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

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

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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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 commenter asserted that some of the proposed regulations,

particularly Sec. 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 commenter 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 commenter 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 commenter 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 commenter 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 commenter 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 commenter 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 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 commenter stated a belief that the preamble description of

proposed Sec. 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 commenter 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 commenter 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.1

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.

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\1\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.

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

Three commenters 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 commenter acknowledged that the FCA may have a

legitimate regulatory concern in curbing the potential abuse of

amendments to manipulate capital ratios, the commenter asserted that

FCA prior approval is an inappropriate means of addressing the concern.

In the commenter'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 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 Sec. 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 commenter 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

commenter 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 Sec. 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 commenter

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 commenter 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 commenter 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 Sec. 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 commenter 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 commenter 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 commenter asked for clarification of whether permanent capital

ratios for the default allocation formula would be computed in proposed

Sec. 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 Sec. 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 commenter recommended

that the regulations require that the allocation agreements provide for

such reallotment.

The FCA agrees with the commenter 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 commenter 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 commenter 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 commenter

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 commenter

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.

In addition, the proposed regulations inadvertently eliminated a

provision of existing Sec. 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 Sec. 615.5210(e)(5) in the final

regulations, and the succeeding paragraphs have been renumbered

accordingly. Furthermore, proposed Sec. 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 Secs. 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 Sec. 614.4351(a) to account primarily for the renumbering

of paragraphs. The references to revised paragraph (e) (2), (3), and

(4) of Sec. 615.5210, replace the reference to paragraph (d)(2) of that

section in the existing regulations. While the methodology in amended

Sec. 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.\2\ 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.

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\2\In other words, the revised Sec. 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).

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With regard to regulation Sec. 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 Secs. 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).

Sec. 607.2 [Amended]

2. Section 607.2 is amended by removing the reference

``Sec. 615.5210(e)'' and adding in its place ``Sec. 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:

Sec. 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

Sec. 615.5201(j) of this chapter, with adjustments provided for in

Sec. 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.

* * * * *

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:

Sec. 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

Sec. 615.5131 [Amended]

7. Section 615.5131 is amended by removing the reference

``Sec. 615.5201(l)'' and adding in its place ``Sec. 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 ``Sec. 615.5210(d)'' and

adding in its place ``Sec. 615.5210 (d) and (e)'' and also by removing

the reference ``Sec. 615.5210(e)'' and adding in its place

``Sec. 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:

Sec. 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 Sec. 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 Sec. 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 ``Sec. 615.5210(e)(2)'' and adding in its

place ``Sec. 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:

Sec. 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 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 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

Sec. 620.1 [Amended]

11. Section 620.1 is amended by removing the reference

``Sec. 615.5201(h)'' and adding in its place ``Sec. 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