Bank Liquidity Reserve

• Citation: 86 FR 34645
• Record Number: 2021-13556
• Published date: 30 June 2021
• Court: Farm Credit Administration

34645

Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Proposed Rules

1

86 FR 26189 (May 13, 2021).

1

The Federal banking regulatory agencies include

the Office of the Comptroller of the Currency, Board

of Governors of the Federal Reserve System

(hereafter Federal Reserve Board), and the Federal

Deposit Insurance Corporation. See ‘‘Liquidity

Coverage Ratio: Liquidity Risk Measurement

Standards,’’ 79 FR 61440 (October 10, 2014) and

‘‘Net Stable Funding Ratio: Liquidity Risk

Measurement Standards and Disclosure

Requirements,’’ 86 FR 9120 (February 11, 2021).

2

Basel III was published in December 2010 and

revised in June 2011. The text is available at http://

www.bis.org/publ/bcbs189.htm. The BCBS was

established in 1974 by central banks with bank

supervisory authorities in major industrial

countries. The BCBS develops banking guidelines

and recommends them for adoption by member

countries and others. BCBS documents are available

at https://www.bis.org/. The FCA does not have

representation on the Basel Committee, as do the

FBRAs, and is not required by law to follow the

Basel standards. The Basel III Liquidity Coverage

Ratio and liquidity risk monitoring tools document

was published in January 2013 and the Net stable

funding ratio document was published in October

2014.

clarify that the requirement that each

debit card transaction must be able to be

processed on at least two unaffiliated

payment card networks applies to card-

not-present transactions, clarify the

requirements that Regulation II imposes

on debit card issuers to ensure that at

least two unaffiliated payment card

networks have been enabled for debit

card transactions, and standardize and

clarify the use of certain terminology.

1

The proposal provided for a comment

period ending on July 12, 2021. Since

the publication of the proposal, the

Board has received comments

requesting a 30-day extension of the

comment period. An extension of the

comment period will provide additional

opportunity for interested parties to

analyze the proposal and prepare and

submit comments. Therefore, the Board

is extending the end of the comment

period for the proposal from July 12,

2021 to August 11, 2021.

By order of the Board of Governors of the

Federal Reserve System, acting through the

Secretary of the Board under delegated

authority.

Ann E. Misback,

Secretary of the Board.

[FR Doc. 2021–13533 Filed 6–29–21; 8:45 am]

BILLING CODE P

FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052–AD44

Bank Liquidity Reserve

AGENCY

: Farm Credit Administration.

ACTION

: Advance notice of proposed

rulemaking.

SUMMARY

: The Farm Credit

Administration (FCA, we, our) is

contemplating revising its liquidity

regulations so Farm Credit System (FCS

or System) banks can better withstand

crises that adversely impact liquidity

and pose a risk to their viability. FCA

is considering whether to amend our

existing liquidity regulatory framework.

We are seeking comments from the

public on how to amend or restructure

our liquidity regulations.

DATES

: Please send us your comments

on or before September 28, 2021.

ADDRESSES

: For accuracy and efficiency

reasons, please submit comments by

email or through FCA’s website. We do

not accept comments submitted by

facsimiles (fax), as faxes are difficult for

us to process and achieve compliance

with section 508 of the Rehabilitation

Act of 1973. Please do not submit your

comment multiple times via different

methods. You may submit comments by

any of the following methods:

•Email: Send us an email at reg-

comm@fca.gov.

•FCA website: http://www.fca.gov.

Click inside the ‘‘I want to . . .’’ field

near the top of the page; select

‘‘comment on a pending regulation’’

from the dropdown menu; and click

‘‘Go.’’ This takes you to an electronic

public comment form.

•Mail: Kevin J. Kramp, Director,

Office of Regulatory Policy, Farm Credit

Administration, 1501 Farm Credit Drive,

McLean, VA 22102–5090.

You may review copies of comments

we receive on our website at http://

www.fca.gov. Once you are on the

website, click inside the ‘‘I want to

. . .’’ field near the top of the page;

select ‘‘find comments on a pending

regulation’’ from the dropdown menu;

and click ‘‘Go.’’ This will take you to the

Comment Letters page where you can

select the regulation for which you

would like to read the public comments.

We will show your comments as

submitted, including any supporting

data provided, but for technical reasons

we may omit items such as logos and

special characters. Identifying

information that you provide, such as

phone numbers and addresses, will be

publicly available. However, we will

attempt to remove email addresses to

help reduce internet spam. You may

also review comments at our office in

McLean, Virginia. Please call us at (703)

883–4056 or email us at reg-comm@

fca.gov to make an appointment.

FOR FURTHER INFORMATION CONTACT

:

Technical information: Ryan Leist,

LeistR@fca.gov, Senior Accountant, or

Jeremy R. Edelstein, EdelsteinJ@fca.gov,

Associate Director, Finance and Capital

Markets Team, Office of Regulatory

Policy, Farm Credit Administration,

McLean, VA 22102–5090, (703) 883–

4414, TTY (703) 883–4056, or

ORPMailbox@fca.gov;

or

Legal information: Richard Katz,

KatzR@fca.gov, Senior Counsel, Office

of General Counsel, Farm Credit

Administration, McLean, VA 22102–

5090, (703) 883–4020, TTY (703) 883–

4056.

SUPPLEMENTARY INFORMATION

:

Table of Contents

I. Introduction

A. Objectives of the Advance Notice of

Proposed Rulemaking

B. Background on System Liquidity

II. Recent Updates to System Liquidity

Regulations

III. Potential Areas for Improvement

IV. Request for Comments

A. Existing FCA Liquidity Regulations

B. Applicability of the Liquidity Coverage

Ratio and Net Stable Funding Ratio

C. Other Comments Requested

I. Introduction

A. Objectives of the Advance Notice of

Proposed Rulemaking

FCA’s purpose in this Advance Notice

of Proposed Rulemaking is to gather

public input to:

•Ensure that each FCS bank operates

under a comprehensive liquidity

framework, so it consistently maintains

adequate liquidity to cover all of its

potential obligations, including

unfunded commitments and other

material contingent liabilities, under

stressful conditions;

•Assess if, and to what extent, the

Basel III International framework for

liquidity risk measurement, standards

and monitoring (hereafter ‘‘Basel III

Liquidity Framework’’), issued by the

Basel Committee on Banking

Supervision (BCBS), and regulations of

the Federal banking regulatory agencies

(FRBAs) implementing this framework

for banking organizations should

influence revisions to FCA’s existing

liquidity framework;

1

•Determine if the Basel III Liquidity

Framework is appropriate for FCS

banks, and evaluate the impacts of

augmenting FCA’s existing liquidity

framework to incorporate appropriate

aspects of the Basel III Liquidity

Framework and the FBRAs’

implementation of the framework;

2

and

•Determine the respective costs and

benefits of updating FCA’s liquidity

framework for FCS banks.

B. Background on System Liquidity

In 1916, Congress created the System

to provide permanent, stable, affordable,

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Number of institutions as of January 1, 2021.

The Federal Agricultural Mortgage Corporation

(Farmer Mac), which is also a System institution,

has authority to operate secondary markets for

agricultural real estate mortgage loans, rural

housing mortgage loans, and rural utility

cooperative loans. The FCA has a separate set of

liquidity regulations that apply to Farmer Mac. This

Advance Notice of Proposed Rulemaking does not

affect Farmer Mac, and the use of the term ‘‘System

institution’’ in this preamble does not include

Farmer Mac.

4

The Funding Corporation is established

pursuant to section 4.9 of the Farm Credit Act of

1971, as amended, and is owned by all Farm Credit

banks.

5

The agricultural credit bank lends to, and

provides other financial services to farmer-owned

cooperatives, rural utilities (electric and

telecommunications), and rural water and waste

water disposal systems. It also finances U.S.

agricultural exports and imports, and provides

international banking services to cooperatives and

other eligible borrowers. The agricultural credit

bank operates a Farm Credit Bank subsidiary.

6

12 U.S.C. 2001–2279cc. The Act is available at

www.fca.gov under ‘‘Laws and regulations,’’ and

‘‘Statutes.’’

7

See 78 FR 23438 (April 18, 2013), as corrected

by 78 FR 26701 (May 8, 2013). In addition,

technical, non-substantive revisions to the terms

‘‘Government-sponsored enterprise (GSE)’’ and

‘‘U.S. Government agency’’ were made in 2018 (83

FR 27486 (June 12, 2018)).

8

See 76 FR 80817 (December 27, 2011).

9

See ‘‘Principles for Sound Liquidity Risk

Management and Supervision.’’ September 2008;

and ‘‘Basel III: International framework for liquidity

risk measurement, standards and monitoring.’’

December 2010.

10

See supra footnote 7.

11

See 79 FR 61440 (October 10, 2014).

and reliable sources of credit and

related services to American agricultural

and aquatic producers. The System

currently consists of 3 Farm Credit

Banks, 1 agricultural credit bank, 66

agricultural credit associations, 1

Federal land credit association, service

corporations, and the Federal Farm

Credit Banks Funding Corporation

(Funding Corporation).

3

Farm Credit

banks (which include both the Farm

Credit Banks and the agricultural credit

bank) issue System-wide consolidated

debt obligations in the capital markets

through the Funding Corporation,

4

which enable the System to extend

short-, intermediate-, and long-term

credit and related services to farmers,

ranchers, aquatic producers and

harvesters, their cooperatives, rural

utilities, exporters of agricultural

commodities products, and capital

equipment, farm-related businesses, and

certain rural homeowners.

5

The

System’s enabling statute is the Farm

Credit Act of 1971, as amended (Act).

6

In many respects, the FCS is different

from other lenders. In contrast to most

commercial banks and other financial

institutions, the System lends primarily

to agriculture and other eligible

borrowers in rural areas. Unlike most

other lenders, FCS banks and

associations are cooperatives that are

owned and controlled by their member-

borrowers. Their common equity is not

publicly traded. The System also funds

its operations differently than most

commercial lenders. FCS banks and

associations are not depository

institutions, and for this reason, System-

wide debt securities, not deposits, are

the System’s primary source for funding

loans to agricultural producers, their

cooperatives, and other eligible

borrowers. Although section 4.2(a) of

the Act authorizes FCS banks to borrow

from commercial banks and other

lending institutions, lines of credit with

such lenders are only used as a

secondary source of liquidity.

As a government-sponsored enterprise

(GSE), the System depends on

continuing access to the capital markets

to obtain the funds necessary to extend

credit to agriculture, aquaculture, rural

utilities, and rural housing in both good

and bad economic times. If access to the

capital markets becomes impeded for

any reason, FCS banks must have

enough readily available funds and

assets that can be quickly converted into

cash to continue operations and pay

maturing obligations. Unlike

commercial banks, the System does not

have a lender of last resort and does not

have a guaranteed line of credit from the

U.S. Treasury or the Federal Reserve.

As part of our ongoing efforts to

ensure the FCS banks have sufficient

liquidity to fund operations in the event

of market disruptions, and in light of

updated guidance and regulations

published by the BCBS and FBRAs, we

are soliciting comments on the best

ways to enhance FCA’s existing

liquidity framework.

II. Recent Updates to System Liquidity

Regulations

FCA regulations governing System

banks’ liquidity were last substantially

updated in 2013 in response to the 2008

financial crisis.

7

FCA proposed

amendments to its liquidity

requirements in 2011 to improve the

quality of liquidity and bolster the

ability of the System banks to fund their

operations during times of economic,

financial, or market adversity.

8

At the

time, FCA considered the Basel III

Liquidity Framework that was

published in September 2008 and

December 2010,

9

but decided not to

adopt the Basel III liquidity ratios. The

final rule incorporated the liquidity

coverage principles of Basel III as

appropriate to the System, improved the

System’s ability to withstand market

disruptions by strengthening liquidity

management practices at Farm Credit

banks, and enhanced the liquidity of

assets in their liquidity reserves. The

objectives of our 2013 liquidity final

rule

10

were to:

•Improve the capacity of FCS banks

to pay their obligations and fund their

operations by maintaining adequate

liquidity to withstand various market

disruptions and adverse economic or

financial conditions;

•Strengthen liquidity management at

all FCS banks;

•Enhance the liquidity of assets that

System banks hold in their liquidity

reserves;

•Require FCS banks to maintain a

three-tiered liquidity reserve. The first

tier of the liquidity reserve must consist

of a sufficient amount of cash and cash-

like instruments to cover each bank’s

financial obligations for 15 days. The

second and third tiers of the liquidity

reserve must contain cash and highly

liquid instruments that are sufficient to

cover the bank’s obligations for the next

15 and subsequent 60 days,

respectively;

•Establish a supplemental liquidity

buffer that a bank can draw upon during

an emergency and is sufficient to cover

the bank’s liquidity needs beyond 90

days; and

•Strengthen each bank’s Contingency

Funding Plan (CFP).

As explained in the preamble to the

2013 final rule, the amendments to

§ 615.5134 incorporated many of the

principles that the BCBS and the FBRAs

have articulated on liquidity

management because many of these

fundamental concepts apply to all

financial institutions, including FCS

banks. The comprehensive supervisory

approach developed by the BCBS and

the FBRAs effectively strengthens both

the liquidity reserves and the liquidity

risk management practices at regulated

financial institutions.

FCA’s update created three levels of

liquid assets (levels 1, 2, and 3) which

are similar to, but not exactly the same

as, the three levels of high-quality liquid

assets (HQLA) established in the Basel

III Liquidity Framework (levels 1, 2a,

and 2b) and used in the Liquidity

Coverage Ratio (LCR).

11

In addition,

FCA’s framework adopted core concepts

of the FBRA’s rules, including the

supplemental liquidity buffer, specific

policies and internal controls that

combat liquidity risk, and CFPs based in

part on the results of liquidity stress

tests.

The Basel III Liquidity Framework is

not the only basis for the existing

liquidity regulation. The regulation was

also based upon the System’s own

initiatives to improve liquidity

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12

See 12 U.S.C. 2277a–10(a)(1); Section 5.61(a)(1)

of the Act.

13

On September 24, 2013, FCSIC entered into an

agreement with the FFB, a U.S. government

corporation subject to the supervision and direction

of the U.S. Treasury.

14

An ‘‘exigent market circumstance’’ is a broad

disruption across U.S. credit markets that originates

external to and independent of the Farm Credit

System.

15

The agreement provides for a short-term

revolving credit facility of up to $10 billion, is

renewable annually and terminates on September

30, 2021, unless otherwise further extended.

16

The FCA has broad authority under various

provisions of the Act to supervise and regulate

liquidity management at FCS banks. Section 5.17(a)

of the Act authorizes the FCA to: (1) Approve the

issuance of FCS debt securities under section 4.2(c)

and (d) of the Act; (2) establish standards regarding

loan security requirements at FCS institutions, and

regulate the borrowing, repayment, and transfer of

funds between System institutions; (3) prescribe

rules and regulations necessary or appropriate for

carrying out the Act; and (4) exercise its statutory

enforcement powers for the purpose of ensuring the

safety and soundness of System institutions.

17

See 79 FR 61440 (October 10, 2014).

18

See 81 FR 35124 (June 1, 2016).

19

See 86 FR 9120 (February 11, 2021). The final

rule will become effective on July 1, 2021.

20

See BCBS, ‘‘Basel III: The Liquidity Coverage

Ratio and liquidity risk monitoring tools’’ (January

2013).

21

See BCBS, ‘‘Basel III: The net stable funding

ratio’’ (October 2014).

22

See Proclamation 9994, ‘‘Declaring a National

Emergency Concerning the Novel Coronavirus

Disease COVID–19 Outbreak,’’ 85 FR 15337 (March

18, 2020).

management as well as the FCA’s

experiences from examining liquidity

risk management at Farm Credit banks

and the Funding Corporation. In this

context, the regulation implemented the

best practices available for liquidity

management at FCS banks at the time.

The Farm Credit System Insurance

Corporation (FCSIC) may use its

Insurance Fund as a backup source of

liquidity for System banks through its

assistance authorities.

12

Additionally,

subsequent to FCA adopting the rule,

FCSIC entered into an agreement with

the Federal Financing Bank (FFB) for a

$10 billion line of credit.

13

Pursuant to

this agreement, the FFB may advance

funds to FCSIC when exigent market

circumstances

14

make it extremely

doubtful that: The Funding Corporation

can issue new System-wide debt

obligations to repay maturing

obligations; and one or more insured

System banks will be able to pay

maturing debt obligations without

selling available liquidity reserve assets

at a material loss. If necessary, FCSIC

would use the funds advanced by the

FFB to increase amounts in its

Insurance Fund to provide assistance to

the System banks until market

conditions improve.

15

The decision whether to provide

assistance, including seeking funds from

the FFB, is at the discretion of FCSIC,

and each funding obligation of the FFB

is subject to various terms and

conditions and, as a result, there can be

no assurance that funding would be

available if needed by the System. This

FCSIC–FFB revolving credit facility is

subject to annual renewal. Additionally,

the agreement only applies during

exigent market circumstances, and can

only be used if the amount needed to

repay maturing System-wide insured

debt obligations will exceed available

Insurance Fund reserves. As such, FCA

does not consider potential FCSIC

assistance, including additional

amounts available through its agreement

with the FFB, when determining

liquidity requirements or completing

examinations of liquidity and related

management practices at FCS

institutions.

FCA has closely monitored how the

FBRAs have adjusted Basel III and

applied it to the institutions they

supervise since 2013. In response to

these developments and more recent

adverse market conditions, FCA

believes it is appropriate to consider

updates to the existing FCA liquidity

framework.

16

III. Potential Areas for Improvement

Our current liquidity regulation

§ 615.5134, which we finalized in 2013,

responded to the 2008 financial crisis.

More specifically, this regulation

improves the System’s liquidity

management and bolsters the ability of

the System banks to fund their

operations during times of economic,

financial, or market adversity. At the

time, FCA considered the Basel III

Liquidity Framework and how to tailor

it to the unique circumstances of System

banks. The FBRAs had not yet enacted

regulations that implemented Basel III,

and we decided it would be premature

for FCA to adopt the LCR and the Net

Stable Funding Ratio (NSFR) for System

banks. FCA’s existing regulation has

achieved FCA’s objectives by ensuring

that System banks have a satisfactory

liquidity framework. Yet, the time has

come for FCA to revisit these issues and

decide how best to strengthen and

update § 615.5134 so System banks are

in a better position to respond to

emerging risks and constantly changing

market conditions.

Between 2013 and 2020, the BCBS

and FBRAs issued new guidance and

regulations to improve the liquidity

framework for the banking sector. The

new regulations included the LCR that

was finalized in 2014

17

and the NSFR,

which was proposed in 2016

18

and

finalized in November 2020.

19

The

LCR

20

focuses on short-term liquidity

risk from severe market stresses and the

NSFR

21

promotes stable funding

structures over a one-year horizon. The

NSFR is designed to act as a

complement to the LCR to mitigate the

risks of banking organizations

supporting their assets with

insufficiently stable funding. The LCR

applies to large banking organizations

and does not apply to community

banking and savings associations. When

the final NSFR rule becomes effective

on July 1, 2021, it too will apply to large

banking organizations, but not

community banks and small saving

associations.

The Basel III Liquidity Framework

encourages regulated entities to account

for unfunded commitments and other

contingent obligations in their liquidity

reserve calculations, and for this reason,

its concepts are relevant to this

rulemaking and the maintenance of

adequate liquidity at FCS banks. After

careful consideration of the comments

received on the 2011 liquidity proposed

rule, FCA decided not to incorporate

unfunded commitments into the

existing regulation, however, FCA stated

it may address unfunded commitments

at a later time. As a result, FCA’s

liquidity reserve requirement does not

capture funds held or unfunded

commitments on retail loans or on the

direct note. While these unfunded

commitments are generally captured as

part of the liquidity stress tests

incorporated into a bank’s CFP, the CFP

in the existing rule gives System banks

considerable discretion to determine the

cash flow assumptions and discount

factors used to determine the amount of

liquidity reserves they should hold for

these potential cash outflows.

Modifying FCA’s liquidity reserve

requirement to capture unfunded

commitments or adopting an LCR/NSFR

framework may promote stronger

liquidity profiles at System banks by

improving how liquidity is measured

and reported. Furthermore, this

modification would help ensure that a

System bank has enough liquidity to

meet its unfunded commitments during

a liquidity crisis.

The containment measures adopted in

early 2020 in response to COVID–19

slowed economic activity in the United

States.

22

Financial conditions tightened

markedly in March and April 2020 and

sudden disruptions in financial markets

put increasing liquidity pressure on

certain credit markets. In response to

the pandemic, the Federal Reserve

Board established a number of funding,

credit, liquidity, and loan facilities to

provide liquidity to the financial

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Section 1101 of the Dodd-Frank Wall Street

Reform and Consumer Protection Act amended

section 13(3) of the Federal Reserve Act, 12 U.S.C.

343(3), to allow the Federal Reserve Board, in

consultation with the Secretary of the Treasury, to

establish by regulation, policies and procedures that

would govern emergency lending under a program

or facility for the purpose of providing liquidity to

the financial system. Under section 13(3) of the

Federal Reserve Act, as amended, the Federal

Reserve Board must establish procedures that

prohibit insolvent and failing entities from

borrowing under the emergency program or facility.

See Public Law 11–203, title XI, sec. 1101(a), 124

Stat. 2113 (Jul. 21, 2010).

24

To provide liquidity to small business lenders

and the broader credit markets and to help stabilize

the financial system, the Federal Reserve Board has

created the PPP Liquidity Facility using its

authority under section 13(3) of the Federal Reserve

Act.

25

See FCA’s Supplement to the January 5, 2021,

FCA Informational Memorandum: Guidance for

System Institutions Affected by the COVID–19

Pandemic: Regulatory Capital Requirements for PPP

Loans.

26

See §614.4125(d).

27

Under section 2.2(12) of the Act, direct lender

associations may borrow money from their affiliated

Farm Credit bank, and with the approval of their

funding banks, may borrow from and issue notes or

other obligations to any commercial bank or

financial institution.

28

OFI means any entity referred to in section

1.7(b)(1)(B) of the Act.

29

See §614.4540(b) which specifies the criteria

for assured access for certain OFIs.

30

The Tier 1/Tier 2 Capital framework regulation

requires that System banks hold capital against this

unfunded wholesale commitment due to the risk

presented. See §628.33 and preamble discussion—

81 FR 49737 (July 28, 2016).

31

See 79 FR 61440, 61444 (October 10, 2014).

Examples include those shocks that would result in:

(1) A partial loss of unsecured wholesale funding

capacity; (2) a partial loss of secured, short-term

financing with certain collateral and counterparties;

(3) losses from derivative positions and the

collateral supporting those positions; (4)

unscheduled draws on committed credit and

liquidity facilities that a covered company has

provided to its customers; and (5) other shocks that

affect outflows linked to structured financing

transactions and mortgages.

system.

23

One of these programs, the

Paycheck Protection Program (PPP)

Liquidity Facility, was directly available

to System institutions, while other

facilities indirectly increased the

liquidity of System institutions’ assets

held in their liquidity reserves.

24

FCA

provided System institutions with

guidance to manage the challenges

associated with the COVID–19

pandemic, including certain regulatory

capital relief for PPP loans and PPP

loans pledged to the PPP Liquidity

Facility.

25

Throughout the market

turbulence in early 2020, System banks

maintained satisfactory liquidity

reserves, however; the market

conditions caused by COVID–19

provided FCA the opportunity to

observe the existing liquidity framework

under adverse market conditions.

Based on these developments, FCA is

considering whether changes to our

liquidity regulations are appropriate or

needed.

IV. Request for Comments

We request and encourage any

interested person(s) to submit comments

on the following questions and ask that

you support your comments with

relevant data, analysis, or other

information. We remind commenters

that comments, data, and other

information submitted in support of a

comment, will be available to the public

through our website.

We have organized our questions into

the following categories: (A) Existing

FCA Liquidity Regulations and (B)

Applicability of the LCR and NSFR.

A. Existing FCA Liquidity Regulations

Unfunded Commitments of FCS Banks

Each FCS bank has its own unique

circumstances and risk profile and,

therefore, exposure to unfunded

commitments and other contingent

obligations varies within the FCS. As

part of each System bank’s general

financing agreement (GFA) with its

affiliated associations, System banks

have an unfunded commitment to each

affiliated association that is a possible

outflow of liquidity. The unfunded

commitment amount is the difference

between the association’s maximum

credit limit with the System bank under

the GFA or promissory note

26

and the

amount the association has borrowed

from the System bank.

The GFA permits a System bank to

terminate an association’s loan or to

refuse to make additional disbursements

in the event of default. The Act

prohibits an association from borrowing

from commercial banks or other

financial institutions without its

funding bank’s approval.

27

We believe

there may be merit in incorporating

these possible outflows for the bank’s

unfunded commitment to its affiliated

associations into the existing liquidity

reserve requirement because the

associations are fully dependent on the

bank for funding its operations so it can

fulfill its mission.

System banks also have unfunded

commitments or other material

contingent liabilities to other financing

institutions (OFIs) that increase

liquidity risk.

28

System banks are

required to provide funding, or provide

similar financial assistance to any

creditworthy OFI that meets certain

requirements.

29

Although the GFAs

with OFIs may permit a System bank to

refuse to make additional disbursements

in the event of default, a System bank

would likely be required to give prior

notice to cancel unfunded commitments

to OFIs. As part of their GFA with OFIs,

System banks can be legally obligated to

fund these commitments. These types of

outflows may include retail funding,

contractual settlements related to

derivative transactions, pledging

collateral, or other off-balance sheet

commitments.

FCS banks may also have outstanding

lines of credit to retail borrowers who

may draw funds to meet their seasonal,

business, or liquidity needs. A line of

credit may be used as a liquidity facility

to function as an undrawn backup that

would be utilized to refinance debt

obligations of a borrower in situations

where the borrower is unable to rollover

that debt in financial markets.

Alternatively, credit facilities provide a

line of credit for borrower’s general

corporate or working capital purposes.

These lines of credit to retail borrowers

may or may not be unconditionally

cancellable. A sudden surge in borrower

demand for funds under these lines may

increase demands on the bank’s

liquidity at a time when market access

is becoming impeded. These unfunded

commitments potentially expose both

FCS banks and associations to

significant safety and soundness risks.

30

To incorporate consideration of these

unfunded commitments, the liquidity

rules of the FBRAs apply a multiplier or

‘‘factor’’ to the gross notional amount to

reflect assumptions on how exposures

will result in ‘‘cash outflows.’’ These

factors are multiplied by the total

amount of each outflow item to

determine the regulatory outflow

amount. The factor applied is

dependent on the type of exposure, and

is consistent with the Basel III Liquidity

Framework and the FBRAs’ evaluation

of relevant supervisory information. The

factors applied consider the potential

impact of idiosyncratic and market-wide

shocks.

31

While unfunded commitments at

System banks should be analyzed in the

CFP, banks have significant discretion

about the assumptions (i.e., factor)

applied. For example, to reflect varying

drawdown assumptions System banks

may apply a factor, similar to the factors

applied in the FBRAs’ rules, to notional

amounts outstanding. A higher factor

reflects a higher drawdown potential of

the undrawn portion of these

commitments and results in a higher

liquidity requirement in the CFP. For

example, a $10 billion exposure at a 10

percent factor would add only $1 billion

to the discounted outflows, while a 40

percent factor would add $4 billion to

the outflows.

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Sections 1.5(6) and 2.2(13) of the Act authorize

institutions to accept advance payments.

To evaluate this further, we are

seeking comment to determine if we

should incorporate unfunded

commitments into the existing FCA

liquidity framework and what type of

factor would be appropriate to capture

the drawdown risks.

1. How should FCA incorporate the

liquidity risk of unfunded commitments

on affiliated associations’ direct notes

into the System banks’ liquidity reserve

requirement?

a. Should drawdown factors be

applied to unfunded commitments?

b. If so, what would be an appropriate

factor to apply to the direct note

unfunded commitments?

2. How should FCA incorporate the

liquidity risk of unfunded commitments

to OFIs into the System banks’ liquidity

reserve requirement?

a. Should drawdown factors be

applied to unfunded commitments?

b. If so, what would be an appropriate

factor to apply to OFI unfunded

commitments?

c. Does the liquidity risk of unfunded

commitments to OFIs pose a different

risk than unfunded commitments to

affiliated associations’ direct notes? If

so, how should FCA incorporate this

risk into the liquidity reserve

requirement?

3. How should FCA incorporate the

liquidity risk of unfunded commitments

to bank retail borrowers into the System

banks’ liquidity reserve requirement?

a. What would be an appropriate

factor to apply to retail borrower

unfunded commitments?

b. Should unfunded commitments to

retail borrowers that are not

unconditionally cancellable be treated

differently from those that are

unconditionally cancellable? Please

explain why.

c. Should we consider applying

different factors to differentiate the risk

between retail credit and liquidity

facilities for such retail borrowers?

Association Lines of Credit to Retail

Borrowers

FCS associations often have

outstanding lines of credit to retail

borrowers who may draw funds to meet

their seasonal or other business needs.

Associations can be legally obligated to

fund these commitments and would

generally rely on their System bank for

funding under the GFA. A sudden surge

in borrower demand for funds under

these lines may increase demands on

the bank’s liquidity at a time when

market access is becoming impeded.

More specifically, during periods of

economic or market uncertainty, retail

borrowers may desire to increase their

cash holdings to cover operating and

business expenses and accordingly,

draw from their operating lines. As

System banks are ultimately responsible

to fund associations, we are seeking

comment to determine if a revised

liquidity requirement should ‘‘look-

through’’ System banks to consider each

association’s unfunded commitment to

retail borrowers as a potential outflow

item.

4. How should FCA incorporate the

risk of unfunded commitments from

association retail borrowers for the

funding banks’ liquidity reserve

requirement?

a. What would be an appropriate

factor for System banks to apply to

association unfunded commitments?

b. Should unfunded commitments at

associations that are not

unconditionally cancellable be treated

differently from those that are

unconditionally cancellable? Please

explain why.

c. If so, should we consider applying

a different factor to differentiate the risk

between credit and liquidity facilities

for association retail borrowers?

d. Should FCA incorporate the

liquidity risk of unfunded commitments

to association retail borrowers through a

‘‘look through’’ approach or using the

direct note unfunded commitment

amount?

Voluntary Advance Conditional

Payment Accounts

Section 614.4175 allows member-

borrowers to make voluntary advance

conditional payments (VACP) on their

loans and allows institutions to set up

involuntary payment accounts for funds

held to be used for insurance premiums,

taxes, and other reasons.

32

VACP (where

the advanced payment is not

compulsory) accounts have the potential

to expose the System to additional

liquidity risk in a crisis. More

specifically, some VACP accounts may

be structured so that System member-

borrowers may withdraw funds at their

request (although prior notice for

withdrawals may be required). A

sudden surge in member-borrower

draws from VACP accounts held at

associations would increase the funding

required from the bank to the

association. This sudden increase in

funding may increase demands on the

bank’s liquidity at a time when market

access is becoming impeded. To

evaluate this further, we are seeking

comment on how we should mitigate

the risk VACP accounts pose to the

liquidity of System banks.

5. How should FCA incorporate the

liquidity risk of VACP accounts at

associations into the funding banks’

liquidity reserve requirement?

a. What would be an appropriate

factor to apply to these VACP accounts?

b. If different factors should apply to

different types of VACP accounts, please

specify.

Continuously Redeemable Perpetual

Preferred Stock

Some System associations have issued

continuously redeemable perpetual

preferred stock (typically called Harvest

Stock or H Stock) to their members who

wish to invest and participate in their

cooperative beyond the minimum

member-borrower stock purchase. H

Stock is an at-risk investment; it is

issued without a stated maturity and is

retireable only at the discretion of the

institution’s board. A common feature of

H stock is that the issuing association

will redeem it upon the request of the

holder only if the association is in

compliance with its regulatory capital

requirements. Because of this feature,

FCA considers the stock to be

continuously redeemable. Some

associations reduce the operational

hurdles to redeeming H stock by

delegating the board’s authority to retire

such stock to management provided

certain board-approved minimum

regulatory capital ratios are maintained.

FCA has determined that holders

reasonably expect the institution to

redeem the stock shortly after they make

a request. A sudden surge in member-

borrower redemptions of H Stock held

at associations would increase the

funding from System bank to its

associations. This sudden increase in

funding may increase demands on the

bank’s liquidity at a time when market

access is becoming impeded. To

evaluate this further, we are seeking

comment on how we should mitigate

the risk H Stock poses to the liquidity

of System banks.

6. How should FCA incorporate the

liquidity risk of H Stock redemptions at

associations into the funding banks’

liquidity reserve requirement? What

would be an appropriate factor to apply

to H Stock?

Cash Inflows

As discussed above, modifying FCA’s

liquidity reserve requirement to capture

potential cash outflows, including

unfunded commitments, may promote a

stronger liquidity profile at System

banks. To improve how liquidity is

measured and reported, we are also

considering incorporating cash inflows

into the liquidity reserve requirement.

FCA’s existing liquidity regulation,

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The discounts applied to the assets held for

liquidity in FCA’s regulations approximate the cost

of liquidating investments over a short period of

time during adverse situations. The mechanism of

discounting assets is designed to accurately reflect

true market conditions. For example, FCA

regulations assign only a minimal discount to

investments that are less sensitive to interest rate

fluctuations because they are exposed to less price

risk. Conversely, the discount for long-term fixed

rate instruments is higher because they expose FCS

banks to greater market risk.

34

See FDIC’s Liquidity Risk Management

Standards. Inflow amounts are defined at 12 CFR

329.33.

35

Assets held in the supplemental liquidity

buffer are not subject to the marketability standard

in §615.5134(d). However, a System bank must be

able to liquidate any qualified eligible investment

in its supplemental liquidity buffer within the

liquidity policy timeframe established by the bank’s

liquidity policy at no less than 80 percent of its

book value. Assets having a market value of less

than 80 percent of their book value at any time must

be removed from the supplemental buffer. See

§615.5134(e).

36

FCA defined money market instruments to

include short-term instruments such as (1) Federal

funds, (2) negotiable certificates of deposit, (3)

bankers’ acceptances, (4) commercial paper, (5)

non-callable term Federal funds (6) Eurodollar time

deposits, (7) master notes, and (8) repurchase

agreements collateralized by eligible investments as

money market instruments. 83 FR 27486, 27489

(June 12, 2018). Of the seven items, the FBRAs only

allow Federal funds to be included in Level 1

HQLA. See supra footnote 1. Federal funds

represent a small amount of the System’s cash and

liquidity included in Level 1 money market

instruments.

37

See SEC, ‘‘Money Market Fund Reform;

Amendments to Form PF,’’ 79 FR 47736 (August 14,

2014).

§ 615.5134, does not consider how

expected cash inflows would affect the

bank’s liquidity reserve requirement.

Outside of CFP stress analysis

(discussed below), FCA’s existing

liquidity framework views the

discounted market value of assets held

in the liquidity reserve and

supplemental buffer as the only source

of liquidity during a liquidity event.

33

However, in a liquidity event, certain

borrowers will still be making payments

on their loans, allowing money to flow

into the institution that can be used to

support ongoing operations. Cash

inflows from sources other than the

liquidity reserve typically include

payments from wholesale and retail

borrowers and coupon and scheduled

principal payments from securities not

included in the liquidity reserve.

34

The CFP requirement at § 615.5134(f)

allows System banks to consider inflows

when analyzing how much contingent

liquidity they must hold under a 30-day

acute stress scenario. However, for the

purposes of the CFP, System banks have

considerable discretion to determine the

assumptions pertaining to the amount of

inflows that will offset potential

outflows. To evaluate this further, we

are seeking comment to determine if we

should incorporate inflows into the

existing FCA liquidity framework.

7. How should FCA incorporate the

uncertainty of cash inflows into System

banks’ liquidity reserve requirements?

8. What would be an appropriate

discount percentage to apply to the

different types of inflows (such as

payments from wholesale and retail

borrowers, payments from securities not

included in the liquidity reserve)?

9. What type of operational changes

(such as data elements, general ledger

requirements, and systems) would be

required to accurately capture inflow

and outflow information to calculate

liquidity ratios on a daily or monthly

basis?

Stability of a Bank’s Balance Sheet

The amount of liquid assets that a

bank must maintain is generally a

function of the stability of its funding

structure, the risk characteristics of the

balance sheet, and the adequacy of its

liquidity risk measurement program.

System banks provide funding to their

affiliated associations through the direct

note which is a significant portion of the

bank’s assets. The bank’s direct note

assets are impacted by the funding and

liquidity demands of their affiliated

associations. However, System banks

directly control the mix of funding for

these assets, as well as the risk

characteristics of other assets acquired.

System banks issue System-wide debt

securities as the primary source for

funding loans and investments. As part

of the examination process, FCA

evaluates how each bank’s debt

structure helps limit liquidity risks. For

example, if a bank funds its balance

sheet wholly with short-term debt, the

resulting large amounts of debt maturing

each week would cause the bank to be

vulnerable to market disruptions and

liquidity risk. Therefore, debt maturities

should be structured in a manner that

they are extended and align with the

tenor and composition of the bank’s

assets. In addition, debt maturities

should ensure longer-term stable

funding.

FCA’s existing liquidity framework

does not directly address the stability of

a bank’s balance sheet and does not

require compliance with specific debt

structure ratios. To evaluate this further,

we are seeking comment to determine if

we should add requirements regarding

the structure of a bank’s balance sheet

into the existing FCA liquidity

framework.

10. How should FCA amend its

liquidity regulations to strengthen the

stability of the balance sheet structure at

FCS banks?

11. Under what circumstances might

it be appropriate for FCA’s liquidity

framework to better address funding

methods such as discount notes and

short funding?

Marketability of the Supplemental

Liquidity Buffer

Currently, investments held in a

bank’s liquidity reserve must be

marketable in accordance with the

criteria in § 615.5134(d). However,

investments held in the supplemental

liquidity buffer are not subject to the

same marketability standard.

35

Thus,

there is the potential that the

supplemental liquidity buffer may

include investments that are not

marketable or liquid under certain

circumstances. To evaluate this further,

we are seeking comment to determine if

we should hold investments in the

supplemental liquidity buffer to the

same or similar marketability standards

as assets in the liquidity reserve.

12. Should FCA apply the criteria for

‘‘marketable’’ investments in

§ 615.5134(d) to assets that FCS banks

hold in their supplemental liquidity

buffer? If yes, why? If no, what criteria

should FCA adopt to address its

concerns about the liquidity and

marketability of assets in the

supplemental liquidity buffers of FCS

banks when access to the markets are

becoming impeded, and why?

Money Market Instruments and

Diversified Investment Funds

The existing liquidity framework

allows certain money market

instruments and diversified investment

funds to be included as Level 1 reserves

at § 615.5134(b). The FBRAs decided

not to include similar instruments in the

LCR’s HQLA framework, such as mutual

funds and money market funds.

36

The

FBRAs stated that certain underlying

investments of the investment

companies may include high-quality

assets, however, similar to securities

issued by many companies in the

financial sector, shares of investment

companies have been prone to lose

value and become less liquid during

periods of severe market stress or an

idiosyncratic event involving the fund’s

sponsor. Additionally, Securities and

Exchange Commission (SEC) rules

regarding money market funds may also

impose some barriers on investors’

ability to withdraw all their funds

during a period of stress.

37

Certain money market instruments

exhibited liquidity stress during the

2008 financial crisis and the economic

shock in March 2020 caused by the

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See 79 FR 61440, 61465 (October 10, 2014) and

Financial Stability Board’s ‘‘COVID–19 Pandemic:

Financial Stability Impact and Policy Responses;

Report submitted to the G20.’’ November 17, 2020.

39

Both CP and CD are included in FCA’s

definition of money market instruments.

40

See SEC’s Division of Economic and Risk

Analysis ‘‘U.S. Credit Markets Interconnectedness

and the Effects of the COVID–19 Economic Shock.’’

October 2020.

41

See §615.5133(f)(3)(iii).

42

System banks can purchase certain municipal

securities and corporate bonds under

§615.5140(a)(1)(ii)(A)—non-convertible senior debt

securities.

43

Investments such as publicly traded common

equity, certain corporate debt securities, and certain

other securities are included in the LCR but are not

eligible investments under §615.5140.

44

See Bank for International Settlements Bulletin

No 14 ‘‘US dollar funding markets during the

Covid–19 crisis—the money market fund turmoil.’’

May 12, 2020.

45

See §615.5134(f).

COVID–19 pandemic.

38

For example, in

March 2020, Commercial paper (CP) and

Certificate of deposit (CD) markets both

became stressed.

39

Under normal

market conditions, secondary trading

volume in CP and CD markets is limited

as most investors purchase and hold

these short-dated instruments to

maturity. However, in March 2020, as

some market participants, including

money market mutual funds and others,

may have sought secondary trading,

they experienced a ‘‘frozen market.’’ For

liquidity purposes, both secondary

trading and new issuances of CP and CD

halted for a period of time during the

pandemic.

40

FCA’s existing definition of

‘‘marketable’’ in § 615.5134(d) makes an

exception for money market

instruments. Specifically,

§ 615.5134(d)(4) exempts money market

instruments from the requirement that

investments in the liquidity reserve

must be easily bought and sold in active

and sizeable markets without

significantly affecting prices.

Additionally, money market

instruments are not subject to FCA’s

investment portfolio diversification

requirements and are not limited in the

liquidity reserve requirement.

41

To

evaluate the type of instruments and

definitions allowed under the FCA

liquidity framework, we are seeking

comment to determine if we should

align the instruments in FCA’s liquidity

reserve requirement with the FBRAs

HQLA framework.

13. Given the risks of money market

instruments and diversified investment

funds and that the FBRAs do not

consider these instruments to be high

quality liquid assets, why should FCA

continue to permit these instruments to

be included in an FCS bank’s liquidity

reserve? If you believe that we should

continue to allow money market

instruments and diversified investment

funds in the liquidity reserve

requirement, how could FCA mitigate

the risks they pose?

14. What factors should FCA consider

in evaluating the risk of money market

instruments and diversified investment

funds in the context of the total

liquidity reserve requirement?

15. Should FCA consider limiting

money market instruments and

diversified investment funds included

in specific levels in the liquidity reserve

to mitigate concentration risk? Please

explain your reasoning.

FCA’s Liquidity Reserve and High-

Quality Liquid Assets in Liquidity

Coverage Ratio

The FBRAs’ HQLA allowed in the

LCR differ from liquid assets allowed in

FCA’s liquidity regulation. FCA’s

regulation allows certain instruments to

qualify as liquid assets even though they

are excluded from the LCR, such as

investment company shares (mutual

funds and money market funds).

However, the LCR allows certain

instruments to be included in HQLA

that are excluded from FCA’s liquidity

regulation, such as municipal

obligations and certain corporate

bonds.

42

There are also certain

instruments in HQLA that System banks

do not have the authority to purchase.

43

FCA’s regulation also differentiates

liquid assets by tenor while the LCR

does not. Additionally, the LCR applies

more substantial discounts or ‘‘haircuts’’

to HQLA than FCA’s liquidity

regulation applies to the same assets.

The FRBAs also limit certain assets to

a percentage of the total eligible HQLA

amount, whereas FCA does not. To

evaluate this further, we are seeking

comment to determine if we should

consider aligning FCA’s existing

requirements for liquid assets with the

LCR’s HQLA.

16. Should FCA consider expanding

the instruments eligible under the

liquidity reserve to more closely align

with the HQLA framework of the

FBRAs? If so, which instruments should

be considered and how would including

the instruments add strength to the

existing liquidity framework?

17. Should FCA consider reviewing

tenor requirements in its existing

liquidity regulations? If so, which

instruments should be considered and

how would the requirements add

strength to the existing liquidity

framework?

18. Should FCA consider changing

discount values assigned to assets held

for liquidity to more closely align with

those applied under the LCR’s HQLA

framework?

19. Should FCA consider limiting

certain assets included in the liquidity

reserve to mitigate concentration risk? If

so, what assets should be limited and

what percent should they be allowed to

count towards the reserve requirement?

Liquidity and COVID–19

FCS banks withstood the recent

economic and financial turmoil from

COVID–19 with their liquidity intact.

However, both the FCA and FCS

continue to gain insights into the effects

that sudden and severe stress have on

liquidity at individual FCS institutions

and in the entire financial system. For

example, in March of 2020, financial

markets experienced a ‘‘flight to cash’’

where demand for cash and the highest

quality cash like instruments

dramatically increased, while demand

(and thus prices) for less liquid

instruments declined.

44

System banks

are required to adopt a CFP to ensure

sources of liquidity are sufficient to

fund normal operations under a variety

of stress events.

45

Such stress events

include, but are not limited to market

disruptions, rapid increase in loan

demand, unexpected draws on

unfunded commitments, difficulties in

renewing or replacing funding with

desired terms and structures,

requirements to pledge collateral with

counterparties, and reduced market

access.

As addressed above, we are reviewing

our regulatory and supervisory

approaches towards liquidity so that

System institutions are in a better

position to withstand whatever future

crises may arise. As part of our ongoing

efforts to limit the adverse effect of

rapidly changing economic, financial,

and market conditions on the liquidity

of any FCS bank, we are seeking

comment to determine if we should

make updates to our regulations to

better prepare for future liquidity crises.

20. How should FCA further

incorporate the demand for cash and

highly liquid U.S. Treasury securities

during times of crisis into the System

banks liquidity reserve requirement?

21. What type of updates should FCA

consider to the CFP requirements in

§ 615.5134(f)?

B. Applicability of the Liquidity

Coverage Ratio and Net Stable Funding

Ratio

System Banks and the LCR and NSFR

For the reasons discussed above, the

FCA is exploring whether, and to what

extent, the LCR and NSFR should apply

to System banks now that the FBRAs

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Credit and liquidity facility are defined at 12

CFR 329.3. A credit facility is a legally binding

agreement to extend funds at a future date and

generally includes working capital facilities (e.g.,

revolving line of credit used for general corporate

or working capital purposes). A liquidity facility is

a legally binding agreement to extend funds for

purposes of refinancing the debt of a counterparty

when it is unable to obtain a primary or anticipated

source of funding. If a facility has characteristics of

both credit and liquidity facilities, the facility must

be classified as a liquidity facility.

47

See 79 FR 61440, 61485 (October 10, 2014).

48

Other GSEs currently include the Federal Home

Loan Mortgage Corporation, the Federal National

Mortgage Association, and the Federal Home Loan

Bank System. As noted in footnote 3, supra, Farmer

Mac is a GSE that has a charter to operate a

secondary market for certain types of loans

originated by retail lenders. Farmer Mac is not a

cooperative. Instead, it is a stockholder-owned,

federally chartered corporation.

issued final rules implementing the

Basel III Liquidity Framework in the

United States. More specifically, we are

evaluating whether it is feasible to

adjust the LCR and NSFR to the

System’s cooperative and non-

depository structures and its mission as

a GSE, and we are seeking your input.

In the alternative, we are considering

whether to incorporate specific

elements of the LCR and NSFR into our

liquidity regulation, and we are

interested in your ideas about how to do

so.

22. What core principles would be

most important in FCA’s consideration

of the Basel III Liquidity Framework?

How relevant is the Basel III Liquidity

Framework to the cooperative and non-

depository structure of the FCS?

23. To what extent should FCA

propose a similar rule to the FBRA’s

LCR and NSFR?

a. Should FCA completely replace its

existing liquidity regulations with an

LCR and NSFR framework or only

augment existing regulations with

certain elements of the LCR and NSFR

framework? If so, please explain.

b. What specific modifications, if any,

should FCA consider making to the LCR

and NSFR ratios for application to

System banks, and why?

c. If FCA proposed to incorporate the

LCR and NSFR ratios as part of the CFP

requirement in § 615.5134(f), what types

of modifications would be necessary to

include elements of the ratios, without

being redundant or overly burdensome?

24. If the FCA closely aligned the LCR

and NSFR to the FBRA’s regulations,

and made only narrow modification to

accommodate the System’s unique

structure, would the results enable FCS

banks to better withstand liquidity

crises, or in the alternative, prove too

costly or burdensome? Please explain.

25. How would the implementation of

an LCR and NSFR impact the System’s

funding structure, lending activities, or

use of discount notes?

Outflows to Credit Facilities

The LCR requires covered institutions

to hold liquidity against the undrawn

amount of a committed credit facility to

a borrower. The outflow factor applied

to this undrawn amount depends on the

type of credit facility (credit or liquidity

facility)

46

and the type of borrower

(financial sector entity or non-financial

sector entity). The direct notes from

System banks to System associations

under the GFAs are credit facilities, not

liquidity facilities. Unfunded

commitments on a credit facility to a

financial sector entity have a 40 percent

factor, while the same commitment to a

non-financial sector entity only have a

10 percent factor. Financial sector

entities typically have shorter-term

funding structures and higher

correlations of drawing down

commitments during times of stress

which support a higher factor when

compared to non-financial sector

entities.

47

A higher factor results in a

higher liquidity requirement under the

LCR.

The FBRAs’ LCR regulation defines a

financial sector entity to include a

regulated financial company, but

specifically excludes GSEs. The FCS is

a cooperative system of financial

institutions that the FCA charters and

regulates in accordance with the Act.

System associations lend directly to and

provide certain financially-related

services to eligible borrowers. The

System’s lending activities to retail

borrowers, and its structure are different

than the activities and structure of other

GSEs excluded from the FBRAs’

definition of a financial sector entity.

48

Unlike the other GSEs, most FCS

institutions lend directly to retail

borrowers in a manner that is

substantially similar to lenders that the

FBRAs define as financial sector

entities. To evaluate this further, we are

seeking comment to determine if we

propose an LCR, should FCA treat

System institutions as financial sector

entities and apply the relevant factor

under the FBRAs’ definition.

26. If FCA proposes an LCR, should

FCA treat System institutions as

financial sector entities and apply a 40

percent factor to the unfunded portion

of the associations’ direct note

commitments?

a. If so, what supports FCA treating

System institutions as financial sector

entities and applying a 40 percent factor

on the unfunded commitments System

banks have to associations?

b. If not, what supports FCA treating

System institutions as non-financial

sector entities and applying a 10 percent

factor on the unfunded commitments

System banks have to associations?

System Bank Member Investment Bonds

Two System banks offer investment

bonds to their member-borrowers and

other specified individuals, such as

bank employees (Member Investment

Bonds). Both programs are similar in

that each bank offers overnight or short-

term, uninsured bonds to the bank’s

members and other specified

individuals. Member Investment Bonds

are structured so that holders may

redeem funds at their request (although

prior notice for withdrawals may be

required). Given their short maturity, a

holder’s investment may be

continuously rolled over until they

provide notice to redeem the

investment, which may be at any time.

Member Investment Bonds present a

liquidity demand similar to maturing

System bonds. Accordingly, FCA treats

Member Investment Bonds and

maturing System bonds the same under

the existing liquidity rules. Under the

LCR, there are several different outflow

categories that Member Investment

Bonds could fall into. To evaluate this

further, we are seeking comment to

determine if we propose an LCR, what

the most appropriate factor for these

investment bonds would be.

27. If FCA proposes an LCR, what

would be an appropriate factor to apply

to the Member Investment Bonds and

why?

Voluntary Advance Conditional

Payment Accounts

As discussed above, FCA regulation

§ 614.4175 allows member-borrowers to

make VACP on their loans and allows

institutions to set up involuntary

payment accounts for funds held to be

used for insurance premiums, taxes, and

other reasons. A sudden surge in

member-borrower draws from VACP

accounts held at associations would

increase the funding required from the

System bank to the affiliated association

at a time when market access is

becoming impeded. To evaluate this

further, we are seeking comment to

determine if we propose an LCR, what

the most appropriate factor for these

VACP accounts would be.

28. If FCA proposes an LCR, given the

uniqueness of VACP accounts and the

ability of member-borrowers to

withdraw certain VACP account funds

at their request, what would be an

appropriate factor?

29. If different factors should apply to

different VACP accounts, please specify.

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34653

Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Proposed Rules

49

For example, the BCBS considered the

traditional ‘‘cash capital’’ measure, which compares

the amount of a firm’s long-term and stable sources

of funding to the amount of the firm’s illiquid

assets. The BCBS found that this cash capital

measure failed to account for material funding risks,

such as those related to off-balance sheet

commitments and certain on-balance sheet short-

term funding and lending mismatches.

50

See 86 FR 9120 (February 11, 2021). See supra

footnote 19.

High Quality Liquid Assets in LCR

As discussed above, the FBRAs’

HQLA allowed in the LCR differ from

liquid assets allowed in FCA’s liquidity

regulation. To evaluate this further, we

are seeking comment to determine if we

propose an LCR, should FCA consider

aligning FCA’s liquid assets with the

LCR’s HQLA.

30. If FCA proposes an LCR, should

we replace the current list of eligible

instruments for the liquidity reserve

with a list that is more closely aligned

to the FBRA’s HQLA instrument list

(excluding common equities)? Please

explain.

a. Should FCA’s liquidity regulation

continue to allow FCS banks to hold in

their liquidity reserve instruments that

are currently excluded from the FBRA’s

HLQA list? Which instruments and

why?

b. Should FCA allow FCS banks to

hold in their liquidity reserves

instruments that are included in the

FBRAs HLQA list, but are currently

excluded from FCA’s liquidity

regulation? Which instruments and

why?

Net Stable Funding Ratio Applicability

The BCBS introduced the NSFR to

require banks to maintain a stable

funding profile to reduce the likelihood

that disruptions in a bank’s regular

sources of funding will erode its

liquidity position that may increase its

risk of failure. Furthermore, during

periods of financial stress, financial

institutions without stable funding

sources may be forced to monetize

assets in order to meet their obligations,

which may drive down asset prices and

compound liquidity issues. The NSFR

implements a standardized quantitative

metric designed to limit maturity

mismatches and applies favorable

factors to a commercial bank’s primary

funding source—deposits. The NSFR

requires a bank to maintain an amount

of available stable funding (ASF) that is

not less than the amount of its required

stable funding (RSF) on an ongoing

basis. ASF and RSF are calculated based

on the liquidity characteristics of a

bank’s assets, derivative exposures,

commitments, liabilities, and equity

over a one-year time horizon.

The NSFR and its corresponding

factors adopted by the FBRAs were

established to measure and maintain the

stability of the funding profiles of

banking organizations that rely

primarily on deposits. In contrast, FCS

banks issue System-wide debt securities

as the primary source for funding its

operations. The System would

potentially need to modify its funding

structure to meet an NSFR by

incorporating more long-term debt

issuances. To evaluate this further, we

are seeking comment to determine if the

NSFR is applicable to the System’s

funding structure, authorities, and

mission.

31. What core principles would be

most important in FCA’s consideration

of the NSFR? How does the cooperative

and non-depository structure of the

System relate to the NSFR?

32. How could NSFR metrics replace

any existing regulations, to ensure

System banks have sufficiently stable

liabilities (and regulatory capital) to

support their assets and commitments

over a one-year time horizon?

33. Is it beneficial or detrimental to

replace existing regulations with NSFR

metrics and why?

Other Considerations

The BCBS developed the Basel NSFR

standard as a longer-term balance sheet

funding metric to complement the Basel

LCR standard’s short-term liquidity

stress metric. In developing the Basel

NSFR standard, the FBRAs and their

international counterparts in the BCBS

considered a number of possible

funding metrics.

49

The Basel guidance

and FBRA’s NSFR regulation

incorporated consideration of these and

other funding risks.

50

34. What other approaches or

methodologies to measuring and

regulating liquidity not discussed above

should FCA consider and why?

C. Other Comments Requested

We welcome comments on every

aspect of this advance notice of

proposed rulemaking. We encourage

any interested person(s) to identify and

raise issues pertaining to other aspects

of the liquidity framework for FCS

banks and associations that we did not

address in this ANPRM. Please

designate such comments as ‘‘Other

Relevant Issues.’’

* * * * *

Dated: June 10, 2021.

Dale Aultman,

Secretary, Farm Credit Administration Board.

[FR Doc. 2021–13556 Filed 6–29–21; 8:45 am]

BILLING CODE 6705–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA–2021–0504; Project

Identifier AD–2020–01380–T]

RIN 2120–AA64

Airworthiness Directives; The Boeing

Company Airplanes

AGENCY

: Federal Aviation

Administration (FAA), DOT.

ACTION

: Notice of proposed rulemaking

(NPRM).

SUMMARY

: The FAA proposes to

supersede Airworthiness Directive (AD)

2019–03–26, which applies to certain

The Boeing Company Model 737–600,

–700, –700C, –800, –900, and –900ER

series airplanes. AD 2019–03–26

requires modifying the passenger

service units (PSUs) and life vest panels

by replacing the existing inboard

lanyard and installing two new lanyards

on the outboard edge of the PSUs and

life vest panels; measuring the distance

between the hooks of the torsion spring

of the lanyard assembly; replacing

discrepant lanyard assemblies; and re-

identifying serviceable lanyard

assemblies. Since the FAA issued AD

2019–03–26, it has been determined that

certain airplanes are listed in the wrong

configuration and certain PSUs have not

been correctly re-identified. This

proposed AD would retain the

requirements of AD 2019–03–26, and,

for certain airplanes, would require an

inspection to determine if the re-

identified PSU part number is correct,

and further re-identification if

necessary. The FAA is proposing this

AD to address the unsafe condition on

these products.

DATES

: The FAA must receive comments

on this proposed AD by August 16,

2021.

ADDRESSES

: You may send comments,

using the procedures found in 14 CFR

11.43 and 11.45, by any of the following

methods:

•Federal eRulemaking Portal: Go to

https://www.regulations.gov. Follow the

instructions for submitting comments.

•Fax: 202–493–2251.

•Mail: U.S. Department of

Transportation, Docket Operations,

M–30, West Building Ground Floor,

Room W12–140, 1200 New Jersey

Avenue SE, Washington, DC 20590.

•Hand Delivery: Deliver to Mail

address above between 9 a.m. and 5

p.m., Monday through Friday, except

Federal holidays.

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