FCSIC’s Risk Profile
FCSIC’s Insurance Fund is exposed to a variety of risks, some inherent in insuring financial institutions and others specific to the System. Examples of specific events that could increase risk to the Insurance Fund include the following:
- Material reduction in System bank capital
- Material adverse change in the System banks’ ability to access debt markets
- Catastrophic operational failure at a System institution related to a control deficiency or cybersecurity breach
- Inadequate governance at a System institution, such as a failed business strategy or mismanagement of the organization
- Significant, rapid, or unexpected credit deterioration resulting from adversity in the agricultural sector
Major categories of risk monitored by FCSIC include the following:
Credit risk - the risk of default on a debt that may arise from a borrower failing to make required payments. Credit risk includes consideration of loan concentrations and other broad elements of System institution portfolios. FCSIC primarily focuses on credit risk issues affecting the underlying agricultural borrowers’ ability to repay their debts to individual System institutions. These risks include the following:
- Changes in farmland values
- Price volatility for agricultural commodities
- Changes in government support programs for agricultural producers
- Changes in supply and demand for U.S. agricultural products
- Changes in international trade and the value of the U.S. dollar
- Changes in production costs
- Changes in the domestic economy that affect incomes from off-farm jobs
- Climate, weather, and other environmental conditions
- Availability of agricultural workers
Liquidity risk - the risk that an institution may be unable to meet short-term financial demands without unacceptable losses. The System relies on its ability to regularly issue new debt obligations in part to pay maturing obligations. The System banks also hold liquidity investments that are available if needed. A significant disruption in the System banks’ ability to issue new debt obligations or sell liquidity investments would impair their ability to repay insured obligations. FCSIC has procedures in place to provide liquidity assistance to System banks if external market circumstances make it likely that the banks will be unable to pay maturing insured obligations.
Interest rate risk - the risk that changes in interest rates may reduce the value of assets with a consequent negative impact on operating results and financial condition.
Operational risk - the prospect of losses resulting from inadequate or failed procedures, controls, systems, or policies, including employee errors, systems failures, or fraud or other unauthorized activity. Operational risk also includes inadequate defenses against cyber-threats.
Strategic risk - the risk that a failed business strategy, decision, or series of decisions leads to losses.
Structural risk - the risk related to the design of the Farm Credit System. For example, as a lender to a single industry (agriculture), the System has a built-in concentration risk. Also, any changes to the System’s fundamental organization, such as an alteration in the supervisory relationship between System banks and associations, or diminution of the two layers of loss absorbing capital, may create risk to the Insurance Fund.
Reputational risk - the risk resulting from events that affect the reputation of the System or the agriculture industry. Such events may affect the System’s funding costs depending on market reaction.
Political risk - the risk of loss of support from federal and state governments. This includes any change in government support for government-sponsored enterprises.
For a discussion of the risk environment in 2023, please review the Annual Report .
For a detailed discussion of FCSIC’s strategic challenges, please review the Strategic Plan.