Contents

**Preface 1**

**Executive Summary 2**

**Financial Performance of the Farm Credit System for the First Quarter,
1997 4**

Janet Goktepe

**FCS Commodity Concentrations and Related Management Strategies**

**in the Farm Credit System 10**

Stephen Gabriel and Regina Pacheco

FCS Purposes and its GSE Charter, the National Bank Charter, and

Financial Reform Proposals 20

George D. Irwin

**Corporate Restructuring of Farm Credit System Institutions 32**

Elna Luopa

**Major Financial Indicators by System, Quarterly Comparison 35**

Thomas R. Risdal

**Major Financial Indicators by District
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36**

Thomas R. Risdal

**Glossary 37**

**Report Manager**

**John C. Moore, Jr.**

**Senior Economist, OPDRC, RCD**

Preface

The Risk Control Division (RCD) of the Office of Policy Development and
Risk Control (OPDRC) publishes an analysis of the condition and
performance of the Farm Credit System (FCS or System) each quarter. The
analytical focus of these reports is the identification of risk, both
from within the System and from the economic and policy areas.

This issue presents an analysis of the overall financial performance and
condition of the System as of March 31, 1997, and two special reports.
In addition, a review of corporate restructuring activity among System
institutions during the six-month period from January 1, 1997, through
July 1, 1997, and a summary of major financial indicators for the System
are provided.

The report uses a variety of information sources, including quarterly
Farm Credit Administration (FCA or Agency) Call Report data, System
quarterly reports, U.S. Department of Agriculture (USDA) reports, and
other Federal, State, and commercial information sources. Unless
otherwise indicated, projections and analyses are those of Agency
analysts and reflect their own analytical judgments.

The graphic and tabular material on financial performance reflects
information from reports filed with the Agency by the close of business,
June 1, 1997. Additional information on other agricultural lenders and
financial markets is maintained by the RCD, OPDRC.

System institutions are required to make certain disclosures to
stockholders, investors, and the general public. Disclosure to investors
in Systemwide securities is made by the Federal Farm Credit Banks
Funding Corporation (Funding Corporation) on behalf of the issuing banks
and by individual System institutions in reports to their respective
stockholders. The quarterly *Summary Report of Condition and Performance
of the Farm Credit System,* published by the Funding Corporation,
provides a detailed set of tables showing the financial results for the
Farm Credit banks combined with their affiliated associations.

Questions regarding the content of this report may be directed to C.
Edward Harshbarger, Division Director, RCD, or to John C. Moore, Jr.,
Senior Economist, RCD.

EXECUTIVE SUMMARY

This issue (1) describes a growing and strong FCS with a small increase
in credit problems, (2) provides evidence of the credit concentration
risks that arise because the FCS is, by law, a single sector lender, and
(3) offers benchmark information for beginning to evaluate how risks in
the FCS may be affected by pending financial restructuring legislation
for the banking, brokerage, and insurance industries.

The FCS continued the pattern of stronger loan growth begun in 1995,
reaching almost \$62 billion in gross loans by March 31, 1997. Three of
the four primary categories shared the increase; long-term real estate
loans were up 2.7 percent (year over year), farm operating and
intermediate-term loans were up 5.7 percent, and domestic loans to
cooperatives were up 3.9 percent, while international loans to
cooperatives were down 19.3 percent, mostly due to paydowns in loans to
Mexico and Russia.

Capital strength also grew, to \$10.8 billion, or 14.3 percent of
assets. However, net income for the quarter was \$303 million, off by 14
percent from the same quarter of 1996, for three primary reasons.
Competition drove down net interest spreads earned by the FCS, personnel
and operating costs increased, and additional provisions for losses were
made to recognize increased credit risk in a few loans to processing and
marketing cooperatives. These additional loss provisions reflected
difficulties encountered as a result of volatile grain prices in 1996.
Despite these specific credit problems, the credit quality in the
overall loan portfolio was stable.

The report on commodity concentrations in farm lending recognizes that
an individual adverse event or economic development for a commodity can
put a large share of a given institution's loan portfolio at risk. The
221 FCS banks and associations have different exposures to credit risk,
owing to the types of commodities in their service area and the
proportion of any one commodity in their portfolio. The report
summarizes data on commodity concentration risk and describes some
management techniques for dealing with this type of risk.

Commodity concentrations are found to be quite high in a few banks and
in a larger number of associations. At the Farm Credit District level,
commodity concentration in single commodities is highest in the CoBank
District portfolio in the Northeast (40 percent dairy) and in the Texas
District (39 percent cattle). At the association level, commodity risk
concentrations often exceed 50 percent in one commodity group.

One article summarizes the market and technological forces that are
causing Congress to consider how to authorize financial service
institutions with broad product bases in banking, brokerage, and
insurance. It notes that the same forces are affecting the FCS and
questions how these changes will affect the ability of the FCS to carry
out its mission. The article does not attempt to answer this question,
but it provides a background in three areas, while noting how the new
studies from USDA and Treasury are related to these issues. Subjects
addressed are the statutory purpose and related economic mission of the
FCS, its contribution to competitive rural credit markets, similarities
of the FCS charter and the national bank charter, and some challenging
questions focused on ensuring a future with a competitive rural credit
delivery system that is in the best interest of the borrower.

The article on corporate restructuring of System institutions notes that
the number of lending institutions continues to decline mostly as a
result of mergers in the Texas District FLBAs over the first six months
of 1997. The System, as of July 1, 1997, was comprised of six FCB\'s,
one ACB, one BC, and 213 associations.

**Financial Performance of the Farm Credit System for the First Quarter,
1997**

*Janet Goktepe*

**Overview: Loan and Capital Growth Continued; Earnings Decreased as
Operating Expenses, Nonaccruals, and Provision for Loan Losses
Increased**

Net income for the first quarter of 1997 declined 14.4 percent, compared
with the first quarter of 1996, to \$303 million. Net interest income
declined by 4.0 percent, compared with the same period of 1996, to \$533
million.

The credit quality of loan portfolios of most System institutions
remained constant during the first quarter of 1997, compared with the
same period of 1996. However, several System institutions experienced
asset quality deterioration in certain segments of their portfolios.
Nonaccrual loans increased 25 percent, from \$778 million at March 31,
1996, to \$974 million at March 31, 1997. Nonaccruals increased from 1.3
to 1.6 percent, respectively, of total loans outstanding. Delinquencies
increased in a few System institutions, but decreased in most
institutions and all districts overall.

Gross loans outstanding grew 2.6 percent, from \$60.4 billion at March
31, 1996, to \$62.0 billion at March 31, 1997. The allowance for loan
losses was \$1.8 billion, compared with \$1.7 billion at March 31, 1996.
Capital as a percentage of total assets increased from 13.6 percent to
14.3 percent over the year.

**Earnings Decreased as Interest Spreads Narrowed and Operating Expenses
Increased**

The decline in net income between the first quarter of 1996 and 1997 was
caused by several factors, including a decrease in net interest income;
increases in salaries and employee benefits, an increase in other
operating expenses; and an increase in the provision for loan losses.

Net interest income decreased to \$533 million for the quarter ended
March 31, 1997, compared with \$555 million for the quarter ended March
31, 1996. The decrease in net interest income resulted from a decline in
the spread[^1] between the yield on earning assets and the cost of
interest-bearing debt of 27 basis points, from 2.30 percent (annualized)
in the first quarter of 1996 to 2.03 percent in the first quarter of
1997. This decline was a result of competitive loan pricing pressures
and decreases in interest income, especially on nonaccrual loans.

The provision for loan losses was \$40 million for the first quarter of
1997, compared with \$18 million for the first quarter of 1996, an
increase of about 122 percent. Increased provisions occurred in the
CoBank, ACB and the St. Paul BC. The increase in the provision was due
primarily to management decisions that additional allowances for loan
losses were necessary to provide for increased credit risks caused by
higher input prices paid by a number of processing and marketing
cooperatives, additional credit risks associated with growth in loan
volume during 1995 and 1996, and adverse weather conditions in certain
parts of the country.

Total operating expenses as a percentage of total loans increased from
1.32 percent (annualized) at March 31, 1996, to 1.36 percent at March
31, 1997 (Chart 1). The increase was due primarily to a 6.6 percent
increase in salaries and employee benefits, from \$122 million at March
31, 1996, to \$130 million at March 31, 1997. Total operating expenses
increased 6 percent, from \$197 million for the first quarter of 1996 to
\$209 million for the first quarter of 1997.

**Chart 1. Total Operating Expenses (TOE) as a Percentage of Total
Loans**

**and as a Percentage of Average Earning Assets, QI 1992--QI 1997.**

![](media/image3.emf)

Source: Data derived from Federal Farm Credit Banks Funding Corporation
Quarterly Information

Statements---First Quarters 1992--1997.

**Loan Volume Continued to Grow in All Loan Sectors Except Export
Financing**

All loan sectors except export financing grew between March 31, 1996,
and March 31, 1997. Gross loans outstanding increased 2.6 percent, from
\$60.405 billion at March 31, 1996, to \$61.968 billion at March 31,
1997 (Table 1). Long-term real estate loans (excluding loans to
cooperatives) grew from \$28.891 billion to \$29.668 billion, or 2.7
percent. Short- and intermediate-term loans to agricultural producers
grew 5.7 percent, from \$13.690 billion to \$14.469 billion. These
increases were due primarily to the System's continued marketing efforts
and competitive pricing programs during the past 12 months. Gross loans
outstanding increased at March 31, 1997, over the same period of 1996 in
all System banks except AgAmerica, FCB, and CoBank, ACB.

**Table 1. Percentage Changes in Loans Outstanding of the Farm Credit
System Combined Banks and Associations---March 31, 1992 to March 31,
1997**

QI 1992- QI 1993- QI 1994- QI 1995- QI 1996-

QI 1993 QI 1994 QI 1995 QI 1996 QI 1997

Long-Term Real Estate Loans -0.83 -1.24 -0.41 2.94 2.69

Short- and Intermediate-Term Loans -2.21 9.17 5.73 13.88 5.69

Domestic Loans to Cooperatives 4.87 17.53 6.90 22.81 3.87

Loans Made in Connection with

International Transactions 7.84 -4.48 -16.68 -1.27 -19.26

**Total Loans 0.47 4.05 1.32 9.46 2.59**

Source: Data derived from Federal Farm Credit Banks Funding Corporation
Quarterly Information Statements---

First Quarters 1992--1997.

Domestic loans to cooperatives grew from \$14.875 billion to \$15.450
billion, or 3.9 percent. This increase was due to demand for inventory
and receivable financing by agricultural and rural utility cooperatives.
Loans made in connection with international transactions declined from
\$2.949 billion to \$2.381 billion, or 19.3 percent. The decrease was
due primarily to paydowns in international loans to Mexico and Russia.
Credit risk in the international loan portfolio is minimized by the
significant concentration in guaranteed trade financing programs. At
March 31, 1997, 94 percent of the System's international loans were
guaranteed by the USDA's Commodity Credit Corporation.

Over the past 5 years, System loan volume has grown primarily because of
domestic loans to cooperatives and short- and intermediate-term loans to
agricultural producers. For example, at March 31, 1993, domestic loans
to cooperatives accounted for 18 percent of the System's total loan
volume, compared with 25 percent today (Chart 2). Short- and
intermediate-term loans accounted for about 20 percent of the total
portfolio, compared with 23 percent today. Long-term real estate loans
declined from 55 percent to 48 percent, and loans made in connection
with international transactions declined from 7.2 percent of the
System's portfolio to 4 percent.

**Chart 2. Percentage Share of FCS \$62.0 Billion Loan Portfolio**

**by Loan Purpose at March 31, 1997**

![](media/image4.emf)

Source: Data derived from the Federal Farm Credit Banks Funding
Corporation

Quarterly Information Statement---First Quarter 1997.

**Asset Quality Remained Stable Overall Despite Increases in
Nonaccruals; Delinquencies Increased in a Few System Institutions**

Nonaccrual loans (where accrual of interest has been suspended because
of doubts as to the collectability of principal and interest) were \$974
million at March 31, 1997, and \$778 million at March 31, 1996, an
increase of about 25 percent. The increase was due primarily to
deterioration in the credit quality of loans to a limited number of
processing and marketing cooperatives (i.e., loans in the St. Paul BC
and CoBank, ACB). These borrowers are experiencing continued operating
difficulties related to unusually high grain prices in 1996.

Nonaccrual loans are still a small percentage of total loans, increasing
from 1.3 percent at March 31, 1996, to 1.6 percent at March 31, 1997
(Chart 3). Nonperforming assets as a percentage of capital remained
constant at March 31, 1997, compared with the same period of 1996, at
12.2 percent, a decline from 16.8 percent at March 31, 1995.

Nonaccrual loans as a percentage of gross loan items increased in
CoBank, ACB, the St. Paul BC, and the Texas FCB, but decreased or
remained the same in all other System banks. Between March 31, 1996, and
March 31, 1997, nonaccruals as a percentage of gross loan items
increased from .06 percent to 1.3 percent at CoBank, ACB, from .08
percent to 5.6 percent at the St. Paul BC, and from .7 percent to .8
percent at the Texas FCB.

**Chart 3. Nonaccrual Loans as a Percentage of Total Loans,**

**QI 1992--QI 1997**

![](media/image5.emf)

Source: Data derived from the Federal Farm Credit Banks Funding
Corporation Quarterly Information

Statements---First Quarters 1992--1997.

The allowance for loan losses increased to \$1.811 billion at March 31,
1997, compared with \$1.696 billion at March 31, 1996. Managements of
System institutions considered the increase adequate to protect against
identified losses inherent in the loan portfolio.

Delinquencies, often used as an early warning indicator of emerging
credit difficulties, did not indicate problems, based on first quarter
1997 numbers. The proportion of delinquent loans (loans more than 30
days past due) in the System's loan portfolio remained low during the
first quarter of 1997, and delinquencies as a percentage of gross loan
items decreased overall in all districts between the first quarter of
1996 and the first quarter of 1997.

There were increases in delinquencies in certain institutions and groups
of institutions. Delinquencies in the St. Paul BC increased from .6
percent to 1.9 percent between the first quarters of 1996 and 1997.
Delinquencies also increased for the following: PCAs combined, from 2.7
to 2.8 percent; Wichita District PCAs, from 2.7 to 2.8 percent; AgriBank
District PCAs, from 2.2 to 2.4 percent; and the Midlands PCA in the
AgAmerica District, from 2.2 to 3.1 percent.

**Total Capital Grew as Surplus and Restricted Capital Increased**

The System's capital as a percentage of total assets was 14.3 percent at
March 31, 1997, compared with 13.6 percent at March 31, 1996. Total
capital grew from \$9.957 billion to \$10.790 billion, or 8.4 percent.
Surplus grew from \$6.861 billion to \$7.671 billion, or 11.8 percent.
Surplus as a percentage of total capital increased from 68.9 percent at
March 31, 1996, to 71.1 percent at March 31, 1997. Capital stock and
participation certificates fell 5.9 percent, from \$2.037 billion to
\$1.917 billion.

Total capital includes "restricted capital,"[^2] which represents the
aggregate assets in the Farm Credit Insurance Fund. As of March 31,
1997, restricted capital was \$1.202 billion, or 11 percent of total
capital of \$10.790 billion. Restricted capital grew 13.6 percent from
\$1.058 billion at March 31, 1996, and almost 30 percent from \$922
million at March 31, 1995.

At March 31, 1997, all System banks and associations were in compliance
with the 7 percent minimum capital to risk-adjusted assets ratio
standard required by FCA (Regulation 12 CFR § 615.5205, Minimum
Permanent Capital Standard). All but three System institutions were well
above the minimum standard.

The FCA's new capital regulations (12 CFR Part 615---Funding and Fiscal
Affairs, Loan Policies and Operations, and Funding Operations, Subpart
K---Surplus and Collateral Requirements, § 615.5330, Minimum, Surplus
Ratios), which became effective in March 1997, added total surplus ratio
and core surplus ratio standards for all institutions and a collateral
ratio standard for banks only. All banks and associations met the
minimum total surplus ratio (total surplus must be at least 7 percent of
risk-adjusted assets) at March 31, 1997.

Two banks and one association did not meet the minimum core surplus
ratio standard (i.e., core surplus is at least 3.5 percent of
risk-adjusted assets) at March 31, 1997. To comply with FCA regulations,
these institutions are required to submit, to the FCA (within 60 days
following the quarterend in which noncompliance is determined) for
approval, a capital restoration plan for achieving and maintaining the
standards. (Subsequent to March 31, one of the two banks had gained
compliance.)

**FCS Commodity Concentrations and Related Management Strategies in the
Farm Credit System**

*Stephen Gabriel and Regina Pacheco*

Lending concentrations are defined as relatively high portfolio
exposures to borrowers whose sources of repayment would be affected
similarly by changes in economic conditions, policy, or other factors.
Concentrations occur in the System by virtue of the statutory
limitations that limit borrower eligibility. Almost 93 percent of loan
volume of Farm Credit System banks and associations at September 30,
1996 was in loans to agricultural producers for farm real estate or
non-real estate purposes. (The remainder were loans for rural housing
,aquatic, processing and marketing, farm related business, or other
purposes). Also, most Farm Credit institutions are granted charters with
specific geographic territories, resulting in specific commodity
concentrations, such as corn, wheat, or dairy. These commodity
concentrations occur because within many geographic areas a combination
of agronomic, climatic, and economic factors limits the range of
commodities produced.

In addition to commodity concentrations, Farm Credit institutions face
geographic, collateral, and single-borrower concentrations[^3] that must
be managed to limit the risk exposure of the institution. However, the
focus of this article is on commodity concentrations.

Commodity concentrations pose a risk to Farm Credit institutions because
a single adverse event or economic development related to that commodity
can put an inordinate amount of the institution\'s portfolio at risk,
threatening its financial viability. For example, if the price of cotton
were to fall dramatically and an institution\'s loan portfolio consisted
of 40 percent cotton loans, that institution could be placed under
serious financial stress if enough of those cotton loans failed to
perform. In many situations, commodity concentrations are unavoidable.
This article discusses various strategies that institutions can
implement to manage commodity concentration risk.

**Commodity Concentrations by Farm Credit District**

Commodity concentrations in each Farm Credit district as a whole are
determined by the geographic, agronomic, climatic, and economic
characteristics of the district. Some districts are more diversified
than others. Because the district encompasses a larger territory than
any single association, one would expect less concentration at the
district level than at the association level. This expectation is borne
out in the data.[^4]

The districts with the highest degree of commodity concentration are
CoBank and Texas.[^5] The CoBank District loans to System associations
all occur in several northeastern States (former Springfield District)
where the dominant commodities produced are dairy products. Over 40
percent of the CoBank loan volume to associations is to producers of
dairy products, which amounted to \$722 million at the end of 1996. The
next highest commodity concentration in the CoBank district is berry
crops, to which just 4.8 percent of the portfolio is devoted.

In the Texas District, 39.0 percent of the loans are to cattle ranchers.
These cattle loans total \$1.5 billion. Another 15 percent, or \$600
million, are to cotton producers. Although the Texas District has a
relatively high exposure to cattle loans, the recent stress in the
cattle sector, owing to low product prices and high feed costs, did not
cause the financial stress to the System lenders that might have been
expected, because many cattle producers have other sources of repayment.
As part-time producers, they were able to weather the difficult economic
situation by relying on nonfarm income.

Cattle is the leading commodity in terms of concentration for several
districts other than Texas, including Wichita (26 percent or \$981
million), AgAmerica (17 percent or \$1.2 billion), and AgFirst (11
percent or \$898 million). Corn, wheat, and dairy are also important
commodities in many districts. In Wichita, 24 percent of the loans are
to wheat farmers, making wheat a close second to cattle. Wheat loans in
the Wichita District amounted to \$884 million at year-end 1996. In the
AgAmerica District, the portfolio is just slightly less concentrated in
corn (16.8 percent) than cattle; in the AgFirst District, dairy lending
(9 percent) is a close second to cattle.

In the AgriBank District, corn (20 percent) and dairy (13 percent) are
the most important commodities in terms of concentration. More than \$3
billion in corn loans are on the books of institutions in the AgriBank
District. The figure is nearly \$2 billion for dairy loans. In the
Western District, the leading commodities are dairy (16 percent, or
\$753 million) and grapes (14 percent, or \$667 million).

+-----------------+-----------------+-----------------+-----------------+
| **Commodity     |                 |                 |                 |
| Concentrations  |                 |                 |                 |
| by Farm Credit  |                 |                 |                 |
| District,       |                 |                 |                 |
| December 31,    |                 |                 |                 |
| 1996\***        |                 |                 |                 |
|                 |                 |                 |                 |
| **Top Two       |                 |                 |                 |
| Commodities**   |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
|                 |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| **District**    | **Commodity**   | **Concentration | **Loan Volume   |
|                 |                 | (%)**           | (\$000)**       |
+-----------------+-----------------+-----------------+-----------------+
|                 |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| CoBank          | > Dairy         | 40.4            | 722,429         |
+-----------------+-----------------+-----------------+-----------------+
|                 | > Berry Crops   | 4.8             | 86,316          |
+-----------------+-----------------+-----------------+-----------------+
| Texas           | > Cattle        | 39.0            | 1,478,380       |
+-----------------+-----------------+-----------------+-----------------+
|                 | > Cotton        | 15.4            | 583,436         |
+-----------------+-----------------+-----------------+-----------------+
| Wichita         | > Cattle        | 26.4            | 980,681         |
+-----------------+-----------------+-----------------+-----------------+
|                 | > Wheat         | 23.8            | 884,327         |
+-----------------+-----------------+-----------------+-----------------+
| AgriBank        | > Corn          | 20.5            | 3,109,834       |
+-----------------+-----------------+-----------------+-----------------+
|                 | > Dairy         | 13.0            | 1,972,277       |
+-----------------+-----------------+-----------------+-----------------+
| AgAmerica       | > Cattle        | 17.2            | 1,181,635       |
+-----------------+-----------------+-----------------+-----------------+
|                 | > Corn          | 16.8            | 1,157,124       |
+-----------------+-----------------+-----------------+-----------------+
| Western         | > Dairy         | 15.8            | 753,443         |
+-----------------+-----------------+-----------------+-----------------+
|                 | > Grapes        | 14.0            | 667,096         |
+-----------------+-----------------+-----------------+-----------------+
| AgFirst         | > Cattle        | 11.0            | 898,466         |
+-----------------+-----------------+-----------------+-----------------+
|                 | > Dairy         | 9.1             | 745,018         |
+-----------------+-----------------+-----------------+-----------------+

\*Data based on LARS.

**District Commodity Concentrations**

**AgFirst**

Although the AgFirst District enjoys the greatest commodity
diversification as measured by district-level commodity concentrations,
many individual associations within the district have substantial
commodity concentrations in their loan portfolios. For example, eight
associations have concentrations in cattle in excess of 20 percent of
their total loan volume. Four associations exceed a 35 percent
concentration in cattle.

One association has a 67 percent concentration in citrus; two
institutions have more than 50 percent of their loans to producers of
poultry and eggs. Another association has a concentration of over 50
percent in hog loans. Soybeans account for over 50 percent of the
portfolio of one association; tobacco loans represent more than a third
of the loan volume at two associations.

+-----------------------------------+-----------------------------------+
| **AgFirst District**              |                                   |
|                                   |                                   |
| **Number of Institutions with     |                                   |
| Commodity Concentration of 20     |                                   |
| Percent or More\***               |                                   |
+-----------------------------------+-----------------------------------+
|                                   |                                   |
+-----------------------------------+-----------------------------------+
| **Commodity**                     | **Number of Institutions**        |
+-----------------------------------+-----------------------------------+
|                                   |                                   |
+-----------------------------------+-----------------------------------+
| Cattle                            | 8                                 |
+-----------------------------------+-----------------------------------+
| Citrus Fruits                     | 3                                 |
+-----------------------------------+-----------------------------------+
| Corn                              | 1                                 |
+-----------------------------------+-----------------------------------+
| Cotton                            | 2                                 |
+-----------------------------------+-----------------------------------+
| Dairy                             | 6                                 |
+-----------------------------------+-----------------------------------+
| Hogs                              | 3                                 |
+-----------------------------------+-----------------------------------+
| Poultry/Eggs                      | 10                                |
+-----------------------------------+-----------------------------------+
| Soybeans                          | 2                                 |
+-----------------------------------+-----------------------------------+
| Timber Tracts                     | 4                                 |
+-----------------------------------+-----------------------------------+
| Tobacco                           | 6                                 |
+-----------------------------------+-----------------------------------+
| Vegetables & Melons               | 1                                 |
+-----------------------------------+-----------------------------------+

\*Based on LARS data. December 31, 1996.

**Western**

The Western Farm Credit District is also relatively well diversified,
yet some associations within the district have significant commodity
concentrations. For example, one association has nearly a 50 percent
concentration in cattle. Eight associations have more than a 20 percent
concentration in dairy, while two have more than a third of their loans
to dairy farmers. In three associations, grapes account for over 40
percent of the total loan portfolio. Two associations have roughly half
their loans to rice producers.

+---------------------------------------+------------------------------+
| **Western District**                  |                              |
|                                       |                              |
| **Number of Institutions with         |                              |
| Commodity Concentration of 20 Percent |                              |
| or More\***                           |                              |
+---------------------------------------+------------------------------+
|                                       |                              |
+---------------------------------------+------------------------------+
| **Commodity**                         | **Number of Institutions**   |
+---------------------------------------+------------------------------+
|                                       |                              |
+---------------------------------------+------------------------------+
| Beef Cattle Feedlots                  | 1                            |
+---------------------------------------+------------------------------+
| Cattle                                | 3                            |
+---------------------------------------+------------------------------+
| Cotton                                | 3                            |
+---------------------------------------+------------------------------+
| Dairy                                 | 8                            |
+---------------------------------------+------------------------------+
| Deciduous Tree Fruits                 | 1                            |
+---------------------------------------+------------------------------+
| Grapes                                | 5                            |
+---------------------------------------+------------------------------+
| Irish Potatoes                        | 1                            |
+---------------------------------------+------------------------------+
| Ornamental Floriculture & Nursery     | 2                            |
| Products                              |                              |
+---------------------------------------+------------------------------+
| Rice                                  | 4                            |
+---------------------------------------+------------------------------+
| Tree nuts                             | 3                            |
+---------------------------------------+------------------------------+
| Vegetables & Melons                   | 2                            |
+---------------------------------------+------------------------------+

\*Based on LARS data. December 31, 1996.

**AgAmerica**

The AgAmerica District consists of just three large multistate
associations. Consequently, the degree of commodity concentration in
these associations is moderate compared with some in other districts.
Still, one of these associations has more than a 20 percent
concentration in both cattle and corn. Another has over a 30 percent
exposure in corn loans.

**AgriBank**

Several associations in the AgriBank District have sizable
concentrations in corn, dairy, poultry and eggs, and rice. Six
associations have more than a 50 percent concentration in corn loanstwo
have nearly 80 percent of their portfolios in corn loans. A number of
associations have substantial dairy exposures; ten associations have
more than a third of their portfolios in dairy loans, six of which
exceed 50 percent. In two associations, poultry and eggs account for
more than half the loan volume; five associations have over a third of
their loans made to rice producers.

+-----------------------------------+-----------------------------------+
| **AgriBank District**             |                                   |
|                                   |                                   |
| **Number of Institutions with     |                                   |
| Commodity Concentration of 20     |                                   |
| Percent or More\***               |                                   |
+-----------------------------------+-----------------------------------+
|                                   |                                   |
+-----------------------------------+-----------------------------------+
| **Commodity**                     | **Number of Institutions**        |
+-----------------------------------+-----------------------------------+
|                                   |                                   |
+-----------------------------------+-----------------------------------+
| Cattle                            | 6                                 |
+-----------------------------------+-----------------------------------+
| Corn                              | 11                                |
+-----------------------------------+-----------------------------------+
| Cotton                            | 4                                 |
+-----------------------------------+-----------------------------------+
| Dairy                             | 15                                |
+-----------------------------------+-----------------------------------+
| Hogs                              | 3                                 |
+-----------------------------------+-----------------------------------+
| Poultry/Eggs                      | 3                                 |
+-----------------------------------+-----------------------------------+
| Rice                              | 5                                 |
+-----------------------------------+-----------------------------------+
| Soybeans                          | 6                                 |
+-----------------------------------+-----------------------------------+
| Sugarcane & Sugar Beets           | 2                                 |
+-----------------------------------+-----------------------------------+
| Wheat                             | 6                                 |
+-----------------------------------+-----------------------------------+

\*Based on LARS data. December 31, 1996.

**Wichita**

Cattle are the dominant commodity in the Wichita District. Four
associations have more than 70 percent of their portfolios dedicated to
cattle lending. Two associations have cattle concentrations of about 50
percent. Sixteen have concentrations in cattle loans that exceed 20
percent. Another association has more than 70 percent of its loans to
producers of Irish potatoes. Wheat loans are important in the Wichita
District; six institutions have more than a 20 percent portfolio
concentration in wheat.

+-----------------------------------+-----------------------------------+
| **Wichita District**              |                                   |
|                                   |                                   |
| **Number of Institutions with     |                                   |
| Commodity Concentration of 20     |                                   |
| Percent or More\***               |                                   |
+-----------------------------------+-----------------------------------+
|                                   |                                   |
+-----------------------------------+-----------------------------------+
| **Commodity**                     | **Number of Institutions**        |
+-----------------------------------+-----------------------------------+
|                                   |                                   |
+-----------------------------------+-----------------------------------+
| Beef Cattle Feedlots              | 3                                 |
+-----------------------------------+-----------------------------------+
| Cattle                            | 16                                |
+-----------------------------------+-----------------------------------+
| Corn                              | 2                                 |
+-----------------------------------+-----------------------------------+
| Cotton                            | 1                                 |
+-----------------------------------+-----------------------------------+
| Irish Potatoes                    | 1                                 |
+-----------------------------------+-----------------------------------+
| Soybeans                          | 1                                 |
+-----------------------------------+-----------------------------------+
| Wheat                             | 6                                 |
+-----------------------------------+-----------------------------------+

\*Based on LARS data. December 31, 1996.

**Texas**

In the Texas District, eleven institutions have concentrations in cattle
that exceed 20 percent, nine of which are greater than a third. One
association has more than 85 percent of its loans in cotton; another has
more than a 60 percent concentration in cotton. Dairy lending accounts
for about half the portfolio of one association.

+-----------------------------------+-----------------------------------+
| **Texas District**                |                                   |
|                                   |                                   |
| **Number of Institutions with     |                                   |
| Commodity Concentration of 20     |                                   |
| Percent or More\***               |                                   |
+-----------------------------------+-----------------------------------+
|                                   |                                   |
+-----------------------------------+-----------------------------------+
| **Commodity**                     | **Number of Institutions**        |
+-----------------------------------+-----------------------------------+
|                                   |                                   |
+-----------------------------------+-----------------------------------+
| Cattle                            | 11                                |
+-----------------------------------+-----------------------------------+
| Cotton                            | 4                                 |
+-----------------------------------+-----------------------------------+
| Dairy                             | 2                                 |
+-----------------------------------+-----------------------------------+
| Poultry/Eggs                      | 1                                 |
+-----------------------------------+-----------------------------------+
| Rice                              | 1                                 |
+-----------------------------------+-----------------------------------+

\*Based on LARS data. December 31, 1996.

**CoBank**

The most important commodity in the CoBank District is dairy. There are
only five associations in this district, and four have significant
concentrations in dairy lending. Two associations have more than 70
percent of their loans to dairy farmers, another has nearly half. The
portfolio of one association has over a third of its loans to producers
of Irish potatoes.

+-----------------------------------+-----------------------------------+
| **CoBank District**               |                                   |
|                                   |                                   |
| **Number of Institutions with     |                                   |
| Commodity Concentration of 20     |                                   |
| Percent or More \***              |                                   |
+-----------------------------------+-----------------------------------+
|                                   |                                   |
+-----------------------------------+-----------------------------------+
| **Commodity**                     | **Number of Institutions**        |
+-----------------------------------+-----------------------------------+
|                                   |                                   |
+-----------------------------------+-----------------------------------+
| Dairy                             | 4                                 |
+-----------------------------------+-----------------------------------+
| Irish Potatoes                    | 1                                 |
+-----------------------------------+-----------------------------------+
| Ornamental Floriculture & Nursery | 1                                 |
|                                   |                                   |
| Products                          |                                   |
+-----------------------------------+-----------------------------------+
| Forest Nurseries & Gathering      | 1                                 |
| Forest                            |                                   |
|                                   |                                   |
| Products                          |                                   |
+-----------------------------------+-----------------------------------+

\*Based on LARS data. December 31, 1996.

**Management Strategies for Dealing with Commodity Concentrations**

The following section presents a general summary of the strategies FCS
institutions use to manage the risks associated with commodity
concentrations in their portfolios.

**Information Systems**

Most FCS institutions have information systems (IS) capable of
identifying primary areas of business risk, such as commodity
concentrations. These IS also enable management to segregate commodity
concentrations. The identification of concentrations allows management
to recognize and manage potential risk associated with such
concentrations.

The sophistication of IS utilized by FCS institutions varies. In
addition to identifying concentrations, many systems can also segregate
commodity concentrations by credit classification and various borrower
credit factors (e.g., repayment capacity, owner's equity, loan amount to
collateral value ratio) for a more in-depth analysis. This capability
allows the institution to identify potential weaknesses in borrowers'
financial conditions and proactively manage the situation. In some
instances, the IS also provide the capability to perform sensitivity
modeling on the portfolio or segment of the portfolio to project the
effect of decreases in prices, yields, or other factors. Some
institutions supplement district IS with their own systems or hire staff
with programming skills to create specialized (nonstandard) reports from
the systems. These initiatives further aid in the proactive management
of portfolio risk. Some districts are in the process of implementing
updated information systems or analyzing the benefit of implementing new
systems to improve information and increase applications available
(e.g., sensitivity modeling).

**Commodity Studies**

Commodity studies provide management and credit staff with information
about commodities financed within the institution's territory and may
alert them to potential risk. Commodity studies may also project the
effect on the institution's financial condition of any perceived risk in
a particular commodity. The use and comprehensiveness of commodity
studies vary by institution. Some may complete commodity studies in
conjunction with the planning cycle. These studies provide an overview
of the institution's concentration exposure and condition of prevalent
industries financed. These studies may also be used to develop
management's expectations regarding servicing of these commodities
(increase marketing or limit exposure). Other studies are completed
periodically or as needed. These studies may provide a more in-depth
analysis of a particular commodity, including historical information and
economic outlook. They may also evaluate the current condition,
including credit classification and financial position, of the
institution's borrowers with repayment capacity reliant on the
commodities. In addition, some studies may project the effect of
expected industry conditions on the borrowers' financial positions and
quality of the loan portfolio.

**Underwriting Standards**

Underwriting standards provide the basis for evaluating credit factors
(defined financial or operating ratios) on individual loans by outlining
minimum guidelines for creditworthiness of borrowers. Loan underwriting
standards help ensure that characteristics of the institution's loan
portfolio are consistent with its risk-bearing ability. Many FCS
institutions utilize commodity-specific underwriting standards as a tool
to manage risk for major commodities financed. Because of the increased
risk posed by concentration in a particular commodity,
commodity-specific underwriting standards may require compensating
strengths in the credit factors for borrowers whose repayment capacity
relies on the commodity. The underwriting standards are normally
assessed on an ongoing basis and updated periodically. These standards
may be modified in response to a change in risk in that particular
portfolio segment. For example, the repayment capacity standard may be
increased as the institution nears its maximum acceptable risk level for
this commodity.

**Loan Participations**

An institution can use participations to diversify commodity
concentrations within its loan portfolio. System institutions have the
authority to participate in loans within their district, outside their
district, and outside the System (e.g., with commercial banks or
insurance companies) to diversify their loan portfolio.

The use of participations in the System is increasing. System
institutions sold \$5.1 billion in participations in the first quarter
of 1997, up from \$3.8 billion during the first quarter of 1996. CoBank
and St. Paul BC accounted for most of this increase. Slightly over
three-quarters of direct lender associations were involved in either
purchasing or selling participations, mostly with other System
institutions.

While the sale of most participations result from institutions complying
with lending limitations or the desire to diversify risk in large loans,
some institutions recognize the potential benefit of diversifying
commodity concentrations in their portfolio through participations. An
institution can sell loan participations in a commodity in which the
institution has a large concentration. An institution may also purchase
loan participations in a commodity in which it does not have a
significant concentration to achieve diversification in the portfolio.

In some districts, groups of institutions have created strategic
alliances to pool large loans. While such alliances are generally
utilized to market large customer loans or participate loans that exceed
an institution's lending limit, they may also be utilized to reduce
commodity concentration risk.

**Capital to Offset Risk**

An institution's management may decide to build and retain higher levels
of risk funds (capital and allowance for loan losses) to insulate the
institution from the potential risk of commodity concentrations. Once
commodity concentrations are recognized, institutions may modify their
capital plans and/or allowance for loan loss levels to account for the
risk. Management may even establish limits on the amount of a particular
commodity in the portfolio as a percentage of loan volume or capital.
Such limits may encourage the association to limit exposure through
participations. In addition, the use of differential underwriting
standards may limit exposure to a particular commodity.

**Additional Strategies**

Some institutions are utilizing Farm Service Agency guarantees and
encouraging borrowers to use crop insurance and advance contracting when
available. Use of these tools to reduce risk to individual borrowers
helps reduce overall risk posed by the particular commodity financed.
However, the use of advance contracts, futures, and other derivatives
also introduces risks to the borrower and the institutions which need to
be recognized and managed.

**The FCA's Role**

During the examination process, FCA examiners evaluate the effectiveness
of an institution's loan portfolio management practices, including
management of portfolio concentrations. If the FCA finds that an
institution is not effectively managing any existing commodity
concentration, it requires that the institution implement an action plan
to correct such weaknesses.

**FCS PURPOSES AND ITS GSE CHARTER, THE NATIONAL BANK CHARTER, AND
FINANCIAL REFORM PROPOSALS**

*George D. Irwin*

The U.S. financial system is in the midst of major changes, thanks to
technological advances in computers, communications, and financial
techniques. Financial products and services formerly in separate
industries have become more alike and have developed new forms. One of
the impacts is that the laws and regulations that created and govern
financial institutions are being reexamined.

In fact, for the past several years, Congress has been considering
additional[^6] changes to the laws that separate banking from other
financial services, and banking regulators have strongly supported the
need for such change (see Exhibit 1 for recent statements). Regulators
have also made a number of changes within existing law that reduce other
barriers between banking and the related fields of securities and
insurance. On the other hand, the continued existence of the Farm Credit
System as a Government-sponsored enterprise (GSE) has been challenged at
regular intervals since the 1980s, and efforts to adjust this body of
law[^7] and regulations to the new market circumstances have been
challenged.

In view of this evidence that market forces are pressing for changes in
the banking charter, it is reasonable to ask whether there will be
impacts on the safety and soundness of the FCS or on its ability to
carry out its statutory mission of ensuring competitive credit markets
in rural America. How will these market and technology forces and
changes to competitors' charters affect the ability of the FCS to carry
out its mission?

This article does not answer these questions; rather, it reviews three
specific sets of information to provide the background needed to develop
answers. First, it outlines the statutory purposes of the FCS. Second,
it compares the Federal charters and roles of the two traditional types
of financial institutions active in rural areas, the FCS banks and
associations and national commercial banks. The former are generally
regarded as Federal entities and the latter as private firms, yet they
share many characteristics. Third, the article notes a major change in
the rural credit environment. It suggests that the dominant issue for
the future is not the competition between the FCS and commercial banks
in rural markets. Rather, it is the appropriate response to competition
that both face from third parties in the new financial environment. The
article also points out that competitive balance among the traditional
agricultural lending institutions must also be maintained for the public
purpose defined in the Farm Credit Act to be accomplished.[^8]

**Statutory Role of the Farm Credit System**

Congress established the public purpose of the FCS by a policy stated in
Section 1.1 of the Farm Credit Act. The Act calls for "a permanent
system of credit and closely related services" for agriculture that is
"farmer owned and controlled," is chartered to serve all areas of the
country under all economic conditions, offers "competitive rates,"
authorizes a variety of loan purposes, and serves farmers and ranchers,
their cooperatives, "selected farm-related businesses necessary for
efficient farm operations," and certain other types of borrowers named
in the Act.

The primary focus of the statute is to *benefit farmers and the rural
sector*, not to serve the interests of the FCS or other providers of
agricultural credit. This role determines the scope of service and the
safety and soundness bounds within which the FCA must establish rules
and regulations for the FCS.

***Economic Missions of the FCS***

The public interest is to have a continuing, competitive market in
agricultural credit through all phases of the business cycle, and the
FCS is one policy instrument to help achieve this goal.

A properly functioning FCS provides high value to the agricultural
sector at no direct cost to the Federal Government (neither the FCA nor
the FCS receives appropriated funds) by performing two missions.
Recognizing both missions is the key to understanding the permanent role
of the FCS in rural financial markets:

1.  Ensure that there is *no credit gap* for eligible groups in rural
    America and that rural areas do not suffer disproportionately in
    periods of credit constraint; and

2.  Promote *competitive market results* in rural credit markets by its
    presence, whether or not a credit gap exists, by alleviating or
    preventing market imperfections.

The role of the FCS is to be proactively available in order to prevent
credit gaps from arising or interest rates from being set at
noncompetitive levels. The role is *not* to sit back, wait until
problems arise in the supply or price of agricultural credit, and then
step in to correct them. Those who object to FCS competition with their
institutions may be objecting to the competitive purposes established in
statute, or they may be concerned that an inequity exists between the
GSE authorities and the national bank authorities.

Farmer-owners, not the FCA, determine whether there is a need for loan
programs authorized under the law. Congress did not prescribe that the
FCA should create any further needs tests in order for loan programs to
exist. The charter authority establishes the presumption that there is a
need *for farmers to have the option* of establishing an FCS institution
and carrying out loan programs as authorized by the Act. The FCS is to
be a competitive presence, to offer eligible borrowers an alternative.

Success in this role, from the public policy viewpoint, is measured
primarily by the adequacy of financing and the competitiveness of terms
to the eligible borrowers, both now and in the future. Loan volume
generated by the FCS is important to the extent that some level and
stability of volume is necessary for efficient operation and long-term
viability. The FCS and its competitors will each attempt to gain loan
volume, but success of the Farm Credit Act is measured by the results of
the competition---do the farmer-customers get good services at
competitive rates?

***Contribution to Competitive Rural Credit Markets***

Congress has created a very effective mixed rural credit system, with
Farm Credit institutions owned cooperatively and commercial banks owned
by investor shareholders. Cooperatives are intended to operate directly
in the interest of users, to minimize costs of customer borrowing, and
to be innovative in providing customer-adapted services. One effect of
their presence is to encourage competitive market behavior by
investor-owned banks, which might otherwise have greater opportunity to
exercise local market power to the disadvantage of borrowers.
Conversely, the banks impose discipline on the FCS institutions, which
might otherwise have less incentive to control operating costs.

# 

The long-standing Federal policy of maintaining both the FCS and other
institutions with Federal charters[^9] has served rural areas well.[^10]
It has made financial markets efficient, effective, and competitive for
farmers and rural America. However, the *issue of competitive advantage
between* these institutions with Federal charters should be viewed as
*secondary to* the *issue of the* *survival of both* in a less regulated
environment. *The fundamental competitive advantage question* for the
future is *between federally chartered and regulated institutions* on
one hand, *and the newer, unregulated institutions* on the other. Both
the FCS and other Federal charters need to be examined from this
viewpoint.

Nevertheless, the secondary issue of competitive balance among the
various Federal charters is worth some discussion. I believe it has been
inappropriately overlooked in the public policy debates shaping
financial markets for the future.

**Federally Chartered Commercial Bank vs. GSE Charter**

Federal charters are not the rule in the United States---most corporate
charters are issued by States. But combinations of State and Federal
charters are fairly common for financial institutions and certain other
areas of great national significance. The FCS institutions are federally
chartered, as are national commercial banks, Federal savings and loans,
and Federal credit unions.[^11]

The Federal charters for all kinds of financial institutions are
intended to achieve some national purpose. But the public debate has
treated classes of federally chartered institutions very
differently.[^12] Federally chartered commercial banks are characterized
as private, even though their charters share many of the attributes of
the class of Federal charters called Government-sponsored enterprises.
The GSEs are generally characterized as public, though they have many
private characteristics. As a matter of fact, both have public
characteristics and both have private characteristics.

Both the FCS institutions and commercial banks are commercial lenders.
Like the FCS, many commercial banks and thrifts have Federal charters
and implied Federal support in raising funds. Both have charter
restrictions on the kinds of customers and services they may provide.
Both commercial banks and the FCS have access to a Government safety
net.[^13]

Both are now facing increased pressures from less regulated competitors
and find their charters to be more binding than they would like.
Congress has utilized both as public vehicles to improve rural access to
credit and has imposed a Federal regulator. Both also have unique tax
laws and exemptions, special accounting treatments, and insider access
to monetary mechanisms.

On the other hand, both commercial banks and the FCS have private
shareholders. In one case, shareholders are investors in commercial bank
stock. In the other, shareholders are farmer-users of the FCS. In one
case, profits flow to investors; in the other, they belong to the farmer
shareholder-users. In many ways, national banks resemble GSEs, but with
the advantage of a charter that gives them broader authorities.

The FCS charter is narrower in two major ways:

1.  The FCS lacks authority to take deposits. Instead, it generates most
    of its funds by selling securities to investors in national and
    international financial markets.

2.  The FCS institutions have a relatively narrow charter of lending
    authority and may offer only a narrow range of financial services to
    their customers. They may serve production agriculture and
    aquaculture, rural housing, processing and marketing, farm related
    service businesses, farmer cooperatives, rural utilities, and
    agricultural exporters.

Both types of institutions have similar attributes that are public and
similar attributes that are private. (These attributes are described
more fully in reference 2.) Rather than treating one as entirely private
and the other as entirely public, it seems appropriate to focus on
*keeping in competitive balance* the sets of attributes that each type
of institution enjoys, so that each continues to be able to serve the
purposes for which it was granted a Federal charter. The intent is to
benefit farmers, ranchers, and rural America.

**Rural Financial Markets for the Future**

A broader issue, noted briefly in an earlier section, may be even more
significant for rural financial markets. There is a danger in focusing
so much attention on the balance between these two kinds of regulated
financial institutions that serve rural markets. The risk is that both
may be allowed to become obsolete for rural America in the face of
change in overall financial markets.

Two forces are at play, one internal and one external. First, new credit
delivery mechanisms are developing that appear to lower costs and to be
of significant value to rural credit customers. These mechanisms are
reflected in the great expansion in trade credit associated with farm
input and product markets and in the great increase in the opportunities
to securitize loans. Second, all commercial banks, including those in
rural America, would gain new powers from the current proposals to
modernize the overall U.S. financial system. That fact alone raises the
question of what adjustments may then be needed to maintain competitive
balance for the FCS.

But the question goes deeper. At this point, it is impossible to project
whether the consolidation of financial services powers will be positive
or negative for banking services in rural America. Yet a positive answer
has vastly different implications for the future of the FCS than a
negative answer. More importantly, both leave a continuing Federal
policy role for the FCS in maintaining efficient rural credit markets.

Keeping rural commercial banks and FCS institutions viable as well as
balanced with respect to each other is likely to be a very large
challenge for the future, yet achieving this goal should get the best
results for the rural credit customer.

**Conclusion**

The recent reports from Treasury (reference 3) and USDA (reference 9)
add a new dimension to these long-standing issues. The Treasury
recommendations for financial services restructuring point out
tremendous financial market changes and suggest extensive broadening of
the national bank charter so that these institutions may remain
competitive with other sources of financing and financial services in
the future. The recommendations are silent on how these changes ought to
be addressed in the GSE charter of the FCS. The USDA study concludes
that rural financial markets have worked relatively well in the past,
but the study was not intended to address the future performance of
these markets.

The two studies leave the reader to infer that no change may be
necessary in either the FCS authorities or in rural commercial bank
authorities for rural financial systems to continue to serve well in the
future. This article argues that such an inference would be wrong, and
that the changes ahead in financial services charters raise legitimate
safety and soundness issues and Federal policy issues for the FCA.

Two points need to be emphasized. First, changes in rural credit markets
may be needed as a result of broader financial restructuring now taking
place. Second, although a competitive balance among regulated financial
institutions is important in ensuring high quality service to rural
areas, a competitive balance with other, less regulated financial
institutions may be equally important. Changes may be required in all
financial institution charters if the rural financial system is to
continue to perform its public purposes as well as it has done in recent
years.

**References**

1\. Robert Collender, *Can Federal Action Improve the Efficiency in the
Market for Farm Loans*?, USDA Agriculture Information Bulletin No.
724-01, March 1996.

2\. George D. Irwin, "GSE Status, the ABA/IBAA Proposal, Eligibility
Regulations, FCS Powers, and the FHLB Legislative Proposal," Regional
Research Committee NC-207 Proceedings: Regulatory, Efficiency and
Management Issues Affecting Rural Financial Markets. New York City,
N.Y., September 9--10, 1996.

3\. Robert E. Rubin, Secretary of the Treasury, Remarks to the Exchequer
Club, May 21, 1997, and accompanying material published in Treasury
News, May 21, 1997.

4\. Thomas H. Stanton, *Government-Sponsored Enterprises: Their Benefits
and Costs as Instruments of Federal Policy, A Study for the Association
of Reserve City Bankers*, April 1988, 38 pp.

5\. Thomas H. Stanton, "Government-Sponsored Enterprises and Changing
Markets: The Need for an Exit Strategy", The Financier: ACMT, Vol. 2,
No. 2, May 1995, pp. 27--42.

6\. Thomas H. Stanton, "Nonquantifiable Risks and Financial
Institutions: The Mercantilist Legal Framework of Banks, Thrifts, and
Government Sponsored Enterprises" in Charles Stone and Anne Zissu, eds.,
Global Risk-Based Capital Regulations, Vol. 1, Homewood, Ill., Irwin
Professional, 1994.

7\. Congressional Budget Office*, Assessing the Public Costs and
Benefits of Fannie Mae and Freddie Mac*, May 1996.

8\. Congressional Budget Office*, Controlling the Risks of
Government-Sponsored Enterprises*, April 1991, 281 pp.

9\. Department of Agriculture, Economic Research Service*, A Study of
the Farm Credit System, A Report to the Secretary of Agriculture*, July
1982 (unpublished).

10\. Department of Agriculture, *Report to Congress on Credit in Rural
America*, April 1997, 112 pp.

11\. Department of Housing and Urban Development, Statement of Assistant
Secretary and Federal Housing Commissioner Nicolas Retsinas before
Subcommittee on Capital Markets, Securities and Government-Sponsored
Enterprises, House Committee on Banking and Financial Services, July 24,
1996.

12\. Department of Housing and Urban Development, Office of Policy
Development and Research, *Studies on Privatizing Fannie Mae and Freddie
Mac*, May 1996.

13\. General Accounting Office, *Government-Sponsored Enterprises: A
Framework for Limiting the Government's Exposure to Risks*,
GAO/GGD-91-90, May 1991.

14\. General Accounting Office*, Government-Sponsored Enterprises: The
Government's Exposure to Risks*, GAO/GGD-90-97, August 1990, 172 pp.

15\. General Accounting Office*, Housing Enterprises: Potential Impacts
of Severing Government Sponsorship*, GAO/GGD-96-120, May 1996.

16\. Treasury Department*, Report of the Secretary of Treasury on
Government-Sponsored Enterprises*, April 1991, 106 pp.

17\. Treasury Department, "Government Sponsorship of the Federal
National Mortgage Association and the Federal Home Loan Mortgage
Corporation," Statement of Deputy Secretary Lawrence H. Summers before
Subcommittee on Capital Markets, Securities and Government-Sponsored
Enterprises of the House Committee on Banking and Financial Services,
July 24, 1996.

18\. Treasury Department, *Government Sponsorship of the Federal
National Mortgage Association and the Federal Home Loan Mortgage
Corporation*, Report to the Congress, July 11, 1996.

**Exhibit I. Statements of Other Regulators Supporting the Need for
Financial Modernization**

-   Comptroller of the Currency, Eugene Ludwig, discussed the need for
    modernizing regulations on June 17, 1996:[^14]

    The truth is that banks had little choice but to become involved in
    the mutual fund industry if they wanted to continue serving the
    financial needs of their customers \... can you imagine how banking
    would have been affected had we not allowed banks to engage in
    mutual fund activities? What we need from our legislatures is much
    more than an exercise in allocating turf among competing interests
    or industries \... Rewriting the laws that govern banking and
    financial services must be based on fundamental
    principles---principles that *respect rather than fight market
    forces* that are reshaping the banking industry. \... the OCC and
    the administration are working now to develop the principles that we
    believe should guide us in this arena, and \... changes in law,
    regulation, and supervisory practice that would be required.
    (Emphasis added.)

-   Comptroller Ludwig on March 13, 1997:[^15]

    Financial modernization is first and foremost a safety and soundness
    issue. Strategic risk---in this case the risk of not being able to
    offer the products and services that the market demands---is, in the
    long term, the most important risk facing the financial industry
    today. In our dynamic economy, if banks are not able to offer new
    products, to evolve as the markets evolve, they will not survive as
    healthy entities. Accordingly, I am pleased to see the Congress \...
    has given financial modernization priority on its agenda \... I am
    similarly pleased that the Federal Reserve has taken action in this
    area. The OCC, too, will continue, as we have for the last several
    years, to allow the system to evolve.

    and

    It is not enough for a statute or regulation to allow banks to
    evolve if the law or regulation permits evolution only in such an
    inefficient way that banks cannot actually compete with other
    entities.

-   Comptroller Ludwig, testifying on March 5, 1997:[^16]

    Government restrictions on financial institutions that are not
    clearly justified by safety and soundness or other public policy
    concerns hurt the long-term health of our financial institutions.

-   Similarly, Federal Reserve Governor Lawrence Meyer recognized these
    imperatives in speaking to bank directors on January 24, 1997:[^17]

> The financial services industry is moving in the direction of expanded
> activities and increased competition, with or without congressional
> action, *driven by market realities*, financial innovations,
> technological change, and global competition. Federal banking
> regulators are cooperating in this process, often reluctantly, but
> recognizing already existing erosions to regulations. (Emphasis
> added.)

-   FDIC Chairman Ricki Helfer said the following on January 16,
    1997:[^18]

> The challenge to the regulators is to develop safety-and-soundness
> regulation that comes as close as possible to market discipline,
> *without imposing inefficient, ineffective regulations* \... that
> unduly inhibit the important function \... that they perform for the
> economy. (Emphasis added.)

-   Federal Reserve Chairman Alan Greenspan, testifying on February 13,
    1997, supported the need for financial modernization, but also
    recognized the need to limit the scope of the "sovereign credit
    subsidy" to the banking system:[^19]

> We strongly urge an extensive increase in the activities permitted to
> banking organizations and other financial institutions, provided these
> activities are financed at nonsubsidized market rates and do not pose
> unacceptable risks to our financial system. While a level playing
> field requires broader powers, it does not require subsidized ones.
>
> and
>
> In this century, the Congress has delegated the use of the sovereign
> credit (of the U.S.) \... the power to create money and borrow
> unlimited funds at the lowest possible rate \... to support the
> banking system. It has done so indirectly as a consequence of deposit
> insurance, the Federal Reserve discount window access, and the final
> riskless settlement of payment systems transactions. The public policy
> purpose was to protect depositors, stem bank runs, and lower the level
> of risk to the financial system from the insolvency of individual
> institutions. In insuring depositors, the Government \... substituted
> its unsurpassable credit rating for those of the banks. Similarly,
> provisions of the Federal Reserve Act enabled banks \... through the
> discount window \... and \... payments using Federal Reserve credits.
> All these uses of the sovereign credit have dramatically improved the
> soundness of our banking system and the public's confidence in it. In
> the process, it has profoundly altered the risks and returns in
> banking.
>
> and
>
> But all good things have their price. The use of the sovereign credit
> \... creates a moral hazard that distorts the incentives for banks.
> \... This then creates the necessity for the Government to limit the
> degree of risk it absorbs by writing rules under which banks operate.

-   Comptroller Ludwig also disagreed with Greenspan's evaluation of
    sovereign risk in his March 5, 1997, testimony:

> Some argue \... that banks benefit from a kind of subsidy through
> Federal deposit insurance and participation in the payments system and
> discount window, whereas bank holding companies are less likely to
> benefit to the same extent. This argument simply doesn't stand up to
> analysis.

-   Chairman Helfer testified in support of modernization, but disagreed
    with Greenspan's assessment of sovereign risk on March 5, 1997:[^20]

> Modernization of the financial system is necessary to achieve an
> efficient and competitive financial services industry \... banks are
> innovating and adapting to a changing marketplace. Nevertheless, banks
> have experienced a relative decline in market share and relatively
> slower growth. Financial modernization should strengthen banking
> organizations by allowing diversification of income sources and better
> service to customers.
>
> and
>
> The lesson we draw from these events (four major regional or sectoral
> downturns since the early 1980s) is that attempts to ensure the safety
> and soundness of insured institutions by limiting market competition
> ultimately fail \... To maintain the safety and soundness of the
> financial system, institutions must be allowed to diversify.
>
> and
>
> FDIC agrees that banks receive a gross subsidy from the federal safety
> net. However, banks also incur costs, both direct and indirect, that
> at least partially offset this gross subsidy. The relevant question
> \... is \... whether banks receive a net subsidy. On balance, the
> evidence indicates that if a net subsidy exists, it is very small.

Corporate Restructuring of Farm Credit System Institutions

*Elna Luopa*

The number of System lending institutions continues to decline as a
result of association mergers in the first half of 1997. As of July 1,
1997, the System was comprised of 6 FCBs, 1 ACB, 1 BC, and 213
associations as follows: 65 PCAs, 57 Federal Land Bank Associations
(FLBAs), 60 Agricultural Credit Associations (ACAs), and 31 Federal Land
Credit Associations (FLCAs), or a total of 221 banks and associations,
compared with 235 as of July 1, 1996. Most of the reductions occurred as
a result of mergers of FLBAs in the Texas District. (Detailed
information on corporate restructuring activity during the fourth
quarter of 1996 appeared in the previous report.)

From January 2, 1997, through July 1, 1997, approvals were granted for
four different mergers involving eleven FLBAs affiliated with the FCB of
Texas, a merger of a PCA and an ACA affiliated with AgriBank, FCB, and
an expansion of territory for an FLCA, also affiliated with AgriBank.
Two mergers that had been approved by the FCA Board took effect during
this periodone in the Texas District and the other in CoBank, ACB\'s
Northeast Region.

In March, CoBank, ACB, headquartered in Denver, Colorado, and AgriBank,
FCB, located in St. Paul, Minnesota, announced a strategic alliance to
identify opportunities that would enhance the capacities of the two
banks to serve their customers as they move into the 21st century. The
joint project will explore the current markets served by the two banks,
their customers\' future needs, and alternative organizational
structures for the delivery of future financial services. Outside
consultants are assisting the banks with the joint project. The board
chairmen have publicly stated that the alliance is not a prelude to
merger, however such an option is not being ruled out. Combined, the
banks hold \$36.0 billion of the System\'s total assets of \$75.3
billion.

**Associations Affiliated with the FCB of Texas**

Since January 1, 1997, the FCA Board has preliminarily approved the
following FLBA mergers in Texas: (1) the FLBA of Paris into the FLBA of
North Texas; (2) the FLBA of Corsicana into the FLBA of Waco; (3) the
FLBAs of Kerrville and Mason into South Central FLBA of San Marcos, the
continuing association to be renamed Capital of Texas FLBA; and (4) the
FLBAs of Brownwood, Coleman, and Haskell into the FLBA of San Angelo,
the continuing association to be renamed the FLBA of Texas. Stockholders
of the FLBAs of Paris and North Texas subsequently approved their
merger, which became effective May 1, 1997. The FCA\'s final approval of
the three remaining mergers is contingent on approval by the voting
stockholders of the FLBAs of each merger group.

Also, the FCA granted final approval for the merger of the FLBAs of
Caprock-Plains of Plainview and High Plains FLBA of Pampa into the FLBA
of Amarillo, the continuing association now known as Panhandle-Plains
FLBA. The merger became effective February 1, 1997.

An additional merger proposal from two Texas District FLBAs has been
received.

**Associations Affiliated with CoBank, ACB**

Empire Farm Credit, ACA, and First Pioneer Farm Credit, ACA, received
the FCA\'s final approval to merge. The merger became effective July 1,
1997. The continuing association, First Pioneer, serves Massachusetts,
Connecticut, New Jersey, Rhode Island, mid- and eastern New York, and
six counties in New Hampshire.

Farm Credit Financial Partners, Inc., a service corporation of CoBank,
ACB, located in Springfield, Massachusetts, provides support services
for the ACAs\' operations in the New England States, New York, and New
Jersey. The Corporation obtained the FCA Board\'s approval to amend its
charter and articles of incorporation to permit the ACAs in CoBank\'s
Northeast Region to hold stock in the corporation. Prior to passage of
the Farm Credit System Reform Act of 1996, System associations were not
permitted to organize or hold stock in service corporations authorized
by the Act. Upon completion of the stock transactions between the ACB
and the ACAs, CoBank will retain a 25 percent interest in the
corporation and the ACAs will hold the balance of the outstanding
capital stock.

**Associations Affiliated with AgriBank, FCB**

On June 5, 1997, the FCA Board preliminarily approved the merger of the
PCA of Southeast Wisconsin into Farm Credit Services of Western
Wisconsin, ACA. If voting stockholders of each association approve the
merger, the resulting ACA will be known as Harvestland Farm Credit
Services, ACA. Concurrent with the merger approval, the FCA Board
conditionally approved a charter amendment request from Farm Credit
Services of Southeast Wisconsin, FLCA, to add 13 counties to its
territory. The FCA Board\'s condition requires the FLCA to provide its
stockholders with a disclosure regarding the effects of the expansion of
its territory. The charter change will result in the FLCA\'s territory
being identical to that of the Harvestland ACA. The FLCA will change its
name to the Harvestland Farm Credit Services, FLCA. Both Harvestland
associations will have common staff and operate under a joint management
agreement.

[**Active System Institutions** ^1^]{.smallcaps}

**[as of July 1, 1997]{.smallcaps}**

+--------------+------+-------+------+-------+-----+-----+----+-----+
| Bank         | PCAs | FLBAs | ACAs | FLCAs | ACB | F   | B  | To  |
| Affiliation  |      |       |      |       |     | CBs | Cs | tal |
+--------------+------+-------+------+-------+-----+-----+----+-----+
| AgFirst FCB  | 1    | --    | 39   | --    | --  | 1   | -- | 41  |
+--------------+------+-------+------+-------+-----+-----+----+-----+
| AgriBank,    | 19   | --    | 11   | 19    | --  | 1   | -- | 50  |
| FCB          |      |       |      |       |     |     |    |     |
+--------------+------+-------+------+-------+-----+-----+----+-----+
| FCB of       | 18   | 22    | --   | --    | --  | 1   | -- | 41  |
| Wichita      |      |       |      |       |     |     |    |     |
+--------------+------+-------+------+-------+-----+-----+----+-----+
| FCB of Texas | 16   | 35    | --   | --    | --  | 1   | -- | 52  |
+--------------+------+-------+------+-------+-----+-----+----+-----+
| Western FCB  | 10   | --    | 5    | 11    | --  | 1   | -- | 27  |
+--------------+------+-------+------+-------+-----+-----+----+-----+
| AgAmerica,   | 1    | --    | 1    | 1     | --  | 1   | -- | 4   |
| FCB          |      |       |      |       |     |     |    |     |
+--------------+------+-------+------+-------+-----+-----+----+-----+
| CoBank ^2^   | --   | --    | 4    | --    | 1   | --  | -- | 5   |
+--------------+------+-------+------+-------+-----+-----+----+-----+
| St. Paul BC  | --   | --    | --   | --    | --  | --  | 1  | 1   |
| ^3^          |      |       |      |       |     |     |    |     |
+--------------+------+-------+------+-------+-----+-----+----+-----+
| 7/1/97 Total | 65   | 57    | 60   | 31    | 1   | 6   | 1  | 221 |
+--------------+------+-------+------+-------+-----+-----+----+-----+
| 7/1/96 Total | 66   | 69    | 60   | 32    | 1   | 6   | 1  | 235 |
|              |      |       |      |       |     |     |    |     |
| Changes      | \    | \     | --   | \(1\) | --  | --  | -- | (   |
|              | (1\) | (12\) |      |       |     |     |    | 14) |
+--------------+------+-------+------+-------+-----+-----+----+-----+

**\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_**

^1^ Service corporations are not included since they do not make loans.

^2^ CoBank, ACB, has authority to serve cooperatives nationwide and ACAs
in the former Springfield District.

^3^ The St. Paul Bank for Cooperatives has authority to serve
cooperatives nationwide.

**Major Financial Indicators by System, Quarterly Comparisons^1^**

***Tom R. Risdal***

**Dollars in Thousands At and For the 3 Months ended**

**Mar 31 '97 Dec 31 '96 Sep 30 '96 Jun 30 '96 Mar 30 '96**

**Farm Credit System Banks ^2^**

Gross Loan Volume 57,044,815 56,466,631 56,587,082 56,778,256 55,935,408

Formally Restructured Loans ^3^ 273,632 307,530 328,813 314,345 313,013

Accrual Loans 90 or More Days Past Due 16,818 6,283 15,220 45,244 35,302

Nonaccrual Loans 583,049 253,869 292,989 303,742 319,978

Nonperforming Loans % ^4^ 1.53% 1.01% 1.13% 1.17% 1.19%

Cash and Marketable Investments 11,088,751 11,274,574 10,797,050
11,368,932 10,788,273

Total Capital/Total Assets ^5^ 8.54% 8.46% 8.57% 8.39% 8.49%

Total URE/Total Assets 3.94% 3.87% 3.96% 3.83% 3.84%

Total Net Income 155,501 120,947 154,142 160,344 186,801

ROA ^6^ 0.93% 0.71% 0.90% 0.94% 1.13%

ROE ^6^ 10.79% 8.23% 10.57% 11.18% 13.22%

Net Interest Margin % 1.62% 1.60% 1.62% 1.71% 1.79%

Operating Expense Rate ^7^ 0.52% 0.73% 0.60% 0.61% 0.61%

**Associations (excluding FLBAs)**

Gross Loan Volume 33,779,492 34,062,673 33,792,140 33,105,217 31,144,834

Formally Restructured Loans 83,062 87,959 90,451 94,413 99,158

Accrual Loans 90 or More Days Past Due 44,947 21,775 18,345 45,157
48,535

Nonaccrual Loans 391,334 390,935 442,427 455,525 458,034

Nonperforming Loans % 1.54% 1.47% 1.63% 1.80% 1.94%

Total Capital/Total Assets ^5^ 17.15% 16.69% 16.55% 16.63% 17.37%

Total URE/Total Assets 12.65% 12.06% 12.11% 12.02% 12.36%

Total Net Income 166,927 160,551 142,343 149,676 170,737

ROA ^6^ 1.90% 1.76% 1.57% 1.75% 2.09%

ROE ^6^ 11.02% 10.46% 9.44% 10.28% 11.90%

Net Interest Margin % 3.50% 3.39% 3.28% 3.50% 3.72%

Operating Expense Rate 1.77% 2.01% 1.82% 1.91% 1.96%

**Total Farm Credit System ^8^**

Gross Loan Volume 61,968,000 61,178,000 60,909,424 61,178,699 60,405,383

Formally Restructured Loans 230,000 246,000 264,543 272,723 298,738

Accrual Loans 90 or More Days Past Due 61,000 28,000 34,264 84,614
82,918

Nonaccrual Loans 974,000 645,000 735,411 759,227 778,085

Nonperforming Loans % 2.04% 1.50% 1.70% 1.83% 1.92%

Total Bonds and Notes 62,571,000 62,343,000 62,045,482 62,857,224
61,406,717

Total Capital/Total Assets ^5^ 14.50% 14.32% 14.24% 13.80% 13.79%

Total Surplus/Total Assets 10.19% 9.91% 9.82% 9.47% 9.36%

Total Net Income 303,000 250,000 288,595 307,521 354,167

ROA ^6^ 1.61% 1.34% 1.54% 1.66% 1.96%

ROE ^6^ 11.33% 9.51% 11.14% 12.21% 14.46%

Net Interest Margin % 2.91% 2.93% 2.90% 3.00% 3.14%

Source: Call Reports and Reports to Investors

^1^ Some of the previously published quarterly data have been restated
to include subsequent adjustments.

^2^ Includes Farm Credit Banks, the Bank for Cooperatives, and the
Agricultural Credit Bank.

^3^ Excludes loans past due 90 days or more.

^4^ Nonperforming Loans are defined as Nonaccural Loans, Formally
Restructured Loans, and Accrual Loans 90 or More Days Past Due.

^5^ Total capital includes protected borrower stock. References to
capital in text do not include protected borrower stock (\$124 million
at March 31, 1997).

^6^ Income ratios are annualized.

^7^ Defined as operating expenses divided by average gross loans,
annualized.

^8^ Cannot be derived through summation of above categories due to
intradistrict and intra-System eliminations. Data rounded in Report to
Investors starting with December 31, 1996.

**Major Financial Indicators by District^1^**

***Tom R. Risdal***

Dollars in Thousands At and For the Quarter Ended March 31, 1997

Allowance Cash

Gross for and Earned Total

Total Loan Nonaccrual Loan Marketable Capital Net Net

Assets Volume Loans Losses Investments Stock ^2^ Worth ^3^ Worth

**Farm Credit System Banks**

Wichita 4,809,324 4,004,869 45,541 132,355 809,707 345,725 321,431
667,156

Texas 4,228,502 3,647,570 30,778 46,640 504,276 100,738 247,501 348,239

Western 4,927,041 4,065,663 0 22,977 723,846 199,321 172,084 371,405

AgriBank 16,859,634 13,449,135 128,771 217,305 3,348,259 566,466 776,348
1,342,814

AgAmerica 6,976,815 6,082,378 38,601 49,693 802,721 562,377 390,856
953,233

AgFirst 9,081,969 7,581,282 0 8,467 1,355,297 298,682 314,932 613,614

CoBank 19,118,512 15,872,054 204,473 215,589 3,181,293 840,042 473,171
1,313,213

St. Paul BC 2,764,138 2,341,864 134,885 65,616 363,352 229,304 36,020
265,324

Total 68,765,935 57,044,815 583,049 758,642 11,088,751 3,142,655
2,732,343 5,874,998

**Associations (excluding FLBAs)**

Wichita 818,145 745,738 5,664 24,576 15,179 52,389 150,467 202,856

Texas 827,453 769,052 15,408 26,144 4,027 58,412 155,393 213,805

Western 4,886,677 4,612,824 57,600 108,908 34,759 146,303 638,880
785,183

AgriBank 12,911,303 12,108,748 88,125 237,193 68 349,611 1,681,846
2,031,457

AgAmerica 6,107,740 5,586,715 87,021 277,744 32,626 144,572 824,261
968,833

AgFirst 8,534,660 8,208,294 106,765 245,707 4,226 272,045 1,338,725
1,610,770

CoBank 1,861,874 1,748,121 30,751 48,616 6,468 70,881 280,152 351,033

Total 35,947,852 33,779,492 391,334 968,888 97,353 1,094,213 5,069,724
6,163,937

**Farm Credit System Totals**

75,274,000 61,968,000 974,000 1,811,000 11,818,000 2,041,000 7,671,000
10,914,000

^1^ Aggregations of district data may not equal totals due to
eliminations.

^2^ Includes protected borrower stock.

^3^ Includes net unrealized gains/losses on investments available for
sale.

Glossary

As used herein, the following terms have the following meanings:

**ACA---**Agricultural Credit Association, the successor association
resulting from an FLBA/PCA merger

**ACB---**Agricultural Credit Bank, the successor Bank resulting from a
BC/FCB merger

**Associations---**FLBAs, FLCAs, PCAs, and ACAs

**Banks---**the FCBs, the ACB, and the BC

**BC---**Bank for Cooperatives

**Consolidated Bank Debt Securities---**debt securities issued by a
combined Bank group pursuant to Section 4.2(c) of the Farm Credit Act

**Farm Credit Act---**Farm Credit Act of 1971, as amended

**FCA or Agency---**Farm Credit Administration

**FCB---**Farm Credit Bank

**FCS or System---**Farm Credit System

**FLBA---**Federal Land Bank Association

**FLCA---**Federal Land Credit Association, an FLBA that has been
granted direct-lending authority

**Funding Corporation---**Federal Farm Credit Banks Funding Corporation

**GSE** - Government-Sponsored Enterprise

**Insurance Corporation---**Farm Credit System Insurance Corporation

**Insurance Fund---**Farm Credit Insurance Fund, maintained by the
Insurance Corporation pursuant to the Farm Credit Act

**IS---**information systems

**OPDRC**---Office of Policy Development and Risk Control

**PCA---**Production Credit Association

**RCD**---Risk Control Division

**ROA** - Return on Assets

**ROE** - Return on Equity

**Systemwide Debt Securities---**Federal Farm Credit Banks Consolidated
Systemwide Bonds, Federal Farm Credit Banks Consolidated Systemwide
Medium-Term Notes, Federal Farm Credit Banks Consolidated Systemwide
Discount Notes, and any other debt securities that may be issued by the
Banks pursuant to Section 4.2 (d) of the Farm Credit Act

**URE** - Unallocated Retained Earnings

**USDA**---U.S. Department of Agriculture

**Copies Available from**

**Office of Congressional and Public Affairs**

**Farm Credit Administration**

**McLean, Virginia 22102-5090**

**(703) 883-4056**

[^1]: Spread refers to the difference between interest rate yield on
    earning assets and the cost of interest-bearing debt.

[^2]: The assets in the Insurance Fund and the capital related thereto
    are designated as "restricted assets" and "restricted capital,"
    respectively. The classification of the Insurance Fund as restricted
    capital is based on the statutory requirement that the amounts in
    the Insurance Fund, which is under the control of the Insurance
    Corporation, are to be used solely for purposes specified in the
    Farm Credit Act of 1971, as amended, all of which benefit, directly
    or indirectly, System institutions.

[^3]: Farm Credit Administration regulations restrict the exposure that
    Farm Credit institutions can have to individual borrowers.

[^4]: The Loan Account Reporting System (LARS) database is used to
    identify portfolio concentrations in specific commodities. The
    commodity associated with each loan in the LARS database is the one
    that accounts for at least 50 percent of the producer\'s sales. If
    no commodity produced on a farm amounts to at least 50 percent, the
    farm is placed in a more general category, such as grain, field
    crops, general farms-primarily livestock, etc. Hence, a loan
    identified as a corn loan may be the obligation of a farmer with as
    little as 51 percent of sales from corn and as much as 49 percent
    from soybeans or hogs. Yet the farmer is identified as a corn
    farmer. Although this definitional factor may be considered a
    limitation to the LARS data for analyzing commodity concentrations,
    the LARS information is still useful in identifying significant
    exposures to specific commodities.

[^5]: This report does not cover concentrations in loans to
    cooperatives.

[^6]: Previous changes include interstate branching of national banks,
    which became effective June 1, 1997, and various modifications
    granted by other legislation over the past decade or more.

[^7]: A recent USDA report to Congress (reference 10) concluded that
    neither changes proposed by the FCS nor ones proposed by commercial
    banking interests would achieve significant improvement in rural
    financial markets, which, the study concluded, have been performing
    rather well. However, the study did not cover how future financial
    restructuring might affect these markets.

[^8]: In a similar vein, Federal Reserve Governor Meyer stated, "The
    primary standard by which all modifications \[of banking
    authorities\] should be measured is the benefit to consumers of
    financial services." (Remarks by Federal Reserve Governor Lawrence
    H. Meyer at the 99th Assembly for Bank Directors, Southwestern
    Graduate School of Banking, January 24, 1997.) Former Federal
    Deposit Insurance Corporation (FDIC) Chairman Ricki Helfer, speaking
    to Women in Housing and Finance on May 20, 1997, said, "the only
    interest the bank regulatory agencies should serve is the public
    interest."

[^9]: Commercial bank, thrift, and credit union charters may also be
    granted by the States. However, the option of Federal charters, and
    the interchangeability of many provisions and benefits, indicates a
    national policy concern.

[^10]: See reference 10, supporting this conclusion.

[^11]: In addition, the FCS institutions are described as
    instrumentalities of the United States, are listed as mixed-
    ownership Government corporations under the Government Corporations
    Control Act, and are subject to U.S. General Accounting Office
    audit. These attributes may contribute to the market perception of
    FCS securities. However, they receive no appropriated funds, and
    extensive safeguards have been established to limit any potential
    Federal liability.

[^12]: In the current good economic times, both the U.S. Treasury and
    institutions that compete with the FCS have suggested that GSEs may
    not be needed any longer, should be restricted in the ways they
    compete, or should be stripped of GSE attributes (privatized). This
    rationale tends to treat GSEs as public and treat commercial banks
    as private, a treatment questioned earlier in this article.

[^13]: Federal Reserve Governor Meyer describes the commercial bank
    safety net as deposit insurance, the discount window, and payment
    system guarantees. He says, "The result is that banks are, in
    effect, subsidized by the Government." (See citation in footnote 8.)
    The FCS has investor insurance and GSE attributes.

[^14]: Remarks of Comptroller of the Currency, Eugene A. Ludwig, before
    the New York State Bankers Association, June 17, 1996.

[^15]: Remarks of Eugene A. Ludwig before the annual Financial Services
    Forum of the New York State Bankers Association. Washington, D.C.,
    March 13, 1997.

[^16]: Oral Statement of Eugene A. Ludwig before the Subcommittee on
    Capital Markets, Securities and Government Sponsored Enterprises of
    the House Banking and Financial Services Committee, March 5, 1997.

[^17]: Remarks by Federal Reserve Governor Lawrence H. Meyer at the 99th
    Assembly for Bank Directors, Southwestern Graduate School of
    Banking, January 24, 1997.

[^18]: Remarks of Federal Deposit Insurance Corporation Chairman Ricki
    Helfer at FDIC symposium entitled History of the Eighties: Lessons
    for the Future. Arlington, Va., January 16, 1997.

[^19]: Testimony of Chairman Alan Greenspan before the Subcommittee on
    Financial Institutions and Consumer Credit of the House Committee on
    Banking and Financial Services, February 13, 1997.

[^20]: Testimony of Chairman Ricki Helfer at hearing on Financial
    Modernization before the Capital Markets, Securities and Government
    Sponsored Enterprises Subcommittee of the House Banking and
    Financial Services Committee, March 5, 1997.