We recognize that with specialization comes a certain amount of expertise and efficiency. That's why it makes sense that the 93 institutions that make up the Farm Credit System are in a unique position to evaluate, purchase and then service the outstanding farm loans of failed commercial banks.
We were surprised to learn, however, that the Farm Credit Administration, the independent federal agency that regulates the system, bans those transactions. But earlier this month, the FCA's governing board voted to adopt a rule that would lift that ban. After the rule passes through a few more administrative hoops, the Farm Credit System banks will be able to pick up those loans.
Last year, 140 commercial banks failed in the United States. That compares to 25 in 2008 and three in 2007. According to the Federal Deposit Insurance Corp., 50 banks have failed to far this year, putting failures in 2010 on pace to exceed last year's figure.
The failure of rural banks that are heavily vested in ag loans can put significant strain on farmers and ranchers, and it can be difficult for the FDIC to find buyers for those assets.
That's what happened in the case of New Frontier Bank in Greeley, Colo. When it failed in April 2009, it held about $500 million in farm loans. New Frontier reportedly held loans on one-third of Colorado's dairy farms. State regulators closed the bank when no buyer could be found. That left farmers scrambling to find banks willing to buy their old loans or issue new lines of credit.
While the situation was made worse because as many as 90 percent of New Frontier's farm borrowers had debt that exceeded the value of their assets, other local and regional commercial banks were overwhelmed by the sheer volume of farmers seeking new loans.
While many commercial banks might bid on the mortgage and consumer loan businesses of a failed bank, far fewer are interested in taking on farm loans. Banks without sizable ag portfolios lack the expertise to evaluate farm businesses, nor do they have an understanding and appreciation of the cyclical nature of the industry.
The Farm Credit System lenders understand farming and ranching. By purchasing and servicing these ag loans, the system will help FDIC more quickly liquidate the assets of failed banks while keeping viable farm and ranch businesses in operation. That, in turn, will help keep suppliers and other vendors in business, and the economies of those rural communities that much stronger.