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Federal Register / Vol. 86, No. 188 / Friday, October 1, 2021 / Rules and Regulations the proportional relationship of the stock investment and the originated loan amount. We are making conforming changes to 628.20b1x and d1viiiC to incorporate this change.
The ABA commented that it appreciated our clarification but asserted that the proposal would still leave FCS institutions subject to very lax requirements concerning stock redemptions compared to those applicable to commercial banks. We note that the proposed amendment eliciting this comment does not reduce restrictions on stock redemptions for System institutions. As discussed in the preamble to the proposed rule, the proposed amendment is merely a technical clarification for the avoidance of doubt.72
As stated in the preamble to the 2017
Capital Rule, one of our objectives was to ensure the Systems capital requirements are comparable to the Basel III framework and the standardized approach under the U.S.
Rule, taking into consideration the cooperative structure and the organization of the System.73
Accordingly, while most requirements of our rule are similar or identical to requirements in the U.S. Rule, the cooperative structure and the organization of System institutions necessitated modification of other requirements. A piecemeal comparison of various elements of the two rules will not yield an accurate appraisal of the regulatory outcome of our requirements as compared to the U.S. Rule.
As the ABA points out, when restrictions on stock redemptions are considered in isolation of other rule requirements, commercial banks are subject to more restrictions than System institutions. For example, to retire stock, national banks must obtain the approval of shareholders owning two thirds of the shares in each affected class, as well as prior approval from the OCC.74 By contrast, System institutions may redeem common cooperative equities without obtaining FCA or shareholder prior approval, provided certain conditions are met.75 We acknowledged 72 85

FR 55786, 55794 September 10, 2020.
objectives in 81 FR 49720 July 28, 2016.
74 12 U.S.C. 59.
75 Under 628.20f5, institutions may retire common cooperative equities included in CET1
capital a minimum of 7 years after the issuance date, and they may retire common cooperative equities included in tier 2 capital a minimum of 5
years after the issuance date. In the case of common cooperative equities included in CET1, after such retirements the dollar amount of CET1 capital outstanding must equal or exceed the dollar amount outstanding one year earlier. Under 628.20b1xivB, statutory minimum borrower 73 See
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and discussed this difference in the preamble to the 2017 Capital Rule.76
However, the requirements for stock redemptions should not be evaluated in isolation of the remaining restrictions on distributions in FCAs capital rules.
First, FCAs Safe Harbor for stock redemptions applies only to common cooperative equities; all other capital instruments including preferred stock and subordinated debt cannot be redeemed or retired prior to their maturity without express prior approval from the FCA Board.77 Second, the most flexible treatment of stock redemptions under FCAs existing capital rules, which is the focus of the ABAs comments, is applicable only to minimum statutory borrower stock.78
This capital element comprises less than 1 percent of the Systems total capital base.79 All other common cooperative equities included in regulatory capital are subject to further restrictions including minimum holding periods before they can be redeemed without obtaining prior approval from FCA.80 A
third consideration is that a significant portion of allocated equities in the System has been designated as unallocated retained earnings equivalents,81 a type of common cooperative equity that cannot be redeemed without obtaining prior approval from the FCA Board.82
Finally and most importantly, as previously discussed in the preamble to the 2017 Capital Rule, the redemptions we allow must be considered in the context of our overall limitations on stock may be retired without a minimum period outstanding after issuance and without the prior approval of FCA.
76 See 81 FR 49720, 49731 July 28, 2016.
77 See 628.20c1vi and d1X.
78 Statutory minimum borrower stock is stock acquired by System borrowers to satisfy requirements under Section 4.3A of the Act. It is equal to the lesser of $1,000 or 2 percent of the loan.
79 As of June 30, 2021, System entities reported combined total regulatory capital of $65.8 billion, of which $0.39 billion or 0.6 percent was comprised of statutory minimum borrower stock that is already eligible to be redeemed without a minimum holding period under existing regulatory requirements. This rulemaking does not change the requirements governing redemption of this stock.
80 See 628.20f5.
81 As defined in 628.2, unallocated retained earnings URE equivalents include nonqualified allocated equities designated as URE equivalents at issuance that a System institution undertakes not to revolve except upon dissolution or liquidation.
Under new 628.21, System institutions are required to obtain prior FCA approval before redesignating URE equivalents as equities that the institution has discretion to redeem.
82 As of March 31, 2021, System entities reported a combined total regulatory capital of $65.8 billion, of which $19.2 billion 29 percent was comprised of allocated common cooperative equities. Of the $19.1 billion in allocated common cooperative equities, $11.9 billion 62 percent were designated as unallocated retained earnings equivalents.

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capital distributions.83 Under the provisions of FCAs Safe Harbor Deemed Prior Approval,84 all capital distributions by a System institution, including redemptions of common cooperative equities, dividends, and cash patronage, are limited to no more than the year-over-year dollar increase in CET1 capital for any given 12-month period. All other factors held constant, this in effect limits System institutions to distributing no more than the current years net income. By contrast, national banks have statutory authority to distribute cash dividends in amounts up to current years net income plus the retained net income for the two previous years.85 As we noted in the preamble to the 2017 Capital Rule, we believe that our Safe Harbor for equities is appropriately comparable to Basel III
and the U.S. Rule because the Safe Harbors broader application to total cash dividend payments, cash patronage payments, and equity redemptions or revolvements is tempered by an overall limit that is more restrictive than commercial banks safe harbor to pay cash dividends.86
IV. Abbreviations BCBS Basel Committee on Banking Supervision CFR Code of Federal Regulations CFTC Commodity Futures Trading Commission EMNA Eligible Master Netting Agreement FCA Farm Credit Administration FDIC Federal Deposit Insurance Corporation FDI Act Federal Deposit Insurance Corporation Improvement Act of 1991
FFIEC Federal Financial Institutions Examination Council FR Federal Register FRB Board of Governors of the Federal Reserve System GAAP Generally Accepted Accounting Principles U.S.
GSE Government-Sponsored Enterprise GSIB Global Systemically Important Bank OCC Office of the Comptroller of the Currency QFC Qualified Financial Contract QMNA Qualified Master Netting Agreement SEC Securities and Exchange Commission SFA Supervisory Formula Approach SRWA Simple Risk-Weight Approach SSFA Simplified Supervisory Formula Approach UBE Unincorporated Business Entity URE Unallocated Retained Earnings UREE Unallocated Retained Earnings Equivalents U.S.C. United States Code 83 See
81 FR 49720, 49731 July 28, 2016.

84 628.20f5.
85 12

U.S.C. 60.
81 FR 49720, 49731 July 28, 2016.

86 See
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