Title: NOTICE OF PROPOSED RULEMAKING--Capital Adequacy and Minimum Capital Requirements--12 CFR Parts 614 and 615
Issue Date: 10/16/1986
Agency: FCA
Federal Register Cite: 51 FR 36824
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FARM CREDIT ADMINISTRATION

12 CFR Parts 614 and 615

Capital Adequacy and Minimum Capital Requirements

AGENCY: Farm Credit Administration.

ACTION: Notice of proposed rulemaking.

SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit Administration Board (FCA Board), publishes for comment proposed regulations that eliminate FCA prior approval requirements and incorporate requirements contained in the proposed capital adequacy regulations that were published in the July 23, 1986 Federal Register (51 FR 26402).

DATE: Written comments must be received on or before November 14, 1986.

ADDRESS: Submit any comments (in triplicate) in writing to Frederick R. Medero, General Counsel, Farm Credit Administration, McLean, VA 22102-5090. Copies of all communications received will be available for examination by interested parties in the Office of General Counsel, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT: Gary L. Norton, Senior Attorney, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020.

TEXT: SUPPLEMENTARY INFORMATION: On July 23, 1986, the FCA published proposed regulations relating to capital adequacy and minimal capital requirements for Farm Credit System (System) institutions (51 FR 26402). The capital adequacy regulations, when final, will eliminate many FCA approval requirements that are currently applicable to the capital-related activities of System institutions. These proposed regulations, approved by the FCA Board at its regularly scheduled August meeting, contain conforming amendments to other regulations that will eliminate specific approval requirements and incorporate other changes provided for in the proposed capital adequacy regulations

The current regulation 614.4270 establishes a general requirement for System institutions to develop interest rate policies. Proposed 614.4270 would incorporate the requirements contained in the capital adequacy regulations by requiring each System institution to set interest rates at a level sufficient to generate the earnings required to maintain its capital above the minimum capital requirements, taking into consideration all relevant requirements, including each institution's obligation to provide assistance to other System institutions.

The current regulation 614.4280 requires System institutions to obtain FCA approval for their interest rate policies and the rates established pursuant to those policies. In addition, the regulation establishes parameters for the contents of interest rate plans and limits the power of bank boards to delegate interest rate setting authorities. Proposed 614.4280 eliminates the requirements for FCA prior approvals and, in accordance with the proposed capital adequacy regulations, requires each System institution to establish interest rates in accordance with the institution's financial plan. The proposed regulation also clarifies the authority of each System institution's board of directors to delegate interest rate setting activities to management

The current regulation 614.4320 provides that interest rates charged by production credit associations (PCAs) shall be authorized by Federal intermediate credit bank (FICB) programs which have been adopted by the bank board and approved by the FCA. Proposed 614.4320 provides that each PCA shall establish interest rates in accordance with the PCA's financial plan. As with all regulations providing for activities to be undertaken in accordance within financial plans, when the institution's financial condition has deteriorated and the financial health of the institution is threatened, FCA approval of those financial plans will be required in accordance with the proposed capital adequacy regulations.

The current regulation 614.4330 establishes requirements relating to loan participations. The proposed amendment to 614.4330 deletes the reference to statutory debt-to-capital ratios, which were repealed by the Farm Credit Amendments Act of 1985 (1985 Amendments), and substitutes a reference to the capital requirements contained in the proposed capital adequacy regulations.

The current regulation 615.5320 establishes requirements relating to the retirement of stock by FICBs. Proposed 615.5320 conforms the regulation with the 1985 Amendments by deleting the reference to ownership of FICB stock by the Governor of the FCA. In addition, the proposed amendments conform the regulation to the proposed capital adequacy regulations by requiring that all retirements of stock, participation certificates, and allocated legal reserve shall be made in accordance with the financial plan of the bank.

Proposed 615.5340 combines and replaces current regulations 615.5330, 615.5335, and 615.5340, relating to allowances for loan losses applicable to each System institution. The proposed regulation requires that all allowance for loan loss accounts be maintained in accordance with generally accepted accounting principles except in the case of PCAs, where under certain circumstances the Act authorizes an allowance greater than that required under generally accepted accounting principles.

Proposed 615.5350 combines and replaces current regulations 615.5350, 615.5360, 615.5370, 615.5390, 615.5400, 615.5410, 615.5420, and 615.5430, relating to the payment of dividends and patronage refunds by System institutions. The proposed regulation (1) eliminates existing requirements for FCA approval; (2) conforms the dividend payment and earnings distribution requirements with the provisions of the capital adequacy regulations; (3) requires that dividends and patronage refunds be made in accordance with the institution's financial plan and the proposed capital adequacy regulations; and (4) prohibits any institution from paying dividends or making a patronage distribution during any period in which such institution is a net recipient of financial assistance from the Farm Credit System Capital Corporation. The remaining provisions in the proposed regulation are unchanged from current regulations and conform with statutory requirements.

List of Subjects in 12 CFR Parts 614 and 615

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

As stated in the preamble, it is proposed that Parts 614 and 615 of Chapter VI, Title 12, of the Code of Federal Regulations be amended as follows:

PART 614 -- LOAN POLICIES AND OPERATIONS

1. The authority citation for Part 614 is revised to read as follows:

Authority: Secs. 4.12, 4.13, 4.13A, 4.13B, 4.14, 5.9, 5.10, and 5.17, Pub. L. 99-205, 99 Stat. 1678 12 U.S.C. 2252(a)(10).

Subpart G -- Interest Rates and Charges

2. Section 614.4270 is revised to read as follows:

614.4270 Policy.

It shall be the objective of each System institution, in setting interest rates and fees on loans, to provide the types of credit needed by eligible borrowers at the lowest reasonable cost on a sound business basis, taking into account the cost of money, necessary reserves and expenses, services provided to members, the capital requirements prescribed by Part 615 of this chapter, and the obligation of each institution to provide financial assistance to other System institutions.

3. Section 614. 4280 is revised to read as follows:

614.4280 Interest rates -- banks.

Banks shall establish interest rates charged on loans in accordance with the financial plan of the institution. The board of directors of each bank may establish interest rates or make interest rate changes either on a case-by-case basis or by providing guidance to management regarding the circumstances under which management may adjust rates subject to specified limits on the range within which management may raise or lower rates.

4. Section 614.4320 is revised to read as follows:

614.4320 Interest rates -- production credit associations.

The board of directors of each production credit association shall establish the rates of interest charged on loans within approved interest rate programs in accordance with the association's financial plan.

Subpart H -- Loan Participations

5. Section 614. 4330 is amended by revising paragraph (d)(5)(ii) to read as follows:

614.4330 General.

* * * * *

(d) * * *

(5) * * *

(ii) The amount subject to the repurchase agreement shall be considered a liability of the selling Farm Credit System institution for the purpose of determining capital requirements prescribed in Subpart H of Part 615 of this chapter.

* * * * *

PART 615 -- FUNDING AND FISCAL AFFAIRS

6. The authority citation for Part 615 is revised to read as follows:

Authority: Secs. 4.3, 5.9, 5.17, Pub. L. 99-205, 99 Stat. 1678, 12 U.S.C. 2154, 2243, 2252(a)(10).

7. The title for Part 615 is revised to read as follows:

PART 615 -- FUNDING AND FISCAL AFFAIRS

Subpart J -- Prescription, Subscription, and Retirement of Stock

8. Section 615.5320 is amended by revising paragraphs (a), (b) introductory text, and (b)(2)(ii) to read as follows:

615.5320 Retirement of Federal intermediate credit bank Class B stock, participation certificates, and allocated legal reserve.

(a) Except as provided in paragraph (b) of this section, banks may, in accordance with their financial plans and the provisions of Subpart H of this part, retire Class B stock at par, participation certificates at face amount, and allocated legal reserve at book value without preference to all holders thereof and in such manner that the oldest outstanding stock, participation certificates, or allocated legal reserve will be retired first.

(b) Notwithstanding the priorities contained in paragraph (a) of this section:


* * * * *

(2) * * *

(ii) In case of liquidation of a production credit association; or

* * * * *

The title of Subpart K is revised to read as follows:

Subpart K -- Reserves

615.5330 and 615.5335 [Removed]

10. Subpart K is amended by removing 615.5330 and 615.5335.

11. Section 615.5340 is revised to read as follows:

615.5340 Allowance for loan losses.

(a) Banks. Each bank shall establish and maintain an allowance for losses account on loans and loan-related assets determined in accordance with generally accepted accounting principles.

(b) Federal land bank associations. Each Federal land bank association shall establish and maintain an allowance for losses for its liability on loans and loan-related assets that exists by reason of its endorsement liability, or its liability under agreement to share losses with the Federal land bank on loans originated by the association. This allowance shall be determined in accordance with generally accepted accounting principles.

(c) Production credit associations. Each production credit association shall establish and maintain an allowance for losses on loans and loan-related assets. Additions to the allowance for losses on loans and loan-related assets. Additions to the allowance shall be equal to the greater of (1) 0.5 percent of outstanding loans and accrued interests, or net income without respect to such addition, whichever is less, or (2) the amount of such addition needed to maintain the allowance at a level determined in accordance with generally accepted accounting principles. Where the allowance for loan losses equals or exceeds 3.5 percent of outstanding loans and accrued interest, additions to the allowance shall be made only as required in accordance with generally accepted accounting principles.

(d) The Farm Credit System Capital Corporation shall establish and maintain an allowance for losses account on loan and loan-related assets which is determined in accordance with generally accepted accounting principles.

(e) Determinations of the amounts necessary to maintain the allowance for losses shall be made at such frequency as is required to ensure that the allowance is maintained in accordance with generally accepted accounting principles. Upon such determination, each institution shall make the adjustments to the allowance for losses necessary to ensure issuance of accurate financial reports.

615.5360 and 615.5370 [Amended]

12. Subpart L is amended by removing 615.5360 and 615.5370.

13. Section 615.5350 is revised to read as follows:

615.5350 Dividends and patronage refunds.

(a) Federal land banks and Federal land bank associations.

(1) Each Federal land bank and Federal land bank association may declare dividends or pay patronage refunds in accordance with the provisions of its financial plan and the provisions of Subpart H of this part, out of the whole or part of net earnings.

(2) Federal land bank and Federal land bank association dividends shall be noncumulative and may be paid on stock or participation certificates. Dividends may be paid in the form of stock, participation certificates, or cash. The rate of dividends may differ between classes and issues of stock and participation certificates on the basis of the comparative contributions of the holders thereof to the capital or earnings of the institution but otherwise dividends shall be without preference.

(3) Each Federal land bank and Federal land bank association may pay patronage refunds in nonvoting stock, participation certificates, allocated surplus, and/or cash. The patronage refund paid to each borrower shall be in proportion to the amount of interest paid by the borrower divided by the total amount of interest paid by all borrowers during the fiscal year. A Federal land bank may make a indirect patronage refund to borrowers by making a distribution to the associations which will make a corresponding distribution of like kind and equivalent value to the borrowers.

(b) Federal intermediate credit banks.

(1) Each Federal intermediate credit bank, in accordance with its financial plan and the provisions of Subpart H of this part, may declare dividends or pay patronage refunds out of the whole or part of net earnings.

(2) Dividends shall be noncumulative and may be paid in the form of stock, participation certificates, or cash. The dividend rate may differ between classes and issues of stock and participation certificates when computed on the basis of each holder's relative contributions to the capital or earnings of the bank; otherwise, dividends shall be paid without preference.

(3) Patronage refunds may be paid to production credit associations and other financing institutions in stock, participation certificates, and/or cash. Each patronage refund shall be distributed to patrons in the same proportion as the interest paid by each patron bears to the total interest paid to the bank.

(c) Production credit associations.

(1) Each production credit association may pay noncumulative dividends on preferred stock in accordance with the authorization to issue such stock. Each production credit association may pay noncumulative dividends on stock, other than preferred stock, and participation certificates in accordance with the association's financial plan and bylaws. The rate of dividends may differ between classes and issues of stock and participation certificates on the basis of the comparative contributions of the holders thereof to the capital or earnings of the association, but otherwise dividends shall be paid without preference.

(2) Each production credit association may, in accordance with the association's financial plan and bylaws, pay a patronage distribution in stock, participation certificates, allocated equities, and/or cash. Patronage refunds shall be paid to borrowers of the fiscal year for which such patronage refunds are distributed. The patronage refund paid to each borrower shall be in proportion to the amount of interest paid by the borrower divided by the total amount of interest paid by all borrowers during the fiscal year.

(d) Banks for cooperatives.

(1) Each bank for cooperatives may, in accordance with its financial plan, pay dividends on nonvoting investment stock of the bank.

(2) Each district bank for cooperatives may, in accordance with its financial plan, make a patronage distribution in stock, participation certificates, and/or cash to borrowers. The amount of the patronage distribution paid to each borrower shall be in proportion to the amount of interest and fees on loans paid by the borrower divided by the total amount of interest and fees on loans paid by all borrowers during the fiscal year.

(3) The Central Bank for Cooperatives may, in accordance with its financial plan, make a patronage distribution in stock, participation certificates, and/or cash to district banks for cooperatives and cooperative associations that are direct borrowers. Patronage distribution to district banks for cooperatives shall be based on the interest held by the Central Bank for Cooperatives in loans made by the district banks. Patronage distributions to cooperative associations that are direct borrowers of the Central Bank for Cooperatives shall be paid to the district bank or banks which issued the stock to the cooperative borrower incident to the loan, and such district bank or banks shall make a corresponding distribution of like kind and equivalent value to the cooperative borrowers. The amount of the patronage refund paid to each district bank for cooperatives or indirectly paid to each cooperative association that is a direct borrower shall be in proportion to the amount of interest and fees paid to the Central Bank for Cooperatives from loan participations with a district bank or paid by a direct borrower divided by the total amount of interest and fees paid to the Central Bank for Cooperatives.

(e) No institution shall make patronage distributions or pay dividends during any period in which such institution is a net recipient of financial assistance from the Farm Credit System Capital Corporation.

Subpart M -- [Removed and Reserved]

14. Subpart M is removed and reserved.


Marvin Duncan,

Acting Chairman, Farm Credit Administration.

[FR Doc. 86-23382 Filed 10-15-86; 8:45 am]

BILLING CODE 6705-01-M