[Federal Register: September 14, 2004 (Volume 69, Number 177)]
[Proposed Rules]
[Page 55362-55366]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14se04-15]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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[[Page 55362]]
FARM CREDIT ADMINISTRATION
12 CFR Part 615
RIN 3052-AC23
Funding and Fiscal Affairs, Loan Policies and Operations, and
Funding Operations; Investments in Farmers' Notes
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
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SUMMARY: The Farm Credit Administration (FCA, agency, us, or we) adopts
a proposed rule that amends regulations governing investments in
farmers' notes (Farmers' Notes). As a result, it should be easier for
Farm Credit System (FCS, Farm Credit, or System) institutions and non-
System lenders to work together to finance farmers, ranchers, and
aquatic producers or harvesters (farmers). The proposed rule would
remove unnecessary regulatory restrictions on Farmers' Notes so this
investment program will be able to keep pace with rapid changes in
agricultural credit markets. Credit enhancements and a new
concentration limit will strengthen the safety and soundness of the
Farmers' Notes. The FCA also proposes amendments to its capital
regulations.
DATES: You may send us comments by October 14, 2004.
ADDRESSES: Send us your comments by electronic mail to
reg-comm@fca.gov, through the Pending Regulations section of our Web site
at http://www.fca.gov, or through the government-wide Web site http://www.regulations.gov.
You may also submit your comments in writing (in
triplicate) to S. Robert Coleman, Director, Regulation and Policy
Division, Office of Policy and Analysis, Farm Credit Administration,
1501 Farm Credit Drive, McLean, VA 22102-5090, or by facsimile
transmission to (703) 734-5785. You may review copies of all comments
we receive in the Office of Policy and Analysis, Farm Credit
Administration.
FOR FURTHER INFORMATION CONTACT:
Dennis K. Carpenter, Senior Policy Analyst, Office of Policy and
Analysis, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4498, TTY (703) 883-4434.
or
Richard A. Katz, Senior Attorney, Office of the General Counsel, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703)
883-2020.
SUPPLEMENTARY INFORMATION:
I. Objectives
The purpose of this proposed rule is to: (1) Make affordable credit
more available to farmers; (2) enable associations to provide
additional funding and liquidity to non-System lenders; and (3)
increase cooperation between System and non-System financial
institutions and merchants that extend credit to agriculture (non-
System agricultural lenders). Although there are several different ways
for System and non-System agricultural lenders to work together in
extending credit to farmers, ranchers, cooperatives, and other eligible
rural residents, this proposed rule focuses on investments in Farmers'
Notes.
II. Overview of the Farmers' Notes Program
The Farmers' Notes program has existed since 1966, when the FCA
originally approved it. Under this program, certain FCS direct lender
associations invest in notes, contracts, and other obligations that
eligible farmers enter into with non-System agricultural lenders.
Currently, Sec. 615.5172 authorizes production credit associations
(PCAs) and agricultural credit associations (ACAs) to buy Farmers'
Notes from private dealers and cooperatives that sell farm machinery,
supplies, equipment, home appliances, and other items of a capital
nature to eligible farmers and ranchers. As a result, the Farmers'
Notes program provides liquidity to certain non-System lenders that
extend credit to agriculture.
The authority to purchase Farmers' Notes derives from sections
2.2(10) and 2.12(18) of the Farm Credit Act of 1971, as amended (Act),
which permit direct lender associations to invest their funds as may be
approved by their funding bank under FCA regulations. Similar to other
investments, the regulation places a portfolio cap and a concentration
limit on association investments in Farmers' Notes. Currently, Sec.
615.5172(c) limits investments in Farmers' Notes to 15 percent of each
association's total outstanding loans at the end of its preceding
fiscal year. Additionally, investments in Farmers' Notes sold by a
single creditor cannot exceed 50 percent of the association's capital
and surplus. Under current Sec. 615.5172(d), participating dealers and
cooperatives must endorse Farmers' Notes that they sell to associations
with full recourse. The full recourse requirement is designed as a
credit enhancement, which is consistent with the treatment of Farmers'
Notes as investments. Finally, the current regulation requires
associations to contact those notemakers who meet their credit
standards, and encourage them to become FCS borrowers.
III. Rulemaking on Farmers' Notes
A. Historical Background
This proposed rule is the latest phase of a rulemaking that began 4
years ago. On April 20, 2000, the FCA published an advance notice of
proposed rulemaking (ANPRM) that asked the public questions about ways
to improve the funding and discount relationship between Farm Credit
banks and other financing institutions (OFIs).\1\ The commenters
responded with a broad array of suggestions on various ways that System
and non-System agricultural lenders could cooperate to extend credit to
agriculture and rural America. As a result, the FCA decided to hold a
public meeting on OFIs and other alternatives for FCS lenders to
provide funding to non-System agricultural lenders. The Federal
Register notice that announced the public meeting asked interested
parties for input on both OFIs and ``other types of partnering
relationships between System and non-System lending institutions that
would increase the availability of funds to agriculture and rural
America.'' \2\
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\1\ See 65 FR 21151 (April 20, 2000).
\2\ See 66 FR 35428 (July 5, 2001).
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On August 3, 2001, we held a public meeting in Des Moines, Iowa,
where interested parties offered suggestions on how we could facilitate
greater cooperation between System and non-System agricultural lenders.
Many System and non-System commenters
[[Page 55363]]
encouraged us to promote other arrangements, in addition to the OFI
program, that make it easier for Farm Credit banks and associations to
provide funding and liquidity to non-System agricultural lenders. Many
commenters expressed their desire for more flexible and informal
arrangements between FCS and non-System agricultural lenders.
B. Original Proposed Rule
On August 11, 2003, the FCA adopted a proposed rule (original
proposed rule or proposed rule of August 11, 2003) on OFIs and Farmers'
Notes that incorporated many of the comments and suggestions that we
received from the ANPRM and at the public meeting.\3\ The FCA proposed
four major changes to the Farmers' Notes regulation so that this
program would be more responsive to the needs of other creditors and
their customers. First, the original proposed rule would have expanded
this program to all entities that routinely extend agricultural or
aquatic credit to eligible farmers and ranchers in the normal course of
their business. Whereas this program now is restricted to private
dealers and cooperatives, the proposed rule of August 11, 2003, would
have allowed all types of creditors, including financial institutions
and merchants, to sell Farmers' Notes to FCS associations. Second, the
original proposed rule would have expanded this program to long-term
loans. Third, the proposed rule of August 11, 2003, would have
permitted all FCS direct lenders to invest in Farmers' Notes, whereas
this program is now limited to PCAs and ACAs, which have short- and
intermediate-term lending authorities. Fourth, the original proposed
rule would have allowed FCS associations to invest in notes from
aquatic producers or harvesters and farm-related businesses.
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\3\ See 68 FR 47502 (Aug. 11, 2003).
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Other provisions of the original proposed rule would have ensured
that FCS direct lender associations continue to treat Farmers' Notes as
investments. Under Sec. 615.5172(b) of the proposed rule of August 11,
2003, for example, FCS associations could have invested in Farmers'
Notes that are secured by specified collateral that the underlying
debtor pledges to creditors. The original proposed rule would have
retained the 15-percent portfolio cap and the 50-percent concentration
limit in Sec. 615.5172(c). Current Sec. 615.5172(d) requires the
seller to endorse all Farmers' Notes with full recourse. The FCA
proposed on August 11, 2003, to update this requirement by allowing
other types of credit enhancements, such as guarantees, insurance,
reserves of cash or marketable securities, subordinated interests, or a
combination of such credit enhancements that would adequately cover the
principal amount of the association's investment in Farmers' Notes.
The proposed rule of August 11, 2003, would have deleted the
provision in Sec. 615.5172 that currently requires associations to
contact the farmers or ranchers who are indebted on these Farmers'
Notes and encourage them to become FCS borrowers.
C. Comment Letters
The FCA received a total of 111 comments on the proposed rule on
OFIs and Farmers' Notes, of which 105 comment letters specifically
addressed issues related to Farmers' Notes. Comments on Farmers' Notes
came from the Farm Credit Council, two Farm Credit banks, two Farm
Credit associations, an agricultural credit cooperative OFI, the
Independent Community Bankers of America (ICBA), which is the trade
association for community banks, and 98 affiliated commercial banks and
their state banking trade associations. System commenters supported the
proposed rule while all non-System commenters opposed it.
All commercial bank commenters asked the FCA to withdraw the
original proposal on Farmers' Notes. These commenters suggested that
the FCA hold a public meeting and solicit congressional input on
Farmers' Notes if the agency continues to believe that FCS associations
need an expanded Farmers' Notes program. The ICBA and other commercial
bank commenters stated that the proposed rule would ``reinvent an
unused lending program'' as ``an expansive new consumer and business
lending program that has not been authorized by Congress.''
Commercial bank commenters also raised safety and soundness
concerns about the Farmers' Notes program. The agricultural credit
cooperative OFI told the FCA that the proposed revisions to Sec.
615.5172 would not attract non-System agricultural lenders to the
Farmers' Notes program or benefit their customers.
System commenters believed that the proposed revisions to the
Farmers' Notes regulation will strengthen cooperation between System
and non-System lenders and increase the flow of credit to agriculture.
Two System commenters, however, asked the FCA to revise the proposed
regulation so it would not require that collateral ``of a capital
nature'' secure all Farmers' Notes. One of these commenters suggested
that the final rule should not require that collateral secure all
Farmers' Notes. This commenter advised the FCA that the final rule
should treat collateralization of Farmers' Notes as a credit
enhancement.
D. The Supplemental Proposed Rule
On April 22, 2004, the FCA Board approved a final rule on OFIs. The
preamble informed the public that the FCA was not adopting a final rule
on Farmers' Notes because it was still considering the best regulatory
approach to this program.\4\
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\4\ See 69 FR 29852 (May 26, 2004).
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The FCA declines the request of commercial bank commenters to hold
another public meeting on this issue. This rulemaking has progressed
beyond the point where another public meeting will help the FCA to
bring this rulemaking to a successful conclusion. Earlier phases of
this rulemaking, such as the ANPRM, the public meeting in Des Moines
and the proposed rule have already provided the FCA with the type of
basic information that another public meeting will provide. Instead,
input from the public on a specific regulatory proposal is the best way
to develop a final rule that will improve the flow of funds to
agriculture and encourage greater cooperation between the FCS and non-
System agricultural lenders.
The FCA also declines the request of commercial bank commenters to
consult with Congress about revisions to the Farmers' Note regulation.
As discussed below, the FCA has express authority delegated by Congress
under sections 2.2(10), 2.12(18), 5.17(a)(9), 7.6(c), and 7.8(b) of the
Act to enact investment regulations for FCS associations. In addition,
FCA submits all proposed rules to Congress for a 30-day review period
under section 5.17 of the Act. FCA welcomes comments from Members of
Congress as it does from all members of the public.
E. New Proposed Rule on Farmers' Notes
The new proposed rule on Farmers' Notes responds to issues and
concerns raised by both System and non-System commenters. The FCA
proposes to retain the provisions in Sec. 615.5172(a) of the original
proposed rule that would: (1) Expand the Farmers' Notes program to all
non-System agricultural lenders; (2) allow all FCS direct lender
associations to invest in Farmers' Notes; (3) extend this program to
long-term mortgages; and (4) include credits to aquatic producers or
harvesters, and farm-related businesses in this program. The FCA also
proposes, without change,
[[Page 55364]]
Sec. 615.5172(d), which would authorize other credit enhancements for
Farmers' Notes, such as guarantees, insurance, reserves, and
subordinated interests. The FCA proposes again to repeal the provision
in current Sec. 615.5172(d) that requires associations to contact the
farmers or ranchers who are indebted on Farmers' Notes, and encourage
them to become FCS borrowers. The new proposal addresses the
commenters' concerns by: (1) Limiting investments in Farmers' Notes
that are not backed by agricultural credits; (2) lowering the
concentration limit for Farmers' Notes; and (3) not requiring
collateral of a ``capital nature'' for Farmers' Notes. As we explain
the new proposal in greater detail, we will respond to issues raised by
various commenters.
Commercial bank commenters assert that the Farmers' Notes program
is really a lending program that is disguised as an investment program.
The FCA responds that it has authorized the Farmers' Notes program by
exercising its delegated powers under sections 2.2(10), 2.12(18),
5.17(a)(9), 7.6(c), and 7.8(b) of the Act to regulate investments at
FCS associations. FCA regulations authorize FCS institutions to hold
investments for two fundamental, but distinct, purposes. The
regulations in subpart E of part 615 authorize FCS institutions to hold
investments for maintaining liquidity and managing market risks.
Separately, the regulations in subpart F of part 615 permit FCS
banks and associations to hold investments that advance their public
policy mission of financing agriculture. Farmers' Notes are
agricultural investments. The Farmers' Notes program enables FCS
associations to act as a source of liquidity for non-System
agricultural lenders, including small local entities, that sell
agricultural supplies, equipment, machinery, other capital goods, and
household appliances to farmers and ranchers on credit. Thus, this
program benefits farmers, ranchers, and their suppliers.
Under both the existing and proposed regulations, Farmers' Notes
are subject to many regulatory criteria that apply to investments. For
example, the regulation requires full recourse or other credit
enhancements that upgrade the credit quality and reduce the risk of
these assets. Additionally, Sec. 615.5172 imposes a portfolio cap on
Farmers' Notes, which the Act and FCA lending regulations do not
establish for agricultural or aquatic loans. Another distinction
between Farmers' Notes and loans is that FCS associations discount
Farmers' Notes from other creditors, rather than lending directly to
eligible farmers and ranchers. When all of these factors are taken
together, it is clear that Farmers' Notes is an investment, not a
lending, program.
Comment letters from commercial banks and their trade associations
state that the original proposed rule would reinvent the Farmers' Notes
program as an ``expansive new consumer and business lending program''
that would finance ``a vast array of retail merchants'' who sell non-
agricultural consumer products on credit to rural residents who are not
farmers. This has never been the intent of the FCA, and the scope of
this regulation does not shift the focus of the Farmers' Notes program
away from farmers and agriculture. For example, FCS associations are
authorized to invest only in notes from farmers, ranchers, aquatic
producers or harvesters, and farm-related businesses that are eligible
to borrow from the System. Additionally, the Farmers' Notes program
focuses on agricultural, not consumer, credit. Therefore, FCS
associations primarily will invest in Farmers' Notes that finance: (1)
Agricultural or aquatic operations of farmers, ranchers, aquatic
producers or harvesters, or (2) farm-related businesses.
The FCA proposes two major changes to Sec. 615.5172 that should
dispel any confusion about the scope of the Farmers' Notes program.
First, the FCA proposes to revise Sec. 615.5172(a) to more clearly
identify which creditors may sell Farmers' Notes to FCS associations.
Second, proposed Sec. 615.5172(b) limits investments in Farmers' Notes
that are for consumer goods and services.
Under the proposed rule of August 11, 2003, Sec. 615.5172(a) would
have allowed FCS associations to invest in Farmers' Notes given ``to
entities that routinely extend credit in the normal course of their
business.'' We now propose that Sec. 615.5172(a) require the seller of
Farmers' Notes to be either: (1) A financial institution, or (2) an
entity whose primary business is selling agricultural supplies,
machinery, and equipment to eligible farmers and farm-related
businesses, and extends agricultural or aquatic credit to such
customers in the normal course of its business. This revision should
remove any doubt that the Farmers' Notes program remains geared towards
agricultural credit. The primary business of financial institutions is
to extend credit. In contrast, merchants primarily sell goods and
services, while providing credit to their customers as a supplemental
but integral part of their overall business. The proposed rule does not
authorize FCS associations to provide funding and liquidity to
businesses that primarily sell consumer goods and services to the
general public. The FCA has also added a new provision to Sec.
615.5172(b) that expressly restricts consumer credit.
Proposed Sec. 615.5172(a) and (b)(2) reinforce each other and
prevent the Farmers' Notes program from expanding into a general
consumer financing program. Proposed Sec. 615.5172(a) authorizes FCS
associations to buy Farmers' Notes only from financial institutions and
entities whose primary business is selling agricultural supplies,
equipment, or machinery to farmers, ranchers, or aquatic producers or
harvesters while debt on consumer goods and services from general
retail businesses cannot qualify as Farmers' Notes under Sec.
615.5172(b)(2). As a result, no FCS association could invest in notes
from merchants whose primary business is selling consumer goods and
services to people who are not eligible farmers, ranchers, or aquatic
producers or harvesters. However, an association could buy notes that
are secured by home appliances and furniture from a farm supply
cooperative that sells such consumer goods to its farmer-members.
In addition to these two regulatory revisions, another provision of
Sec. 615.5172 ensures that FCS associations invest only in Farmers'
Notes to eligible farmers, ranchers, aquatic producers or harvesters,
and farm-related businesses. The new proposed regulation continues to
require that an FCS association invest in Farmers' Notes only in
accordance with policies prescribed by its own board and the board of
its funding bank. Thus, each association must operate under policies
that ensure it invests only in notes to eligible agricultural and
aquatic producers or harvesters, and farm-related businesses. Failure
to comply with such policies would violate the regulation.
As requested by two System associations, the FCA has revised Sec.
615.5172(b) so that it no longer requires collateral ``of a capital
nature'' to secure Farmers' Notes for agricultural, aquatic, or farm-
related purposes. However, these notes must still be secured by some
form of collateral as is appropriate for the type of funding being
provided. Instead of limiting the collateral to items ``of a capital
nature,'' the new proposal gives FCS associations the flexibility to
accept other agricultural collateral such as accounts receivable or
inventory, as appropriate.
The FCA declines a System commenter's request to give FCS
associations the option of investing in
[[Page 55365]]
unsecured Farmers' Notes. This commenter does not believe that the rule
should require collateral to secure all Farmers' Notes. Instead, the
commenter wants associations to have the option of requiring collateral
as a credit enhancement. The FCA responds that securing Farmers' Notes
with collateral enhances the safety and soundness of the Farmers' Notes
program. From a legal perspective, secured credit is easier to collect
if either the seller of these Farmers' Notes fails, or the underlying
notemaker defaults. Together, both collateral and credit enhancements
improve the quality and liquidity of Farmers' Notes, so they qualify as
investments under the regulations.
Commercial bank commenters suggested that the 15-percent portfolio
cap and the 50-percent concentration limit in Sec. 615.5172(c) are
inherently unsafe and unsound. According to these commenters, Farmers'
Notes will not diversify the portfolios of FCS associations, which are
already concentrated in agricultural assets. Another criticism of
commercial banks is that Farmers' Notes are not liquid assets.
In response, the FCA reiterates that FCA regulations authorize FCS
institutions to hold investments for two different purposes. As
discussed earlier, FCS institutions hold investments to: (1) Maintain
liquidity and manage market risks, or (2) advance their public policy
mission of financing agriculture. Farmers' Notes are investments in
agriculture. Investing in Farmers' Notes enables FCS associations to
provide funding and liquidity to non-System agricultural lenders.
Farmers' Notes also increase the flow of affordable, dependable, and
stable credit to America's farmers and ranchers, and it fosters
cooperation between the FCS and non-System agricultural lenders. In
this context, this program achieves the objectives that Congress
identified in section 1.1 of the Act.
As agricultural lenders, FCS associations have the expertise that
is necessary to understand and manage the risks inherent in Farmers'
Notes. Additionally, the regulation upgrades the quality of these
assets and minimizes the risks to associations by: (1) Requiring
collateral and credit enhancements on all Farmers' Notes, and (2)
establishing a portfolio cap and concentration limit on these
investments. Thus, this program does not expose FCS associations to
significant risks that they cannot manage.
Since 1972, FCA regulations have imposed a 15-percent portfolio cap
and a 50-percent concentration limit on Farmers' Notes. We continue to
believe that the 15-percent portfolio cap on Farmers' Notes is
appropriate because FCS associations are cooperatives, and loans to
their members should always comprise most of the assets in their
portfolios. However, the suggestion that we should consider a lower
concentration limit on Farmers' Notes has merit. We anticipate that a
revised rule will increase investments in Farmers' Notes which, in
turn, could expose System associations to greater safety and soundness
risk issues from the counterparties in these transactions. For this
reason, proposed Sec. 615.5172(c) limits the total amount of Farmers'
Notes that an association may invest in from any single seller,
guarantor, insurer, or other counterparty to 20 percent of the
association's total capital. Although the current regulation and
original proposed rule refer to ``capital and surplus,'' the new
proposal ties the concentration limit to ``total capital,'' which is
consistent with FCA's capital regulations. This limit is compatible
with the concentration limits for other investments, and it adequately
addresses counterparty risks associated with these investments.
As noted earlier, the agricultural credit cooperative OFI stated
that the Farmers' Notes regulation offers no incentives for non-System
agricultural lenders. More specifically, this commenter asserted that
full recourse and other credit enhancements frustrate the efforts of
non-System agricultural lenders to minimize their capital, credit, and
portfolio risks by selling notes to FCS associations. If non-System
agricultural lenders do not take part in this program, the commenter
reasoned that farmers and ranchers would not benefit from it. Although
reducing capital, credit, and portfolio limits are important objectives
for many agricultural lenders, the Farmers' Notes program bolsters the
liquidity and provides an additional source of funds to agricultural
businesses and other non-System agricultural lenders.
Commercial bank commenters claimed that Sec. 615.5172, as
originally proposed, fails to adhere to statutory restrictions that
apply to cross-title lending. The FCA replies that investments are not
subject to the same restrictions that apply to loans. Separately,
almost all FCS associations are now ACAs, which have authority to make
both short- and intermediate-term operating loans, and long-term
mortgage loans. No free-standing PCAs are left in the System. There are
only 12 stand alone Federal land credit associations (FLCAs) in the
FCS, and all are relatively small. The FCA anticipates that many of
these FLCAs will merge into ACAs in the near future. For these reasons,
we do not believe that the cross-title concerns presented by the
commenters are a serious issue.
IV. Capital Risk Weighting
The preamble to the proposed rule of August 11, 2003, explained
that we have interpreted FCA's capital adequacy regulations as
requiring Farm Credit banks to risk weight investments in Farmers'
Notes at 100 percent. The original proposed rule would have amended
Sec. 615.5210 so that FCS associations could risk weight Farmers'
Notes that exhibit specified risk-mitigating characteristics at 20 or
50 percent. Under the proposed rule of August 11, 2003, System
associations would continue to risk weight Farmers' Notes that do not
meet these criteria, or otherwise exhibit a higher risk profile at 100
percent. We received no comments about the risk weighting of Farmers'
Notes. We now propose the risk-weighting guidelines for Farmers' Notes,
as addressed in the original proposed rule, without change.
The proposed rule would establish a 20-percent risk weighting for
Farmers' Notes sold by entities that are either: (1) An equivalent to
an Organization for Economic Cooperation and Development (OECD) \5\
bank (Federal-or state-regulated depository institution); (2)
subsidiaries of OECD equivalent banks or bank holding companies and
carry full guarantees from such parent entities; or (3) an institution
that carries one of the three highest investment-grade ratings from a
nationally recognized statistical rating organization (NRSRO).\6\
Additional criteria for a 20-percent risk weight is that the obligation
must have full recourse or another credit enhancement.
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\5\ ``OECD'' means the group of countries that are full members
of the Organization for Economic Cooperation and Development,
regardless of entry date, as well as countries that have concluded
special lending arrangements with the International Monetary Fund's
General Arrangement to Borrow, excluding any country that has
rescheduled its external sovereign debt within the previous 5 years.
For purposes of United States banking operations, all federally
regulated depository institutions are considered the equivalent of
OECD banks.
\6\ ``Nationally recognized statistical rating organization''
means an entity recognized by the Division of Market Regulation (or
any successor Division) of the Securities and Exchange Commission
(Commission) as a nationally recognized statistical rating
organization for various purposes, including the Commission's
uniform net capital requirements for brokers and dealers.
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Proposed Sec. 615.5210 would establish a 50-percent risk weight
for Farmers' Notes sold by entities that: (1) Are not OECD banks but
otherwise meet similar
[[Page 55366]]
capital and operational standards; and (2) carry an investment-grade or
higher NRSRO rating, or the investment is guaranteed by a parent
company that has such a rating. Again, full recourse or another
appropriate credit enhancement is a condition for the 50-percent risk
weight.
The proposed rule retains a 100-percent risk weight for all
Farmers' Notes that do not qualify for the 20-percent or 50-percent
risk-weight categories. Sellers of Farmers' Notes that are well
capitalized and well managed expose the System to less risk. Therefore,
FCS institutions need less capital to support these investments. This
approach is consistent with the direction from the proposed Basel
Accord revisions, which are currently under consideration.
V. 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 proposed 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.
For the reasons stated in the preamble, part 615, chapter VI, title
12 of the Code of Federal Regulations is proposed to be amended as
follows:
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
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 F--Property, Transfers of Capital, and Other Investments
2. Revise Sec. 615.5172 to read as follows:
Sec. 615.5172 Investments by associations in Farmers' Notes.
(a) In accordance with policies prescribed by its own board of
directors and the board of the Farm Credit bank that funds it, each
direct lender association may invest in notes, sales contracts, and
other similar obligations (hereafter Farmers' Notes) that eligible
farmers, ranchers, producers or harvesters of aquatic products, and
farm-related businesses give to:
(1) Financial institutions; and
(2) Any entity whose primary business is selling agricultural
supplies, machinery, or equipment to farmers, ranchers, aquatic
producers or harvesters, and farm-related businesses, and extends
agricultural or aquatic credit to such customers in the normal
course of its business.
(b) Farmers' Notes that each direct lender invests in must be
secured by collateral pledged by the individual farmer, rancher,
aquatic producer or harvester, or farm-related business. In
addition, each Farmers' Note must evidence the funding of:
(1) Agricultural assets that eligible farmers, ranchers, or
producers or harvesters of aquatic products use in their
agricultural or aquatic operations;
(2) Household appliances, furniture, and goods that eligible
farmers, ranchers, or producers or harvesters of aquatic products
buy for their living needs from entities identified in paragraph
(a)(2) of this section; or
(3) Assets that eligible farm-related businesses use in
providing farm-related services to eligible farmers and ranchers.
(c) The total amount that an association may invest in Farmers'
Notes, at any one time, must not exceed 15 percent of the balance of
its loans outstanding at the close of the association's preceding
fiscal year. In addition, the total amount that an association may
carry as investments in Farmers' Notes from any one entity that
sells, guarantees, insures, or provides another credit enhancement
listed in paragraph (d) of this section must not exceed 20 percent
of the association's total capital.
(d) All Farmers' Notes in which an association invests shall
have at least one of the following credit enhancements:
(1) The selling entity must endorse each Farmers' Note with full
recourse;
(2) A guarantee by a creditworthy third party covers the entire
principal amount of each Farmers' Note;
(3) Insurance covering the entire principal amount of each
Farmers' Note;
(4) The selling entity or a third party maintains a reserve of
cash or marketable securities of at least 10 percent of the entire
principal amount of each Farmers' Note;
(5) The selling entity or a third party holds a subordinated
interest of at least 10 percent of the entire principal amount of
each Farmers' Note; or
(6) The entire principal amount of each Farmers' Note is covered
by a combination of credit enhancements listed in this section.
Subpart H--Capital Adequacy
3. Amend Sec. 615.5210 by adding new paragraphs (f)(2)(ii)(N),
(f)(2)(iii)(D), and (f)(2)(iv)(F) to read as follows:
Sec. 615.5210 Computation of the permanent capital ratio.
* * * * *
(f) * * *
(2) * * *
(ii) * * *
(N) Investments in Farmers' Notes that:
(1) Provide the Farm Credit System direct lender association
full recourse against a seller or has other acceptable credit
enhancements specified in Sec. 615.5172(d) of this part, and
(2) Are guaranteed by an OECD bank or other institution that
qualifies for a 20-percent risk weight under this section, or
(3) Are sold by entities that:
(i) Are rated in one of the highest three investment-grade
rating categories from a NRSRO or the investment is guaranteed by a
parent company with such a rating. If the entity has more than one
NRSRO rating the lowest rating shall apply.
(ii) Maintain capital to total assets of at least 9 percent.
(iii) * * *
(D) Investments in Farmers' Notes that:
(1) Provide the Farm Credit System direct lender association
full recourse against a seller or has other acceptable credit
enhancements specified in Sec. 615.5172(d) of this part, and
(2) The seller is not covered by the provisions of paragraph
(f)(2)(ii)(N) (20-percent risk weight) of this section, but
otherwise meets similar capital, risk identification and control,
and operational standards, or
(3) The credit provider carries an investment-grade or higher
NRSRO rating or the investment is guaranteed by a parent company
with such a rating. If the entity has more than one NRSRO rating the
lowest rating shall apply.
(iv) * * *
(F) Investments in Farmers' Notes that do not otherwise qualify
for a lower risk weight under this section.
* * * * *
Dated: September 8, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04-20607 Filed 9-13-04; 8:45 am]
BILLING CODE 6705-01-P