LESE 306LESE 306Financial Markets

and

Financial Intermediation

Both Sides of the DeskBoth 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 DeskBoth 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 ProjectsFinancing 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 AgricultureLenders Serving US Agriculture

Real Estate LendersReal Estate Lenderso Farm Credit System

o Farm Service Agency

o Commercial banks

o Life insurance companies

o Individuals and others

Nonreal Estate LendersNonreal Estate Lenderso Farm Credit System

o Farm Service Agency

o Commercial banks

o Individuals and others

The two biggest lenders to US agriculture are the Farm CreditSystem and commercial banks.

The two biggest lenders to US agriculture are the Farm CreditSystem and commercial banks.

Financial IntermediationFinancial Intermediation

Investors inbond market

Investors inbond market

Government bond market

Government bond market

Farm Credit System entities

Farm Credit System entities

Farm borrowers

Farm borrowers

Farm Credit System

Commercial Banks

Individualdepositors

Individualdepositors

Commercial banks

Commercial banks

Farm borrowers

Farm borrowers

In both instances, financial intermediation transfers savings In both instances, financial intermediation transfers savings and investment of others into loan funds borrowed by farmers.and investment of others into loan funds borrowed by farmers.

Regulator of LendersRegulator of LendersFarm Credit System Farm Credit Administration

Farm Service Agency USDA and Congress

Commercial banks Comptroller of CurrencyFederal Deposit Insurance Corporation (FDIC)Federal Reserve SystemState banking agencies

Life Insurance Companies None

Individuals and others None

Farm Credit SystemFarm Credit System

Farm Credit SystemFarm Credit SystemMajor 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 SystemFarm Credit SystemAlso 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 SystemFarm Credit SystemFCS 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 SystemFinancial Intermediation Process in the Farm Credit System

Website for the FarmCredit Bank of Texas – a district bank that serves credit associations within this district like Capital Farm Credit.

Capital FarmCredit Assoc.

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.

You can apply electronically for various types of loans from the CapitalFarm Credit Association.

Loan applications

differ by the size of the loan requested

Less information required on Less information required on smaller loan requests – greater smaller loan requests – greater reliance placed on scorecard reliance placed on scorecard

lending practices.lending practices.

Less information required on Less information required on smaller loan requests – greater smaller loan requests – greater reliance placed on scorecard reliance placed on scorecard

lending practices.lending practices.

Annual LOCAnnual LOC

Electronic access to cash

Electronic access to cash

Characteristics of Farm Credit System LoansCharacteristics of Farm Credit System Loans

Farm Credit System RegulationFarm Credit System Regulation

Commercial BanksCommercial Banks

Commercial BanksCommercial BanksIn 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 MergersBank MergersThe 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 US Bank Consolidation

Characteristics of rural commercial banks

Commercial Bank RegulationCommercial Bank Regulation

The Comptroller of the Currency is an agency within the U.S. Treasury.

Commercial Bank RegulationCommercial Bank Regulation

Other US LendersOther US Lenders

Specialty LendersSpecialty LendersLife 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 LendersKorean LendersNational Agricultural Cooperative

FederationOthersDr. Han will cover these sources of loans

to agriculture and ag-related businesses.