By Bert Ely
FCA board members serving expired terms creates dangerous situation
The Farm Credit Administration, the Farm Credit System’s regulator, is structured in the same manner as many other federal regulatory agencies, with an independent board of directors appointed by the president and confirmed by the Senate. The chairman of the FCA board also serves as the agency’s chief executive officer while the other two FCA directors, together with the chairman, adopt the rules, regulations and policies that guide the FCA’s operations and the enforcement of its rules and regulations.
With slight variations, particularly as to the number of members, this is the structure of the nation’s key financial regulators overseen by a board of directors or commissioners—the Federal Reserve, Federal Deposit Insurance Corporation, Securities and Exchange Commission, Commodities Futures Trading Commission, and National Credit Union Administration. The Fed’s members are called governors, but they effectively serve as a board of directors.
The boards of these agencies vary in size, from as few as three directors—the case at the FCA—to as many as seven at the Fed. These boards act by majority rule, provided that a quorum of directors is present and voting. Importantly for these boards, a quorum is a majority of the authorized number of directors, not the actual number of directors serving at the time. Therefore, for the FCA board, the quorum requirement is two directors. If a quorum is not present, then the agency’s board cannot take any official action, such as adopting a new regulation or approving an enforcement against an FCS bank or association.
The FCA board has been in a relatively unique, and dangerous, situation for several years that could, at any time, leave the FCA unable to take any official action. Two of its three board members—Frank Hall and Glen Smith—are serving in expired terms. They can continue voting on FCA matters until their successors are confirmed or they officially resign from the board as they are ineligible under the Farm Credit Act from being appointed to serve another term as FCA directors.
What is especially troubling is how long this very tenuous situation has existed. Hall’s term expired in October 2018, while Smith’s expired in May 2022. The Biden administration has failed to nominate a successor for either board member. Given how close we are to a presidential election, it is highly unlikely that replacements for Hall and Smith will be nominated, much less confirmed until well into next year. In the meantime, the FCA would be unable to take any official action, such as approving a regulatory change or the merger of two FCS associations if both Hall and Smith left the FCA board.
FCS consolidation has increased the system’s taxpayer risk
Although there has been no meaningful change for years is how the FCS is regulated or in the scope of its lending powers, the ongoing consolidation of FCS associations lending directly to farmers, ranchers and agriculture-related businesses has quite dramatically increased the risks the FCS poses to taxpayers and ultimately to the American economy.
Over the last five years, the number of FCS associations declined from 69 at the end of 2018 to 56 at the beginning of 2024 while the number of FCS banks has held constant at four. At the end of 2018, the largest association, FCS of America, had total assets of $29.8 billion. As of March 31 this year, FCS of America, still the largest association, had total assets of almost $42.9 billion, 13.9% of the total assets of all FCS associations, while the 10 smallest associations collectively held just 1.71% of total FCS assets. It is reasonable to assume consolidation will continue, particularly among the smaller associations, which will further concentrate the FCS’ financial risk within a shrinking number of very large associations.
Meanwhile, as of March 31, the Farm Credit System Insurance Corporation insured $418.4 billion of FCS debt, up 48% from $282.5 billion at the end of 2018. Over that same period the FCSIC’s capital—its loss-absorbing capacity—grew, too, rising from $4.95 billion at the end 2018 to $8.46 billion at the end of 2023. However, the FCSIC’s loss-absorbing capacity as a percentage of outstanding FCS debt shrank over that five-year period, from 0.57% of the total amount of FCSIC-insured debt at the end of 2018 to 0.50% at the end of 2023.
Interestingly, the FCSIC’s loss-absorbing capacity is much thinner than the loss-absorbing capacity of the FDIC’s Deposit Insurance Fund, or DIF. As of March 31, the DIF’s fund balance equaled 1.17% of insured bank deposits, more than double the FCSIC’s comparable ratio. Further, the FDIC’s insurance risk is spread over a far larger number of banks (4,577 as of March 31), which collectively have far more diverse asset and geographical risks than the relatively narrow risk exposure of the FCS’ banks and associations.
Is the FCSIC “actuarially sound”?
The Farm Credit Act authorizes a quite convoluted methodology for calculating the adequacy of the FCSIC’s fund balance, called the secure base amount or SBA. The SBA is supposed to equal 2% of FCS’ “outstanding insured obligations, adjusted to exclude 90% of federal government-guaranteed loans and investments and 80% of state government-guaranteed loans and investments.” However, and this is a critically important, the FCSIC is authorized to determine if the 2% level is “actuarially sound.”
According to its 2023 annual report, the FCSIC, employing an undisclosed financial model, concluded that the 2% SBA target “remains actuarially sound.” No details were provided in the annual report about that model or how the conclusion about actuarial soundness was reached. However, given the relatively few FCS institutions that exist today, the undiversified nature of the FCS’ assets and insured risks, and the FCS’ previous taxpayer bailout, the FCA should release for public and congressional review the methodology by which it asserts that the FCSIC “remains actuarially sound.”
Editor’s note: If you have questions for Bert, feel free to email him at [email protected].
