Pub. 12 2017-2018 Issue 3

NEBRASKA BANKERS ASSOCIATION 23 Bert Ely — continued on page 24 each of the four FCS banks to issue bonds both individually as well as collectively through the Federal Farm Credit Banks Funding Corporation. Second, in 1990 the Treasury Depart- ment issued a letter to the FCA exempting FCS banks from key provisions of the Securities Exchange Act of 1934. This exemption permitted each FCS bank to sell bonds directly to FCS member/borrowers as well as to FCS employees and retirees, without providing the disclosures usually associated with the sale of securities. An FCS association acts as agent in selling the bonds of the bank that funds it. Funds deposited with an association are immediately forwarded to the bank to purchase the bank’s bonds with a face value equal to the amount deposited with the association. Consequently, the association has no liability for the deposits it accepts. The Treasury letter required that purchasers of these bonds (effectively FCS depositors) be given “printed materials [that] clearly state that the [farm credit bank] and not the association is the issuer” of the bonds, that the bonds “are not direct obligations of the United States,” and that the bonds “are in no way insured or guaranteed as to prin- cipal or interest by the United States or any governmental en- tity.” It is highly unlikely that FCS depositors understand that they effectively are buying an uninsured bond. At the end of 2016, AgriBank had $939million of member investment bonds outstanding and CoBank had $1.5 billion of “cash investment services payable” outstanding. It noted that these payables mature within a year; if a bond can be redeemed overnight, it effectively functions as a demand deposit. The other two FCS banks—Farm Credit Bank of Texas and AgFirst—appear not to offer these bonds. Presumably, then, the associations they fund cannot accept deposits in connection with cash management services they offer to their member/borrowers. Presumably the exemption the Treasury Department approved in 1990 enhanced the ability of the FCS banks to fund their balance sheets directly to complement the funds raised through the Funding Cor- poration. Today, however, more and more associations, in cooperation with the FCS banks, are using that exemption for an entirely different purpose: to compete against commercial banks in offering cash management services. Offering cash management is not why Congress created the FCS. Credit Quality Issues Emerge in Some Larger FCS Associations The quarterly and annual FCS information statements pub- lished by the Federal FarmCredit Banks Funding Corporation include a table listing key data and ratios for all FCS associa- tions with total assets exceeding $1 billion. (Go to http://bit. ly/FCWtable. ) The spreadsheet lists the 37 associations that hadmore than $1 billion of assets on bothMarch 31, 2017, and March 31, 2016. They hold almost 90 percent of the total assets of all FCS associations. What is evident in these numbers is the variability across these associations in key measures of performance and financial soundness.