'' then 
select Capital--Tier 1/Tier 2 Capital Framework--Clean Up--NPRM.
    \14\ See Letter from Charles Dana, General Counsel, Farm Credit 
Council (November 6, 2020).
    \15\ See Letter from Thomas E. Halverson, President and Chief 
Executive Officer, CoBank, ACB (November 9, 2020); Letter from 
Barbara Kay Stille, Chief Administrative Officer and General 
Counsel, AgriBank, FCB (November 9, 2020).
    \16\ See Letter from Northwest Farm Credit Services, FLCA and 
PCA (November 6, 2020); Letter from Steve Zagar, Senior Vice 
President Chief Financial Officer, Farm Credit Mid-America, ACA 
(November 9, 2020); Letter from Jase Wagner, Chief Financial Officer 
(CFO), Compeer Financial, ACA (November 5, 2020).
    \17\ See Letter from Hu A. Benton, Vice President, Banking 
Policy, American Bankers Association (November 9, 2020).
---------------------------------------------------------------------------

    The System Comment Letter stated that the Farm Credit Council and 
its members ``generally support'' the proposed rule, including 
provisions that incorporate the Capital Bookletter and call report 
instructions, but that certain aspects of the proposal were

[[Page 54349]]

``problematic.'' Many of the comments from System institutions 
reiterated recommendations they had previously communicated to FCA (in 
comments on the September 4, 2014, proposed rulemaking) \18\ and 
requested changes that were beyond the scope of the proposal. The 
balance of the comments from System institutions were supportive of the 
proposed amendments or requested specific technical changes.
---------------------------------------------------------------------------

    \18\ See 79 FR 52814 (September 4, 2014).
---------------------------------------------------------------------------

    The ABA asserted that the proposed rule would increase risks to the 
safety and soundness of the System and increase competitive inequities 
between the System and commercial banks. The ABA also requested that we 
clarify certain matters we did not expressly address in the proposal. 
In some cases, the ABA's comments did not directly relate to the 
amendments we proposed.
    In the preamble to the proposed rule, we discussed certain matters 
that were not the subject of the proposed rule,\19\ and we also sought 
comments on potential changes to our permanent capital regulations to 
reduce regulatory burden. We may consider proposing specific changes to 
the permanent capital requirements and calculations in a future 
rulemaking.
---------------------------------------------------------------------------

    \19\ In the proposed rule preamble, we discussed the exclusion 
of continuously redeemable preferred stock (H Stock) from tier 1 and 
tier 2 capital and also commented on issues raised in a 2016 letter 
we received from the Farm Credit Council. See 85 FR 57786, 55795 
(September 10, 2020).
---------------------------------------------------------------------------

    As discussed in Section 2--Substantive Revisions to the Capital 
Rule and Section 3--Clarifying and Other Revisions to the Capital Rule, 
the final rule adopts the revisions we proposed with minor adjustments 
in response to comments received.

II. Substantive Revisions to the Capital Rule

A. Safe Harbor Deemed Prior Approval

    Under existing Sec.  628.20(f), System institutions are required to 
obtain prior approval from FCA before retiring equities included in 
tier 1 or tier 2 capital and making cash payments for dividends and 
patronage (collectively, cash distributions). Institutions have 
``deemed prior approval'' from FCA for such distributions provided the 
conditions in Sec.  628.20(f)(5) and (6) are satisfied (Safe Harbor). 
One of the conditions stipulates that, after any such cash payment, the 
dollar amount of CET1 capital must equal or exceed the dollar amount of 
CET1 on the same date in the previous calendar year.\20\ Using the same 
date in the previous calendar year has made monitoring and enforcing 
this requirement difficult because regulatory capital numbers for 
System institutions are reported to FCA quarterly, rather than daily.
---------------------------------------------------------------------------

    \20\ See existing regulation Sec.  628.20(f)(5)(ii). FCA 
considers the date of the cash distribution to be the date on which 
the institution's board passes a binding resolution declaring an 
amount it will make as a cash dividend or patronage refund. This 
either must be a specified dollar amount or must include language 
whereby a specific amount can be calculated.
---------------------------------------------------------------------------

    We proposed to simplify the Safe Harbor provisions of Sec.  
628.20(f) by replacing the requirement to use the exact calendar date 
of the cash distribution with a requirement to use the quarter-end date 
of the quarter in which the cash payment is made. A System institution 
would have ``deemed prior approval'' from FCA if, after making the cash 
distribution, the dollar amount of CET1 capital at the quarter-end 
equals or exceeds the dollar amount of CET1 capital on the same 
quarter-end in the previous calendar year. We provided two examples in 
the preamble to the proposed rule.\21\ We stated that we do not believe 
the amendment as proposed would increase or decrease the amount of cash 
patronage System institutions would be able to pay when compared to the 
provision in the 2017 Capital Rule.
---------------------------------------------------------------------------

    \21\ See 85 FR 55786, 55788 (September 10, 2020).
---------------------------------------------------------------------------

    The ABA expressed concern that the proposal was ``liberalizing'' 
the provisions of the ``Safe Harbor Deemed Prior Approval'' in Sec.  
628.20(f)(5) and suggested that the Safe Harbor framework gives 
inadequate consideration to an institution's risk profile. The comments 
appear to be based in part on concerns regarding the proposal's 
omission of specific reference to capital distribution limitations 
already in the 2017 Capital Rule and unchanged by the proposal.
    We disagree with the assertion that the proposal would 
``liberalize'' the Safe Harbor. The proposed rule would change the date 
for determining compliance with the Safe Harbor provision in order to 
simplify the administration, enforcement, and monitoring of compliance 
with the Safe Harbor requirements. As we state above, we do not believe 
the proposal would increase or decrease the amount of cash patronage 
System institutions could pay when compared to the existing provision. 
The proposed changes would in no way ``liberalize'' the Safe Harbor or 
create any greater opportunity for capital distributions under the Safe 
Harbor.
    In response to the ABA's concerns regarding the Safe Harbor giving 
inadequate consideration to an institution's risk profile, the 
commenter's assertion that the Safe Harbor permits ``cash payouts based 
only on maintaining the dollar amount of CET1 capital in a prior year'' 
is incorrect. As we stated in the preamble to the proposed rule, in 
order to make a cash distribution under the Safe Harbor, a System 
institution must remain in compliance with all regulatory capital 
requirements and any supervisory or enforcement actions after such 
distribution.\22\ FCA's regulatory capital requirements are comparable 
to the U.S. Rule and include regulatory capital measures using both 
risk-adjusted and non-risk-adjusted computational methods.\23\ 
Furthermore, FCA has comparable authorities to the Federal banking 
regulatory agencies to establish minimum capital ratios for an 
individual institution \24\ as well as to place further restrictions on 
institutions' capital distributions as part of supervisory agreements 
and enforcement actions.\25\ Lastly, cash distributions under the Safe 
Harbor are subject to the capital buffers in Sec.  628.11, which reduce 
the amount of capital distributions an institution can make when its 
capital levels fall within the leverage buffer or capital conservation 
buffer ranges. These requirements are unaltered by the proposed or 
final rule.
---------------------------------------------------------------------------

    \22\ See Sec.  628.20(f)(5)(iii).
    \23\ Compare, for example, Sec. Sec.  628.10 and 628.11 with the 
OCC's rules at 12 CFR 3.10 and 3.11.
    \24\ Section 4.3(a) of the Act (12 U.S.C. 2154) and 12 CFR 
615.5350.
    \25\ Section 5.25 of the Act (12 U.S.C. 2261).
---------------------------------------------------------------------------

    Compeer requested that we expand the Safe Harbor to allow 
institutions to retire the allocated equities of a borrower, 
irrespective of compliance with minimum holding periods,\26\ to offset 
losses when a borrower defaults on a loan. The commenter asserted that 
present hurdles to retiring equities in these scenarios (i.e., 
requesting prior approval from FCA under Sec.  628.20(f)) present an 
unnecessary administrative burden.
---------------------------------------------------------------------------

    \26\ To be included in regulatory capital, common cooperative 
equities (defined at Sec.  628.2) must meet minimum holding periods 
as stipulated in Sec.  628.20(b)(1)(xiv) and (d)(1)(xi). Minimum 
holding period requirements are further discussed below under 
Section II, C--Common Cooperative Equity Issuance Date.
---------------------------------------------------------------------------

    Compeer's requested revision is beyond the scope of the present 
rulemaking. We note, however, that as we stated in the preamble to the 
2017 Capital Rule, equities are issued to capitalize the institution, 
not the loan. Accordingly, these equities should not be viewed or 
treated as compensating loan balances.\27\ Furthermore, the preamble to 
the 2017 Capital Rule also explains in detail our position on the

[[Page 54350]]

necessity for minimum holding periods to address the ``expectation 
criterion'' in the Basel III Framework and the U.S. Rule, maximizing 
comparability of our rule with the rules applicable to commercial 
banks.\28\ We note that, under Sec.  628.20(f)(6), System institutions 
may offset allocated equities against a loan in default if mandated by 
a court of competent jurisdiction or under Sec.  615.5290 in connection 
with a restructuring plan.
---------------------------------------------------------------------------

    \27\ See 81 FR 49720, 49731 (July 28, 2016).
    \28\ See 81 FR 49720, 49732 (July 28, 2016).
---------------------------------------------------------------------------

    The balance of comments received supported this proposed amendment, 
and we are adopting it as proposed.

B. Capital Bylaw or Board Resolution To Include Equities in Tier 1 and 
Tier 2 Capital

    The 2017 Capital Rule stipulates conditions and criteria that must 
be met in order to include an instrument in an institution's regulatory 
capital.\29\ Among these are the requirements for the institution's 
board of directors to affirm its commitment to adhere to the regulatory 
minimum redemption or revolvement periods; to obtain prior approval 
from FCA prior to redeeming, revolving, redesignating, cancelling or 
removing equities included in regulatory capital; \30\ and to obtain 
prior approval from FCA for certain other actions that could impact the 
institution's capital quantity or quality.\31\ Such affirmation must be 
set forth in the institution's capitalization bylaws or in a board 
resolution that the board must re-affirm annually. Where this 
requirement is satisfied by a board resolution, we proposed to reduce 
the administrative burden by no longer requiring an annual re-
affirmation by the board. We proposed to replace the annual re-
affirmation with a one-time requirement to adopt the board resolution 
and, in subsequent annual capital adequacy plans, to expressly 
acknowledge the continuing and binding effect of this resolution.
---------------------------------------------------------------------------

    \29\ See existing regulations Sec. Sec.  628.20 and 615.5200(d).
    \30\ By meeting the conditions for ``deemed prior approval'' 
under regulation Sec.  628.20(f)(5) and (6), an institution 
effectively obtains FCA prior approval for a given capital 
distribution.
    \31\ Existing Sec.  615.5200(d)(3) requires boards to obtain 
prior approval before redesignating unallocated retained earnings 
(URE) equivalents as redeemable equities; removing equities from 
regulatory capital (other than through repurchase, cancellation, 
redemption, or revolvement); or redesignating equities from one 
regulatory capital component to another. Section 615.5200(d)(4) 
requires that URE equivalents shall not be revolved, except under 
very limited circumstances (i.e., upon dissolution or liquidation).
---------------------------------------------------------------------------

    We proposed to move the existing requirements of Sec.  615.5200(d) 
to a new section, Sec.  628.21, and to revise them to provide that an 
institution's board must adopt either a capitalization bylaw 
requirement or a binding board resolution. New Sec.  615.5200(b) would 
add to existing capital planning provisions a requirement that the 
capital adequacy plan must expressly acknowledge the continuing and 
binding effect of all board resolutions adopted pursuant to Sec. Sec.  
628.20(b)(1)(xiv), (c)(1)(xiv), and (d)(1)(xi) and 628.21. We proposed 
conforming changes as necessary to refer to new Sec.  628.21 rather 
than Sec.  615.5200(d).
    We received no specific comments on this amendment and are adopting 
it as proposed.

C. Common Cooperative Equity Issuance Date

    Common cooperative equities \32\ included in CET1 capital have a 
minimum holding period of 7 years before redemption or revolvement, and 
common cooperative equities included in tier 2 capital have a minimum 
holding period of 5 years.\33\ These holding periods also must be met 
for equities (other than the statutory borrower stock minimum) to be 
retireable under the Safe Harbor. To clarify when the minimum 
redemption and revolvement period starts for a common cooperative 
equity, we proposed to add a new definition, common cooperative equity 
issuance date, in Sec.  628.2 and to make conforming changes to other 
sections of the regulations. Similar to our guidance in the Capital 
Bookletter, we proposed to define the common cooperative equity 
issuance date as the quarter-end in which an institution recognizes 
newly issued purchased stock in its financial statements and, for newly 
allocated equities, the quarter-end in which the institution's board 
has declared a patronage refund and the applicable accounting treatment 
has taken place. We provided examples of the proposed treatment in the 
proposed rule preamble.\34\
---------------------------------------------------------------------------

    \32\ Common cooperative equities are defined in Sec.  628.2.
    \33\ As established in Sec.  628.20(b)(1)(xiv)(A) and 
(d)(1)(xi)(A).
    \34\ See 85 FR 55786, 55789 (September 10, 2020).
---------------------------------------------------------------------------

    The System Comment Letter and Compeer requested that we eliminate 
altogether the minimum holding period requirements for allocated 
equities. The System made the same request and supporting arguments in 
comments on our 2014 Tier 1/Tier 2 proposed capital rule, and FCA 
responded to those comments in the final rule preamble to the 2017 
Capital Rule.\35\
---------------------------------------------------------------------------

    \35\ See 81 FR 49720, 49732 (July 28, 2016). The proposed rule 
is at 79 FR 52814 (September 4, 2014).
---------------------------------------------------------------------------

    The System's request not only is beyond the scope of this 
rulemaking but also presents no new arguments that would persuade us to 
reevaluate the need for minimum holding periods. We discussed at length 
the stock-like attributes of allocated equities (as distinct from 
unallocated retained earnings) and the reasons for the minimum holding 
periods in the preamble to the 2017 Capital Rule.\36\
---------------------------------------------------------------------------

    \36\ See 81 FR 49720, 49726-49730 (July 28, 2016).
---------------------------------------------------------------------------

    The System Comment Letter suggested we add the word ``calendar'' 
before ``quarter-end'' in the proposed definition of ``common 
cooperative equity issuance date'' to clarify that the issuance date 
would be the calendar quarter-end. We agree and have incorporated the 
suggestion into the final rule. FCA also fully acknowledges the legal 
stock issuance date may be different from the quarter-end date used for 
financial reporting and regulatory capital calculations. Beyond this 
minor change, we are adopting the new definition as proposed.

D. Farm Credit Leasing Services Corporation

    The proposed rule would recognize the current ownership status of 
Farm Credit Leasing as a wholly-owned subsidiary of CoBank, ACB 
(CoBank) by removing FCL from the definition of ``System institution'' 
in Sec. Sec.  615.5201 and 628.2 for the purposes of the regulatory 
capital requirements.\37\ In so doing, FCA would no longer require FCL 
to meet minimum capital and related regulatory requirements under part 
615, subpart H, and part 628 of our regulations on a stand-alone basis. 
As a wholly-owned subsidiary of CoBank, FCL is a business unit of the 
bank with profits and losses accrued to the bank, and its assets and 
liabilities are consolidated with the bank's assets and liabilities for 
financial and regulatory reporting purposes. To the extent the bank is 
adequately capitalized overall, CoBank's consolidation ensures FCL's 
assets are adequately capitalized. This amendment will reduce the 
administrative burden of separately applying the regulatory capital 
requirements to FCL and will not reduce the capital to be held against 
FCL and CoBank's combined assets. If

[[Page 54351]]

FCL's ownership status were to change in the future, we will reassess 
whether to separately apply our regulatory capital requirements.\38\
---------------------------------------------------------------------------

    \37\ Farm Credit Leasing is a service corporation chartered 
under section 4.25 of the Act. A service corporation is an 
institution of the System that is established by System banks or 
associations and chartered by FCA, and it is subject to FCA 
regulation and examination. See title IV, subpart E of the Act.
    \38\ The definitions of ``System institution'' under Sec. Sec.  
615.5201 and 628.2 provide that we may include ``any other 
institution chartered by the FCA that we determine should be 
included for purposes of this subpart.''
---------------------------------------------------------------------------

    Commenters supported this change, and we are adopting it as 
proposed.

E. Lending and Leasing Limit Base Calculation

    Since adopting the 2017 Capital Rule, FCA has relied on tier 1 and 
tier 2 capital, not on permanent capital, to evaluate the safety and 
soundness of System institutions. In order to better align the lending 
and leasing limit base with FCA's supervisory focus on tier 1 and tier 
2 capital, we proposed to shift the base of the lending and leasing 
limit from permanent capital \39\ to total capital as defined and 
adjusted in Sec. Sec.  628.20-628.22 and to continue to include 
otherwise eligible third-party capital that must be excluded under 
Sec.  628.23. We further proposed to align the treatment of investments 
in other System institutions under the lending and leasing limit base 
with the treatment under regulatory capital calculations by eliminating 
the exceptional treatment of stock purchased in connection with a loan 
participation under Sec.  614.4351(a)(1).\40\ We estimated that the 
impacts to lending limits at System institutions resulting from these 
changes would be small.\41\ The System Comment Letter supported the 
change to the use of total capital as the lending limit base and noted 
that most institutions have internal lending limit policies that are 
lower than the lending limit base in the regulation. We received no 
other comments and are adopting the amendment as proposed.
---------------------------------------------------------------------------

    \39\ The existing lending and leasing limit base (which this 
final rule is changing) is a System institution's permanent capital 
with adjustments applicable to the institution in accordance with 
Sec.  615.5207, and with two additional adjustments in Sec.  
614.4351(a) that apply only to the lending and leasing limit base.
    \40\ The 2017 Capital Rule requires System institutions to 
deduct their investments in other System institutions from 
regulatory capital calculations. Existing Sec.  614.4351(a)(1) 
directs a System institution to include its investment in another 
System institution in its lending limit base where the investment 
resulted from stock purchased in connection with a loan 
participation. This is, in effect, the exact opposite of the 
regulatory capital requirements in the 2017 Capital Rule.
    \41\ See 85 FR 55786, 55790 (September 10, 2020), footnotes 29 
and 30.
---------------------------------------------------------------------------

F. Qualified Financial Contract (QFC) Related Definitions

    In 2017, the Federal banking regulatory agencies adopted rules 
establishing certain restrictions and requirements for the financial 
contracts (QFC Rules) of global systemically important banking 
institutions (GSIBs).\42\ We provided details on the background and 
impetus for these regulatory changes in the preamble to the proposed 
rule.\43\ The QFC Rules prompted related definitional changes in the 
U.S. Rule to ensure regulated entities continued to benefit from 
recognition of the risk-mitigating effects of netting and financial 
collateral on certain financial transactions. This recognition likely 
results in reduced capital requirements for those transactions.
---------------------------------------------------------------------------

    \42\ See 82 FR 56630 (November 29, 2017) (OCC); 82 FR 50228 
(October 30, 2017) (FDIC); and 82 FR 42882 (September 12, 2017) 
(FRB).
    \43\ See 85 FR 55786, 55790-55791 (September 10, 2020).
---------------------------------------------------------------------------

    To incorporate amendments made to the U.S. Rule \44\ and to ensure 
System institutions would also continue to benefit from recognition of 
the risk-mitigating effects of netting and financial collateral, we 
proposed changes to the definitions of ``Collateral agreement,'' 
``Eligible margin loan,'' ``Qualifying master netting agreement 
(QMNA),'' and ``Repo-style transaction.'' The proposed changes to QMNA 
would also harmonize that definition with the definition of ``Eligible 
master netting agreement'' as used in FCA's Margin and Capital 
requirements for Covered Swap Entities regulation.\45\ The System 
Comment Letter supported these revisions, and we are adopting them as 
proposed.
---------------------------------------------------------------------------

    \44\ As we have previously stated, FCA seeks to achieve 
comparability between our regulatory capital rules and those of the 
Federal banking regulatory agencies. Among other benefits, 
comparability of rules increases transparency for investors in the 
capital markets.
    \45\ See Sec.  624.2.
---------------------------------------------------------------------------

G. Common Equity Tier 1 Capital Eligibility Requirements

    Consistent with the Basel III regulatory capital framework \46\ and 
the U.S. Rule, we proposed to add the term ``paid-in'' to the 
eligibility criteria for CET1 capital in Sec.  628.20(b)(1)(i). Basel 
III defines ``paid-in'' capital as capital that (1) has been received 
with finality by the institution, (2) is reliably valued, (3) is fully 
under the institution's control, and (4) does not directly or 
indirectly expose the institution to the credit risk of the 
investor.\47\
---------------------------------------------------------------------------

    \46\ See Basel Committee on Banking Supervision (BCBS), Basel 
III: A Global Regulatory Framework for More Resilient Banks and 
Banking Systems, December 2010 (as revised June 2011).
    \47\ See BCBS, Basel III Definition of capital--Frequently Asked 
Questions, September 2017 (update of FAQs published in December 
2011).
---------------------------------------------------------------------------

    As discussed in the preamble to the proposed rule, we proposed this 
amendment to the eligibility criteria for CET1 capital after re-
evaluating the attributes of System allocated equities, which we have 
subsequently determined meet the Basel definition of ``paid-in.'' \48\ 
We further discussed our reexamination of the attributes of allocated 
equities and the financing of statutorily required borrower stock at 
System institutions.\49\ The System Comment Letter supported our 
recognition of allocated equities as meeting the definition of ``paid-
in'' and expressed no concern with the additional criteria for an 
instrument's inclusion in CET1 capital.\50\ We are adopting the 
revision as proposed.
---------------------------------------------------------------------------

    \48\ See 85 FR 55786, 55791-55792 (September 10, 2020).
    \49\ Id.
    \50\ As discussed under Section III, E--Unallocated Retained 
Earnings and Equivalents Deductions and Adjustments, the System 
Comment Letter draws a connection between our determination that 
allocated equities are ``paid-in,'' as defined by the Basel 
Committee, and arguments in the letter requesting the elimination of 
the URE and URE equivalents requirements in FCA's capital rules. Our 
determination that allocated equities fully meet the Basel III 
definition of paid-in capital does not have any connection to our 
URE and URE equivalents requirements.
---------------------------------------------------------------------------

    We also proposed a conforming change in Sec.  628.20(d)(1)(i) to 
clarify that all instruments included in tier 2 capital must be issued 
and paid-in. We received no comments on this proposed change and are 
adopting it as proposed.
    Lastly, we proposed clarifying, non-substantive changes to Sec.  
628.20(b)(1)(i) and (b)(1)(ii), both to align our language more closely 
with the language in the U.S. Rule and to emphasize a difference 
between the rules' prioritization of a capital instrument holder's 
claim on the residual assets of an institution in a receivership, 
insolvency, liquidation, or similar proceeding. We received no comments 
on these proposed revisions and are adopting them as proposed.

III. Clarifying and Other Revisions to the Capital Rule

A. Capitalization Bylaw Adjustment

    Section 615.5220(a)(6) requires a System institution to include in 
its capitalization bylaws a provision stating that equities other than 
those protected under Section 4.9A of the Act are retireable at the 
sole discretion of the board, provided minimum capital adequacy 
standards established in subpart H of part 615 and part 628 are

[[Page 54352]]

met. We proposed to amend this section by replacing the reference to 
parts 615 and 628 with a general reference to FCA's capital adequacy 
standards. This would satisfy the requirement to refer to parts 615 and 
628 and would include all existing capital requirements of the FCA as 
well as any future capital requirements that we may adopt in other 
parts of our regulations.
    As we noted in the proposal,\51\ changes to bylaws to conform to 
this regulatory requirement should not change any substantive rights of 
the System institution or its member-borrowers.\52\ System institutions 
that have already amended their capitalization bylaws to include a 
reference to parts 615 and 628 do not need to amend their 
capitalization bylaws to comply with this revision.
---------------------------------------------------------------------------

    \51\ See 85 FR 55786, 55792 (September 10, 2020).
    \52\ If the change is non-substantive and does not alter, 
reduce, or increase the rights of any member-borrowers, a System 
institution's board may choose to make a conforming change to the 
capitalization bylaws to include a general reference to regulatory 
capital adequacy standards without a vote by its member-borrowers, 
provided that such bylaws allow for technical amendments without a 
shareholder vote.
---------------------------------------------------------------------------

    We received no comments on this amendment and are adopting it as 
proposed.

B. Annual Report to Shareholders Corrections

    We proposed technical revisions to Sec.  620.5, which lists the 
required contents of a System institution's annual report to 
shareholders, to ensure institutions report financial data as we 
intended. First, we proposed to move the requirement that System 
associations report their tier 1 leverage ratio in each annual report 
for each of the last 5 fiscal years from Sec.  620.5(f)(4)(iv) to Sec.  
620.5(f)(3)(v), as we had originally intended. In addition, we proposed 
to amend the requirement in Sec.  620.5(f)(4) that institutions report 
core surplus, total surplus, and the net collateral ratio (banks only) 
in a comparative columnar form for each fiscal year ending in 2012 
through 2016. This requirement resulted in System institutions 
reporting capital ratios beyond the 5-year requirement established in 
Sec.  620.5(f), which was not our intention. Accordingly, we proposed 
to require these disclosures in each annual report through 2021, but 
only as long as these ratios are part of the previous 5 fiscal years 
for which disclosures are required. We received no comments on these 
revisions and are adopting them as proposed.

C. Appropriate Risk-Weighting of Cash and Gold Bullion

    We proposed to delete provisions in Sec.  628.32(l)(1) pertaining 
to the risk weighting of cash that were redundant and potentially 
confusing. Specifically, existing Sec.  628.32(l)(1) states that System 
institutions must assign a 0-percent risk weight to cash held in 
accounts at a depository institution, which created potential confusion 
pertaining to the proper risk weight for deposits that exceed the limit 
of FDIC deposit insurance coverage (currently set at $250,000). In 
addition, existing Sec.  628.32(l)(1) also states that System 
institutions must assign a 0-percent risk weight to cash held in 
accounts at a Federal Reserve Bank. As the risk weighting of cash on 
deposit with a U.S. depository institution or at the Federal Reserve 
Bank is adequately and more accurately addressed in Sec.  
628.32(a)(1)(i)(A) and (B) and (d)(1), we proposed eliminating the 
duplicative and potentially confusing provisions in Sec.  628.32(l)(1). 
We received no comments on these revisions and are adopting them as 
proposed.
    We additionally proposed to revise Sec.  628.32(l)(1) to add a 
provision assigning a 0-percent risk weight to gold bullion held in a 
System institution's own vaults, consistent with the risk weight 
assigned to gold bullion held in the vaults of a depository 
institution. We received no comments on this revision and are adopting 
it as proposed.

D. Securitization Formulas

    Consistent with corrections previously provided in the Capital 
Bookletter, we proposed to correct 3 formulas used in the simplified 
supervisory formula approach (SSFA) to risk-weighting securitizations 
under Sec.  628.43(d), and one formula used in the simple risk-weight 
approach (SRWA) for risk-weighting equity exposures under Sec.  628.52. 
These formulas were printed incorrectly in the Federal Register version 
of the 2017 Capital Rule. We received no comments on these corrections 
and are finalizing them as proposed.

E. Unallocated Retained Earnings and Equivalents Deductions and 
Adjustments

    Under Sec.  628.10, at least 1.5 percent of the 4 percent tier 1 
leverage ratio minimum must consist of URE and URE equivalents (UREE). 
As the 2017 Capital Rule did not specify how to calculate this 
requirement, we proposed to prescribe the calculation methodology. 
Specifically, we proposed to incorporate the guidance in the Capital 
Bookletter requiring the deductions in Sec.  628.22(a) from the 
numerator and the deductions used in calculating the tier 1 leverage 
ratio from the denominator.\53\ We also proposed to require that 
institutions deduct from the numerator any purchased equity investments 
that must be deducted under the corresponding deduction approach in 
Sec.  628.22(c). The use of differing deductions for the computation of 
the tier 1 leverage ratio and the URE and UREE measure, which is a 
component of the tier 1 leverage ratio, resulted in the URE and UREE 
measure, when calculated on a stand-alone basis, exceeding the tier 1 
leverage ratio at many System institutions.\54\ This was not our 
intent. The System Comment Letter generally supported our proposed 
revisions, and we are adopting them as proposed.
---------------------------------------------------------------------------

    \53\ See Capital Bookletter, Item 4.
    \54\ Section 628.10(c)(4) requires the amounts deducted under 
Sec. Sec.  628.22(a) and (c) and 628.23 to be deducted from tier 1 
capital when calculating the tier 1 leverage ratio. However, the 
deductions under Sec. Sec.  628.22(c) and 628.23 were not applied to 
the numerator when calculating the URE and UREE requirement as they 
do not increase the URE of a System institution. Although we are 
amending the rule to incorporate deductions under new Sec.  
628.22(b) and existing Sec.  628.22(c), we did not find it necessary 
to require the deductions under Sec.  628.23 when calculating the 
URE and UREE measure because third-party stock is not a component of 
URE, UREE, or CET1 capital.
---------------------------------------------------------------------------

    In addition, we are adopting technical conforming amendments in 
Sec.  628.10(c)(4) to incorporate adjustments required under proposed 
Sec.  628.22(b) \55\ into the computation of both the tier 1 leverage 
ratio and the URE and UREE measure. More specifically, we are amending 
the calculation of average total consolidated assets described in Sec.  
628.10(c)(4)(i) to include the deduction or adjustment required by 
Sec.  628.22(b). Furthermore, we are amending the calculation of the 
URE and UREE measure described in Sec.  628.10(c)(4)(ii) to include the 
deduction or adjustment required by Sec.  628.22(b). These conforming 
changes are consistent with existing call report instructions,\56\ are 
technical in nature, and are necessary to maintain consistency in the 
deductions for the computation of the tier 1 leverage ratio and the URE 
and UREE measure, consistent with the intent of the proposed rule.
---------------------------------------------------------------------------

    \55\ Proposed Sec.  628.22(b) is discussed below under Section 
III, G--Adjustments for Accruing Patronage and Dividends.
    \56\ See the call report instructions for Uniform Call Report 
schedule RC-R.4, item 3, and schedule RC-R.5, item 1.c. The call 
report instructions are available at https://ww3.fca.gov/fcsinfo/CRS/CallReportFiles/UCR%20Report%20Instructions.pdf.

---------------------------------------------------------------------------

[[Page 54353]]

    The System Comment Letter advocated that FCA reconsider the 
necessity of requirements to hold a minimum level of URE. Consistent 
with its comments on our 2014 proposed Capital Rule, the System Comment 
Letter asserted that the minimum URE requirement establishes URE as 
higher quality capital relative to other System capital components, 
results in nearly 3 percent of URE held against each dollar of new 
loans made by associations, violates the cooperative principle of user-
ownership, and undermines the cooperative principle of user-
control.\57\ In addition, the System Comment Letter asserted that a 
minimum URE requirement is not consistent with the Basel III Framework 
and thus decreases the comparability of FCA's capital requirements to 
those of the U.S. Rule.
---------------------------------------------------------------------------

    \57\ The Farm Credit Council made similar comments in response 
to the 2017 Capital Rule, as we summarized in the rule's preamble. 
See 81 FR 49720, 49733-49735 (July 28, 2016).
---------------------------------------------------------------------------

    The System Comment Letter and AgriBank, FCB (AgriBank), also 
requested that we consider changes to the definition of UREE in Sec.  
628.2 if we retain the URE requirement.
    Under the existing definition, nonqualified allocated equities not 
subject to redemption or revolvement are included in the definition of 
UREE and count towards an institution's minimum URE and UREE 
requirement, provided that certain additional stipulations are met.\58\ 
Such equities allocated to other System institutions are expressly 
excluded. The commenters assert that, because of the deductions and 
eliminations for computing regulatory capital under FCA's 2017 Capital 
Rule, equities allocated by a System bank to an association satisfy the 
objectives for URE and UREE as previously outlined by FCA.\59\
---------------------------------------------------------------------------

    \58\ To include nonqualified allocated equities in UREE, an 
institution's board must designate the equities as UREE at issuance 
and undertake in its capitalization bylaws or a board resolution 
(1.) not to change the designation without FCA prior approval, (2.) 
not to exercise discretion to revolve the equities except under 
dissolution or liquidation, and (3.) not offset the equities against 
a loan in default except as required by a court of competent 
jurisdiction, or if required under Sec.  615.5290 in connection with 
a restructuring.
    \59\ URE and UREE provide a cushion from losses for both third-
party and common cooperative equities and protect against 
interconnected risk between System banks and associations. See 79 FR 
52814 (September 4, 2014).
---------------------------------------------------------------------------

    The request to reconsider application of the minimum URE and UREE 
requirements or to change the definition of UREE is beyond the scope of 
the proposal. We explained at length our position on the significance 
of URE and UREE to System capitalization in the preamble to the 2017 
Capital Rule.\60\
---------------------------------------------------------------------------

    \60\ See 81 FR 49720, 49732-49735 (July 28, 2016).
---------------------------------------------------------------------------

    We note that the System Comment Letter and AgriBank drew a 
connection between our interpretation that allocated equities are 
``paid-in'', as defined by Basel, and their argument for the 
elimination of the URE and UREE requirements. The interpretation that 
allocated equities meet the Basel definition of paid-in capital, as 
discussed in the proposal,\61\ does not diminish the importance of the 
URE and UREE requirements.\62\
---------------------------------------------------------------------------

    \61\ See 81 FR 55786, 55791 (September 10, 2020).
    \62\ As noted in the System Comment Letter, Basel III recognizes 
two broad categories of CET1 capital: Retained earnings and paid-in 
capital instruments. Consistent with that view, our capital rules 
acknowledge and draw distinction between these two types of CET1 
capital (Sec.  628.20(b)(1) and (2)). Our interpretation that common 
cooperative equities are ``paid-in'' as defined by Basel does not 
eliminate the distinction between these two types of high-quality 
capital. Equities allocated by one System institution to another are 
at risk at both institutions and present a risk of financial 
contagion as a result of the interconnection that gives rise to 
their existence. Unallocated retained earnings and equivalents (as 
presently defined) do not present the same contagion risk.
---------------------------------------------------------------------------

    The minimum URE and UREE requirement as presently calculated 
protects association members against association losses, associations 
against bank losses, and the System against financial contagion. 
Financial contagion in this context would include impacts to earnings 
measures that are relevant to System investors and FCA's evaluations of 
the safety and soundness of System institutions. In addition to our 
previously stated position, we note that URE at a System bank ensures 
the bank can act as a source of strength and provide assistance to 
district associations or other banks if needed, and it also insulates a 
bank's affiliated associations from losses in other districts in the 
event of a joint and several liability call.

F. Service Corporation Deductions and Adjustments

    Existing Sec.  628.22(a)(6) requires a System institution to deduct 
any allocated equity investment in another System institution. We 
proposed to expand the deduction requirement to include allocated 
equity investments in a System service corporation.\63\ The System 
Comment Letter indicated that System institutions are unaware of any 
service corporations that allocate equities and provided no further 
comment on the amendment proposed. Accordingly, we are adopting the 
revision as proposed.
---------------------------------------------------------------------------

    \63\ System institution is defined in existing Sec.  628.2 as 
``a System bank, an association of the Farm Credit System, . . . and 
any other institution chartered by the FCA that the FCA determines 
should be considered a System institution for the purposes of this 
part.'' The FCA has not made any determinations to include other 
institutions in this definition.
---------------------------------------------------------------------------

    As we noted in the preamble to the proposed rule, in November 2016 
the Farm Credit Council sent a letter \64\ to FCA requesting that 
institutions be permitted to risk-weight their investments in System 
service corporations at 100 percent instead of having to deduct the 
investments from CET1 capital in their regulatory capital calculations. 
The Farm Credit Council further requested FCA to establish regulatory 
capital treatments for unincorporated business entities (UBEs) based on 
the specific nature of the entity in question. We responded to this 
request in the preamble to the proposed rule, declining to revise the 
requirement to deduct equity investments in service corporations from 
regulatory capital and noting that we retain the authority to consider 
the appropriate capital treatment of UBEs on a case-by-case basis.
---------------------------------------------------------------------------

    \64\ Letter dated November 22, 2016, from Charles Dana, General 
Counsel, Farm Credit Council to Gary K. Van Meter, Director, Office 
of Regulatory Policy. This letter was received after the 2017 
Capital Rule had been adopted by the FCA Board and communicated a 
request to change certain provisions of the 2017 Capital Rule, as 
discussed in this section.
---------------------------------------------------------------------------

    The System Comment Letter requested that we reconsider our position 
on service corporation investments. The System believes the requirement 
to deduct investments in System service corporations is inconsistent 
with the level of risk in the investments and state that the deduction 
requirement discourages the formation of organizations that provide an 
efficient means for cooperation among System institutions in providing 
services to their stockholders. The System further noted that all 
service corporations are subject to chartering requirements and that 
FCA can establish the individual capital requirements of a service 
corporation on a case-by-case basis.
    We are not convinced of the need to change our previously 
communicated position. As we stated in the preamble to the proposed 
rule, we believe that investments in service corporations are committed 
to support the risks at the service corporation and must be available 
to meet the service corporation's capital needs.\65\ This position and 
our resulting regulatory capital treatment of investments in service 
corporations are consistent with our treatment of all intra-System 
investments. The System accurately points out that FCA can establish

[[Page 54354]]

individual capital requirements for service corporations as part of the 
chartering process. We believe the more prudent default treatment is 
deduction rather than risk weighting. We would consider risk weighting 
on a case-by-case basis as the exception.
---------------------------------------------------------------------------

    \65\ See 85 FR 55786, 55795 (September 10, 2020).
---------------------------------------------------------------------------

G. Adjustments for Accruing Patronage and Dividends

    We proposed to amend the regulatory capital adjustment and 
deduction requirements under Sec.  628.22 by incorporating in proposed 
Sec.  628.22(b) the existing call report instructions directing System 
institutions to reverse the accrual of patronage or dividend payables 
or receivables that occur prior to a board declaration resolution.\66\ 
As discussed in the proposed rule preamble, FCA believes it is 
important to reflect regulatory capital on the basis of related 
contractual obligations. Some options for the treatment of patronage 
and dividend accruals under GAAP may not be consistent with this 
regulatory capital requirement.\67\ FCA looks to the date an 
institution's board of directors passes a binding resolution declaring 
an amount it will pay in patronage or dividends \68\ to establish when 
the legal obligation exists and should be reflected in regulatory 
capital computations. We received no comments on this amendment and are 
adopting it as proposed.
---------------------------------------------------------------------------

    \66\ See existing Call Report instructions for Schedule RC-R.4, 
Line item 3 at https://www.fca.gov/bank-oversight/fcs-call-reports.
    \67\ See 85 FR 55786, 55787-55788 (September 10, 2020).
    \68\ The declaration must include an amount to be paid or 
include language by which an amount could be calculated.
---------------------------------------------------------------------------

H. Bank Disclosures

    We proposed clarifying amendments to the requirement under Sec.  
628.63(b)(4) that banks disclose a reconciliation of their regulatory 
capital elements to their balance sheets in any audited consolidated 
financial statements. Specifically, we proposed to add the word 
``applicable'' before ``audited'' to clarify that reconciliation 
requirements apply only to current period financial statements that 
have been audited.\69\ We further proposed that System banks be 
required to complete this reconciliation of regulatory capital elements 
using both point-in-time and three-month average daily balance 
regulatory capital values as our regulatory capital requirements are 
based on a three-month average daily balance.\70\ Financial statements 
are generally prepared using point-in-time information.
---------------------------------------------------------------------------

    \69\ Under FCA regulations, only the annual report to 
shareholders prepared at yearend must be audited. See Sec.  
620.5(j)(1).
    \70\ See Sec.  628.10(a).
---------------------------------------------------------------------------

    The System Comment Letter questioned the value added by completing 
the required reconciliation on both a point-in-time and a three-month 
average daily balance basis. The commenters noted that Basel III Pillar 
3 disclosure requirements are based on a tieback to audited financial 
statements, which are prepared on a point-in-time basis. They further 
noted that the addition of the three-month average reconciliation was 
unnecessary and potentially confusing.
    We are persuaded that completing the reconciliation on a point-in-
time basis satisfies the Basel III Pillar 3 disclosure requirement for 
a reconciliation of regulatory capital to GAAP capital. We acknowledge 
that requiring a reconciliation on two separate bases would have added 
another administrative requirement. We have decided instead to revise 
Sec.  628.63(b)(4) to require only a reconciliation on a point-in-time 
basis, together with a statement that compliance with the minimum 
capital requirements in subpart B of part 628 is determined using 
average daily balances for the most recent 3 months.
    To address potential conflicts between the requirements of 
Sec. Sec.  620.3 and 628.62(c), we proposed to revise Sec.  620.3 to 
state that, unless otherwise determined by FCA, the use of the 
authorized limited disclosure in Sec.  628.62(c) does not create an 
incomplete disclosure. We also proposed to revise Sec.  620.3 to permit 
institutions to modify the required statement that the information 
provided is true, accurate, and complete to explain that the 
completeness of the disclosure was determined in consideration of Sec.  
628.62(c). We received no comments on this amendment and are adopting 
it as proposed.
    Lastly, we proposed to remove and reserve Sec.  628.63(b)(3), which 
required disclosure of the computation of regulatory capital ratios 
during the transition period, because the provision is no longer 
applicable. We received no comments on this amendment and are adopting 
it as proposed.

I. Retirement of Statutory Borrower Stock

    Under existing Sec.  628.20(b)(1)(xiv)(B), System institutions may 
redeem the minimum statutory borrower stock described in Sec.  
628.20(b)(1)(x) without prior FCA approval and without satisfying the 
minimum holding period for common cooperative equities included in CET1 
capital. In order to eliminate any possible misinterpretation that an 
institution could retire statutory borrower stock if the institution 
were not meeting its regulatory capital requirements, we proposed to 
add a provision to Sec.  628.20(b)(1)(xiv)(B) to clarify that 
institutions may redeem statutory borrower stock only provided that, 
after such redemption, the institution continues to comply with all 
minimum regulatory capital requirements.
    The System Comment Letter and Compeer requested that we reconsider 
the regulatory provisions for redemptions of statutory minimum borrower 
stock because of the administrative burden they create for small-
balance loans at some institutions (those with balances of $50,000 or 
less). As we clarified in the preamble to the proposed rule, under the 
existing provisions of Sec.  628.20(b)(1)(xiv)(B), for any statutory 
borrower stock exceeding $1,000 or 2 percent of the loan amount, 
whichever is less, the minimum holding periods for inclusion in 
regulatory capital apply.\71\ We also clarified in the preamble that 
the 2 percent of the loan amount is determined relative to the 
originated loan amount. Commenters stated that, under this structure, 
some System institutions must undertake a ``burdensome process'' to 
track the holding period for stock that is $1,000 or less but greater 
than 2 percent of the loan balance. The commenters further noted that 
the amounts of capital retained as a result of this requirement are de 
minimis in terms of any institution's total capital.
---------------------------------------------------------------------------

    \71\ See 85 FR 55786, 55794 (September 10, 2020). Of note, under 
Sec.  628.20(b)(1)(x) and (d)(1)(viii), any statutory borrower stock 
in excess of the statutory minimum that is funded through loan 
proceeds from the System institution is includable only in tier 2 
capital.
---------------------------------------------------------------------------

    We are persuaded that the burden of tracking and managing these de 
minimis amounts of statutory minimum borrower stock in accordance with 
existing requirements is not justified by the safety and soundness 
benefits of the nominal amounts of capital retained. Accordingly, we 
are amending the provisions of Sec.  628.20(b)(1)(xiv)(B) to reflect 
that an amount of the statutory borrower stock as described in section 
4.3A of the Act, not to exceed $1,000, may be redeemed without a 
minimum period outstanding after issuance and without the prior 
approval of the FCA. This amendment eliminates the burden of tracking 
de minimis amounts of statutory borrower stock that are less than 
$1,000 but exceed 2 percent of the loan balance. More specifically, 
System institutions may redeem up to $1,000 of statutory borrower stock 
irrespective of

[[Page 54355]]

the proportional relationship of the stock investment and the 
originated loan amount. We are making conforming changes to Sec.  
628.20(b)(1)(x) and (d)(1)(viii)(C) to incorporate this change.
    The ABA commented that it appreciated our clarification but 
asserted that the proposal would still leave FCS institutions subject 
to very lax requirements concerning stock redemptions compared to those 
applicable to commercial banks. We note that the proposed amendment 
eliciting this comment does not reduce restrictions on stock 
redemptions for System institutions. As discussed in the preamble to 
the proposed rule, the proposed amendment is merely a technical 
clarification for the avoidance of doubt.\72\
---------------------------------------------------------------------------

    \72\ 85 FR 55786, 55794 (September 10, 2020).
---------------------------------------------------------------------------

    As stated in the preamble to the 2017 Capital Rule, one of our 
objectives was to ensure the System's capital requirements are 
comparable to the Basel III framework and the standardized approach 
under the U.S. Rule, taking into consideration the cooperative 
structure and the organization of the System.\73\ Accordingly, while 
most requirements of our rule are similar or identical to requirements 
in the U.S. Rule, the cooperative structure and the organization of 
System institutions necessitated modification of other requirements. A 
piecemeal comparison of various elements of the two rules will not 
yield an accurate appraisal of the regulatory outcome of our 
requirements as compared to the U.S. Rule.
---------------------------------------------------------------------------

    \73\ See objectives in 81 FR 49720 (July 28, 2016).
---------------------------------------------------------------------------

    As the ABA points out, when restrictions on stock redemptions are 
considered in isolation of other rule requirements, commercial banks 
are subject to more restrictions than System institutions. For example, 
to retire stock, national banks must obtain the approval of 
shareholders owning two thirds of the shares in each affected class, as 
well as prior approval from the OCC.\74\ By contrast, System 
institutions may redeem common cooperative equities without obtaining 
FCA or shareholder prior approval, provided certain conditions are 
met.\75\ We acknowledged and discussed this difference in the preamble 
to the 2017 Capital Rule.\76\ However, the requirements for stock 
redemptions should not be evaluated in isolation of the remaining 
restrictions on distributions in FCA's capital rules.
---------------------------------------------------------------------------

    \74\ 12 U.S.C. 59.
    \75\ Under Sec.  628.20(f)(5), institutions may retire common 
cooperative equities included in CET1 capital a minimum of 7 years 
after the issuance date, and they may retire common cooperative 
equities included in tier 2 capital a minimum of 5 years after the 
issuance date. In the case of common cooperative equities included 
in CET1, after such retirements the dollar amount of CET1 capital 
outstanding must equal or exceed the dollar amount outstanding one 
year earlier. Under Sec.  628.20(b)(1)(xiv)(B), statutory minimum 
borrower stock may be retired without a minimum period outstanding 
after issuance and without the prior approval of FCA.
    \76\ See 81 FR 49720, 49731 (July 28, 2016).
---------------------------------------------------------------------------

    First, FCA's Safe Harbor for stock redemptions applies only to 
common cooperative equities; all other capital instruments including 
preferred stock and subordinated debt cannot be redeemed or retired 
prior to their maturity without express prior approval from the FCA 
Board.\77\ Second, the most flexible treatment of stock redemptions 
under FCA's existing capital rules, which is the focus of the ABA's 
comments, is applicable only to minimum statutory borrower stock.\78\ 
This capital element comprises less than 1 percent of the System's 
total capital base.\79\ All other common cooperative equities included 
in regulatory capital are subject to further restrictions including 
minimum holding periods before they can be redeemed without obtaining 
prior approval from FCA.\80\ A third consideration is that a 
significant portion of allocated equities in the System has been 
designated as unallocated retained earnings equivalents,\81\ a type of 
common cooperative equity that cannot be redeemed without obtaining 
prior approval from the FCA Board.\82\
---------------------------------------------------------------------------

    \77\ See Sec.  628.20(c)(1)(vi) and (d)(1)(X).
    \78\ Statutory minimum borrower stock is stock acquired by 
System borrowers to satisfy requirements under Section 4.3A of the 
Act. It is equal to the lesser of $1,000 or 2 percent of the loan.
    \79\ As of June 30, 2021, System entities reported combined 
total regulatory capital of $65.8 billion, of which $0.39 billion or 
0.6 percent was comprised of statutory minimum borrower stock that 
is already eligible to be redeemed without a minimum holding period 
under existing regulatory requirements. This rulemaking does not 
change the requirements governing redemption of this stock.
    \80\ See Sec.  628.20(f)(5).
    \81\ As defined in Sec.  628.2, unallocated retained earnings 
(URE) equivalents include nonqualified allocated equities designated 
as URE equivalents at issuance that a System institution undertakes 
not to revolve except upon dissolution or liquidation. Under new 
Sec.  628.21, System institutions are required to obtain prior FCA 
approval before re-designating URE equivalents as equities that the 
institution has discretion to redeem.
    \82\ As of March 31, 2021, System entities reported a combined 
total regulatory capital of $65.8 billion, of which $19.2 billion 
(29 percent) was comprised of allocated common cooperative equities. 
Of the $19.1 billion in allocated common cooperative equities, $11.9 
billion (62 percent) were designated as unallocated retained 
earnings equivalents.
---------------------------------------------------------------------------

    Finally and most importantly, as previously discussed in the 
preamble to the 2017 Capital Rule, the redemptions we allow must be 
considered in the context of our overall limitations on capital 
distributions.\83\ Under the provisions of FCA's Safe Harbor Deemed 
Prior Approval,\84\ all capital distributions by a System institution, 
including redemptions of common cooperative equities, dividends, and 
cash patronage, are limited to no more than the year-over-year dollar 
increase in CET1 capital for any given 12-month period. All other 
factors held constant, this in effect limits System institutions to 
distributing no more than the current year's net income. By contrast, 
national banks have statutory authority to distribute cash dividends in 
amounts up to current year's net income plus the retained net income 
for the two previous years.\85\ As we noted in the preamble to the 2017 
Capital Rule, we believe that our Safe Harbor for equities is 
appropriately comparable to Basel III and the U.S. Rule because the 
Safe Harbor's broader application to total cash dividend payments, cash 
patronage payments, and equity redemptions or revolvements is tempered 
by an overall limit that is more restrictive than commercial banks' 
safe harbor to pay cash dividends.\86\
---------------------------------------------------------------------------

    \83\ See 81 FR 49720, 49731 (July 28, 2016).
    \84\ Sec.  628.20(f)(5).
    \85\ 12 U.S.C. 60.
    \86\ See 81 FR 49720, 49731 (July 28, 2016).
---------------------------------------------------------------------------

IV. Abbreviations

BCBS Basel Committee on Banking Supervision
CFR Code of Federal Regulations
CFTC Commodity Futures Trading Commission
EMNA Eligible Master Netting Agreement
FCA Farm Credit Administration
FDIC Federal Deposit Insurance Corporation
FDI Act Federal Deposit Insurance Corporation Improvement Act of 
1991
FFIEC Federal Financial Institutions Examination Council
FR Federal Register
FRB Board of Governors of the Federal Reserve System
GAAP Generally Accepted Accounting Principles (U.S.)
GSE Government-Sponsored Enterprise
GSIB Global Systemically Important Bank
OCC Office of the Comptroller of the Currency
QFC Qualified Financial Contract
QMNA Qualified Master Netting Agreement
SEC Securities and Exchange Commission
SFA Supervisory Formula Approach
SRWA Simple Risk-Weight Approach
SSFA Simplified Supervisory Formula Approach
UBE Unincorporated Business Entity
URE Unallocated Retained Earnings
UREE Unallocated Retained Earnings Equivalents
U.S.C. United States Code

[[Page 54356]]

V. Regulatory Analysis

A. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies that this final rule will not 
have a significant economic impact on a substantial number of small 
entities. Each of the banks in the System, considered together with its 
affiliated associations, has assets and annual income in excess of the 
amounts that would qualify them as small entities. Therefore, System 
institutions are not ``small entities'' as defined in the Regulatory 
Flexibility Act.

B. Congressional Review Act

    Under the provisions of the Congressional Review Act (5 U.S.C. 801 
et seq.), the Office of Management and Budget's Office of Information 
and Regulatory Affairs has determined that this final rule is not a 
``major rule'' as the term is defined at 5 U.S.C. 804(2).

List of Subjects

12 CFR Part 614

    Agriculture, Banks, Banking, Foreign trade, Reporting and 
recordkeeping requirements, 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 628

    Accounting, Agriculture, Banks, Banking, Capital, Government 
securities, Investments, Rural areas.

    For the reasons stated in the preamble, the Farm Credit 
Administration amends parts 614, 615, 620, and 628 of chapter VI, title 
12 of the Code of Federal Regulations as follows:

PART 614--LOAN POLICIES AND OPERATIONS

0
1. The authority citation for part 614 is revised to read as follows:

    Authority:  Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 
2.3, 2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 
3.20, 3.28, 4.12, 4.12A, 4.13B, 4.14, 4.14A, 4.14D, 4.14E, 4.18, 
4.18A, 4.19, 4.25, 4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 
7.0, 7.2, 7.6, 7.8, 7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 
U.S.C. 2011, 2013, 2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074, 
2075, 2091, 2093, 2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 
2141, 2149, 2183, 2184, 2201, 2202, 2202a, 2202d, 2202e, 2206, 
2206a, 2207, 2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252, 
2279a, 2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5); 
12 U.S.C. 2121 note; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.


0
2. Amend Sec.  614.4351 by revising paragraph (a) to read as follows:


Sec.  614.4351   Computation of lending and leasing limit base.

    (a) Lending and leasing limit base. An institution's lending and 
leasing limit base is composed of the total capital (tier 1 and tier 2) 
of the institution, as defined in Sec.  628.2 of this chapter, with 
adjustments applicable to the institution provided for in Sec.  628.22 
of this chapter, and with the following further adjustments:
    (1) [Reserved]
    (2) Eligible third-party capital that is required to be excluded 
from total capital under Sec.  628.23 of this chapter may be included 
in the lending limit base.
* * * * *

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, 
AND FUNDING OPERATIONS

0
3. The authority citation for part 615 is revised 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, 8.0, 8.3, 8.4, 8.6, 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, 
2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, 2279aa-10, 2279aa-
12); 12 U.S.C. 2154 note; 15 U.S.C. 78o-7 note.


0
4. Revise Sec.  615.5200 to read as follows:


Sec.  615.5200   Capital planning.

    (a) The Board of Directors of each System institution shall 
determine the amount of regulatory capital needed to assure the System 
institution's continued financial viability and to provide for growth 
necessary to meet the needs of its borrowers. The minimum capital 
standards specified in this part and part 628 of this chapter are not 
meant to be adopted as the optimal capital level in the System 
institution's capital adequacy plan. Rather, the standards are intended 
to serve as minimum levels of capital that each System institution must 
maintain to protect against the credit and other general risks inherent 
in its operations.
    (b) Each Board of Directors shall establish, adopt, and maintain a 
formal written capital adequacy plan as a part of the financial plan 
required by Sec.  618.8440 of this chapter. The plan shall include the 
capital targets that are necessary to achieve the System institution's 
capital adequacy goals as well as the minimum permanent capital, common 
equity tier 1 (CET1) capital, tier 1 capital, total capital, and tier 1 
leverage ratios (including the unallocated retained earnings (URE) and 
URE equivalents minimum) standards. The plan shall expressly 
acknowledge the continuing and binding effect of all board resolutions 
adopted in accordance with Sec.  628.20(b)(1)(xiv), (c)(1)(xiv), and 
(d)(1)(xi) of this chapter, and with Sec.  628.21 of this chapter. The 
plan shall address any projected dividend payments, patronage payments, 
equity retirements, or other action that may decrease the System 
institution's capital or the components thereof for which minimum 
amounts are required by this part and part 628 of this chapter. The 
plan shall set forth the circumstances and minimum timeframes in which 
equities may be redeemed or revolved consistent with the System 
institution's applicable bylaws or board of directors' resolutions.
    (c) In addition to factors that must be considered in meeting the 
minimum standards, the board of directors shall also consider at least 
the following factors in developing the capital adequacy plan:
    (1) Capability of management and the board of directors (the 
assessment of which may be a part of the assessments required in 
paragraphs (b)(2)(ii) and (b)(7)(i) of Sec.  618.8440 of this chapter);
    (2) Quality of operating policies, procedures, and internal 
controls;
    (3) Quality and quantity of earnings;
    (4) Asset quality and the adequacy of the allowance for losses to 
absorb potential loss within the loan and lease portfolios;
    (5) Sufficiency of liquid funds;
    (6) Needs of a System institution's customer base; and
    (7) Any other risk-oriented activities, such as funding and 
interest rate risks, potential obligations under joint and several 
liability, contingent and off-balance-sheet liabilities or other 
conditions warranting additional capital.

0
5. Amend Sec.  615.5201 by revising the definition of ``System 
institution'' to read as follows:


Sec.  615.5201   Definitions.

* * * * *
    System institution means a System bank, an association of the Farm 
Credit System, and their successors, and any other institution 
chartered by the Farm Credit Administration (FCA) that the FCA 
determines should be considered a

[[Page 54357]]

System institution for the purposes of this subpart.
* * * * *

0
6. Amend Sec.  615.5220 by revising paragraph (a)(6) to read as 
follows:


Sec.  615.5220   Capitalization bylaws.

    (a) * * *
    (6) The manner in which equities will be retired, including a 
provision stating that equities other than those protected under 
section 4.9A of the Act are retireable at the sole discretion of the 
board, provided minimum capital adequacy standards established by the 
Farm Credit Administration, and the capital requirements established by 
the board of directors of the System institution, are met;
* * * * *

PART 620--DISCLOSURE TO SHAREHOLDERS

0
7. The authority citation for part 620 continues to read as follows:

    Authority: Secs. 4.3, 4.3A, 4.19, 5.9, 5.17, 5.19 of the Farm 
Credit Act (12 U.S.C. 2154, 2154a, 2207, 2243, 2252, 2254); sec. 424 
of Pub. L. 100-233, 101 Stat. 1568, 1656; sec. 514 of Pub. L. 102-
552, 106 Stat. 4102.


0
8. Amend Sec.  620.3 by adding a sentence at the ends of paragraphs (a) 
and (c)(3) to read as follows:


Sec.  620.3   Accuracy of reports and assessment of internal control 
over financial reporting.

    (a) * * * Unless otherwise determined by the Farm Credit 
Administration (FCA), the appropriate use of the limited disclosure 
authorized by Sec.  628.62(c) of this chapter does not create an 
incomplete disclosure.
* * * * *
    (c) * * *
    (3) * * * If the report contains the limited disclosure authorized 
by Sec.  628.62(c) of this chapter, the statement may be modified to 
explain that the completeness of the report was determined in 
consideration of Sec.  628.62(c).
* * * * *

0
9. Amend Sec.  620.5 by adding paragraph (f)(3)(v) and revising 
paragraph (f)(4) to read as follows:


Sec.  620.5   Contents of the annual report to shareholders.

* * * * *
    (f) * * *
    (3) * * *
    (v) Tier 1 leverage ratio.
    (4) For all banks (on a bank only basis) and for all associations. 
The following ratios shall be disclosed in comparative columnar form in 
each annual report through fiscal year end 2021, only as long as these 
ratios are part of the previous 5 fiscal years of financial data 
required under paragraphs (f)(2) and (3) of this section:
    (i) Core surplus ratio.
    (ii) Total surplus ratio.
    (iii) For banks only, net collateral ratio.
* * * * *

PART 628--CAPITAL ADEQUACY OF SYSTEM INSTITUTIONS

0
10. The authority citation for part 628 is revised 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, 
8.0, 8.3, 8.4, 8.6, 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, 
2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, 2279aa-10, 2279aa-
12); 12 U.S.C. 2154 note; 15 U.S.C. 78o-7 note.


0
11. Amend Sec.  628.2 by:
0
a. Revising the definition of ``Collateral agreement'';
0
b. Adding in alphabetical order a definition for ``Common cooperative 
equity issuance date''; and
0
c. Revising the definitions of ``Eligible margin loan'', ``Qualifying 
master netting agreement'', ``Repo-style transaction'', and ``System 
institution''.
    The revisions and addition read as follows:


Sec.  628.2   Definitions.

* * * * *
    Collateral agreement means a legal contract that specifies the time 
when, and circumstances under which, a counterparty is required to 
pledge collateral to a System institution for a single financial 
contract or for all financial contracts in a netting set and confers 
upon the System institution a perfected, first-priority security 
interest (notwithstanding the prior security interest of any custodial 
agent), or the legal equivalent thereof, in the collateral posted by 
the counterparty under the agreement. This security interest must 
provide the System institution with a right to close-out the financial 
positions and liquidate the collateral upon an event of default of, or 
failure to perform by, the counterparty under the collateral agreement. 
A contract would not satisfy this requirement if the System 
institution's exercise of rights under the agreement may be stayed or 
avoided:
    (1) Under applicable law in the relevant jurisdictions, other than:
    (i) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to Government-sponsored 
enterprises (GSEs), or laws of foreign jurisdictions that are 
substantially similar to the U.S. laws referenced in this paragraph 
(1)(i) in order to facilitate the orderly resolution of the defaulting 
counterparty;
    (ii) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (1)(i) of this 
definition; or
    (2) Other than to the extent necessary for the counterparty to 
comply with the requirements of part 47, subpart I of part 252, or part 
382 of this title, as applicable.
* * * * *
    Common cooperative equity issuance date means the date in which the 
holding period for purchased stock (excluding statutory minimum 
borrower stock and third-party stock) and allocated equities start:
    (1) For allocated equities, the calendar quarter-ending in which:
    (i) The System institution's Board of Directors has passed a 
resolution declaring a patronage refund; and
    (ii) The System institution has completed the applicable accounting 
treatment by segregating the new allocated equities from its 
unallocated retained earnings.
    (2) For purchased stock (excluding statutory minimum borrower stock 
and third-party stock), the calendar quarter-ending in which the stock 
is acquired by the holder and recognized on the institution's balance 
sheet.
* * * * *
    Eligible margin loan means:
    (1) An extension of credit where:
    (i) The extension of credit is collateralized exclusively by liquid 
and readily marketable debt or equity securities, or gold;
    (ii) The collateral is marked-to-fair value daily, and the 
transaction is subject to daily margin maintenance requirements; and
    (iii) The extension of credit is conducted under an agreement that 
provides the System institution the right to accelerate and terminate 
the extension of credit and to liquidate or set-off collateral promptly 
upon an event of default, including upon an event of receivership, 
insolvency, liquidation, conservatorship, or similar proceeding, of the 
counterparty, provided that, in any such case:
    (A) Any exercise of rights under the agreement will not be stayed 
or avoided under applicable law in the relevant jurisdictions, other 
than:
    (1) In receivership, conservatorship, or resolution under the 
Federal Deposit

[[Page 54358]]

Insurance Act, Title II of the Dodd-Frank Act, or under any similar 
insolvency law applicable to GSEs,\2\ or laws of foreign jurisdictions 
that are substantially similar to the U.S. laws referenced in this 
paragraph (1)(iii)(A)(1) in order to facilitate the orderly resolution 
of the defaulting counterparty; or
---------------------------------------------------------------------------

    \2\ This requirement is met where all transactions under the 
agreement are (i) executed under U.S. law and (ii) constitute 
``securities contracts'' under section 555 of the Bankruptcy Code 
(11 U.S.C. 555), qualified financial contracts under section 
11(e)(8) of the Federal Deposit Insurance Act, or netting contracts 
between or among financial institutions under sections 401-407 of 
the Federal Deposit Insurance Corporation Improvement Act or the 
Federal Reserve Board's Regulation EE (12 CFR part 231).
---------------------------------------------------------------------------

    (2) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (1)(iii)(A)(1) of 
this definition; and
    (B) The agreement may limit the right to accelerate, terminate, and 
close-out on a net basis all transactions under the agreement and to 
liquidate or set-off collateral promptly upon an event of default of 
the counterparty to the extent necessary for the counterparty to comply 
with the requirements of part 47, subpart I of part 252, or part 382 of 
this title, as applicable.
    (2) In order to recognize an exposure as an eligible margin loan 
for purposes of this subpart, a System institution must comply with the 
requirements of Sec.  628.3(b) with respect to that exposure.
* * * * *
    Qualifying master netting agreement means a written, legally 
enforceable agreement provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default following any stay permitted by paragraph (2) of this 
definition, including upon an event of receivership, conservatorship, 
insolvency, liquidation, or similar proceeding, of the counterparty;
    (2) The agreement provides the System institution the right to 
accelerate, terminate, and close-out on a net basis all transactions 
under the agreement and to liquidate or set-off collateral promptly 
upon an event of default, including upon an event of receivership, 
conservatorship, insolvency, liquidation, or similar proceeding, of the 
counterparty, provided that, in any such case:
    (i) Any exercise of rights under the agreement will not be stayed 
or avoided under applicable law in the relevant jurisdictions, other 
than:
    (A) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar to the U.S. laws 
referenced in this paragraph (2)(i)(A) in order to facilitate the 
orderly resolution of the defaulting counterparty; or
    (B) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this 
definition; and
    (ii) The agreement may limit the right to accelerate, terminate, 
and close-out on a net basis all transactions under the agreement and 
to liquidate or set-off collateral promptly upon an event of default of 
the counterparty to the extent necessary for the counterparty to comply 
with the requirements of part 47, subpart I of part 252, or part 382 of 
this title, as applicable;
    (3) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make a lower 
payment than it otherwise would make under the agreement, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate of the defaulter is a net creditor under the 
agreement); and
    (4) In order to recognize an agreement as a qualifying master 
netting agreement for purposes of this subpart, a System institution 
must comply with the requirements of Sec.  628.3(d) with respect to 
that agreement.
    Repo-style transaction means a repurchase or reverse repurchase 
transaction, or a securities borrowing or securities lending 
transaction, including a transaction in which the System institution 
acts as agent for a customer and indemnifies the customer against loss, 
provided that:
    (1) The transaction is based solely on liquid and readily 
marketable securities, cash, or gold;
    (2) The transaction is marked-to-fair value daily and subject to 
daily margin maintenance requirements;
    (3)(i) The transaction is a ``securities contract'' or ``repurchase 
agreement'' under section 555 or 559, respectively, of the Bankruptcy 
Code (11 U.S.C. 555 or 559), a qualified financial contract under 
section 11(e)(8) of the Federal Deposit Insurance Act, or a netting 
contract between or among financial institutions under sections 401-407 
of the Federal Deposit Insurance Corporation Improvement Act or the 
Federal Reserve's Regulation EE (12 CFR part 231); or
    (ii) If the transaction does not meet the criteria set forth in 
paragraph (3)(i) of this definition, then either:
    (A) The transaction is executed under an agreement that provides 
the System institution the right to accelerate, terminate, and close-
out the transaction on a net basis and to liquidate or set-off 
collateral promptly upon an event of default, including upon an event 
of receivership, insolvency, liquidation, or similar proceeding, of the 
counterparty, provided that, in any such case:
    (1) Any exercise of rights under the agreement will not be stayed 
or avoided under applicable law in the relevant jurisdictions, other 
than:
    (i) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar to the U.S. laws 
referenced in this paragraph (3)(ii)(A)(1)(i) in order to facilitate 
the orderly resolution of the defaulting counterparty;
    (ii) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (3)(ii)(A)(1)(i) 
of this definition; and
    (2) The agreement may limit the right to accelerate, terminate, and 
close-out on a net basis all transactions under the agreement and to 
liquidate or set-off collateral promptly upon an event of default of 
the counterparty to the extent necessary for the counterparty to comply 
with the requirements of part 47, subpart I of part 252, or part 382 of 
this title, as applicable; or
    (B) The transaction is:
    (1) Either overnight or unconditionally cancelable at any time by 
the System institution; and
    (2) Executed under an agreement that provides the System 
institution the right to accelerate, terminate, and close-out the 
transaction on a net basis and to liquidate or set-off collateral 
promptly upon an event of counterparty default; and
    (4) In order to recognize an exposure as a repo-style transaction 
for purposes of this subpart, a System institution must comply with the 
requirements of Sec.  628.3(e) with respect to that exposure.
* * * * *
    System institution means a System bank, an association of the Farm 
Credit System, and their successors, and any other institution 
chartered by the Farm Credit Administration (FCA) that the FCA 
determines should be considered a System institution for the purposes 
of this subpart.
* * * * *

0
12. Amend Sec.  628.10 by revising paragraph (c)(4) to read as follows:


Sec.  628.10   Minimum capital requirements.

* * * * *

[[Page 54359]]

    (c) * * *
    (4) Tier 1 leverage ratio. (i) A System institution's leverage 
ratio is the ratio of the institution's tier 1 capital to the 
institution's average total consolidated assets as reported on the 
institution's Call Report net of deductions and adjustments from tier 1 
capital under Sec. Sec.  628.22(a), (b), and (c) and 628.23.
    (ii) To calculate the measure of URE and URE equivalents described 
in paragraph (b)(4) of this section, a System institution must adjust 
URE and URE equivalents to reflect all the deductions and adjustments 
required under Sec.  628.22(a), (b), and (c), and must use the 
denominator of the tier 1 leverage ratio.
* * * * *

0
13. Amend Sec.  628.20 by revising paragraphs (b)(1)(i), (ii), (x), and 
(xiv), (c)(1)(xiv), (d)(1)(i), (d)(1)(viii)(C), (d)(1)(xi), and 
(f)(5)(ii) to read as follows:


Sec.  628.20   Capital components and eligibility criteria for tier 1 
and tier 2 capital instruments.

* * * * *
    (b) * * *
    (1) * * *
    (i) The instrument is paid-in, issued directly by the System 
institution, and represents the most subordinated claim in a 
receivership, insolvency, liquidation, or similar proceeding of the 
System institution;
    (ii) The holder of the instrument is entitled to a claim on the 
residual assets of the System institution after all senior claims have 
been satisfied in a receivership, insolvency, liquidation, or similar 
proceeding;
* * * * *
    (x) The System institution, or an entity that the System 
institution controls, did not purchase or directly or indirectly fund 
the purchase of the instrument, except that where there is an 
obligation for a member of the institution to hold an instrument in 
order to receive a loan or service from the System institution, an 
amount of that loan equal to no more than $1,000 of the borrower stock 
requirement under section 4.3A of the Act will not be considered as a 
direct or indirect funding where:
    (A) The purpose of the loan is not the purchase of capital 
instruments of the System institution providing the loan; and
    (B) The purchase or acquisition of one or more member equities of 
the institution is necessary in order for the beneficiary of the loan 
to become a member of the System institution;
* * * * *
    (xiv) The System institution's capitalization bylaws, or a 
resolution adopted by its board of directors under Sec.  628.21, 
provides that the institution:
    (A) Establishes a minimum redemption or revolvement period of 7 
years for equities included in CET1; and
    (B) Shall not redeem, revolve, cancel, or remove any equities 
included in CET1 without prior approval of the FCA under paragraph (f) 
of this section, except that the statutory borrower stock described in 
paragraph (b)(1)(x) of this section, not to exceed $1,000, may be 
redeemed without a minimum period outstanding after issuance and 
without the prior approval of the FCA, as long as after the redemption, 
the System institution continues to comply with all minimum regulatory 
capital requirements.
* * * * *
    (c) * * *
    (1) * * *
    (xiv) The System institution's capitalization bylaws, or a 
resolution adopted by its board of directors under Sec.  628.21, 
provides that the institution:
    (A) Establishes a minimum redemption or no-call period of 5 years 
for equities included in additional tier 1; and
    (B) Shall not redeem, revolve, cancel, or remove any equities 
included in additional tier 1 capital without prior approval of the FCA 
under paragraph (f) of this section.
* * * * *
    (d) * * *
    (1) * * *
    (i) The instrument is issued and paid-in;
* * * * *
    (viii) * * *
    (C) The capital instruments are in excess of $1,000.
* * * * *
    (xi) The System institution's capitalization bylaws, or a 
resolution adopted by its board of directors under Sec.  628.21, 
provides that the institution:
    (A) Establishes a minimum call, redemption or revolvement period of 
5 years for equities included in tier 2 capital; and
    (B) Shall not call, redeem, revolve, cancel, or remove any equities 
included in tier 2 capital without prior approval of the FCA under 
paragraph (f) of this section.
* * * * *
    (f) * * *
    (5) * * *
    (ii) After such cash payments have been declared and defined by 
resolution of the board, the dollar amount of the System institution's 
CET1 capital at quarter-end equals or exceeds the dollar amount of CET1 
capital on the same quarter-end in the previous calendar year; and
* * * * *

0
14. Add Sec.  628.21 to read as follows:


Sec.  628.21   Capital bylaw or board resolution to include equities in 
tier 1 and tier 2 capital.

    In order to include otherwise eligible purchased and allocated 
equities in tier 1 capital and tier 2 capital, the System institution 
must adopt a capitalization bylaw, or its board of directors must adopt 
a binding resolution, which resolution must be acknowledged by the 
board on an annual basis in the capital adequacy plan described in 
Sec.  615.5200, in which the institution undertakes the following, as 
applicable:
    (a) The institution shall obtain prior FCA approval under Sec.  
628.20(f) before:
    (1) Redeeming or revolving the equities included in common equity 
tier 1 (CET1) capital;
    (2) Redeeming or calling the equities included in additional tier 1 
capital; and
    (3) Redeeming, revolving, or calling instruments included in tier 2 
capital other than limited life preferred stock or subordinated debt on 
the maturity date.
    (b) The equities shall have a minimum redemption or revolvement 
period as follows:
    (1) 7 years for equities included in CET1 capital, except that the 
statutory borrower stock described in Sec.  628.20(b)(1)(x) may be 
redeemed without a minimum holding period and that equities designated 
as unallocated retained earnings (URE) equivalents cannot be revolved 
without submitting a written request to the FCA for prior approval;
    (2) a minimum no-call, repurchase, or redemption period of 5 years 
for additional tier 1 capital; and
    (3) a minimum no-call, repurchase, redemption, or revolvement 
period of 5 years for tier 2 capital.
    (c) The institution shall submit to FCA a written request for prior 
approval before:
    (1) Redesignating URE equivalents as equities that the institution 
may exercise its discretion to redeem other than upon dissolution or 
liquidation;
    (2) Removing equities or other instruments from CET1, additional 
tier 1, or tier 2 capital other than through repurchase, cancellation, 
redemption or revolvement; and
    (3) Redesignating equities included in one component of regulatory 
capital (CET1 capital, additional tier 1 capital, or tier 2 capital) 
for inclusion in another component of regulatory capital.
    (d) The institution shall not exercise its discretion to revolve 
URE

[[Page 54360]]

equivalents except upon dissolution or liquidation and shall not offset 
URE equivalents against a loan in default except as required under 
final order of a court of competent jurisdiction or if required under 
Sec.  615.5290 in connection with a restructuring under part 617 of 
this chapter.
    (e) The minimum redemption and revolvement period (holding period) 
for purchased and allocated equities starts on the common cooperative 
equity issuance date, as defined in Sec.  628.2.

0
15. Amend Sec.  628.22 by revising paragraph (a)(6) and adding 
paragraph (b) to read as follows:


Sec.  628.22   Regulatory capital adjustments and deductions.

* * * * *
    (a) * * *
    (6) The System institution's allocated equity investment in another 
System institution or service corporation; and
* * * * *
    (b) Regulatory adjustments to CET1 capital. (1) Any accrual of a 
patronage or dividend payable or receivable recognized in the financial 
statements prior to a related board declaration or resolution must be 
reversed to or from unallocated retained earnings for purposes of 
calculating CET1 capital.
    (2) [Reserved]
* * * * *

0
16. Amend Sec.  628.32 by revising paragraph (l)(1) to read as follows:


Sec.  628.32   General risk weights.

* * * * *
    (l) * * *
    (1) A System institution must assign a 0-percent risk weight to 
cash owned and held in all offices of the System institution or in 
transit; to gold bullion held in the System institution's own vaults or 
held in a depository institution's vaults on an allocated basis, to the 
extent the gold bullion assets are offset by gold bullion liabilities; 
and to exposures that arise from the settlement of cash transactions 
(such as equities, fixed income, spot foreign exchange (FX), and spot 
commodities) with a central counterparty where there is no assumption 
of ongoing counterparty credit risk by the central counterparty after 
settlement of the trade.
* * * * *

0
17. Amend Sec.  628.43 by revising paragraphs (d)(1) and (2) to read as 
follows:


Sec.  628.43   Simplified supervisory formula approach (SSFA) and the 
gross-up approach.

* * * * *
    (d) * * *
    (1) The System institution must define the following parameters:

K<INF>A</INF> = (1-W) x K<INF>G</INF> + (0.5 x W)

    (2) Then the System institution must calculate K<INF>SSFA</INF> 
according to the following equation:
[GRAPHIC] [TIFF OMITTED] TR01OC21.002

Where:
[GRAPHIC] [TIFF OMITTED] TR01OC21.003

* * * * *

0
18. Amend Sec.  628.52 by revising paragraph (c)(2)(ii) to read as 
follows:


Sec.  628.52   Simple risk-weight approach (SRWA).

* * * * *
    (c) * * *
    (2) * * *
    (ii) Under the variability-reduction method of measuring 
effectiveness:
[GRAPHIC] [TIFF OMITTED] TR01OC21.004

Where:

Xt = At-Bt;
At = the value at time t of one exposure in a hedge pair; and
Bt = the value at time t of the other exposure in a hedge pair.
* * * * *

0
19. Amend Sec.  628.63 by:
0
a. Removing and reserving paragraph (b)(3);
0
b. Revising paragraph (b)(4).
    The revision reads as follows:


Sec.  628.63   Disclosures.

* * * * *
    (b) * * *
    (4) A reconciliation of regulatory capital elements using month-end 
balances as they relate to its balance sheet in any applicable audited 
consolidated financial statements. The reconciliation must include a 
statement that compliance with the regulatory capital requirements 
outlined in subpart B of this part is determined using average daily 
balances for the most recent 3 months.
* * * * *


[[Page 54361]]


    Dated: September 16, 2021.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2021-20433 Filed 9-30-21; 8:45 am]
BILLING CODE P


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>