By Bert ElyAlthough not widely known in rural America, Farm Credit System associations hold substantial amounts of uninsured deposits. These deposits usually represent that portion of an FCS loan that has been drawn down by a borrower but not yet spent.
Instead, the borrowed funds are held in an account at the FCS association controlled by the borrower on which the borrower can earn some interest to partially offset loan interest. As such, these borrowed-but-not-yet-disbursed funds, an asset of the borrower, are an uninsured liability of the FCS.
While the funds the FCS borrows in the capital markets through the Federal Farm Credit Banks Funding Corporation are protected from any loss by the Farm Credit System Insurance Corporation, that insurance protection does not extend to deposits held by FCS institutions. Therefore, should the FCS bank holding deposits in the form of undispersed loan proceeds becomes insolvent and is placed in a receivership, the borrower/owner of those funds could suffer a loss.
The total amount of these uninsured deposits, or whatever they should be called, is not insignificant. As discussed below, at the end of 2022, these deposits total $5.7 billion, spread across three of the four FCS banks.
As bankers have come to understand in recent years many of the FCS associations they compete against effectively are accepting deposits in the manner described above. In July 2017, Farm Credit Watch discussed this practice:
“Bankers in many areas of the country have discovered that the FCS associations they compete against effectively are accepting deposits. The associations accept these funds as one element of the cash-management services they offer to their member/borrowers. Technically, the funds deposited with the FCS represent an advance payment against an outstanding loan or line of credit from the association. Check the Compeer Financial website for a good example of the range of cash management services some associations offer. Note how frequently the word ‘deposit’ is used.
FCS institutions are not authorized to accept deposits in the manner that banks do, but years ago the Farm Credit Administration and the Treasury Department constructed a legal justification for the manner in which deposits can now be accepted by FCS associations. First, the Farm Credit Act permits each of the four FCS banks to issue bonds both individually as well as collectively through the Federal Farm Credit Banks Funding Corporation. Second, in 1990 the Treasury Department issued a letter to the Farm Credit Administration exempting FCS banks from key provisions of the Securities Exchange Act of 1934. This exemption permitted each FCS bank to sell bonds directly to FCS member/borrowers as well as to FCS employees and retirees, without providing the disclosures usually associated with the sale of securities.
An FCS association acts as agent in selling the bonds of the bank that funds it. Funds deposited with an association are immediately forwarded to the bank to purchase the bank’s bonds with a face value equal to the amount deposited with the association. Consequently, the association has no liability for the deposits it accepts. The Treasury letter required that purchasers of these bonds (effectively FCS depositors) be given ‘printed materials [that]clearly state that the [farm credit bank]and not the association is the issuer” of the bonds, that the bonds “are not direct obligations of the United States,’ and that the bonds ‘are in no way insured or guaranteed as to principal or interest by the United States or any governmental entity.'”
It is highly unlikely that FCS “depositors” understand that they effectively have purchased an uninsured FCS bond. By the end of 2022, “member investment bonds” issued by AgriBank had grown to $3.19 billion, more than triple the $939 million of such bonds outstanding at the end of 2016.
At the end of 2022, CoBank had $2.14 billion of uninsured “cash investment services payable,” up from $1.03 billion two years earlier and $1.5 billion outstanding at the end of 2016. It noted by CoBank that these payables mature within a year but if such a bond can be redeemed overnight it effectively functions as a demand deposit.
The Farm Credit Bank of Texas had a liability on its balance sheet called Payable to Associations for Cash Management that totaled $36.75 million at the end of 2022, down slightly from $37.32 million at the end of 2020. The Texas bank calls this product Farm Cash Management, or FCM, which it describes as “a short-term investment account that automatically invests your excess funds and pays you a return, similar to a money market account.”
AgFirst does not appear to offer these bonds, or an equivalent cash management account. Presumably, then, the associations AgFirst funds cannot accept deposits in connection with whatever cash management services they offer to their member/borrowers. Whether this in fact is the case has not been determined.
The FCS’s deposit-taking began in 1990 when the Treasury Department authorized the FCS banks to fund their balance sheets directly with farmers to complement the funds raised through the FCS Funding Corporation. However, today more associations, in coordination with the FCS banks, are using that authorization for an entirely different purpose—to compete against commercial banks in offering cash-management services. Offering cash-management services is not why Congress created the FCS.
If added together, the FCS’s total deposits at the end of last year would only rank it about the 220th-largest bank in the country, measured in terms of total domestic deposits. In terms of uninsured deposits, though, the FCS would rank much higher on that list as most domestic deposits, even in the largest banks, are FDIC-insured or fully protected in the bank is too big to fail.
Congress will have an opportunity in the upcoming Farm Bill to address the possible systemic consequences to the FCS, to agriculture, and to rural America if FCS borrowers with undrawn balances on their FCS lines-of-credit, become nervous about their ability to draw down on those balances should the FCS experience financial difficulties. Farmers and ranchers suddenly unable to obtain funds they are committed to repay could be very damaging not only to those borrowers, but to all of agriculture and to rural America, too.