The Texas Banking Department is preparing for a new crop of challenges now that federal farm supports are withering away.
The agency is educating examiners about the impact of the 1996 Farm Bill, which eliminates most federal farm supports over the next seven years and is urging them to scrutinize portfolios for danger signs.
The elimination of subsidies "is going to make the market more volatile," said Randall S. James, deputy commissioner of the state banking department. "It's that volatility that is going to raise some unknowns."
Texas, the second-largest agricultural state after California, is leading the way as regulators brace for a new farming environment. The elimination of subsidies means that examiners must be watchful that marginal producers aren't dragging down banks.
Indeed, while no one yet knows the full impact of the bill, Catherine Ghiglieri, commissioner of the banking department, is expecting the worst.
"I think it's going to have a negative effect on the farmers and the banks," Ms. Ghiglieri said in a recent interview. "Farmers will really have to do some soul-searching to see if they can remain in business."
The Texas agency has been educating examiners about the changes since last year, and in December it teamed up with the state Legislature and Texas A&M University to put on a conference dealing with the topic.
The agency also has been encouraging bankers to tell their customers to bone up on marketing strategies, Ms. Ghiglieri said.
The primary responsibility for watching credit quality-and, if necessary, kicking out marginal credits-lies with the banks, Mr. James said.
Mr. James said that most banks appear to understand what the Farm Bill will do. Indeed, it has been a hot topic at any gathering of agricultural bankers for the past year.
"At this point in time, we have been getting enough anecdotal information to think that bankers are pretty far along on this," he said.
But examiners also must keep an eye on the $4 billion in agriculture credits held by Texas banks in the third quarter of 1996.
For example, examiners will be looking for borrowers who are overly dependent on subsidies for income, Mr. James said. They also will watch out for farmers who are diversifying in response to the bill.
"If the farmers start changing which crops they usually deal with, that's going to start raising some questions," Mr. James said.
Outside Texas, federal and state regulators are making sure their examiners are aware of the changes the bill will enact.
The Office of the Comptroller of the Currency is overhauling its guidelines for examining agriculture credits, a spokesman said.
The California state regulator is educating its examiners as well, said David Scott, chief state bank examiner.
"It's something our examiners have been made aware of," Mr. Scott said.
Mr. Scott said he has already seen one effect of the Farm Bill: small banks pulling out of agriculture lending.
"We've seen a lot of banks decide that this is not a business they want to be in anymore," he said. "Some are pulling back."
Mr. James said that if state banking regulators haven't taken a hard look at the bill yet, they should start.
"You can't completely sit back," he said. "You got to get into it early."