The Federal Deposit Insurance Corp. may soon have another option for resolving failed banks whose assets include farm loans. Traditional banks are not welcoming the expected change.

The Farm Credit Administration is set to vote Thursday on a proposal to let its 96 system lenders bid on pools of failed-bank assets, as long as the pool is overwhelmingly based in agriculture. Such pools are often left behind when the FDIC can't find a buyer for the whole bank. Nonetheless, banks appear to be irritated at the notion of having to compete with Farm Credit lenders over the dregs.

The Farm Credit System, a government-sponsored entity, has long been a point of contention among farm bankers. As those bankers see it, system lenders have progressively moved beyond their mission of providing a stable credit environment for farmers. System lenders can best traditional banks on price, because of lower funding costs and minimal tax liability.

To some bankers, letting those lenders bid on failed-bank assets would just be one more area where more mainstream banks would be at a competitive disadvantage.

"Agriculture is a mature market, so they are always looking for alternative things to finance in order to grow," said Fred Bauer, the president of Farmers Bank in Alt, Colo. "They have their noses in too many places already. This would be just another example."

The rule — proposed last May — would allow system lenders to chase the pools of loans that the FDIC retains, often in the case of a pay out. Farm Credit lenders would not have the ability to bid on whole banks because they are not allowed to take deposits. The Farm Credit Administration declined to comment for this story.

To be sure, farm loans have largely been left out of the current crisis. Data from Trepp LLC, which bought Foresight Analytics last year, shows that 10 agricultural banks — or those with 25% or more exposure to agriculture — are on its watch list of 1,548 troubled banks. Another 10 banks are on its "near watch" list.

However, there has been one noteworthy farm-bank failure: the $2 billion-asset New Frontier Bank in Greeley, Colo. The FDIC was unable to find a buyer for New Frontier and ultimately bundled its agricultural portfolios into two loan pools. The first pool received 38 bids and was sold at 25 cents on the dollar. The second pool received 34 bids, selling at 30 cents on the dollar.

According to the FDIC, farm loans provide an additional challenge in resolution. When a farmer at a failed bank has revolving lines of credit, there is an immediate need to find a new lender because livestock needs to be fed and fields need to be plowed, unlike vacant home lots.

Kenneth Auer, the president of the Farm Credit Council, a trade organization, said that banks should welcome the possibility of Farm Credit lenders bidding on the assets of failed banks, because more competition means less of a hit to the Deposit Insurance Fund.

"From the bankers' perspective, higher bids ultimately benefit the FDIC, which funds itself with premiums that banks pay," Auer said in an interview Tuesday.

Banks are not the typical participants in asset sales, said Chip MacDonald, a partner at Jones Day in Atlanta. Essentially, the proposed rule would give Farm Credit lenders the ability to bid on the assets that banks passed on, he said.

"We are looking at the remnants here, and most banks aren't big participants in the failed-bank asset market," MacDonald said. "From the FDIC's standpoint, this is a great idea."

The proposed rule has received 92 comment letters, mostly from bankers like Bauer.

Additionally, the American Bankers Association and the Independent Community Bankers of America have both questioned the legality of the proposed rule.

"This is an issue that Congress has never deliberated on," Mark Scanlan, the director of the ICBA's Office of Agriculture and Rural Policy, said in an interview Tuesday. "The FCA pulled this out of thin air, but has no legislative ability to do this."

John Blanchfield, a senior vice president at the ABA, has long accused the Farm Credit Administration of circumventing the legislative process through administrative rulemaking.

"It is a classic FCA move," Blanchfield said in an interview Monday.

"Congress gave them the authority to oversee a very specific charter," Blanchfield said. "But this is another example of a regulator reaching way beyond what Congress intended to provide a business opportunity to its lenders."

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