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Rule2022-08832

Implementation of the Current Expected Credit Losses Methodology for Allowances, Related Adjustments to the Tier 1/Tier 2 Capital Rule, and Conforming Amendments

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Published

May 9, 2022

Effective

January 1, 2023

Issuing agencies

Farm Credit Administration

Abstract

The Farm Credit Administration (FCA or Agency) is amending certain regulations to address changes in U.S. generally accepted accounting principles (U.S. GAAP). These amendments modify FCA's capital and other regulations, including certain regulatory disclosure requirements.

Full Text

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<title>Federal Register, Volume 87 Issue 89 (Monday, May 9, 2022)</title>
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[Federal Register Volume 87, Number 89 (Monday, May 9, 2022)]
[Rules and Regulations]
[Pages 27483-27494]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-08832]

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FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 615, 620, 621, 628, and 630

RIN 3052-AD36

Implementation of the Current Expected Credit Losses Methodology
for Allowances, Related Adjustments to the Tier 1/Tier 2 Capital Rule,
and Conforming Amendments

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA or Agency) is amending
certain regulations to address changes in U.S. generally accepted
accounting principles (U.S. GAAP). These amendments modify FCA's
capital and other regulations, including certain regulatory disclosure
requirements.

DATES: The final rule is effective on January 1, 2023.

FOR FURTHER INFORMATION CONTACT:
Technical information: Ryan Leist, <a href="/cdn-cgi/l/email-protection#eda188849e99bfad8b8e8cc38a829b">[email&#160;protected]</a>, Associate
Director, Operations, Management, and Accounting Team, Corbin West,
<a href="/cdn-cgi/l/email-protection#095e6c7a7d4a496f6a68276e667f">[email&#160;protected]</a>, Policy Analyst (capital markets), or Jeremy R.
Edelstein,

[[Page 27484]]

<a href="/cdn-cgi/l/email-protection#85c0e1e0e9f6f1e0ecebcfc5e3e6e4abe2eaf3">[email&#160;protected]</a>, Associate Director, Finance and Capital Markets
Team, Office of Regulatory Policy, (703) 883-4414, TTY (703) 883-4056;
or <a href="/cdn-cgi/l/email-protection#ce819c9e83afa7a2aca1b68ea8adafe0a9a1b8">[email&#160;protected]</a>;
or
Legal information: Jennifer Cohn, <a href="/cdn-cgi/l/email-protection#bcffd3d4d2f6fcdadfdd92dbd3ca">[email&#160;protected]</a>, Assistant General
Counsel, Office of General Counsel, (720) 213-0440, TTY (703) 883-4056.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
A. Objectives of the Final Rule
B. Background
C. Overview of Changes to U.S. GAAP
D. Regulatory Capital
II. Summary of the Proposal
A. Proposed Revisions to the Capital Rules To Reflect the Change
in U.S. GAAP
B. Summary of Comments Received on the Proposal
III. Final Rule
A. Revisions to the Capital Rules To Reflect the Change in U.S.
GAAP
1. Introduction of Adjusted Allowances for Credit Losses as a
Newly Defined Term
2. Definition of Carrying Value
i. Available-for-Sale Debt Securities
ii. Purchased Credit Deteriorated Assets
B. CECL Transition Provision
C. ``Safe Harbor'' Deemed Prior Approval To Make Cash
Distributions
D. Disclosures and Regulatory Reporting
E. Conforming Changes to Other FCA Regulations
1. Final Rule Change for Vintage Year Disclosure
2. Conforming Changes Adopted as Proposed
F. Effective Date
G. Supervisory Guidance on the ACL
IV. 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> Ensure the Farm Credit System's (System) capital
requirements, including certain regulatory disclosures, reflect the
current expected credit losses methodology (CECL), which revises the
accounting for credit losses under U.S. GAAP; and
<bullet> Ensure conforming amendments to other regulations
accurately reference credit losses.

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.\1\ As of January 1, 2022,
the System consists of three Farm Credit Banks, one agricultural credit
bank, 64 agricultural credit associations, one Federal land credit
association, several service corporations, and the Federal Farm Credit
Banks Funding Corporation (Funding Corporation). System banks
(including both the Farm Credit Banks and the agricultural credit bank)
issue Systemwide consolidated debt obligations in the capital markets
through the Funding Corporation,\2\ which enables the System to extend
short-, intermediate-, and long-term credit and related services to
eligible borrowers. Eligible borrowers include farmers, ranchers,
aquatic producers and harvesters, their cooperatives, rural utilities,
exporters of agricultural commodities products, farm-related
businesses, and certain rural homeowners. The System's enabling statute
is the Farm Credit Act of 1971, as amended (Act).\3\
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\1\ The Federal Agricultural Mortgage Corporation (Farmer Mac)
was chartered in 1987 as a Farm Credit System institution. Farmer
Mac operates secondary market activities for agricultural real
estate mortgage loans, rural housing mortgage loans, rural utility
cooperative loans, and agriculture and rural development loans
guaranteed by the United States Department of Agriculture (USDA).
The FCA has a separate set of capital regulations, at subpart B of
part 652, 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.
\2\ The Funding Corporation was established pursuant to section
4.9 of the Farm Credit Act of 1971, as amended, and is owned by all
System banks. The Funding Corporation is the fiscal agent and
disclosure agent for the System. The Funding Corporation is
responsible for issuing and marketing debt securities to finance the
System's loans, leases, and operations and for preparing and
producing the System's financial results.
\3\ 12 U.S.C. 2001-2279cc. The Act is available at <a href="http://www.fca.gov">www.fca.gov</a>
under ``Laws and regulations'' and ``Statutes.''
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On September 23, 2019, FCA published in the Federal Register a
notice of proposed rulemaking (proposed rule or proposal) seeking
public comment on revisions to certain regulations to address changes
to credit loss accounting under U.S. GAAP.\4\ In particular, FCA
proposed to amend certain rules to reflect the Financial Accounting
Standards Board's (FASB) issuance of Accounting Standards Update (ASU)
No. 2016-13, Financial Instruments--Credit Losses, Topic 326,
Measurement of Credit Losses on Financial Instruments (ASU 2016-13).
FASB's new accounting standard for credit losses applies to all System
institutions.\5\
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\4\ See 84 FR 49684. Section 621.3 requires System institutions
to prepare financial statements in accordance with U.S. GAAP
(referred to as GAAP in FCA regulations), except as otherwise
directed by statutory and regulatory requirements. Previously, FCA
had issued an informational memorandum providing initial information
on the new accounting standard. See Informational Memorandum, New
Accounting Standard on Financial Instruments--Credit Losses, dated
September 1, 2016.
\5\ FCA regulation Sec. 628.2 defines System institution, for
capital rule purposes, as a System bank, an association, and any
other institution chartered by the FCA that the FCA determines
should be subject to FCA's capital rules.
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ASU 2016-13 introduces CECL, which replaces the incurred loss
methodology for financial assets measured at amortized cost. This
update is discussed in more detail in the next section, Overview of
Changes to U.S. GAAP. FCA proposed to revise the tier 1/tier 2 capital
rule in part 628 to distinguish which credit loss allowances under the
new accounting standard would be eligible for inclusion in a System
institution's regulatory capital.
FCA's tier 1/tier 2 capital rule in part 628 are similar to the
standardized approach capital rules the Federal banking regulatory
agencies (FBRAs) \6\ adopted for the banking organizations they
regulate (U.S. Rule), while taking into account the cooperative
structure and the organization of the System. FCA's proposed CECL rule
was similar to the FBRAs' final CECL rule, which was published in
February 2019.\7\
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\6\ The FBRAs are the Office of the Comptroller of the Currency,
the Board of Governors of the Federal Reserve System, and the
Federal Deposit Insurance Corporation.
\7\ See FBRA's final CECL rule at 84 FR 4222 (February 14,
2019). FCA staff met with System representatives during the
development of FCA's proposed rule to seek their input on certain
issues. The questions discussed were similar to the questions asked
in the preamble to the FBRAs' proposed CECL rule (83 FR 22312, May
14, 2018). FCA staff considered this input in developing the
proposed rule.
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Unlike the CECL rule adopted by the FBRAs, FCA did not propose a
phase-in of the day-one impacts of CECL on regulatory capital ratios.
The CECL Transition Provision section below discusses why a transition
period for System institutions is unnecessary and would create undue
burden and complexity.
As part of efforts to address the disruption of economic activity
in the United States caused by the spread of COVID-19, the FBRAs
adopted a second CECL transition provision.\8\ This second CECL
transition provided banking organizations that were required to adopt
CECL for purposes of U.S. GAAP on January 1, 2020, the option to delay,
for up to two years, an estimate of CECL's impact on regulatory
capital, followed by a three-year transition period (i.e., a five-year
transition period in total).
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\8\ See 85 FR 17723 (March 31, 2020) (interim final rule); 85 FR
61577 (September 30, 2020) (final rule).
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As discussed below, FCA received four comment letters on the
proposed

[[Page 27485]]

rule. These comments, together with FCA's responses to those comments,
are addressed in the Final Rule section below. FCA is finalizing most
provisions as proposed. However, FCA is making changes to certain
provisions in response to comments, as discussed below.

C. Overview of Changes to U.S. GAAP

In June 2016, FASB issued ASU No. 2016-13, Topic 326, Financial
Instruments--Credit Losses,\9\ which revises the accounting for credit
losses under U.S. GAAP. In pertinent part, ASU No. 2016-13:
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\9\ ASU 2016-13 covers measurement of credit losses on financial
instruments and includes three subtopics within Topic 326: (i)
Subtopic 326-10 Financial Instruments--Credit Losses--Overall; (ii)
Subtopic 326-20: Financial Instruments--Credit Losses--Measured at
Amortized Cost; and (iii) Subtopic 326-30: Financial Instruments--
Credit Losses--Available-for-Sale Debt Securities.
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<bullet> Introduces CECL, which replaces the incurred loss
methodology for financial assets measured at amortized cost;
<bullet> Introduces the term purchased credit deteriorated (PCD)
assets, which replaces the term purchased credit impaired (PCI) assets;
<bullet> Modifies the treatment of credit losses on available-for-
sale (AFS) debt securities; and
<bullet> Requires certain disclosures of credit quality indicators
by year of origination (or vintage).
CECL differs from the incurred loss methodology in several key
respects. CECL requires System institutions to recognize lifetime
expected credit losses for financial assets measured at amortized cost,
not just those credit losses that have been incurred as of the
reporting date. CECL also requires the incorporation of reasonable and
supportable forecasts in developing an estimate of lifetime expected
credit losses, while maintaining the current requirement for System
institutions to consider past events and current conditions.
Furthermore, the probable threshold for recognition of allowances in
accordance with the incurred loss methodology is removed under CECL.
Estimating expected credit losses over the life of an asset under CECL,
including consideration of reasonable and supportable forecasts,
results in earlier recognition of credit losses than under the existing
incurred loss methodology.
In addition, CECL replaces multiple impairment approaches in
existing U.S. GAAP. CECL allowances will cover a broader range of
financial assets than allowance for loan losses (ALL) under the
incurred loss methodology. Under the incurred loss methodology, in
general, ALL covers credit losses on loans held for investment and
lease financing receivables, with additional allowances for certain
other extensions of credit and allowances for credit losses on certain
off-balance sheet credit exposures (with the latter allowances
presented as a liability).\10\ These exposures will be within the scope
of CECL. In addition, CECL covers credit losses on held-to-maturity
(HTM) debt securities.
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\10\ ``Other extensions of credit'' includes trade and
reinsurance receivables, and receivables that relate to repurchase
agreements and securities lending agreements. ``Off-balance sheet
credit exposures'' includes off-balance sheet credit exposures not
accounted for as insurance, such as loan commitments, standby
letters of credit, and financial guarantees. Note that credit losses
for off-balance sheet credit exposures that are unconditionally
cancellable by the issuer are not recognized under CECL.
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As mentioned above, ASU No. 2016-13 also introduces PCD assets as a
replacement for PCI assets. The PCD asset definition covers a broader
range of assets than the PCI asset definition. CECL requires System
institutions to estimate and record credit loss allowances for a PCD
asset at the time of purchase. The credit loss allowance is then added
to the purchase price to determine the amortized cost basis of the
asset for financial reporting purposes. Post-acquisition increases in
credit loss allowances on PCD assets will be established through a
charge to earnings. This is different from the current treatment of PCI
assets, for which System institutions are not permitted to estimate and
recognize credit loss allowances at the time of purchase. Rather, in
general, credit loss allowances for PCI assets are estimated after the
purchase only if there is deterioration in the expected cash flows from
the assets.\11\
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\11\ The System currently holds limited PCI assets, which have
generally been acquired through business combinations. FCA does not
believe the amount of PCD assets in the System after the adoption of
CECL will be materially different.
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ASU No. 2016-13 also introduces new requirements for AFS debt
securities. The new accounting standard requires a System institution
to recognize credit losses on individual AFS debt securities through
credit loss allowances, rather than through direct write-downs, as is
currently required under U.S. GAAP. AFS debt securities will continue
to be measured at fair value, with changes in fair value not related to
credit losses recognized in other comprehensive income. Credit loss
allowances on an AFS debt security are limited to the amount by which
the security's fair value is less than its amortized cost.
Upon adoption of CECL, a System institution will record a one-time
adjustment to its credit loss allowance as of the beginning of its
fiscal year of adoption equal to the difference, if any, between the
amount of credit loss allowance required under the incurred loss
methodology and the amount of credit loss allowance required under
CECL. Except for PCD assets, the adjustment to credit loss allowance
would be recognized with offsetting entries to deferred tax assets
(DTAs), if appropriate, and to the fiscal year's beginning retained
earnings.
The effective date of ASU No. 2016-13 varies for different
financial institutions. The original effective date for public business
entities (PBEs) that are not Securities and Exchange Commission (SEC)
filers, such as the Funding Corporation,\12\ was the fiscal year
beginning after December 15, 2020, including interim periods within
that fiscal year, and that was the timeframe in effect when FCA
published the proposed CECL rule. After publication, on October 18,
2019, FASB amended the effective dates of certain major accounting
standards, including ASU No. 2016-13. Specifically, for entities such
as the Funding Corporation, ASU No. 2016-13 is effective for fiscal
years beginning after December 15, 2022, including interim periods
within those fiscal years.\13\ System institutions will implement the
new standard on January 1, 2023, and Systemwide combined financial
statements for the quarter ending March 31, 2023, will reflect the new
standard.\14\
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\12\ A PBE that is not an SEC filer includes: (1) An entity that
has issued securities that are traded, listed, or quoted on an over-
the-counter market, or (2) an entity that has issued one or more
securities that are not subject to contractual restrictions on
transfer and is required by law, contract, or regulation to prepare
U.S. GAAP financial statements (including footnotes) and make them
publicly available periodically. For further information on the
definition of a PBE, refer to ASU No. 2013-12, Definition of a
Public Business Entity, issued in December 2013. Since, as discussed
above, the Funding Corporation is the System's fiscal and disclosure
agent, the CECL effective date for the System is based on its
effective date for the Funding Corporation. The Funding Corporation
satisfies the definition of a PBE that is not an SEC filer.
\13\ See FASB ASU 2019-10 Financial Instruments--Credit Losses
(Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic
842) Effective Dates, issued in November 2019.
\14\ If FASB were to amend the effective date again, System
implementation may similarly be delayed.
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D. Regulatory Capital

Changes necessitated by CECL to a System institution's retained
earnings, DTAs, and allowances will affect the institution's regulatory
capital ratios.\15\

[[Page 27486]]

Specifically, retained earnings are a key component of a System
institution's common equity tier 1 (CET1) capital.\16\ An increase in a
System institution's allowances, including those estimated under CECL,
generally will reduce the institution's earnings or retained earnings,
and therefore its CET1 capital.\17\
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\15\ These capital ratios are specified in Sec. 628.10.
\16\ FCA's capital rules refer to ``unallocated retained
earnings (URE)'' rather than ``retained earnings.'' Section 628.2
defines URE as ``accumulated net income that a System institution
has not allocated to a member-borrower.'' This preamble uses the
term ``retained earnings,'' because that is the term used in CECL
and in U.S. GAAP more generally. For purposes of this preamble,
``retained earnings'' has the same meaning as ``URE.''
\17\ However, as discussed above, allowances recognized on PCD
assets upon adoption of CECL and upon later purchases of PCD assets
generally would not reduce the System institution's earnings,
retained earnings, or CET1 capital.
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Depending on the nature of the difference, DTAs arising from
temporary differences (temporary difference DTAs) are included in a
System's institution's risk-weighted assets or are deducted from CET1
capital.\18\ Increases in allowances generally give rise to increases
in temporary difference DTAs that will partially offset the reduction
in earnings or retained earnings.\19\ Under Sec. 628.20(d)(3), the ALL
is included in a System institution's tier 2 capital up to 1.25 percent
of its standardized total risk-weighted assets (as defined in Sec.
628.2) not including any amount of the ALL.\20\
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\18\ DTAs arising from temporary differences in relation to net
operating loss carrybacks are risk-weighted at 100 percent under
Sec. 628.32(l)(3). DTAs that arise from net operating loss and tax
credit carryforwards, net of any related valuation allowances and
net of deferred tax liabilities in accordance with Sec. 628.22(e),
are deducted from CET1 capital under Sec. 628.22(a)(3). All other
DTAs are risk-weighted at 100 percent under Sec. 628.32(l)(5). DTAs
are immaterial at most System institutions.
\19\ See Accounting Standards Codification Topic 740, ``Income
Taxes.''
\20\ Under Sec. 628.2, any amount of ALL greater than the 1.25
percent limit is deducted from standardized total risk-weighted
assets.
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II. Summary of the Proposal

A. Proposed Revisions to the Capital Rules To Reflect the Change in
U.S. GAAP

To address the forthcoming implementation of changes to U.S. GAAP
resulting from the FASB's issuance of ASU No. 2016-13 and to improve
consistency between FCA's capital rules and U.S. GAAP, FCA proposed to
amend the capital rules in part 628 to identify which credit loss
allowances under the new accounting standard would be eligible for
inclusion in a System institution's regulatory capital. Because FCA's
capital rules are generally similar to the U.S. Rule, FCA's proposed
CECL rule was generally similar to the FBRAs' final CECL rule.
In particular, FCA proposed to add adjusted allowances for credit
losses (AACL) as a newly defined term in its capital rules. Under the
proposal, AACL included credit loss allowances related to financial
assets, except for allowances for PCD assets and AFS debt
securities.\21\ AACL was eligible under the proposal for inclusion in a
System institution's tier 2 capital subject to the current limit for
including ALL in tier 2 capital under the capital rules.\22\ The
proposed rule provided separate capital treatment for allowances
associated with AFS debt securities and PCD assets that would apply to
System institutions upon adoption of ASU 2016-13. Unlike the CECL rule
adopted by the FBRAs, FCA did not propose a phase-in of the day-one
impacts of CECL on regulatory capital ratios.
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\21\ This exclusion of credit loss allowances on PCD assets and
AFS debt securities is what differentiates AACL from the term
allowance for credit losses (ACL), which is used by the FASB in ASU
2016-13 and which applies to both financial assets and AFS debt
securities. Consistent with the proposal and as described in the
following sections, the AACL definition includes only those
allowances that have been charged against earnings or retained
earnings.
\22\ See existing Sec. 628.20(d)(3).
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FCA's proposed rule also revised capital disclosure requirements
that apply to System banks following their adoption of CECL \23\ and
made conforming amendments to other regulations so they refer to credit
loss allowance and reflect the implementation of ASU No. 2016-13.
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\23\ Section 628.63 requires System banks to disclose items such
as capital structure, capital adequacy, credit risk, and credit risk
mitigation.
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B. Summary of Comments Received on the Proposal

FCA received four comment letters on the proposed rule: One letter
from the Funding Corporation on behalf of the System's Accounting
Standards and CECL Workgroups (System Workgroups Letter); \24\ one
letter from CoBank, ACB (CoBank Letter), a System bank; \25\ and one
letter each from Northwest Farm Credit Services, an Agricultural Credit
Association (Northwest Letter) \26\ and Capital Farm Credit, ACA
(Capital Letter),\27\ both System associations. All commenters
generally supported many significant aspects of the proposed rule and
expressed similar comments. CoBank expressly stated it supported the
System Workgroups Letter. The two associations offered comments
consistent with certain aspects of the System Workgroups Letter.
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\24\ System Workgroups Letter dated November 22, 2019.
\25\ CoBank Letter dated November 20, 2019.
\26\ Northwest Letter dated November 15, 2019.
\27\ Capital Letter dated October 18, 2019.
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All commenters supported FCA's new defined term ``Adjusted
Allowances for Credit Losses'' and the modification to the definition
of ``carrying value.'' All the commenters also supported the existing
limit on the inclusion of the allowance in tier 2 capital of 1.25
percent of risk-weighted assets.
All commenters asked FCA to follow U.S. GAAP for disclosure and
reporting requirements, including the conforming amendments FCA
proposed, rather than introducing specific disclosures different than
those required by U.S. GAAP. In addition, all commenters suggested the
rule should contain a general reference to the effective date required
by U.S. GAAP rather than specifying an effective date.
All commenters believe FCA should adopt an optional transition
period for the day-one impact CECL may have on institutions' regulatory
capital to align more closely with the approach taken by the FBRAs.
Additionally, all commenters asked FCA to exclude any day-one impact of
CECL from the year-over-year change in CET1 capital referred to in
Sec. 628.20(f)(5)(ii), to avoid a negative impact on an institution's
ability to make capital distributions, including the payment of
patronage.

III. Final Rule

As discussed above, FCA's capital rules are similar to the U.S.
Rule, while taking into account the cooperative structure and the
organization of the System. This final rule is similar in many respects
to the FBRAs' CECL rule.

A. Revisions to the Capital Rules To Reflect the Change in U.S. GAAP

1. Introduction of Adjusted Allowances for Credit Losses as a Newly
Defined Term
FCA is adopting as final, without change from the proposal, the
proposed definition of the new capital term AACL. As proposed, FCA is
revising the capital rules to reflect the revised accounting standard
for credit losses under U.S. GAAP as it relates to System institutions'
calculation of regulatory capital ratios. The new capital term AACL,
which replaces the existing term ALL, applies to all System
institutions.
FCA is also adopting without change its proposal, consistent with
the treatment of ALL under FCA's existing capital rules, to make
amounts of AACL eligible for inclusion in an institution's tier 2
capital up to 1.25 percent of the institution's standardized total
risk-weighted assets not including any amount of the AACL.

[[Page 27487]]

All commenters supported the new defined term AACL and the
continuation of the existing limit on the inclusion of the allowance in
tier 2 capital.
CECL allowances cover a broader range of financial assets than the
ALL under the incurred loss methodology. Under FCA's existing capital
rules, ALL includes valuation allowances that have been established
through a charge against earnings to cover estimated credit losses on
loans or other extensions of credit as determined in accordance with
U.S. GAAP. Under CECL, credit loss allowances represent an accounting
valuation account, measured as the difference between the financial
assets' amortized cost basis and the amount expected to be collected on
the financial assets (i.e., lifetime credit losses). Thus, AACL
includes allowances for expected credit losses on HTM debt securities
and lessors' net investments in leases that have been established to
adjust these assets to amounts expected to be collected, as determined
in accordance with U.S. GAAP. AACL also includes allowances for
expected credit losses on off-balance sheet credit exposures not
accounted for as insurance, as determined in accordance with U.S. GAAP.
As described below, however, credit loss allowances related to AFS debt
securities and PCD assets are not included in the definition of AACL.
As the FBRAs have said they are doing for the banking organizations
that they regulate, FCA intends to monitor the impacts of this 1.25
percent limit on regulatory capital and System institution lending
practices after the final rule is effective. FCA's ongoing monitoring
will include the review of data, including data provided by System
institutions. FCA will also monitor the FBRAs' actions in this area.
FCA will consider the information it is monitoring in determining
whether a further change to the FCA's capital rules' treatment of AACL
might be warranted. To the extent FCA determines further revisions to
the capital rules are necessary, the Agency would seek comment through
a separate proposal.
2. Definition of Carrying Value
FCA is adopting as final, without change from the proposal, a
revision to the definition of carrying value. Under the existing
definition at Sec. 628.2, carrying value means, with respect to an
asset, the value of the asset on the balance sheet as determined in
accordance with U.S. GAAP. Under the final rule, and consistent with
the FBRAs' final CECL rule, the definition of carrying value is revised
to add a provision that, for all assets other than AFS debt securities
and PCD assets, the carrying value is not reduced by any associated
credit loss allowance. All commenters supported this proposed revision
to the definition of carrying value.
i. Available-for-Sale Debt Securities
Current accounting standards require a System institution to make
an individual assessment of each of its AFS debt securities and take a
direct write-down for credit losses when such a security is other-than-
temporarily impaired. The amount of the write-down is charged against
earnings, which reduces CET1 capital and results in a reduction in the
same amount to the carrying value of the AFS debt security. ASU 2016-13
revises the accounting for credit impairment of AFS debt securities by
requiring System institutions to determine whether a decline in fair
value below an AFS debt security's amortized cost resulted from a
credit loss, and to record any such credit impairment through earnings
with a corresponding allowance.
Similar to the current regulatory treatment of credit-related
losses for other-than-temporary impairment, under the final rule all
credit losses recognized on AFS debt securities will correspondingly
affect CET1 capital and reduce the carrying value of the AFS debt
security. Since the carrying value of an AFS debt security is its fair
value, which would reflect any credit impairment, credit loss
allowances for AFS debt securities required under the new accounting
standard are not eligible for inclusion in a System institution's tier
2 capital.
ii. Purchased Credit Deteriorated Assets
The final rule maintains the requirement that valuation allowances
be fully charged against earnings in order to be eligible for inclusion
in tier 2 capital. The final rule, however, excludes PCD allowances
from being included in tier 2 capital; rather, a System institution
will calculate the carrying value of PCD assets net of allowances.
Under the new accounting standard, PCD assets are acquired
individual financial assets (or acquired groups of financial assets
with shared risk characteristics) that, as of the date of acquisition
and as determined by an acquirer's assessment, have experienced a more-
than-insignificant deterioration in credit quality since origination.
The new accounting standard will require System institutions to
estimate expected credit losses that are embedded in the purchase price
of a PCD asset and recognize these amounts as an allowance as of the
date of acquisition. As such, the initial allowance amount for a PCD
asset recorded on a System institution's balance sheet will not be
established through a charge to earnings. Including allowances in tier
2 capital that have not been charged against earnings would diminish
the quality of regulatory capital. Post-acquisition increases in
allowances for PCD assets will be established through a charge against
earnings.
Accordingly, the final regulation provides that valuation
allowances charged to retained earnings, in accordance with U.S. GAAP
(i.e., the allowances required at CECL adoption), are eligible for
inclusion in tier 2 capital. This treatment of PCD assets, in effect,
will reduce a System institution's standardized total risk weighted
assets, similar to the proposed treatment for credit loss allowances
for AFS debt securities.
Consistent with FCA's proposal and with the FBRAs' final CECL rule,
this final rule does not allow System institutions to bifurcate PCD
allowances to include post-acquisition allowances in the definition of
AACL. As discussed in the preamble to the proposed rule, FCA is
concerned a bifurcated approach could create undue complexity and
burden for System institutions and believes requiring System
institutions to calculate the carrying value of PCD assets net of
allowances appropriately accounts for post-acquisition allowances in
the calculation of regulatory capital.\28\ FCA received no comments
concerning not allowing a bifurcated approach.
---------------------------------------------------------------------------

\28\ 84 FR 49684, 49687 (September 23, 2019).
---------------------------------------------------------------------------

B. CECL Transition Provision

Unlike the FBRAs' final CECL rule, FCA did not propose and is not
adopting an optional phase-in of the day-one impacts of CECL on
regulatory capital ratios. The FBRAs included an optional transition
period for banking organizations to reduce the potential day-one
adverse impacts CECL may have on a banking organization's regulatory
capital ratios. The FBRAs included this transition period because of
concerns that some banking organizations might face difficulties in
capital planning because of uncertainty about the economic environment
at the time of CECL adoption.\29\
---------------------------------------------------------------------------

\29\ CECL requires consideration of current and future expected
economic conditions to estimate allowances. To an extent, these
conditions will not be known until closer to a System institution's
CECL adoption date.
---------------------------------------------------------------------------

All commenters asked FCA to adopt an optional transition period for
the

[[Page 27488]]

day-one impact CECL may have on an institution's regulatory capital to
more closely align with the approach adopted by the FBRAs.\30\ Two
commenters stated that FCA should follow its own objective in the
capital rules that became effective January 1, 2017, which was to
ensure the System's capital requirements were comparable to the Basel
III framework and the U.S. Rule.\31\ Two commenters asserted that FCA's
statement in the preamble to the proposed rule that all institutions
will be sufficiently capitalized to absorb the day-one impacts of CECL
is not supported by firm estimates.\32\ Additionally, all commenters
stated that as of their comment submission date, System institutions
had not yet fully implemented CECL and were not able to definitively
assess possible capital impacts of the implementation.\33\
---------------------------------------------------------------------------

\30\ In response to a specific question from FCA on the matter,
none of the commenters asked FCA to adopt a mandatory transition
provision.
\31\ System Workgroups Letter and Northwest Letter.
\32\ System Workgroups Letter and Capital Letter.
\33\ No commenters provided analysis to support their position.
In the proposed rule, FCA requested analysis that would support a
transition period or alternatives to a transition period that might
accommodate institutions in their implementation of the CECL
requirements.
---------------------------------------------------------------------------

FCA disagrees with these commenters. As when FCA proposed this
rule, FCA continues to believe a transition provision is unnecessary
for any System institution. First, even without a transition period,
FCA expects all institutions will be sufficiently capitalized to absorb
the day-one impact of CECL for the purpose of complying with regulatory
capital requirements. Second, FCA's capital requirements are comparable
to the Basel III framework and the U.S. Rule even without an optional
phase-in period. Finally, adopting an optional phase-in period would
create significant operational burden and complexity with no
corresponding benefit to the safety and soundness of System
institutions.\34\
---------------------------------------------------------------------------

\34\ For the same reasons, FCA declines to adopt the second,
COVID-related transition period the FBRAs adopted in 2020. In
addition, FCA notes that transition period applied only to banking
organizations that were required to implement CECL on January 1,
2020.
---------------------------------------------------------------------------

The first reason a transition period is not necessary is because
even without one, FCA expects all institutions will be sufficiently
capitalized to absorb the day-one impact of CECL for the purpose of
complying with regulatory capital requirements. FCA expects allowances
estimated under CECL will likely increase at most System institutions,
causing CET1 capital (including retained earnings) to decrease and tier
2 capital to increase. Total capital, which is generally the most
constraining capital ratio for associations, would remain largely
unchanged. For System banks, where the tier 1 leverage ratio is
generally the most constraining capital ratio, FCA expects credit
losses under CECL to result in little to no change for bank allowance
levels.\35\ FCA continues to believe all System institutions will
continue to comply with regulatory capital ratios and buffers without a
transition period.\36\
---------------------------------------------------------------------------

\35\ While each System bank has different strategies and asset
compositions, in general, the direct note to associations and
investments comprise a majority of each banks' assets. Given these
assets held at System banks (and their anticipated allowance levels
under CECL), FCA anticipates all banks will maintain regulatory
capital compliance.
\36\ As noted above, FCA issued an informational memorandum in
2016 titled ``New Accounting Standard on Financial Instruments--
Credit Losses.'' This informational memorandum specifically
encouraged System institutions to plan and prepare for CECL's
potential impact on capital and included seven items for System
institutions to consider for the measurement, transition, and
implementation of CECL. Institutions that have heeded this planning
guidance have had ample opportunity to prepare themselves for CECL's
day-one impact.
---------------------------------------------------------------------------

Contrary to the commenters' assertions, FCA's expectations for the
day-one impact of CECL are supported by firm estimates. For the
proposed rule, FCA analyzed allowance amounts from the Uniform Reports
of Financial Condition and Performance (Call Report) for all System
institutions under various stress scenarios.\37\ For the final rule,
FCA analyzed allowance amounts from updated Call Report data for all
System institutions and completed a review of select System
institutions' model development and implementation of CECL.\38\
Additionally, since the proposed rule comment period closed, regulatory
capital levels remain satisfactory, indicating the System is well
positioned to absorb the day-one impact of CECL. In addition, the
credit quality of the System's combined loan portfolio remains strong
as of December 31, 2021.\39\
---------------------------------------------------------------------------

\37\ See Call Report Schedule RC Balance Sheet.
\38\ FCA also reviewed allowance ratios provided by the FBRAs as
of June 30, 2021, which compared allowances for banking
organizations that had already adopted CECL and allowance ratios for
banking organizations that were still under the incurred loss model.
\39\ The Funding Corporation reported strong credit quality in
the combined System's loan portfolio with loans classified as
Acceptable and Other Assets Especially Mentioned at 98.1 percent on
December 31, 2021, compared to 97.5 percent on December 31, 2020.
See 2021 Annual Information Statement of the Farm Credit System,
March 1, 2022.
---------------------------------------------------------------------------

Based on these reviews, unless existing and future expected
economic conditions significantly deteriorate after publication of this
rule and before the January 1, 2023, effective date of this rule, FCA
expects all institutions will be sufficiently capitalized to absorb the
day-one impact of CECL for the purpose of complying with regulatory
capital requirements. More specifically, FCA continues to believe the
regulatory capital ratios of all System institutions--CET1; tier 1;
total capital; and tier 1 leverage--will remain above the regulatory
minimums and buffers after the implementation of CECL, even without a
transition period. FCA considered this analysis as part of its
determination not to provide an optional transition period for System
institutions.
The second reason a transition period is not necessary is that FCA
disagrees with the commenters' position that not adopting an optional
phase-in period would diverge from FCA's capital rule objective to
ensure the System's capital requirements are comparable to the Basel
III framework and the U.S. Rule. FCA views comparability as ensuring
the overall regulatory outcome of FCA's capital requirements are
comparable with the U.S. Rule as appropriate, taking into account the
differences between System institutions and banking organizations
subject to the U.S. Rule.\40\ While many requirements in FCA's capital
rules are similar or identical to requirements in the U.S. Rule,
comparability does not mean every provision and requirement in the U.S.
Rule should be incorporated into FCA's capital rules. FCA's minimum
capital requirements ensure the quality and quantity of capital are
comparable to that of the U.S. Rule and reflect principles outlined in
the Basel III framework, ensuring an overall uniform standard of
capital quality that is consistent and transparent.
---------------------------------------------------------------------------

\40\ As noted in FCA's preamble to the proposed tier 1/tier 2
capital rule, FCA changed items from the U.S. Rule as appropriate to
account for the differences between System institutions and banking
organizations regulated by the FBRAs. See 79 FR 52814 (September 4,
2014).
---------------------------------------------------------------------------

In adopting the tier 1/tier 2 capital rule in 2016, FCA did not
adopt the majority of phase-in and transitional periods that were
included in the U.S. Rule.\41\ At the time, FCA determined most of
these transitional and phase-in periods were not needed to give System
institutions sufficient time to come into

[[Page 27489]]

compliance with the new rules.\42\ FCA's analysis at the time evidenced
that all System institutions would exceed the minimum regulatory
capital ratios on the effective date of the rule. Since January 1,
2017, the effective date of the rule, as FCA expected, System capital
levels have remained satisfactory and all System institutions have
exceeded all minimum regulatory capital requirements as well as
applicable capital conservation and leverage buffer requirements.
---------------------------------------------------------------------------

\41\ As an example, the U.S. Rule provided for phase-in and
transitional periods of certain regulatory deductions and
adjustments, minority interests, and temporary inclusions of non-
qualifying instruments. The FBRAs provided these transitional
periods, in part, to provide banking organizations they regulate
sufficient time to build capital to meet the new requirements. See
79 FR 52814 (September 4, 2014).
\42\ FCA did provide a phase-in period of 3 years for the 2.5
percent capital conservation buffer. See 81 FR 49720, 49721 (July
28, 2016).
---------------------------------------------------------------------------

In general, banking organizations regulated by the FBRAs may have a
larger day-one impact from adopting CECL and a phase-in may be more
appropriate to ensure their regulatory capital compliance. The lending
operations of many of these banking organizations--including unsecured
lending such as credit cards--have historically caused banking
organizations to experience higher credit losses (as a percentage of
loans) than System institutions. In contrast to many banking
organizations, the System lends primarily to agriculture and other
eligible borrowers in rural areas. Approximately 50 percent of the
System's combined loan portfolio is in real estate mortgage and rural
residential real estate loans. These real estate loans are generally
long-term and well-secured, and they are generally expected to have
lower credit losses than commercial real estate loans.
The final reason an optional transition period is not needed is
that it would lead to unnecessary complexity and operational burden. An
optional transition period would require changes to existing Call
Report schedules that would require institutions to change existing
reporting processes each year of the transition period. For example,
new, more complex calculations would be necessary for each year of the
transition period (based on the percentage of the transition amount
allowed for the year) for reporting items such as retained earnings,
average assets, AACL, and other assets. The Call Report would also need
to be updated to reflect new temporary line items such as the CECL
transition amount.\43\
---------------------------------------------------------------------------

\43\ See Federal Financial Institutions Examination Council
Supplemental Instructions: Interim Final Rules and Notice Issued
March 2020, Revision 3: 2020 CECL Transition Provision.
---------------------------------------------------------------------------

If System institutions were not sufficiently capitalized to absorb
the day-one impact of CECL, FCA believes the complexity and operational
burden of an optional transition period might be warranted to provide
relief from regulatory capital requirements. However, all System
institutions are expected to be sufficiently capitalized to absorb the
day-one impact and comply with regulatory capital requirements without
an optional transition period.
An optional transition period could also be difficult to implement
and maintain for System institutions in districts that make use of
common standardized applications for computing and reporting regulatory
capital. A transition period utilized by some institutions in such
districts but not by others would appear to complicate supporting the
common reporting platforms for those institutions. In addition,
allowing an optional transition period would create a lack of
comparability among System institutions' capital levels.
The commenters asked FCA to state in this final rule that the
Agency will work with individual institutions to provide regulatory
relief similar to a transition period if the day-one impacts of CECL
cause a significant impact to an individual institution's regulatory
capital ratios. FCA confirms the Agency will work with individual
institutions if the day-one impact of CECL causes them not to comply
with the regulatory capital requirements but does not commit to
granting relief. As stated in the preamble to the proposed rule, if
closer to the adoption of CECL its day-one impact threatens regulatory
capital compliance, FCA may consider options to reduce the
unanticipated impacts of implementing CECL. The type of action would
depend on, among other factors, the significance of CECL's impact on an
individual institution, the institution's capital strategy, business
planning, and implementation efforts,\44\ and how widespread the issue
is throughout the System.
---------------------------------------------------------------------------

\44\ As noted above, FCA issued an informational memorandum in
2016 titled ``New Accounting Standard on Financial Instruments--
Credit Losses'' which included seven items for System institutions
to consider for the measurement, transition, and implementation of
CECL. System institutions were specifically encouraged to plan and
prepare for CECL's potential impact on capital.
---------------------------------------------------------------------------

For these reasons, FCA declines to adopt a transition period for
the day-one impact CECL may have on an institution's regulatory
capital.

C. ``Safe Harbor'' Deemed Prior Approval To Make Cash Distributions

All commenters asked FCA to exclude any day-one CECL impacts from
Sec. 628.20(f)(5)(ii).
Section 628.20(f) requires System institutions to obtain prior
approval from FCA before making any cash distributions of capital
included in tier 1 or tier 2 capital. FCA's ``safe harbor'' deemed
prior approval provisions, at Sec. 628.20(f)(5), provide that System
institutions are deemed to have prior approval from FCA to distribute
cash payments as long as certain conditions are met. One of the
conditions, in Sec. 628.20(f)(5)(ii), stipulates that, after any such
cash payments have been declared and defined by resolution of the
board, the dollar amount of CET1 capital at quarter-end equals or
exceeds the dollar amount of CET1 capital on the same quarter-end in
the previous calendar year.\45\
---------------------------------------------------------------------------

\45\ Note that amendments to the capital rule published at 86 FR
54347 (October 1, 2021) and effective on January 1, 2022, made a
minor revision to this provision that does not change the comment or
FCA's response.
---------------------------------------------------------------------------

Commenters believe FCA should exclude the day-one impacts CECL will
have on the dollar amount of CET1 capital from compliance with this
condition so that CECL implementation would not impact a System
institution's ability to make cash capital distributions, including
patronage payments, under the ``safe harbor.'' Commenters seek this
exclusion so the existing deemed prior approval process would continue
without interruption.
FCA disagrees with this request for several reasons. First, FCA
believes it is unlikely the day-one impact would result in CET1 capital
declining to the same level of CET1 capital on March 31, 2022 (the
quarter-end of the prior year). The ``safe harbor'' essentially limits
System institutions (without express FCA prior approval) to
distributing net income for the current quarter (in which the
distribution is declared and defined by resolution of the board) and
the prior 3 quarters.
In practice, System institutions rarely make capital
distributions--including paying dividends on preferred stock, making
cash patronage payments, or redeeming or revolving equities--that equal
net income for the current quarter and prior 3 quarters. Rather, in the
last three years, System associations have reported, on average,
distributing at least 40 percent of their net income in cash
patronage.\46\ This means the overwhelming majority of associations
have had sufficient capacity both to pay cash patronage and to build
capital.
---------------------------------------------------------------------------

\46\ See Call Report Schedule RI-D Changes in Net Worth.
---------------------------------------------------------------------------

FCA continues to expect System boards to give significant thought
to capital distribution decisions and how they impact overall
capitalization of their institution, especially regarding a cash
payment that equals 12-months of net income. In the unlikely event
CECL's day-one impact reduces CET1

[[Page 27490]]

capital to a level where an institution could not use the ``safe
harbor'' to make a cash patronage distribution in line with prior
years, the appropriateness of making such a cash patronage distribution
may be questionable.
Second, in the unlikely event CECL implementation would cause a
System institution's CET1 capital to be less than the same quarter-end
in the previous calendar year, that does not preclude the institution
from paying patronage. An institution that wants to pay cash patronage
but that cannot satisfy the ``safe harbor'' deemed prior approval
requirements under Sec. 628.20(f)(5) may request the prior approval of
FCA for such distribution under Sec. 628.20(f)(2) and (3).\47\ In
addition, a System institution may allocate equities to its member-
borrowers as a form of patronage without needing to satisfy any
requirements that could be affected by any day-one impacts from CECL.
---------------------------------------------------------------------------

\47\ Section 628.20(f)(2) and (3) provide that at least 30 days
prior to the intended action, a System institution must submit a
request for approval to FCA for a 30-day review period before it
takes the intended action. The request is deemed to be granted if
FCA does not notify the System institution to the contrary before
the end of the 30-day review period. While the prior approval
provisions under Sec. 628.20(f)(2) and (3) do not require any
supporting documentation, institutions that have material declines
in CET1 capital due to the day-one impact of CECL may want to
provide the following supporting documentation in any prior approval
request related to CECL's implementation: (1) The institution's
historical trends and current projections for capital growth through
earnings retention, (2) average cash patronage payments over the
last 3 years, (3) projected cash patronage payments over the
institution's current planning horizon, and (4) the most recent
allowance analysis/study under CECL.
---------------------------------------------------------------------------

D. Disclosures and Regulatory Reporting

FCA is adopting as final the proposed requirement for System banks
to update their disclosures required under Sec. 628.63 to reflect the
adoption of CECL. Section 628.63 imposes public disclosure requirements
for System banks related to the capital requirements contained in part
628. The public disclosure requirements are designed to provide
important information to market participants on the scope of
application, capital structure, risk exposures, risk assessment
processes, capital adequacy of the bank, and techniques the bank uses
to identify, measure, monitor, and control risks. The final rule
replaces requirements to disclose ALL with requirements to disclose
AACL. Additionally, the final rule updates references to ``probable
loan losses'' and ``loan losses'' with references to allowance for
credit losses (ACL) \48\ or AACL, as applicable. FCA did not receive
any comments related to the proposed bank disclosure amendments in
Sec. 628.63.
---------------------------------------------------------------------------

\48\ ASU No. 2016-13 removes impairment approaches and related
terminology, including replacing the term ALL with ACL.
---------------------------------------------------------------------------

To reflect changes in U.S. GAAP concerning CECL, FCA anticipates
revising the Call Reports in the first quarter of 2023. These revisions
would specify the affected line items in the capital schedules and the
newly defined term AACL. In addition, FCA intends to update the Call
Report instructions for all references to ALL.

E. Conforming Changes to Other FCA Regulations

FCA is not adopting the proposed requirement for System
institutions to provide a vintage year credit loss analysis disclosure
in Sec. Sec. 620.5 \49\ and 630.20.\50\ However, the final rule adopts
all the other proposed conforming changes.
---------------------------------------------------------------------------

\49\ Governing the contents of the annual report to
shareholders.
\50\ Governing the contents of the annual report to investors.
---------------------------------------------------------------------------

1. Final Rule Change for Vintage Year Disclosure
Existing FCA regulations at Sec. Sec. 620.5 and 630.20 require
that the discussion and analysis of risk exposures analyze the ALL.\51\
The proposal amended these disclosure requirements to update references
to the ALL with the newly defined U.S. GAAP term ACL. The proposal also
required a new credit loss analysis disclosure by vintage year.\52\
---------------------------------------------------------------------------

\51\ See Sec. Sec. 620.5(g)(1)(iv)(B) and 630.20(g)(1)(ii)(B).
\52\ See proposed Sec. Sec. 620.5(g)(1)(iv)(B) and
630.20(g)(1)(ii)(B).
---------------------------------------------------------------------------

All commenters noted that a vintage year disclosure of the ACL is
not required by U.S. GAAP. The commenters requested FCA not introduce
specific disclosure requirements in Sec. Sec. 620.5 and 630.20 that
may result in regulatory disclosures being different than those
required by U.S. GAAP. The commenters believe removing the vintage year
requirement would eliminate the need for FCA to update regulations in
the event of any subsequent changes in U.S. GAAP. Because of the
overlap of U.S. GAAP disclosures and FCA's requirement to disclose the
``Allowance for credit losses-to-loans,'' \53\ the final rule removes
the vintage year requirements for the allowance analysis in Sec. Sec.
620.5(g)(1)(iv)(B) and 630.20(g)(1)(ii)(B), as requested by the
commenters. However, consistent with the proposal, the final rule
replaces the term ALL with ACL and requires a discussion of the
adequacy of the allowance for credit losses given reasonable and
supportable forecasts.
---------------------------------------------------------------------------

\53\ See Sec. Sec. 620.5(f)(1)(iii)(F) and 630.20(f)(3)(v).
---------------------------------------------------------------------------

2. Conforming Changes Adopted as Proposed
The proposal made a conforming amendment to replace the key
financial ratio ``Allowance for loan losses-to-loans'' with ``Allowance
for credit losses-to-loans'' in the selected financial disclosure
requirement for banks and associations in Sec. 620.5(f). The
commenters requested that FCA retain the existing ratio. The commenters
believe retaining the existing ratio would avoid the need to reconcile
financial data included in the regulatory financial disclosures with
the U.S. GAAP balance sheet. The commenters stated a reconciliation
would become necessary if the allowance for off-balance sheet credit
exposures, which is a liability for U.S. GAAP purposes, were included
within the definitions of ``Allowance for credit losses'' in the
proposed rule. The commenters proposed as an alternative to require the
denominator of the ratio (loans) be expanded to include total off-
balance sheet credit exposures to keep the ratios comparable.
FCA disagrees with the commenters' suggestion and continues to
believe System disclosures should remain generally consistent with
those of the financial services industry, as they have been since at
least 1986. FCA's disclosure requirements in the annual report to
shareholders and investors are similar to, though not as extensive as,
those required by the SEC and other financial regulators.\54\ The
disclosure reporting requirements originally adopted by FCA in 1986
were generally similar to the SEC Industry Guide 3, Statistical
Disclosure by Bank Holding Companies (Industry Guide 3).\55\ Subsequent
to FCA's proposed CECL rule, the SEC updated and codified certain
Industry Guide 3 disclosure requirements, including requirements for a
similar Allowance for Credit Losses-to-loans ratio disclosure.\56\ The
FCA continues to believe that System institution shareholders should
have access to comparable disclosures made to shareholders of other
financial institutions in order to enhance the borrower ownership and
control mandated by the Act.
---------------------------------------------------------------------------

\54\ See 50 FR 34711, 34712 (August 27, 1985).
\55\ See 51 FR 8656 (March 13, 1986).
\56\ See 85 FR 66108 (October 16, 2020). See also 17 CFR
229.1405 (Item 1405) Allowance for Credit Losses.
---------------------------------------------------------------------------

Similarly, the proposal made a conforming amendment to replace the
balance sheet line item ``Allowance for

[[Page 27491]]

losses'' with ``Allowance for credit losses'' in the selected financial
disclosure requirement for banks and associations in Sec. 620.5(f).
Commenters s uggested FCA retain the current Sec. 620.5(f)(1)(i)(D)
requirement to disclose the allowance for loan losses, rather than
adopting the proposed requirement to disclose the allowance for credit
losses. Commenters stated the new requirement could result in
regulatory disclosure requirements that are different than those
required by U.S. GAAP.
FCA disagrees with the commenters' suggestions regarding the usage
of ``Allowance for credit losses'' in Sec. 620.5(f)(1)(i)(D) as FCA
believes it is important for users of the annual report to understand
the amount of potential credit losses to which each bank and
association may be exposed. While certain regulatory disclosures, such
as the proposed Sec. 620.5(f)(1)(i)(D), may require a reconciliation
with U.S. GAAP, FCA continues to believe shareholders should have
access to comparable disclosures provided to shareholders of other
financial institutions. By retaining the conforming proposed financial
disclosures in the final rule, System institutions will be required to
provide transparent and comparable disclosures similar to others in the
financial services industry.\57\
---------------------------------------------------------------------------

\57\ Commenters did not request changes to similar disclosure
requirements in part 630. Since the requirements are similar, FCA
considered the comments in connection with those requirements as
well and, for the same reasons, declines to amend them.
---------------------------------------------------------------------------

FCA received no comments relating to any other proposed conforming
change and adopts them as proposed.
A number of existing FCA regulations outside of part 628 refer to
ALL or to ``loan loss.'' As discussed above, ASU No. 2016-13 removes
impairment approaches and related terminology, including replacing the
term ALL with ACL. Accordingly, most of the conforming changes outside
of part 628 are to replace ALL or ``loan loss'' with ACL or ``credit
loss,'' as appropriate. In addition, several existing regulations that
refer to ``allowance for losses'' more appropriately refer to ACL.
Most of the conforming changes to regulations within part 628 (as
well as to regulations that refer to regulations within part 628),
replace ``ALL'' with ``AACL.'' In the capital disclosures at Sec.
628.63, the final rule replaces references to ``probable loan losses''
and ``loan losses'' with ACL or AACL, as applicable.
The final rule makes conforming changes in the following parts:

<bullet> Part 611--Organization
<bullet> Part 615--Funding and Fiscal Affairs, Loan Policies and
Operations, and Funding Operations
<bullet> Part 620--Disclosure to Shareholders
<bullet> Part 621--Accounting and Reporting Requirements
<bullet> Part 628--Capital Adequacy of System Institutions
<bullet> Part 630--Disclosure to Investors in Systemwide and
Consolidated Bank Debt Obligations of the Farm Credit System.

F. Effective Date

Under U.S. GAAP, System institutions are required to implement the
new standard for purposes of Systemwide combined financial statements
for the Call Report quarter ending March 31, 2023. Thus, the final rule
will be effective January 1, 2023, for System institutions.
All commenters recommended that FCA not adopt a specific effective
date and instead include a more generic reference to the effective date
required by U.S. GAAP. When FCA's proposed rule was published in
September of 2019, as discussed above, CECL was scheduled to be
effective for PBEs that are not SEC filers, such as the Funding
Corporation, on January 1, 2021. After FCA's proposed rule was
published, FASB deferred the mandatory effective date of CECL for such
entities to January 1, 2023.\58\ FCA agrees with System commenters that
this final rule should be effective consistent with U.S. GAAP. If FASB
changes the effective date of CECL for System institutions, FCA will
update the effective date of this final rule consistent with the
System's implementation date of CECL.
---------------------------------------------------------------------------

\58\ In November 2019, FASB issued ASU 2019-10 Financial
Instruments--Credit Losses (Topic 326), Derivatives and Hedging
(Topic 815), and Leases (Topic 842) Effective Dates, which amended
the effective date of CECL.
---------------------------------------------------------------------------

G. Supervisory Guidance on the ACL

FCA expects to issue supervisory guidance on the ACL and update
existing guidance referencing ALL. Until that time, many concepts,
processes, and practices detailed in existing supervisory guidance on
the ALL continue to remain relevant under CECL. Relevant guidance
includes, but is not limited to, information related to management's
responsibility for the allowance estimation process, the board of
directors' responsibility for overseeing management's process, and the
need for institutions to appropriately support and document their
allowance estimates.\59\ Until new guidance is issued, institutions
should consider the relevant sections of existing ALL guidance in their
implementation of the new accounting standard.
---------------------------------------------------------------------------

\59\ Existing supervisory guidance includes: FCA Bookletter 49,
Adequacy of Farm Credit System Institutions' Allowance for Loan
Losses and Risk Funds, April 26, 2004; FCA Informational Memorandum,
Allowance for Loan Losses, June 30, 2009; FCA Exam Manual, Allowance
for Loan Losses, November 17, 2015; and FCA Exam Manual, Corporate
Governance, September 24, 2021.
---------------------------------------------------------------------------

IV. 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 would
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 611

Agriculture, Banks, banking, 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 621

Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.

12 CFR Part 628

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

12 CFR Part 630

Accounting, Agriculture, Banks, banking, Organization and functions
(Government agencies), Reporting and recordkeeping requirements, Rural
areas.

[[Page 27492]]

For the reasons stated in the preamble, the Farm Credit
Administration amends parts 611, 615, 620, 621, 628, and 630 of chapter
VI, title 12 of the Code of Federal Regulations as follows:

PART 611--ORGANIZATION

0
1. The authority citation for part 611 is revised to read as follows:

Authority: Secs. 1.2, 1.3, 1.4, 1.5, 1.12, 1.13, 2.0, 2.1, 2.2,
2.10, 2.11, 2.12, 3.0, 3.1, 3.2, 3.3, 3.7, 3.8, 3.9, 4.3A, 4.12,
4.12A, 4.15, 4.20, 4.25, 4.26, 4.27, 4.28A, 5.9, 5.17, 5.25, 7.0-
7.3, 7.6-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 2002, 2011,
2012, 2013, 2020, 2021, 2071, 2072, 2073, 2091, 2092, 2093, 2121,
2122, 2123, 2124, 2128, 2129, 2130, 2154a, 2183, 2184, 2203, 2208,
2211, 2212, 2213, 2214, 2243, 2252, 2261, 2279a-2279a-3, 2279b-
2279f-1, 2279aa-5(e)); secs. 411 and 412, Pub. L. 100-233, 101 Stat.
1568, 1638, as amended by secs. 403 and 404, Pub. L. 100-399, 101
Stat. 989, 999 (12 U.S.C. 2071 note and 2202 note).

Sec. 611.515 [Amended]

0
2. Amend Sec. 611.515(b)(6)(ii)(E) by removing the word ``loan'' and
adding in its place the word ``credit''.

Sec. 611.1122 [Amended]

0
3. Amend Sec. 611.1122 by:
0
a. Removing in paragraph (e)(6)(iii) the word ``loan'' and adding in
its place the word ``credit''; and
0
b. Removing in paragraph (e)(10) the words ``loan losses'' and adding
in their place the words ``credit losses'' wherever they appear.

Sec. 611.1130 [Amended]

0
4. Amend Sec. 611.1130(b)(4)(i) by removing the words ``allowance for
losses'' and adding in their place the words ``allowance for credit
losses''.

Sec. 611.1223 [Amended]

0
5. Amend Sec. 611.1223(c)(23)(ii) by removing the words ``allowance
for losses'' and adding in their place the words ``allowance for credit
losses''.

Sec. 611.1250 [Amended]

0
6. Amend Sec. 611.1250(b)(5)(i)(B) by removing the words ``loan
losses'' and adding in their place the words ``credit losses''.

Sec. 611.1255 [Amended]

0
7. Amend Sec. 611.1255(b)(5)(i)(B) by removing the words ``general
allowance for losses'' and adding in their place the words ``general
allowance for credit losses''.

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

0
8. 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); sec. 301(a), Pub. L. 100-233, 101 Stat. 1568, 1608, as amended
by sec. 301(a), Pub. L. 103-399, 102 Stat 989, 993 (12 U.S.C. 2154
note); sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15 U.S.C.
78o-7 note).

Sec. 615.5050 [Amended]

0
9. Amend Sec. 615.5050 by:
0
a. Removing in paragraph (c)(1) the words ``allowance for loan losses''
and adding in their place the words ``allowance for credit losses'';
and
0
b. Removing in paragraphs (c)(2) through (4) the words ``allowance for
losses'' and adding in their place the words ``allowance for credit
losses''.

Sec. 615.5132 [Amended]

0
10. Amend Sec. 615.5132(a) by removing the words ``loan loss
adjustments'' and adding in their place the words ``credit loss
adjustments''.

Sec. 615.5140 [Amended]

0
11. Amend Sec. 615.5140(b)(4)(ii) by removing the words ``loan loss''
and adding in their place the words ``credit loss''.

Sec. 615.5200 [Amended]

0
12. Amend Sec. 615.5200(c)(4) by adding the word ``credit'' before
``losses''.

Sec. 615.5201 [Amended]

0
13. Amend Sec. 615.5201 by removing the words ``allowance for loan
losses'' and adding in their place the words ``adjusted allowance for
credit losses'' in the definition of ``Risk-adjusted asset base''.

Sec. 615.5351 [Amended]

0
14. Amend Sec. 615.5351(d) by adding the word ``credit'' before
``loss''.

PART 620--DISCLOSURE TO SHAREHOLDEERS

0
15. The authority citation for part 620 is revised 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, Pub. L. 100-233, 101 Stat. 1568, 1656 (12 U.S.C. 2252 note);
sec. 514, Pub. L. 102-552, 106 Stat. 4102, 4134.

0
16. Amend Sec. 620.5 by:
0
a. Removing in paragraph (f)(1)(i)(D) the word ``losses'' and adding in
its place the words ``credit losses'';
0
b. Removing in paragraph (f)(1)(ii)(B) the words ``loan losses'' and
adding in their place the words ``credit losses'';
0
c. Removing in paragraph (f)(1)(iii)(F) the words ``loan losses-to-
loans'' and adding in their place the words ``credit losses-to-loans'';
0
d. Revising paragraph (g)(1)(iv)(B); and
0
e. Removing in paragraph (g)(1)(iv)(E) the word ``losses'' and adding
in its place the word ``credit losses''.
The revision reads as follows:

Sec. 620.5 Contents of the annual report to shareholders.

* * * * *
(g) * * *
(1) * * *
(iv) * * *
(B) An analysis of the allowance for credit losses that includes
the ratios of the allowance for credit losses to loans and net
chargeoffs to average loans, and a discussion of the adequacy of the
allowance for credit losses given reasonable and supportable forecasts;
* * * * *

PART 621--ACCOUNTING AND REPORTING REQUIREMENTS

0
17. The authority citation for part 621 is revised to read as follows:

Authority: Secs. 5.17, 5.19, 5.22A, 8.11 of the Farm Credit Act
(12 U.S.C. 2183, 2202, 2202a, 2202d, 2252, 2257a, 2279aa-11); Pub.
L. 102-552, 106 Stat. 4102, 4134.

Sec. 621.5 [Amended]

0
18. Amend Sec. 621.5 by removing the word ``loan'' and adding in its
place the word ``credit'' in the section heading and paragraphs (a) and
(b).

Sec. 621.8 [Amended]

0
19. Amend Sec. 621.8(c)(2) by removing the word ``loan'' and adding in
its place the word ``credit''.

PART 628--CAPITAL ADEQUACY OF SYSTEM INSTITUTIONS

0
20. The authority citation for part 628 is revised to read as follows:

[[Page 27493]]

301(a), Pub. L. 100-233, 101 Stat. 1568, 1608, as amended by sec.
301(a), Pub. L. 103-399, 102 Stat 989, 993 (12 U.S.C. 1254 note);
sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15 U.S.C. 78o-7
note).

0
21. Amend Sec. 628.2 by:
0
a. Adding in alphabetical order a definition for ``Adjusted allowances
for credit loss (AACL)'';
0
b. Removing the definition of ``Allowances for loan losses (ALL)''; and
0
c. Adding a sentence at the end of the definition of ``Carrying
value'';
0
d. Revising paragraph (2) of the definition of ``Standardized total
risk-weighted assets''.
The additions and revision reads as follows:

Sec. 628.2 Definitions.

* * * * *
Adjusted allowances for credit losses (AACL) means valuation
allowances that have been established through a charge against earnings
or retained earnings for expected credit losses on financial assets
measured at amortized cost and a lessor's net investment in leases that
have been established to reduce the amortized cost basis of the assets
to amounts expected to be collected as determined in accordance with
GAAP. For purposes of this part, adjusted allowances for credit losses
includes allowances for expected credit losses on off-balance sheet
credit exposures not accounted for as insurance as determined in
accordance with GAAP. Adjusted allowances for credit losses excludes
allowances created that reflect credit losses on purchased credit
deteriorated assets and available-for-sale debt securities.
* * * * *
Carrying value * * * For all assets other than available-for-sale
debt securities or purchased credit deteriorated assets, the carrying
value is not reduced by any associated credit loss allowance that is
determined in accordance with GAAP.
* * * * *
Standardized total risk-weighted assets * * *
(2) Any amount of the System institution's adjusted allowance for
credit losses that is not included in tier 2 capital.
* * * * *

Sec. 628.20 [Amended]

0
22. Amend Sec. 628.20(d)(3) by removing the word ``ALL'' and adding in
its place the word ``AACL'' wherever it appears.

Sec. 628.22 [Amended]

0
23. Amend Sec. 628.22(c) by removing the word ``ALL'' in footnote 6
and adding in its place the word ``AACL''.

0
24. Amend Sec. 628.63(c) in Table 5 by revising entries (a)(5),
(e)(5), and (g) and footnote 6 to read as follows:

Sec. 628.63 Disclosures.

* * * * *
(c) * * *

Table 5 to Sec. 628.63 \1\--Credit Risk: General Disclosures
------------------------------------------------------------------------

------------------------------------------------------------------------
Qualitative Disclosures.............. (a) * * *
(5) Description of the
methodology that the System bank
uses to estimate its adjusted
allowance for credit losses,
including statistical methods
used where applicable;

* * * * * * *
(e) * * *
(5) The balance in the adjusted
allowance for credit losses at
the end of each period according
to GAAP; and

* * * * * * *
(g) Reconciliation of changes in
adjusted allowance for credit
losses.\6\

* * * * * * *
------------------------------------------------------------------------
\1\ This Table 5 does not cover equity exposures, which should be
reported in Table 9 of this section.
* * * * * * *
\6\ The reconciliation should include the following: A description of
the allowance; the opening balance of the allowance; charge-offs taken
against the allowance during the period; amounts provided (or
reversed) for estimated credit losses during the period; any other
adjustments (for example, exchange rate differences, business
combinations, acquisitions and disposals of subsidiaries), including
transfers between allowances; and the closing balance of the
allowance. Charge-offs and recoveries that have been recorded directly
to the income statement should be disclosed separately.

* * * * *

PART 630--DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM

0
25. The authority citation for part 630 is revised to read as follows:

Authority: Secs. 4.2, 4.9, 5.9, 5.17, 5.19 of the Farm Credit
Act (12 U.S.C. 2153, 2160, 2243, 2252, 2254); sec. 424, Pub. L. 100-
233, 101 Stat. 1568, 1656 (12 U.S.C. 2252 note); sec. 514, Pub. L.
102-552, 106 Stat. 4102, 4134.

0
26. Amend Sec. 630.20 by:
0
a. Removing in paragraph (f)(1)(ii) the word ``losses'' and adding in
its place the words ``credit losses'';
0
b. Removing in paragraphs (f)(2)(iii) and (f)(3)(v) the words ``loan
losses'' and adding in their place the words ``credit losses''; and
0
c. Revising paragraph (g)(1)(ii)(B).
The revision reads as follows:

Sec. 630.20 Contents of the annual report to investors.

* * * * *
(g) * * *
(1) * * *
(ii) * * *
(B) An analysis of the allowance for credit losses to loans and net
chargeoffs to average loans and a discussion of the adequacy of the
allowance for credit losses given reasonable and supportable forecasts.
* * * * *

0
27. Revise appendix A to part 630 to read as follows:

Appendix A to Part 630--Supplemental Information Disclosure Guidelines

Supplemental information required by Sec. Sec. 630.20(m) and
630.40(e) shall contain, at a minimum, the current year financial
data for the components listed in the following tables and be
presented in the columnar format illustrated in the following
tables:

[[Page 27494]]

Table A--Supplemental Balance Sheet Information
--------------------------------------------------------------------------------------------------------------------------------------------------------
Combined Insurance fund
Associations Financial without and related Combined with
Banks \1\ \2\ assistance Eliminations insurance fund combination insurance
corporation \3\ entries fund
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cash and investments.......................
Net loans..................................
Restricted assets..........................
Other Assets...............................
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total assets...........................
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total liabilities..........................
Protected borrower capital \4\.............
Restricted capital.........................
Capital stock and surplus..................
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total liabilities, protected borrower
capital, and capital stock and surplus
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Provided combined financial data of all FCS banks, including any consolidated subsidiaries of the banks.
\2\ Provide association-only combined financial data of all FCS associations.
\3\ Provide the combined financial data of all columns on the left.
\4\ Any item that is no longer applicable, e.g., protected borrower stock, may be omitted.

Table B--Supplemental Income Statement Information
--------------------------------------------------------------------------------------------------------------------------------------------------------
Combined Insurance fund
Associations Financial without and related Combined with
Banks \1\ \2\ assistance Eliminations insurance combination insurance fund
corporation fund \3\ entries
--------------------------------------------------------------------------------------------------------------------------------------------------------
Net interest income........................
Provision for credit losses................
Other income...............................
Other expenses.............................
--------------------------------------------------------------------------------------------------------------------------------------------------------
Net Income.............................
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Provide combined financial data of all FCS banks, including any consolidated subsidiaries of the banks.
\2\ Provide association-only combined financial data of all FCS associations.
\3\ Provide the combined financial data of all columns on the left.

Dated: April 20, 2022.
Ashley Waldron,
Secretary, Farm Credit Administration Board.
[FR Doc. 2022-08832 Filed 5-6-22; 8:45 am]
BILLING CODE 6705-01-P

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