A merger pending between two Farm Credit System banks is heightening fears that the government-sponsored lenders are becoming even tougher competitors for agricultural banks.
Denver-based CoBank announced last week that it intends to buy $2.4 billion-asset St. Paul Bank for Cooperatives in a stock swap valued at $319 million. The $21 billion-asset post-merger bank would be the largest among the six remaining Farm Credit banks.
Driving the merger, in part, is a proposal by the Farm Credit Administration to let Farm Credit System lenders compete against one another for customers. Under current rules, the FCA assigns geographic boundaries or restricts banks' products to prevent internal competition.
St. Paul Bank, which lends to farm cooperatives in the Upper Midwest, views the proposed rule change as a sign that system banks should "get lean, get mean, and get out there"-something St. Paul could not do by itself, said Philip Erickson, the bank's general counsel.
St. Paul also wants to continue serving its customers, many of which have gone through mergers themselves and now have credit needs too large for St. Paul to meet, Mr. Erickson said.
CoBank also maintains that bigger is better. Its board has agreed to expand through mergers or affiliations with other Farm Credit lenders, said Jack Cassidy, senior vice president.
"Additional consolidation within the Farm Credit System is a way to achieve operating efficiencies and better serve our customers," he said.
Mergers within the Farm Credit System should concern agricultural bankers, many of whom already complain that the governmentsponsored lenders undercut them on loan rates, said Bert Ely, a critic of the Farm Credit System.
"There will be increased aggressiveness from banks trying to grow their resources," he said.
Though CoBank lends only to farm cooperatives and utilities-not individual farmers-its nationwide network of lenders would make it a leading candidate "to begin cherry-picking larger ag credits everywhere," wrote Mr. Ely in the latest issue of Farm Credit Watch, a newsletter he writes for the American Bankers Association.
Mr. Cassidy said CoBank has no plan to go head-to-head with agricultural banks for small credits. However, it does participate in loans of $10 million and more.
Internal competition could be allowed among Farm Credit lenders as early as next year. This month the Farm Credit Administration submitted the proposed rule for review by Congress.
Both the ABA and the Independent Bankers Association of America oppose the rule.