Pub. 10 2015-2016 Issue 2

July/August 2015 19 Extraordinary Service for Extraordinary Members.  Bert Ely — continued on page 20 The EFT You can TRUST NetWorks is the Electronic Funds Transfer (EFT) service provider that Nebraskans have used and learned to trust like family for over 30 years. Our highly experienced staff is extremely knowledgeable and resourceful when it comes to assisting your institution. Give us a call to learn more about our services, you’ll have the opportunity to talk to someone who truly cares about and understands your EFT service needs. www.netseft.com Toll Free 800-735-6833 Local 402-434-8202 Recently, a large commercial bank participating in a large loan originated by a very large FCS association was told that it was being dropped from the loan “because [the bank does] not pay patronage.” As bankers know, interest- rate spreads on large loans are quite thin. In this case, the requested patron- age payment would have chewed up much of the bank’s lending spread over LIBOR, leaving an insufficient spread to cover the bank’s operating costs, credit risk, and required return on its equity capital. This particular case, where a bank is being squeezed out of an FCS loan participation, illustrates so well the competitive edge the FCS enjoys by vir- tue of being a substantially tax-exempt GSE. Ironically, that bank’s share of the loan probably will be reparticipated within the FCS. FCS Plunging Further Into the Payments Business FCS associations are plunging into the banking business, offering both pay- ments services and accepting what are tantamount to deposits, even though the FCS is not authorized to accept deposits. Here is how FCS effectively accepts deposits: FCS banks are autho- rized under the Farm Credit Act and related regulations to sell Farm Credit Investment Bonds to member/borrow- ers of the associations they fund. These bonds are not insured by the FDIC or by the Farm Credit System Insurance Corp., which insures FCS bonds sold to investors. Instead, these bonds are unsecured, interest-bearing debt of the FCS bank that sold them. However, an FCS bank selling investment bonds must hold “specific eligible assets at least equal in value to the total amount of [these] debt securities outstanding.” In effect, the FCS banks selling invest- ment bonds are running the equivalent of an uninsuredmoney-market fund. As the May 2015 Farm Credit Watch re- ported, though, Fitch Ratings assigned AA- ratings to the FCS banks—three notches below the federal government’s credit rating—so investment bonds is- sued by FCS banks clearly are not as creditworthy as FDIC-insured bank deposits. At the present time, only two of the four FCS banks—CoBank and AgriBank—issue investment bonds; in effect, the FCS associations, acting as sales agents for their funding bank, sell these bonds as one element of the payments services they offer to their member/borrowers. These services include remote deposit capture as well as using drafts tomake payments; these drafts are the functional equivalent of a check. Any positive account balance in a borrower’s account with an FCS bank is then invested in the bank’s investment bonds. Because the Federal Reserve Act authorizes Federal Reserve Banks to