CAPITALIZATION OF SYSTEM INSTITUTIONS.

SEC. 301. CAPITALIZATION OF SYSTEM INSTITUTIONS. (a) Minimum Capital Adequacy Standards.— (1) In general.— (A) Establishment.— Within 120 days after the date of the enactment of this Act, the Farm Credit Administration shall issue regulations under section 4.3(a) of the Farm Credit Act of 1971 (12 U.S.C. 2154(c)) that establish minimum permanent capital adequacy standards for Farm Credit System institutions. (B) Basis for establishment.— The standards established under subparagraph (A) shall be based on the financial statements of the institution prepared in accordance with generally accepted accounting principles. (C) Ratio of capital to assets.— The standards established under subparagraph (A) shall specify fixed percentages representing the ratio of permanent capital of the institution to the assets of the institution, taking into consideration relative risk factors as determined by the Farm Credit Administration. (D) Phase-in period.— The standards established under subparagraph (A) shall be phased in during the 5-year period beginning on the date of the enactment of this Act. (2) Emergency power not available.— The Farm Credit Administration shall not invoke the emergency provisions of section 5.17(b)(2) of the Farm Credit Act of 1971 (12 U.S.C. 2251(b)(2)) with respect to the issuance of the proposed regulations required under paragraph (1)(A). (3) Prohibitions during transition period.— During the 5-year period specified in paragraph (1)(C), the Farm Credit Administration shall not initiate any receivership, conservatorship, liquidation, or enforcement action against any System institution certified to issue preferred stock under section 6.27 of the Farm Credit Act of 1971 (as added by section 201 of this Act), solely because of the failure of such institution to meet minimum permanent capital adequacy standards unless such action is recommended or concurred in by the Farm Credit System Assistance Board established under section 6.0 of such Act (as added by section 201 of this Act). (4) Permanent capital.— For purposes of this subsection, the term “permanent capital” has the same meaning given that term in section 4.3A(a)(1) of the Farm Credit Act of 1971. (b) Capitalization Bylaws.— Title IV (12 U.S.C. 2151 et seq.) is amended by inserting after section 4.3 the following new section: 101 STAT. 1609 “SEC. 4.3A. CAPITALIZATION OF SYSTEM INSTITUTIONS. “(a) Definitions.— As used in this section: “(1) Permanent capital.— The term ‘permanent capital’ means current year retained earnings, allocated and unallocated earnings, all surplus (less allowances for losses), and stock issued by a System institution, except stock that— “(A) may be retired by the holder thereof on repayment of the holder’s loan, or otherwise at the option or request of the holder; or “(B) is protected under section 4.9B or is otherwise not at risk. “(2) Stock.— The term ‘stock’ means voting and nonvoting stock (including preferred stock), equivalent contributions to a guaranty fund, participation certificates, allocated equities, and other forms and types of equities. “(b) Adoption of Bylaws.— Subject to approval by shareholders under subsection (c)(2), each bank and association shall adopt bylaws, developed by its board of directors, that provide for the capitalization of the institution in accordance with subsection (c)(1). “(c) Requirements of Bylaws.— “(1) In general.— Notwithstanding any other provision of this Act, the bylaws adopted under subsection (b)— “(A) shall provide for such classes, par value, and amounts of the stock of the institution, the manner in which such stock shall be issued, transferred, and retired, and the payment of dividends and patronage refunds, as determined appropriate by the Board of Directors, subject to this section; “(B) may provide for the charging of loan origination fees as determined appropriate by the Board of Directors; “(C) shall enable the institution to meet the capital adequacy standards established under the regulations issued under section 4.3(a); “(D) shall provide for the issuance of voting stock, which may only be held by— “(i) borrowers who are farmers, ranchers, or producers, or harvesters of aquatic products, and cooperative associations eligible to borrow from System institutions under this Act; “(ii) in the case of a Central Bank for Cooperatives, other banks for cooperatives; and “(iii) in the case of banks other than banks for cooperatives, System associations; “(E) shall require that— “(i) as a condition of borrowing from or through the institution, any borrower who is entitled to hold voting stock or participation certificates shall, at the time a loan is made, acquire voting stock or participation certificates in an amount not less than $1,000 or 2 percent of the amount of the loan, whichever is less; and “(ii) within 2 years after the loan of a borrower is repaid in full, any voting stock held by the borrower be converted to nonvoting stock; 101 STAT. 1610 “(F) may provide that persons who are not borrowers from the institution may hold nonvoting stock of the institution; “(G) shall require that any holder of stock issued before the adoption of bylaws under this section exchange a portion of such stock for new voting stock; “(H) do not need to provide for maximum or minimum standards of borrower stock ownership based on a percentage of the loan of the borrower; “(I) shall permit the retirement of stock at the discretion of the institution if the institution meets the capital adequacy standards established under standards issued under section 4.3(a); and “(J) shall permit stock to be transferable. “(2) Effective date.— The bylaws adopted by the board of directors of a System institution under subsection (b) shall take effect only on approval of a majority of the stockholders of such institution present and voting, or voting by written proxy, at a duly authorized stockholders’ meeting. “(d) Reduction of Capital.— “(1) General rule.— Except as provided in paragraph (2) and in section 4.9A, the board of directors of a System institution may not reduce the permanent capital of the institution through the payment of patronage refunds or dividends, or the retirement of stock or allocated equities if, after or due to such action, the permanent capital of the institution would thereafter fail to meet the minimum capital adequacy standards established under section 4.3(a). “(2) Exceptions.— Paragraph (1) shall not apply to the payment of noncash patronage refunds by any institution exempt from Federal income tax if the entire refund paid qualifies as permanent capital. Notwithstanding paragraph (1), any System institution subject to Federal income tax may pay patronage refunds partially in cash as long as the cash portion of the refund is the minimum amount required to qualify the refund as a deductible patronage distribution for Federal income tax purposes and the remaining portion of the refund paid qualifies as permanent capital. “(e) Compliance.— The Farm Credit Administration may issue a directive that requires compliance with subsection (d), to the board of directors of any System institution that fails to comply therewith. “(f) Construction.— This section shall not be construed to affect the provisions of this Act that confer on System institutions a lien on borrower stock or other equities and the privilege to retire or cancel such stock or other equities for application against the indebtedness on a defaulted or restructured loan. “(g) Controlling Authority.— To the extent that any provision of this section is inconsistent with any other provision of this Act (other than section 4.9A), the provision of this section shall control.”.