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Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Proposed Rules
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 COVID19
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 COVID19
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 persons 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
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Unfunded Commitments of FCS Banks Each FCS bank has its own unique circumstances and risk profile and, 23 Section 1101 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended section 133 of the Federal Reserve Act, 12 U.S.C.
3433, 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 133 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 11203, title XI, sec. 1101a, 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 133 of the Federal Reserve Act.
25 See FCAs Supplement to the January 5, 2021, FCA Informational Memorandum: Guidance for System Institutions Affected by the COVID19
Pandemic: Regulatory Capital Requirements for PPP
Loans.

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therefore, exposure to unfunded commitments and other contingent obligations varies within the FCS. As part of each System banks 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 associations 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 associations 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 banks approval.27 We believe there may be merit in incorporating these possible outflows for the banks 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 26 See
614.4125d.
section 2.212 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 1.7b1B of the Act.
29 See 614.4540b which specifies the criteria for assured access for certain OFIs.
27 Under
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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 borrowers 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 banks 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.
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.

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