[Federal Register: April 16, 2003 (Volume 68, Number 73)]
[Rules and Regulations]
[Page 18532-18535]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16ap03-2]
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FARM CREDIT ADMINISTRATION
12 CFR Part 615
RIN 3052-AC05
Funding and Fiscal Affairs, Loan Policies and Operations, and
Funding Operations; Capital Adequacy
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA or agency) amends its
capital adequacy regulations to add a definition of total liabilities
for the net collateral ratio calculation, limit the amount of term
preferred stock that may count as total surplus, clarify the
circumstances in which we may waive disclosure requirements for an
issuance of equities by a Farm Credit System (FCS, Farm Credit or
System) institution, and make several nonsubstantive technical changes.
These amendments update, modify, and clarify certain capital
requirements.
EFFECTIVE DATE: This regulation will become effective 30 days after
publication in the Federal Register during which either or both houses
of
[[Page 18533]]
Congress are in session. We will publish a notice of the effective date
in the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Alan Markowitz, Senior Policy Analyst, Office of Policy and Analysis,
Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4479; TTY
(703) 883-4434;
or
Rebecca S. Orlich, Senior Attorney, Office of General Counsel, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703)
883-2020.
SUPPLEMENTARY INFORMATION:
I. Objectives
The objectives of our rule are to:
[sbull] Limit the effect of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), on the net collateral ratio;
[sbull] Ensure that Farm Credit institutions do not overly rely on
term preferred stock to meet regulatory capital requirements;
[sbull] Explain how the FCA may include other debt or equity in the
definition of permanent capital;
[sbull] Clarify the requirements for the FCA to consider waiving
disclosure requirements for issuances of stock to more than a single
sophisticated investor; and
[sbull] Make several nonsubstantive technical changes to our
capital regulations.
II. Introduction
The FCA proposed amendments to the capital adequacy regulations on
October 22, 2002. (See 67 FR 64833.) We now adopt the final amendments
without changes from the proposed rule. The amendments will update,
modify, and clarify certain capital requirements, as follows:
[sbull] Revisions to the net collateral ratio calculation will
limit the effect of new accounting requirements for derivatives. This
revision is in response to a petition we received in May 2001, from two
System banks.
[sbull] There will be a limit on the amount of term preferred stock
that can be counted in total surplus.
[sbull] Term preferred stock will be excluded from liabilities in
the calculation of the net collateral ratio for System banks to the
extent that the stock is counted as total surplus.
[sbull] We also clarify certain requirements and make additional
technical corrections.
The amendments are more fully described in the section-by-section
analysis below.
III. Comments
We received one comment letter on the proposed rule. The comment
was submitted on behalf of two Farm Credit banks. The banks commended
the agency for developing the proposed rule, stated their agreement
with the objectives set out in the proposed rule, and expressed support
for the rule ``in its entirety.''
IV. Section-by-Section Analysis
Section 615.5201(e)--Definition of Direct Lender Institution
We amend Sec. 615.5201(e) by removing the phrase ``loan of lease''
and adding, in its place, the phrase ``loan or lease'' to correct a
typographical error.
Section 615.5201(l)--Definition of Permanent Capital
We add a new paragraph (8) to the definition of permanent capital
in Sec. 615.5201(l). This amendment reflects a statutory change to
section 4.3A of the Farm Credit Act of 1971, as amended, by the Farm
Credit Banks and Associations Safety and Soundness Act of 1992 (1992
Act). The 1992 Act added section 4.3A(a)(1)(E), which includes in
permanent capital any debt or equity instrument or other account that
the FCA determines appropriate to be considered as permanent capital.
The amendment states that we may include a debt or equity instrument or
other account in permanent capital in whole or in part, and on a
permanent or temporary basis. The language of this amendment is similar
to language in existing Sec. 615.5301(b)(1)(iv) and (i)(5), which
states that we may include additional items in core or total surplus
when we deem their inclusion to be appropriate. The inclusion of
additional items gives institutions more flexibility in meeting their
capital requirements.
Section 615.5250(c)(5)--Waiver of Disclosure Requirements
We amend Sec. 615.5250(c)(5) to clarify the circumstances in which
we may waive any or all of the disclosures we require institutions to
make to potential investors in stock issuances. The existing waiver
language was interpreted by some institutions to apply only when a
single investor acquires all the equities of an entire class issued by
an institution. Our revision clarifies that we may waive disclosure
requirements when the following conditions are met: (1) Equities are
sold only to sophisticated investors; (2) equities are sold in blocks
of $100,000 or more; and (3) purchasers of equities agree that any
subsequent sale or transfer must be in blocks of $100,000 or more. Any
subsequent sale or transfer of equities that is less than $100,000 must
receive our prior written approval.
We also correct the reference to paragraph (b) in existing
paragraph (c)(5). The reference should have been to the disclosure
requirements in paragraph (c)(1).
Section 615.5301(i)--Definition of Total Surplus
We add a new paragraph (4) to the definition of total surplus in
Sec. 615.5301(i) to limit the amount of term preferred stock that may
be included in total surplus to 25 percent of permanent capital.
Conforming changes are made to paragraph (3).
Our existing regulations have included term preferred stock in
total surplus without limit. The final rule contains a limitation equal
to 25 percent of permanent capital, to ensure that System institutions
do not overly rely on this type of capital to meet regulatory capital
requirements. This limitation is generally comparable to the treatment
of intermediate-term preferred stock in the regulatory capital
requirements for commercial banks. Commercial banks' Federal financial
regulators exclude term preferred stock from Tier 1 capital and limit
the amount of intermediate-term preferred stock that can count as Tier
2 capital to an amount equal to 50 percent of Tier 1 capital.\1\ In
addition, the amount a commercial bank may count as Tier 2 capital can
be no greater than its Tier 1 capital. This means, in effect, that no
more than 25 percent of a commercial bank's minimum total regulatory
(Tier 1 + Tier 2) capital may consist of intermediate-term preferred
stock.\2\ We believe a similar limit to that imposed on commercial
banks is also appropriate for System institutions and, therefore,
impose a limitation on the total surplus ratio.
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\1\ See 12 CFR Part 325, App. A (I.A.2(d)) (Federal Deposit
Insurance Corporation); 12 CFR part 3, App. A (2(b)(4)) (Comptroller
of the Currency); and 12 CFR part 208, App. A (II.A.2(iv)) (Board of
Governors of the Federal Reserve System).
\2\ This example assumes that a commercial bank has Tier 2
capital equal in amount to its Tier 1 capital.
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We note that the limitation will not prohibit System institutions
from issuing preferred stock in excess of what may be counted as total
surplus, but such excess amounts will not qualify as total surplus. The
preferred stock will, however, be treated as permanent capital to the
extent permitted in the permanent capital calculation.
[[Page 18534]]
New Section 615.5301(j)--Definition of Total Liabilities
We add a new Sec. 615.5301(j) to define ``total liabilities'' for
the purpose of calculating the net collateral ratio. This new
definition limits the effect of the new accounting requirements for
derivatives in SFAS 133, as promulgated by the Financial Accounting
Standards Board. The net collateral ratio is a bank's net collateral,
as defined in Sec. 615.5301(c), divided by the bank's total
liabilities. Section 615.5301(j)(1) specifies that total liabilities
are valued in accordance with generally accepted accounting principles
(GAAP), with the following exclusions for the effects of SFAS 133: (1)
Adjustments to the carrying amount \3\ of any liability that is
designated as being hedged; and (2) any derivative recognized as a
liability that is designated as a hedging instrument.
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\3\ GAAP defines the carrying amount of a liability as the face
amount of a liability increased or decreased by any applicable
accrued interest payable and any applicable unamortized premium,
discount, finance charges, or issue costs.
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Prior to SFAS 133, GAAP allowed many derivative instruments to be
treated by System banks as off-balance sheet items. However, with the
adoption of SFAS 133, System banks must now recognize all derivative
instruments at their fair value as either an asset or a liability on
the balance sheet. If a derivative instrument qualifies as a designated
hedge,\4\ System banks may be required to adjust the carrying value of
certain assets or liabilities.
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\4\ Under SFAS 133, derivative instruments designated as hedges
routinely reduce an entity's exposure to changes in the fair value
of an asset or liability (i.e., fair value hedge) or changes in
expected future cash flows (i.e., cash flow hedge) attributable to a
particular risk. For Farm Credit banks, derivative instruments are
routinely used to reduce their exposure to (hedge against) changes
in interest rates or other types of market risks.
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As a result of SFAS 133, System banks that use derivatives may have
to recognize an increase in the amount of total liabilities when
calculating their net collateral ratios. These increases in total
liabilities have resulted in lower net collateral ratios than what the
banks would have had under the previous accounting requirements for
derivative instruments.
Under SFAS 133, a System bank's total liabilities will often
increase for a derivative instrument designated as hedged. This
resulting increase in the bank's liabilities from a derivative
instrument designated as a hedge has no offsetting equivalent increase
in the collateral amount used in the computation of its net collateral
ratio because of the way net collateral is defined in Sec.
615.5301(c). Thus, a derivative instrument used by a bank to hedge
against interest rate risk can often result in an unintended decline in
the bank's net collateral ratio.
We believe a bank's net collateral ratio should not be negatively
affected by derivative instruments appropriately used to hedge against
interest rate risk or other types of market risks. Appropriate use of
derivatives as hedges protects System banks against a true economic
decline in their net collateral. Accordingly, our amendment excludes
the effect of SFAS 133 on the calculation of the net collateral ratio
for derivative instruments that qualify as hedges under SFAS 133.
Conversely, we believe derivative instruments that are not
designated to hedge specific assets or liabilities do not provide
adequate protections for interest rate or other market risks.
Therefore, our definition of total liabilities includes derivative
instruments that do not qualify as designated hedges.
Section 615.5301(j)(2) also excludes from total liabilities the
amount of term preferred stock that is eligible to be counted as total
surplus in the numerator of a bank's calculation of its total surplus
ratio. In the absence of such exclusion, the existing rule could have
required certain forms of term preferred stock to be considered
liabilities. The exclusion eliminates the potential inconsistency of
treating a particular balance sheet item as a liability for net
collateral purposes but as capital for the total surplus ratio.
IV. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), the FCA hereby certifies that the 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.
List of Subjects in 12 CFR Part 615
Accounting, Agriculture, Banks, banking, Government securities,
Investments, Rural areas.
0
For the reasons stated in the preamble, we amend part 615 of chapter
VI, title 12 of the Code of Federal Regulations as follows:
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
0
1. The authority citation for part 615 continues to read as follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17,
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm
Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074,
2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b,
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4,
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of
Pub. L. 100-233, 101 Stat. 1568, 1608.
Subpart H--Capital Adequacy
0
2. Amend Sec. 615.5201 as follows:
0
a. Remove the words ``loan of lease'' in paragraph (e) and add in their
place, the words ``loan or lease''; and
0
b. Add a new paragraph (l)(8).
Sec. 615.5201 Definitions.
(1) * * *
(8) Any other debt or equity instruments or other accounts the FCA
has determined are appropriate to be considered permanent capital. The
FCA may permit one or more institutions to include all or a portion of
such instrument, entry, or account as permanent capital, permanently or
on a temporary basis, for purposes of this part.
* * * * *
Subpart I--Issuance of Equities
0
3. Amend Sec. 615.5250 by revising paragraph (c)(5) to read as
follows:
Sec. 615.5250 Disclosure requirements.
(c) * * *
(5) For a class of stock, the FCA may waive any or all of the
disclosure requirements of paragraph (c)(1) of this section when each
investor acquires at least $100,000 of the stock if the sophistication
of the purchaser warrants, provided that subsequent transfers of the
stock in amounts of less than $100,000 must receive the prior written
approval of the FCA.
* * * * *
Subpart K--Surplus and Collateral Requirements
0
4. Amend Sec. 615.5301 as follows:
0
a. Redesignate paragraphs (i)(4) through (i)(7) as paragraphs (i)(5)
through (i)(8);
0
b. Remove the reference ``Sec. 615.5201(j)(4)(iv)'' in paragraph
(i)(2)
[[Page 18535]]
and add in its place, the reference ``Sec. 615.5201(l)(4)(iv)'';
0
c. Revise paragraph (i)(3);
0
d. Add a new paragraph (i)(4); and
0
e. Add a new paragraph (j).
Sec. 615.5301 Definitions.
(i) * * *
(3) Common and perpetual preferred stock (other than allocated
stock) that is not purchased or held as a condition of obtaining a
loan, provided that the institution has no established plan or practice
of retiring such stock;
(4) Term preferred stock that is not purchased or held as a
condition of obtaining a loan, up to a maximum of 25 percent of the
institution's permanent capital (as calculated after deductions
required in the permanent capital ratio computation). The amount of
includible term stock must be reduced by 20 percent (net of
redemptions) at the beginning of each of the last 5 years of the term
of the instrument;
* * * * *
(j) Total liabilities means liabilities valued in accordance with
generally accepted accounting principles (GAAP), except that total
liabilities shall exclude the following:
(1) As set forth in Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities, as
promulgated by the Financial Accounting Standards Board--
(i) Adjustments to the carrying amount of any liability designated
as being hedged; and
(ii) Any derivative recognized as a liability that is designated as
a hedging instrument.
(2) Term preferred stock to the extent such stock is included as
total surplus in the computation of the bank's total surplus ratio
pursuant to Sec. 615.5301(i).
Dated: April 10, 2003.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 03-9320 Filed 4-15-03; 8:45 am]
BILLING CODE 6705-01-P