Annual Report - CoBank

Reputation Risk ManagementReputation risk is the risk to earnings and capital arisingfrom negative public opinion. Such risk encompasses the lossof confidence, trust and esteem among customers, investors,partners, policymakers, shareholders and other keystakeholders. Like all businesses, the Bank is subject to a widevariety of reputation risk factors both within and outside itscontrol, including credit difficulties with individual customersor industries, business disputes, lawsuits, credit marketdisruptions, regulatory events and public allegations ofmisconduct against employees. As a member of the FarmCredit System, the Bank could be indirectly impacted byevents that damage the reputation of another System entity.The Board of Directors and management regard theBank’s reputation as a critical asset and have implemented anumber of policies, procedures and programs to ensure it iswell protected. The controls and processes surrounding creditrisk, interest rate risk, liquidity risk and operational risk alsomitigate reputation risk by lowering the likelihood ofsignificant problems in each of those areas. In addition, theBank has a formal crisis communications plan in place inorder to help it manage communications with stakeholders ifan unplanned, reputation-impacting event occurs. The Bankalso has a variety of initiatives in place to ensure thatcustomer-owners are communicated with openly and haveaccess to the information they need to accurately evaluate theBank’s overall business and financial performance.Furthermore, customers, Farm Credit partners and others haveregular access to members of the Board of Directors andmanagement through numerous meetings and events held bythe Bank throughout the year.We place considerable emphasis on ethical behavior andensure that our employees receive regular training related tobusiness ethics, fraud identification and prevention,compliance with laws and regulations, and informationsecurity. In addition, as discussed on page 140, each year allemployees certify their compliance with our AssociateResponsibilities and Conduct Policy. Finally, the Bankactively supports and participates in the Farm Credit System’sreputation management committee, which consists ofrepresentatives of banks and associations from across theSystem.Other Risk FactorsJoint and Several Liability for the Debt of theFarm Credit SystemWe, along with the other banks in the System, obtainfunds for our operations primarily through participating in theissuance of Systemwide Debt Securities by the FundingCorporation. Systemwide Debt Securities are the joint andseveral liabilities of the System banks and are not obligationsof, nor are they guaranteed by, the U.S. government or anyagency or instrumentality thereof, other than the Systembanks. Under the Farm Credit Act, each System bank isprimarily liable for the portion of the Systemwide DebtSecurities issued on its behalf. At December 31, 2011, wewere primarily liable for $53.8 billion of Systemwide DebtSecurities. Additionally, each System bank is contingentlyliable for Systemwide Debt Securities of the other Systembanks. At December 31, 2011, the total aggregate principalamount of the outstanding Systemwide Debt Securities was$184.8 billion.Although the System banks have established mutualcovenants and measures, which are monitored on a quarterlybasis, there is no assurance that these would be sufficient toprotect a System bank from liability should another Systembank default and the Insurance Fund be insufficient to cure thedefault. See Note 15 to the accompanying consolidatedfinancial statements for a more complete description of theinterbank agreements among the System banks.The Insurance Fund, which totaled $3.4 billion as ofDecember 31, 2011, is available from the InsuranceCorporation to ensure the timely payment by each Systembank of its primary obligations on Systemwide DebtSecurities. Under the Farm Credit Act, before joint and severalliabilities can be invoked, available amounts in the InsuranceFund would first be exhausted. There is no assurance,however, that the Insurance Fund would have sufficientresources to fund a System bank’s defaulted obligations. If theInsurance Fund is insufficient, then the remaining Systembanks must pay the default amount in proportion to theirrespective available collateral positions. Available collateralapproximates the amount of total shareholders’ equity of theSystem banks.To the extent we must fund our allocated portion ofanother System bank’s portion of the Systemwide DebtSecurities due to a default, our earnings and totalshareholders’ equity would be negatively impacted. TheInsurance Corporation does not insure any payments on oursubordinated debt, preferred stock or common stock. SeeNote 5 to the accompanying consolidated financial statementsfor more information about the Insurance Fund.Our Funding Costs Could Be Negatively Impacted byDowngrades of the Long-Term U.S. Sovereign CreditRating and the System’s Long-Term Debt RatingAs a member of the System, we have historicallybenefited from the favorable funding costs and fundingflexibility associated with the debt securities issued throughthe Funding Corporation. We (as well as the other Systembanks) are not legally authorized to accept deposits andtherefore cannot use deposits as a funding source. Instead, weraise funds for our operations primarily through SystemwideDebt Securities issued on our behalf by the FundingCorporation.CoBank 2011 Annual Report54