LESE 306
Financial Markets
and
Financial Intermediation
Both Sides of the Desk
The borrower:
•Enterprise analysis
•Cash management
•Line of credit needs
•Operating loan application
•Investment planning
•Financing alternatives
•Term loan application
•Planning for long run
Both Sides of the Desk
The borrower:
•Enterprise analysis
•Cash management
•Line of credit needs
•Operating loan application
•Investment planning
•Financing alternatives
•Term loan application
•Planning for long run
The lender:
•Loan application analysis
•Credit scoring
•Loan pricing for risk
•Loan approval process
•Loan portfolio analysis
•Loan loss reserves
•Regulatory oversight
•Lending institutions serving
commercial agriculture and
rural businesses.
Financing Investment Projects
 Assume you have a project that has a strong
positive NPV.
 What is the next step – financing with loan or
obtaining a financial lease?
 Financing with loan requires completing a loan
application with a financial institution.
 Applying for a financial lease to finance purchase
equipment often obtained through manufacturer.
 Be prepared to present financial statements and
income tax reports in either case.
Lenders Serving US Agriculture
 Real Estate Lenders
o Farm Credit System
o Farm Service Agency
o Commercial banks
o Life insurance
 Nonreal Estate Lenders
o Farm Credit System
o Farm Service Agency
o Commercial banks
o Individuals and others
companies
o Individuals and others
The two biggest lenders to US agriculture are the Farm Credit
System and commercial banks.
Financial Intermediation
Farm Credit System
Investors in
bond market
Government
bond market
Farm Credit
System entities
Farm
borrowers
Commercial Banks
Individual
depositors
Commercial
banks
Farm
borrowers
In both instances, financial intermediation transfers savings
and investment of others into loan funds borrowed by farmers.
Regulator of Lenders
Farm Credit System
Farm Credit Administration
Farm Service Agency
USDA and Congress
Commercial banks
Comptroller of Currency
Federal Deposit Insurance
Corporation (FDIC)
Federal Reserve System
State banking agencies
Life Insurance
Companies
None
Individuals and others
None
Farm Credit System
Farm Credit System
Major long term (mortgage) lender to US
farmers.
Originally a government entity; now a
private lender with implied government
backing.
Obtains capital by issuing consolidated
bonds in national bond market as a GSE
(government sponsored enterprise).
Farm Credit System
 Also makes short and intermediate term loans
for the production of farm products, aquatic
products, and purchase or repair of rural
homes.
 The FCS today accounts for 20% of non-real
estate farm debt outstanding.
 The FCS today also accounts for over 40% of
the real estate farm debt outstanding ( debt
secured by real estate mortgage).
Farm Credit System
 FCS became wholly borrower-owned when the
last government loan was repaid in 1968.
 FCS is regulated by the Farm Credit
Administration, which is an agency of the
Federal government’s Executive Branch. The
FCA regularly examines loan portfolios to
ensure compliance with sound lending
practices set forth in examination manuals.
The original 12 district banks have consolidated into 6 districts today.
Financial Intermediation Process in the Farm Credit System
Website for the Farm
Credit Bank of Texas
– a district bank that
serves credit
associations within
this district like Capital
Farm Credit.
The Capital Farm Credit Association is
headquartered in Bryan Texas. It has 35 offices
throughout the state of Texas and one office in the
state of Tennessee.
Capital Farm
Credit Assoc.
You can apply electronically for various types of loans from the Capital
Farm Credit Association.
Loan
applications
differ by the size
of the loan
requested
Less information required on
smaller loan requests – greater
reliance placed on scorecard
lending practices.
Annual LOC
Electronic
access to
cash
Characteristics of Farm Credit System Loans
Farm Credit System Regulation
Commercial Banks
Commercial Banks
 In US today there are 8,500 independently
chartered banks in the US.
 Large commercial banks like Bank of America
have a significant amount of farm loans, but this
represents a small portion of their total loan
portfolio.
 Rural commercial banks have a much greater
percentage of their loan portfolio devoted to
agriculture.
Bank Mergers
The US banking industry has been
consolidating over the last several
decades.
Ultimately the nation may have less
than 2,000 chartered banks.
Has resulted in a net outflow of loan
funds from rural to urban areas.
US Bank Consolidation
Characteristics of rural commercial banks
Commercial Bank Regulation
The Comptroller of the Currency
is an agency within the U.S.
Treasury.
Commercial Bank Regulation
Other US Lenders
Specialty Lenders
Life insurance companies – large real
estate loans.
Merchants and dealers – finance purchase
of their machinery and equipment.
Farm Service Agency – government
lender making subsidized loans to small
and beginning farmers.
Korean Lenders
National Agricultural Cooperative
Federation
Others
Dr. Han will cover these sources of loans
to agriculture and ag-related businesses.