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Independent banks charge FCS activities are ‘troubling’

 

 

By DAVE BLOWER JR.

Farm World Senior Editor

 

WASHINGTON, D.C. — Although all panelists last week declared farm credit is readily available for growers, the competitive balance for that credit was debated.

At the center of that debate is the Farm Credit System (FCS). Created by Congress in 1916, the FCS is a government-sponsored enterprise (GSE) with the mission to provide American farmers with a dependable source of credit. The FCS is a national network of borrower-owned financial institutions that provide credit to ranchers, farmers, residents of rural communities, agricultural and rural utility cooperatives and other eligible borrowers.

FCS is monitored by the Farm Credit Administration (FCA), an agency charged with regulating the banks and institutions that are part of the FCS, including the Federal Agricultural Mortgage Corp. (Farmer Mac). Many private banks and private banking associations, though, believe the FCS benefits as a result of being a GSE.

Leonard Wolfe, representing the American Bankers Assoc., told the U.S. House Subcommittee on Livestock, Rural Development and Credit last week that he has concerns about the strategic direction of the FCS.

He explained the growing size, complexity and tax advantages of the FCS, which is a GSE like Fannie Mae and Freddie Mac, poses at threat to U.S. taxpayers.

"The most troublesome competitor I face is the taxpayer-backed and tax-advantaged federal (FCS)," Wolfe said. "Unlike the housing GSEs which are subject to reform efforts to lessen the taxpayer’s exposure, the (FCS) seems to be increasing its dependence upon the U.S. Treasury."

Jill Long Thompson, the FCA’s board chair and CEO, disagrees with that assessment. In an interview with Farm World, she said the FCS has no reliance on the U.S. Treasury.

"The System’s primary source of liquidity is its ability to issue Systemwide debt securities in the market," Thompson said. "As part of a (GSE), the System’s banks have access to the global capital markets. The U.S. government does not guarantee, directly or indirectly, the payment of principal or interest on any Systemwide debt securities."

She added the FCS enjoys no tax benefits. "The System’s tax-exempt income is primarily from its long-term lending activities. All other income is taxable. For 2013, the System recorded provisions for income taxes of $221 million."

Representing the Independent Community Bankers of America, Sean Williams, president and CEO of First National Bank of Wynne, Ark., told the House Ag Committee he is concerned by "troubling activities" of the FCS.

Williams voiced community bankers’ alarm about the cherry-picking activities of the FCS. As a GSE, he said the FCS leverages tax and funding advantages to target the financially strongest customers of community banks, destabilizing ag loan portfolios of many banks. This increases risks to the community banks, leading to fewer lenders and less credit availability for rural America.

In written testimony, Williams noted FCA’s unauthorized "investment" gambit allows FCS lenders to engage in non-farm lending.

He said the FCA obtained a $10 billion line of credit without Congressional approval. He said Congress should host hearings to investigate the actions of FCS.

Thompson said she isn’t against such an effort: "We do not speak for the (FCS), but we are willing to answer any questions regarding our regulatory and examination activities."

As an example of the troubling activities by FCS, both Wolfe and Williams cited a loan financed by FCS lenders for the acquisition of Verizon Wireless. Williams said the FCA’s "anything goes" regulatory approach led to CoBank, the FCS’s largest cooperative lender, making an unauthorized $725 million loan to Verizon to buy out Vodafone’s interest in Verizon Wireless.

"This deal finances large, corporate, multinational firms located in New York City and London," Williams said. "This is a non-rural and non-cooperative international corporate financial deal inappropriate for an ag-based cooperative operating as a taxpayer-backed GSE."

Thompson said the FCA reviewed the Verizon transaction and deemed the FCS had the statutory authority to provide the credit. "In section 3.8 of the Farm Credit Act, Congress gave the FCS the authority to lend to entities providing communication services in rural areas," she explained.

She said Congress granted the FCS the authority to participate in loans to "similar entities" for risk diversification and management purposes. Similar entities are defined as parties that are ineligible for FCS loans but have operations that are "functionally similar" to the activities of eligible borrowers. The majority of the income for these entities is derived from, or its assets are invested in, the activities performed by eligible borrowers.

Because of that definition, Thompson added loans of this type could be in the future of the FCS. "As the regulator, we do not speak for the System, but it certainly has the authority provided by Congress to participate in similar-entity loans for risk management purposes," she said.

"Therefore, we continue to expect FCS institutions to use these authorities to manage risk in their portfolios. The System’s involvement in lending to similar entities is limited to no more than 50 percent of a loan and to no more than 15 percent of total assets."

7/2/2014