The Canadian government has asked banking regulators to review whether the nation’s biggest agricultural lender is taking on too much risk, according to a person familiar with the matter.
The finance and agriculture ministries requested the review of Farm Credit Canada by the Office of the Superintendent of Financial Institutions, which regulates the country’s banks, said the person, who asked not to be identified because the information isn’t public.
Farm Credit Canada, which is owned by the federal government, makes loans to individuals and farming businesses to buy land, inputs, livestock and equipment. Its loan portfolio has grown more than 400 percent since 1997 to C$24.9 billion ($24.2 billion), accounting for nearly 30 percent of the farm debt in the world’s 11th-largest economy. Canada is the world’s largest exporter of wheat after the U.S.
The review follows moves by Finance Minister Jim Flaherty to give OSFI power to monitor risks being taken by another government agency -- Canada Mortgage & Housing Corp. -- the organization that insures residential mortgages.
“FCC is a prudent and responsible lender that is committed to its customers and the long-term viability of the agriculture and agri-food industry,” Farm Credit Canada spokesman Trevor Sutter said by e-mail. “Our risk models indicate the level of risk on new loans, and the strength of the overall portfolio has never been better.”
OSFI spokesman Rod Giles referred questions to the agriculture ministry. Joel Taguchi, a spokesman for Agriculture Minister Gerry Ritz, said by telephone the government routinely reviews entities such as FCC. He said he couldn’t confirm that FCC is being reviewed.
“Government entities are routinely examined as part of proper oversight,” Bram Sepers, a spokesman for Minister of State for Finance Ted Menzies, said in an e-mail. “That is responsible, prudent and routine action by a government.”
FCC’s activities may be taking business from private lenders and undermining the stability of the Canadian financial system by encouraging farmers to take on risky loans, according to a Feb. 6 report by the C.D. Howe Institute, an independent Toronto-based research organization.
Some products offered by FCC, such as loans that do not require repayment of the principal, are similar to subprime mortgage loans, said the report, written by Philippe Bergevin and Finn Poschmann.
“Given the risks involved for FCC, farmers and for the economy at large, it would be prudent for Canadian regulators to monitor the situation more closely,” Bergevin and Poschmann said.
Outstanding farm debt rose 6.4 percent in 2011 to C$69.7 billion, continuing a steady increase since 1993, according to Statistics Canada data. Federal government agencies accounted for 29 percent of lending, while chartered banks such as Royal Bank of Canada accounted for 36 percent. Credit unions held a 16 percent share.
The largest single share of farm debt by a single bank was about 8 percent, Maura Drew-Lytle, a spokeswoman for the Canadian Bankers Association, which represents banks including Royal Bank of Canada (RY), Toronto-Dominion Bank and Bank of Nova Scotia said in an e-mail.
The OSFI review will hopefully clarify whether FCC has been gaining market share through risky lending, said Marion Wrobel, the CBA’s vice president of policy. “The government and taxpayers, who are ultimately on the hook, should know that,” he said by phone from Toronto.
It would be ironic if the government, while attempting to support rural communities, actually exposes farmers to greater risk, Wrobel said. “We saw that in the residential housing market in the United States. It wasn’t just financial institutions that suffered because of bad lending practices. It was homeowners.”
FCC’s lending may also be inflating asset values in the industry, Bergevin and Poschmann said. The average value of Canadian farmland increased 8.6 percent in the first half of last year, a record pace, according to Farm Credit Canada figures.
FCC is “financially strong,” with equity and loan-loss reserves of C$3.73 billion, the agency said in its annual report for the year ended March 31, 2012.
The agency has a portfolio and credit risk division that monitors the potential for financial losses, and the board of directors is responsible for approving its credit-risk tolerance, according to its annual report.
FCC had C$588 million in bonds outstanding at the end of last year that were backed by the government, according to its website. Since 2008, it has financed itself by borrowing directly from the government.
FCC, based in Regina, Saskatchewan, was founded in 1959. The agency’s lending authority was expanded in 1993 and again in 2001, according to its annual report. The most recent changes enabled it to lend to businesses that aren’t owned by farmers and offer venture-capital financing.
In addition to farmers, the agency lends to suppliers and processors who “support primary producers,” including equipment manufacturers and marketing firms, the report said.
The changes to CMHC’s oversight made last year require that OSFI check the housing agency’s finances at least once a year. Flaherty also added two government deputy ministers to the agency’s board of directors.
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