SeptemberOctober 1999 by vbd19928



                 News                                       September/October 1999 • Vol. 1, No. 8

FCA Expects Farm Credit System Financial Condition
To Remain Sound During Next 12 Months
     Under the “most likely” scenario     associations had total assets of         although increasing, have not
for the agricultural environment, the     $2,703 million at June 30, 1999, and     escalated as they did in the 1980s.
Farm Credit System (FCS or System)        were about 6.2 percent of total assets   System institutions have higher
is expected to remain financially         of all direct lending associations. An   capital and loan loss reserves levels
sound during the next 12 months,          association’s risk funds include at-     than in the 1980s and are in a better
according to a recent Stress Analysis     risk capital, surplus, and allowance     position to absorb risks,” he added.
Report prepared by FCA’s Office of        for losses. These eight associations          “Although conditions today are
Examination.                              would not materially impair the          different than those of the 1980s,
     Chief Examiner Roland Smith          safety and soundness of the System       several factors pose risks to System
said, “While the results of this stress   or their funding banks.                  institutions,” Smith said. These
test are relatively positive, FCA                                                  factors include the continuing low
remains cautious on these projec-                                                  commodity prices, poor yields in
tions, particularly over the 24-month                                              drought stressed areas, and uncer-
‘worst case’ scenario. The actual           FCS institutions are in a              tainty regarding the future of Federal
financial condition of the System            better position today to              farm programs. While Congress is
will be influenced by external factors     absorb risks than they were             likely to act this year to provide aid
affecting agriculture that the System                                              to farmers, the safety net for farmers
institutions can not control. These                in the 1980s.                   is shrinking. Government assistance
external factors include low com-                                                  to farmers will be essential to relieve
modity prices, export demand,                                                      the stress in 1999.
weather conditions, and the competi-                                                    Copies of the report are available
tion.”                                         “Today’s economic environment       from FCA’s Office of Congressional
     Under “worst case” conditions        differs from the one that led to the     and Public Affairs, 1501 Farm Credit
projected at June 30, 2001, eight         agricultural crisis of the 1980s,”       Drive, McLean, VA 22101-5090;
associations would have adverse           Smith said. “Interest rates are low      phone, 703-883-4056; e-mail, info-
assets in proportion to risk funds        and stable, farm debt levels are
greater than 90 percent. These eight      moderate, and real farmland values,

Chairman Martin Addresses National Agricultural Credit Committee
     On September 13, FCA Board Chairman Marsha Pyle Martin addressed almost 50 representatives of regulatory
agencies and banking organizations at the National Agricultural Credit Committee’s semi-annual conference in
Chicago. The conference was hosted by the Federal Reserve Bank of Chicago. The committee also holds a confer-
ence in Washington, D.C., during April each year.
     Martin emphasized the need for change in the world of agricultural finance to accommodate the changes taking
place in agriculture, the financial marketplace, related technological innovations, and the rise in partnerships and
alliances. She specifically encouraged more alliances and partnerships between Farm Credit System institutions and
commercial banks.
     Martin concluded her remarks by highlighting the increasing globalization and concentration within agriculture
and the significance of integrated markets. She also quoted Fed Chairman Alan Greenspan on the importance of
agricultural trade to domestic agriculture and the U.S. economy.
Page 2 • September/October 1999                                                                             FCA Newsline

Debate on Allowance for Loan Losses Expected to Have No Significant
Effect on Farm Credit System Institutions
     Farm Credit Administration              ing issues and to strongly encourage      •   In an increasing risk environment,
Chief Examiner Roland Smith                  the parties involved to work together         a conservative approach should be
recently discussed his expectations          to resolve their differences. Conse-          used to establish an adequate but
regarding the effect on Farm Credit          quently, the Federal regulatory               not an excessive ALL;
System institutions of the Financial         agencies and the SEC released a joint
Accounting Standards Board (FASB)            statement in July agreeing on the         •   The ALL evaluation process
guidance on accounting for allow-            important principles of establishing          usually results in a range of
ance for loan losses (ALL).                  and maintaining an allowance for              estimated losses that can be
     “Despite the lengthy discussions        loan losses.                                  considered acceptable, yet the
the FASB statements have generated                The American Institute of                amount selected must be based on
among banking and securities                 Certified Public Accountants is               management’s best estimate within
regulators, I do not expect a signifi-       scheduled to issue a final rule later         the range;
cant change in the FCS institutions’         this year in an attempt to further
accounting for ALL,” said Smith.             clarify the issues surrounding the        •   The ALL evaluation and pertinent
     How to account for loan losses          allowance for loan losses. The FASB           analysis must be well documented
has been a topic of recent debate.           cleared the rulemaking project                and applied consistently from year
The FASB issued Statements No. 5,            during a September 8, 1999, meeting.          to year; and
“Accounting for Contingencies,” and               The Office of Examination’s
No. 114, “Accounting by Creditors for        (OE) position regarding the underly-      •   Given the current agricultural
Impairment of a Loan,” in 1975 and           ing principles on accounting for ALL          environment, any significant
1993, respectively. Those Statements         is highlighted below:                         change in ALL or the ALL process
provide the general principles a                                                           by an FCS institution would
creditor should apply to account for         •   The ALL accounting employed by            prompt OE’s concern.
impairment in a loan portfolio.                  the FCS institutions should comply
     The FASB provided further                   with Generally Accepted Account-           As other Federal regulators, the
guidance on accounting for ALL in                ing Principles (GAPP);                FCA requires all FCS institutions to
its Viewpoints issue of April 1999.                                                    maintain their allowances in accor-
That Viewpoints issue led to discus-         •   The process of establishing an        dance with GAAP. The Office of
sions among the FASB, the Securities             adequate ALL involves a significant   Examination will soon release an
and Exchange Commission (SEC),                   degree of sound management            Informational Memorandum for FCS
and banking regulators. Earlier this             judgment;                             institutions that outlines the Chief
year, Congress held hearings to                                                        Examiner’s expectations on FCS
clarify the loan loss reserve account-                                                 institutions’ accounting for ALL.

  The FCA Newsline is a publication of the
  Farm Credit Administration. It is
  published 10 times a year. Suggestions,
  comments or questions should be sent to:                                                 The Farm Credit Administration is
                                                     Chairman and CEO                      the Federal agency responsible for
  Editor                                             Marsha Pyle Martin                    the regulation and examination of
  Office of Congressional                                                                  the Farm Credit System, a nation-
   and Public Affairs                                                                      wide network of cooperatively
  Farm Credit Administration                          Board Members                        owned agricultural lending institu-
  1501 Farm Credit Drive                                                                   tions and their service organiza-
  McLean, VA 22102-5090                                Ann Jorgensen
  Phone: 703-883-4056                                 Michael M. Reyna
  Fax: 703-790-3260
FCA Newsline                                                                 Page 3 • September/October 1999

Variety of Issues Discussed at FCA Examiner Conference
     FCA examiners from McLean
headquarters and all field offices
attended the Office of Examination’s
(OE) biennial conference in San
Diego, California, August 9-13. FCA
Board Chairman Marsha Pyle Martin
addressed the group and discussed
her vision of the Farm Credit System
and FCA.
     “In my discussions with direc-
tors and officers throughout the
System, I have frequently heard
comments that FCA examinations
add value to the FCS,” Martin told
the examiners. “Anyone can follow a
checklist, but your skills and experi-
ence allow you to go much beyond            Office of Examination Conference participants return for another session after a break. Pictured,
that and to get at the root of any          left to right, are Lynn Major, Sarah Kreger, Allen Moore, all from the McLean Field Office, and
safety and soundness problems.” She         Doug Wheeler, Dallas Field Office.
concluded her remarks by noting the
FCS has a great future in financing              Besides breakout sessions on                 “wealth effect” and the resulting
food and agriculture, and that FCA          examination and credit issues, the                spending patterns of individuals.
examiners will be key to that future        conference featured several outside                    The conference also featured
success.                                    speakers. Bruce Roland of                         three farmer/ranchers who serve on
     Board members Ann Jorgensen            PricewaterhouseCoopers addressed                  the boards of Farm Credit System
and Michael Reyna also attended the         Year 2000 technology issues. He said              institutions—John G. Nelson, III,
conference and provided their               regulatory personnel must take the                Chairman of AgAmerica, FCB;
insights on various issues during a         steps necessary to become an                      Wayne Allen, Chairman of Sacra-
panel discussion. They shared their         integral part of the risk management              mento Valley Farm Credit, ACA; and
views on the future role of FCA and         structure and process.                            John L. Guthrie, Chairman of
the System and discussed the major               Dr. Ed Seifried, professor of                Western Farm Credit Bank. Each
issues facing the Agency.                   economics and business at Lafayette               provided his perspective on the “Role
     “The role of the regulator is          College in Easton, Pennsylvania,                  of a Bank Director” and shared his
changing,” said Jorgensen. “We must         discussed “Economic Forecasts in the              views and ideas on the FCS and
continue to focus on safety and             New Millenium.” He reviewed his                   FCA. They noted FCS directors
soundness, but we also need to              selected economic indicators and                  learned a lot from the crisis of the
develop new and creative ideas on           how to use them to predict eco-                   1980s and are now quicker to
how FCA can improve, and how we             nomic recessions. Seifried pointed                respond to problems. They also
can enable the System to better serve       out that two statistics are providing             pointed out that FCS institutions
agriculture and rural America.”             strong positive signals for the                   today are technically stronger and
     Reyna said FCA’s single biggest        economy—the Index of Leading                      more attuned to forecasting and
asset is its staff. “It is important that   Indicators and the interest rate                  long-range planning.
we have a talented staff that, in           spread between 10-year Treasury                        The conference concluded with
addition to doing a good job of             securities and 90-day T-bills. He                 FCA Chief Examiner Roland Smith
examining and regulating, can spot          said these indicators lead him to                 presenting awards to examiners and
emerging trends and take advantage          believe that an economic recession is             support staff in recognition of their
of the early warning systems we have        not likely to occur before the end of             contributions and achievements.
developed.”                                 2000. Seifried also discussed the
Page 4 • September/October 1999                                                                           FCA Newsline

FCA Board Approves Regulatory Performance Plan
The FCA Board recently approved FCA’s Regulatory Performance Plan for fiscal year 2000. The plan contains the
projected schedule for regulation development during the fiscal year beginning October 1, 1999. The Agency has
placed special emphasis on developing regulations using innovative customer-focused techniques. These include
Advanced Notices of Proposed Rulemaking (ANPRM), Direct Final Rulemaking, Negotiated Rulemaking, Stream-
lined Fast-track Rulemaking, and other methods of gathering additional information from clients and customers. To
streamline the regulatory process, the FCA is also encouraging the public to submit comments on regulatory propos-
als electronically.

FY 2000 Regulatory Performance Plan
Regulation Project/Date                  Type of Action                               Purpose
October – December 1999
Flood Insurance Amendment                 Direct Final    To remove regulatory reference to the Federal Emergency Manage-
                                                          ment Agency’s standard flood hazard determination form and make
                                                          other technical amendments needed.
Stock Issuance                            Proposed        To consider permitting Farm Credit System institutions, including
                                                          service corporations, to issue additional amounts of certain classes
                                                          of stock and allow service corporations to issue non-voting stock to
                                                          non-System institutions.
January – March 2000
Mission-Related Investments               ANPRM           To assist us in developing safety and soundness standards and other
                                                          criteria for mission-related investment activity. We hope to gain
                                                          valuable information in response to the ANPRM that will enable us
                                                          to better address this issue through future regulatory initiatives.
                                                          Mission-related investment activities are those that directly relate to
                                                          agriculture, increase the flow of funds to farmers, ranchers, coopera-
                                                          tives, and rural areas, or otherwise support the ongoing mission of
                                                          the FCS.
OFIs – Risk Weighting of Loans at FCBs    ANPRM           To consider revising the current risk-weighting requirements for OFI
                                                          direct loans and other related changes necessary for the safety and
                                                          soundness of Farm Credit Banks.
Customer Choice                           Final           To provide additional flexibility for borrowers to obtain financing
                                                          from System institutions of their choice and to otherwise de-regulate
                                                          lending restrictions on FCS entities.
Regulatory Burden – Phase II              Notice          To address comments received from the Regulatory Burden Notice
                                                          published in August 1998. Would specifically inform the public of
                                                          the Agency’s rationale for retaining certain regulations due to
                                                          statutory requirements or safety and soundness concerns.
April – June 2000
Loan Participations & Purchases           Proposed        To remove regulatory restrictions affecting the System’s ability to
                                                          purchase interests in eligible loans and address any technical
                                                          changes necessary.
Disclosure – Annual Report                Proposed        To consider eliminating the requirement that FCBs distribute their
                                                          financial reports to the stockholders of their associations.
Standards of Conduct
Plain Language Revision                   Direct Final    To revise existing Standards of Conduct regulations so they are
                                                          written in “Plain Language.”
July – September 2000
Borrower Rights                           Proposed        To revise the borrower rights regulations to provide clarification and
                                                          remove unnecessary burdens.
Termination Regulations                   Final           To establish regulations under which a bank or large association
                                                          within the Farm Credit System can terminate its charter as provided
                                                          in the Farm Credit Act of 1971, as amended.
Mission-Related Investments               Proposed        To develop safety and soundness standards and other criteria for
                                                          mission-related investment activity. Mission-related investment
                                                          activities are those that directly relate to agriculture, increase the
                                                          flow of funds to farmers, ranchers, cooperatives, and rural areas, or
                                                          otherwise support the ongoing mission of the FCS.

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