A new law reducing farm subsidies could weaken the financial condition of banks with large agricultural loan portfolios, Federal Deposit Insurance Corp. economist James Freund said Tuesday.
Addressing the Society of Government Economists, Mr. Freund said examiners recently have been reporting this concern on loan underwriting surveys, which they complete after each exam.
Mr. Freund said it is too early to quantify how big a risk the new law poses to banks. But he said examiners in farm areas are watching.
"It is a hot issue," he said.
President Clinton signed the farm bill in April. It reduces government subsidies to $4 billion, from $5.5 billion last year. It also removes price supports and planting restrictions. The cuts in farm subsidies could reduce farmers' income and make it difficult for them to repay agricultural loans.
John Blanchfield, associate director of agricultural banking at the American Bankers Association, said he can understand why some examiners are nervous. But he said he doesn't expect any problems.
"I am fully convinced that agriculture banks and bankers have developed the skills necessary to evaluate and manage the risks of agricultural lending," Mr. Blanchfield said. "The new farm bill offers exciting opportunities for farmers and their lenders to discover truly what a market-driven economy for agriculture is."
Mr. Freund spent most of his speech discussing the FDIC's underwriting survey, which the agency initiated in January 1995. He said the agency requires the examiners in charge of loan reviews to complete the survey, which asks 53 questions about every aspect of a bank's underwriting standards.
The results are sent anonymously to the FDIC in Washington, where they are tabulated into the national survey. Results are sent directly to headquarters, he said, so they are not influenced by the outcome of the bank's overall exam.
The FDIC released the first survey results in March. They showed no significant deterioration in underwriting standards. The agency plans to release survey results twice a year. The next one is expected this summer.