Intermediate Credit Banks

views updated

INTERMEDIATE CREDIT BANKS

INTERMEDIATE CREDIT BANKS. A system of unified Federal Intermediate Credit Banks (FICBs) was created with the passage of the Agricultural Credits Act on 4 March 1923.The twelve regionally dispersed inter-mediate credit banks received an initial infusion of $60 million in capital from the U.S. Treasury and were established as separate divisions of the Federal Land Banks, with the intention of providing a permanent source of seasonal production credit for agriculture and livestock production.

In the early 1920s Federal Reserve policy had shifted toward tighter credit, and country banks were reluctant to lend to farmers due to the precipitous decline in farm commodity and land prices (which had peaked in 1920) and the large proportion of agricultural loans already on their books. In response to these credit conditions, declining demand for their products, and the liquidation of the War Finance Board (which had discounted agricultural paper on an emergency basis from 1921 to 1923), agricultural interest groups, such as the American Farm Bureau Federation, began to clamor for more dependable and improved sources of credit. The authorizing legislation that created the FICBs in 1923 was passed in response to the intensive lobbying efforts of the "Farm Bloc," a bipartisan coalition of congressmen.

The FICBs were authorized to provide credit for the production of crops and livestock, for cooperative marketing of staple agricultural products, and for the cooperative purchase of farm supplies. To carry out these functions, the banks could sell collateral trust debentures to increase their capital stock, discount agricultural paper, and make loans to cooperative associations. Loans typically had short maturities and could not exceed three years by law.

The initial impact of the banks was limited. Loans and discounts outstanding at the end of 1929 totaled approximately $76 million, but the loans amounted to less than 2 percent of all non–real estate agricultural loans outstanding in that year. In part, this was due to their design. The credit banks were not authorized to make loans directly to individual farmers. Instead, local cooperative marketing associations, finance corporations, and livestock loan companies provided FICB funds indirectly to farmers. However, throughout the 1920s, these agencies complained about the cumbersome loan procedures of the credit banks and did not utilize them extensively. The rediscounting function of the banks also proved to be unprofitable for country banks relative to Federal Reserve banks since caps on their profit margins were imposed.

The Farm Credit Act of 1933 significantly altered the federal farm credit system; it created twelve production credit associations to assist the FICBs in reaching out to individual farmers. By executive order in that same year, supervision of the banks was also transferred from the Federal Farm Loan Board to the Farm Credit Administration (FCA).Despite these changes, through 1970, FICBs never provided more than 2 percent of the non–real estate agricultural loans outstanding.

In 1988 Federal Credit Banks were created by merging the FICBs with Federal Land Banks. The Federal Credit Banks were authorized to extend loans to Production Credit Associations, Agricultural Credit Associations, and Federal Land Credit Associations, and to make long-term real estate mortgage loans in areas not serviced by direct lenders. These banks are owned and operated by their member-borrowers and have elected boards that guide the institutions' policies and ensure compliance with the FCA's regulations.