Pub. 14 2019-2020 Issue 5

WWW.NEBANKERS.ORG 24 Publishing enforcement actions would put the member/borrowers, i.e., the owners of a regulatory sanction association, on notice that there are problems in their association that must be addressed. One of themost troubling and systemically critical conditions that has emerged in recent years are loans from FCS banks to FCS associations that have less than acceptable credit quality. Given the threat deteriorating credit quality among FCS bor- rowers pose to the solvency of FCS associations, the FCA and the FCS bank funding that association should move quickly to prevent a troubled association from failing. For at least a year, loans from AgFirst bank to one associa- tion have been classified as Other Assets Especially Mentioned (OAEM), or less than satisfactory. Each of the other three FCS banks indicated that they had “special mention” loans outstand- ing with some of the associations they fund. AgriBank had $1.17 billion of such loans outstanding at Sept. 30, 2019, up $100 million from Dec. 31, 2018. At Sept. 30, 2019, the Farm Credit Bank of Texas reported that a $231.2 million loan had a special mention classification. Finally, CoBank reported $2.2 billion in special mention loans as of Sept. 30, 2019, to two of the associations it funds and that it held a $471 million participation in a loan made by the Farm Credit Bank of Texas to one of the associations that bank funds. CoBank stated that the “special mention classifica- tions primarily reflect internal control and other operational weaknesses at these associations, some of which were material weaknesses.” That statement should ring loud alarmbells at the FCA and on Capitol Hill. Actions the FCA, Congress must take to strengthen FCS credit quality It is clear from the events described above and the stressful conditions farmers, ranchers and agribusinesses have experi- enced in recent years, a circumstance likely to continue, that the FCS will experience financial distress for at least the next few years. While it is unlikely that American agriculture or the FCS will suffer a financial trauma comparable to what occurred during the 1970s, the coming years could be the toughest years the FCS has experienced since then. Before conditions worsen further, the FCA must become more aggressive in its safety-and-soundness supervision of FCS institutions, including monitoring the lending relationship between the associations and the FCS banks that fund them. To that end, the FCA needs to abandon its longstanding practice of not publishing its enforcement orders and other regulatory 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. actions. Although an FCA policy statement states that “final enforcement orders, formal agreements and conditions imposed in writing … be disclosed to the FCS and the public,” that state- ment includes a classic catch 22—disclosure will not occur if the FCA’s Office of General Counsel “determines that a disclosure adversely affects a civil or criminal investigation.” Publishing enforcement actions would put the member/bor- rowers, i.e., the owners of a regulatory sanction association, on notice that there are problems in their association that must be addressed. The bank regulatory agencies have long published their enforcement orders, without fear of compromising any investigation. The number of troubled associations, as evidenced by the FIRS ratings and the increased reporting of special mention loans from FCS banks to FCS associations, should raise ques- tions about the supervisory capabilities of the four banks. As explained in an ABA white paper in August, 3 Restructuring the Farm Credit System — why now and how to do it, the time has come to simplify the structure of the FCS by abolishing the four banks, empowering FCS associations to obtain their funding directly from the Federal Farm Credit Banks Funding Corporation, and strengthening the regulatory and supervisory powers of the FCA so that it becomes a more effective regulator and ceases being an enabler for the FCS. Congress needs to address the regulatory issues within the FCS, before conditions worsen further, and to begin the task of restructuring the FCS.  1 https://www.aba.com/-/media/documents/industry-insights/bert-ely- resolve-growing-fcs-credit-quality-problems.pdf?rev=12f1cf64fef94ae8a5 0d3121228de821 2 https://www.aba.com/-/media/documents/email-bulletins/ag-banking/ dec2019-fcw-fcs-report-key-ratio-comparisons.pdf 3 https://www.aba.com/-/media/documents/industry-insights/bert-ely-re- structuring-farm-credit-system.pdf#_ga=2.258912205.612848808.1575985604- 1432977566.1531427325 Bert Ely — continued from page 23