Inflating debt C.D. Howe Institute says FCC supplying excessive credit to the farm sector
A new report by a leading public policy think-tank accuses Farm Credit Canada and other federal financial Crown corporations of “mission creep” by offering services far beyond their original mandates.
The report by the C.D. Howe Institute recommends their authority “should be clearly circumscribed and even rolled back” so private lenders can do more to serve Canadian borrowers.
The report, issued Feb. 6, focuses on three agencies: Farm Credit Canada, the Business Development Bank of Canada and Export Development Canada.
It reserves its strongest criticism for FCC, which ranks second only to chartered banks in the amount lent to Canadian farmers.
The report by authors Philippe Bergevin and Finn Poschmann accuses FCC of inflating farm debt. It argues that, by offering a wide range of financial services, FCC “increases market risks and seems to be supplying excessive credit to the farm sector.”
Because the federal government backstops Crown corporations, FCC’s operations “pose risks to taxpayers and the overall economy — and… these risks seem to have grown in recent years,” the report says.
“In particular, the FCC has grown alongside a rise in the level of farm indebtedness and a bidding-up in farm asset values, including supply-managed farm quotas.”
The report notes FCC’s share of the national farm debt 20 years ago was less than 15 per cent. In 2011, it was 29 per cent, compared to 36 per cent for chartered banks and 16 per cent for credit unions.
The report suggests FCC is an unfair competitor because its capital is provided partly by government. It “does not face the regulatory capital requirements as financial institutions and… it does not pay corporate income tax.”
The report says FCC loans tend to have long amortization periods and higher loan-to-value ratios. The agency also lends extensively to supply management producers who want to buy quota. These practices “raise concerns about the impact of its lending criteria on the level of debt farmers take on” and could “encourage excessive debt buildup or inflate farm asset values.”
Exceeded original mandate
Bergevin and Poschmann say financial Crown corporations were originally supposed to complement the private sector by filling in credit market gaps left by other lenders. Since then, however, their activity has grown far beyond their intended role. As a result, they pose risks to taxpayers and the economy, and should be curtailed because “they have no clear public policy rationale” and “the private sector tends to be better than the government at running a business.”
The report recommends Crown financial corporations should be regulated by the Superintendent of Financial Institutions, as private lending institutions are.
Remi Lemoine, FCC’s chief operating officer, said the agency was never intended to only complement farm lending in Canada, as the report claims.
“When they use the word complementary, what I read in that is they want us to be a lender of last resort, much like we were in the early ’80s,” said Lemoine, speaking by phone from FCC’s head office in Regina.
“The result of that was that FCC almost went broke and taxpayers had to bail it out at that time.”
FCC in the early 1990s was so saddled with bad debts that Ottawa bailed it out and gave it a new mandate with strict instructions to become self-sustaining.
Legislative amendments in 1993 and 2001 allowed FCC to provide a broader range of financial and business management services.
Lemoine said FCC today is financially sound with a $25-billion portfolio and only $125 million in payment arrears, its lowest rate ever.
FCC is such a major farm lender partly because agriculture makes up no more than two per cent of chartered banks’ portfolios, said Lemoine.
He said FCC’s portfolio is made up mostly of mortgage lending and includes very little in operating loans.
Lemoine said FCC and the other corporations are audited by the federal auditor general, which is “the gold standard” in the industry. The auditor general also does an annual review of their financial statements and conducts a regulatory review every five years.