Title: FINAL RULE--Assessment and Apportionment of Administrative Expenses; Loan Policies and Operations; Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; Disclosure to Shareholders--12 CFR Parts 607, 614, 615, and 620
Issue Date: 07/22/1994
Agency: FCA
Federal Register Cite: 59 FR 37403
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Parts 607, 614, 615, and 620

RIN 3052-AB44

Assessment and Apportionment of Administrative Expenses; Loan Policies and Operations; Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; Disclosure to Shareholders


ACTION: Final rule.

SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit Administration Board (Board), amends the regulations relating to the components of permanent capital for Farm Credit System (Farm Credit or System) banks and associations. The objective of these regulations is to implement amendments to the Farm Credit Act of 1971 (1971 Act) made by the Farm Credit Banks and Associations Safety and Soundness Act of 1992 (1992 Act). The effect of the regulations is to establish requirements for the agreement between a Farm Credit Bank (FCB) and its related direct lender associations specifying where the earnings held by the FCB and allocated to associations may be counted as permanent capital, to specify how these earnings would be counted in the absence of an agreement, to provide a date certain for the exclusion from capital of payments by Farm Credit institutions to the Farm Credit System Financial Assistance Corporation (FAC) made in connection with the repayment of Treasury-paid interest, and to make other conforming changes to implement the statutory amendments. Technical and conforming changes are made throughout the agency's regulations.

EFFECTIVE DATE: The regulations shall become effective on December 31, 1994.

FOR FURTHER INFORMATION CONTACT:

Robert S. Child, Policy Analyst, Regulation Development, Office of Examination, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703) 883-4444, or

Rebecca S. Orlich, Senior Attorney, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444.
SUPPLEMENTARY INFORMATION: On June 15, 1993, the FCA Board proposed amendments to its regulations that would implement the changes set forth by the 1992 Act. (See 58 FR 34004, June 23, 1993.) The FCA received comments in response to these proposed regulations from The Farm Credit Council on behalf of its membership and the Federal Farm Credit Banks Funding Corporation, two Farm Credit Banks (FCBs), a Farm Credit association, and a state bankers' association. These comments were fully considered by the FCA in drafting the final regulations. The comments and the FCA's response to the comments are discussed below, along with an explanation of any material changes made to the proposed regulations. In addition, technical and clarifying changes to language of the proposed regulations have been made in the final regulations.

I. General Comments

A commentor asserted that some of the proposed regulations, particularly 615.5210(e)(2)(ii)(A) through (C) and (E), inject the FCA into the decision making process of the banks and associations as they attempt to develop agreements that will best fit their business needs. The proposed regulations cited by the commentor pertain to the time period of the allocation agreement, the effective date, the prohibition on amendments more often than annually without FCA approval, and the automatic 1-year extension if neither party objects. As is explained in more detail below, the regulatory requirements were proposed primarily for safety and soundness reasons but also provided for the administrative convenience of the System institutions and the FCA. The FCA also attempted to provide a framework that would permit negotiation between banks and associations on an equitable basis. The final regulations contain modifications to the proposed regulations, including certain deletions of provisions pertaining to administrative convenience, to the extent the FCA believes appropriate without compromising safety and soundness and fairness principles.

A commentor asserted that the underlying impact of the proposed regulations was to provide greater flexibility to the FCBs in competing with private sector lenders and criticized this as contrary to the public good and inconsistent with the objective of reducing Government's role in the free market. The FCA disagrees. The proposed regulations do not augment the statutory authority of the FCBs. The "greater flexibility" in allocating capital is provided by the statute and is not expanded by the regulations.

A commentor stated a belief that the intent of the 1992 Act amendment to section 4.3A(a)(1)(B) of the 1971 Act was to require FCBs and associations to enter into allocation agreements. The FCA disagrees that the law mandates allocation agreements and does not believe it is appropriate or feasible to promulgate a regulation forcing nonagreeing associations and FCBs to enter into agreements. In the event that there is no agreement, the allocation formula provides an orderly way of determining which institution will count the allocated investment, or any part of it, as permanent capital.

II. Specific Comments

Section 615.5201(a)-Definition of "Allocated Investment"

One commentor requested clarification that allocated earnings "retained by the bank" means "not paid in cash." This was the intended meaning of the regulation, consistent with the statutory language. The FCA has added clarifying language in the final regulation.

Section 615.5201(j)(6)-Definition of "Permanent Capital"

A commentor encouraged the FCA to provide guidelines in the regulations by which the financial assistance provided by the Farm Credit System Insurance Corporation (FCSIC) would be counted as permanent capital. In addition, the commentor asserted that the nature of the security, and not the holder of the security, should be the determinant in counting capital.

The FCA does not believe it necessary or useful to set forth in the regulations guidelines to be followed by the FCA in determining how it would count assistance provided by the FCSIC. Since the FCA does not know what form FCSIC assistance may take, it is impossible to determine at this time whether the assistance would qualify as permanent capital. Moreover, the FCA disagrees with the comment that the [*37401] FCSIC should be treated the same as any other security holder in determining whether FCSIC assistance is permanent capital. The role of the FCSIC as a provider of financial assistance to System institutions is statutory and unique.

Section 615.5210(d)-Counting of Treasury-Paid Interest as Permanent Capital

A commentor stated a belief that the preamble description of proposed 615.5210(d) was inconsistent with the text of the proposed regulation, in that the preamble indicated that only assessments passed on directly to associations would be added back to the association's capital (and would not be added back to the bank's capital).

For purposes of calculating the permanent capital ratio, it was not the FCA's intention to differentiate between assessments directly passed on to the associations and assessments passed on "indirectly (through loan pricing or otherwise)" as provided by the statute. Congress apparently contemplated that there would be three possible ways of paying the cost of assessments:

(1) The FCB would not directly or indirectly pass on the cost, even though the ultimate effect would be felt by the associations;

(2) The FCB would assess associations directly for an amount based on proportionate average accruing retail loan volumes of the associations for the preceding year; or

(3) The bank would indirectly assess associations by adjusting the interest rate on the direct loan or some other method based on proportionate average accruing retail loan volumes of each association for the preceding year.

The difference between method 1 and method 3 is that the ultimate effect of method 1 on an association is in proportion to the amount of its investment in the bank or its direct loan, whereas method 3's "cost" is based on average accruing retail loan volumes. Changes have been made in the final regulations to clarify that, when an FCB directly assesses an association (method 2), or when it indirectly assesses an association by specifically identifying the assessment in other charges made by the FCB to the association (method 3), the amount of the assessment is added back to the capital of the association (and not to the capital of the bank).

In this connection, it is the FCA's view that, while the regulations do not require an FCB to enter into an agreement with its direct lender associations that would specify whether and how assessments would be passed through, there are important advantages in having a written understanding. This would clearly document the understandings and expectations of all parties and would provide more certainty to all parties for business planning and capital building purposes.

A commentor asked how the amount of assessments passed indirectly to an association is to be reported in the Call Reports of the institution. The instructions to the Call Reports specify how this is to be done.

Section 615.5210(e)(2)(ii)-Basis for Allotment of Allocated Investment

A commentor recommended that the references to "a percentage allotment" of the allocated investment be changed to a "percentage or other allotment." Such a change would, for example, enable an FCB to count the allocated investment up to a specific percentage of the association's direct loan from the bank. Alternatively, the bank may wish to count a specified dollar amount of the investment. The FCA believes that an allotment based on a specific dollar amount would be appropriate but does not believe that the allotment should be tied to floating factors such as the direct loan amount. The permanent capital ratio is used as one of the key determinants of a Farm Credit institution's financial health and stability. Allowing permanent capital to move frequently based on floating measures, such as loan volume outstanding, diminishes the permanent capital ratio's usefulness as a financial measure. If the allotment is left to float, it could change daily, beyond the control of management. This may not be appropriate during stressful periods in some institutions. n1 Accordingly, the final regulation has been revised to permit only an allocation based on a dollar amount and/or a percentage of the allocated investment. The amount of allocated investment could be determined based on a dollar amount, and any earnings that may be distributed could be allotted on a percentage basis. The FCA believes that this permits adequate flexibility.

n1 If, for example, an institution's permanent capital ratio were under the minimum required, the capital ratio should not be lowered based on an automatic adjustment.

Section 615.5210(e)(2)(ii)(C)-Amendments to Allocation Agreement

Three commentors objected to the restrictions in the proposed regulations that would prohibit the reallotment of the association's investment in the FCB more often than annually without the FCA's approval. While one commentor acknowledged that the FCA may have a legitimate regulatory concern in curbing the potential abuse of amendments to manipulate capital ratios, the commentor asserted that FCA prior approval is an inappropriate means of addressing the concern. In the commentor's view, a prior approval is inconsistent with the FCA's role as an arm's-length regulator, and without specific criteria for granting approval the FCA could become involved in the business decisions of the institutions.

The FCA has reexamined the proposed prior approval procedure and has determined that it would be appropriate to replace it with a provision enumerating specific circumstances in which a reallotment may be made. Therefore, the final regulations permit only annual amendments to the allocation agreement, except in the event of a reorganization or merger, or when a reallotment is required to enable the FCB to make payments in connection with the Capital Preservation Agreements.

The FCA strongly believes that the more frequently an allocated investment "moves" in the computation of the permanent capital ratio, the less reliable the permanent capital ratio is as an indicator of the financial soundness of an institution or of trends in the institution's operations. Consequently, one of the most important uses of the minimum permanent capital standard would be eliminated if institutions were permitted to change their allotments frequently and at will.

Other than in the context of a merger or other corporate reorganization of one of the parties, when a reallotment would likely be necessary, or when a reallotment is necessary to enable the FCB to make payments in connection with the Capital Preservation Agreements, the FCA is aware of only a limited number of situations in which there would be any incentive for the institutions to reallot capital. For example, as part of its examinations, the FCA makes evaluations of the capital adequacy of each institution. The FCA is concerned that, if a reallotment is permitted as often as desired, it would be permissible to reallot capital in the time period between the examination of an FCB and an affiliated association for the benefit of the institution to be examined next.

Moreover, since the lending limit of an institution is based on the amount of its permanent capital, it would also be permissible to temporarily reallot capital to enable an institution to make a loan that would otherwise be [*37402] in excess of its lending limits. Similarly, an institution could reallot capital in order to retire stock that it would otherwise be unable to retire, or even attempt to forestall an enforcement action by the FCA based on insufficient permanent capital. Although these matters could be viewed by institutions as "internal business decisions," they raise safety and soundness and other issues.

Consequently, as a policy matter, the FCA views frequent changes in where the capital is counted as undesirable. The FCA believes that it is more efficacious to prevent the possibility of manipulation by regulation rather than to examine institutions to determine, after the fact, if such manipulation of their capital has occurred.

Section 615.5210(e)(2)(ii)(A)-Effective Date of Allocation Agreement

Proposed 615.5210(e)(2)(ii)(A) provided that all of the allocation agreements would become effective at the start of the second quarter of each year. A commentor stated that there was no need for delay in implementing the agreement and noted that many districts currently implement the agreement on a calendar year basis. The commentor also stated the opinion that the effective date of these agreements is a procedural matter that ought to be left to the discretion of the parties and should be controlled by the business needs and planning processes of the affected institutions.

The date proposed by the regulations was set, for the convenience of the parties, as the quarter following the allocation of earnings from the FCBs to associations so that the actual dollar amount of the allocation would be known when the allotment was being determined. In addition, setting a specific date would have facilitated the FCA's oversight of institutions. However, upon reconsideration, the FCA believes that the requirement to file a copy of the agreement with the responsible FCA examination field office will be sufficient to enable the agency to fulfill its oversight responsibilities. The final regulations permit banks and associations to select any date as the effective date of their agreement, provided that such date is no less than 12 months after the effective date of the existing agreement.

Section 615.5210(e)(2)(ii)(D)-Filing of Allocation Agreement With the FCA

Proposed 615.5210(e)(2)(ii)(D) required an allocation agreement to be sent to the FCA and any nonparty associations (i.e., associations that were not parties to that allocation agreement) in the district within 3 days after the agreement was signed. A commentor asked that the time period be increased from 3 days to 20 business days, stating that this would enable a district with many associations to submit all of the agreements in one mailing.

The FCA has reconsidered the proposal and has determined that a more flexible filing requirement would be less burdensome to the banks and associations, without compromising the FCA's ability to monitor the capital strength of the institutions. The final regulation deletes the 3-day FCA filing requirement and provides, instead, that a certified copy of the agreement must be filed with the appropriate FCA field office on or before the effective date of the agreement, and that copies of agreements must be sent to other associations in the district within 30 calendar days of signing.

A commentor requested assurance that the allocation agreement could consist of a contract, an exchange of board resolutions, or an incorporation of the terms of the agreement into the business plans of the institutions. The commentor is correct that any of the means described would be appropriate.

Section 615.5210(e)(2)(ii)(E)-Notification to the FCA of Objection to the Extension of an Allocation Agreement

Proposed 615.5210(e)(2)(ii)(E) provided that the allocation agreement would be automatically extended for another year if not amended and if neither party to the agreement notifies the FCA of its objection to the continuation of the agreement at least 30 days before the expiration date. A commentor suggested that the notification to the FCA be made in writing. The FCA agrees that this notification should be made in writing, and the final regulations include this requirement.

The commentor also stated that the agreement itself should govern such matters as termination and extension rather than the regulations. The FCA has considered this comment and agrees in principle that the bank and association should be free to provide in their agreement for such matters as termination and extension. However, the FCA also believes that it is appropriate to provide for an automatic extension of the agreement if the matter has not been addressed in the agreement. The final regulations reflect this change.

Section 615.5210(e)(2)(ii)(F)-Default Allotment Formula

A commentor asked for clarification of whether permanent capital ratios for the default allocation formula would be computed in proposed 615.5210(e)(2)(ii)(F) using a 3-month average daily balance, as the regulations otherwise require for permanent capital ratio computations. The ratios would be computed in the same manner in this circumstance, using a 3-month average daily balance, and the final regulations contain this clarification. The regulations further provide that the permanent capital computations must be calculated as of the expiration date of the existing agreement.

Section 615.5210(e)(2)(ii)(G)-Reallotment in Connection With Payments Relating to Capital Preservation Agreements

Proposed 615.5210(e)(2)(ii)(G) required a bank and one or more associations to amend their agreement in order to reallot the allocated investment if such reallotment would enable the FCB to make its Capital Preservation Agreement annuity payment and still meet minimum permanent capital standards. However, it did not specify a basis to determine which associations must amend their agreements. A commentor recommended that the regulations require that the allocation agreements provide for such reallotment.

The FCA agrees with the commentor and believes that this issue would be appropriately provided for in the allocation agreements as suggested. The final regulations include a provision requiring the issue to be addressed in the allocation agreement.

Other Issues

One commentor recommended that, in addition to the preferred stock that System institutions are presently authorized to issue, subordinated notes and intermediate-term preferred stock be allowed to be counted as permanent capital. The commentor suggested that such issues be limited to 25 percent of total capital so that an institution would not be able to rely principally on this source. Another commentor expressed an opinion that the use of debt instruments as a substitute for capital would undermine the safety and soundness of the System and, therefore, opposed that part of the proposal. Yet another commentor stated that debt securities should be included in permanent capital if they are counted on a discounted or sinking fund basis. These proposals are still under consideration by the FCA and will be addressed in future proposed regulations.

The FCA has deleted from the definition of permanent capital the reference to preferred stock issued to the FAC, since all such stock has now been retired. [*37403]

In addition, the proposed regulations inadvertently eliminated a provision of existing 615.5210(d)(3) regarding investments made in connection with loan participations. That provision states that, where an institution invests in another institution to capitalize a participation interest, the investing institution must deduct from its total capital an amount equal to its investment in the participating institution. The proposed regulations addressed situations where an institution invested in a bank for any purpose, including to capitalize a loan participation, but did not address any situation where a bank or association invested in another association (to capitalize a loan participation or for any other purpose). The provision from the existing regulations has been revised to apply only to investments in associations and restored as 615.5210(e)(5) in the final regulations, and the succeeding paragraphs have been renumbered accordingly. Furthermore, proposed 615.5210(e)(3) has been revised and a new paragraph (e)(4) has been added to clarify that all earnings allocated by a bank to a recipient will count as permanent capital of the bank in the absence of an allocation agreement, except when the bank is a Farm Credit Bank or agricultural credit bank and the recipient is a Farm Credit association, in which case the default allotment formula would apply.

Finally, these regulations include amendments to parts 607, 614, 615 (subpart E), and 620 of the regulations. These changes, as more fully described below, are conforming and clarifying changes to provisions containing references to existing capital regulations that are now covered by various provisions of new 615.5201 and 615.5210(d), (e), and (f). The FCA has determined that the notice and comment requirements of 5 U.S.C. 553 (b) and (c) do not apply in this situation. Notice and public procedure thereon are unnecessary because the amendments are not substantive in nature and do not impose new requirements. Therefore, there is no reason to solicit public comments on them. Accordingly, the FCA finds that good cause exists to promulgate final amendments to these provisions without notice and comment.

Conforming changes have been made to the capital regulation references in 614.4351(a) to account primarily for the renumbering of paragraphs. The references to revised paragraph (e) (2), (3), and (4) of 615.5210, replace the reference to paragraph (d)(2) of that section in the existing regulations. While the methodology in amended 614.4351(a) for computing an institution's lending limit base will be somewhat different, and in some cases more complicated, because of the amendments to the capital regulations, the effect will be the same. n2 To facilitate institutions' understanding and interpretation of the lending limit calculation, the language describing the calculation has been clarified regarding the sequence of the adjustments and regarding which institution will count the investment in question in its lending limit base. We note, in this connection, that the "investment" includes any equities that are purchased as well as equities that are allocated in a distribution of earnings on participations. The FCA is considering how the calculation might be simplified and will publish for comment any proposed substantive changes that may be appropriate.

n2 In other words, the revised 614.4351(a) will continue to require that an investment held to capitalize a loan participation interest sold to another institution will be included in the lending limit base of the institution that holds the investment (i.e., the institution that sold the participation interest).

With regard to regulation 614.4710(a)(1)(i), instead of the current reference by citation to the capital regulations relating to the elimination of certain investments for the purpose of calculating a limit on bankers acceptances for a bank for cooperatives, the actual referenced language has been inserted as an aid to the reader.

Lastly, the conforming amendments in 607.2, 615.5131(t), and 620.1(j) have been made to reflect the renumbering of existing capital provisions.

List of Subjects

12 CFR Part 607

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

12 CFR Part 614

Agriculture, Banks, banking, Foreign trade, Reporting and recordkeeping requirements, 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.

For the reasons stated in the preamble, parts 607, 614, 615, and 620 of chapter VI, title 12 of the Code of Federal Regulations are amended to read as follows:

PART 607-ASSESSMENT AND APPORTIONMENT OF ADMINISTRATIVE EXPENSES

1. The authority citation for part 607 continues to read as follows:

Authority: Secs. 5.15, 5.17 of the Farm Credit Act (12 U.S.C. 2250, 2252, 3025).

607.2 -- [Amended]

2. Section 607.2 is amended by removing the reference " 615.5210(e)" and adding in its place " 615.5210(f)" in the introductory text of paragraph (b).

PART 614-LOAN POLICIES AND OPERATIONS

3. The authority citation for part 614 continues to read as follows:

Authority: Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A, 4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.19, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8, 7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011, 2013, 2014, 2015, 2017, 2018, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 2096, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184, 2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2207, 2219a, 2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2, 2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 of Pub. L. 100-233, 101 Stat. 1568, 1639.

Subpart J-Lending Limits

4. Section 614.4351 is amended by revising paragraph (a) to read as follows:

614.4351 -- Computation of lending limit base.

(a) Lending limit base. An institution's lending limit base is composed of the permanent capital of the institution, as defined in 615.5201(j) of this chapter, with adjustments provided for in 615.5210(d), (e)(1), (e)(2), (e)(3), (e)(4), and (e)(6) of this chapter, and with the following further adjustments:

(1) Where one institution invests in another institution in connection with the sale of a loan participation interest, the amount of investment in the institution purchasing this participation interest that is owned by the institution originating the loan shall be counted in the lending limit base of the originating institution and shall not be counted in the lending limit base of the purchasing institution.

(2) Stock protected under section 4.9A of the Act may be included in the lending limit base until January 1, 1998.

* * * * * [*37404]

Subpart Q-Banks for Cooperatives Financing International Trade

5. Section 614.4710 is amended by revising the first sentence of paragraph (a)(1)(i) to read as follows:

614.4710 -- Bankers acceptance financing.

* * * * *

(a) * * *

(1) * * *

(i) The dollar amount of such acceptances outstanding at any one time to any one borrower, exclusive of participations sold to others, shall be limited to 10 percent of the net worth of a bank for cooperatives as calculated on a monthly basis after eliminating from its net worth an amount equal to the total of the bank's investments made to capitalize participation interests purchased by other institutions. * * *

* * * * *

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

6. The authority citation for part 615 continues to read as follows:

Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20, 6.26, 8.0, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2160, 2202b, 2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of Pub. L. 100-233, 101 Stat. 1568, 1608.

Subpart E-Investment Management

615.5131 -- [Amended]

7. Section 615.5131 is amended by removing the reference " 615.5201(l)" and adding in its place " 615.5201(n)" in paragraph (t).

Subpart H-Capital Adequacy

8. Section 615.5201 is amended by redesignating paragraphs (a), (b), (c), (d), (e), (f), (g), (h), (i), (j), (k), and (l) as paragraphs (b), (c), (d), (e), (f), (g), (i), (j), (k), (l), (m), and (n) consecutively; by removing the reference " 615.5210(d)" and adding in its place " 615.5210 (d) and (e)" and also by removing the reference " 615.5210(e)" and adding in its place " 615.5210(f)" in newly designated paragraph (k); by adding new paragraphs (a) and (h); and by revising newly designated paragraph (j) to read as follows:

615.5201 -- Definitions.

* * * * *

(a) Allocated investment means earnings allocated but not paid in cash by a System bank to an association or other recipient.

* * * * *

(h) Nonagreeing association means an association that does not have an allocation agreement in effect with a Farm Credit Bank or agricultural credit bank pursuant to 615.5210(e).

* * * * *

(j) Permanent capital means-

(1) Current year retained earnings;

(2) Allocated and unallocated earnings (which, in the case of earnings allocated in any form by a System bank to any association or other recipient and retained by the bank, shall be considered, in whole or in part, permanent capital of the bank or of any such association or other recipient as provided under an agreement between the bank and each such association or other recipient);

(3) All surplus;

(4) Stock issued by a System institution, except-

(i) Stock that may be retired by the holder of the stock on repayment of the holder's loan, or otherwise at the option or request of the holder;

(ii) Stock that is protected under section 4.9A of the Act or is otherwise not at risk;

(iii) Farm Credit Bank equities required to be purchased by Federal land bank associations in connection with stock issued to borrowers that is protected under section 4.9A of the Act;

(iv) Capital subject to revolvement, unless:

(A) The bylaws of the institution clearly provide that there is no express or implied right for such capital to be retired at the end of the revolvement cycle or at any other time; and

(B) The institution clearly states in the notice of allocation that such capital may only be retired at the sole discretion of the board in accordance with statutory and regulatory requirements and that no express or implied right to have such capital retired at the end of the revolvement cycle or at any other time is thereby granted;

(5) Payments to, or obligations to pay, the Farm Credit System Financial Assistance Corporation to the extent permitted by section 6.26(c)(5)(G) of the Act and 615.5210(d); and

(6) Financial assistance provided by the Farm Credit System Insurance Corporation that the Farm Credit Administration determines appropriate to be considered permanent capital.

* * * * *

9. Section 615.5210 is amended by removing the reference to "paragraph (d)" and adding in its place "paragraph (e)" in paragraph (c); by redesignating paragraphs (d) and (e) as paragraphs (e) and (f); by adding a new paragraph (d); by removing the reference to "paragraph (e)(3)" and adding in its place "paragraph (f)(3)" in newly designated paragraph (f)(1); by removing the references "(e)(3)(ii)" and "(e)(2)" and by adding in their places "(f)(3)(ii)" and "(f)(2)" in newly designated paragraph (f)(3)(i); by removing the reference " 615.5210(e)(2)" and adding in its place " 615.5210(f)(2)" in newly designated paragraph (f)(3)(ii)(D)(1); by redesignating newly designated paragraphs (e)(4), (e)(5), (e)(6), and (e)(7) as paragraphs (e)(6), (e)(7), (e)(8), and (e)(9), consecutively; by revising newly designated paragraph (e)(2); by removing newly designated (e)(3); and by adding new paragraphs (e)(3), (e)(4), and (e)(5) to read as follows:

615.5210 -- Computation of the permanent capital ratio.

* * * * *

(d) Until September 27, 2002, payments of assessments to the Farm Credit System Financial Assistance Corporation, and any part of the obligation to pay future assessments to the Farm Credit System Financial Assistance Corporation that is recognized as an expense on the books of a bank or association, shall be included in the capital of such bank or association for the purpose of determining its compliance with regulatory capital requirements, to the extent allowed by section 6.26(c)(5)(G) of the Act. If the bank directly or indirectly passes on all or part of the payments to its affiliated associations pursuant to section 6.26(c)(5)(D) of the Act, such amounts shall be included in the capital of the associations and shall not be included in the capital of the bank. After September 27, 2002, no payments of assessments or obligations to pay future assessments may be included in the capital of the bank or association.

(e) * * *

(2) Where a Farm Credit Bank or an agricultural credit bank is owned by one or more Farm Credit System institutions, the double counting of capital shall be eliminated in the following manner:

(i) All equities of a Farm Credit Bank or agricultural credit bank that have been purchased by other Farm Credit institutions shall be considered to be permanent capital of the Farm Credit Bank or agricultural credit bank.

(ii) Each Farm Credit Bank or agricultural credit bank and each of its affiliated associations may enter into an agreement that specifies, for the purpose [*37405] of computing permanent capital only, a dollar amount and/or percentage allotment of the association's allocated investment between the bank and the association. The following conditions shall apply:

(A) The agreement shall be for a term of 1 year or longer.

(B) The agreement shall be entered into on or before its effective date.

(C) The agreement may be amended according to its terms, but no more frequently than annually except in the event that a party to the agreement is merged or reorganized, or in the event of a reallotment pursuant to paragraph (e)(2)(ii)(G) of this section. The agreement shall include a provision addressing how the agreement will be amended if a reallotment is required by paragraph (e)(2)(ii)(G) of this section.

(D) On or before the effective date of the agreement, a certified copy of the agreement, and any amendments thereto, shall be sent to the field office of the Farm Credit Administration responsible for examining the institution. A copy shall also be sent within 30 calendar days of adoption to the bank's other affiliated associations.

(E) Unless the parties otherwise agree, if the bank and the association have not entered into a new agreement on or before the expiration of an existing agreement, the existing agreement shall automatically be extended for another 12 months, unless either party notifies the Farm Credit Administration in writing of its objection to the extension prior to the expiration of the existing agreement.

(F) In the absence of an agreement between a Farm Credit Bank or an agricultural credit bank and one or more associations, or in the event that an agreement expires and at least one party has timely objected to the continuation of the terms of its agreement, the following formula shall be applied with respect to the allocated investments held by those associations with which there is no agreement (nonagreeing associations), and shall not be applied to the allocated investments held by those associations with which the bank has an agreement (agreeing associations):

(1) The allotment formula shall be calculated annually.

(2) The permanent capital ratio of the Farm Credit Bank or agricultural credit bank shall be computed as of the date that the existing agreement terminates, using a 3-month average daily balance, excluding the allocated investment from nonagreeing associations but including any allocated investments of agreeing associations that are allotted to the bank under applicable allocation agreements. The permanent capital ratio of each nonagreeing association shall be computed as of the same date using a 3-month average daily balance, and shall be computed excluding its allocated investment in the bank.

(3) If the permanent capital ratio for the Farm Credit Bank or agricultural credit bank calculated in accordance with paragraph (e)(2)(ii)(F)(2) of this section is 7 percent or above, the allocated investment of each nonagreeing association whose permanent capital ratio calculated in accordance with paragraph (e)(2)(ii)(F)(2) of this section is 7 percent or above shall be allotted 50 percent to the bank and 50 percent to the association.

(4) If the permanent capital ratio of the Farm Credit Bank or agricultural credit bank calculated in accordance with paragraph (e)(2)(ii)(F)(2) of this section is 7 percent or above, the allocated investment of each nonagreeing association whose capital ratio is below 7 percent shall be allotted to the association until the association's capital ratio reaches 7 percent or until all of the investment is allotted to the association, whichever occurs first. Any remaining unallotted allocated investment shall be allotted 50 percent to the bank and 50 percent to the association.

(5) If the permanent capital ratio of the Farm Credit Bank or agricultural credit bank calculated in accordance with paragraph (e)(2)(ii)(F)(2) of this section is less than 7 percent, the amount of additional capital needed by the bank to reach a permanent capital ratio of 7 percent shall be determined, and an amount of the allocated investment of each nonagreeing association shall be allotted to the Farm Credit Bank or agricultural credit bank as follows:

(i) If the total of the allocated investments of all nonagreeing associations is greater than the additional capital needed by the bank, the allocated investment of each nonagreeing association shall be multiplied by a fraction whose numerator is the amount of capital needed by the bank and whose denominator is the total amount of allocated investments of the nonagreeing associations, and such amount shall be allotted to the bank. Next, if the permanent capital ratio of any nonagreeing association is less than 7 percent, a sufficient amount of unallotted allocated investment shall then be allotted to each nonagreeing association, as necessary, to increase its permanent capital ratio to 7 percent, or until all such remaining investment is allotted to the association, whichever occurs first. Any unallotted allocated investment still remaining shall be allotted 50 percent to the bank and 50 percent to the nonagreeing association.

(ii) If the additional capital needed by the bank is greater than the total of the allocated investments of the nonagreeing associations, all of the remaining allocated investments of the nonagreeing associations shall be allotted to the bank.

(G) If a payment or part of a payment to the Farm Credit System Financial Assistance Corporation pursuant to section 6.9(e)(3)(D)(ii) of the Act would cause a bank to fall below its minimum permanent capital requirement, the bank and one or more associations shall amend their allocation agreements to increase the allotment of the allocated investment to the bank sufficiently to enable the bank to make the payment to the Farm Credit System Financial Assistance Corporation, provided that the associations would continue to meet their minimum permanent capital requirement. In the case of a nonagreeing association, the Farm Credit Administration may require a revision of the allotment sufficient to enable the bank to make the payment to the Farm Credit System Financial Assistance Corporation, provided that the association would continue to meet its minimum permanent capital requirement. The Farm Credit Administration Board may, at the request of one or more of the institutions affected, waive the requirements of this paragraph (e)(2)(ii)(G) if the Board deems it is in the overall best interest of the institutions affected.

(3) A Farm Credit Bank or agricultural credit bank and a recipient, other than an association, of allocated earnings from such bank may enter into an agreement specifying a dollar amount and/or percentage allotment of the recipient's allocated earnings in the bank between the bank and the recipient. Such agreement shall comply with the provisions of paragraph (e)(2) of this section, except that, in the absence of an agreement, the allocated investment shall be allotted 100 percent to the allocating bank and 0 percent to the recipient. All equities of the bank that are purchased by a recipient shall be considered as permanent capital of the issuing bank.

(4) A bank for cooperatives and a recipient of allocated earnings from such bank may enter into an agreement specifying a dollar amount and/or percentage allotment of the recipient's allocated earnings in the bank between the bank and the recipient. Such [*37406] agreement shall comply with the provisions of paragraph (e)(2) of this section, except that, in the absence of an agreement, the allocated investment shall be allotted 100 percent to the allocating bank and 0 percent to the recipient. All equities of a bank that are purchased by a recipient shall be considered as permanent capital of the issuing bank.

(5) Where a bank or association invests in an association to capitalize a loan participation interest, the investing institution shall deduct from its total capital an amount equal to its investment in the participating institution.

* * * * *

PART 620-DISCLOSURE TO SHAREHOLDERS

10. The authority citation for part 620 continues to read as follows:

Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12 U.S.C. 2252, 2254, 2279aa-11); sec. 424 of Pub. L. 100-233, 101 Stat. 1568, 1656.

Subpart A-General

620.1 -- [Amended]

11. Section 620.1 is amended by removing the reference " 615.5201(h)" and adding in its place " 615.5201(j)" in paragraph (j).

Dated: July 19, 1994.

Curtis M. Anderson,

Secretary, Farm Credit Administration Board.

[FR Doc. 94-17907 Filed 7-21-94; 8:45 am]

BILLING CODE 6705-01-P