Pub. 14 2019-2020 Issue 3

WWW.NEBANKERS.ORG 22 Further consolidation among the remaining four FCS banks is unlikely because of a little-known feature of FCS debt issued by the Funding Corporation—each additional bank merger would further weaken the joint-and-several liability the remaining banks would have for the Systemwide Debt Securities issued by the Funding Corporation. That is, if an FCS bank cannot pay the interest due on the funds it has borrowed from the Funding Corporation or repay the borrowed funds when due, then the other three banks are jointly liable for that debt. The next FCS bank merger would further weaken the joint- and-severally-liable feature now backing FCS debt by reducing to two the number of other banks liable for a troubled bank’s obligations if that bank could not meet its debt obligations in a timely manner. Each of the remaining banks would have to shoulder a larger portion of the defaulting bank’s debt, thereby increasing the likelihood that the other banks would default. Most interestingly, the joint-and-several liability feature back- stopping debt issued by the Funding Corporation does not extend to the FCS associations. As the FCS associations continue to consolidate while the number of banks has shrunk to an irreducible number, the time has come to authorize each association to borrow directly from the Funding Corporation, which in turn would assume the as- sociation oversight functions now performed by the four banks. That is, the functions of three of the banks—all but CoBank— would simply be assumed by the Funding Corporation and the banks liquidated. The equity capital in each bank would then be transferred to the associations that belonged to that bank, thereby strengthening the capital of those associations. Most importantly, the joint-and-several obligation now resid- ing with the four banks would shift to the much larger number of FCS associations as they began borrowing directly from the Funding Corporation. That shift would greatly strengthen the joint-and-several liability feature of FCS debt, which in turn would reduce the taxpayer risk posed by the FCS, a risk that became a reality in 1987. Interestingly, on at least three occa- sions, former FCA board chairman, the late Dallas Tonsager implored the FCS to study its present structure and to suggest how the FCS should be restructured. Simplifying the structure of the FCS would improve its op- erating efficiency, which presumably would benefit its member/ borrowers, while strengthening the FCA’s safety-and-soundness regulation of the FCS. An important element of FCS restructuring is to extend CoBank’s currently exclusive lending authorities to all FCS associations. Today, other FCS entities cannot lend to rural cooperatives, except with CoBank’s consent or by purchasing a participation in a loan to a cooperative originated by CoBank. In conclusion, empowering FCS associations to borrow di- rectly from the Funding Corporation while shifting other FCS bank functions to the Funding Corporation and the FCA would improve the operating efficiency of the FCS while reducing the substantial insolvency risk the FCS now poses to taxpayers.  Bert Ely is a consultant specializing in banking issues. He writes the Farm Credit Watch column in ABA's quarterly Ag Banking Newsbytes email bulletin. As the FCS associations continue to consolidate while the number of banks has shrunk to an irreducible number, the time has come to authorize each association to borrow directly from the Funding Corporation, which in turn would assume the association oversight functions now performed by the four banks. That is, the functions of three of the banks—all but CoBank—would simply be assumed by the Funding Corporation and the banks liquidated. Bert Ely's FarmWatch — continued from page 21 https://www.aba.com/member-tools/industry-solutions/insights/ restructuring-the-farm-credit-system https://www.fca.gov/bank-oversight/fcs-directory-map https://www.fca.gov/template-fca/bank/20180101InstitutionTerritoryM ap.pdf