Fitch tells it like it is
Fitch Ratings, one of the three major debt rating agencies, recently reaffirmed its AAA Long-Term Issuer Default Rating for FCS debt. Most importantly, Fitch noted that “as a government-supported entity (GSE), the FCS benefits from implicit [federal]government support.” Fitch added: “While the government does not explicitly guarantee the debt issued by the [FCS], Fitch believes that if needed, the government would support payments to bond holders most likely by allowing the Farm Credit System Insurance Corporation to draw on its line with the Treasury.” The FCSIC is an arm of the Farm Credit Administration.
The “line” Fitch refers to is the $10 billion line of credit the FCSIC has with the U.S. Department of the Treasury. The line can be drawn upon “to provide assistance to the [FCS’] banks in exigent market circumstances which threaten the banks’ ability to pay maturing debt obligations.”
The line of credit was created in the aftermath of the 2008 financial crisis, when the spread on the yield on FCS debt over the Treasury yield curve widened significantly, narrowing the FCS’ funding cost advantage over commercial banks and the FCS’ other taxpaying competitors.
Every Sept. 30 this line of credit expires. It almost certainly will be renewed again this year. It is highly questionable, though, how competitive the FCS would be as an ag lender if it did not have what is, for all practical purposes, the explicit backing of the Treasury. Fitch said as much when it stated that the four FCS banks, which lend to FCS associations, “could not exist without the funding advantage provided to them by the U.S. government’s implicit guarantee” of FCS debt.
The Fitch ratings on FCS debt are subject to a very important and increasingly significant qualification: The long-term rating of FCS debt “is directly linked to the U.S. sovereign rating and will continue to move in tandem.” Worse, the “Rating Outlook [on FCS debt]remains Negative and in line with the U.S. sovereign outlook.” Given the enormity of the deficits the federal government has been running in recent years, which have boosted the ratio of the federal debt to GDP, Fitch’s ratings outlook for the federal government is likely to remain negative for some time.
Congressional Financial Services Committees should oversee FCA capital regulations
At its July 8 meeting, the FCA board approved a proposed rule that would amend the agency’s tier 1/tier 2 capital framework to “define and establish a risk weight for high-volatility commercial real estate exposures.” Most importantly, “the proposed rule would ensure that FCA’s capital rule remains comparable with the capital rules of other federal banking regulatory agencies. It would also ensure that FCA’s capital rule recognizes the increased risk posed by high-volatility commercial real estate exposures.”
Perhaps inadvertently, the FCA effectively referred to itself as a bank regulatory agency. Additionally, the FCA stated that it sought to “ensure that the [Farm Credit System’s] capital requirements are comparable to the Basel III framework and the standardized approach the federal banking regulatory agencies have adopted, with deviations as appropriate to accommodate the different operational and credit considerations of the system.” That the FCA considers itself a bank regulator implementing Basel III capital rules provides a very strong rationale for the Senate Banking Committee and the House Financial Services Committee to exercise legislative oversight over the FCA’s capital rules along with each body’s agriculture committee.
Broader congressional oversight of the FCA and the FCS would ensure uniform regulatory treatment across the federal government with regard to agricultural-related financial services provided by commercial banks, credit unions and the FCS. Since the Senate Banking Committee and the House Financial Services Committee also oversee the three housing finance GSEs, these committees certainly possess the necessary expertise to participate in joint regulatory oversight of the FCS. That joint oversight also would encourage the ag committees to be more aggressive in ensuring that the FCA is being sufficiently diligent in its regulation of the FCS.
FCA’s board needs to issue written policy statements
At its monthly meetings, the FCA board receives important oral reports and policy recommendations from FCA staff. However, because the FCA, unlike all the other financial regulatory agencies, does not post a video of its board meetings or even allow outsiders to record its board meetings, viewers and listeners of FCA board meetings can easily miss important points in the staff presentations that they cannot learn about or clarify later via a recording. Shortly after a board meeting has concluded, the FCA should then post on its website written statements summarizing policy statements and staff recommendations presented at the meeting. Executives at FCS institutions as well as the general public, including members of the media, would appreciate such postings that expand upon and clarify what often is only highly summarized in the posted minutes of the board meetings.
For example, the FCA received three oral reports at its July 8 board meeting on important matters: improving data quality, IT risks facing both the FCA and FCS institutions, and climate issues that may pose risks to the FCS loan portfolio. But nothing is available online concerning the substance of these reports. More broadly, the general public as well as FCS insiders (perhaps even FCA staff), are ill-served by the inability to listen to a recording of board meetings. For this reason alone, as well as to increase the transparency of its meetings, the FCA should follow the practice of the other financial regulators and post a link to a video recording of its board meetings as soon as possible after the event concludes.