The Texas bank commissioner is warning that the prolonged drought will lead to loan losses for many banks that lend to farmers.
Commissioner Catherine A. Ghiglieri said in an interview last week that she expects the drought to result in "diminished production and repayment capacity" for farmers. "This in turn will mean increased carry-over debt, nonperforming loans, and loan losses," she said.
As a result, regulators may downgrade agriculture banks' ratings to problem status, she added.
Ms. Ghiglieri voiced similar concerns in a memo last week to Texas legislators, who met Friday to discuss the drought's effects on farmers.
Nevertheless, she said, the industry is better prepared for this now than it was five years ago. Fewer than 25% of Texas' 828 national and state banks have agriculture loans that exceed their capital levels, and those banks hold only 6% of the total assets in the state banking system, according to her analysis of Federal Deposit Insurance Corp. call report data.
Ms. Ghiglieri said she does not expect any banks to fail.
"There could be some bank downgrades, but it is far from the catastrophe it could have been," she said. Many of the farm loans were guaranteed by the Farm Service Agency, which would reduce the actual loss exposure to banks.
The drought, which is responsible for more than 100 deaths in the Loan Star State this summer, is taking a heavy toll on farmers. The Texas Agricultural Extension Service said Wednesday that the drought has cost state farmers and ranchers $1.75 billion this year, $200 million more than earlier appraisals. Cotton farmers alone have lost more than $500 million.
Robert E. Harris, president of the Texas Bankers Association, said the situation is grim but that he has not heard of any banks in the state that are worried about failing.
Most banks he contacted have "one or two producers that are not going to make it through all this," Mr. Harris said. "But I have yet to talk to a banker that feels like the ongoing viability of the bank will be substantially damaged."
The evolution of the banking industry-not to mention the overall success of Texas' economy-has left banks better able to withstand some hits.
"So many small banks are part of holding companies that are spread out over much wider areas," said Don Reynolds, a Fort Worth-based economist. "Diversification will mean not as severe an impact for the banking industry as we would have seen five years ago."
The past few planting seasons have been good ones for the state, so many farmers now in trouble did not enter 1998 heavily in debt, Mr. Reynolds added.
"People were in relatively good shape coming into this year," he said. "If they were coming in to this from a bad year, it would be a whole different story."