(See table 1.4.) In conducting this study, we were asked to consider the impact of FCB mergers on the following factors: (1) any economy of scale benefits, (2) the level of services provided, (3) the cooperative nature of the System, (4) the issuance of System-wide bonds, (5) the bank-association relationship, and (6) jointly provided services. Most District Costs Are Incurred at the Association Level

Although the initial FCB mergers focused on bank-level operating cost savings, association costs comprise most of the districts’ operating costs. Officials of merged FCBs generally expected their associations to offer the same or a wider variety of services to borrowers. Although we found no evidence that FCB mergers would affect the System’s cooperative nature, mergers could change the way certain cooperative principles are applied. If the merged banks choose to increase the services and loan products offered in each district before the merger, some associations could enjoy greater flexibility in servicing their borrowers’ needs. (See table 3.2.) Related to the System’s cooperative nature is its tradition of local control, which refers to associations making lending, credit, and operational decisions with member-borrowers having an active voice in decision-making through their election of peers to serve as directors on association and bank boards. FCB mergers would enhance local control if the merged banks promoted association autonomy and encouraged borrower involvement. Merged banks may also experience local differences in merged districts. Mergers Have an Impact on Association Voting Strength and Number of Elected Bank Directors

An FCB merger increases the number of associations affiliated with a single bank and dilutes individual association voting strength. FCB Mergers Could Significantly Affect How Banks and Associations Relate

Of all the factors covered by our study, the bank-association relationship is likely to be most affected by FCB mergers. Since support services provided by the banks facilitate association operations, there may be some indirect impact on member-borrowers. Conclusions

FCB and association relationships vary throughout the System; therefore, certain FCB mergers could affect some bank-association relationships.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO examined the potential impact of Farm Credit Bank (FCB) mergers on Farm Credit System borrowers and associations, focusing on the: (1) economies of scale; (2) level of services offered by FCB associations; (3) System's operation as a cooperative; and (4) bank-association relationship.

What GAO Found

GAO found that: (1) cost savings from FCB mergers through economies of scale may be difficult to realize, since the associations incur most of the district operating costs and their increased costs could more than offset any savings at the bank level; (2) associations in merged districts are expected to offer the same or increased services based on their borrowers' demands, but the banks can withdraw approval for existing services after merging; (3) mergers between certain FCB could affect the application of certain cooperative principles; (4) local control of merged FCB will continue, since local borrowers serve as association and bank board directors; (5) an individual association's influence will be diluted by the mergers, since each association will have proportionally fewer bank directors; (6) local control may increase as FCB lessen their supervision of associations which generally enjoy greater autonomy in operations; (7) FCB mergers should have little impact on systemwide bond issues, since all banks remain liable for the bonds; (8) FCB mergers could significantly change some bank-association relationships due to the merging of banks with varying oversight practices and association support services, but these changes may not directly affect member-borrowers; and (9) FCB mergers could spur jointly provided support services by reducing the number of entities involved and encouraging uniformity in borrower services.