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Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Proposed Rules
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management as well as the FCAs 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 FCSICFFB 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.
12 See 12 U.S.C. 2277a10a1; Section 5.61a1
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.

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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 Systems 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. FCAs existing regulation has achieved FCAs 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 16 The FCA has broad authority under various provisions of the Act to supervise and regulate liquidity management at FCS banks. Section 5.17a of the Act authorizes the FCA to: 1 Approve the issuance of FCS debt securities under section 4.2c 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.

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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, FCAs 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 banks 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 FCAs 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 COVID19
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 22 See Proclamation 9994, Declaring a National Emergency Concerning the Novel Coronavirus Disease COVID19 Outbreak, 85 FR 15337 March 18, 2020.

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