Pub. 8 2019 Issue 5

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 26 The time has come to simplify the structure of the FCS 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 – not always that effectively – 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 position of those associations. Most importantly, the joint-and-several obligation now residing with the four banks would then 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. It might then be possible for the Treasury Department to cancel the $10 billion line-of-credit it extended to the FCSIC in 2013. As extreme as this proposal may seem, the late Dallas Tonsager, the former board chairman and CEO of the FCA, on at least three occasions, most recently in a January 30, 2018, speech, 10 implored the FCS to study its present structure and to suggest how the FCS should be restructured, stating that: System Structure: Some folks think I kicked a hornet’s nest last year by suggesting we have a year of dialogue around the topic. This is not a new issue, but it is an important one. The System has been in a constant state of renewal since its inception in 1916. As it continues to evolve, we must evaluate how any proposed change could impact the integrity and cooperative structure of the System. We must look at the operational, managerial, and reputational risks that might result from the change. And we must consider how the change might affect the relationship between the funding bank and its associations. Bottom-line, your members and stakeholders must have confidence that structural changes are in the best long-term interest of the System and those it serves. Unfortunately, former Chairman Tonsager did not invite the public to participate in that discussion nor has his plea stirred any public dialogue. Hopefully this paper will help to stimulate public involvement in that much needed discussion. Simplifying the structure of the FCS would improve its operating efficiency, which presumably would benefit its member/borrowers, while strengthening the FCA’s safety-and- soundness regulation of the FCS. Perhaps the FCA would then begin publishing its enforcement orders, as the bank regulators have done for many years. Where CoBank fits into this proposal In addition to funding 22 associations, CoBank has three nationwide lending authorities unique to it. 11 Therefore, special consideration needs to be given to the scope of its so-called Title III authorities under the Farm Credit Act in a restructured FCS. Interestingly, in its 2017 annual report, CoBank acknowledged that “the FCS has experienced many of the same challenges facing its commercial competitors, including . . . persistent pressure to consolidate. How will the [FCS] evolve to ensure it is optimally configured to serve customers and fulfill its vital mission going forward? 12 ” Listed below are CoBank’s unique lending authorities; that is, other FCS entities cannot lend to these types of entities or for these purposes, except with CoBank’s consent or by purchasing a participation in a loan to a cooperative originated by CoBank: • Cooperatively owned rural utilities, specifically telephone; electricity production, transmission, and distribution; and water systems and waste disposal facilities; • Cooperatively owned businesses engaged in activities related to agriculture; • Financing agricultural exports, some of which are guaranteed by the federal government. That CoBank has these exclusive lending authorities reflects the evolution of the FCS; there is no rational reason for barring FCS associations from lending directly to agricultural and rural-utility cooperatives under Title III of the Farm Credit Act. As noted above, CoBank sells participations in many of its loans to cooperatives such that as of March 31, 2019, 26 percent of the amount the FCS had lent to rural utilities and 21 percent of the amount lent to agricultural cooperatives in fact had been loaned by FCS institutions other than CoBank. 13 Given the knowledge FCS associations have gained in lending to agricultural and rural utility cooperatives by virtue of buying participations in loans to those businesses, there is no reason why FCS associations should not be able to originate loans to cooperatives operating in the territories the associations serve. Authorizing FCS associations to lend directly to cooperatives also would have the beneficial effect of shrinking the size of SIMPLIFYING THE STRUCTURE OF THE FCS WOULD IMPROVE ITS OPERATING EFFICIENCY, WHICH PRESUMABLY WOULD BENEFIT ITS MEMBER/ BORROWERS, WHILE STRENGTHENING THE FCA’S SAFETY-AND-SOUNDNESS REGULATION OF THE FCS. PERHAPS THE FCA WOULD THEN BEGIN PUBLISHING ITS ENFORCEMENT ORDERS, AS THE BANK REGULATORS HAVE DONE FOR MANY YEARS.