Banking Law

It appears that the plan of the FDIC to crack down on agricultural lending is having an immediate impact, at precisely the worse time for farmers.

Rural banks and credit unions, hit by the financial crisis and stiffer credit regulations, are tightening up on lending to farmers, choking off a key source of funds just as spring planting gets under way.

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?Right now it?s tough for community banks to make loans,? said John Collins, executive director of Community Bankers of Washington, which represents 60 smaller banks across the state. ?The regulators are saying you have to have certain capital levels. If the capital levels aren?t a certain level, the only way you can get there is to not make loans.?

Of course, it's not merely the borrowers who suffer when the banks can't make loans. The banks themselves are negatively impacted.

?We rent money, and if you aren?t allowed to rent money you can?t make interest, you can?t make fees, you can?t make a profit,? said Brad Tower, lobbyist for Community Bankers of Washington.

Unfortunately, this problem appears to be one that is not only not going to improve anytime soon, but is one that may grow quickly worse.

The squeeze could worsen in coming years if stiffer regulations make it harder for farmers to rely on good years to get out of debt, said Todd King, president of Leffel, Otis & Warwick an accounting firm in Odessa, Wash.

His company provides accounting to more than 3,000 state farmers. King said he personally knows of three or four farmers who haven?t been able to get operating loans this spring.

?I foresee in the next couple of years access to credit becoming a real problem,? King said. ?Anybody a little bit marginal, banks are a lot more conservative than they were before this big crunch... Once they can?t get the operating loan, the house of cards will start to fall.?

Unlike much of the criticism heard from the aggressively uninformed-but-loud, a representative of at least one trade farmer's group, Kevin Gay, understands that the fault lies not with the banks but with their regulators tightening down the screws on credit standards.

Gay said he doesn?t blame the banks. ?It?s not the banks? fault, it?s the tightening of credit. A lot of the banks, their hands are tied. It?s really sad.?

There's another "credit tightener" at work here, too: the erosion of commercial real estate values.

In addition, the fall in real estate values is eroding the collateral that banks relied on to make farm loans, posing a problem for many rural bankers who are trying to maintain higher levels of liquidity, some bankers say.

One more nail in the farmers' coffin comes from the requirement by regulators that agricultural banks increase their general loss reserves to cover future possible losses that aren't specifically reserved against.

One indicator of the size of the problem: Northwest Farm Credit Services, a Spokane-based cooperative that is the state?s largest single agricultural lender, posted a 14 percent drop in net income last year, as it set aside money to cover bad loans to farmers. The cooperative?s loan volume actually edged up a little last year.

?One hundred percent of that (income drop) is because of need to increase allowance for loan losses,? said CEO Jay Penick.

These types of problems mirror those faced by community banks in various parts of the country that have large portfolios of nonresidential real estate loans. Tightening of credit standards, the writedown of collateral values, the increasing of ALLLs all spell less credit available for the small businesses that community banks typically feed. Without that credit, small businesses, the traditional source of job growth in the US, are starving. As they starve, so do their workers and potential workers.

Somehow, some way, we're going to have to break this downward spiral that seems to be self-reinforcing. Certainly, if banks can't take any credit risk, they're not likely to make any bad loans. Unfortunately, taking risk is their business and it's how they make their money. If they don't make money, they'll eventually fail, even if it won't be from good loans gone bad. In the interim, small businesses who need credit to create jobs to help the country dig its way out of this economic hole we're in will also fail, and not only will job growth stagnate, but if this trend takes hold, unemployment may actually get worse than it is currently.