Pub. 4 2015 Issue 6

August 2015 21 L E A D I N G A D V O C A T E F O R T H E B A N K I N G I N D U S T R Y I N K A N S A S In effect, the FCS passes through to its borrowers a portion of the tax savings and funding-cost advantages the FCS enjoys by virtue of being a government-sponsored enterprise. These rebates are not insignificant. For 2014, the FCS as a whole recorded cash patronage dividends totaling $1.20 billion, equal to 14.5% of the total amount of loan interest income the FCS reported for 2014. The dividend/rebate each borrower received likely varied from this percentage, but this percentage gives an idea of the current magnitude of patronage dividends. In addition, various FCS institutions granted $387 million of non-cash capital stock, participation certificates and surplus allocations to their member/borrowers. 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 patronage 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 virtue 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 payments 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 authorized under the Farm Credit Act and related regulations to sell Farm Credit Investment Bonds to member/borrowers of the associations they fund. These bonds are not insured by the FDIC or by the Farm Credit System Insurance Corporation, which insures FCS bonds sold to investors. Instead, these bonds are unsecured, interest-bearing debt of the FCS bank which 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 investment bonds are running the equivalent of an uninsured money-market fund. As last month’s FCW reported, though, Fitch Ratings assigned AA- ratings to the FCS banks – three notches below the federal government’s credit rating – so investment bonds issued 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 to make 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 “act as depositories for and fiscal agents of” the FCS banks, each FCS bank has an ABA routing number and therefore can deal directly with the Fed; they do not need to clear deposits and drafts through a commercial bank. In effect, FCS banks function as if they were a commercial bank, but without providing FDIC insurance to their customers. The investment bonds the two banks sell, which at AgriBank are shown on its balance sheet as Member Investment Bonds and at CoBank as Cash Investment Services Payable, provide a not insubstantial amount of funding to the banks. At the end of 2014, CoBank reported a $2.53 billion payable for its cash investment services, up from $1.61 billion at the end of 2012. AgriBank reported $1.10 billion in outstanding Member Investment Bonds at the end of 2014, up from $786 million at the end of 2012. One can reasonably wonder when the other two FCS banks – AgFirst and the Farm Credit Bank of Texas – will begin to sell investment bonds through the associations they fund as one element of expanding the payments services their associations can provide to their member/borrowers, in direct competition with taxpaying commercial banks. The Senate Banking and House Financial Services Committees might want to examine this uninsured FCS deposit-taking. Report FCS lending abuses to: green-acres@ely-co.com