Pub. 8 2019 Issue 1

January/February 2019 17 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 BERT ELY’S FARM CREDITWATCH® AN ACADEMIC’S PROPOSAL TO EXPAND FCS’S BANKING AND DEPOSIT-TAKING POWERS POSES AN EXISTENTIAL THREAT TO RURAL BANKS P rof. Lee Reiners of the Duke University Law School and executive director of the law school’s Global Financial Markets Center, recently published a very troubling paper, “A New Proposal To Expand Banking Services in Rural America.” The greatly expanded FCS Reiners has proposed would pose an existential threat to commercial banking in rural America, and beyond, while being quite damaging to rural America. A truncated version of this paper was published in the January 3 issue of the American Banker. Essentially Reiners proposes expanding the powers of FCS institutions so that they can “provide a greater variety of financial products to a broader base of customers. Specifically, FCS [associations] should be allowed to offer checking and savings accounts, as well as secured and unsecured loans, to individuals and all businesses (not just agricultural) located in the rural communities they already operate in (I call this idea ‘FCS banking’).” Reiners points out that “because the FCS enjoys GSE status and the associated funding advantages, [FCS] associations should be able to issue loans at interest rates below what a commercial bank would offer.” How stockholder-owned, taxpaying commercial banks could compete against FCS associations with bank-like powers is a question Reiners does not address, although he suggested that “Congress may also want to consider granting existing rural community banks the option of joining the FCS, which would provide these institutions with an additional, low-cost source of funding.” Admitting commercial banks into the FCS would violate the territorial exclusivity that FCS associations, with a few exceptions, now enjoy, creating a competition between FCS associations and commercial banks admitted to the FCS that does not now exist. This aspect of Reiners’ proposal ignores a key ownership difference between FCS associations and banks — FCS borrowers must also own a nominal amount of stock in the association they are borrowing from, but there is a complete separation between commercial bank ownership and being a bank customer. One issue Reiners does not address satisfactorily is the geographical limitation on where these bank-like FCS associations could and could not operate. He states that “FCS banks would be restricted to serving customers that operate exclusively in rural communities (as defined by some objective standard, e.g., census tracts).” As bankers in rural and semi-rural areas know so well, it is not possible to draw a sharp line between rural and non-rural areas. Worse, that line is constantly shifting on the edge of urban areas as population growth leads to the conversion of farmland and small villages to urban and suburban districts. Further, many retail businesses and other types of businesses with rural locations also have operations in urban areas that presumably could borrow from an FCS bank. On the deposit-taking side of the balance sheet, Reiners helpfully observes that “if [FCS] associations are to attract deposits, these deposits must be insured, similar to how commercial bank deposits are insured by the FDIC.” He then states that “thankfully the [FCS] Insurance Corporation (FCSIC) already serves as the government insurer for FCS debt obligations.” Today, the deposits some FCS institutions accept are not insured by any government agency. Reiners proposes that “under FCS banking the FCSIC would also