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Informational Memorandum
Subject:Potential Year 2000 Impact on Liquidity and Funding Needs
Date of Memorandum:11/08/1999
Expiration Date:
Office:OE
Signed By:Smith, Roland
FCA Contact Person:Holland, Tom
Contact Phone:703-883-4484
List of Attachments:none




INFORMATIONAL MEMORANDUM


November 8, 1999



To: The Chief Executive Officer
From: Roland E. Smith, Director /s/
Office of Examination

Subject: Potential Year 2000 Impact on Liquidity and Funding Needs


As part of the Farm Credit Administration's (FCA) efforts to foster readiness for the Year 2000 (Y2K), we ask that you review your Y2K contingency plans to ensure potential liquidity and funding needs are adequately addressed. It is likely that some borrowers will increase their lines of credit or make draws on existing credit lines to fund cashflow needs that may be disrupted by the turn of the century date change. In this regard, you should establish liquidity and funding plans and programs that are supported by your institution's financial strength, capital position, and risk management capabilities.

Federal banking agencies recently issued a joint statement that addressed the agencies’ supervisory approach to possible balance sheet growth due to potential unusual market responses around the century date change. Many of the issues identified in the joint statement are also applicable to Farm Credit System (FCS) institutions and are contained in this Informational Memorandum.

Unusual market responses to the century date change could lead to temporary balance sheet growth at some institutions during the century date change period. This growth could occur if an association or bank were to receive unusually large credit requests. Temporary asset growth could occur if borrowers with large lines of credit make unusual draws on their existing lines of credit, or seek new lines, in response to a perceived need for extra liquidity during the century date change period. Absent other factors, increases in extensions of credit would likely cause an increase in total assets.

All FCS institutions are responsible for prudently managing any temporary balance sheet growth that may occur. As part of our Y2K supervisory program, examiners will evaluate your institution’s contingency plan to address funding and liquidity needs. Contingency plans should address the possible effects on the institution's balance sheet that may arise from increased lending activity. It is likely that some institutions will experience Y2K-related asset growth that is significant in relation to their size, although such growth is expected to be temporary. Some institutions that experience significant Y2K-related asset growth may also experience a temporary decline in regulatory capital ratios as a result of responding to customers' needs over the century date change period. Such a decline has the potential to result in certain consequences for FCS institutions under statutes and regulations the FCA administers. If you believe such problems could arise, please contact the Director of your FCA Field Office to discuss options to address these issues. In assessing options, we will carefully consider whether the decline in capital ratios and risk profiles is temporary and whether prudent and responsible measures have been taken to manage the balance sheet and restore compliance with regulatory requirements.

If you have any questions about this memorandum, please call Thomas Holland at (703) 883-4484, or correspond on the Internet at e-mail address hollandt@fca.gov.