October 5, 2000

The proposal to grant national charters to Farm Credit System (FCS) institutions is not in the best interest of the farmers, ranchers and rural residents FCS was chartered to serve, the American Bankers Association (ABA) told the House Banking and Financial Services Committee.

"The proposal to grant national charters to FCS institutions destroys any shred of the notion that the FCS is a borrower owned and locally controlled cooperative lending organization," said Dennis Everson, senior vice president of First Dakota National Bank in Yankton, SD, on behalf of the ABA. "National charters pose safety and soundness risks as FCS institutions venture into territories in which they are inadequately prepared to manage risk."

The Farm Credit Administration (FCA), a government-sponsored enterprise (GSE), recently announced its decision to issue national charters, effective Jan.1, 2001. Although the FCA agreed to take public comment, it declined to subject the policy to formal rulemaking processes, ABA claims.

Michael M. Reyna, chairman and CEO of the Farm Credit Administration told the committee that the FCA Board "believes national charters are important to the Farm Credit System for safety and soundness reasons and because all farmers and ranchers will ultimately benefit."

Reyna said after "extensive discussions and debates," the agency ultimately concluded that "rigid territorial constraints posed unsafe and unsound conditions on (FCS) institutions which hindered their capacity to serve agriculture and rural America."

He added, "If we do not act wisely, it will continue to do so in the coming decades." So in July 1998, the FCA Board issued a philosophy statement that, among other things, announced support for removing regulatory geographic barriers imposed on system institutions.

Everson, however, argued that FCA "failed to assess the potential for problems and failed to open an adequate dialogue with all stakeholders about this issue. Given their track record of unsafe and unsound lending in the past, and the lack of enforcement on the part of their regulator, we urge Congress to stop this process before it is too late."

He said national charters serve no credible public policy purpose; will have a negative impact on access to credit for small and beginning farmers; raise serious safety and soundness concerns and expose the American taxpayer to additional risk.

Reyna argued that the "overriding public policy purpose of FCA's National Charter Initiative is to further the safety and soundness of the Farm Credit System by updating and modernizing the system's credit delivery structure."

The system is "overwhelmingly a single-sector lender to an industry that is particularly volatile due to prices, weather, disease, pests and other factors. While nothing in this initiative would change that, it would enable system institutions to better manage these risks by diversifying their operations geographically and by reducing portfolio concentrations of certain commodities."