[Federal Register Volume 59, Number 71 (Wednesday, April 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8902]


[[Page Unknown]]

[Federal Register: April 13, 1994]


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FARM CREDIT ADMINISTRATION
 

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

AGENCY: Farm Credit Administration.

ACTION: Statement of policy; request for comments.

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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 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.

Background

    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 1933.1 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:
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    \1\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.
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(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.2
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    \2\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).
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    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.

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. 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.

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]
BILLING CODE 6705-01-P