The Federal Reserve Board recently issued supervisory expectations for management of agricultural credit risk (SR 11-14). The guidance is both evolutionary and an important break from prior practice.
The substance of the guidance builds on both Federal Reserve experience with agricultural banks, particularly during the farm crisis of the 1980s, and prior Federal Reserve guidance. Indeed, the guidance is cast as a “reminder.”
The break from practice comes before the text of the guidance. In an impossible-to-miss box, the supervisory letter reads:
Applicability to Community Banking Organizations: This letter applies to all banking organizations with signiﬁcant exposure to agriculture-related credit risk, including those with $10 billion or less in consolidated assets.
This sentence seems mundane. It is not. It answers the question, “Does this guidance apply to me or not?” The language the Federal Reserve has used historically to answer this question has more typically been, “This guidance should be applied as appropriate to all banking organizations supervised by
the Federal Reserve, taking into account each organization’s size, nature, and complexity.”
This historical approach continues to have a place in supervisory guidance. Sometimes guidance really does apply to all banks. Implementation of the guidance is key to
right-sizing supervision of community banks.
Sometimes, however, the thrust of guidance is sufficiently tangential to the vast majority of community banks, or alternatively large banks, that the historical approach confuses the issue. In these cases, the clarity of the new box and language should help.
One sentence at the start of supervisory guidance will not eliminate ambiguity.
What should banks and bank holding companies do when they remain unsure how to comply? Institutions supervised by the Federal Reserve should contact us. On the safety and soundness side, state member banks and select holding companies have relationship managers charged with answering questions. Some of these institutions also direct questions to speciﬁc consumer exam contacts; however, all of our supervised entities can also call the consumer hotline at 612-204-6500 with compliance-related questions.
I can understand the reluctance that some bankers have in asking supervisors questions. The contact should, however, make life easier for bankers. It may clarify whether an elaborate plan or process or engaging a consultant is necessary. In most cases, it is not. Contact may dispel the need to create elaborate new processes or hire additional staff or consultants.
Feel free to call or write with any comments or questions you have. I can be reached at Ron.Feldman@mpls.frb.org or 612-204-5000.