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FDIC warns of 'emerging' wholesale-funding trend among ag, CRE-heavy banks

Some community banks with higher concentrations of agricultural and commercial real estate lending are becoming more reliant on wholesale funding, including brokered deposits and listing services, according to the FDIC.

Speaking at the FDIC Advisory Committee on Community Banking, Rae-Ann Miller, associate director of the Division of Risk Management, said a recent study shows wholesale funding is an "emerging trend" among institutions that exceed supervisory criteria.

George French, deputy director of the Division of Risk Management Supervision, noted that a reliance on wholesale funding was a risk factor for bank failures during the crisis. French said there is "nothing inherently wrong" with the practice, but that a "confluence" of concentrated and rapidly growing loan portfolios with reliance on wholesale funding is a "risky mix."

"They can help match imbalances between prudent lending opportunities and core-deposit availability in the local markets," French said. "They can also help banks that are trying to match maturities between assets and liabilities. … Part of the difficulty in assessing the risks off-site is that we really need to understand the risks the banks are taking on the asset side."

Miller said it has been proven that aggressive CRE growth and poor risk management, underwriting and loan-administration practices were the primary causes of bank failures during the crisis, especially for institutions that relied on wholesale funding.

She said that while wholesale funding is down at most financial institutions, it remains the highest for those with higher concentrations of CRE. Risk factors, she said, include low cap rates, particularly in the multifamily segment.

Agriculture-heavy banks' reliance on wholesale funding has "increased quite a bit" in the last eight years, Miller said. She said agriculture loans are increasing after being flat during the crisis.

"We think this may be in part a way to meet the increasing loan demand from farmers in response to their distressed farm income," Miller said.