Keywords: Agricultural finance, agricultural loans, risk ratings
Abstract: In this paper, we review the prevalence of the use of risk ratings by commercial banks that
participated in the Federal Reserve's Survey of Terms of Bank Lending to Farmers between
1997 and 2002. We find that adoption of risk rating procedures held about steady over the
period, with a little less than half the banks on the panel either not using a risk rating
system, or reporting the same rating for all their loans in the survey. However, most of
these banks were small, and roughly four-fifths of all sample loans carried an informative
risk rating. We found that after controlling for the size and performance of the bank and
as many nonprice terms of the loan as possible, banks consistently charged higher rates of
interest for the farm loans that they characterized as riskier, with an average difference
in rates between the most risky and least risky loans of about 1-1/2 percentage points.
Full paper (137 KB PDF)
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Last update: November 17, 2003