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Farmer Mac Risk-Based Capital Stress Test
Congress required FCA to establish a risk-based capital stress test (RBCST) to ensure that Farmer Mac maintains at least the minimum calculated capital requirement at all times. The test is used to determine the minimum level of regulatory capital Farmer Mac must hold in order to maintain positive capital during a 10-year period characterized by stressful credit and interest rate conditions.
A rule revising the RBCST was published in the Federal Register on June 5, 2008. The new version of the RBCST
- adds a component to recognize the risk-reducing characteristics of structures such as off-balance-sheet AgVantage, a new guarantee product that accounts for a growing percentage of Farmer Mac’s program volume;
- adds a component to recognize counterparty risk on nonprogram investments; and
- revises the estimated carrying costs of nonperforming loans.
Components of the Test
Designed and maintained by OSMO, the RBCST model is essentially two Excel spreadsheets that incorporate loan portfolio data and other data reflecting Farmer Mac’s condition and operations as of the date of submission. Credit loss estimates are obtained using the Credit Loss Module 3.0, which applies statistical loan loss equations to Farmer Mac’s loan portfolio data to produce the estimated credit losses for the RBCST’s 10-year stress period. During development of the RBCST in 1998, a report was issued explaining in detail the loan loss estimation procedures that were later applied in the Credit Loss Module.
The second Excel spreadsheet, the RBCST 3.0, takes credit loss results from the Credit Loss Module and adds interest rate stress information and other Farmer Mac data to produce estimated financial statements for the 10-year stress period. This spreadsheet calculates the estimated equity and reserves necessary for Farmer Mac to maintain positive capital over the 10 years. In accordance with the statute, this amount is then multiplied by 1.3 to account for management and operations risk. The total represents the minimum capital Farmer Mac is required to hold as of the run date.
Using the RBCST
Anyone with financial modeling experience can use the RBCST, the credit loss module spreadsheet, and publicly available Farmer Mac data to derive approximately the same risk-based capital results that Farmer Mac and FCA derive. Because not all Farmer Mac data are publicly available, you will have to make certain assumptions and will not be able to reproduce exact results. These spreadsheets should be used with the guidance provided in the Farmer Mac risk-based capital regulation and technical appendix.
History of the RBCST
The regulation and technical appendix establishing the RBCST was published on April 12, 2001. Farmer Mac’s first submission of the RBCST under the rule was for the quarter ended June 30, 2002. The FCA Board approved a final rule revising the RBCST regulation on November 9, 2006, which was published in the Federal Register on December 26, 2006.
