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Proposed Rule2023-01042

Federal Agricultural Mortgage Corporation Funding and Fiscal Affairs; Risk-Based Capital Requirements

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Published

January 24, 2023

Issuing agencies

Farm Credit Administration

Abstract

The Farm Credit Administration (FCA) is considering updating its regulatory capital framework for the Federal Agricultural Mortgage Corporation (Farmer Mac) to enhance safety and soundness during periods of financial and economic stress. With this Advance Notice of Proposed Rulemaking (ANPRM), FCA is seeking comments from the public on whether and how to amend and strengthen the regulatory capital framework in furtherance of Farmer Mac's safe and sound operations and its role in promoting affordable and sustainable access to credit in agricultural and rural communities, which it carries out by providing liquidity and credit protection tools to rural lenders.

Full Text

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<title>Federal Register, Volume 88 Issue 15 (Tuesday, January 24, 2023)</title>
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[Federal Register Volume 88, Number 15 (Tuesday, January 24, 2023)]
[Proposed Rules]
[Pages 4107-4111]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-01042]

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FARM CREDIT ADMINISTRATION

12 CFR Part 652

RIN 3052-AD51

Federal Agricultural Mortgage Corporation Funding and Fiscal
Affairs; Risk-Based Capital Requirements

AGENCY: Farm Credit Administration.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Farm Credit Administration (FCA) is considering updating
its regulatory capital framework for the Federal Agricultural Mortgage
Corporation (Farmer Mac) to enhance safety and soundness during periods
of financial and economic stress. With this Advance Notice of Proposed
Rulemaking (ANPRM), FCA is seeking comments from the public on whether
and how to amend and strengthen the regulatory capital framework in
furtherance of Farmer Mac's safe and sound operations and its role in
promoting affordable and sustainable access to credit in agricultural
and rural communities, which it carries out by providing liquidity and
credit protection tools to rural lenders.

DATES: You may send comments on or before March 27, 2023.

ADDRESSES: For accuracy and efficiency reasons, FCA encourages
commenters to submit comments by email or through the FCA's website. As
facsimiles (fax) are difficult to process and achieve compliance with
section 508 of the Rehabilitation Act, comments submitted by fax are
not accepted. Regardless of the method used, please do not submit
comments multiple times via different methods. Comments may be
submitted by any of the following methods:
<bullet> Email: Send an email to <a href="/cdn-cgi/l/email-protection#1e6c7b79337d7173735e787d7f30797168">[email&#160;protected]</a>.
<bullet> FCA Website: <a href="http://www.fca.gov">http://www.fca.gov</a>. Click inside the ``I want
to . . .'' field near the top of the page; select ``comment on a
pending regulation'' from the dropdown menu; and click ``Go.'' This
takes you to an electronic public comment form.
<bullet> Mail: Joseph T. Connor, Acting Director, Office of
Secondary Market Oversight, Farm Credit Administration, 1501 Farm
Credit Drive, McLean, VA 22102-5090.
FCA posts all comments on the FCA website. FCA shows comments as
submitted, including any supporting data provided, but for technical
reasons may omit items such as logos and special characters.
Identifying information that you provide, such as phone numbers and
addresses, will be publicly available. However, FCA will attempt to
remove email addresses to help reduce internet spam.
Copies of all comments received may be reviewed on the FCA website
at <a href="http://www.fca.gov">http://www.fca.gov</a>. Once on the website, click inside the ``I want
to . . .'' field near the top of the page; select ``find comments on a
pending regulation'' from the dropdown menu; and click ``Go.'' This
will take you to the Comment Letters page where you can select the
regulation for which you would like to read the public comments. You
may also review comments at the FCA office in McLean, Virginia. Please
call us at (703)883-4056 or email us at <a href="/cdn-cgi/l/email-protection#cfbdaaa8e2aca0a2a28fa9acaee1a8a0b9">[email&#160;protected]</a> to make an
appointment.

FOR FURTHER INFORMATION CONTACT:
Joseph T. Connor, <a href="/cdn-cgi/l/email-protection#573438393938253d1731343679303821">[email&#160;protected]</a>, Acting Director, Office of
Secondary Market Oversight, Farm Credit Administration, McLean, VA
22102-5090, (703) 883-4280, TTY (703) 883-4056, or
Andra Grossman, <a href="/cdn-cgi/l/email-protection#e087928f93938d818e81a0868381ce878f96">[email&#160;protected]</a>, Attorney Advisor, or Jennifer
Cohn, <a href="/cdn-cgi/l/email-protection#4d2e222523270d2b2e2c632a223b">[email&#160;protected]</a>, Assistant General Counsel, Office of the General
Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4020, TTY (703) 883-4056.

SUPPLEMENTARY INFORMATION:

I. Objective

The objective of this ANPRM is to gather public input to:
<bullet> Promote Farmer Mac's safe and sound operations through the
ongoing maintenance of sufficient capital and reserves to absorb
unexpected losses and support the growth and continued fulfillment of
its role.
<bullet> Ensure that Farmer Mac operates under a clear,
comprehensive, and transparent capital framework.
<bullet> Assess whether and how the FCA should further incorporate
elements of other established and emerging regulatory frameworks
governing capital to enhance the regulatory capital framework for
Farmer Mac and determine whether the application of those frameworks to
Farmer Mac would

[[Page 4108]]

require modifications to suit Farmer Mac's non-bank, rural-focused,
secondary market business model, and if so what modifications would be
needed.
<bullet> Analyze the costs and benefits of updating FCA's capital
regulations for Farmer Mac, including the costs of potential unintended
consequences, if any. Responses to this ANPRM will help FCA evaluate
whether and how it should adopt a capital framework similar to other
recognized frameworks to enhance the safety and soundness of Farmer
Mac, with adjustments as appropriate, that would take into
consideration Farmer Mac's status as a secondary market financial
institution focused on agricultural and rural utility markets.\1\
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\1\ This ANPRM seeks comment only on Farmer Mac's regulatory
capital framework, not on the regulatory capital framework
applicable to System banks and associations. Farmer Mac is governed
by different statutory and regulatory capital requirements than
those that apply to System banks and associations.
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II. Introduction

Farmer Mac is an institution of the Farm Credit System (System),
regulated by FCA through its Office of Secondary Market Oversight
(OSMO).\2\ Governed by Title VIII of the Act, Farmer Mac was
established in 1988 to create a secondary market for agricultural real
estate mortgage loans and rural housing mortgage loans; rural utilities
loans were later added. The Act established Farmer Mac as a
stockholder-owned instrumentality of the United States government, a
structure commonly referred to as a government-sponsored enterprise
(GSE). Farmer Mac's role in the secondary market for agriculture and
rural infrastructure loans is comparable to the roles of the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac) (collectively, the housing GSEs) in
the secondary market for U.S. housing mortgages. The housing GSEs'
Federal regulator is the Federal Housing Finance Agency (FHFA).
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\2\ Sections 8.1 and 8.11 of the Farm Credit Act of 1971, as
amended (Act), 12 U.S.C. 2279aa-1 and 2279aa-11.
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The purpose of the legislation creating Farmer Mac was to provide a
secondary market for agricultural real estate mortgages, to increase
the availability of long-term credit to farmers and ranchers, to
provide greater liquidity and lending capacity to primary lenders as
they extend credit to farmers and ranchers, to provide an arrangement
for new lending to facilitate capital market investments in long-term
agricultural funding, and to enhance the ability of individuals in
small rural communities to obtain financing for moderate-priced
houses.\3\ The FCA, through OSMO, is responsible for the oversight and
supervision of Farmer Mac's safe and sound operations in furtherance of
its role to facilitate an efficient, competitive, and resilient
secondary market for agriculture and rural communities.
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\3\ See Section 701 of the Agricultural Credit Act of 1987,
Public Law 100-233, 101 Stat. 1568, 1686 (Jan. 6, 1988) (12 U.S.C.
2279aa note).
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Sufficient capital is crucial to the resiliency and effective
operations of all financial institutions, serving functions such as
absorbing losses, promoting public confidence, helping restrict
excessive asset growth, and providing protection to debt investors.
Capital's loss-absorbing capacity allows financial institutions to
continue operating as going concerns during periods of unexpected
operating losses or other adverse financial conditions. Financial
institution regulators, both internationally and in the United States,
have increasingly recognized the value of globally adopted standards
and measurements that, among other things, provide more transparency to
an institution's capital adequacy and make institutions' financial
strength more readily comparable.
After the worldwide financial crisis of 2007-2009, the Basel
Committee on Banking Supervision (BCBS) issued in 2010, subsequently
revised, and issued additional documents related to, a framework known
as Basel III.\4\ Basel III was an internationally agreed upon set of
measures developed in response to the financial crisis with the goal of
strengthening the regulation, supervision, and risk management of
banks. Since that time, the BCBS has revised, updated, and integrated
the Basel III reforms into a consolidated Basel Framework (Basel
Framework), which comprises all of the current and forthcoming BCBS
standards.\5\ Three U.S. Federal banking regulatory agencies are
represented on the BCBS: the Office of the Comptroller of the Currency
(OCC), the Board of Governors of the Federal Reserve System (FRB), and
the Federal Deposit Insurance Corporation (FDIC) (collectively, the
FBRAs).\6\
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\4\ See ``Basel III: A global regulatory framework for more
resilient banks and banking systems,'' revised version June 2011,
and other Basel III documents at <a href="https://www.bis.org/bcbs/basel3.htm?m=2572">https://www.bis.org/bcbs/basel3.htm?m=2572</a>.
\5\ Id. The Basel Framework can be found at <a href="http://www.bis.org/basel_framework/index.htm">http://www.bis.org/basel_framework/index.htm</a>, and the BCBS continues to update it as
indicated on the website. While the Basel Framework includes
liquidity and other provisions in addition to capital provisions,
this ANPRM addresses only its capital provisions.
\6\ Neither the FBRAs nor any other U.S. regulator is required
by law to adopt the Basel Framework but, as discussed below, the
FRBAs, the FCA (for System banks and associations), and FHFA have
all issued Basel-based capital rules.
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The Basel Framework is intended to improve both the quality and
quantity of banking organizations' capital, as well as to strengthen
various aspects of the international capital standards governing
regulatory capital. Enhanced comparability and disclosure requirements
also improve market discipline, the positive externality provided by
the response of capital markets to disclosed information. The Basel
Framework has two main approaches to calculating risk-weighted assets
for credit risk--the internal ratings-based (IRB) approach and the
standardized approach.\7\ In turn, the IRB approach has two
approaches--the advanced IRB approach (A-IRB) approach and the
foundation IRB approach. While this ANPRM focuses more on the A-IRB
than the foundation IRB approach, we invite comments on both.
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\7\ Basel Framework at CRE20.1 and CRE20.2 (version effective as
of 1/1/2023). The Basel Framework's IRB approach also addresses the
calculation of risk-weighted assets for market risk and operational
risk (see MAR and OPE sections of the Basel Framework), but these
risks are not the focus of this ANPRM.
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Under the Basel Framework's IRB approach, an institution calculates
risk weights using its internal risk rating assignments, probabilities
of default, and other inputs derived from its internal models.\8\ In
general, under the standardized approach, an institution's regulator
assigns fixed risk weights to exposures based on their relative risk
characteristics.\9\
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\8\ See Basel Framework at CRE 30 through CRE 36.
\9\ Basel Framework at CRE 20.
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In 2013 and 2014, the FBRAs adopted the Basel III framework to
apply to the U.S. banking organizations they regulate (U.S. rule).\10\
The U.S. rule applies the A-IRB approach to the largest,
internationally active bank organizations--in general, those with
assets of $700 billion or more--and the standardized approach to
smaller banks.\11\ In addition, the U.S. rule requires the A-IRB
approach banks to

[[Page 4109]]

also calculate their capital ratios under the standardized approach and
provides that their capital ratios are whichever approach yields the
lower ratios. In other words, A-IRB approach banks are required to
comply with whichever approach requires the bank to hold more
capital.\12\
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\10\ 78 FR 62018 (Oct. 11, 2013) (FRB and OCC); 79 FR 20754
(Apr. 14, 2014) (FDIC). This rulemaking refers to the FBRAs' capital
regulations, including amendments after their initial adoption, as
the U.S. rule. The U.S. rule reflects Basel III as well as other
BCBS standards, and the provisions of the U.S. rule that are not
specifically included in the Basel III framework are generally
consistent with the goal of the framework. The U.S. rule is codified
at 12 CFR part 3 (OCC), 12 CFR part 217 (FRB), and 12 CFR part 324
(FDIC).
\11\ 12 CFR 3.1(c)(3) (OCC), 12 CFR 217.1(c)(4) (FRB), 12 CFR
324.1(c)(3) (FDIC).
\12\ The FBRAs' A-IRB approach rules are at 12 CFR part 3 (OCC),
12 CFR part 217 (FRB), and 12 CFR part 324 (FDIC). The regulatory
requirements to hold capital in accordance with whichever approach
requires holding the greater amount of capital are set forth at 12
CFR 3.10(d) (OCC), 12 CFR 217.10(d) (FRB), and 12 CFR 324.10(d)
(FDIC). The U.S. rule includes market risk (as appropriate) and
operational risk, as well as credit risk, in its calculation of
risk-weighted assets under the A-IRB approach. See definition of
``advanced approaches total risk-weighted assets'' in 12 CFR 3.2
(OCC), 12 CFR 217.2 (FRB), and 12 CFR 324.2 (FDIC). As stated above,
this ANPRM is focused on credit risk only.
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In 2016, FCA adopted a rule governing System banks and associations
that is comparable to the standardized approach of the U.S. rule to the
extent appropriate for the System's cooperative structure and status as
a GSE with a mission to provide a dependable source of credit and
related services for agriculture and rural America.\13\ Consistent with
the U.S. rule, the FCA's rule for banks and associations incorporates
key aspects of the Basel III framework.
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\13\ 81 FR 49720 (Jul. 28, 2016). FCA made revisions to the rule
in 2021; see 86 FR 54347 (Oct. 1, 2021). These rules are part 628 of
FCA regulations. FCA did not adopt IRB approaches or market or
operational risk provisions.
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The FHFA issued several final capital rules between 2020 and 2022
that apply aspects of the Basel Framework to the housing GSEs (FHFA
capital rule).\14\ Like the U.S. rule, the FHFA capital rule requires
the housing GSEs to calculate their risk-weighted assets under both the
standardized and A-IRB approaches with the greater of the two used to
determine compliance with risk-based capital requirements.\15\
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\14\ 85 FR 82150 (Dec. 17, 2020); 87 FR 14764 (Mar. 16, 2022).
These rules have been codified at 12 CFR part 1240. As discussed
below, the housing GSEs have been in conservatorship since 2008.
They will not be subject to FHFA's capital rules until after they
exit conservatorship (see 12 CFR 1240.4(d)(1) and (d)(2)). Like the
FBRAs, the FHFA did not adopt the foundation IRB approach and
includes market risk (as appropriate) and operational risk, as well
as credit risk, in its calculation of risk-weighted assets under the
A-IRB approach (see 12 CFR 1240 Subpart E and 12 CFR 1240 Subpart
F).
\15\ 12 CFR 1240.10.
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The FHFA capital rule is particularly relevant to Farmer Mac in
several respects. As discussed earlier, the housing GSEs, like Farmer
Mac, are secondary market GSEs. Like the housing GSEs, Farmer Mac has a
countercyclical role, meaning that while it is an important resource
for liquidity in normal operating conditions, it becomes an even more
important resource for primary lenders under stressful conditions.
The financial crisis of 2007-2009 demonstrated the inadequacy of
the capital requirements that governed the housing GSEs at the time. On
September 6, 2008, ``in response to a substantial deterioration in the
housing markets that severely damaged [the housing GSEs'] financial
condition and left both of them unable to fulfill their missions
without government intervention,'' \16\ the FHFA placed the housing
GSEs into conservatorship (where they remain as of the date the FCA
Board adopted this ANPRM). While the housing GSEs are not subject to
the FHFA capital rule while they are in conservatorship, the FHFA
adopted the FHFA capital rule in anticipation of the eventual
termination of the conservatorships.
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\16\ See ``History of Fannie Mae and Freddie Mac
Conservatorships,'' at https://www.fhfa.gov/Conservatorship/Pages/
History-of-Fannie-Mae_Freddie-
Conservatorships.aspx#:~:text=History%20of%20Fannie%20Mae%20and%20Fre
ddie%20Mac%20Conservatorships,its%20authorities%20to%20place%20each%2
0Enterprise%20into%20conservatorship.
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For Farmer Mac, a strong capital position promotes market
confidence in the Corporation's ability and readiness to provide rural
lenders with a reasonably priced source of liquidity and credit. That
service, in turn, helps lenders provide uninterrupted credit services
to agricultural and rural utility borrowers.
In 2013, FCA adopted regulations governing Farmer Mac (the capital
planning rule) that included provisions based on the Basel III
framework.\17\ The capital planning rule focuses on the capital
planning process, board responsibilities for approving that process,
and the mandatory elements of the capital plan, among other things. In
addition, the capital planning rule requires Farmer Mac's capital plan
to include a Basel-based tier 1 ratio using tier 1 capital comprised of
components that meet the criteria established in definitions set forth
in the Basel III Framework or the U.S. rule, and using a risk-weighted
assets approach that is appropriate given Farmer Mac's business
activities and consistent with broadly accepted banking practices and
standards.\18\ In accordance with the rule, Farmer Mac reports other
capital measures to FCA in agreed-upon call report schedules.
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\17\ 78 FR 65145 (Oct. 31, 2013). This rule is set forth at 12
CFR 652 Subpart B.
\18\ 12 CFR 652.61(b), definition of ``Tier 1 ratio.''
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Although the capital planning rule does not require Farmer Mac to
disclose its tier 1 capital ratio, Farmer Mac voluntarily discloses the
ratio in its Securities and Exchange Commission (SEC) filings its tier
1 ratio as calculated under the A-IRB approach.\19\ In addition, Farmer
Mac voluntarily discloses in its SEC filings that its board has adopted
a capital policy which includes a 2.5% buffer over its internal minimum
tier 1 capital ratio.\20\
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\19\ See, e.g., Farmer Mac Form 10-Q for the quarterly period
ended June 30, 2022, page 111, at <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/845877/000084587722000163/agm-20220630.htm">https://www.sec.gov/ix?doc=/Archives/edgar/data/845877/000084587722000163/agm-20220630.htm</a>.
\20\ See, e.g., Farmer Mac's Form 10-K for the period ending
December 31, 2021, page 32 at <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/845877/000084587722000022/agm-20211231.htm">https://www.sec.gov/ix?doc=/Archives/edgar/data/845877/000084587722000022/agm-20211231.htm</a>.
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Since FCA's adoption of the 2013 capital planning rule, the scale
and complexity of Farmer Mac's operations and secondary market
activities have both increased substantially. Outstanding program
volume was $23.6 billion as of December 31, 2021, up from $14.0 billion
at yearend 2013. Farmer Mac's agricultural finance operations include
an increased focus on participations in, and syndications of, large
commercial loans. Further, the scope of its rural infrastructure
finance operations has expanded to include renewable energy project
finance and telecommunications finance focused on broadband services.
Because of Farmer Mac's growth and the increasing complexity of its
operations, and in light of enhancements other U.S. regulators have
made to their capital requirements since Farmer Mac's capital planning
requirements were adopted in 2013, FCA believes it is appropriate to
consider whether and how Farmer Mac's capital requirements should be
enhanced to strengthen its safe and sound operations.

III. Discussion of Farmer Mac's Business and Current Capital
Requirements

A. Farmer Mac's Business Operations

Under Farmer Mac's agricultural finance activities, it purchases
eligible loans directly from lenders, provides advances against
eligible loans by purchasing obligations secured by those loans or
assets that qualify as eligible agricultural real estate collateral,
securitizes assets and guarantees the resulting securities, and issues
long-term standby purchase commitments for eligible loans. Securities
guaranteed by Farmer Mac may be held either by the originator of the
underlying assets or by Farmer Mac, or they may be sold to third-party
investors.
Under its rural infrastructure financing activities, Farmer Mac
purchases, or commits to purchase, and guarantees, qualified rural
electric and

[[Page 4110]]

telephone utility loans, or securities backed by such loans, directly
from cooperative lenders. Congress granted Farmer Mac the authority for
this activity as program business in 2008.\21\
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\21\ See Section 5406 of Public Law 110-246, 122 Stat. 1651,
1920, June 18, 2008 (codified at section 8.0(9) of the Act).
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Farmer Mac's total program business volume was $23.6 billion which
equates to 20-year compound average growth of 9.0 percent since yearend
2001. Of that $23.6 billion in total outstanding program business
volume, 75 percent is in agricultural finance and 25 percent in rural
infrastructure finance.\22\
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\22\ Farmer Mac is authorized to invest in eligible non-program
investments. In this activity, Farmer Mac purchases eligible
securities for the purposes of enterprise risk management, including
complying with its interest rate risk requirements, complying with
its liquidity risk requirements, managing surplus short-term funds,
and complementing program business activities. See 12 CFR 652.15.
These investments also contribute to total risk-weighted assets for
capital purposes.
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B. Farmer Mac's Current Capital Requirements

Section 8.11 of the Act authorizes FCA to provide for the general
supervision of the safe and sound performance of the powers, functions,
and duties of Farmer Mac.
Section 8.32 of the Act requires FCA to establish a risk-based
capital test to determine the amount of regulatory capital \23\ that
would be sufficient for Farmer Mac to maintain positive capital during
a 10-year period under certain specified circumstances. FCA first
issued regulations governing Farmer Mac capital to implement the
requirements for the Risk-based Capital Stress Test (RBCST) in 2001.
These regulations have been updated three times, most recently in
2011.\24\ FCA is not requesting comment on potential changes to the
RBCST in this ANPRM.\25\
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\23\ ``Regulatory capital'' is defined in section 8.31(5) of the
Act as core capital ``plus an allowance for losses and guarantee
claims, as determined in accordance with generally accepted
accounting principles [GAAP].''
\24\ These regulations are set forth at 12 CFR part 652 Subpart
B. The regulations were published at 66 FR 19048 (Apr. 12, 2001); 71
FR 77247 (Dec. 26, 2006); 73 FR 31937 (Jun. 5, 2008); and 76 FR
23459 (Apr. 27, 2011).
\25\ FCA notes that at the time the housing GSEs entered
conservatorship in 2008, their regulator had in place a similar
RBCST-type requirement pursuant to the housing GSEs' authorizing
statute. This statute also imposed minimum leverage ratio
requirements similar to, though lower than, the leverage ratio
requirements imposed on Farmer Mac by the Act.
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Section 8.33 of the Act established minimum core capital \26\
(leverage) ratios, for which FCA also published regulations in
2001.\27\ FCA is also not seeking comment on potential changes to these
regulations.
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\26\ ``Core capital''is defined as the sum of the following as
determined in accordance with GAAP: the par value of outstanding
common and preferred stock, paid-in capital, and retained earnings.
\27\ 66 FR 19048 (Apr. 12, 2001), originally codified at 12 CFR
650.25(c), and later moved to 12 CFR 652.75(c).
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As discussed above, FCA's capital planning rule requires Farmer Mac
calculate and include in its capital plan a Basel-based tier 1 ratio as
defined by established standards or regulations.\28\ The capital
planning rule incorporates by reference Basel capital-related terms
\29\ that are also in the U.S. rule.
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\28\ 12 CFR 652.61(b), definition of ``Tier 1 ratio.''
\29\ Id.
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The capital planning rule requires Farmer Mac's board of directors
to review the robustness of its process for assessing capital adequacy,
to correct any deficiencies in that process, and to approve the annual
capital plan.\30\ The rule also established an annual assessment by FCA
of Farmer Mac's capital plan.\31\ The rule requires Farmer Mac to
consider the results of its stress tests and FCA's assessment of the
plan in its capital planning process, including specific stress
scenarios required by FCA.\32\
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\30\ 12 CFR 652.61(c).
\31\ 12 CFR 652.61(d) and (e).
\32\ 12 CFR 652.61(c)(1)(iii)(A), (c)(2)(i)(A).
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IV. Request for Comments

FCA solicits comments on the following questions. Comments should
be supported with relevant data or examples when available. These
questions refer collectively to the Basel Framework, the U.S. rule,
FCA's capital regulations governing System banks and associations, and
the FHFA's capital regulations as the ``existing capital frameworks.''

A. General

1. What core principles are most important in FCA's consideration
of whether capital regulations governing Farmer Mac should be more
closely aligned with any of the existing capital frameworks?
2. What unintended consequences, if any, could result from the
application of any of the existing capital frameworks to Farmer Mac?

B. Risk-Based Approaches and Buffers

3. FCA's existing regulations do not specify whether Farmer Mac
must use the standardized approach, an IRB approach, or both to
calculate credit risk-weighted assets. As discussed above, Farmer Mac
reports its capital measures to FCA in agreed-upon call report
schedules and voluntarily makes certain public disclosures regarding
its use of the A-IRB approach. The IRB approach was intended to apply
to large, international lenders and include fundamental assumptions
consistent with their size and the scope of their business profiles.
The U.S. rule and the FHFA capital rule require regulated entities
that use the A-IRB approach to also calculate credit risk-weighted
assets using the standardized approach, and the binding capital minimum
requirements are based on the greater of the risk-weighted asset
calculations under the two approaches.
(a) Should FCA consider requiring Farmer Mac to comply with the
standardized approach, the IRB approach, or both? If so, which approach
or approaches should Farmer Mac be required to comply with, and why?
(b) What adjustments, if any, should FCA consider to tailor either
the standardized approach or an IRB approach to take account of Farmer
Mac's smaller size, more limited financing authorities, or other unique
aspects of its business model?
(c) If FCA were to require Farmer Mac to use both the standardized
and an IRB approach to calculate its credit risk-weighted assets, how
should differences between the two approaches' results be treated with
respect to capital requirements? For example, the U.S. rule and FHFA
both require the use of the greater of the two risk-weighed assets
calculation.
4. The BCBS' summary of 2017 post-crisis reforms notes that the
financial crisis of 2007-2009 highlighted shortcomings in the
internally modeled approaches for regulatory capital, including the IRB
approach to credit risk.\33\ The shortcomings included excessive
complexity of the IRB approach, the lack of comparability in banks'
internally modeled IRB capital requirements, and the lack of robustness
in modeling certain asset classes.\34\
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\33\ BCBS, ``High-level summary of Basel III reforms,'' December
2017, at 5. <a href="https://www.bis.org/bcbs/publ/d424_hlsummary.pdf">https://www.bis.org/bcbs/publ/d424_hlsummary.pdf</a>.
\34\ Id.
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The BCBS noted that internal models should allow for more accurate
risk measurement than the standardized approach. It cautioned, however,
that internal modeling, when used to set minimum capital requirements,
can create incentives to minimize risk weights. The BCBS stated that
``certain types of asset, such as low-default exposures, cannot be
modelled reliably or robustly.'' \35\
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\35\ BCBS, ``Finalising Basel III, In brief'', December 2017,
page 1. <a href="https://www.bis.org/bcbs/publ/d424_inbrief.pdf">https://www.bis.org/bcbs/publ/d424_inbrief.pdf</a>.

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[[Page 4111]]

The existing capital frameworks--particularly the A-IRB approach--
have expanded the use of floors to address these shortcomings in
modeling. These frameworks impose floors on measures--such as
probability of default (PD), loss given default (LGD), and risk-
weights--that apply to certain exposures. These floors prevent the
measures from falling below specified levels, even if the modeling
would otherwise result in lower levels. The existing capital frameworks
include both input floors, for measures such as PD and LGD,\36\ and
output floors (i.e., risk-weight floors to be applied when model
outputs are lower than the floor) for different exposures.
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\36\ For example, see Basel Framework at CRE32.4 for PD floor
and CRE 32.16 for LGD floor (version effective as of January 1,
2023). For examples of the U.S. rule PD and LGD floors see 12 CFR
3.131 (OCC); 12 CFR 217.131 (FRB); and 12 CFR 324.131 (FDIC).
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If FCA adopts Basel Framework-based requirements, should it
establish floors similar to those in the existing capital frameworks?
If so, what should those floors be and why? Given the differences among
the risk-weight floors established in the other capital frameworks, is
there a policy among them that should be considered the most readily
transferrable to a Farmer Mac capital framework, or should FCA develop
Farmer Mac-specific risk-weight floors?
5. The existing capital frameworks require entities to hold capital
over the minimum requirements--referred to as ``buffers''--to avoid
restrictions on dividend payouts and discretionary bonuses. The
existing capital frameworks include different types of buffers
including, but not limited to, a capital conservation buffer and a
countercyclical buffer.\37\ Should capital buffers be required for
Farmer Mac and, if so, what type should FCA consider?
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\37\ See buffer requirements at section RBC30 of the Basel
Framework; 12 CFR 3.11 (OCC); 12 CFR 217.11 (FRB); and 12 CFR 324.11
(FDIC) of the U.S. rule; 12 CFR 628.11 of the FCA banks and
associations capital rule; and 12 CFR 1240.11 of the FHFA capital
rule. A conservation buffer is designed to ensure that banks build
up capital buffers outside periods of stress which can be drawn down
as losses are incurred. Under a countercyclical buffer regime, the
regulator monitors credit growth and other indicators for signs of
elevated system-wide risk; based on this assessment the regulator
may put in place a countercyclical buffer requirement when
circumstances warrant and then remove that buffer when credit risk
returns to more normal levels. Other types of buffers also exist.
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6. The existing capital frameworks require certain entities to make
capital-related public disclosures to improve market discipline and
transparency.\38\ The nature of these disclosures varies depending on
whether the entities follow the standardized or an IRB approach.
Currently, as discussed above, within a Basel-based context, Farmer Mac
voluntarily discloses its tier 1 ratio as calculated under the A-IRB
approach, as well as its adoption of a buffer over its internal minimum
tier 1 capital ratio. What disclosures, if any, should FCA consider
requiring for Farmer Mac?
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\38\ See Basel Framework section DIS10; 12 CFR 3.61-3.63 (OCC);
12 CFR 217.61-217.63 (FRB); 12 CFR 324.61-324.63 (FDIC) (U.S. rule
standardized approach entities with total consolidated of $50
billion or more); 12 CFR 3.171-3.173 (OCC); 12 CFR 217.171-217.173
(FRB); 12 CFR 324.171-324.173 (FDIC) (U.S. rule A-IRB approach
entities); 12 CFR 628.61-628.63 (FCA rule for System banks); 12 CFR
1240.61-1240.63 (FHFA).
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C. Leverage Ratio and Leverage Buffer

7. The Basel Framework requires a minimum leverage ratio (i.e., a
non-risk-based ratio) of three percent.\39\ The U.S. rule requires a
minimum leverage ratio of four percent to be considered adequately
capitalized and an additional supplementary leverage ratio of three
percent for A-IRB approach users.\40\ FCA regulations governing System
banks and associations require a four percent leverage ratio with a
leverage buffer of one percent.\41\ The FHFA capital rule requires a
2.5 percent minimum tier 1 leverage ratio plus a leverage buffer that
adjusts based on the entity's market share.\42\ FCA regulations do not
require Farmer Mac to calculate a leverage ratio or buffer.
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\39\ Basel Framework at LEV20.6.
\40\ See 12 CFR 217.10 (FRB); 12 CFR 3.10 (OCC); 12 CFR 324.10
(FDIC).
\41\ See 12 CFR 628.11.
\42\ See 12 CFR 1240.10(f) and 12 CFR 1240.11, respectively.
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Should FCA consider leverage ratio requirements for Farmer Mac? If
so, what leverage ratio requirements should FCA consider? Should FCA
consider a leverage buffer for Farmer Mac? If so, what type and
structure should FCA consider?

D. Other

8. What other approaches, risk categories (e.g., market risk and
operations risk, including model risk), or methodologies not discussed
above should FCA consider in updating its regulatory capital framework
for Farmer Mac?

Dated: January 17, 2023.
Ashley Waldron,
Secretary, Farm Credit Administration Board.
[FR Doc. 2023-01042 Filed 1-23-23; 8:45 am]
BILLING CODE 6705-01-P

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