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Federal Intermediate Credit Banks 
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

The 12 Federal Intermediate Credit banks were established in 1923 under Title II of the Federal Farm Loan Act, as amended.  They were intended to discount or purchase short-and intermediate-term notes of farmers and ranchers held by commercial banks and other financing institutions.  These organizations, however, did not fully use the services available to them, nor, it was held, did they adequately provide for the production credit needs of agricultural producers.  Consequently, in 1933 the Congress passed the Farm Credit Act of 1933, which authorized farmers to organize local credit cooperatives, called Production Credit associations, which could discount farmers' notes with the Federal Intermediate Credit banks.

The capital stock of the Federal Intermediate Credit banks (FICBS) is owned by the Production Credit associations (PCAs).  The stock of the associations is owned by farmers and ranchers.

The Farm Credit Act of 1971, enacted in December, 1971, consolidated and updated the various acts under which the units of the Farm Credit System operate.

Lending Operations.

The Federal Intermediate Credit banks provide funds for financing bona fide farmers and ranchers, producers or harvesters of aquatic products, rural residents, and persons furnishing to farmers and ranchers services directly related to their on-farm operating needs.  They make loans to and discount paper (maEagle Tradersg in not more than seven years) for various types of financing institutions, including Production Credit associations, national and state banks, agricultural credit corporations, incorporated livestock loan companies, and other similar institutions, with their endorsement.  The Federal Intermediate Credit banks may also participate as primary lenders with the 135 Production Credit associations and other Federal Intermediate Credit banks in making loans.

In addition to their operations in discounting agricultural paper, the Federal Intermediate Credit banks supervise and assist the Production Credit associations in making sound credit available in rural areas.  The Federal Intermediate Credit banks have compiled an outstanding operating record - no loss has been sustained on any loan made since 1933, and no loss has ever resulted from a loan to a Production Credit association.  FICBs derive their funds through issues of stock (only PCAs may hold voting stock) and sale of participation certificates.  A large portion of their loans are made for production purposes and mature within a year.  Farm and rural home loans, however, may have terms of up to 10 years, and loans to producers and harvesters of aquatic products may be made for up to 15 years.

Production Credit Associations.

The Production Credit associations are primary lenders which provide borrowers with short- and intermediate-term credit for operating, capital, and other needs.  Loans from Production Credit associations may vary from a few months in maturity up to seven years.  Production Credit associations may participate with commercial banks in making loans to farmers.

A Production Credit association must obtain prior approval from its district Federal Intermediate Credit bank for any loan it intends to discount if the loan exceeds 15% of the capital structure of the association.  In turn, any loan that exceeds 35% of the association's capital structure must be approved by the Farm Credit Administration.

As primary lenders, Production Credit associations must sustain all losses to the extent of available resources.  In their years of operations, losses have amounted to only a fraction of 1% of cash advanced.  In all Farm Credit districts, the associations have adopted either mutual loss sharing or participating loan plans or both.  These agreements, which have been in existence for several years, have the effect of putting the net worth of the Production Credit associations more directly behind the net worth of the Federal Intermediate Credit banks and their outstanding debentures.

Production Credit associations are controlled by their borrowers through elected boards of directors.  Borrowers are required to invest in the capital stock of the associations in an amount equal to 5% of their loans.  The associations, in turn, invest equal amounts in the capital stock of their district Federal Intermediate Credit bank.

Participation by Commercial Banks.

It is reported that more banks are resorting to PCAs as a source of credit, but that many banks are hesitant to participate with PCAs in loans for two reasons.  First, PCAs are competitors for such loans.  Second, commercial banks wishing to participate with PCAs in loans must comply with one of the following terms:  (1) at least 50% of the loan must be retained, (2) at least 10% of each loan must be retained as long as the ratio of agricultural loans to total loans is not materially reduced, or (3) the maximum amount of the participated loan permitted to which the bank is subject is retained.

Farm Credit System Financing.

Securities serving as financing media for the Farm Credit System are consolidated systemwide notes and bonds, the joint and several obligations of all 37 Farm Credit banks.  All of the issues are backed by collateral requirements equal to the amount of securities outstanding, which consist of the following types:  discount notes of 5- to 270-day maturities sold daily in denominations of $50,000, $10,000, and $1,000,000; six- to nine-month bonds sold each month; and longer-term bonds sold in January, April, July, and October, and as system's needs require.  Bonds are issued in book-entry form, with denominations of $1,000 for maturities of over 13 months and $5,000 for shorter maturities.  The Farm Credit banks are authorized to issue bonds and notes to a maximum of 20 times the capital and surplus of the banks.  The bonds are eligible investments for national banks and state member banks of the Federal Reserve System as well as federal savings and loan associations and federal credit unions, lawful investments for fiduciary and trust funds of the U.S. government, and eligible as security for all public deposits.  Taxwise, the bonds and interest therefrom are exempt from state, municipal, and local income taxes, but subject to federal taxation.

Commercial banks are reportedly the largest single group of investors in Farm Credit System securities.

RestrucEagle Tradersg.

The AGRICULTURAL ACT OF 1987 mandated a restrucEagle Tradersg of the Farm Credit System which required the FEDERAL LAND BANK and the FEDERAL INTERMEDIATE CREDIT BANK in each Farm Credit district to merge.  The resulting FARMCREDIT BANK will be a federally chartered instrumentality of the United States with corporate powers similar to those formerly held by the FLB and the FICB.  Each Farm Credit bank will elect a board of directors in accordance with its bylaws.  At least one member of the board will be elected by the other directors and shall not be a director, officers, employee, or stockholder of any system institutions.


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