The Farm Credit Administration is again igniting fears among bankers that Farm Credit institutions may gain the ability to expand beyond the agricultural sector.

The American Bankers Association and Independent Community Bankers of America are rallying members against a proposal they believe would give Farm Credit institutions more leeway to invest in non-farming businesses. They are comparing the proposal to a pilot program withdrawn last year that let the government-sponsored enterprise's institutions invest in non-agricultural enterprises.

The Farm Credit Council, a trade group for the Farm Credit System, has a much different take, arguing that the proposal will actually limit investments. And the Farm Credit Administration also denies that its proposal would authorize the institutions it oversees to make those types of investments.

Still, bankers are voicing their concerns.

"Farm Credit has the potential to grow these investment portfolios quite large," said Mark Scanlan, the ICBA's senior vice president of agriculture and rural policy. "Some of these investments they are talking about would make the system less safe and sound."

The FCA, in July, issued a proposal it said would strengthen regulations governing the eligibility of investments held by Farm Credit banks "by reinforcing that only high-quality investments may be purchased and held." The agency said its proposal would remove requirements related to credit ratings in order to comply with a section of the Dodd-Frank Act.

The agency also proposed changing how it handles investments in the portfolios of Farm Credit associations "to limit the type and amount of investments that an association may hold." Farm Credit banks are a wholesale funding source to the Farm Credit associations, which are essentially retail locations that provide loans to customers.

The FCA's proposal goes beyond Dodd-Frank's requirements and would instead "open the door to institutions to take on more risk," said John Blanchfield, the ABA's senior vice president of agricultural and rural banking.

The proposal, the ABA claimed in a comment letter, would allow Farm Credit banks to seek permission to make investments that go beyond those already allowed. The letter also claimed that the proposal would give the FCA the ability to decide, on a case-by-case basis, whether individual investments have an appropriate amount of risk.

Farm Credit associations would also be allowed to "hold investments for purposes other than managing surplus short-term funds and reducing interest rate risk," which are the only reasons allowed for current investment, the ABA stated, quoting from the new proposal.

Bankers believe the proposal is similar to a pilot that let Farm Credit institutions invest in a range of projects, including nursing facilities, hospitals and fairgrounds. Since the institutions couldn't legally lend to those entities, the investments were often done as privately held bonds.

That proposal was highly controversial, generating more than 10,000 comment letters, the most the FCA had ever received on a proposed rule. It was eventually withdrawn, though the pilot is still being phased out.

If the current proposal is approved, Farm Credit institutions would once again make investments using bonds, Scanlan and Blanchfield said.

"This would be virtually any type of nonfarm lending," Scanlan said. "Will these investments replace bank loans? That's what their intention is. Therefore, it is a threat to community banks."

Farm Credit institutions are a big competitor for City State Bank when it comes to agricultural lending, said Kim Greenland, a market president for the Norwalk, Iowa, bank. But the $275 million-asset City State has also seen Farm Credit get involved in non-farm lending, including a hospital in Mount Ayr, Iowa, that benefited from financing tied to a Farm Credit institution in South Carolina.

Such lending "seems to go beyond any mission that Farm Credit was originally intended to do," Greenland said. "It is a grave concern to us as bankers whether they're operating outside of their original intent. We're all for business and free enterprise, but we'd like an even playing field."

The Farm Credit Council and the FCA, for their part, have said that the proposal would not lead to an expansion of the Farm Credit System's investment strategy.

"Nothing changes as far as the system institutions' authority," said Ken Auer, president and chief executive of the Farm Credit Council. The banking trade groups are "mixing together the mission related investment proposal they previously had on the table that was withdrawn with this. And this is not the same thing."

Instead, the proposal focuses on Farm Credit institutions' ability to buy and hold investments backed by the U.S. government, differing from the pilot's reliance on bonds issued by businesses.

The new proposal, for instance, would allow Farm Credit associations to hold "full faith and credit instruments" to manage concentration risk by diversifying assets. Currently, associations can only hold investments to manage short-term funds and reduce rate risk. It also limits an association's investments to 10% of total outstanding loans. No cap existed before.

"The banks look for the worst-case scenario, and I don't blame them," said Michael Stokke, the FCA's director of the office of congressional and public affairs. "This proposed rule is fairly narrowly drawn."

As the previous pilot program winds down, Farm Credit institutions will have to get approval from the FCA on a case-by-case basis to pursue future opportunities, Stokke said.

The comment period is now closed for the current proposal. The FCA will "look at the comments and will decide if a final rule is appropriate," Gary Van Meter, the agency's director for the office of regulatory policy, said.

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