Second, the act required us to study the feasibility and appropriateness of three specific options to increase FCSIC’s powers to (1) directly or indirectly assess association capital, (2) assess supplemental insurance premiums, and (3) establish a risk-based insurance premium system. We reviewed the basis for FCA’s 1991 legislative recommendations pertaining to increased powers for FCSIC. Two of these issues have diminished since 1991. Additionally, in our view, it is especially important that FCA set adequate capital standards for the banks and that any problems be promptly identified and resolved to minimize threats to the Insurance Fund. If the System avoids major losses in the next several years and the Insurance Fund reaches the Secure Base Amount, the Fund should continue to grow gradually because of its investment income, even though no premiums are assessed. Assuming that a repayment program might extend over a period of years, FCSIC could reduce the federal subsidy by paying interest to the Treasury on the unpaid balance. Specifically, the first option of authorizing FCSIC to assess the capital of the Farm Credit associations could provide additional short-term protection to the Insurance Fund, investors in System debt, and taxpayers. Finally, the third option, authorizing FCSIC to charge premiums that are more fully based on risk, would be a useful complement to FCA’s risk-based capital requirements. The investment income earned by FCSIC on this $260 million, or any unpaid balance, represents a continuing federal subsidy, because FCSIC is not required to pay interest to the government.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO reviewed the appropriateness and major advantages of three proposals to increase the Farm Credit System Insurance Corporation's (FCSIC) oversight powers over its Insurance Fund.

What GAO Found

GAO found that: (1) authorizing FCSIC to assess association capital would provide short-term additional protection to the Insurance Fund, investors, and taxpayers, but reasons for increased FCSIC power have diminished and granting this authority could destabilize the Fund if the authority were used during a period of financial stress; (2) the Farm Credit Administration (FCA) needs to set adequate capital standards for system banks and supervise and resolve any threats to the Fund; (3) FCA has not demonstrated that giving FCSIC supplemental premium authority is needed; (4) giving FCSIC supplemental premium authority could reduce the system's ability to compete, increase its instability, and reduce banks' ability to pay supplemental premiums; (5) if the system avoids major losses, it should reach a secure base amount and continue to grow gradually through investment income; (6) authorizing FCSIC to charge higher premiums to banks that are most at risk could create additional incentives for banks to manage risk prudently and complement FCA risk-based capital requirements; and (7) FCSIC should be required to pay interest on the $260 million used to start up the Fund, since this interest represents a continuing subsidy.