Rabobank Group's bold bid to buy one of the Farm Credit System's largest lenders collapsed more than a year ago, but regulators clearly have not forgotten about it.
The board of the Farm Credit Administration, which regulates the Farm Credit System's 101 members, has proposed regulatory changes that observers say would make it harder for lenders to leave the system.
The agency said it is trying to clear up the uncertainty that arose during Rabobank's attempt last year to buy Farm Credit Services of America of Omaha. It said changes are needed because under the current regulations the final decision about whether a lender can leave the government-sponsored Farm Credit System is taken out of the regulator's hands.
Bankers say the Farm Credit Administration has proposed the changes to protect its turf by preventing lenders it regulates from merging with private-sector banks.
"We would tend to label this as an anti-termination proposal. Its clear intent is to ensure that no entity ever leaves the system," said Mark K. Scanlan, the Independent Community Bankers of America's director of agricultural finance.
It is unclear if all Farm Credit lenders are on board with the Dec. 8 proposal, which would add several steps to the charter termination process. Officials at several large lenders would not comment for this story, saying they had not had time to review it.
One who did comment was Tom Welsh, the chief administrative officer of the $19.3 billion-asset AgFirst Farm Credit Bank of Columbia, S.C. He acknowledged that the proposed changes would make leaving the system harder, but said they would make the process of terminating a charter more transparent to stockholders.
Publicly traded companies have had to create similar transparency in complying with the Sarbanes-Oxley Act, Mr. Welsh said. "I would see it as being in line with what the understanding of appropriate disclosure is in today's marketplace," he said.
Kenneth E. Auer is the president of the Farm Credit Council, a trade group that represents Farm Credit lenders. The group's position is that no institution should be allowed to leave the system, and it supports regulation that would make it harder to do so, Mr. Auer said.
Ultimately, though, he would like to see Congress amend the Farm Credit Act to prevent individual institutions from privatizing.
"If the system wants to change its status, all the system institutions should do it together," Mr. Auer said.
But Michael M. Reyna, who was the Farm Credit System's top regulator from January 2000 to May 2004, said member institutions should at least have the option to go private. He said he worries that the latest proposal might discourage them from even considering it.
"What would be inappropriate would be for the regulator to set the standard so highly it would prevent an institution from departing," Mr. Reyna said. "It is actually against the free-market system."
Congress created the Farm Credit System in 1916 to give farmers and ranchers a lender of last resort. Its lenders are exempt from paying federal income taxes and have access to low-cost funding through the government-sponsored Federal Farm Credit Banks Funding Corp.
Banks view the Farm Credit System as unfair competition. Its lenders, they argue, use their tax-exempt status to undercut banks on loans and steal their best customers.
In August 2004, Farm Credit Services of America, which had about $8 billion of assets at the time, stunned the agricultural lending community when it announced it had struck a deal to sell itself to Rabobank. It was the first time a private-sector bank tried to acquire a Farm Credit System lender.
Less than two months later, facing intense opposition from lawmakers, other Farm Credit lenders, and even some of its own shareholders, Farm Credit Services called off the deal with the Dutch giant.
Still, the episode prompted the Farm Credit Administration to take a closer look at its termination rules.
Current rules for leaving the Farm Credit System call for institutions to first notify the regulator, then submit a plan of termination that included its proposed stockholder disclosure. After the Farm Credit Administration approves or rejects the plan and the disclosure at the same time, the stockholders vote.
No lender has left the system under such regulations. California Livestock Production Association left it in 1991 but was allowed to do so by provisions specifically included for it in the 1990 farm bill. It is now Stockmans Bank of Elk Grove and has assets of $372 million.
Andrew Jacob, the director of the Farm Credit Administration's office of regulatory policy, said the current process does not comply with the Farm Credit Act. It combines the approval of the plan and disclosure, so the regulator and the stockholders have too little time to consider a plan of termination, he said.
The proposed changes would require the directors of an institution that want to leave to vote three times. First they would have to vote to adopt a commencement resolution stating the institution's plan.
Next they would have to vote to adopt and submit a termination plan to their regulator and to distribute that plan to the shareholders once the regulator said the disclosure was clear enough. Then, if the Farm Credit Administration approved the disclosure language in the plan, the board would have to vote to pass a reaffirmation resolution to terminate the charter.
These changes would separate the Farm Credit Administration's approval of the shareholder disclosure from its approval of the plan, Mr. Jacob said. The agency would vote twice on an application: once on the shareholder disclosures and then on the termination once the shareholders agreed to it.
"When you think about some of the experience we had with the one notice of potential termination, we wanted to update the termination procedure based upon on our experiences … to ensure that it consistent with the statute," Mr. Jacob said.
The proposal has been sent to Congress for review. After that it will be published in the Federal Register for a 60-day comment period.
