The weak farm economy has harmed agricultural banks little so far, but Federal Reserve Bank of Chicago President Michael H. Moskow is worried banks might be relaxing credit standards for farmers.
Mr. Moskow, addressing the American Bankers Association's National Agricultural Bankers Conference on Monday, said lenders must work with their farm customers to plot a way for them to survive the sector's downturn.
"And for some farmers, that plan should not involve additional credit," he said. "Saying yes is tempting, but in many cases it's not the long-run solution, and you may not be doing your borrower any favors by increasing his or her debt levels."
Farmers in the early- and mid-1980s ran up debt, which factored into thousands of them losing their land and hundreds of agricultural banks failing. The current agricultural turmoil, in which farmers have faced the lowest commodity prices in decades, has paled so far in comparison with the problems of the 1980s.
But regulators worry that lenders have yet to see the full extent of this crisis.
Gary Bergman, a commissioned examiner with the Iowa Division of Banking in Des Moines, said competition is pressing some agricultural banks to increase their loan-to-asset ratios -- a move that could jeopardize their soundness.
"Banks may be lowering their credit standards to maintain their market share," he said.
Agricultural banks are increasingly dipping into their loan-loss reserves and facing more past-due loans, said Marybeth Lytle, a Midwestern District credit expert for the Office of the Comptroller of the Currency in Kansas City, Mo. In addition, a recent survey of senior risk management officers conducted by Robert Morris Associates found that 63% believe the agricultural sector will be a source of more bad credits in the near future.
In some cases, bankers should sit down with longtime farm customers and advise them to sell rather than dig themselves deeper into debt, regulators said. "If we manage credit risk proactively today, we'll reduce problems tomorrow," said Don McFadyen, an examiner with the Chicago Fed.
Bankers who heard the speeches said the criticism is unwarranted.
"Any loosening would have to be pretty isolated," said Michael Weasel, vice president of agricultural services for Huntington National Bank in Marysville, Ohio. "Nonperforming loans don't pay. We don't want to see them and sure aren't going to loosen our credit standards."
Lonnie Wells, a vice president and manager of Cornerstone Bank in Aurora, Neb., agreed.
"Most banks, including ourselves, are redoubling efforts to prevent problem loans," he said. "Most of us lived through the '80s. We don't want to repeat the mistakes that were made."
Mr. Moskow also questioned the government's continuing haste to bail out farmers with additional subsidies rather than allowing the "challenges of consolidation" to hit rural communities and the banks that serve them.
He estimated that 45% of farmers' income this year will come from direct government handouts, including the $8.7 billion emergency aid package that President Clinton signed last month. In the past couple of years, about a third of farmers' income has come from the government.
"Do the American people want to provide a subsidy to small farmers to maintain a lifestyle that may not be economically viable?" Mr. Moskow said. "That's an important public policy question that we have to address as a country."
