Farmer Mac Risk-Based Capital Stress Test
Congress required FCA to establish a risk-based capital stress test (RBCST) to ensure that Farmer Mac maintains at least the minimum calculated capital requirement at all times. The test determines the minimum level of regulatory capital Farmer Mac must hold in order to maintain positive capital during a 10-year period of stressful credit and interest rate conditions.
The current rule governing the RBCST was published in the Federal Register on April 27, 2011, and became effective on June 15, 2011. This rule amended the test by
- adding a component to characterize credit losses on rural utility loan volume,
- modifying the risk-reducing characteristics of such structures as off-balance-sheet AgVantage, and
- revising the component of the test that recognizes counterparty risk in nonprogram investments.
On June 9, 2011, the Board adopted an advance notice of proposed rulemaking (ANPRM) that would again revise regulations governing the RBCST. The ANPRM solicits public comments on the following:
- How best to replace references to nationally recognized statistical ratings organizations in the RBCST. To comply with Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, agencies must find standards other than these ratings to measure creditworthiness.
- Whether and how to address counterparty risk in Farmer Mac’s derivatives portfolio.
- Whether and how to amend current requirements on operational and strategic planning to include a focus on diversity and inclusion—not only in Farmer Mac’s workforce but also in its customer base and among the borrowers served by its programs.
The ANPRM is open for public comment until August 15, 2010. To submit a comment, go to the ANPRM and click the comment link near the top of the page. You may also submit comments through the Federal Government Web portal at www.regulations.gov.
The ANPRM would amend the regulations at 12 CFR part 652, subpart B, and its appendix A.Components of the Test
Designed and maintained by OSMO, the RBCST model is essentially two Excel spreadsheets that incorporate loan portfolio data and other data reflecting Farmer Mac’s condition and operations as of the date of submission. Credit loss estimates are obtained using the Credit Loss Module 4.0, which applies statistical loan loss equations to Farmer Mac’s loan portfolio data to produce the estimated credit losses for the RBCST’s 10-year stress period. During development of the RBCST in 1998, a report was issued explaining in detail the loan loss estimation procedures that were later applied in the Credit Loss Module.
The second Excel spreadsheet, the RBCST 4.0, takes credit loss results from the Credit Loss Module and adds interest rate stress information and other Farmer Mac data to produce estimated financial statements for the 10-year stress period. This spreadsheet calculates the estimated equity and reserves necessary for Farmer Mac to maintain positive capital over the 10 years. In accordance with the statute, this amount is then multiplied by 1.3 to account for management and operations risk. The total represents the minimum capital Farmer Mac is required to hold as of the run date.
Using the RBCST
Anyone with financial modeling experience can use the RBCST, the credit loss module spreadsheet, and publicly available Farmer Mac data to derive approximately the same risk-based capital results that Farmer Mac and FCA derive. Because not all Farmer Mac data are publicly available, you will have to make certain assumptions and will not be able to reproduce exact results. These spreadsheets should be used with the guidance provided in the Farmer Mac risk-based capital regulation and technical appendix.
History of the RBCST
The regulation and technical appendix establishing the RBCST was published on April 12, 2001. Farmer Mac’s first submission of the RBCST under the rule was for the quarter ended June 30, 2002. The FCA Board approved a final rule revising the RBCST regulation on November 9, 2006, which was published in the Federal Register on December 26, 2006. Further amendments and revisions were published in the Federal Register on June 5, 2008.