WASHINGTON — Amid asset-bubble concerns in the agricultural industry, the Federal Deposit Insurance Corp. urged institutions Tuesday to establish prudent risk management when it comes to farm lending.
In a letter to the banks it supervises, the FDIC said agricultural lenders should assess credit based on a borrower's cash flow and repayment capacity, not solely on the value of its collateral as well as develop workout strategies for agricultural loans. The agency said although agriculture is still booming, the industry is prone to "shocks" from weather tragedies, rising interest rates and fluctuating markets.
"Because agriculture is vulnerable to sharp shifts in commodity prices and operating costs, this level of volatility warrants implementation of strong risk-mitigation strategies," the FDIC said.
In the wake of the housing collapse, regulators have been vocal in airing concerns about other potential bubbles. In comments in October, FDIC Chairman Sheila Bair cited farm lending as a potential trouble spot, noting that farmland values have risen 58% over the past decade. "A sharp decline in farmland prices similar to the early 1980s could have a severe adverse impact on the nation's 1,579 farm banks," she said.
The FDIC's financial institution letter said that in analyzing credit quality, institutions should consider "a reasonable range of future conditions" in the markets for commodities and farm properties that could affect cash flows. "A borrower's credit history and financial strength are critically important components of assessing their willingness and ability to repay, and should be considered in conjunction with other subjective factors, such as the borrower's management capabilities and experience," the agency said.
The letter said banks should also be wary of potential speculation that could affect prices for agricultural land and commodities. Certain measures by borrowers to lessen their risk — such as crop insurance — should also be considered, the FDIC said.
