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Federal Register / Vol. 86, No. 188 / Friday, October 1, 2021 / Rules and Regulations The System Comment Letter advocated that FCA reconsider the necessity of requirements to hold a minimum level of URE. Consistent with its comments on our 2014 proposed Capital Rule, the System Comment Letter asserted that the minimum URE
requirement establishes URE as higher quality capital relative to other System capital components, results in nearly 3
percent of URE held against each dollar of new loans made by associations, violates the cooperative principle of user-ownership, and undermines the cooperative principle of user-control.57
In addition, the System Comment Letter asserted that a minimum URE
requirement is not consistent with the Basel III Framework and thus decreases the comparability of FCAs capital requirements to those of the U.S. Rule.
The System Comment Letter and AgriBank, FCB AgriBank, also requested that we consider changes to the definition of UREE in 628.2 if we retain the URE requirement.
Under the existing definition, nonqualified allocated equities not subject to redemption or revolvement are included in the definition of UREE
and count towards an institutions minimum URE and UREE requirement, provided that certain additional stipulations are met.58 Such equities allocated to other System institutions are expressly excluded. The commenters assert that, because of the deductions and eliminations for computing regulatory capital under FCAs 2017 Capital Rule, equities allocated by a System bank to an association satisfy the objectives for URE and UREE as previously outlined by FCA.59
The request to reconsider application of the minimum URE and UREE
requirements or to change the definition of UREE is beyond the scope of the proposal. We explained at length our position on the significance of URE and 57 The Farm Credit Council made similar comments in response to the 2017 Capital Rule, as we summarized in the rules preamble. See 81 FR
49720, 4973349735 July 28, 2016.
58 To include nonqualified allocated equities in UREE, an institutions board must designate the equities as UREE at issuance and undertake in its capitalization bylaws or a board resolution 1. not to change the designation without FCA prior approval, 2. not to exercise discretion to revolve the equities except under dissolution or liquidation, and 3. not offset the equities against a loan in default except as required by a court of competent jurisdiction, or if required under 615.5290 in connection with a restructuring.
59 URE and UREE provide a cushion from losses for both third-party and common cooperative equities and protect against interconnected risk between System banks and associations. See 79 FR
52814 September 4, 2014.

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UREE to System capitalization in the preamble to the 2017 Capital Rule.60
We note that the System Comment Letter and AgriBank drew a connection between our interpretation that allocated equities are paid-in, as defined by Basel, and their argument for the elimination of the URE and UREE
requirements. The interpretation that allocated equities meet the Basel definition of paid-in capital, as discussed in the proposal,61 does not diminish the importance of the URE and UREE requirements.62
The minimum URE and UREE
requirement as presently calculated protects association members against association losses, associations against bank losses, and the System against financial contagion. Financial contagion in this context would include impacts to earnings measures that are relevant to System investors and FCAs evaluations of the safety and soundness of System institutions. In addition to our previously stated position, we note that URE at a System bank ensures the bank can act as a source of strength and provide assistance to district associations or other banks if needed, and it also insulates a banks affiliated associations from losses in other districts in the event of a joint and several liability call.
F. Service Corporation Deductions and Adjustments Existing 628.22a6 requires a System institution to deduct any allocated equity investment in another System institution. We proposed to expand the deduction requirement to include allocated equity investments in a System service corporation.63 The System Comment Letter indicated that System institutions are unaware of any service corporations that allocate 60 See
81 FR 49720, 4973249735 July 28, 2016.
81 FR 55786, 55791 September 10, 2020.
62 As noted in the System Comment Letter, Basel III recognizes two broad categories of CET1 capital:
Retained earnings and paid-in capital instruments.
Consistent with that view, our capital rules acknowledge and draw distinction between these two types of CET1 capital 628.20b1 and 2.
Our interpretation that common cooperative equities are paid-in as defined by Basel does not eliminate the distinction between these two types of high-quality capital. Equities allocated by one System institution to another are at risk at both institutions and present a risk of financial contagion as a result of the interconnection that gives rise to their existence. Unallocated retained earnings and equivalents as presently defined do not present the same contagion risk.
63 System institution is defined in existing 628.2
as a System bank, an association of the Farm Credit System, . . . and any other institution chartered by the FCA that the FCA determines should be considered a System institution for the purposes of this part. The FCA has not made any determinations to include other institutions in this definition.
61 See
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equities and provided no further comment on the amendment proposed.
Accordingly, we are adopting the revision as proposed.
As we noted in the preamble to the proposed rule, in November 2016 the Farm Credit Council sent a letter 64 to FCA requesting that institutions be permitted to risk-weight their investments in System service corporations at 100 percent instead of having to deduct the investments from CET1 capital in their regulatory capital calculations. The Farm Credit Council further requested FCA to establish regulatory capital treatments for unincorporated business entities UBEs based on the specific nature of the entity in question. We responded to this request in the preamble to the proposed rule, declining to revise the requirement to deduct equity investments in service corporations from regulatory capital and noting that we retain the authority to consider the appropriate capital treatment of UBEs on a case-by-case basis.
The System Comment Letter requested that we reconsider our position on service corporation investments. The System believes the requirement to deduct investments in System service corporations is inconsistent with the level of risk in the investments and state that the deduction requirement discourages the formation of organizations that provide an efficient means for cooperation among System institutions in providing services to their stockholders. The System further noted that all service corporations are subject to chartering requirements and that FCA can establish the individual capital requirements of a service corporation on a case-by-case basis.
We are not convinced of the need to change our previously communicated position. As we stated in the preamble to the proposed rule, we believe that investments in service corporations are committed to support the risks at the service corporation and must be available to meet the service corporations capital needs.65 This position and our resulting regulatory capital treatment of investments in service corporations are consistent with our treatment of all intra-System investments. The System accurately points out that FCA can establish 64 Letter dated November 22, 2016, from Charles Dana, General Counsel, Farm Credit Council to Gary K. Van Meter, Director, Office of Regulatory Policy.
This letter was received after the 2017 Capital Rule had been adopted by the FCA Board and communicated a request to change certain provisions of the 2017 Capital Rule, as discussed in this section.
65 See 85 FR 55786, 55795 September 10, 2020.

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