Title: STATEMENT OF POLICY; REQUEST FOR COMMENTS--Statement of Policy on System Institution Activities Involving the Potential for Nonexclusive Territories
Issue Date: 04/13/1994
Agency: FCA
Federal Register Cite: 59 FR 17543

Statement of Policy on System Institution Activities Involving the Potential for Nonexclusive Territories

ACTION: Statement of policy; request for comments.


SUMMARY: The Farm Credit Act of 1971 (1971 Act) gives the Farm Credit Administration (FCA) broad powers to issue and amend the charters of Farm Credit System (System) institutions and regulate the exercise of their powers. In most instances since 1933 the FCA has issued charters and regulations that authorize institutions to provide their services in exclusive territories. The FCA Board has determined that since the agency may be requested to issue nonexclusive charters in the future or to modify the regulations governing out-of-territory activities, the FCA Board should adopt a policy statement setting forth its views on nonexclusive territories. The FCA Board is requesting comments on its views.

DATES: Comments must be submitted on or before [June 13, 1994].

ADDRESSES: Comments should be mailed or delivered (in triplicate) to Kenneth D. Smith, Executive Assistant to FCA Board Member Gary C. Byrne, Farm Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-5090. Copies of all comments received will be available for examination by interested parties in the offices of the Farm Credit Administration, 1501 Farm Credit Drive, McLean, Virginia.

FOR FURTHER INFORMATION CONTACT: Kenneth D. Smith, Executive Assistant to Board Member Gary C. Byrne, Farm Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-5090, (703) 883-4010, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: The 1971 Act authorizes the FCA to issue and amend the charters of System institutions and regulate the exercise of their powers. Included in this authority is the ability for the FCA to issue or amend charters or promulgate regulations that would result in increased competition among System institutions. The issue of competition among System institutions arises, typically, in two types of situations. First, charters could be issued [*17544] authorizing two or more System institutions to extend the same types of credit services to the same types of customers in the same geographic territories; such charters have typically been issued as a result of mergers or other chartering actions requested by institutions. Second, institutions could be authorized by regulation to engage in certain activities outside of their chartered territories.


Although the FCA has broad authority to issue charters that authorize two or more institutions to serve the same territory, exclusive charters have been the general practice since 1933. n1 The exceptions to this general practice are worth noting. Prior to the Agricultural Credit Act of 1987 (1987 Act), at least four types of competition existed at various times as follows:
n1 The Emergency Farm Mortgage Act of 1933 (1933 Act) authorized the chartering of production credit associations (PCAs) and other institutions. FCA, generally, has issued PCA charters with exclusive territories.

(1) Nonexclusive Charters

The 1916 Federal Farm Loan Act (1916 Act) authorized the creation of numerous National Farm Loan Associations, predecessors to the Federal land bank associations (FLBAs). Few, if any, of these associations had exclusive territories. Most of the charters involving nonexclusive territories were issued prior to 1933. At one time, there were about 5,000 FLBAs. As a result of mergers and territorial realignments, only a few FLBA charters with nonexclusive territories remain, all in the Texas District.

(2) Competition Between Short- and Long-Term Lenders

The potential for intra-System competition has always existed between the long-term lender (Federal land bank/FLBA) and the short- and intermediate-term lender (Federal intermediate credit bank/production credit association/agricultural credit association) (FICB/PCA/ACA) serving the same territory because of overlapping lending authorities.

(3) Specialized Association Charters

In the early days of the System, FCA granted certain associations authority to finance specific commodities over wide geographical areas (often statewide) resulting in the issuance of charters with the same territory as other associations in the area. Only two of these specialized lending charters remain: two ACAs on the east coast have full authority in an exclusively chartered area and very limited authority in broader areas.
In addition, a small number of other nonexclusive charters were granted. Very few of the other nonexclusive charters granted during this early period still exist, and they are primarily located in New Mexico, a small area of California, and Nevada.

(4) Competition Created By Statute

The 1916 Act created parallel long-term mortgage credit systems to serve both commercial banks and direct retail customers: A system of cooperative mortgage banks and a system of joint stock land banks owned by investors. The former evolved into the Federal land banks (now the farm credit banks or agricultural credit banks) and the latter no longer exist. n2

n2 In 1993, similar systems were created to serve cooperative borrowers (the banks for cooperatives) and short-term production credit users. The production credit system consisted of the PCAs, FICBs, (now the farm credit or agricultural credit banks), and a system of production credit corporations (which no longer exist).
In addition to these existing forms of competition, the 1987 Act contained several provisions that have resulted in competition among System institutions:

(1) Section 411

This section provided that PCAs and FLBAs sharing substantially the same territory were required to vote on whether to merge. These mergers led to five ACAs with nonexclusive charters in areas where the parties merging did not have identical territories. The FCA Board also provided any association that no longer had exclusive territory as a result of such mergers an opportunity to become an ACA. Several of the associations affected by these "411 mergers" subsequently became ACAs.

(2) Section 413

This section required a merger vote by the 13 banks for cooperatives (BCs). Eleven of the 13 banks voted to merge, resulting in the creation of three BCs with the same territory.

(3) Section 433

This section authorized certain associations to change their affiliation from one Farm Credit Bank (FCB) to another. The district FCB from which the association shifted retained its chartered authority to continue to serve the area through other existing or newly created associations. However, competitive charters cannot be issued in these areas unless the affected parties give their consent. So far, no competitive association charters have resulted from this provision.

In addition to these statutory authorities, there are certain restraints on the FCA's authority to issue competitive charters.

First, following passage of the 1987 Act, the FCA Board granted charters to institutions serving the same territory in those situations arising from mergers that were specifically required to be voted on by the 1987 Act or as necessary to provide for a level playing field as a result of those mergers. However, because of concerns surrounding the potential for competitive situations arising from the 1987 Act, the FCA Board determined it would not issue competitive charters, other than as required by statute, until it had thoroughly reviewed the issue.

Second, the law specifies certain circumstances in which the FCA may only grant competitive charters if all of the institutions affected by the proposed charter grant their approval. Those circumstances involve:

(1) The territories where associations changed their affiliation from one FCB to another in accordance with section 433 of the 1987 Act; and

(2) The States of Mississippi, Alabama, and all of Louisiana except the territory served by the Northwest Louisiana PCA.

With the exception of those situations discussed above where an institution must obtain the consent of another institution, the law does not prohibit institutions from requesting "competitive charters." Indeed, the 1971 Act does not directly address the issue of competition among System institutions. Instead, the Act concerns itself with the purposes, operating objectives, and authorities of the System and its regulator. When the agency receives these requests it must act on them, based on an analysis of all relevant facts, and arrive at a reasonable conclusion that is consistent with the purposes of the Act. In the first few years after passage of the 1987 Act, most of the FCA's decisions involving competitive issues were associated with the merger of unlike associations to become ACAs. In the last few years, the competitive issues coming before the FCA have involved banks as well as associations. In addition to matters involving charters, competition issues have arisen in the context of out-of-territory authorities provided for by regulations. By this policy statement, the FCA Board now expresses its views on how the agency will approach decisions that may involve competition among System institutions. [*17545]

Recent Analysis

In 1990, the FCA contracted with consultants to review the issue of competition within the System and provide the FCA Board with options to consider. In 1991, as a part of its legislative initiative, the FCA Board recommended to Congress that the 1971 Act be amended to require that ACA charters contain exclusive territory. In 1992, the FCA Chairman appointed FCA Board Member Gary C. Byrne to lead an internal work group focusing on the issue. This work group analyzed competition from several perspectives and developed a set of recommendations for agency action in the absence of legislative changes.

FCA staff identified advantages and disadvantages of various approaches to the general question of competition within the System and also considered several challenging situations that may (or have) come before the agency:

(1) An association not properly serving its territory;

(2) An association wanting to merge, but potential mergers would involve a charter with nonexclusive territories as a result of an inability to establish congruent territory; and

(3) An eligible customer with operations in two or more association territories wishing to choose which association would best serve his/her needs.

Opinion Interviews

FCA staff interviewed representatives of some of the System institutions that currently have the authority to compete. The purpose of the interviews was to gain insight into how competition is working within the System. Among those interviewed, there was no consensus on either the benefits or disadvantages of competition.

Some interviewees questioned whether "competition" should exist in the current environment. There was agreement among institution managers that customer loyalty to the System plays a big part in maintaining business relationships and, as a result, competing institutions should not do anything that would damage the System's reputation. Most respondents wanted to preserve the funding benefits of the System's Government-sponsored-enterprise (GSE) status. Some association managers wanted to be able to shop for funding from different System banks. Several operational problems relating to the accommodation of competition in the current environment were cited: joint and several liability; System institution board representation; size differential; and common funding through a bank jointly owned by competitors.

In addition to these interviews, FCA staff conducted a limited survey of System farmer-customers, directors, and managers. The sample was relatively small, consisting of 51 respondents of 135 randomly selected, so no definitive conclusions were drawn. The survey was done to get a sense of the nature and extent of support for, or opposition to, intra-System competition. Six questions on the survey represented various positions the agency could take relative to the competition issue. Additionally, the survey respondents were provided the opportunity to write in any comments on the issue and include those comments as part of the survey.

The results of the survey indicated no clear consensus for or against competition. The farmer-customers surveyed were somewhat more likely to favor competition than were the managers and directors. Most System institution managers surveyed were opposed to competition; however, the directors believed that some form of competition would be justified if the farmer-customers were not being adequately served. The only area of consensus was opposition to chartering a new association within the territory already being served by an existing association.

Competition in the Larger Market

FCA staff also reviewed the economic literature on competition. System institutions are participants in the agricultural credit market, which is a part of the broader financial credit market. The financial credit market, generally, is among the most competitive markets in the world, in that no one market participant can control price and availability. While this general competitiveness appears to be true for the agricultural credit market as a whole, there are exceptions in some geographical areas and specialty submarkets. Staff concluded that Government action should not normally be required to ensure that competitive markets for agricultural credit exist, and that Government action might be appropriate if the agricultural credit market in a specific geographical area or agricultural credit submarket were noncompetitive.

Because System institutions compete in the broader agricultural and general credit markets, increasing the amount and nature of competition between and among System institutions could only improve the availability, terms, and price of credit for eligible customers if the overall market for agricultural credit in a certain area were noncompetitive. Therefore, when the local market for agricultural credit is already competitive, the additional economic benefits of increased competition, including competition among System institutions, are likely to be relatively small (although there may be other, noneconomic reasons for such competition). Conversely, when the local market for agricultural credit is not competitive, the economic benefits of increased competition, including competition among System institutions, are likely to be relatively large (although there may be other, noneconomic reasons for avoiding such competition).

Finally, the FCA attempted to determine if there were lessons to be learned or knowledge to be gained by looking at competition between the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). These two GSEs carry an implicit Federal government guarantee. Freddie Mac and Fannie Mae both serve the same market for secondary housing loans and, although both have existed for some time, they have only competed directly against each other since 1990.

Interviews were conducted with representatives from the two GSEs, the Federal government oversight agency, independent rating agencies, and those who do business with both companies. Almost all of the participants believed that competition between the two had yielded extremely productive results, both in the way of new products for housing consumers as well as investors.

The interviewees expressed little concern that the newly acquired ability to compete could force one GSE out of business, thus triggering some Federal response. However, Freddie Mac and Fannie Mae are a duopoly for the market they serve. Between the two, they clearly control the single-family housing, conventional loan secondary market-an enormous market to begin with-which shows every sign of continued growth. Because of the nature of the market, its size, its growth, and the limited number of market participants, vigorous innovation and competition are not surprising.

After considering the work group's analysis, the FCA Board concluded that the FCA's current policy of granting exclusive charters, with limited exceptions, has been generally effective in facilitating the delivery of agricultural credit and related services to eligible customers. However, the FCA Board also recognizes that its current position does not provide for consideration of competitive charters, even if such charters would provide customers with lower cost or higher quality agricultural credit. [*17546] Consequently, the FCA Board proposes to modify its current policy on competition to authorize the issuance of competitive charters when doing so would enhance, beyond the status quo, the availability of the highest quality, lowest cost credit and credit service, on a safe and sound, financially sustainable basis, to eligible customers. The FCA Board invites your comments on the following statement.

Proposed Policy Statement on System Institution Activities Involving the Potential for Nonexclusive Territories
Competition between Farm Credit System institutions can potentially occur as a result of the Farm Credit Administration's (FCA) authority to issue nonexclusive charters and, in some situations, by regulation. As a general rule, the FCA grants charters and issues regulations which do not provide for intra-System competition. The FCA Board continues to endorse this general practice of noncompetitive territories as being reasonable for a cooperatively owned enterprise that competes with a variety of other credit suppliers.

Nevertheless, the degree to which the FCA's authority can influence the level of territorial exclusivity is guided by the overall purposes and, in some cases, the specific direction of the Farm Credit Act of 1971 (Act). Briefly stated, the Act seeks to provide for a customer-owned system of cooperative lending institutions that can provide sound and constructive credit and credit services for agriculture, certain types of rural housing, and utilities while maintaining high levels of safety and soundness as measured by sustained financial viability. If a System institution were to propose a territorial structure or lending authority different from current practice, the FCA's response would be based on how the new proposal meets the purposes of the Act. There may be limited circumstances under which some form of competition would result in higher quality, lower cost service to customers, on a safe and sound, financially sustainable basis.

The purpose of this policy statement is to provide a consistent framework within which the FCA may respond to issues that involve the potential for competition as a result of either charter, regulation, or other request submitted by System institutions.

The FCA Board recognizes that System institution boards may occasionally seek to alter their charters or expand authorities beyond current boundaries to enhance efficiencies or to provide better service to customers. Prior to formally submitting requests, the FCA encourages the adjacent institutions involved to resolve any territorial disputes that may result from the request in a fair and amicable manner. Considerable guidance is provided in FCA regulations concerning routine charter amendments, territorial transfers, and out-of-territory lending. Additionally, the FCA Board encourages the development of innovative proposals to address territorial and competitive issues that are not covered by existing regulation. These may range from one institution granting permission for the other institution to lend to its customers, to reciprocal agreements to compete in each other's territory, to providing some form of compensation for ceded territory, or to enter into some form of joint venture. The FCA will provide assistance, upon request, to enable System institutions to reach agreements on such matters. Naturally, such innovative agreements must be consistent with the Act and FCA regulations.

In the event agreements are not reached, based on the purposes of the Act, the standard for addressing each request involving territorial issues with the potential for intra-System competition is consistent with what is used in deciding all charter requests, that is:

Determine whether or not the proposal will enhance, beyond the status quo, the availability of the highest quality, lowest cost, credit and credit service on a safe and sound, financially sustainable basis to eligible customers.

In determining whether or not the above standard is met, the FCA will analyze a range of factors, as each is deemed relevant to the situation, as outlined in the following categories:

1. Finance and Management

(a) Whether the financial and managerial capacity exists to provide competitive services and generate sufficient earnings so the new enterprise can continue on a sustainable basis.

(b) The degree to which it is evident that the proposal could adversely affect the cost of funds to either the specific institutions involved or the System as a whole.

(c) Whether the proposal will adversely affect the institutions involved, thus creating potential liability for the Farm Credit System Insurance Fund and/or subsequently for banks under joint and several liability.

2. Market Conditions

(a) Whether there is significant information that the market involved is being inadequately served by a System institution.

(b) The extent to which the market involved is being served by other credit sources.

3. Participant Opinion

(a) The views and concerns of the affected System institutions, including, as appropriate, the views of customer-shareholders, recognizing that significant disagreement between members of a cooperative system has the potential for adverse consequences regarding matters for which they are mutually responsible.

Depending upon the situation, other factors, such as the degree to which the FCA's discretion is affected by statutory or judicial considerations or the opinions of outside oversight parties, might also affect the FCA's decision.

The FCA intends to apply this analysis, on a case-by-case basis, to requests that involve charters where two institutions would be serving all or part of the same territory. Similarly, the FCA will apply the same analysis should future efforts occur to promulgate regulations that would expand or change the authorities of institutions to engage in out-of-territory activities.

In the case of charter requests, to ensure that it obtains all of the necessary information, the FCA will develop procedures, including a checklist, regarding the submission of materials. The procedures will include mechanisms that will enable the FCA to solicit and consider the views of System institutions affected by a proposed request. Consistent with the procedures provided, the requesting institution will be expected to make its case that the standard outlined in this policy will be met. The FCA recognizes that, by their nature, some of the factors listed would be addressed by the agency rather than the requesting institution.

While this policy is designed to address the broader issues of the potential for intra-System competition, several years ago the FCA determined that it would temporarily avoid acting on requests for competitive charters until it completed its review of the matter and issued a policy. This policy is designed to achieve that objective. Therefore, following the development of these procedures, the FCA Board will be in a position to entertain charter requests involving the potential for competition in accordance with the principles contained in this statement.

The FCA recognizes that System institutions continue to undergo structural change in their effort to best meet the System's mission. The agency realizes the importance of these changes and will consider each request promptly. [*17547]

Specific Request for Comments

The FCA Board intends to evaluate any matter involving competition among System institutions that comes before it by balancing all relevant factors on a case-by-case basis. The FCA Board specifically invites comments on the factors set forth in the proposed policy statement and on the appropriate analysis of such factors, and asks for suggestions for additional factors or analyses that should be considered by the FCA Board.

No one factor is likely to be dispositive in any given matter, and the FCA Board has set only one specific criterion or standard that must be met in each proposal involving increased competition among System institutions-that the proposal, if approved, would lead to a net overall improvement in the availability, quality, and price of credit and credit services to eligible customers. The FCA Board invites suggestions on the information it should require and the procedures it should use to determine the "availability, quality, and price of credit and credit services" when it is considering a matter involving competition among System institutions.

Dated: April 7, 1994.

Curtis M. Anderson,

Secretary, Farm Credit Administration Board.

[FR Doc. 94-8902 Filed 4-12-94; 8:45 am]