The Agricultural Lending Industry: Commercial Banks and the Farm Credit System

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The Agricultural Lending Industry Commercial
Banks and the Farm Credit System

• Chapter 8

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Commercial Banks

• In US today there are 8,000 independently
  chartered banks.
• Chartering of first bank came in 1791

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Regulatory History

• National Banking act of 1863 - congresses third
  attempt to regulate banking at the federal level.
• Federally Chartered office of the Comptroller
  of the Currency.
• State Chartered all states already had their
  own state chartering agencies, thus the beginning
  of our dual banking system.

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Regulatory History

• Federal Reserve Act established our current
  national bank in 1913.
• Feds original task was to provide liquidity to
  banks as a lender of last resort.
• Federal Reserve was established as a system of
  twelve district banks.
• Great Depression
• Price Deflation

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Mergers

• The banking industry is consolidating
• Ultimately the nation may have just 2000 or so
  chartered banks
• Will this improve the lot of the consumer?

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REAL PRIME INTEREST RATES
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Bank Balance Sheets
Assets Liabilities and Equity
Cash and Reserves 2,000 Demand Deposits 20,000
Securities 26,000 Savings Deposits 65,000
Consumer Loans 20,000 Bank Debentures 17,000
Real Estate Loans 25,000 Other Borrowings 0
Commercial Loans 31,000 Common Stock _at_par 2,000
Less Loan Reserves 2,000 Excess paid in Capital 1,000
Premises Equipment 4,000 Retained Surplus 5,000
Total Assets 110,000 Total Liabilities Equity 110,000
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Liabilities

• Banks earn maintenance fees on traditional demand
  deposit accounts.
• Demand deposits have been shrinking as a
  percentage of total since 70s due to money market
  accounts.
• Savings include passbook savings, CDs,
  educational savings funds and IRAs
• Interest Rate Differences.

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Equity

• Remaining accounts on RHS are Ownership Accounts
  or Equity
• Common Stock _at_ Par
• Excess Paid in Capital
• Retain Surplus or Retained Earnings
• How banks use this is a matter or asset financial
  management

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Assets

• Cash and Reserves
• Fed Requires approx. 10 of bank demand deposits
  to be placed in reserve.
• Not a significant source of liquidity for the
  bank
• Securities Portfolio
• Loan Portfolio
• Premises and Equipment

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Introduction

• Many farmers have long argued that credit for
  agriculture has not been met by conventional
  financial institutions.
• Private lending procedures, sources of funds, and
  loan terms are not beneficial to the needs of
  agriculture.

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History

• Government began to make direct loans to farmers
  for short term credit requirements in the 1920s.
• In the 1930s FCS, FmHA, REA, and CCC were
  created.
• All of these agencies continue to operate
  although the names and scope of work have changed
  over time.

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Farm Credit System

• Long Term FCS loans are made to farmers,
  corporations producing farm products,
  agribusinesses, and rural homeowners.
• Loans can be used to acquire land, equipment, and
  livestock or to refinance existing debt.
• The largest holders of farm real estate debt are
  the FCS and commercial banks.

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Farm Credit System

• Short and intermediate term FCS loans can be used
  for the production of farm products, aquatic
  products, and purchase or repair of rural homes.
• FCS holds 20 of non real estate farm debt.

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Government-Sponsored Enterprise

• Farm Credit began as a government sponsored
  cooperative effort to provide a system through
  which farmers could provide their own credit.
• FCS is now self-supporting.
• As a GSE , FCS can borrow money from the US
  Treasury cheaper than commercial banks.
• In turn, FCS can usually loan out money cheaper
  than commercial banks.

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FCS Independence

• FCS became wholly user owned when the last
  government loan was repaid in 1968.
• In 1985 FCS lost 2.7 billion through mortgage
  and loan defaults.
• Several of the FCS banks had become insolvent and
  Congress responded with a Federal bailout.
• Now FCS is run by the Farm Credit Administration
  which is an agency of the U.S. Executive Branch.

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USDA

• USDA has a number of credit programs for ag and
  rural areas.
• FSA is the direct lending arm in agriculture.
• Rural Development is the direct lending agency
  for rural programs.

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FmHA

• Farmers Home Administration was created to
  implement all direct lending, loan insurance, and
  grant programs for low income farmers.
• FmHA was abolished in 1994 and its farm credit
  programs were transferred to the newly created
  FSA.

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Farm Service Agency

• Lender of last resort to farmers.
• Loans are for farmers who can not get credit with
  commercial banks or FCS.
• FSA makes farm ownership loans, operating loans,
  and emergency loans.

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Farm Service Agency

• Emergency loans are made only to counties
  designated as a disaster area.
• Interest rates on FSA loans are significantly
  lower than those of commercial banks.
• FSA held 4.1 of total US farm business debt in
  2000.
• Because of their risky loans, many FSA loans
  result in default.

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Rural Development

• Rural Development includes the Rural Housing
  Service, Rural Business Cooperative Service, and
  Rural Utilities Service.
• Direct loans, loan guarantees, and rental
  assistance are available to low income people in
  rural areas which include cities with populations
  up to 50,000.

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Rural Development

• The Rural Business-Cooperative Service
  administers the business assistance programs.
• Grants are made to non profits and public bodies
  for business development.
• Large loan guarantees are also available to
  businesses.

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Rural Development

• Rural Utilities Service provides large loans and
  grants for electricity, water, and sewer.
• Assistance is available to public bodies and
  utility districts for expanded utility programs.

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Commodity Credit Corporation

• Farmers would pledge a quantity of a commodity as
  collateral and obtain a recourse loan from the
  CCC.
• Farmers can either repay the loan with interest
  within a period of time or they must forfeit
  their commodity to the CCC.

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Effects of Subsidized Credit

• Immediate effects are to reduce interest rates
  and to increase the amount of credit used in
  agriculture.
• This contributes to increased production and
  larger, more highly mechanized farms.
• It is harmful to nonusers because it increases
  output and decreases product prices.

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Problems with Subsidized Credit

• Moral Hazards
• Government restrictions reduced diversification
  in bank loan portfolios, thereby increasing risk
  and likelihood of bank failure.
• These instances have made it difficult to make a
  case for subsidized credit to agriculture.