Government-Sponsored Entities in Competition Against Private Business

Last week the American Bankers Association Center for Agricultural and Rural Banking unveiled its annual Farm Bank Performance Report. The report showed that 2,036 banks qualify as farm banks, which are those banks whose ratio of domestic farm loans to total domestic loans is greater than or equal to the industry average. This represents nearly one-third of all banks in the United States! These banks showed a 13.6 percent increase in farm lending during 2014, extending $94.6 billion in farm loans, representing over half of the total borrowings of farmers and ranchers in the United States. Interestingly, small loans — mostly under $100,000 — made up over half of the loans extended by banks.

Those banks have enjoyed a decade of a bullish agricultural economy, and the data reflect how well banks have fared. Over 97 percent of farm banks were profitable in 2014, and 65 percent reported an increase in earnings for 2014. Equity capital, the highest form of capital, increased by 4.8 percent to $46.2 billion. Perhaps most telling is that noncurrent farm loans declined to a pre-recession level of 0.5 percent of total loans. Employment at farm banks increased by 2.8 percent, equaling about 2,300 new jobs, for a total farm bank employment level of 89,000 rural Americans.

Obviously, many banks would love to be more involved in this area of lending. So, what are the organizations making up the other nearly one-half of agricultural credit? While I do not have that specific information, it is easy to speculate that the largest competitors would likely be those entities affiliated with the Farm Credit Services, the Farm Credit Banks (FCBs). Those entities enjoy regulatory advantages, significant taxation advantages and the implied guarantee of the federal government. It is a wonder why the FCBs are permitted to maintain these advantages, while competing in the retail marketplace against tax-paying, privately owned banks.

Even above and beyond the big-name, big-dollar nonfarm loans that have been made to Verizon Wireless, AT&T, U.S. Cellular and Frontier Communications, I regularly hear from bankers dismayed about loan terms offered by Farm Credit Banks that cannot be matched in the for-profit marketplace. This is outrageous. Our federal government was not founded to be in competition with private business. Our forefathers would spin in their graves at the thought that a government-sponsored enterprise (GSE) is competing directly against private business. On the other hand, our forefathers might have seen the wisdom in having the federal government support the private marketplace through a GSE such as the Federal Home Loan Bank System (FHLB). The FHLB system works at the wholesale level to provide better purchasing power to lower the cost of bank-provided mortgages in the retail marketplace. Both private banks and mortgage borrowers benefit from this GSE support.

By contrast, the Farm Credit Bank system picks winners and losers. The winners are those large companies mentioned above which are able to borrow at below-market rates, plus those farmers, ranchers and many nonfarm-related businesses which are privileged to borrow on favorable terms. The farmers, ranchers and nonfarm businesses, which are not able to borrow at those favorable terms, are losers relative to not receiving tax-break subsidies … but ultimately they are winners when they choose the banking system and benefit from its quality offerings. All taxpayers are losers, in that they are forced to support a system that discriminates in the marketplace, while at the same time competing against for-profit private businesses. Banks, too, clearly are big losers, as they are cut out of many loans that represent their very lifeblood to survival. Most banks in this country are small businesses themselves, with an average of $200 million in assets, 45 employees, four branches and four ATMs. These are the banks which are primarily the farm banks.

The question becomes, why is our federal government policy in favor of a government-sponsored enterprise that competes against thousands of small businesses? It is perplexing to me.

– S. Joe DeHaven

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