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Rabobank Opposes FCA Proposed Amendments to Exit Provisions

Rabobank filed comments Monday opposing the Farm Credit Administration's proposed amendments to its termination regulations under which a Farm Credit System bank or association can apply to terminate its FCS status.

The ag lender attempted to acquire Farm Credit Services of America in 2004 but was pushed out of the deal after widespread controversy erupted about a private lender purchasing a government entity.

Cor Broekhuyse, Regional Head of Rabobank International in the Americas, says, "The overall effect of the FCA's proposed changes would be to make the termination process so onerous as to make it virtually impossible for any institution to terminate its System status - in effect, a de facto prohibition on any institution ever exiting the System, which would be contrary to the explicit intent of Congress. Such a result would also prevent FCS stockholders from ever realizing the substantial value of the equity built up in their FCS institution, of which they are the owners."

Rabobank also believes, however, that there is an inherent contradiction between, on the one hand, the motivation behind the FCA's proposed changes, which is to strengthen the System's protections and barriers to ensure its continued ability to fulfill its government-mandated mission of serving farmers and rural America; and, on the other hand, the System's desire for broader powers in order to serve a larger market well outside its historical mission, as expressed in the Horizons project.

"In fact, many FCS institutions today are already behaving as private sector banks, lending to very large corporate borrowers, often publicly traded companies with limited ties to agriculture," says Robert Bucklin, head of Corporate Banking for Rabobank International in North America. "In doing so, they are aggressively competing against private sector banks on an unfair, government-sponsored, virtually tax-free basis. As supporters of the free market system, we believe that it is unfair for FCS institutions to use their virtually tax-free status and low GSE-sponsored cost of funds to compete in the same arena as other tax-paying, non government-sponsored banks."

Rabobank says that, at the very least, this practice creates a very uneven playing field and violates the principles of the free market system; and at worst, it could be viewed as a misuse of taxpayer dollars, an abuse of the System's Congressional mandate, or perhaps even regulatory negligence.

The lender says equally troublesome is the current practice of many FCS institutions of promising very substantial patronage payments to large corporate borrowers in exchange for being allowed to make loans that are highly sought after by private sector banks. Rabobank says it is inappropriate and unfair for FCS institutions to promise huge patronage payments to large companies who have only become stockholders as part of their recent borrowing arrangement, when the farmers who have been stockholders and customers of that FCS institution for decades are earning just a fraction of that amount in their patronage payments.

Rabobank also believes that such aggressive competition for private sector loans seems to demonstrate that System institutions are concentrating more on serving large corporate borrowers in a very liquid commercial market, and not focusing enough on serving the young, beginning and small farmers who comprise its core historical constituency.

"The System cannot expect to have 'higher walls' and increased protections, as well as lower barriers and greater freedoms. In short, the FCS cannot be both a GSE-advantaged, virtually non tax-paying entity and a free market competitor," a statement from the company says.

Rabobank says system entities should either relinquish their tax-advantaged status and compete on a level playing field with all other commercial lenders; or they should adhere to the System's original Congressionally-mandated mission, which continues to be meaningful and valid. The FCA as regulator must enforce that mission and prevent any lending activities that fall outside that historical mandate. Those FCS institutions who wish to pursue broader lending activities should be allowed to exit the System, in accordance with FCA regulations, which Rabobank's suggestions as contained in its comment will ensure are effective and reasonable, and without the tax advantages and government support provided to the FCS as a government-sponsored entity.