Institutions do not fail from a lack of capital or earnings it’s the lack of liquidity that puts the nail in their coffins. No amount of financial regulation will save an institution, if they find themselves in a crisis brought on by a credit event of their own making.  That is unless there is an outside savior.  My comments in no way lessen those facts of life. But, liquidity should be looked at holistically with all aspects of financial management.

FCA should consider aligning the investments held in FCA’s Liquidity Reserve with the FBRA’s HQLA for the LCR. The ANPR lays out arguments for doing so based on the recent liquidity shown by money markets instruments and investments in diversified investment companies.  FCS banks in stressed circumstances must be able to convert its investment into cash as quick as possible to meet a short term liquidity crisis.

The days liquidity ratio has worked well for the System but It could be enhanced to include FCS banks’ unfunded commitments with some FCA determined risk factors. These risk factors could be somewhat similar to the ones used in the FBRA’s LCR rules. Is a minimum 90 days liquidity still sufficient for all banks including CoBank with its large retail loan portfolio?  In reality this measure only buys a short time for the System to find solutions to any liquidity crisis.

The Basel III Liquidity rules are overly complex for only 4 FCS Banks that are examined every 12 months by FCA’s Capital Market Specialist. These examiners have specialized training in capital, earnings, liquidity, and balance sheet interest rate sensitivity.  They are the FCA’s experts in asset-liability management and it’s related risks. I do not see need for the LCR and the NSFR and the regulatory burden posed to the System. These examiners are required to identify weaknesses in the financial management of an institution and follow-up on required recommendations in FCA’s Report of Examinations. These specialized examiners develop an intimate understanding of a bank’s financial management and operations. If the number of FCS banks were much larger there would be a greater need for the standardization rules in the FBRAs LCR and NSFR rules.

Unfunded commitments, VACP, H-stock, and Bank investment bonds all pose potential liquidity problems for FCS banks in a stressed economic environment.  The unfunded commitments especially those of large agribusiness firms pose the far greater problem and for that reason should be included someway Into the days liquidity measure. While VACP, H-stock, and bank investment together pose a lesser risk to System bank liquidity that does not preclude those banks from analysis of look-through risks of their affiliated associations. These association program risks should be evaluated along with mitigation strategies in each System banks liquidity contingency plan

Do not enact standard debt ratios for the System’s debt structure. Capital Market Specialist examiners are in a better position to monitor bank debt structure and its impact to liquidity.  These examiners also look at overall System debt structure through their examination of the Funding Corporation. Again there are only 4 Banks, not hundreds. The Days Liquidity measure while simple actually makes banks monitor their debt structures because more short term debt increases the need for more liquidity as that that short term debt is rolled-over.  Bank earnings are also driven by their long term debt, excessive amounts of long term debt and its additional costs impact a bank’s competitiveness to offer loans to its customers.

I do not mean to downplay liquidity management at a bank but as previously stated should be viewed holistically with all aspects of financial management of an institution. I am also aware Basel III Capital was adopted as a request from the System (the FCA concurred), has their been a request to adopt Basel III Liquidity?  With that said FCA should always consider enhancements for System Liquidity it feels necessary.  I am just not sure the costs of implementing Basel III Liquidity would be all that beneficial to the farmers, ranchers, and cooperatives served by the System. Again we are only taking about four institutions that have liquidity challenges.

To recap, yes further align FCA’s investment held with the FBRAs HQLA LCR. Look for a way to include unfunded commitments in the days liquidity measure.  Require FCS banks to include a look-through analysis of their affiliated associations to capture potential liquidity risk posed by VACP, H-stock, and bank investment programs. Finally is a Basel III Liquidity Framework really necessary given all the cost to farmers, ranchers, and cooperatives served by the System? Is their a simpler way to accomplish the same goal? 
 
 
John C Floyd, Jr
Private Citizen
Parker, Colorado
Sent from my iPad